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Abnormal Profit: This is a common case in oligopolies, whereby the profit of the firms at the top of the market take in profits that are not normal (profit)– that meaning the costs are just about covered by the revenue created. Abnormal Profit refers to when the profit of a firm exceeds the average profit that firm should be making. Because of the choice between firms with prices that are practically the same in small prices; the non-price competition aspect of the oligopolistic market structure creates a situation whereby all firms enjoy abnormal profit (which is portrayed as normal profit when compared to other competing firms in the oligopoly). This in turn creates an input of funds into fuelling non-price competition, continuing the loop of creating abnormal profit. The supermarket industry is a perfect example of abnormal profit; the ever-growing amount of outlets to purchase groceries from is a result of the input of funds as a result of the success the profits indicate.
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Product Differentiation: As firms in oligopolistic market structures do not compete in price, making your product as appealing as possible is an important factor in selling in the grocery market. Supermarkets employ strategies such as associating their name with certain goods that promote a benefit to the consumer such as “Tesco’s Low-Fat Butter”. Even changing the packaging or promoting a supermarket-made brand of food is a way of product differentiation which all the “Big 4” in the supermarket industry have done.
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Kinked Demand Curve and Barriers: One of the ways of distinguishing an oligopoly from any other type of market structure is through the use of graphs; in this instance a kinked demand curve as seen below:
From the kinked demand curve on the previous page, you can see how price stability is expressed from the point of the kink and the sections above and below it. Above the point of the kink, the demand is elastic. As the consumer sees price as a main factor in where they should go to shop, there will always be one firm that takes the initiative to lower the price of the product and attract more consumers. However, due to the nature of other firms, they will also lower their prices to not give the opposition an advantage in price. In the end, every firm that has a substantial cut in the market will eventually have the same price as each other. As the other firms continue to lower prices, the kink in the graph represents how the decreases in the overall market price causes the demand curve to become more inelastic. The variation in price is larger than the variation in quantity, which also shows the inelasticity.
With this inelasticity, three main effects create the current oligopolistic market that is the supermarket industry. Firstly, the lower prices from all of the firms create a positive point for the consumers; getting lower prices from any major supermarket chain they decide to shop. Secondly, the negative aspect of lower profits for the firms is exhibited through the low prices in the market. However, due to asymmetric information between the buyer and seller, the “lower profits” theory could just be another loss that the firm can afford to cope with.
Alongside this, no firm can ever afford to increase the price of their product, which would also increase the elasticity of the product. This is why oligopolies never compete in price, the sacrifice of profit is a sacrifice a firm isn’t willing to make against opponents that have a large and equal share of the market they compete in and against.
In a perfect market structure, firms are free to exit and enter that market with no barriers to prevent that from happening and can even make a profit in the (very) short run of a firm’s entry to the market. Other barriers that can occur with companies in oligopolistic market structures is the use of “predatory pricing” to lower a large firms’ prices to a point at which two things will happen.
The first thing to happen will be the predicted loss that the larger firm will experience. The second thing to happen will be the eventual demise of another firm who cannot afford the same level of losses that the larger firm can have. In this case, the smaller firm can’t compete in the market. This is an illegal practice, but is hard to prove from the point of an investigating organisation because of the positive aspects that the firm creates for the majority of consumers; something that cannot be ignored.
In a similar fashion, “shadow pricing” can be used as a type of collusion; creating a market price that is stable and allows all parties who collude to enjoy abnormal profits.
Uses of economies of scale – advancements in technology and overall resources including financial, marketing and controlling the supply of produce with distributor agreements – known as oligopsony are both common barriers in this type of market structure that the supermarket industry displays in the substantially larger amount of marketing and advertising that the larger firms such as Tesco and Sainsbury’s exhibit.
External Research: The Consumer’s Needs and Wants
To examine further my theory as to why small retailers are able to survive and compete in an oligopolistic market structure; I questioned 15 members of the public (ages ranging from 15 – 55) with questions that related to what influences their choices and the reasoning behind their choices. The age ranges that the participants questioned fall under are 15-20 [2]; 21-27[5]; 28-40[7] and 41-60[1] above. The questions and results; with my analysis are below:
- Where do you buy your groceries?
Answers: 14 people of the 15 I questioned gave at least one supermarket brand name that is one of the “Big 4” as an answer – the oldest person to take the questionnaire stating that he did not go to any of the large outlets (The “Big 4” Sainsburys, Asda, Tesco and Morrisons). Out of those 4 chains, the following number of people responded with the respective brand:
Tesco: 10
Morrisons: 3
Sainsburys: 6
Asda: 6
In terms of mentioning small retailers such as local newsagents and small grocery stores, all 15 stated that they went to small retailing outlets.
- How often do you go to certain grocery stores?
Answers: Out of all the 15 people questioned, 14 of them stated that they went to a small outlet at least once a day. Again, the oldest person to be questioned stated that he went to his local store once a week; because in his words “I’m an old man living by myself, can’t go to no place like Tesco.”
When questioned about how often they go to major grocery stores like Asda, 9 out of the 14 that visit major stores say they go around twice a week. The other 5 stated they go there once a week, all of them replying that they went on a Saturday when I asked about a specific day. In addition, 7 out of the 9 that go to the larger chains twice a week said they go to the “smaller or express” version of a major chain supermarket.
Interview with “Junction News”
From the point of consumers, it’s somewhat hard to realise why smaller retailers survive when the majority of people go and shop to supermarkets which are expanding at amazing rates into so many different markets, yet still growing stronger within their own specialist market of groceries. To further investigate the different aspects of the grocery market, the seller should be analysed along with the consumer to fully analyse the thoughts and actions which fuel the market and its changes. For this, I chose to ask a few select questions to the co-owner of a local newsagent/grocery shop, Junction News. He however requested that his name not be used in this; but his ethnicity is of an Indian background (JN = Junction News Co-Owner; CH = Conrad Hall – Myself):
CH: Hi, how are you doing?
JN: Just fine, thanks.
CH: That’s good, I’m just going to ask a few questions about the shop, nothing incriminating.
JN: That’s good to hear.
CH: Cool. First question, how do feel about having a larger store right next to you in the form of the Co-Op? And a Sainsburys just down the road?
JN: Seeing as Junction News has been around longer than the Co-Op, it hasn’t much of a threat to us. In fact, being close to Archway Station helps us because of the morning rush people are in. People can just get in and out, even getting a lottery ticket and topping up their mobile or Oyster. We haven’t really felt anything from Sainsburys, but they do get more heavy shoppers than us.
CH: Would you call Sainsburys your competition?
JN: We have tons of competition in local stores. There’s an alcohol store just down the road, Sainsburys, two new specialist stores across the road along with three other convenience stores.
CH: Do you think you have an edge in getting more customers?
JN: We never close, that helps. As said before, the station has people in a rush. This is the closest store to those in a rush.
CH: Do you think that you would benefit a lot from being the only local store?
JN: Yes, but in a way, that’s something that can hurt. With lots of little stores that focus on one thing; butchers, pharmacies, etc; being the most varied little store is a good thing that is happening.
CH: Do you stock any special items, like foreign foods?
JN: No, there’s no point with a butchers right next to us. This area isn’t like Tottenham with Jewish people, there’s no money to be made in getting special foods like that.
CH: Do you have any special relationships with customers?
JN: There are a few familiar faces that come in at times where you can have a little chat with them, you do see the same faces from day to day.
CH: Are you aiming to go “head-to-head” with Co-Op?
JN: We beat them in areas we need to, I’m not trying to drive them out of business. But that wouldn’t be so bad for the shop.
CH: Do you have any plans for the future?
JN: Yeah, there’s something.
CH: Could you tell me those plans?
JN: No.
CH: Ok then, thank you for helping me out.
JN: Alright, bye.
Conclusion
In conclusion, there are many aspects in the economic world that add hundreds of factors into how small retailers are able to compete in the world. But from the information I’ve gathered and the amount of different viewpoints that I’ve viewed the market.
On the one hand, the strength of the large superpowers in the grocery market continues to grow. A good example of this would be Tesco, who are planning to compete in the catalogue buying market against a major player in Argos and going overseas to compete against the largest chains of supermarkets in the United States called Wal-Mart. With these expansions, a logical analyse would say that you wouldn’t move on to another market until you’ve completely conquered the previous market. So with that, there can’t be a way for competition against one of the world’s biggest grocery chains. But even before that, there are chains that own 20% of the national market who are still trailing behind Tesco.
Furthermore, these companies aren’t even trying to eliminate the smaller retailers; they are just doing what major companies across the world (regardless of speciality) would do. Expand. Expansion means more opportunities, and more opportunities means more chances to make profits. There’s only so much room in a market, even one that can possibly have smaller retailers compete. Eventually, the expansion will have to squeeze out those who fail to expand and hence the effort to even compete against larger firms is wasted. Even in Britain now, urban and rural areas have been losing 30,000 small retailing outlets from 1995 to 2005, and this number is growing leading eventually to a loss of more than 28,000 small retailing outlets by the end of this year.
From the masses and masses of resources the large retailers have at their disposal to the way that the world today is revolving around the media to communicate with each other more and more; a system that stores such as Tesco and Asda are exploiting even more, competing in the same ring as the heavyweights such as Sainsburys can’t be an issue. It’s an issue of survival, and the figures show that even survival is beyond the small retailer.
But on the other hand, the small retailer needs not to stretch into other markets to thrive, even in a world where the media applications such as TV advertising are out of their reach. Through the questionnaire with the co-owner of Junction News, I gathered from how he spoke about people’s natures that he can thrive and even grow because he doesn’t entirely attach himself to the consumer; nor does the consumer attach themselves to the retailer in the way that supermarket chains would want to – the heavy use of promotions, advertising and expansion to keep the consumer in their shopping bracket. What keeps the smaller retailer in the market is the point of not being totally reliant of being in the public eye; a strength when it comes to not being parted to brand selection because of the major firms literally attacking the consumer to get them buying their products.
In terms of expansion, smaller retailers have another advantage. The need not to expand their business. Simply because it is not in demand for them to expand. The oligopolistic market structure already allows for many firms to be suppliers to the consumers. With the growing need to for all major player to expand, it raises two issues. One, why would a new player in the market be needed? And two, how would the player be able to grab enough consumers to stay alive in the market? Point being, the small retailer has the large advantage of just wanting a profit. They don’t need to keep up; they are already up by still being in the market today!
Through answering this question, I have found flaws in my research. Firstly, I don’t think I interviewed enough people. 15 was a decent amount, but I could’ve got 20 or even 30 to make the result more conclusive and even better in terms of accuracy. However, the detailed deconstruction of those questions provides a good amount of answers that answer my questions. Another point would be to use more sources outside of the internet, using more texts from books would be something else to change.
Bibliography
