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British Oligopolies in the Grocery Market

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Introduction

Oligopoly market is a scenario where the market is dominated by a few suppliers and many buyers. Oligopoly markets are characterized by identical or differentiated products, barriers to entry, independence, rigid prices, non-price competition, mergers and collusions. Firms in this market behave relatively similar to those in monopoly markets despite being controlled by a few suppliers (Boyes, 2010, p. 229). The large number of buyers in the market has fewer alternatives to choose compared to suppliers. The suppliers take advantage of the many buyers and determine the market supply and price. The products in the market are very close substitutes for each other, which makes the firms compete intensively for market share. The nature of the market structure also does not allow for free entry because of patents, copyrights, government rules, and regulations (Geetika, 2008, p. 323). New firms will also not be interested to join the market because of the associated high cost of advertisement and product differentiation to capture market share.

Each firm in this market makes an independent decision but after taking into account the possible action by competitors. In the long run, the firm can achieve high profits if they enjoy economies of scale and the marginal cost decrease, along with the increase in output, thus ensuring high profits. A small price increase by one firm with the intention to increase sales will lose many customers because competitors will not react to the variation in price. However, a decrease in price will not have any impact on sales because the other firms may respond by reducing their prices also and none of them will lose its market share.

Hypothesize the basic short-run and long-run behaviors of the model in the industry you have chosen in a “market economy.”

The equilibrium price and quantity in this market are determined through adjustment in the market forces to a point where DD=SS (Duffy, 1993). Firms in this market maximize their profits at the point where MR=MC. 

Since each firm makes economic profits in short-run, such profits will attract more firms into the competitive market in long-run. This will make the supply curve shift rightwards from S1 to S2 resulting to excess supply. Such an excess supply will exert a downward pressure on market prices from P1 to P2. The long-run market equilibrium point (B) is achieved through an interaction of long-run supply curve (S2) and the initial demand curve (D). As a result, an individual firm’s demand curve will shift downwards from D1 to D2. In long-run, each firm will charge price P2 and supply quantity Q2. The long-run equilibrium point of each firm will be at a point where MR2=P2=D2=Min LRAC. In this case, no firm will enjoy supernormal profits.

Explain the general pattern of change of the particular market model

In Britain, there are five supermarkets, which control 75.6% of the grocery market in the United Kingdom. The five supermarket chains are Tesco, Sainsbury’s, Asda, Morrison’s, and Safeway, which together control three quarters of the market share (Commission, 2005, p. 72). Many potential and talented entrepreneurs have been discouraged to join the market because of the associated cots to acquire market share. These firms enjoy economies of scale and supply at very low prices, thus tightening their competitive edge.  In the south, it has become very difficult for new investors because of the high costs to get planning permission in and around the town.

These supermarkets record high profits, while the consumers and workers suffer from exploitation. For example, a lot of criticism has been raised about Tesco from both individuals and national organizations.

Analyze at least three (3) possible areas for the industry that could lead to transaction costs, and explain each in detail

Price wars in the market have also had negative effect on consumers. A price war occurs in the oligopoly market, when competitive rivalry is very high, accompanied by a series of price reduction in the short-run. Once one competitor lowers the price, a series of price reductions follows as others compete for their market share. In the short term, the series of price reductions is good for consumers who take advantage of the decreasing price. However, the survival of firms is threatened at this level because of the decrease in profit margin. In the medium to long term, the price wars start to benefit the dominant firms in the market. The smaller and more marginal firms cannot survive the fierce competition and they are forced to close. In addition, with the few dominant firms remaining in the market, the consumer may lose too. The trend in price behavior starts to increase faster than before the war started and consumers become price takers. 

Speculate about the behavior that could result from these transactions and propose at least two (2) strategies for dealing with them.

Cost of living has increased in Britain due to the price wars of the supermarket industry, where they reap high profits.  This is because the pricing strategy of these firms increases their profits at the expense of the consumers’ welfare. In order to maximize profits, these firms set their output at the point where the marginal revenue equals marginal cost (Stroux, 2004, p. 68). The pricing strategy results in suppressed output and prices above the competitive level. 

The idea of price fixing among oligopolies is beneficial to them but highly detrimental to consumers. Price collusion is not economically desirable to consumers because oligopolistic firms set their prices and output like a profit maximizing monopolist. There has been agreement in prices, quantities for supply and service standard among the supermarkets. Cartels restrict output to monitor price behavior in the market. The agreements have also resulted in the collective rise in prices of products, thus worsening consumer exploitation (Parr, 2005, p. 434). On collusions, these firms charge monopoly prices, which clear the consumer surplus in the market.

Oligopolies have less to benefit in price competition and they mostly rely on product differentiation, barriers to entry in the market, and advertising the non-price discrimination method to maintain the market share. The main goal of using the non-price competition is to increase market share, while holding up with the price increase or reduction (McCready 1982, p.82). However, the costs involved are transferred to the consumer in terms of high prices in the long run. This results in loss of consumer welfare in the market.

A lot of product differentiation by these supermarkets means to keep their products unique. A lot of duplication of products has been done in order to deceive consumers into believing that they are different. The degree of consumer satisfaction has reduced because the same products are sold at different prices but only with different packaging and location. Most consumers have lost trust in the quality difference that the intensive advertisements for these products suggest. Consumer exploitation is experienced as suppliers want to maximize without considering the consumer or whether the product purchased gives the desired satisfaction.

Barriers to entry in oligopoly

Tesco is said to cause a lot of threat to small businesses who want to join the market. The supermarket chain is known to exert a lot of monopoly power over its products (Daft, 2010, p. 202). The supermarkets also gain planning permissions to build new stores through aggressive means, locking out small suppliers in the market. The chain supermarkets also exercise unfair dismissal of staff and commercial matters. It is therefore, evident that British consumers are not ready for an oligopolistic supermarket. The high set-up costs, also associated with the market, discourage new entrants. The breakeven output and the time lag of making profits increase with the high set-up costs (Salanié, 2000, p. 167). The main costs that a firm will incur on joining the market are marketing, advertising, and other fixed costs, which cannot be recovered once the firm decides to exit the market. A lot of research and development cost on Britain grocery market is also required for new entrants.

Explain the major factors that affect the degree of degree of competitiveness in your industry   Oligopoly market is an imperfect market which survives at the expense of the consumer. In this market, the supplier has the market power and the consumer have no say in the market. The rigid, high prices in the supermarkets have also contributed to the increase in cost of living, while the supermarkets have recorded very high profits. This is an indication that the British people are not ready for the oligopoly market. The pricing strategy, which also includes price discrimination, has a discriminatory effect against the low-income earners. The welfare of the people has been deteriorating, since the supermarkets maintain the high profits at the expense of consumers. The power, which these supermarkets have assumed for a long time, has discouraged entry into the market. Aggressive mechanisms have been used to stop new entrepreneurs, which may dissolve the market power and cut down the advantages that the firms enjoy.         

Strategy to deal with imperfect markets

The British government should make certain price control policies to be implemented in this market. Intensive public awareness should also be encouraged. This will ensure that consumers have vast knowledge on the products in the market, their price and quality. The government should also implement incentives to encourage fresh investments in the market. This will dilute the market concentration and consumers will have a say in the market. Unless there is intervention in this market to control the evils that these firms are exercising, then consumer exploitation may persist.

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