Oligopy Market Structure

Topics: Economics, Monopoly, International trade Pages: 5 (1981 words) Published: November 21, 2011
(a) Oligopoly Market Structure
Under Perfect Competition or Monopolistic system there are so many firms in the industry. None of the firms worry about the effect of their actions on their rival firms. The type of market structure describe in this question is Oligopoly. Oligopoly is the market structure where few large market firms compete with each other. Supermarkets (Tesco, Morrison’s and Asda) and cars are the perfect example for oligopoly market structure in the UK. In oligopoly market structure each firm needs to consider that “how its actions affect the decisions of its relatively few rivals”. (Begg, Fischer and Dornbusch, 2003:75). Firms have to guess that how its rivals will react. For example if one firm decrease the price of its product it will affect the other firms. However increase in price of the product of one firm will have no affect on the other firms. For example if Asda decided to cut the price of its product it will affect Tesco and other supermarkets. In oligopoly market structure it is believe that the rivals will match price cuts but not price rises. Price rises lead to a large loss of market share, but price cuts increase quantity only by increasing industry sales. (Begg, Fischer and Dornbusch, 2008). In oligopoly market structure firms compete to rise market share and profits at the expense of rivals. They do so by cutting the price of the product, make schemes to attract more customers. Tesco club card scheme is one example of it where Tesco gives points to its customers on every purchase of goods and after getting specific points customers get discount on their purchase. (b) Identification made by OFT and Competition Commission

Result of research made shows that every year more than £110billion is spend by people in the UK on groceries. Over the past decade people are switching from one supermarket to another in order to get better quality at cheap price. Customers move around according to the different deals offer by different stores. Customer’s main aim is to get better choice of products offer at cheap price that is the reason they carry on switching to different supermarkets. So in order to have a grip on customers and to maximise joint profit supermarkets do price fixing. From the last few years investigation have been taken place by OFT and Competition Commission relating to price fixing. By fixing price large firms can lead smaller firms out of business. Price fixing can also hurt suppliers very badly it means they have to sell their products at very low price. By fixing price firms can charge more to the customers and it will be very difficult for the potential firm to enter in the market. Price Fixing is considered illegal in Europe and USA. (http://www.economist.com). Over the last few years large supermarkets (Tesco, Morison’s and Sainsbury’s) have been investigated by OPT and Competition Commission. The investigations were taken place in order to avoid price fixing which can affect the suppliers, customers and the potential firm. The areas which were covered by this investigation of OFT and Competition Commission are the following: 1) “The relation between food retailers and their suppliers. 2) The level of competition between retailers in consumer’s local area. 3) The planning regime and land banks”. (www.news.bbc.co.uk/1/hi/business/7243522.stm) As the result of the investigation made by OPT and Competition Commission (regarding large supermarkets) there was no affect on the price of the products for customers living in small areas. Suppliers were happy there was no pressure on them to sell their products for less price. In fact they were appreciated. But some supermarkets carry on buying lands so that new competitor cannot enter the market. To stop these large supermarkets for doing so they have to fine them heavily or make some new laws with the help of which landholdings by large supermarkets stop and encourage them to sell their land to potential rivals so...
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