Farmers have to bear the burden of unfair trading practices imposed by supermarkets, especially Tesco, which is a name that comes up time and time again, during farmers complaints. Even if there is no agreement, oligopolistic firms dont end up changing their output with changes in cost. Bigger firms force smaller firms out of business. This process is illegal though, because firms are not allowed to set prices secretly, because it may cause unfairness to other competing markets. An oligopoly is a market structure with a small number of firms, in which none can prevent other from having a significant influence in the industry. The game theory is mainly concerned with predicting the outcome of games of strategy in which the participants (for example two or more businesses competing in a market) have incomplete information about the others' intentions. The development of superstores on outskirts of town centres and out-of-town sites, and the closure of many local independent shops as a result, has created food deserts areas where it is almost impossible to buy affordable healthy food, especially fresh fruit and vegetables, without private transport. A negative effect of oligopolies in general, is the increase in the concentration of wealth and income. Governments can use law and policy to inhibit or support the existence of oligopolies. Above, I mentioned that a common behavioural tendency that is exhibited by oligopolistic firms is interdependence. If suppliers complain, supermarkets can simply move their business elsewhere, and their dominance of the food retail sector is such that there may simply be no one else for farmers to sell their produce to. A formal agreement is a cartel and is illegal. The result of these higher prices for consumers is higher profit margins for the firms involved in the oligopoly. Android, iOS, and Windows are the most prevalent options. Laws can prevent behaviors like collusion, price-fixing, output restrictions, and so forth. Their market share gives them a level of flexibility between store formats and over product pricing, and control of supply chains. The report predicted that independent convenience stores were unlikely to survive by 2015 and independent newsagents were very unlikely to survive. Supermarkets (Tesco, Morrison's and Asda) and cars are the perfect example for oligopoly market structure in the UK. Monopoly inefficiency has the potential for being so harmful; it is inevitably subject to corrective government regulation. While the concentration of wealth is not bad unto itself, such wealth can then be used to exert influence over the economy, which might not be beneficial for society as a whole. The simple answer is because, as I mentioned above, colluding is illegal, because it would be unfair on other competing firms. 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. 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. Advertising increases peoples awareness of the product, which leads to more profit, and also if a company wants to exit an industry and thinks of how much money in the form of sunk costs has been spent, it is always an incentive to stay in the market. Firms within an oligopoly produce branded products, and there are also barriers to entry. It might be a particular firm situated in an isolated area of town. There are four types of market structure such as - perfect competition, monopoly, oligopoly and monopolistic competition. Guardian 2010 states Tesco sent out about 100m club card to customers, it encourages people to do more shopping in their . The four leading supermarkets in the UK supermarket oligopoly are Tesco, ASDA, Sainsbury's, and Morrisons. 3. In this diagram when costs rise, from an increase in sales taxes for example, the marginal cost curve MCi moves upward to MCii. There are concerns that the closure of small shops is a one-way street. However, the stronger the position of Tesco and other grocery retailers, could lead to the closure of suppliers, as The Times stated about vegetable and fruit growers going bankrupt, because of the aggressive behaviour of larger retailers. Tesco and other supermarkets fail to pay farmers a fair share of retail prices too. From the gathered data, I feel that the features of the original hypothesis have been suitably proved; however, it still remains unclear whether the future looks good for consumers and suppliers that deal with Tesco. They also heavily advertise and often employ loyalty programs. By competing they may increase their own market share at the expense of their competitors, but by collaborating, they decrease uncertainty and the firms together can act as a monopoly. Supermarkets control nearly 80% of the British grocery market and as the most powerful players along most food supply chains are able to dictate terms, conditions and prices to suppliers. This is achieved by constant innovation, and by incessant advertising. Tesco are abusing seller power, through practices such as price flexing and below-cost selling. Originally specialising in food, it has diversified into areas such as discount clothes, consumer electronics, consumer financial services, selling and renting DVDs, compact discs and music downloads, Internet service, consumer telecoms, consumer health insurance, consumer dental plans and budget software. et al, 2008:298). The firms comprise an oligopolistic market, making it possible for already-existing smaller businesses to operate in a market dominated by a . gain extra market returns by placing restrictions on output or by price fixing. the characteristics of an oligopoly market structure the construction of a kinked demand curve price and non-price competition the existence of collusion and cartels how game theory impacts on the behaviours of oligopolistic firms Additional teacher guidance is available at the end of this online lesson. Technically, there is not a maximum number of firms that can exist in an oligopoly, but as a rule there have to be so few powerful firms in an industry that anything one firm does has a major effect on the decisions of the other firms in that industry. For smartphone operating systems, Tesco has been investing in its stores pipeline since mid 1990s. ECONOMIC SURPLUS; PRODUCER AND CONSUMER SURPLUS. Tesco has also moved into Internet Service Providing (ISP) and its own mobile phone and home phone sector. Will Tesco start taking advantage of their power in the market, to drive other competitors out, and start forming the Tesco monopoly, at which point it will drive prices up, and consumers will have no power to change anything? practice they often collude with one another to increase their collective (See Figure 3). This graph can be seen below, Figure 9. Some consumers will see that as a blessing, but for proponents of competition, thats a sign of inadequate competitive tension in some parts of the country. This is illustrated by the use of The Kinked Demand Curve. (See later.). If the markets for factors are perfectly competitive as well, producer surplus ultimately ends up as economic rent to the owners of scarce inputs such as land. Capital costs can prevent competitors from entering an industry because, depending on the industry, the costs may be very high. The dominance of Tesco as the leading retailer in the UK has been challenged. Perfect competition is a market in which there are many sellers and many buyers. In oligopoly market structure, since there are only a few large vendors of a commodity, each one has an effect on others, and there is a correlation between producers, because the amount of sales . Again, the source of the data is The Office of Fair Trading, and is not subject to any suspicion of bias. In Figure 2, the current price is therefore determined by cost-plus pricing. Oligopoly is therefore more complicated than our other models of monopoly or perfect competition and there are indeed several methods used to model oligopoly. Sainsbury which owns 16.3% of the UK supermarket shares and Morrisons which owns 11.5%, this means the ), OLIGOPOLIES CHARACTERISTICS AND BEHAVIOUR, Oligopolistic businesses tend to be assorted and also tend to exhibit several behavioural tendencies. 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. The recommendations will apply to all the big supermarket chains, but because of the way that Tesco has acquired very large market shares in many towns and districts, inevitably it will be most affected by proposed reforms. A Natural Monopoly Market Structure is the result of natural advantages like a strategic location or an . For example, the decisions that firms must take over pricing of products, and also how much money to invest in research and development spending. The answer to the first question is logical; Tesco will balance the loss with profits made on other product lines. There are four major types of competitive market structure, these include: Perfect competition, Monopolistic competition, Oligopoly and Monopoly. What Are The Effects Of Tescos Oligopolistic Market Structure, On Both Consumers And Producers? One of the characteristic features of an oligopoly market structure is interdependence among sellers. For example, De Beers is known to have a monopoly in the diamond industry. |. For example, Tesco planed to extend its "Finest" to include a range of homecare. More relevant is that about a third of consumers have three superstores within relatively easy reach of them. This is the ideal market structure, however, in a perfect world, it is very difficult to always obtain. In oligopoly market structure each firm needs to consider that "how its actions affect the decisions of its relatively few rivals". Second the oligopoly market structure with L . In geographical areas with no major competitors, they were selling products at higher products than in areas where they faced stronger competition. Other supermarkets in the United Kingdom have done some of the same things, but Tesco has generally implemented them more effectively, and as a result, have made most profit. 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. This is stated in The Office of Fair Trading website; Supermarkets, entry into the convenience store sector pushes prices down. Business Studies. The report also highlights on the key success factors when operating in this retail industry. There are a few barriers to entry and exit. 2. It is also likely that therell be a ban on the groups use of restrictive covenants whose point is to prevent any parcel of land being developed by a competitor. The four leading supermarkets in the UK supermarket oligopoly are Tesco, ASDA, Sainsbury's, and Morrisons. In 2000 the Department of Health actually recommended that local authorities should discourage the provision of new supermarkets over 1000 square metres outside existing town centres in recognition of the value of local shops to low income households. At the same time, research has shown that supermarkets are not always the cheapest sources of healthy food. I have still deemed it sufficiently trustworthy to use, because of. Oligopoly is defined as a concentrated market. As large firms, they can mass produce at a lower average cost. The major market forms are: The simple characteristics of these market structures can be seen in Figure 1(right.) The closure of many small shops has left some neighbourhoods with limited access to healthy food. Let us study the four basic types of market structures. The source of the information in figure 8 is sourced directly from Tescos website. The price and quantity dont change regardless of cost. Thus independent record labels, which are not affiliated with these large Economies of scale characterize a production process in which an increase in the scale of the firm causes a decrease in the long run average cost of each unit. No communication is permitted between the two suspects in other words, each must make an independent decision, but clearly they will take into account the likely behaviour of the other when under interrogation. It results in a high degree of market concentration. Collusion in this context refers to two or more firms that secretly agree to control prices, production and other aspects of the market, such as advertising. This is not necessarily negative, but it is definitely self-reinforcing and inhibits the pursuit of equity. The diagram would be like the monopoly profit maximizer. The marginal revenue recall, falls at twice the rate of the average revenue (demand) curve. It is very difficult for new businesses to start up. Like with the supermarket chain there is the oligopoly of Tesco, Asda, Somerfield and Sainsburys. It said in the entry that new supermarkets may face barriers to entering the market because of the planning system. Planning laws make it difficult for new entrants to open stores. However, from a regulatory view, monopoly power exists when a single firm controls 25% or more of a particular market. For example, the Competition Commission investigation revealed that Tesco consistently paid suppliers nearly 4% below the average price paid by other retailers. Types of Market Structures 1. As of its 2006 year end Tesco was the fourth largest retailer in the world behind Wal-Mart, Carrefour and Home Depot. This means there is a few dominant firms in the market. Here are a few of the many For instance, if all of the businesses have come to a shared agreement to maintain artificially high prices and artificially low supply, one of them could decide to lower their own prices or increase the amount of goods/services offered on the market, thereby making huge profits. When two or more oligopolies agree to fix prices or take part in anti-competitive behavior, they form a collusive oligopoly. There are no barriers to entry whatsoever. 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. However, there are only a limited number of rights available to be won and if all of the leading firms in a market spend on research and development; this may ultimately bring a lower rate of return. As seen from figure 10, in 1998 the earnings per share were 8.12 pence and have risen steadily to a share price of 22.36 pence, making a 64% increase in share prices over the 9 year period. The Department of Justice sued these book The larger chains can extract more favourable conditions from suppliers than other types of retailer can. As the biggest holder of land, Tesco is bound to be seen as the most at risk here. Out of the four market structures (discussed on pages 1 and 2), oligopoly is most likely to develop the innovations that: Oligopoly has both the motive and the opportunity to pursue innovation. The current land bank of 319 sites across the big four retailers-Tesco, ASDA, Sainsburys, and Morrisons, could obstruct new competition and perhaps harm consumers. That is the demand curve below price Pi is inelastic. An example would be the intergovernmental organization known as the Organization of the Petroleum Exporting Countries (OPEC)no one government has the high-level power to prevent this group of states from colluding. Mikey HolderGCE A2 ECONOMICS UNIT EC4CTescos Oligopoly. The dotted sections of Da and Db are irrelevant as consumers are always going to choose any given quantity at the lower price, so the relevant sections of the marginal revenue curves are as in Figure 4. 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.) There are concerns about the way supermarket chains gain an advantage over small shops on the High Street. In 2005, a National Consumer Council study showed that retailers practices are contributing to, or aggravating, the inequalities that exist between the diet and health of more affluent and less affluent customers. Retailing Services: Tesco has taken the lead in its sector in expanding into areas like personal finance, telecom, and utilities. Theories to explain these imaginary curves were developed in a rare instance of simultaneous discovery by Paul Sweezy at Harvard and by R. L. Hall and C. J. Hitch in Oxford in 1939. a monopoly. So why doesnt this always happen? Supermarkets (Tesco, Morrison's and Asda) and cars are the perfect example for oligopoly market structure in the UK. The entire data are for Tesco's financial years, which run for 52 or 53 week periods to late February. Although Tesco has been criticised for acquiring too much of the market, by forms of hostile behaviour, and causing companies to be forced to close, it is easy to clearly see the benefits that consumers are benefiting from Tescos oligopoly. A survey by Sustain in 2005 showed that a basket of fruit and vegetables at a supermarket in Walthamstow cost 2.50 more than the equivalent at a market. A game occurs when there are two or more interacting decision-takers (players) and each decision or combination of decisions involves a particular outcome (pay-off.) Though there are many companies operating chain retail shop. EVALUATION OF TESCOS EFFECT ON THE CONSUMER. Farmers' organisations believe that a major contributory factor to this crisis in British farming is the increasing buying power of supermarkets and their ability to squeeze suppliers. industries that frequently exhibit characteristics of oligopoly: Here are some more details on 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. This means that each firm must take into account the likely reactions of other firms in the market when making pricing decisions. Equilibrium occurs when each player takes decisions which maximise the outcome for them given the actions of the other player in the game. METRO was only just behind and might move ahead again if the euro strengthens against the pound, but METRO's sales include many billions of wholesale turnover, and its retail turnover is much less than Tesco's. A monopoly is typified by a single competitor and widespread market control. Customers benefit from strong competition and falling prices in the sector. Tesco also wrote on their site that whilst lower prices benefit all consumers they are especially important to families on a budget and have made a significant contribution to making healthy food accessible to all. The dominant strategy is each prisoners unique best strategy regardless of the other players action. In an oligopoly, the relatively That said, Tesco will not be singled out for special treatment by the commission. Closure of many small shops on the high street of healthy food changes in cost Wal-Mart, Carrefour home... 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