The oligopoly market of supermarket industry in the UK
The supermarket industry in the UK can be described as an oligopolistic market for the following reasons. Firstly, there are few firms share the market such as Tesco, Asda, Morrisons and Sainsbury's, and there hold a majority of share. Table one shows four firms' market share in this area. Secondly, firms are interdependent. Tesco opened its first self-service supermarket in 1950, and then Morrisons opened it 8 years late. Finally, there are barriers to enter this area. Table 1 shows that the four dominant firms have taken up more than 60% market share, and the others are difficult making abnormal profits from this area. This essay will discuss how the consumers get benefits from the oligopolistic supermarket industry.
\December 2007 2008
The consumers can get a significant benefit from oligopolistic supermarket is the low price. Wallop and Collins (2009) have report that Tesco had cut its prices by £250 million and it leads Asda to cut its prices by £150 million. According to Anderton(2008,322), firms must be interdependent that means if a firm decides to cut price, it will directly affect other firms to cut their price. Consequently, the consumers can get the benefit from this supermarket structure. However, if a firm raises its price, the consumers can still get the low price. Aderton(2008,329) point out that is because the other firms would keep the same price, then they can gain more market share. As a result, the action of prices cut is benefit for consumers.
Another benefit for consumers is the consumer services. According to Anderton(2008,332), price wars can be very damaging for firms in an oligoolistic industry. As a result, Tesco and Asda would compete in others area, such as the consumer services. For example, Asda promises that it provides the best value insurance for consumers, such as the car insurance, it claims its cars form over 20 insurance. Many supermarkets provide other functions for consumers, such as parking place, Café and petrol station. Furthermore, Safeway provide cheap petrol for the consumers if they shopping in the supermarket and Morrisons claims that it will cut down the prices if consumer consume in their petrol stations. Thus, consumers can get many services under this oligopolistic industry.
Despite those benefits, there is a drawback for consumers in this oligopolistic industry. Andertonï¼ˆ2008ï¼Œ323ï¼‰state that the firms could collude together, it means they could make arrangement and restrict the price war to maximize their benefits. Price war is harmful for the firms, their abnormal profits may be zero, and then they could avoid attending a price war. If the few firms dominate industry and they would like to collude together, the price war must be restricted, they could halve its current output to raise more abnormal profit which could shared between the colluding firms. Consequently, the firms would like to collude rather than attending a price war. However, the consumers need to receive a high price under the arrangement was reached.
In conclusion, the oligopolistic supermarket industry can bring some benefits for the consumers, such as the low prices and the consumer services. On the other hand, if the firms collude together, consumers only can get the high prices. Based on the evidences above, in this structure of supermarket, consumers can get the low prices and receive many services when they shopping in the supermarket and it is not usually to happen when the firms collude together. Therefore, the oligopolistic industry creates a situation that is highly beneficial to consumers.
Anderton A. (2008) Economics (5th Edition)
Harlow: Pearson Education
Wallop, H and Collins, N (2009) Supermarkets start Christmas price war
Available at: http://www.telegraph.co.uk/finance/newsbysector/retailandconsumer/6555313/Supermarkets-start-Christmas-price-war.html[Accessed 02/02/2010]
Wikipedia (2010) Tesco
Available at: http://en.wikipedia.org/wiki/Tesco#cite_note-Snapshot_of_the_market-103 [Accessed 02/02/2010]