What Are The Effects Of Tescos Oligopolistic Market Structure, On Both Consumers And Producers?

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Mikey Holder        GCE A2 ECONOMICS UNIT EC4C        Tesco’s Oligopoly

What Are The Effects Of Tesco’s Oligopolistic Market Structure, On Both Consumers And Producers?

During this assignment I wish to highlight the benefits and losses that consumers and suppliers are likely to experience while shopping at Tesco. I would also like to analyse other consequences of Tesco’s oligopoly position that seem to affect other aspects of the UK economy.


I would like to begin by pointing out the major types of market structure, and then focus on the oligopoly market structure, and its behaviour. In economics, market structure is a term that describes the state of a market, with respect to competition. The major market forms are:

  1. Perfect Competition
  1. Monopolistic Competition
  2. Monopoly
  3. Oligopoly

The simple characteristics of these market structures can be seen in Figure 1(right.) This table illustrates how the 4 markets work in the real world.

Perfect competition is a market in which there are many sellers and many buyers. There are no barriers to entry whatsoever. This is the ideal market structure, however, in a perfect world, it is very difficult to always obtain.

A monopoly is typified by a single competitor and widespread market control. As seen from Figure 1, monopoly only has one seller, and restricts entry to the market, because monopolies generally benefit from economies of scale, and use advertising to block out any companies from trying to enter the market. It is difficult to say whether there are still any ‘real’ monopolies still in existence in the UK, but just as an example, ‘Royal Mail’ would have held the monopoly in the postal industry in 2005, because if someone wanted to send a letter, it would have to be sent by Royal Mail.

Monopolistic competition is typified by a large number of relatively small competitors, each with a ‘humble’ degree of market control. Monopolistic competition is a common market structure. Many markets can be considered as monopolistically competitive, often including restaurants and book shops, in large cities.

Finally, an oligopoly is a market dominated by a few large suppliers. The degree of market concentration is very high. Firms within an oligopoly produce branded products, and there are also barriers to entry. Another important characteristic of an oligopoly is interdependence between firms. This means that each firm must take into account the likely reactions of other firms in the market when making pricing decisions. This creates uncertainty in such markets, and economists seek to model through the use of game theory (see page 5) Examples of some oligopolistic firms are Tesco, Asda, Sainsbury's and Morrisons.

Because this assignment relates directly to oligopoly, I will now analyse the oligopoly market structure in more depth.


Oligopolies include positive and negative aspects. People tend to think instantaneously that oligopolies are advantageous all round, but there are two obvious negative aspects that come along with an oligopolistic market structure; oligopolies tend to be inefficient in the allocation of resources and they cause a disturbed concentration of wealth and income.

It is arguable that oligopolies do not allocate resources efficiently. Like any firm with market control, an oligopoly charges a higher price and produces less output than the efficiency benchmark of perfect competition. In fact, Oligopoly tends to be the worst efficiency offender in the real world, because:

  • Perfect competition does not exist
  • Monopolistic competition inefficiency is slight
  • Monopoly inefficiency has the potential for being so harmful; it is inevitably subject to corrective government regulation.

Oligopolies tend to increase the concentration of wealth and income too. This is not necessarily negative, but it is definitely self-reinforcing and inhibits the pursuit of equity. While the concentration of wealth is not bad unto itself, such wealth can then be used to exert influence over the economy, which might not be beneficial for society as a whole.

The naive reaction to oligopolies is that they invariably stifle competition and artificially inflate prices. However, in an article called ‘The Benefits of Oligopolies,’ Sam Vaknin ignores the effect of price signalling, saying it is easier to effect when there's only a Coke and a Pepsi, a Boeing and an Airbus in the market. He also ignores the problem of excessive political power, as large corporations can threaten retailers, suppliers, and regulators far more effectively than little ones. Like many economists, he presents an ideal market that exists independent of politics and power. Because firms in an oligopoly characteristically charge above-equilibrium (i.e., high prices) the only way to compete is through product differentiation. This is achieved by constant innovation, and by incessant advertising.

Out of the four market structures (discussed on pages 1 and 2), oligopoly is most likely to develop the innovations that:

  • Advance the level of technology
  • Expand production capabilities
  • Promote economic growth
  • Lead to higher living standards.

Oligopoly has both the motive and the opportunity to pursue innovation. Motive comes from interdependent competition and opportunity arises from access to plentiful resources.

Oligopolistic firms are also able to take advantage of economics of scale that reduce production costs and prices. As large firms, they can ‘mass produce’ at a lower average cost. Many modern goods, including computers, cars and assorted household products, would be significantly more expensive if they were produced by a large number of small firms rather than a small number of large firms (oligopolistic firms.)


Oligopolistic businesses tend to be assorted and also tend to exhibit several behavioural tendencies. Firstly, many oligopolistic businesses tend to hold their prices at a constant level, preferring only to compete in ways that do not involve changing the price. The main reason for sustaining prices at a constant level, is so that competitors can match price decreases, but not increases. Independently, a firm will have minimal gain from altering prices. This is illustrated by the use of ‘The Kinked Demand Curve.’ (See later.)

Interdependence is also displayed in an oligopoly market structure. Interdependence is a term used to imply that businesses have to take into account likely reactions of rivals to any change in price and output. It is a go ahead of being equally responsible to and sharing a common set of principles with other firms. Tesco, for example, will keep a small group of staff analysing Sainsbury’s activity in the grocery industry. A decision that Sainsbury’s make will affect Tesco, and vice versa, so therefore, interdependence is always exhibited as a behavioural tendency, in the oligopolistic market.

Oligopolistic firms display forms of non-price competition because they have little to gain from price competition, so they rely on non-price methods of competing with other firms. Three methods that an oligopolistic firm may employ as a form of competition are:

  1. Advertising
  2. Product Differentiation

Like any firm, an oligopolistic firm seeks to attract consumers and increase market share, while sustaining the price. This way, the firm will maximise their profits.

Sometimes two oligopolistic firms can co-operate to increase welfare in the market. Merging and colluding are two common ways in which firms cooperate. Oligopolies incessantly seek to balance competition and support. One way to increase support is by combining two separate firms, into one large firm. Since there are only a small amount of firms holding an oligopolistic position in the market, it is a big incentive for oligopolistic firms to merge. This way, the merged firm will hold additional authority within the market.

Collusion in this context refers to two or more firms that secretly agree to control prices, production and other aspects of the market, such as advertising. When executed correctly, collusion means that firms behave as if they are on firm-i.e. a monopoly. This way, the two firms can set a monopoly price, produce monopolistic quantities, and allocate resources monopolistically. This process is illegal though, because firms are not allowed to set prices secretly, because it may cause unfairness to other competing markets. Collusion would therefore not be commonly exhibited publicly.

A barrier to entry method is probably the behaviour that is exhibited most widely, not only by oligopolies but also by monopolies. Barriers to entry prevent competitors from entering the market. The costs of setting up a business in different industries varies depending on which industry you want to focus your company on, for example building newsagents is a lot cheaper than to buy a factory because it costs less to build or buy the site of newsagents than the factory. Capital costs can prevent competitors from entering an industry because, depending on the industry, the costs may be very high.

Also there are sunk costs and natural cost advantages, which may prove to be successful barriers. Costs that may be un-recoverable are sunk costs, which mean that when money is spent on a sunk product or service, the money cannot be returned. An example of a sunk cost is the cost of advertising. Advertising increases people’s awareness of the product, which leads to more profit, and also if a company wants to exit an industry and thinks of how much money in the form of sunk costs has been spent, it is always an incentive to stay in the market. Natural cost advantages make one firm unique, and therefore will have more revenue. It might be a particular firm situated in an isolated area of town. Legal barriers are a way that governments play in barriers to entry. This is a barrier that a government enforces, in the way it may allow privileges to certain companies rather than others.

Paul M Sweezy suggested ‘It is pretty well agreed among economists that the ordinary concept of a demand curve is inapplicable to oligopoly.’ In particular Sweezy said, the assumption, that everything else would remain unchanged if the oligopolist changed his price, was unrealistic. Oligopoly is therefore more complicated than our other models of monopoly or perfect competition and there are indeed several methods used to model oligopoly. The two main approaches to understanding oligopoly are ‘The Kinked Demand Curve’ and the ‘Game Theory.’

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Joan Robinson hypothesised in 1936 that demand curves might be other than the traditional downward sloping curves that we have encountered so far. Specifically she thought there might be a demand curve with a ‘kink’ in it. Theories to explain these ‘imaginary curves’ were developed in a rare instance of simultaneous discovery by Paul Sweezy at Harvard and by R. L. Hall and C. J. Hitch in Oxford in 1939. Both publications produced versions of a kinked demand curve. Hall and Hitch questioned the owners of 38 firms and found that ...

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