Oligopoly Market in UK Supermarket Industry
In this essay I will search the information about supermarket industry in the UK, focus on the characteristic of oligopoly market and try to find out the effect of this market structure to customers, analysis its advantages and disadvantages.
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According to my search, there are a five big supermarket companies in the UK: Tesco, Asda, J Sainsbury, Safeway and Morrisons. We can see in the following diagram, in 2003 and 2008, Tesco is throughout having the most market share and the Asde .J Sainsbury Safeway and Morrisons always competitive with each other, having a large market share. So, the supermarket industry in UK is oligopoly market.
The reason why the UK supermarket industry is oligopoly market for the follow reason:
1. Supply in the industry must be concentrated in the hands of relatively few firms. (Anderton A. (2004:322). In the UK, these supermarkets consider how much to supply and maybe make evaluate that how much their competitors will supply so that to insure the supply
2. Non-price competition (Anderton A. (2004:322). In UK supermarkets, in order to expand their market share, non-price competition has become a marketing strategy, As Revision Guru (2010); the supermarket will use different kinds of promotion or some way to encourage the consumer to buy more.
3. Collusion. Collusion is often a feature of the behaviour of firms in oligopolistic markets where it is not illegal. (Anderton A. (2004:323)
4. Many markets are dominated by brands. (Anderton A. (2004:323) .Every firm may produce the nearly the same good, in order to discriminate their good, many firms will make it as a brand to sell higher price.
5. Price rigidity. Price in oligopoly market changes far less than perfect competition in market. (Anderton A. (2004:323)
The above is the characteristic of the oligopoly marker, and UK supermarket industry is match its characteristic, therefore, I draw a conclusion; UK supermarket industry is oligopoly market. In the follow section, will focus on discussion the advantages and disadvantages of this market structure for the consumers.
In the oligopoly market, consumer can benefit from many ways.
First of all, in the oligopoly market, consumers may have a better service a. For example in UK supermarkets, it is not only Tesco, but also Asda, J Sainsbury, Safeway…That means, consumers have choice to where they buy. As I mention above, oligopoly market is non-price competition, all the supermarkets sell almost the same good in the same price, in order to earn more money, the compete supermarkets may use different way to expand their market share, changing their marketing mixï¼Œsuch as Internet shopping for customers, Store Loyalty cards, Innovative use of technology for shoppers including self-scanning machines and so on (Revision Guru (2010), by changing in four area: product, promotion, place, pricing so that can promote the development of service of the supermarkets. In this process, consumers can enjoy a better and convince shopping service.
Secondly, in the oligopoly market, consumers have more opportunity to buy a new and advanced produce. According to Buzzle (2010), in the oligopoly market, because of the strong enterprise strength and a lot of funds, these companies will invest much money in produce research so that to create new produce, also, companies want to be more competitive, they must have something new to attract consumers. Therefore, consumers can benefit from this new produce to improve their living.
Thirdly, in the oligopoly market, the price is more stable, consumers can accepted it. In the oligopoly market, the price change very little, because if one company change price, other company must be affected and have some reaction, For instance, according to Worve (2010), Tesco if reduce 3% to 25% of each good, this will increasing its revenue and even increase its market share expand 12% in eight weeks. Besides, in the oligopoly market, other companies will also reduce their price, therefore, the consumers may benefit from this “price war”, saving £150 a year. The reason why the supermarket will decrease their price is form the kinked demand curve theory, the supermarkets activated is accepting the Kinked Demand Curve. If one firm reduces their price, other firms will follow to reduce so that to keep their market share so in the oligopoly market, customers may also benefit too, the customers not only had a stable price for goods, but also can buy a cheaper goods.
However, oligopoly market also has it advantages for consumers.
Firstly, high barrier to entry the oligopoly market also is a disadvantage to consumers. Because there are a few companies in oligopoly market, such the UK supermarket, there only a big firms competed in the market, the little companies do no have enough power to completive with that big one, therefore, some little companies may be quitted the market ,or some even can not entry the market. Mail Online (2010). The little supermarkets quit means consumers have less choice; it is a disadvantage for consumers.
Secondly, collusion between the compete supermarkets; it is also cause by the first disadvantage. As I mention before, the collusion is the characteristic of oligopoly, the firms want to keep their revenue so that to increase their price, between firms, they may collude with each other illegally. Consumers are forced to buy the goods in a higher price; Telegraphï¼ˆ2010ï¼°said that “Any exchange of information between retailers is bound to distort prices at the expense of consumers “, thus it can be seen that this is a disadvantage for customers.
In sum up, the research I have study about UK supermarket industry I find that UK supermarket industry is an oligopoly market, and customers can benefit a lot. As I mention before, consumers can not only have a better service, but also be provided acceptable price of good. Besides, for customers, the most important thing is the quality and price of goods, in the oligopoly markets, because of completion, every company will provide a new and advanced produce for customers. However, in this oligopoly market, because of the characteristic of oligopoly market, high barrier to entry the market and the illegally collusion, customers may lose chance to meet other new supermarket in the market, that means customers have fewer choice and more easily to be forced to buy good in higher price.In order to make UK supermarket better, government should check whether companies have colluded with each other, to protect the consumers benefit.
Anderton A. (2004) Economics (3rd ed.) Ormskirk, Causeway Press Ltd. (Accessed 5th January 2010)
Buzzle (2010) [On line] The Benefits of Oligopoly
Available at: http://www.buzzle.com/editorials/10-27-2002-29003.asp (Accessed 5th January 2010)
Mail Online (2010) [On line] Stores Sold Supermarket Sweep Create Choice Shoppers
Available at:http://www.dailymail.co.uk/news/article-490986/Stores-sold-supermarket-sweep-create-choice-shoppers.html (Accessed 5th January 2010)
Revision Guru (2010) [On line] Oligopoly
Available at: http://www.revisionguru.co.uk/economics/oligopoly.htm ) (Accessed 5th January 2010)
Single Marketing Ltd (2010) [On line] UK Market
Available at: http://www.singlemarketing.co.uk/uk_market.html (Accessed 5th January 2010)
Teagasc (2010) [On line], Retailer Dominance and the Impact on Farmers: from Growing to Sustenance
Available at: http://www.teagasc.ie/publications/2004/20040226/paper2.asp (Accessed 5th January 2010)
Telegraph (2010) [On line], UK Supermarkets Fixed Milk and Cheese Price
Tutore2U(2010) [On line] Kinked Demand Curve Under Oligopoly
Available at: http://tutor2u.net/economics/content/topics/monopoly/kinked_demand.htm
(Accessed 5th January 2010)
Worve (2010) [On line] Oligopolies in Supermarkets Essay
Available at: http://www.wovre.com/revision/oligopolies-in-supermarkets-essay/
(Accessed 5th January 2010)