Classification of an Industry Essay

Pages: 11 (2940 words)  ·  Bibliography Sources: 15  ·  File: .docx  ·  Level: College Senior  ·  Topic: Economics

SAMPLE EXCERPT . . .

Building cartels is illegal but still they are present in some markets.

The study of Oligopoly becomes very advance in the modern era. A lot of advantage was taken by companies through loop holes in the legalities known as oligopoly games.

Monopoly:

Monopoly is the market structure in which all the market power is under the producers' or suppliers hand. Market power can be defined as the ability to influence the market specially the market price through controlling the quantity for production. Monopoly can be created through controlling two factors. Firstly the product does not have any close substitute. If there is no close substitute then all the demands will be filled through only one product, producing by one company or cartel. And every one has to buy only from them. If not, then the company needs to face competition from the company producing close substitutes. And secondly there are strong barriers to entry.

The barriers to the entry can be legal or natural. Legal barrier creates legal monopoly. These include copyright, public franchise, government license, patents and invention of new highly efficient production methods. Natural barriers create natural monopoly. In which a single firm is capable of fulfilling the demand of certain product easily. And new entry just creates an economic loss in the market for both the companies.

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There are advantages of monopoly as well. Some businesses can reduce their cost per unit or average production cost by producing more units, a concept generally known in business as economies of scale and thus it gives the end consumer the advantage that price of that product or service is reduce drastically. So, the product becomes economical and more people can purchase it. In addition to this, there are some industries or businesses which require too much capital investment thus by having only one market player operating in such an industry, large investment cost can be saved and these funds can be used for any other purpose.

Effect of Monopoly on Companies:

TOPIC: Essay on Classification of an Industry Into Assignment

For a monopolistic company the price decision can be of two types. Firstly it can be done through price discrimination. In price discrimination different quantities of products are sold on different prices thus encouraging the buyers to buy in bulk. Secondly it can be done through single price method in which all the buyers have to buy on the same price as established by the monopolistic company. This price is set through the highest amount of profit they can achieve.

UK Super market Sector Oligopoly

The supermarkets carry very similar sort of products and providing very little differentiation. Due to their very big size they possess very less competitors in the market (Sweeting, 2007). In UK, there are chains of the super markets thus much lowering the competition. Only differentiation in UK super market is when super market are also providing the own produced goods. One way of pricing in the oligopoly system is that all the firms in the market decide a particular price through collaboration and set them throughout the market. Thus creating a sort of monopoly in shape of cartelization.

One more characteristic of the oligopoly is that the companies compete on prices so as to attract more market share. In the UK super markets we can see that in shape of price wars. When a single super market lowers its price, the whole market came into action and start lowering their prices more than the others so as to attract as much customers as possible.

Apart from price and quality there are other ways as well in which super market produce differentiation and competes to each other. One o these include their advertising campaigns. Most of these are spending around 15-25 million pounds for the advertising of their stores. Most of these have published their own loyalty cards so as to retain their customers. For doing so they regularly send mails and cards to their loyal customers so as to attract more. These non-price strategies are costly but these are providing better differentiation and increasing the competition in the market for the long run (Katsoulacos, and Xepapadeas, 1995).

According to many researches, as long as oligopoly remains functional, the prices will be continuously rising (and higher than the normal prices). This not only reduces customer welfare but also will increase inflation in the sector due to the expectations of the public. Under the cournot model, there is a price leader (Clarkson, Clarke-Hill, and Robinson, 1996). However, it must take into account the behaviors of one or more followers when it sets its price. The four biggest market share holders in UK's supermarket sector are Tesco (31.6%), Asda (17%), Sainsbury (15.9%) and Morrison's (11.1%). These market shares show that more than 75% of the market shares are in the hands of big four and the prices changes can create big impact in the market if changed by any one of the big four (Moore, and Robson, 2002).

Accusation of Anti-Competition

But it's not all fair in the UK's super market sector. Many things have changed from the past and people forgot the lesson of fairness. When they grew big, they have established cartels. Now the giants in the supermarket sector have built good relationships with the suppliers and their competitors as well and using these relationships to earn better profits and not considering the benefit of mass. For that they have been accused recently (Cotterill, 2006).

It was April 1999, when for the first time UK super market sector came under scrutiny for the monopoly provisions of the fair trading act 1973. These super markets were charged of blocking the competition in grocery markets, spreading over 600 square meters area and owned by a person who own ten more like that, are supposed to be totally out of competitive environment. In this aspect 24 grocery retailers were identified as the main parties involving in building such an oligopoly. They were accused of persistently selling some products below cost so as to create their power in the market through attracting the demand. This phenomenon developed a situation in which majority of the products are not fully exposed to the competitive pressure and distorted competition in the supply of groceries (Clarke, 2000). The super markets were found guilty for setting their prices to attract the customers rather covering the costs. Some of these own label products were excessively profitable. Five of these supermarkets possess more than eight percent market share which make the market not very competitive and the understanding between these supermarkets make them a sort of cartel which imposes their own policies on the customers thus decreasing the competition. This in long run will drastically affect the prices. These super stores use advertising communication strategy which links directly to service levels and non-price factors which time constrained buyers need. Most of these buyers are strategic buyers. According to the research these stores are strategically positioned for price discrimination targeted on grocery sub-market. Apart from that, the suppliers and supermarket chains are also found in strong relationships. The practices done by both parties were found to be operating against the public interest. The continued rise in social inequality since New Labor came to power in 1997 is reflected in the growth of "food poverty."

References

Bulow, I. (1982). Durable Good Monopolists. Journal of Political Economy, 90 (2), pp. 314-322.

Caves, R. And Porter, M. (1978). Market Structure, Oligopoly, and Stability of Market Shares. The Journal of Industrial Economics, 26 (4), pp. 289-313

Clarke, I. (2000). Retail power, competition and local consumer choice in the UK grocery sector. European Journal of Marketing, 34 (8), pp.975 -- 1002.

Clarkson, R., Clarke-Hill, C. And Robinson, T. (1996). UK supermarket location assessment. International Journal of Retail & Distribution Management, 24 (6), pp.22 -- 33.

Cotterill, R.W. (2006). Antitrust analysis of supermarkets: global concerns playing out in local markets. Australian Journal of Agricultural and Resource Economics, 50 (1), pp.17 -- 32.

Fehr, E. And Gachter, S. (2000). Fairness and Retaliation: The Economics of Reciprocity. The Journal of Economic Perspectives, 14(3), pp. 159-181

Katsoulacos, Y. And Xepapadeas, A. (1995). Environmental Policy under Oligopoly with Endogenous Market Structure, The Scandinavian Journal of Economics, 97 (3), 411-420.

Lancaster, K. (1990). The Economics of Product Variety: A Survey. Marketing Science, 9 (3), pp. 189-206

Mazzeo, M. (2002). Product Choice and Oligopoly Market Structure. The RAND Journal of Economics, 33(2), pp. 221-242.

Moore, G. And Robson, A. (2002). The UK supermarket industry: an analysis of corporate social and financial performance, Business Ethics. A European Review, 11 (1), pp. 25 -- 39.

Nishimori, A. And Ogawa, H. (2002), Public Monopoly, Mixed Oligopoly and Productive Efficiency.… [END OF PREVIEW] . . . READ MORE

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