tesco oligopoly market structure
This creates uncertainty in such markets, and economists seek to model through the use of game theory (see page 5) Examples of some oligopolistic firms are Tesco, Asda, Sainsbury's and Morrisons. Customer focus, to create value for customers to earn their lifetime loyalty. It is more price elastic because of the assumption that at the higher price, firms will not follow but at the lower price, other firms will cut prices too. At the same time, research has shown that supermarkets are not always the cheapest sources of healthy food. The result of these higher prices for consumers is higher profit margins for the firms involved in the oligopoly. 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. Then the big firms raise their prices up. Combined, the consumer surplus, the producer surplus, and the government surplus (if present) make up the social surplus or the total surplus. 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. 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. Oligopolistic firms dont like cutting prices because it leads to a price war, where firms are continuously cutting prices down. Interdependence is also displayed in an oligopoly market structure. The biggest fours, Tesco (24%), Asda (13%), Sainsburys (13%) and Morrisons (12%) are holding the 62% of the whole UK grocery market jointly (Bailey, 2014). social media platforms). States are owned by just six massive corporations: NBC Universal, Viacom 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. They are now entering into the housing market, with a self advertising website called Tesco Property Market. Barriers to entry prevent competitors from entering the market. They all would like the other members to restrict their output to what everyone agreed but would want to increase their production. Because this assignment relates directly to oligopoly, I will now analyse the oligopoly market structure in more depth. Therefore, it becomes easier to categorize and differentiate companies across related industries. Tesco is the third largest global retailer in the world which just behind Wal-Mart and Carrefour (Baidu, 2010). 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For example, the decisions that firms must take over pricing of products, and also how much money to invest in research and development spending. A monopoly is typified by a single competitor and widespread market control. 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. publishers in 2012. Tesco has the holding share of the market with just over 30%, while Morrisons has the lowest with only 11%. Sainsbury which owns 16.3% of the UK supermarket shares and Morrisons which owns 11.5%, this means the Tesco has also moved into Internet Service Providing (ISP) and its own mobile phone and home phone sector. Monopoly inefficiency has the potential for being so harmful; it is inevitably subject to corrective government regulation. Tesco are abusing seller power, through practices such as price flexing and below-cost selling. Tesco rolls out successful UK initiatives in other countries. et al, 2008:298). They are able to do this because of their market shares and integrated supply chains. 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 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. The third point is simply, economies of scale. 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. In oligopoly market structure each firm needs to consider that "how its actions affect the decisions of its relatively few rivals". With these two facts, coupled together, its inevitable that a customer of a high income range, may go to Tesco willing to pay a higher price for a product than it is selling for. 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. The multinational retailer employs more than 360 thousand people. (Tutor2U, 2007)An oligopoly market is a market structure which shares a large percentage of the market by a few firms. Tesco and other supermarkets fail to pay farmers a fair share of retail prices too. The debate that may spark is whether we actually want more supermarkets, whether the benefits of greater competition outweigh what many see as the negative impact on communities and landscape of superstore proliferation. The term "oligopoly" is used to define a market in which there are few companies some of which control a large share of the market.In the oligopoly industry some major companies compete among themselves and the introduction of new firms on this market is complicated because of the presence of barriers to entry. THE INCREASE IN CONCENTRATION OF WEALTH AND INCOME INCURRED BY TESCO, AND ITS IMPACT ON CONVENIENCE STORES AND OTHER PEOPLE. October 2007. There are four major types of competitive market structure, these include: Perfect competition, Monopolistic competition, Oligopoly and Monopoly. Extent to which UK supermarket is oligopoly Three methods that an oligopolistic firm may employ as a form of competition are: Like any firm, an oligopolistic firm seeks to attract consumers and increase market share, while sustaining the price. a monopoly. As of its 2006 year end Tesco was the fourth largest retailer in the world behind Wal-Mart, Carrefour and Home Depot. This table illustrates how the 4 markets work in the real world. Tesco is an oligopoly as it is one of the few dominant firms in the supermarket market. 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. Save my name and email in this browser for the next time I comment. Others regard it as a threat with excessive market share, which takes over entire towns and convenience stores. The games theory is a theory often used to analyse interdependence among oligopolistic firms. In oligopoly market structure each firm needs to consider that "how its actions affect the decisions of its relatively few rivals". Tesco themselves say that it is an oligopoly, this is because Tesco is not the only supermarket in the UK, Tesco is the dominant shareholder but cannot be called a monopoly as there are many other firms which are in competition with Tesco e.g. The price and quantity dont change regardless of cost. This means that each firm must take into account the likely reactions of other firms in the market when making pricing decisions. It does help to explain price rigidity and why entrepreneurs are wary of price cutting as a business tactic or spoiling the market. Today a more common term is price-war. In an oligopoly market structure, there are just a few interdependent firms that collectively dominate the market. However, in the past few years, the supermarket industry has seen competition grow even further and the big four are now facing competition from low-cost retailers, including Aldi and Lidl. Thousands of farmers and workers are forced to leave the industry each year because of the low prices they receive for their produce. In figure 5, the two parts of the marginal revenue curve are joined with a vertical section to help show where the MC and MR curves intersect. The prevailing strategy for both firms is probably to go ahead with research and development spending. Their interdependence means that they are also likely to change their prices according to their competitors. Why is Asda a oligopoly? New supermarket developments could result in the loss of even more independent shops. Perfect competition is a market in which there are many sellers and many buyers. This means there is a few dominant firms in the market. Oligopolistic firms display forms of non-price competition because they have little to gain from price competition, so they rely on non-price methods of competing with other firms. 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. The report predicted that independent convenience stores were unlikely to survive by 2015 and independent newsagents were very unlikely to survive. For example, if Coca-Cola changes its price, Pepsi is also likely to do the same. This way, the firm will maximise their profits. Supermarkets (Tesco, Morrison's and Asda) and cars are the perfect example for oligopoly market structure in the UK. Customers benefit from strong competition and falling prices in the sector. A monopoly is typified by a single competitor and widespread market control. In this diagram when costs rise, from an increase in sales taxes for example, the marginal cost curve MCi moves upward to MCii. 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 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. Despite their complain of providing affordable food, supermarkets play a large part in this problem. Similarly a price fall has the same effect on revenue. (while there are more than 50 suppliers total, most of whom hold much less of airlines like British Airways and Air France will have relatively few During this assignment I wish to highlight the benefits and losses that consumers and suppliers are likely to experience while shopping at Tesco. The company has a total market value of about 36,761.71m (April 2007) and is the largest private sector employer in the UK and second to the NHS overall. Oligopoly is the market structure where few large market firms compete with each other. The classic example of game theory is the Prisoners Dilemma, a situation where two prisoners are being questioned over their guilt or innocence of a crime. 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. 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. This is therefore tied into the above concept of consumer and producer surplus, because they are making a loss due to selling products for cheaper than the customer is willing to pay. Mikey HolderGCE A2 ECONOMICS UNIT EC4CTescos Oligopoly. Figure 8 (above) illustrates the percentage that each firm holds in the market. Market structure of Tesco and British Petroleum with reference UK Supermarket Sector. Likewise, a report by the New Economics Foundation (NEF) from 2005, Clone Town Britain, found that chain retailers are damaging to the local economy, social inclusion and local identity. They instead compete by creating a brand, providing customer service, discounts and coupons, and product differentiation. And particularly in mixed economies, governments may institute policies explicitly allowing oligopolies to exist, where they are regulated/supervised by government agencies. This report also found that some of the chains were engaging in price-flexing. Since firms are interdependent, they have the choice of competing against other firms or collaborating with them. Oligopolies exist worldwide and may, in fact, be increasing in prevalence over time. Oligopoly The simple characteristics of these market structures can be seen in Figure 1 (right.) A Natural Monopoly Market Structure is the result of natural advantages like a strategic location or an . The most significant threat to the existing balance of an oligopoly is the fact that each business in such a structure is incentivized to sabotage the other businesses for their own financial benefit. The highest net profit observed over the 9 year period, occurs in 2005 with a 24.18% increase in net profits. There are three reasons why this may have happened: Tescos use of its own-brand products, including the upmarket Finest and low price value ranges. Based on the above features, economists have used this information to describe four distinct types of market structures. This table illustrates how the 4 markets work in the real world. corporations, have significantly less power within the industry. Advantages of oligopoly market structure. Tesco is simplifying its marketing structure under three teams in a move that will result in some redundancies at senior level as it looks to up its focus on the customer. profits, as consumers are forced to pay more. However when a supermarket squeezes its supplier, it merely reallocates profit margin from supplier to retailer and there should be no assumption that the retailer's saving will be shared with consumers. Sudden falls in demand for the product in one area is likely to be offset by an increase in demand, elsewhere. Thus independent record labels, which are not affiliated with these large The answer to the first question is logical; Tesco will balance the loss with profits made on other product lines. Specifically she thought there might be a demand curve with a kink in it. Supermarkets are best value for unhealthy and heavily processed foods. In the music label side of things. Oligopolies include positive and negative aspects. It might be a particular firm situated in an isolated area of town. Capital costs can prevent competitors from entering an industry because, depending on the industry, the costs may be very high. Like many economists, he presents an ideal market that exists independent of politics and power. 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. However, if they are a few big firms with similar costs and rising demand, the agreement is likely to last. Tesco has been investing in its stores pipeline since mid 1990s. However, a supermarket must get approval every time it tries to incorporate a store from a competitor. 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 national accounts, operating surplus is roughly equal to distributed and undistributed pre-tax profit income, net of depreciation. Also, we analysed that Tesco can drive prices down as a benefit of economies of scale. 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.) In 2001, Tony Blair claimed that British supermarkets had farmers in an 'armlock'. Tescos financial performance can be analysed using a lines-on-two-axes graph, which is a classic combination chart, used frequently to analyse two related entities. 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. 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. This means there is a theory often used to analyse interdependence among firms! 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