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The UK Supermarket Oligolopy Structure

Info: 872 words (3 pages) Essay
Published: 25th May 2017 in Economics

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There are mainly five key players in the supermarket industry- Tesco, Asda, Sainbury, Safeway and Morrisons (ChinaCCM). Thus, the supermarket industry in the UK could be described as an Oligopoly Market. Oligopolies lie between the definitions of perfect competition and pure monopoly. Firstly, there are several sellers but only a few big companies who have a large market share in the industry. In the UK, the five big supermarkets totally have 3/4th of the market share (123help me! com). Secondly, barriers to entry in the supermarket industry in the UK are high. Since the big firms have a great economic of scale in this area and sell products in a low price, hence they are competitive. Tesco is always ahead of all, Asda has been trying to close the gap, and Morrisons is struggling with its acquisition of Safeway. Finally, the firms in the industry are interdependent (Bized,a). The Kinked Demand Curve (Peoi) as figure 3 above is mainly made of two segments. The line on the up is highly elastic which will occur when the firm is losing its market share; the lower one is inelastic, which means no firm can gain more market share. Oligopoly market, which can be seen as advantages for consumers because of its similar and stable prices, the products are highly differentiation as well. Besides, there is a main disadvantage which is caused by the collusion.

SUPERMARKET SHARE

Tesco: 30.6%

Asda: 16.6%

Sainsbury’s: 16.3%

Morrison’s: 11.1%

Summerfield: 5.4%

Waitrose: 3.7%

Iceland: 1.8%

Source: TNS

Figure 2: Supermarket Share (TNS, 2008)

Figure 3: Oligopoly kinked demand (Peoi, 2002)

There are some advantages for consumers to buy in an oligopoly supermarket. The price is always similar among firms, supermarkets will not change price frequently, as well as homogenous products to purchase.

Firstly, supermarkets have to sell price in similar prices or even the same price. Since the firms are oligopolistic, a Cartel must be found to avoid price compositing, at this time, collusive oligopoly exist and agreements have to be reached. The larger the number of firms, the more importance that key principles have to be reached (Anderton A., 2008). Firms will keep their prices at one level for a long period of time and then change their prices at the same time. Thus, no matter which supermarket consumers purchase, the price will always be similar.

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Secondly, the price will be stable in the supermarket. According to the Kinked Demand Curve above, if a firm increases its price will lead to lose revenue, and so as to decrease the price. Therefore, as Peoi says, a firm will usually try to make the price stably. Moreover, as the kinked demand curve shows, there is a gap between marginal revenue and marginal cost, which means if the price remains the same; it is optimum for many different cost structures.

Thirdly, consumers have lots of different kinds of products to choose in the supermarket. Because there is no price competition, the prices will no longer be an important aspect for the firms, instead of it, the brand image and other aspects, such as good looking and function will be more concentrated on (Anderton A., 2008). As a result, products are usually highly differentiated.

Everything has two sides; there are some bad aspects for consumers to be at the oligopoly market. For instant, the most terrible effect for consumers is that they may need to pay more than the goods or services worth.

Sometimes consumers may force to pay in a high price. Since the firms are price makers, they may collude to set the price in high so that consumers have to pay a high price for their goods or services though this behavior is illegal (Welkerswikinomics). For the consumers, this may mean that high prices but possibly low quality. Moreover, if these few firms are around the world, it can control the price all over the world. As the graph illustrates below (Bized, b, 2010), the global oil prices should not have been so expensive, but because of the control under a few big companies that in many areas on the world, the price have been high for a long time. Compared to 1973, the price becomes so high is mainly because two factors, the important one is because of the oligopoly market structure, another one is because the oil becomes less and less in current days. Towards this situation, however, governments have no solutions to curb collusion.

All in all, the oligopoly market structure gives a similar and stable price to consumers no matter which firm they purchase in. In addition, there are variety goods to choose. Nevertheless, if the companies collude with each other to make the price high, it is harm to both the economic of scale and consumers. It is difficult to give a definition that whether the oligopoly market structure is totally good or not, however, on most of the aspects, the advantages is greater than the disadvantages. An oligopoly market offers a fair commerce on some aspects, it makes companies more focus on developing new products, in some level, and it indirectly makes the society and the technology develop more advanced.

 

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