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The Effects Of Oligopoly On Consumers Economics Essay

860 words (3 pages) Essay in Economics

5/12/16 Economics Reference this

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According to BBC (2006), Tesco (30.4%), Sainsbury(16.2%), Asda (16.6%) and Morrisons(11.2%) dominant supermarkets and which produce approximately three quarters (74.4%) of output in the whole industry. According to Anderton (2008) Supermarket industry in the UK fits the characters of oligopoly. Firstly, relatively few suppliers control over in the industry. Secondly, each firm in the industry is independent. Thirdly, high barriers are established for new firms to entry firms in the industry, which preventing new firms from taking advantages of the abnormal profit in the market. Finally, large firm in the industry act interdependently. In this case, the supermarkets industry in the UK exhibits entirely an oligopoly industry (an oligopoly market defined by tutor (2006) is the one dominated by a few large firms, and each of which has control over the industry). In an oligopoly market, such as supermarket industry in the UK, the price stabilization and the lack of the price competition benefit consumers, on the other hand, collusion existing in the oligopoly will maintain the price in high which do harm to consumers.

To begin with, consumers can save considerable spending from the price stability in the oligopoly. With the kinked demand curve (figure1) (kinked demand curve assumes that there will be an asymmetrical reaction to a change in price by one firm (Anderton 2008)), if firm A increase their price, the rest large firms will not follow and keep their relatively low price unchanged. On the contrary, rivals are more likely to match a price fall by firm A to avoid a loss of market share (TUTOR 2U nd). In this instance, one large firm does not often raise its price since if it increases the price above P1Q1, there will be a loss in market share and a fall in total revenue of that firm. On the other hand, firms will not low the price below P1Q1 neither, as demand will be more inelastic and the total revenue will declines as well, though they will probably keep their market share (tutor2u 2006). In order to maintain the market share and make more total revenue, firms like Tesco, Sainsbury, Asda and Morrisons which occupy the main position in the UK supermarket industry will generally not raise or low their price. With the relatively lower and rigid price, consumers can save their spending while shopping.

Another advantage consumers enjoy in oligopoly goes to the non-price competition. It is apparent clear from Anderton (2008), price is often not the most important factor in the competitive process, but decide upon marketing mix which contains 4Ps-price, product, place and promotion.

Place-according Anderton (2008) a good distribution system is important to get the product at the right place. In the supermarket industry in the UK, in order to increase their market share, firms prefer to locate their store at a place with very developed transportation systems, though, it always with very high rent. Hence, amount their place competition consumers can purchase goods with a very convenient transportation system.

Promotion-although there is lake of price competition, price does different in particular few products. According Tesco(2010) and Sainsbury (2010), despite that there is the same product, Mobile LG KP170, Tesco sells it with promotion which is £19.97 and Sainsbury sells it on the original price £24.97. Obviously, it is £5 cheaper when buy the phone in Tesco in this period.

Price-producer set their price depend on the pricing strategy to be used. According to Anderton (2008), a high price needs to be set if the firm sold as a high quality product, conversely, a lower should be set if producer sold as a low quality goods. Thus, different groups of people can purchase the products rely on the different price.

To conclude the merits of the oligopoly industry to consumers, the non-price competition contribute consumers to purchase products in a relatively suitable or lower price. And the consumers can go shopping with very convenient transportation.

In spite of the advantages of an oligopoly market, drawbacks have brought to the consumers as well-COLLUDE and from a CARTEL¼ˆAnderton 2008). While there is non-price competition in oligopoly, firms will not raise or reduce their price in order to maintain the market share they already had. Once firms have colluded, they made an agreement amount each other, they can force up the price in a higher level¼ˆAnderton 2008). Under this circumstance, though, firms earn more abnormal profit indeedly; the consumers are suffering a huge exploitation. They have to spent more to purchase products which should be in lower price. However, it is apparent clearly from Anderton (2008), with the incentive that cutting price would increase its sales and market share; firms will probably cheat on any agreement which they made before they collude, cartels are usually unstable.

To sum up, despite the drawback exists in the oligopoly industry, the advantages are the neon to consumers. Under the oligopoly market, consumers can purchase product in a stable price and the non-price competition contributes consumer to gain relatively profit. Nevertheless, collusive oligopoly destroys that condition and cause consumers into exploitation, it is claimed that cartel should be banned highly to protect consumers.

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