The third point is simply, economies of scale. The dominant strategy is each prisoners unique best strategy regardless of the other players action. What Are The Effects Of Tescos Oligopolistic Market Structure, On Both Consumers And Producers? To state the obvious, when suppliers provide supermarkets with more items at a cheaper price, that is in theory good news for shoppers, and they are also offering good in-store service, and a comfortable shopping environment. Note that producer surplus flows through to the owners of the factors of production, unlike economic profit which is zero under perfect competition. During this assignment I wish to highlight the benefits and losses that consumers and suppliers are likely to experience while shopping at Tesco. 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.. 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. CONCLUSION ON HOW TESCO AFFECTS BOTH CONSUMERS AND PRODUCERS. Monopoly inefficiency has the potential for being so harmful; it is inevitably subject to corrective government regulation. The answer to the first question is logical; Tesco will balance the loss with profits made on other product lines. It usually enters into joint schemes with major players in these sectors, contributing its customer base and brand strength to the partnership. As the biggest holder of land, Tesco is bound to be seen as the most at risk here. But if both prisoners choose to confess, their pay-off is higher than if they both choose to deny any involvement in the crime. While individually powerful, each of these firms also cannot prevent other competing firms from holding sway over the market. Further insight can be gained by examining the marginal revenue curve. Let us study the four basic types of market structures. 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. Appealing to customers of all income ranges is also a main reason to the leap in growth. Governments can use law and policy to inhibit or support the existence of oligopolies. 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. 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. 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 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. Tesco believe that they do more by running promotions on fresh fruit and vegetables; they now sell 95 fresh fruit and vegetable Value lines and are also working with the Pre-School Learning Alliance to help parents and children in some of the UKs most deprived areas to make healthier choices. The knock on effect of this will be further damage to the independent retail sector. Also, we analysed that Tesco can drive prices down as a benefit of economies of scale. Study with Quizlet and memorize flashcards containing terms like An oligopoly is a market structure, Three examples of oligopolies in the United States are industries that produce or sell, Without barriers to entry, and more. . At current, a supermarket can develop a site it already owns without approval from the competition authorities. The naive reaction to oligopolies is that they invariably stifle competition and artificially inflate prices. 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. Overall, quantity demand increases as the demand curve slopes down, but the increase is less than proportionate. This is illustrated by the use of The Kinked Demand Curve. (See later.). It found 52 kinds of abusive trading practices. Above, I mentioned that a common behavioural tendency that is exhibited by oligopolistic firms is interdependence. Even if there is no agreement, oligopolistic firms dont end up changing their output with changes in cost. Tesco rolls out successful UK initiatives in other countries. Sainsbury which owns 16.3% of the UK supermarket shares and Morrisons which owns 11.5%, this means the By late 2004, it was widely regarded as a major competitive threat to traditional high street chains in many sectors, from clothing to consumer electronics to health and beauty to media products. There are a few barriers to entry and exit. social media platforms). Tesco and other supermarkets fail to pay farmers a fair share of retail prices too. 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. The graph (right) illustrates this: consumer surplus is red, and producer surplus is blue. What Are The Effects Of Tescos Oligopolistic Market Structure, On Both Consumers And Producers? Save my name and email in this browser for the next time I comment. Existence of Oligopolies, Special legal privileges (this is one of the ways that governments can support the existence of oligopolies)for instance, if firms have special permission to use land for infrastructure like railroads, Platforms that tend to increase in value as they gain more users (e.g. For smartphone operating systems, In all threemonopoly, duopoly, and oligopolyother firms will experience major barriers to entry. Mass media is a very significant This leads to competition in the oligopoly market. By taking on this marketing strategy, ASDA have seemingly lost interest from upmarket customers, that Tesco benefit from, as well as the customers looking for good value. The games theory is a theory often used to analyse interdependence among oligopolistic firms. 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. The prevailing strategy for both firms is probably to go ahead with research and development spending. 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. However, this thought can be quickly dismissed as Tesco are unlikely to release false data due to the fact that they are being monitored by the London Stock Exchange. There is a lack of competition. in price fixing of electronic books. In oligopoly market structure each firm needs to consider that "how its actions affect the decisions of its relatively few rivals". One of the outcomes, of increases in the concentration of wealth and income, is the closure of independent local stores as stated on The Office of Fair Trading website, where it says that Supermarkets entry into the convenience store sector may force local stores to close. It also appears the Tesco are abusing buyer power and the planning system. Tesco PLC organizational structure is decentralized, tall (hierarchical) and product-based. Tesco being in perfect competition faces a challenge that they have to lower their price to remain in the market leadership where as British Petroleum's oligopoly market structure helps them in building a price by mutual interdependency with their competitors. 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. In Figure 2, the current price is therefore determined by cost-plus pricing. 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. a monopoly. 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? THE INCREASE IN CONCENTRATION OF WEALTH AND INCOME INCURRED BY TESCO, AND ITS IMPACT ON CONVENIENCE STORES AND OTHER PEOPLE. The company has taken the lead in overcoming customer reluctance to purchasing own brands, which are generally considered to be more profitable for a supermarket as it retains a higher portion of the overall profit than it does for branded products. A market is deemed oligopolistic or extremely concentrated when it is shared between a few common companies. These companies are technically competitors in their industries, but in In oligopoly market structure each firm needs to consider that "how its actions affect the decisions of its relatively few rivals". The report argued that the social and economic benefits of diverse forms of retail should be protected. When two or more oligopolies agree to fix prices or take part in anti-competitive behavior, they form a collusive oligopoly. Firstly, many oligopolistic businesses tend to hold their prices at a constant level, preferring only to compete in ways that do not involve changing the price. |. 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. 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. 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. Oligopolistic firms are also able to take advantage of economics of scale that reduce production costs and prices. 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. 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. 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 . 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. Tesco is an oligopoly as it is one of the few dominant firms in the supermarket market. Tesco sells an expanding range of own-brand non-food products. "Own-label sales generate 38% of Sainsbury's total revenue, with its Taste The . In May 2005 the IGD revealed the loss of 2,157 unaffiliated independent convenience retailers, compared to only 1,079 the year before. Because this assignment relates directly to oligopoly, I will now analyse the oligopoly market structure in more depth. The United States publishing market The profit maximising oligopolist still equates MC with MR in order to determine the level of output. At the same time, research has shown that supermarkets are not always the cheapest sources of healthy food. For example, if Coca-Cola changes its price, Pepsi is also likely to do the same. And there are concerns that a tipping point could be reached. Their market share gives them a level of flexibility between store formats and over product pricing, and control of supply chains. This report also found that some of the chains were engaging in price-flexing. document.getElementById( "ak_js_1" ).setAttribute( "value", ( new Date() ).getTime() ); Comparing Oligopoly to Monopoly and Duopoly, The Role of Governments in the Existence of Oligopolies. 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. In the field of air travel, large 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. During the 1990s Tesco expanded into Central Europe, Ireland and East Asia. Each of these factors reduces the long run average costs of production. Many modern goods, including computers, cars and assorted household products, would be significantly more expensive if they were produced by a large number of small firms rather than a small number of large firms (oligopolistic firms. In the five years to 2002, 50 specialist stores including butchers, bakers, fishmongers and newsagents closed every week. Oligopolistic firms dont like cutting prices because it leads to a price war, where firms are continuously cutting prices down. Many of the 12 original provisions recommended by the Competition Commission were weakened. When executed correctly, collusion means that firms behave as if they are on firm-i.e. An oligopoly is a market structure with a small number of firms, none of which can keep the others from having significant influence. Extent to which UK supermarket is oligopoly Marginal Revenue the revenue earned by selling one more unit. The report also highlights on the key success factors when operating in this retail industry. The main reason for sustaining prices at a constant level, is so that competitors can match price decreases, but not increases. Firms often try to lower their price as much as possible to deter new entrants. 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. Each seller intends to maximize its market power however, their actions are influenced by the actions of the other sellers. 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.. Once small independent stores shut, there are often insurmountable barriers to getting back into the High Street. Retailing Services: Tesco has taken the lead in its sector in expanding into areas like personal finance, telecom, and utilities. et al, 2008:298). 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. Equilibrium occurs when each player takes decisions which maximise the outcome for them given the actions of the other player in the game. The simple answer is because, as I mentioned above, colluding is illegal, because it would be unfair on other competing firms. 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. 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. Barriers to entry prevent competitors from entering the market. Total Revenue Total Quantity x Price. Please see the food poverty page and Sustain's Food Access Network for more information on this. Customer focus, to create value for customers to earn their lifetime loyalty. Advantages of oligopoly market structure. 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? This way, the merged firm will hold additional authority within the market. Thus independent record labels, which are not affiliated with these large 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. Many markets can be considered as monopolistically competitive, often including restaurants and book shops, in large cities. Oligopoly is a type of Market Structure. Including 60 weeks of non-UK and Ireland sales the figures to 24 February 2007 were: As seen from figure 9, Tescos turnover and net profit have been increasing steadily since 1998, without exception. At 24 February 2007 Tesco operated 1,988 stores in the UK, and 1,275 outside the UK. Jack Cohen, the founder led it to its initial success on the approach of Pile it high, sell it cheap. The only disadvantage of this was that the stores adopted a poor image with middle-class customers. Business Studies. An optimal strategy for each prisoner must be reached (Figure 7 right). Tesco bought into the USA market through internet shopping when it obtained a 35% stake in GroceryWorks. The market is dominated by four key manufacturers known as Big Tobacco. 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. 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.) 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 degree of market concentration is very high. This could damage independents and smaller chains, and in turn damage consumers. 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. 2. 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. 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. This table illustrates how the 4 markets work in the real world. Sudden falls in demand for the product in one area is likely to be offset by an increase in demand, elsewhere. 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. Another important characteristic of an oligopoly is interdependence between firms. I have still deemed it sufficiently trustworthy to use, because of. The. A few took into account what the market price was but none was able to calculate marginal costs and revenues. So why doesnt this always happen? There are no barriers to entry whatsoever. 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.) 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. In the music label side of things. 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. Laws can prevent behaviors like collusion, price-fixing, output restrictions, and so forth. When XYZ firm entered the market for good A two years back, it kept the price of its product low to attract . Android, iOS, and Windows are the most prevalent options. Are supermarkets oligopoly or monopoly? 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