What Are The Effects Of Tescos Oligopolistic Market Structure, On Both Consumers And Producers? This data is also released from Tescos own website, so it may appear that the data is slightly biased. Also there are sunk costs and natural cost advantages, which may prove to be successful barriers. Sprint (S), AT&T (T), and T-Mobile (TMUS). Smaller shops do not have this flexibility and control. Interdependence is also displayed in an oligopoly market structure. The implication here is that the prices in oligopoly tend to be more stable than in the other theories of the firm. New supermarket developments could result in the loss of even more independent shops. For example, the widespread comparative data on the . Sainsbury which owns 16.3% of the UK supermarket shares and Morrisons which owns 11.5%, this means the Many regard Tesco as a great British success story built on a fearsome determination to win in a competitive market, to the great benefit of consumers. In particular Tesco is squeezing suppliers on prices. Marginal Revenue the revenue earned by selling one more unit. 3. social media platforms). A few took into account what the market price was but none was able to calculate marginal costs and revenues. As mentioned above, some of these markets require large economies of scale for firms to be viable. In the wireless cell phone service And that brings us to The Game Theory.. Total surplus is the primary measure used in welfare economics to evaluate the efficiency of a proposed policy. When two or more oligopolies agree to fix prices or take part in anti-competitive behavior, they form a collusive oligopoly. Save my name and email in this browser for the next time I comment. industries that frequently exhibit characteristics of oligopoly: Here are some more details on Overall, quantity demand increases as the demand curve slopes down, but the increase is less than proportionate. Accounting & Finance; Business, Companies and Organisation, Activity; Case Studies; Economy & Economics; Marketing and Markets; People in Business A later review by the OFT revealed that many practices identified in 2000 were still occurring, and a survey of farmers conducted by Friends of the Earth in 2003 showed that many farmers were 'being asked to pay a rebate on an agreed price, waiting over 30 days for an invoice to be paid, incurring additional transport or packaging costs due to changes in supermarket specifications and meeting the costs of unsold or wasted products where quality of the product was not an issue'. The producer surplus is the amount that producers benefit by selling at a market price that is higher than they would be willing to sell for. It is a go ahead of being equally responsible to and sharing a common set of principles with other firms. 1. Its market structure comprises few firms which dominate whole market which is in case of U.K. supermarkets where 'big Four' namely Tesco, Asda, Sainsbury and Morrison's are the dominate ones and indulged in oligopoly. The Role of Governments in the Larger firms are also able to borrow money at cheaper rates, because they have more assets and so it is less risky to lend to them, and feel more secure to lend to them. An Oligopoly is a group of leaders in a certain market. The third point is simply, economies of scale. By diversifying into several regions or countries, the firm is likely to have more stable demand patterns. Tesco is definitely a suitable example to model oligopoly, since it is competing with a small number of other large firms, selling similar products with significant barriers to entry mainly due to brand name, and large land acquisitions. We can characterize market structures based on the competition levels and the nature of these markets. Research by the New Economics Foundation for the London Development Agency in 2006 showed that fresh produce in street markets was on average 30% cheaper than at supermarkets. As seen from Figure 1, monopoly only has one seller, and restricts entry to the market, because monopolies generally benefit from economies of scale, and use advertising to block out any companies from trying to enter the market. This could damage independents and smaller chains, and in turn damage consumers. They all would like the other members to restrict their output to what everyone agreed but would want to increase their production. There are concerns that the closure of small shops is a one-way street. Diet-related ill health is costing the NHS increasing amounts through illnesses such as cancer, diabetes, obesity and coronary heart disease. Its report "High Street Britain: 2015", released in January 2006, predicted a bleak future for independent shops. Many markets can be considered as monopolistically competitive, often including restaurants and book shops, in large cities. According David McCarthy, a retail analyst, Tesco have pulled off a trick that no other retailer has achieved; that is, of course, appealing to all segments of the market.. The medium term aim is to have half of group sales outside the United Kingdom. Oligopolistic firms are also able to take advantage of economics of scale that reduce production costs and prices. (Tutor2U, 2007)An oligopoly market is a market structure which shares a large percentage of the market by a few firms. First the team explores the pure competition market structure through the analysis to Fiji Water Company. Equilibrium occurs when each player takes decisions which maximise the outcome for them given the actions of the other player in the game. This behavior can be seen in the diagram below; there is a stickiness in price as firms produce the same output when marginal cost is at Marginal Cost Upper or Marginal Cost Lower. Groups of firms can also avoid governments laws against oligopoly if they are not restricted by these laws. An oligopoly is most likely to have a kinked demand curve. An oligopoly is a market structure with a small number of firms, none of which can keep the others from having significant influence. Just earlier on, we analysed Tescos growth and noticed that Tesco appeals to customers of all income ranges. Like any large firm, Tesco are bound to invest money in research and development, and through this Tesco has made significant advances in technology, mainly through use of the internet. It has been innovative and energetic in finding ways to expand, such as making a large-scale move into the convenience-store sector, which the major supermarket chains have traditionally avoided. Small shops are vital for people to access healthy food, in particular disadvantaged groups, and people without cars or with limited mobility. The data surely confirms that there is an increase in concentration of wealth as can be deduced from the taking over of stores and the increase in market share of store sales. Motive comes from interdependent competition and opportunity arises from access to plentiful resources. I would like to begin by pointing out the major types of market structure, and then focus on the oligopoly market structure, and its behaviour. The Office of Fair Trading also mentioned price cuts as a concern: aggressive pricing by supermarkets may be distorting competition.. The report argued that the social and economic benefits of diverse forms of retail should be protected. Let us study the four basic types of market structures. In fact, Oligopoly tends to be the worst efficiency offender in the real world, because: Oligopolies tend to increase the concentration of wealth and income too. Others regard it as a threat with excessive market share, which takes over entire towns and convenience stores. corporations, have significantly less power within the industry. Up to the 27 February 2007 period end, the numbers include non-UK and Ireland results for the calendar year ended on 31 December 2006 in the accounting year. Oligopoly is the most complex market structure, characterised by a few large firms which dominate the industry. In fact, this situation can be explained by framing it as a form of prisoners dilemma. Oligopolies achieve stability when the costs/benefits are such that none of the firms are motivated to betray the rest of the group in their own interests because the ongoing collective benefits are too high or the potential punishment for cheating is too significant. Oligopolies include positive and negative aspects. In economics, market structure is a term that describes the state of a market, with respect to competition. Tesco has promised more brand marketing to help reverse declining sales. The retail food prices is a source obtained from The Office of Fair Trading website, and therefore there is no suspect to bias on this source, since The Office of Fair Trading have no reason to alter figures to support Tesco. The firm can keep their price stable by reducing the overall level of profit earned, and if they can sustain this stability in the long run it implies that a measure of abnormal profit was being earned before the cost increases. It has focused mainly on developing markets with weak incumbent retailers in Central Europe and the Far East, rather than on mature markets such as Western Europe and the United States. Oligopolies tend to emerge in This graph can be seen below, Figure 9. The report predicted that independent convenience stores were unlikely to survive by 2015 and independent newsagents were very unlikely to survive. They also heavily advertise and often employ loyalty programs. However, bigger firms cut prices so low that the smaller firms cant compete. Costs that may be un-recoverable are sunk costs, which mean that when money is spent on a sunk product or service, the money cannot be returned. If they do not and the other firm does, then their profits fall and they will lose market share. In geographical areas with no major competitors, they were selling products at higher products than in areas where they faced stronger competition. Tesco has also upgraded its software through Business Systems UK Ltd. Whilst the upgrades were being performed, The Times made investigations and wrote in the paper: Tesco, the UKs largest supermarket retail organisation, has chosen Nice university quality management software and the NiceLog digital voice recording and screen capture platform which automates and optimises its approach to customer service and employee development through consultancy and implementation of a recording and quality management solution all promoting a more advanced Tesco.. Another important characteristic of an oligopoly is interdependence between firms. Costly research projects represent a risk for any business, but if one firm invests in research and development, can another rival firm decide not to follow? Monopolistic competition is typified by a large number of relatively small competitors, each with a humble degree of market control. According to a data regarding the market share of the US cigarettes in 2003, the top two firms are Philip Morris and R. J. Reynolds. Sainsbury which owns 16.3% of the UK supermarket shares and Morrisons which owns 11.5%, this means the An oligopoly market is characterized by many buyers and few sellers. Figure 8 (above) illustrates the percentage that each firm holds in the market. States are owned by just six massive corporations: NBC Universal, Viacom There may be a large number of firms, but most are small and relatively unimportant, while a small number of large firms produce most of the outputs of the . Supermarkets (Tesco, Morrison's and Asda) and cars are the perfect example for oligopoly market structure in the UK. An example of a sunk cost is the cost of advertising. The equilibrium in the Prisoners Dilemma occurs when each player takes the best possible action for themselves given the action of the other player. Depending on the industry, each of the firms might also sell products that are somewhat differentiated from those of the other firms. So why doesnt this always happen? The ice cream market is an example of _____ because it has many sellers who offer differentiated products. A basic technique of bargaining for both parties is to pretend that their surplus is less than it really is: sellers may argue that the price they ask hardly leaves them any profit, while customers may play down how eager they are to have the article. The major market forms are: The simple characteristics of these market structures can be seen in Figure 1(right.) However, this is not just a question of personal choices, but of social circumstances, with low-income communities far more likely to suffer from diet-related illnesses, and an estimated four million people in the UK are unable to obtain access to a healthy diet. The answer is that they must be balancing the loss with profits made on other product lines, or they have a cash reserve which they can rely on as collateral, until the profits start picking up later on. A price increase would, he assumes, not be matched by his competitors, hence the demand curve above Pi is elastic. particular kinds of situations. This way, the two firms can set a monopoly price, produce monopolistic quantities, and allocate resources monopolistically. Also, we analysed that Tesco can drive prices down as a benefit of economies of scale. According to the 2000 Competition Commission Report the buying power of the major supermarkets actually means that 'the burden of cost increases in the supply chain has fallen disproportionately heavily on small suppliers such as farmers'. International Expansion: Tesco began to expand internationally in 1994, and in the year ending February 2005, its international operations accounted for just over 20% of sales (about 7 billion.) Using the profit maximization rule, Marginal Cost = Marginal Revenue, anywhere on the vertical MC curve works. 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