Economics - Oligopolies

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There are a number of areas of relevant theory in this story. The first is the issue of market structure. The retail grocery market contains many hundreds of firms but as the figures above highlight, five firms account for 75% of the total sales in the industry. The industry is said to have a 5 firm concentration ratio of 75%. If the takeover goes ahead this will become a 4 firm concentration ratio. This implies that the market structure is an oligopoly. Oligopoly refers to competition between the few and occurs where a few large firms dominate an industry. We must not forget however, that there are a large number of much smaller firms in the industry - indeed part of the reason for analysing such markets may be to see what happens to these smaller players who may not be able to compete. This is an example of a market that has become more concentrated over recent years - this means there are fewer businesses in the industry and their market share is rising.

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Oligopoly theory highlights a number of characteristics; non-price competition is strong, high levels of branding and brand loyalty; prices tend to be stable, high degree of interdependence between the main rivals - all of them watching what the other is doing and seeking to react and pre-empt their rivals; high of barriers to entry; strong emphasis on advertising; economies of scale; a possible price leader whose actions are followed by rivals and the potential for collusion. Many of these features can be observed in the leading supermarkets - remember the 'product' they are selling is not just the items you ...

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