Oligopoly Analysis of the competitive supermarket industry

Oligopoly Analysis

The supermarket industry in UK is believed that an oligopoly market and it is highly competitive by few large firms. The main four firms in supermarket industry nearly dominate 75% of the whole market share. They are Tesco, Sainsbury, Asda and Morrison's. (Ireland, 2007)The characteristics of oligopoly are the supplies in the industry are owned by some relatively firms; firms must be interdependent and high barriers to entry the industry. (Anderton, 2007:p322)The advantages and disadvantages will be analyzed with the oligopoly characteristics,market conducts,kinked demand curve and some principles of oligopoly.

The characteristics and function of oligopoly bring some benefits to the market and consumers. First of all, in oligopoly, the supply in the industry is mostly concentrated in the hands of relatively few firms (Anderton, 2008:p322). In other words, the majority of supply is held by very little number of companies'. For instance, In the UK, the four big firms hold a very big percentage of the supply in supermarket. There are amount of citizens in the UK prefer this four big supermarkets because their goodwill and big power. Therefore, the four supermarkets can gain huge profit to develop economics of scale which can help company to lower the cost in overheads due to their power and knowledge in this area. This can directly save money and avoid waste of resources which is good for society, especially for the UK. Moreover, the capital they put in research are higher than monopoly or perfect competition because the new technology is an effective way for developing the company. In addition, they will increase their service quality to attract more customers to compete with the other three main competitors which can be called as non-price competition. Thus, customers can receive a better product or preferable service by oligopolist.

Secondly, the companies in the oligopoly are interdependent. This means if a large firm has an action in the market, it will cause a big effect on the other large company in oligopoly. (Anderton, 2008:p322). The advantage of this is consumer may receive a far lower price in the market. For example, in 2003, Tesco launched a price war that they announce a plan about more than 100 million pounds worth of their price will be cut in the future. It is certainly a big bomb in the supermarket. The another big supermarket—Asda, reacted at once that to announce their plan in that week is cut price on many good sell goods, such as lower the price of jeans to six pounds.(Fletcher, 2003) In the oligopoly, the main competition between the firms is price war which is not good for competitors. One firm will want to sometimes lower their price for gaining more market share through marketing mix which uses four elements (product, price, place and promotion) to make a suitable market strategy for the product, but another big company in the market will not allow the competitor to achieve this target. The large firms in the market will raise or lower their price carefully. The situation in the oligopoly about price can be shown in the kinked demand curve below which can show the influence of sell by changing the price in oligopoly market. Consequently, they will lower their price either or make some series promotion activities for stabling their market share. The consumers will prefer to see price war because they can purchase goods in a lower price than before. However, the price is stabled in most of the oligopoly market. Because a stable price is good for all the big firms in the market by avoiding price war and also benefit to consumers in a unchanged good price. This can also be called as price rigidity.

Lastly, there are high barriers for entry the oligopoly. (Anderton, 2008:p322). The firms in oligopoly will use their economics of scale to lower the price as they can to avoid other companies to get in the market and take away their market share. For instance, the barriers to entry the supermarket industry in the south of the UK is difficult for the other supermarket because of the planning permission is hard to get. This is one of the barriers—Legislation.(“The UK supermarket”,n.d) Therefore, the Morrison's decided to acquire Safeway in order to control the market in the south of the UK and Scotland.(“Morrison's acquires Safeway”,2003) Without this action, the Morrison's may be impossible to enter the market in the south of the UK. The advantage for the oligopolist is they can reduce the chance of other companies to take away their market share due to the legislation and competition. For the consumers, they can have a more stable market rather than lots of uncertain change in the supermarket industry that may bring some inconveniences to them.

The oligopoly has some disadvantages to the market and consumers. The first one is the barriers are too high for other competitor to get in the oligopoly market. Therefore, it makes the level of competition become lower and it directly influences the attitudes of the firms and the speed of development that the firm may not provide good service to the consumers.

Another disadvantage of oligopoly is the large companies may collude as a cartel to make some policy to the goods together for gaining more abnormal profit. This is known as collusive oligopoly (Anderton, 2008:p323). For instance, the big firms may collude together to raise the price unfairly. Therefore, they can get more profit due to the rise in price by the oligopoly. This is bad for consumer because they have to pay more to the goods which may be not the standard price.

To conclude, oligopoly is very common in the market 0all over the world. Through analyzed with characteristics of oligopoly, kinked demand curve and the principles of oligopoly, from the case of the supermarket industry in the UK, it brings the benefits to the consumers in lower price, avoid waste, new technology, better service and decrease the uncertainty in the markets. However, there are still some potential problems in oligopoly. Among perfect competition, monopoly and oligopoly, there is not any standards about which one is better. All of them have advantages and disadvantages. The situation in the supermarket industry in the UK is showing oligopoly is still suitable now. However, the government and the market should pay attention to the problems about less competitive and price illegally rise.

Reference Section

Anderton, A. (2008).Economics (5th Edition) Harlow: Pearson Education

THE UK SUPERMARKET [Online] First 1500 of UK supermarkets-oligopolistic competition: 123helpme

Available at: http://www.123helpme.com/preview.asp?id=97935

[Access date: 2010.1.31]

Fletcher, R. (2003) [Online] Tesco and Asda launch new price war: Telegraph

Available at: http://www.telegraph.co.uk/finance/2838462/Tesco-and-Asda-launch-new-price-war.html

[Access date: 2010.1.31]

Ireland, D. (2007) [Online]Identify the various challenges and opportunities existing in the UK supermarket industry: bnet

Available at: http://findarticles.com/p/articles/mi_m0EIN/is_2007_May_21/ai_n19154961/

[Access date: 2010.1.31]

MORRISON'S ACQUIRES SAFEWAY (2003) [Online] Morrison's acquires Safeway: Arla

Available at: http://www.arla.com/press/archive/morrison-acquires-safeway-/

[Access date: 2010.1.31]

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