scope can help the economy save costs and this will also help a command
economy maximise profits allowing the economy to grow.
Finally economies of scale can also help a planned economy grow, as they
can carry out effective market research regarding the most important items
in the market, and save costs by using economies of scale.
the advantages of a planned economy are;
- A planned economy avoids wasteful competition.
-
Wages are controlled in a planned economy, therefore strike action can be avoided.
the disadvantages of a planned economy are;
- The collection of information can be very timely and costly for a planned economy.
- There could be a lack of response to the demand of consumers. Consumers will not have a freedom of choice.
5.
(a) The opportunity cost for a negatively sloping demand curve can either be
the price or the level of demand. In order to increase demand the
opportunity cost will be the price, as the higher prices will need to be
decreased in order to increase the level of demand. In order to increase the
price of a product, the opportunity cost will be the level of demand, as
increasing the price of a product will decrease the demand for the product.
Section B: Essay Question
Using the examples of supermarkets in the UK explain the competition policy issues associated with oligopolistic markets.
An oligopolistic market is a market form in which a market is dominated by a small number of sellers. In the UK there is an oligopolistic market involving supermarkets, where the market is dominated by Tesco, ASDA, Sainsbury’s and Morrisons. These companies own nearly 75% of the UK grocery market. Tesco alone has a market share of over 30%.
The competition commission is an independent public body which ensures there is healthy competition between companies in the UK for the benefit of companies, consumers and the economy. The competition commission will look into any merges if the companies being merged are gaining a market share of 25% or over. This body will also investigate markets where they may believe further competition is being prevented.
The big four supermarkets in the UK can go under investigation at anytime by the competition commission as they are competing in an oligopolistic market. Tesco alone can also go under investigation at any time due to the substantial amount of market share. The competition policy will want to ensure the supermarkets in the UK are not trying to prevent further competition from occurring. This is enforced by the competition policy where it is a public policy to promote/safeguard competition and penalise firms that seek to reduce markets.
The office of fair trading (OFT) is another body which has the role to ensure markets work well for the interests of consumers. They need to ensure any action taken by the supermarkets in the UK is done with the best interests of the consumers.
Price fixing is an agreement which occurs between competitors to sell the same product at the same price. The outcome of this method used by competitors is to prevent further competition or maximise profits as consumers will have no alternative choice. Price fixing in the UK is illegal. Therefore, the main 4 supermarkets in the UK can’t make agreements with one another to fix prices. Other products such as commodities may have a fixed price in the supermarkets as these prices can be set by the government. The Competition commission and the Office of Fair Trading keep an eye on all the supermarkets which are competing in the oligopolistic market to ensure they are not using price fixing.
Predatory pricing occurs when firms sell products at a very low price where there are very few competitors or a monopoly with the intent to drive out existing competition as they may not be able to match the prices. This method also creates a barrier of entry for new competitors as they will find it very difficult to enter the market. The information which the Office of Fair Trading gathered suggested that the UK supermarkets such as Tesco, ASDA, Sainsbury’s and Morrisons used predatory pricing in order to prevent further competition and also drive out current competition. However, supermarkets will not incur financial losses due to cross subsidisation. This is where supermarkets can increase prices for other products in order to recover costs for the much cheaper goods.
The Competition commission and the Office of fair Trading want to make the competition in the UK grocery sector as perfect as possible. This will benefit more companies and also the8consumers as they will have a wider variety of choices. The OFT gathered evidence suggesting the main supermarkets in the UK are buying and holding land. They also suggested this is a technique used by the supermarkets in order to block competition. Tesco owns the most undeveloped land in the UK out of all the supermarkets, this action has prevented competition as other companies whom try to enter the market will find it very difficult to find a good area. It will also make it difficult for some of the current competitors to try and expand in order for them to compete with the top supermarkets.
The main supermarkets in the UK have a lot of buying power. Supermarkets such as Tesco and ASDA benefit from economies of scale because of the size of their businesses. This is mainly due to the oligopolistic market which features in the UK grocery market. This enables the Supermarkets to put larger orders through and benefit from economies of scale and save costs. This can also prevent further competition, as potential competitors or current competitors will not be able to compete as they do not have much of a market share compared to the big supermarkets. Also, due to the size of these supermarkets they are able to bully their suppliers as they are their main source for income and they depend on them to purchase goods.
In the UK, milk producers have fallen from 120,000 to 10,000 due to the substantial amount of power the main supermarkets have over their suppliers. This is mainly due to the size of the supermarkets and the size of orders they put through. Supermarkets currently are purchasing milk for 26-27pence, the same price it was being sold 11 years ago. This is preventing competition and making the oligopolistic market stronger as others are unable to compete with the prices of the big supermarkets in the UK. Also, cheaper costs for the supermarkets may result to cheaper prices, however, in this case the price for milk has not changed and firms are able to maximise profits. The office of fair trading must ensure all action taken by supermarkets benefit the consumers, on this occasion customers are well and truly being overpriced. This allows the main supermarkets in the UK to maximise profits and expand even more making them stronger.
This will then result in a ‘waterbed effect’ situation where the large supermarkets pay a very low price for their goods, and the smaller firms will have to pay much more to the same suppliers for the same goods in order for the suppliers to recover their costs and keep their profit levels consistent. This will also distort competition as competitors will not be able to compete with the big supermarkets in the UK. Also, potential competitors will see the market as very unattractive to enter as they will not be able to match the big supermarkets.
A merge occurs when two corporate companies become one. A merge can occur when one company takes over another. There are three different types of merges;
- Horizontal merge
- Vertical merge
- Conglomerate merge
A horizontal merge took place between Morrisons and Safeway. Morrisons took over Safeway in March 2004. A horizontal merge is when two companies at the same production stage and service industry combine to become one. This helped increase Morrison’s market share allowing them to compete in the oligopolistic market with the other main 3 supermarkets in the UK. The other supermarkets also made a series of bids for Safeway which was later blocked by the competition commission as they all would have increased their market share to around 25% or over making them even stronger in the market. The merge which was approved will boost competition as there is now another genuine rival which gives consumers a wider variety of choice.
The competition commission need to ensure that there is healthy competition in the UK market for supermarkets, currently this market is an oligopoly as it is dominated by four main supermarkets. The competition commission want to try and make the market as perfect as possible to benefit consumers and companies by ensuring current competitors and potential competitors get an equal chance to compete in the market. However, the current big four supermarkets have taken up tactics to prevent competition by buying undeveloped land and using predatory pricing making it very difficult to compete. The competition is looking into this and supermarkets such as Tesco may be forced to sell their undeveloped land giving others an opportunity to compete. The competition commission want to try and make the market perfect if possible which will benefit more or less the whole economy.
The office of Fair trading need to ensure supermarkets actions are for the best interests of the consumers. However, due to the significant buying power and size of the UK supermarkets, customers are being over priced heavily as supermarkets are paying less but keeping the prices at the same level. This is also preventing competition as the waterbed affect results in their competitors having to pay higher prices for the same produce. The OFT want to ensure the consumers are not being overpriced and have a wide variety of options, in order to achieve this goal the OFT will hope to increase competition within the UK grocery market.
References:
Supermarket Probe (May 2006)
BBC News
Competition probe (Jan 2007)
BBC News
Farmers react to supermarket Curbs (Apr 2008)
BBC News
Morrisons takeover Safeway (March 2004)
BBC News
