The Oligopoly Uk Super Market Industry Economics Essay
In Britain, the supermarket industry is controlled by a few major firms who share the market percentage greater than 74. According to Anderton (2007), an oligopoly market is a combination of a small number of interdependent suppliers holding more than 70% of the market share, creating a high barrier for other firms to enter the market. As well as the UK supermarket industry behaviors, it is obviously to identify that the market ran by an oligopoly.
(BBC NEWS, 2008)There are four major members in the Britain supermarket industry. As the figure BBC NEWS (2008) shows, Tesco who is believed the biggest member in the market owns 31.4% of the market share. Meanwhile, the other three, Asda, Sainsbury’s and Morrison’s, each takes more than 11% of the market share, so that they can named as the four giants in the market (BBC NEWS, 2008). The main purpose of this essay is to give a discussion on the advantage and disadvantage of oligopoly base on the UK supermarket. The oligopoly market can benefit consumers by charging a ideal price, creating innovative products and making consumers’ life easier, however, a oligopoly market may also limit consumers’ choices, damage community culture, and consumers’ benefits may be harmed by a collusion.
On the positive side, the British supermarket industry establishes a situation that is more convenient for the consumers to visit their stores and satisfy their needs and consumption. The several major supermarket giants compete with each other by creating new product and setting an ideal price for their consumers.
First of all, oligopoly is different from perfect competition in the fact that price is not the primary concern of firms. The supermarket giants in the UK supermarket industry prefer to gain profits through expanding the scale of their firms and increasing products and services. This is based on the non-price competition theory. According to Anderton (2007), this form of competition is defined that competitors will develop their market shares by making a decision upon a marketing mix rather than compete with each other with lower prices. That means, they will pay more attention to distributing the better ‘4Ps’--product, promotion, place and price rather than only considering a price strategy. This creates a favorable situation for the consumers, because more and more supermarkets will be run in different areas, which can make shopping more convenient for consumers. For instance, the four giants-- Tesco, Asda, Sinsbury and Morrison’s are implementing a new strategy to expand their business --opening some small stores to help a number of “ cash rich, time poor” consumers (BBC NEWS, 2006). Therefore, this type of stores can save time for busy men and women. Moreover, honoring the “4P” principle, firms in an oligopoly market will pay attention to the products and services quality, which may benefits consumers .As Tesco (2008) stated, many products in stores have been improved in product safety.
Secondly, a number of types of products produced by the major firms because of a furious competition among them, which gives the consumers plenty of shopping choices and results in the prosperity of the market. In this situation, firms compete with each other by manufacturing more innovative products, and it is necessary for them to keep their ideas new. But more importantly, consumers can buy new products in the supermarkets, which can make a colorful life.
Finally, because there are only a few members in the industry, firms can easily develop their scales, which can lower their cost of overhead. Hence, the price they give to consumers may be lower than other places. According to Tesco (2008), “The OFT estimates that grocery prices have fallen by over 7 percent in real terms between 2000 and 2005”, and the past three years, consumers have saved more than £3 billion with this action. Hence, consumers can receive a lower price in supermarkets due to the scale economics. Moreover, kinked demand curve is another feature of oligopoly. According to Anderton, (2007), firms that are run based on a Kinked demand curve will keep the price of products unchanged when competitor higher its price, but will reduce its price when there is a price war, as the figure blow shows. For example, Asda’s CEO said that his stores would reduce goods price in 2008, likewise, Tesco has reduced its price by £170 m that year (Sibun, Jonathan & James Hall, 2008). Obviously, kinked demand curve is a good theory for consumers, because consumers can purchase goods by a lower price when a price war started. In fact, it is risky for one firm to change its price. According to Anderton, (2007), change price will have a potential threat for firms to lose their market share and profits, so it is better for firms to keep price stable. This gives oligopoly another characteristic –price stability. Therefore, price in the oligopoly market will maintain at the same level, it is called Price rigidity in economic (Anderton, 2007), which in general benefits the consumers.
(Dennis W , Carlton & Effrey. M ,2000)
On the other hands, there are, however, still some drawbacks of oligopoly, such as setting a high barrier for other firms to enter the market, destroying local community culture, and posing a price threat to consumers in collusion.
First of all, as one of the characteristics of oligopoly, the barriers to enter the market are too high. Thus, in Britain supermarket industry, it is hard for smaller business to enter the industry due to the stable market share taken by the four giants. As Anderton (2007) states, firms will limit the competition in order to increase market shares rather than change its product price, which is risky for the companies. According to BBC NEWS (2006), the four giants own half of the UK’s shops. What’s more, due to new big supermarkets open, two hundred independent new convenience stores forced to close down from June 2004 to June 2005 (BBC NEWS, 2006). And because of that, “many people had too few large supermarkets to choose from in their local area” (BBC NEWS, 2008).
Further more, although supermarkets can convent some busy consumers’ life, some small business in local communities may be destroyed by the invasion of supermarkets into the convenience store sector. The culture of the local communities will be swallowed by commercialization, and may cause a negative effect to traditional culture event (BBC NEWS, 2008).
Finally, according to Anderton (2008), when the large companies in the oligopoly market collude together from a cartel, a collusive oligopoly will existed. In this situation, big companies usually colluded together and reach an agreement, which can maximize their abnormal profits. In order to achieve this goal, they may reduce their output and raise goods price. However, it will harm the products supplier to these supermarkets giants and the consumers.
To conclude based on the UK supermarket situation; an oligopoly market has both positive and negative influences to the consumers. To consider the benefits of oligopoly bring to consumers only, it is beneficial to the consumers with a lower price, numerous innovative product choices and saving consumers’ precious time. Therefore, it is suggest that companies should start a strategy which is satisfy the consumers and benefits consumers, avoid to make some wrong plans which may increase their profit in a short run but lose their consumers in a long run. Therefore, while making more profits, companies should pay more attention to the consumers' advantages, such as leaving places in local communities for other small independent stores to survive, reduce the possibility to make a illegally price rise. It is believed that, an oligopoly market may have many potential values to not only the economic growth but also consumers’ life.
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