Advantages Of Oligopolistic Market For Consumers Economics Essay

The original supermarket was set up in Rochdale, Lancashire in the 1840s. It was established by groups of retailers. Gradually, the supermarkets grow up quickly. In 20th century, supermarket has been developed a shop which selling different kinds of food products. After the Second World War, supermarket developed continually, this has a sell-service format. At that time, Tesco, Sainsbury’s, Asda and Morrisons had opened there own stores (Tescopoly, n d). According to The Guardian (2010), the supermarket industry in UK, was dominated by four main companies with about 72.5% of the market share: Tesco has 27.1%, Asda has 16.9%, Sainsbury’s has 16.1% and Morrisons has 12.4% of market. Anderton (2008) states that one market has a few firms compete with each other, and the firms are interdependent, that is oligopoly. The major aspects of its market structure are that the industry must be controlled by a small number of firms; the main firms are interdependent; the market has barriers to prevent new firms to entry. In this case, the supermarket industry in UK was dominated by four producers; and they are interdependent, therefore it fits the characteristic of oligopoly market. The discussion is about advantages and disadvantages of oligopolistic market for consumers. It will be discussed with the features of the oligopoly. The advantages include non-price competition, price stability and the market mix. And the disadvantage is collusion.

There are several advantages of oligopolistic market for consumers. First of all, according to Anderton (2008), one of the characteristic of oligopoly is non-price competition. Firms in order to compete the market share in this highly competitive oligopolistic industry. They may use price competition and non-price competition. Price competition can use discounting the price of productions to increase the market share. However, price war is a risky strategy, which may lose the market share and insufficiency in oligopolistic market. Anderton (2008) suggests that, in oligopoly, non-price is ‘a less risky strategy than price competition.’ (Anderton, 2008:330). It includes advertising campaign and Branding. All of these are benefit for consumers, for instance, Tutor2u (2010) lists a couple of steps of non-price competition including Home delivery systems, 24 hour opening the store, shopping online, establish the post office or child-care centre, technology innovation including self-scanning machines and banking services including insurance. Furthermore, because of the characteristic of the imperfect competition, oligopoly selling many different branded goods for consumers, therefore, people may have many choices and the welfare is increased. It is benefit for the consumers (Anderton, 2008). Another example is that firms offer the club card to attract consumers. Guardian (2010) states Tesco sent out about £100m club card to customers, it encourages people to do more shopping in their markets. Tesco use this promotion to benefit the consumers, so that they earn more market share. In these cases, they represent that non-price competition is commonly in oligopolistic market, and it is good for customers.

Another advantage for consumers is that the price in oligopoly is stable. According to Anderton (2008), changing the price has potential risks, whatever the firm lowers the price or rise the price, they all could lost market share, such as the price war. Even though firm lower their price may expand the demand as customers buy more of their products, this strategy is not permanent, at the end, they still lost the market share. Therefore, to keep the price unchanged is a rational strategy for firms in an oligopolistic market. The situation of the price is shown in the kinked demand curve (which can be seen the following figure). Anderton (2008) shows that the kinked demand curve is when one firm lowers the price, another will follow. If one firm raises the price, then the price will not change. That is the kinked demand. In short, price stability is benefit for the consumers, because to keep the price stable, then consumers no need to change their budgets usually. It is convenient to consumers and no worry about the price. In addition, although the price war is not good for the competitors, it has advantage for consumers. People would prefer to see the price war, because they can buy the products with a lower price.

Figure: The kinked demand curve

Source: Tutor2u (2010)

Apart from the advantages for consumers, there is a disadvantage exist either. It is colluding with other interdependent firms in oligopolistic market. Anderton (2008) states the major firms may join together to become a Cartel, it seems to become a monopoly to control the market, as they may make agreement together to earn a maximize profit. In this situation, consumers must become the sufferer, because the firms would choose a high price strategy and the price is unfair to people.

To sum up, the advantages and disadvantage of oligopoly market for consumers have been discussed. With the researching of the supermarket industry in UK, it fits the characteristic of oligopoly. The market structure of oligopoly including non-price competition, price stability and the promotion are benefit for consumers. And the collusion in oligopoly is bad for consumers. The oligopoly in this industry brings several advantages to consumers, such as stabling the price, gain the benefits under the non-price competition including mass promotion, technology innovation and good services. However, there are also some harmful effective to consumers in oligopoly. In oligopoly, it is easy to become collusion that violating the benefits of the consumers. Nevertheless, it seems that the market structure of the oligopoly is more to the benefit of consumers in the supermarket industry in UK.

Reference Section

Anderton, A. (2008).Economics (5th Edition) Harlow: Pearson Education

Guardian (2010) [Online]¼ŒMorrisons clear to buy Safeway.

Available at: http://www.guardian.co.uk/business/2003/sep/27/supermarkets.uknews

(Accessed 10th February 2010)

Guardian (2010) [Online]¼ŒTesco enjoys best Christmas in three years.

Available at:

http://www.guardian.co.uk/business/2010/jan/12/tesco-christmas-sales-figures

(Accessed 10th February 2010)

Tescopoly (n d) [Online], Supermarkets History.

Available at:

http://www.tescopoly.org/index.php?option=com_content&task=view&id=657&Itemid=158

(Accessed 10th February 2010)

Tutor2u (2010) [Online], Oligopoly.

Available at:

http://tutor2u.net/economics/content/topics/monopoly/oligopoly_notes.htm

(Accessed 10th February 2010)

Tutor2u (2010) [Online], Kinked demand curve under oligopoly.

Available at:

http://tutor2u.net/economics/content/topics/monopoly/kinked_demand.htm

(Accessed 10th February 2010)