In 2000, the UK Competition Commission reported on many of the supermarkets' unfair practices which were considered anti-competitive. Its important to relate the above graph to Tesco. The implication here is that the prices in oligopoly tend to be more stable than in the other theories of the firm. The Times have even described this behaviour as bulling and said that the bankruptcy of fruit and vegetable growers can be blamed on the bullish behaviour of retailers. The dominant strategy is each prisoners unique best strategy regardless of the other players action. 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. I have still deemed it sufficiently trustworthy to use, because of. This means that each firm must take into account the likely reactions of other firms in the market when making pricing decisions. They have a simple choice, either to confess to the crime (thereby implicating their partner in crime) and accept the consequences, or to deny all involvement and hope that their partner does likewise. In our example of the Prisoners Dilemma, the dominant strategy for each player is to confess since this is a course of action likely to minimise the average number of years they might expect to remain in prison. (See Figure 3). 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. Further insight can be gained by examining the marginal revenue curve. The diagram would be like the monopoly profit maximizer. 3. 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. An inclusive offer is a phrased used by Tesco to describe its aspiration to appeal to all customers of all income range, in the same stores. Their existence in a given industry can prevent new firms from entering the industry, while also inhibiting innovation and creativity. However, bigger firms cut prices so low that the smaller firms cant compete. 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. In oligopoly market structure each firm needs to consider that "how its actions affect the decisions of its relatively few rivals". Non-food Business: Many United Kingdom supermarket chains have attempted to diversify in other areas, but Tesco has been exceptionally successful. 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. Supermarket groups may be forced to sell off those chunks of their so-called land banks that are competition-spoilers. This is the ideal market structure, however, in a perfect world, it is very difficult to always obtain. It usually enters into joint schemes with major players in these sectors, contributing its customer base and brand strength to the partnership. 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. The price and quantity dont change regardless of cost. The main problem with the kinked demand curve model is that it fails to explain oligopolist behaviour consistently. The equilibrium in the Prisoners Dilemma occurs when each player takes the best possible action for themselves given the action of the other player. 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. Oligopoly is the market structure where few large market firms compete with each other. An optimal strategy for each prisoner must be reached (Figure 7 right). They may have differentiated products. The music industry is an oligopoly A Natural Monopoly Market Structure is the result of natural advantages like a strategic location or an . Governments can use law and policy to inhibit or support the existence of oligopolies. This is stated in The Office of Fair Trading website; Supermarkets, entry into the convenience store sector pushes prices down. Like any firm with market control, an oligopoly charges a higher price and produces less output than the efficiency benchmark of perfect competition. In part this comes from the rapid growth of deep discounters such as Aldi and Lidl who in November 2014 had accumulated an 8.4% market share, up from 6.95 in the autumn of 2013. . Groups of firms can also avoid governments laws against oligopoly if they are not restricted by these laws. The answer is, it probably regards Jekyll Tesco as the dominant personality but that the preliminary findings (not yet released) will be seen as curbing some of Tescos allegedly noxious habits. Capital costs can prevent competitors from entering an industry because, depending on the industry, the costs may be very high. As of its 2006 year end Tesco was the fourth largest retailer in the world behind Wal-Mart, Carrefour and Home Depot. At the same time, research has shown that supermarkets are not always the cheapest sources of healthy food. 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. More recently, and encouraged by government initiatives, supermarket chains have begun to set up stores in deprived areas, but this is not necessarily good news. CONCLUSION ON HOW TESCO AFFECTS BOTH CONSUMERS AND PRODUCERS. 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. In particular Tesco is squeezing suppliers on prices. For prices to change, costs would need to rise above that part of the MR curve which is discontinuous, say to MCiii (Figure 6, right) If demand increased, this too might not lead to an increase in price unless the demand curve moved far enough to the right to make the MC curve cut MR above the discontinuity of MR. Tescos growth over the last two or three decades has involved a transformation of its strategy and image. 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.In contrast, ASDAs marketing strategy is heavily focused on value for money, which can undermine its appeal to upmarket customers even though it sells a wide range of upmarket products. 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. And will consumers fall into the trap, and then later on pay the price? If the government intervenes by implementing, for example, a tax or a subsidy, then the graph of supply and demand becomes more complicated and will also include an area that represents government surplus. 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. Andrew Simms, an economist working for The New Economist Foundation, an independent firm, agrees with this concern: The paradox is that if the government hand supermarkets freedom to deliver lower prices to consumers, what do they do if they kill the competition and create a position of long term price increase? David Rae, head of convenience stores, said that Supermarkets sold lines at a loss to attract customers. This appears to convey that lower prices are really just a disguise and prices are bound to rise in the long run, once enough customers have been attracted. THE ADVANTAGES AND DISADVANTAGES OF OLIGOPOLY. This is a barrier that a government enforces, in the way it may allow privileges to certain companies rather than others. The big question is why dont the firms collude and agree together what to do with their money, instead of worrying about what the other firm might do? In addition barriers to entry increase concentration of wealth at the supermarket level. The Office of Fair Trading also mentioned price cuts as a concern: aggressive pricing by supermarkets may be distorting competition.. After analysing Tesco and its financial status, I think it is important to analyse a negative aspect that I discussed earlier and incorporate with the ideas derived from information about Tesco. 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.) The entrepreneurs added up their costs of production and then added what they thought was a fair profit margin. An oligopoly is a term used to explain the structure of a specific market, industry, or company. In oligopoly market structure each firm needs to consider that "how its actions affect the decisions of its relatively few rivals". When two or more oligopolies agree to fix prices or take part in anti-competitive behavior, they form a collusive oligopoly. Figure 13 below, illustrates the percentage point change in market share of store sales (2005-2007,) and it can be seen that convenience specialists and independent stores sales have decreased 6 points, while Grocery multiple sales have increased 7 points. oligopolies include: Oligopolies have a number of significant downsides, particularly for consumers. Thus independent record labels, which are not affiliated with these large Sprint (S), AT&T (T), and T-Mobile (TMUS). et al, 2008:298). What Are The Effects Of Tescos Oligopolistic Market Structure, On Both Consumers And Producers? A study by the National Consumer Council released in December 2006 showed that some supermarkets were undermining efforts to tackle health inequality, and that many economy lines were high in salt, fat and sugar. The report argued that the social and economic benefits of diverse forms of retail should be protected. In oligopoly market structure each firm needs to consider that "how its actions affect the decisions of its relatively few rivals". This process is illegal though, because firms are not allowed to set prices secretly, because it may cause unfairness to other competing markets. These services are available to UK residential consumers and marketed via, Economists have described it as Jekyll and Hyde Tesco. Using this phrase, we can ask whether the Competition Commission has seen the Jekyll Tesco or Hyde Tesco over the 17 month investigation of groceries markets which continued until 30. 1. Bigger firms force smaller firms out of business. 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. Therefore, it becomes easier to categorize and differentiate companies across related industries. This table illustrates how the 4 markets work in the real world. The Office of Fair Trading found that real prices for food had fallen 7.3% between 2000 and 2005, as seen in the above source. There are a few barriers to entry and exit. The ice cream market is an example of _____ because it has many sellers who offer differentiated products. Tesco has promised more brand marketing to help reverse declining sales. The result of these higher prices for consumers is higher profit margins for the firms involved in the oligopoly. Tesco bought into the USA market through internet shopping when it obtained a 35% stake in GroceryWorks. In contrast, ASDAs marketing strategy is heavily focused on value for money, which can undermine its appeal to upmarket customers even though it sells a wide range of upmarket products. 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. The degree of market concentration is very high. Tesco are abusing seller power, through practices such as price flexing and below-cost selling. The changes will see Sharry Cramond take up a role as head of brand and . As seen from figure 11, prices have decreased from 100 RPI in 2002, to 92 RPI in 2006.This is described as an 8 point drop., Tescos claims that between 2000 and 2006 Tesco prices fell by 17%. Firms operating in an oligopoly market with a few competitors must take the potential reaction of its closest rivals into account when making its own decisions. NCH the Childrens Charity found that travel costs to go food shopping added 23% to the shopping budget of low income families. Total Revenue Total Quantity x Price. (see earlier for further analysis into independent convenience stores.). Figure 8 (above) illustrates the percentage that each firm holds in the market. Collusion would therefore not be commonly exhibited publicly. 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. Accounting & Finance; Business, Companies and Organisation, Activity; Case Studies; Economy & Economics; Marketing and Markets; People in Business The main reason for sustaining prices at a constant level, is so that competitors can match price decreases, but not increases. New supermarket developments could result in the loss of even more independent shops. Supermarkets (Tesco, Morrison's and Asda) and cars are the perfect example for oligopoly market structure in the UK. ECONOMIC SURPLUS; PRODUCER AND CONSUMER SURPLUS. Since there are only a small amount of firms holding an oligopolistic position in the market, it is a big incentive for oligopolistic firms to merge. In an informal agreement, the firms behave as a monopoly and choose the price that maximizes output. 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 industry (Anderton. And that brings us to The Game Theory.. Supermarkets (Tesco, Morrison's and Asda) and cars are the perfect example for oligopoly market structure in the UK. A negative effect of oligopolies in general, is the increase in the concentration of wealth and income. 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. Monopoly inefficiency has the potential for being so harmful; it is inevitably subject to corrective government regulation. In an article in The Financial Times Richard Hyman, chairman of Verdict Research, said intervening in the grocery sector could have a counterproductive effect if redrawing the competitive playing-field had a material effect on supermarkets' ability to deliver low prices. From the above sources, it is easy to show that a retail/grocery oligopoly such as Tesco does not raise prices but decreases prices. CDs are one of the best examples, with Tesco Ireland promising to sell all chart CDs for 15(10.71). Some technical proposals from the commission that could have far-reaching consequences, are expected to rectify this problem, and it is likely that supermarket groups will be prohibited from buying land near to an existing store and then sitting on the land with intent of preventing a competitor from muscling in. That said, Tesco will not be singled out for special treatment by the commission. Tesco now controls just over 30% of the grocery market in the UK, approximate to the combined market share of its closest rivals, Asda, Sainsbury's, Morrisons and other grocery markets. Its report "High Street Britain: 2015", released in January 2006, predicted a bleak future for independent shops. 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