Oligopoly Market
An oligopoly market has a small number of firms, which are all similar. The advantages are that these companies have the resources to reduce the price of their products, this can sometimes lead to price wars such as in the case of the big supermarkets. As there a fewer firms the more market share there is between them and the more influence they can have on the market. Another advantage is that these companies do not always compete on price and sometimes try to entice customers into their shops through:
- Advertisements - showing their level of service is better than competitors.
- Celebrity endorsement - Jamie Oliver helps Sainsbury's through special advertisements and exclusive products with his name on.
- Loyalty card - Giving something back to the consumer every time they shop at their store.
The downside is that the barrier to entry is very high and any company coming into the market would need a big backer or they would run the risk of being squeezed out. Another real threat is the risk of two or more companies wanting to form collusions, which would affect the balance of market power in their favour. Yet another disadvantage is the risk of all of the companies within the oligopoly forming a cartel which will see them agree to see them all offer anti-competitive prices. This means that the consumer will not have the advantage of “shopping around” for the best offers because all of the prices will be the same and will give the consumer less choice.
Perfect Competition
This market structure has a vast amount of companies with no barriers to entry; new companies can join easily. Product pricing rarely changes, and is usually low, as no one company has the resources to develop the product or business image.
The downside to this type of market is that there is little reason for competition, as the price will not have a significant difference when consumers go to a different company.
A perfectly competitive market usually has four characteristics -
- Many buyers and sellers in the market, none large enough to influence price. The Buyers and sellers are price takers.
- There is freedom of entry and exit from the industry. Barriers to entry are therefore low. If a firm wishes to cease production and leave the market, it is free to do so.
- Buyers and sellers possess perfect knowledge of prices. If one firm charges a higher price than the market price, the demand for its product will be zero as buyers buy elsewhere in the market. This is why they are price takers because they have to charge the same as every other company within the market.
- All firms produce a homogenous product. There is no branding of products and products are identical.
Supermarket – Oligopoly
The business that I am going to investigate is Tesco. I am going to investigate its market type, the way it runs its business and report some of their market shares. Tesco is a supermarket in the UK and competes against another 3 main supermarkets. Tesco is in an oligopolistic market because it is a supermarket that is very similar to the 3 other main supermarkets within the UK. They all offer the same sorts of goods and services, but typically seek to become market leader within that market. The reason it is an oligopoly is because it is in a market where 4 supermarkets are all jockeying for the top postion within that market. Currently the top four supermarkets vying for the title are –
- Tesco
- Asda
- Sainsbury’s
- *
Currently Tesco is the market leader and is in fact a monopoly in its own right because it currently has 33% market share which is 8% more than what is needed to become a monopoly. The way that these supermarkets try to become market leader include the following –
- Build a strong brand identity
- Use good advertising
- Sales promotion
It would be especially hard for a new business to enter the supermarket market. The supermarket industry is huge in the UK, there are many different supermarkets, with the main 4 as labeled above offering numerous things other than food including clothes, media, electronics etc. the growth of the supermarket has had a detrimental effect on the highstreet. 10 years ago if you were to walk through the high street you would see numerous sole traders, including butchers, greengrocers, fish mongers etc. however supermarkets are forcing these businesses out of the market place because they are offering the same products for a much cheaper price. This is good for the consumer because they don’t have to spend as much, but is devastating to the owners and workers in these small shops who no longer have jobs. Not only does it have an effect on the owners and staff of the butchers or fish mongers etc. but because of the power that supermarkets in the oligopoly have, they are able to dictate prices to the suppliers which in this case is local farmers. These farmers are being increasingly driven down to sell their produce for little or no profit to ensure that the supermarket can sell the products at a low price.
Many of these supermarkets are becoming more than just the provider of food. They are becoming one stop shops that allow the consumer to buy a wide range of products under one roof. In tesco for example you can buy kitchen appliances, televisions, decorating products, DVD’s, cd’s, games, clothes, mobile phones and much more. There is no need for the consumer to go anywhere else, this is likely to have an effect on the businesses that the consumer would have previously gone to to source these items. For example B&Q and their decorating range are likely to suffer because tesco offer the same range which is also likely to be cheaper.
Barriers
In the oligopolistic supermarket market there are large barriers to entry. These include –
- Strong brand differentiation
- Financial barriers. It costs millions of pounds to develop a new store
- Distribution barriers. All supermarkets have their own suppliers and distribution centres. These centres will cost millions to build and maintain, it is yet another barrier for any business wanting to break into the market.
Other barriers or risks of entering the supermarket market include –
The risk of the other supermarkets negotiating anti-competitive pricing with suppliers. They have the power to also tell a supplier not to sell a certain product range to another supermarket. By making a range exclusive, it prevents other supermarkets from offering that product, but to gain this exclusivity it would cost a lot of money.
As you can see it would be very hard for a new business to enter the supermarket market. However, having said this, it can be done. Wal-Mart, which is the second largest corporation the USA has a massive brand identity in America, but wanted to break into the UK’s supermarket place. If they were to come to the UK and build the stores with a Wal-Mart brand name they would face numerous barriers including –
Finding space for the stores, they would need planning permission to build the new store. This could be hard considering the vast amount of supermarkets already built throughout the UK.
Cost – they would have to build the stores from scratch, buy the stock, build somewhere to store the stock (distribution centre)
Competition – the marketplace is increasingly full and not much room for maneuver, supermarkets are increasingly competing with each other to become market leader and would not take kindly to another competitor. They would use all of their power to ensure that Wal-Mart didn’t grow to become a competitor.
However, despite these barriers, Wal-Mart has been able to break into the UK market very successfully. They did this by buying out one of the UK’s biggest supermarket chains, ASDA. They decided that this would be easier because ASDA already has a strong brand identity and has all of the things that would prevent them from entering (finance, distribution). They were very clever in doing this because instead of changing ADSA’s name to Wal-Mart they decided to just call ASDA “part of the Wal-Mart family” this way it keeps the same name but the consumer is also aware of the Wal-Mart status.
To sum up, economists have identified numerous types of markets within the uk; monopoly, oligopoly, monopolistic competition and perfect competition. Because of the lack of competition in some of these markets and in some cases the huge size of the organisation. The government has established market regulators to ensure that the consumer is being treated fairly and that the business is operating in the right market type. These regulators include –
The OFT
The OFT's job is to make markets work well for consumers. Markets work well when businesses are in open, fair and vigorous competition with each other for the consumer's custom. Their job is to make sure that consumers have as much choice as possible across all the different sectors of the marketplace. When consumers have choice they have genuine and enduring power. As an independent professional organisation, the OFT plays a leading role in promoting and protecting consumer interests throughout the UK, while ensuring that businesses are fair and competitive. They have three main operational areas within the office they are - Competition Enforcement, Consumer Regulation Enforcement, Markets and policies initiatives.
Competition Commission
To make competition fair, the European Union introduced The Competition Commission; it came into being on 1st April 1999. The Competition Commission has two main roles, reporting on referrals made by the Director General of Fair Trading, the Department of Trade and Industry and the main utility regulators and hearing appeals against prohibitions under the Competition Act 1998. The Prohibitions of the CC fall into two categories, the anti competitive agreements, fixing purchasing and selling prices, limiting production and sharing supply sources etc and the abuse of dominant market position which is where a firm has over 40% of the market and could impose unfairly high selling or purchasing prices. This is also known as colluding, when markets become too big and can exploit their customers because they have superiority over other products and therefore the consumer has no other option but to shop with them.
Watchdog
Watchdog is a BBC television series that investigates viewers' reports of problematic experiences with traders, retailers, and other companies around the UK. It has had great success in changing the awareness consumers have of their purchasing rights and in changing policies of companies, closing businesses down and pushing for law changes
Quango – OFWAT, OFGEM
These are regulators of essential home and business resources such as water, gas and electric. Because many people have no choice as to the provider of these services, these regulators ensure that the consumer is being treated fairly.
The Water Services Regulation Authority (Ofwat) is the economic regulator of the water and sewerage industry in England and Wales. Their role is to seek value for consumers.
Ofgem’s first priority is to protect consumers for gas and electricity. They do this by:
- promoting effective competition, wherever appropriate, and
- regulating effectively the monopoly companies which run the gas pipes and the electricity wires
They have other priorities too:
- help secure Britain’s energy supplies by promoting competitive gas and electricity markets - and regulating so that there is adequate investment in the networks
- help gas and electricity markets and industry achieve environmental improvements as efficiently as possible
- Take account of the needs of vulnerable customers, particularly older people, those with disabilities and on low incomes.
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