The Oligopoly Supermarket: Benefit Consumers?

985 words (4 pages) essay in Economics

16/05/17 Economics Reference this

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In the early twentieth century, the idea, which is putting many different kinds of products together in one store and selling to consumers, is fulfilled by several companies (Tescopoly, 2005). Naturally the supermarket industry in the UK is becoming an oligopolistic market, which is dominated by several supermarkets. Safeway is one large supermarket company, which had been taken over by Morrison’s in 2003 (The Independent, 2003). Therefore, Tesco, Morrision’s, Asda and Sainsbury’s are the four main supermarkets, which have controlled the market share of food supplying more than seventy five percent in the UK (Channel4, 2010). The question that whether consumers are beneficial from the industry structure of oligopoly or not is argued by the whole society today. This essay will cover the characteristics of oligopoly, and both the advantages and disadvantages of the UK supermarkets will be discussed separately.

An oligopolistic market has several main characteristics that few firms dominate a whole market. Anderton (2008: 322) mentions that an oligopolistic market restricts new entrants where there are high barriers, the legislations and intensely competition. Oligopolies can benefit from the huge economic of scale that set a low price in order to gain a competitive edge. The competition between different firms in oligopolistic market is non-price competition, which means the firms are the price maker that others cannot influence setting the price of products. Moreover, the price in oligopolistic market is rigid. Otherwise, it is hard to change a product’s price in an oligopolistic market.

There are two main advantages in the oligopolistic market. Firstly, consumers and the government can benefit from the price rigidity and kinked demand curve. If one firm reduced the price of the products in an oligopolistic market, other competitors in this market will also reduce the price to avoid a decrease on sales (Anderton, 2008: 322). For example, if Tesco supermarket reduces one popular food’s price, Morrision, Sainsbury and Asda will set the same price as Tesco supermarket. Hence Tesco will have not enough time to earn profit by reducing the price. This situation is called kinked demand curve, which might lead to price rigidity in the market that consumers should not have to worry about the changeable price. What is more, the price competition in an oligopolistic market will be extremely intense; therefore the price competition can be seen as a perfect competition, which will bring consumers benefits. Thus, customers might not only reassure the price change but spend lower price with high quality goods in an oligopolistic market.

Secondly, an oligopolistic market will motivate firms to innovate and to offer more advanced services that firms can be more competitive in the market. For example, Tesco had opened the first zero-carbon store all over the world last year. ‘The store was made from timber, uses sun-pipe lighting and collects rainwater to flush the toilets and run the car wash’ (Tesco, 2010). Tesco (2010) also mentioned that it is the plan of the company to develop the company into zero-carbon by 2050. The new technologies and plans will bring more benefits not only to consumers, but also to the society, because it can make a lot of contributions to the environment. What is more, to understand the needs of the market and consumers, the companies in oligopolistic markets will work harder in marketing mix. The researches between market and consumers, such as the suitable places, different prices for different people and the better promotions are all beneficial for both consumers and producers. Beside the new technology and marketing mix, large supermarkets in the oligopolistic market will be more efficient for attracting more consumers. For example, a lot of supermarkets had begun to offer the vegetables, which were washed and chopped before selling that would offer consumers more conveniences. The consumers will prefer the companies, which can offer the more efficient services.

However, oligopoly has some negative effects simultaneously. In an oligopolistic market, the non-price competition might be unfavorable to consumers. Initially, the large firms aimed to maximize profits, which might lead to the collusion between the large firms. For example, if Morrison’s and other three companies colluded to set one popular product within a high price in the market, a lot of consumers cannot afford that kind of product. Times online (2010) points out that Tesco prepares to fight charges of collusion in price-fixing scandal in 2007. Tesco would use legal ways to clear that they do not collude with others. Asda and Sainsbury’s had admitted that they were parts of collusion that they would pay fines along with a number of daily firms (BBC, 2010). These evidences had reflected that although the law will protect the rights of consumers, collusions still exist between firms in oligopolistic markets.

Furthermore, consumers in an oligopolistic market have less choice. The barriers to entry the markets are extremely high, other companies therefore cannot entry the market. For example, Tesco, Morrison, Sainsbury and Asda can spend oceans of money on the advertisements, which means other small companies in the UK cannot offer the advertising cost and lose the competition. Bized (2007) stated that, to prevent competitors from building new supermarkets nearby, the block of land had been also bought by supermarket companies. This would result in other supermarkets leave the industry that consumers had to accept the price in the large firms, which means consumers’ alternatives have been highly restricted.

In conclusion, based on the discussion above, the positive sides of this oligopolistic supermarket market in the UK are obviously more than the negative sides. Consumers will benefit from the intense competition by enjoying more advanced technologies and more convenient services with lower prices in this high degree oligopolistic market. Although the barrier to entry this oligopolistic market is high, the higher quality goods will be produced by these four large supermarkets. Altogether, a good situation, which is really favorable to consumers, is existed in an oligopolistic market.

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