Features of an Oligopolistic Market the Roles of Both Price and Non-Price Competition in this Market - Coursework Example

The expression oligopolistic market refers to the situation where few competitors are present and they have transparent actions (For instance; their behavior in pricing). Thus, each and every of the few competitors is aware of the actions by others and therefore by making a study of reactions in the past, prediction of conduct in future is possible. Therefore, under a market structure of an oligopolistic market there stands a major predicament. That is, there is very little competition especially when price comes in- every player is well aware of the other players’ moves. Oligopolistic interdependence theory stipulates that the few firms in context can access an excess profit made by a monopolist even without making conspiracy or forming of cartels in such a manner that is not allowed by the rules of competition. Due to this structure of the market as well as the company sizes of the involved businesses in the market, business rivals are thus interdependent and are set to make matching policies, with there being no or little price competition. The fact that each company’s aim is to make maximum profitability, oligopolies are thus able to make matching strategies and make profit maximising prices of a monopoly. Self-awareness of the firms curbs the need for a collusive agreement itself. In practice the system of an oligopolistic market can maximise profits by way of pricing where there is price leadership by a single company. This one company raises prices and the other firms in the market follow suit. It eventually achieves a ‘parallel pricing’. It is said to serve a barometric firm for the rest of the firms and it is the market price leader. (Rodger and MacCulloch, 2004 p 26) This study is aimed at answering comprehensively and vividly the question, “What are the features of an oligopolistic market and what are the roles of both price and non-price competition in this market?” A special concentration will be taken on the UK supermarket industry where the firms like Tesco, Sainsbury, ASDA, and Somerfield will be in focus. Mergers and takeovers that have happened in this market will also not be left behind as the study tackles the main question. As will be made clear later, this UK market is a befitting example as far as oligopolistic markets are considered. An oligopolistic market has the following attributes; companies are conscious of rivalry, a small number of large firms dominate the market, entry as well as exit from this market is hard, for some oligopolistic markets products are differentiated while in others it is homogenous, they have a demand curve that is negatively sloping and have considerable control over pricing. Where the industry/market is stable the tendency is presence of considerable non-price competition and price leadership, but where there is competition both price as well as non-price competition are evident. Non-price competition is usually applied to maintain or gradually advance in market shares. (Bumas, 1999 p 291) Basically price competition is in the form of price raise or reduction. While setting output and price, oligopolies do not have necessarily to set prices at the point where Marginal Revenue is equal to Marginal Cost. An oligopoly, just like in a game of chess, always considers the reactions of other players in the industry while making pricing or output decisions. Non-price competition is often through differentiation of products and advertising. Firms may aim at capturing business away from the competitors by offering apt campaigns of advertising as well as improved products. This kind of behavior offers an explanation on why oligopolies spend large amounts on advertising and also explains why Research and Development is such an essential function to oligopolies. For instance, most of the efforts of engineering are focused on developing new commodities as well as improving the existing ones. The reason why oligopolies tend to depend very much upon non-price competition is that each firm in an oligopolistic market setting has a perception that rivals can quickly and easily any reduction in price. While compared to price competition it is much harder to counter a clever product improvement. (Tucker, 2008 p 262) ASDA, Tesco, Morrisons, and Sainsbury are the dominant supermarkets in the UK. As of May 2006, they controlled approximately 75% of the UK’s £120 billion grocery market. In the same year the Competition Commission was being urged to probe these firms by the Office of Fair Trading. Even though the commission cannot fine the big supermarkets, it can force them to dispose some of their stores or even rectify their ways of running operations. Critics accused these big supermarkets of driving the local convenience stores away from High Street. For instance, from 2000 up to 2004 about 7,337 independent grocers exit the business. OFT (Office of Fair Trading) said that it had enough evidence suggesting several factors. Some of these were the planning system of the supermarkets that would be costly for any aspiring entrants to the market; to avoid competition, the major group supermarkets had large holdings of land, while selling sites there was an occasional attachment by the supermarkets of restrictive covenants and that the power of the supermarkets had risen and to distort any forthcoming competition they had some pricing behaviours like price flexing and cost selling. (bbc.co.uk, 2006) In the year 2005 there was a takeover battle between Tesco and ASDA- two of the largest supermarkets in Britain. The bigger of the two, Tesco supermarket chain was thought to be aiming at converting the smaller stores of Littlewoods to ensure an expansion of Tesco express convenience shop. ASDA, the second largest supermarket in Britain was prepared to counter the move by paying any premium for the same stores since the previous three months had seen Tesco raise its food market share to about 30.5% in comparison to its 16.7%. The head of Wal-Mart, which is the parent company for ASDA in U.S.A, sought for a probe in the competition since Tesco was seen to dominate the food market of UK. Also as of 2005 both the supermarkets were seen to use their own brand clothing labels so as to take upon more established name in this trade. (Rossiter, 2005) The UK supermarket industry is not free of mergers and takeovers. For example; in mid 1999 a US based giant supermarket Wal-Mart made a spectacular intervention in a set merger between Kingfisher and ASDA by making a payment of US $10.72 billion to purchase ASDA. ASDA was the then number three biggest food retailers in Britain. Hyperbolic reactions to the takeover ensured as this meant a death Knell of the retailing business in Britain as well as the consumers, salvation by way of big price reductions. Before this merger occurred, it had been believed that Wal-Mart was to enter the UK, but this came as a surprise due to the intervention of an already set merger. ASDA was the best fit as far as Wal-Mart was concerned, though. The takeover by Wal-Mart of ASDA was a market of an onset of a big-scale strategic investment in a major retail world economy. The takeover of the supermarket by Wal-Mart did not go uncontested outside and within Wal-Mart. For example; Bob Martin, who was the head of the International Section of Wal-Mart at the takeover’s time, may be due to the approach of the takeover as well as the divisions caused by the move in the company. In the UK, the largest supermarket, Tesco, Made a promise that it would fight tooth and nail to maintain its market share. (Brunn, 2006 p 243) Another takeover and which is more recent is the Somerfield takeover. The Co-operative group entered the market of groceries when it agreed to purchase Somerfield in a deal involving some £1.6 billion. This firm is based in Manchester and with this purchase the market share would rise from 4.2% to 8% and make it the fifth biggest of the firms in the supermarket business. Somerfield was to disappear and the co-operative group would have about 3000 stores and sales stand at £8 billion. This takeover was to cause some negative impact as well as to the fact that there would be a high level of job losses. Somerfield’s head office at the time this merger was employing 800 workers. This bid is required by the OFT to have the Co-operative group sell from 100-200 of its shops so as to be allowed to do this merger. Competitors like Waitrose, Morrisons and ASDA had already expressed their intentions to get the particular stores. (Finch, 2008) While making a conclusion one cannot forget to take a notice of the efforts by the Office of Fair Trade and Competition Commission to ensure fair competition in this industry which has all the features of an oligopolistic market. Also while talking about mergers and takeovers it is hard to segregate the issue of internationalisation and international firms being involved in the whole issue. This is while seeking to answer the question, “What are the features of an oligopolistic market and what are the roles of both price and non-price competition in this market?” Reference list: Bbc.co.uk. (2006). Supermarkets in Competition Probe. Retrieved August 16, 2009 http://news.bbc.co.uk/2/hi/business/4753707.stm Brunn, Stanley D. (2006). Wal-Mart World: The World’s Biggest Corporation in the Global Economy. CRC press. Edition illustrated. p 243. Bumas, Lester O. (1999). Intermediate Microeconomics: Neoclassical and Factually-oriented Models. M.E. Sharpe. Edition Illustrated. p 291. Economicwatch.com. (2009). Oligopoly. Retrieved August 15, 2009 http://www.economywatch.com/economics-theory/market-theory/oligopoly.html Finch, Julia. (2008). Supermarkets: Somerfield Takeover Pushes Co-Op Into Big League. Retrieved August 15, 2009 http://www.guardian.co.uk/business/2008/jul/17/mergersandacquisitions.supermarkets Rodger, Barry J. and MacCulloch, Angus. (2004). Competition law and policy in the EC and UK. Routledge Cavendish. Edition: 3. Rossiter, James. (2005). Tesco to Battle Asda for Stores. Retrieved August 15, 2009 http://www.thisismoney.co.uk/news/article.html?in_article_id=403426&in_page_id=2 Tucker, Irvin B. (2008). Microeconomics for Today. Cengage learning. Edition 6, revised. p 262. Read More