Oligopoly In The UK Supermarket Industry

1027 words (4 pages) Essay in Economics

5/12/16 Economics Reference this

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Supermarket plays a significant role in people’s social life, there are many necessities are sold in the supermarket. Supermarkets in the UK are very important for British people¼Œthey can buy everything they need in the supermarket. And the British supermarket industry is an oligopolistic market. This will be discussed in the following paragraph. According to Anderton (2008), an oligopolistic market is one where a small number of interdependent firms compete with each. Oligopoly in supermarket industry is good for the consumers. However, it still has some disadvantages.

To discuss the market structure of the supermarket industry in the UK, it can be described as an oligopolistic market. In figure 1 (guardian, 2003), the market share of the UK supermarket industry in 2003 is shown. There are 5 main companies running in the market and they own approximately 75% of the market. So this can be defined as an oligopolistic market. They are Tesco, Asda, J Sainsbury, Safeway and Morrisons. Tesco is the largest company in the UK supermarket industry. It owns 26% of the market. The Asda is the second largest company in the market. The oligopolistic market has 5 main characteristics, and to compare with monopoly market, in most situations, oligopolistic market is better than monopolistic market. The kinked demand curve in figure 2(Compilerpress, 2000) is one of the most important theories in oligopolistic market of economics. Anderton (2008) has suggested the definition of the kinked demand curve in an oligopolistic market: if a firm decreases its price of a good, then others companies will also decrease their prices in order to compete with that company. If a firm increases its price of a good, other companies will not decrease their prices that makes the company which increases its price lose money in the industry.

Figure 1: UK supermarket industry market share (guaidian, 2003)

Oligopolistic market has five main characteristics. First, “supply in the industry must be concentrated in the hands of relatively few firms” (Anderton, 2008:322). Second, Anderton has inclined that the companies in the industry must be interdependent. Third, he has also said the barriers for other company to entry the industry tend to be high. Forth, the competition between different firms in oligopolistic market is non-price competition. Fifth, price in oligopolistic market is rigidity. Anderton has demonstrated that price rigidity is that prices in oligopolistic are usually stable. These are the main characteristics of oligopolistic market.

Figure 2: The Kinked Demand Curve (Compilerpress, 2000)

Oligopolistic market has two advantages. First, the price of one product is acceptable in the market; it is hard to change a product’s price in oligopolistic market. This is also a characteristic of oligopolistic market which is mentioned above. Price rigidity is good for government to control the business, and a stable price is also good for consumers. Consumers do not have to worry when the price will be higher. It is convenient for consumers to make decisions. For example, in the UK supermarket industry, Tesco, Asda and Sainsbury may have collusions, so they all have almost the same price of the same product. According to the kinked demand curve theory, to make the biggest profit, these three companies will not change their prices easily. And this is good for the consumers in the UK. If there is no collusion between these firms, then they will try lower their price to compete with others. To another example, according to Wovre (2010), Asda has a plan which is called “roll back” scheme, Asda reduce its price around 0.5 billion pounds. At the same time, Tesco has also announced some price cuts, worth almost 12 billion pounds. This can be shown in the kinked demand curve in figure 2(Compilerpress, 2000), so consumers can take advantages from that competition. Second, oligopolistic market is good for each firm to concentrate on developing their new technology and new products. For example, because of the competition between these firms, they have to make more new products and make better products. Besides that, they also have to increase their efficiency to make products faster, so that they can lower their cost to compete with other oligopolies in the market. This is good for consumers too, because they have cheaper products to buy and they have more choices, there are many new products for them to choose to buy too.

However, it still has some disadvantages. First, Anderton has explained that collusion is that producers have collective agreements to restrict competition. Collusion may be bad for consumers because these firms could have collusions, and all of them will make the price very high. Some consumers can not afford the high price so they would not to buy that product. Second, there are also high barriers for other firms to entry the supermarket industry. For example, they may not have enough money to run the firm well and advertise their products. However, Tesco spends much money on advertising their products and services. These barriers make it difficult for other firms to entry the supermarket industry in the UK. So consumers have less choices, the only place for them to buy things is that five firms. Third, due to some people cannot afford the high price, low efficiency occurs. This makes those five companies lose a lot of consumers

To consider the discussion above, it is suggested that the oligopoly in the UK supermarket industry is more to the benefit of consumers because of several reasons. First, the prices of the products are acceptable for consumers in most situations, consumers do not have to worry about the price is too high to buy. Second, because of the competition between the oligopolies, there are increasingly more products are created so that consumers have more choices and they can enjoy the advanced technology. Third, although it is difficult for other companies to entry the industry, but these five firms are famous for consumers, and they can make sure that their products have good qualities. If other companies have come into the industry, most consumers will choose to shop in these five firms. All in all, oligopoly in UK supermarket industry is good for most consumers though it still has some disadvantages.

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