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
References: 1) David B, Stanley F and Dornbusch, R, 2008 , Economics 9th Edition, McGraw-Hill Education, Berkshire. 2) David B, 2006, Foundation of Economics 3th Edition, McGraw-Hill Education, Berkshire. 3) David B, Stanley F and Dornbusch, R, 2003 , Foundation of Economics 2th Edition, McGraw-Hill Education, Berkshire. 4) http://www..com/news/world_news/2005-05-16/chius1605.html [Accessed 28th Dec 2009] . 5) http://www.economist.com/businessfinance/displaystory.cfm?story_id=E1_TTNRJTPG&source=lo&source=login_payBarrier [Accessed at 5 Jan 2010] 6) http://uk.reuters.com/article/idUKTRE51O7HN20090225 [Accessed on 8 Jan 2010]