Tesco in UK’s Grocery Market

Question: Describe the Oligopoly concept of market structure and use it to discuss material in the case study of Tesco and Supermarkets. Answer: Market structure, in economics, shows the number of firms which are producing identical or close substitute products which are more or less homogeneous. UKs grocery market can be a good example of competitive oligopoly market. The few firms who are dominating the market know that their decisions influence the nature of the competition in the industry. Tesco, who used to play the dominant role in the market as the leading retailer, has been challenged, making the market an oligopoly one. In the case of oligopoly, the few existing firms dominate the market selling a little-differentiated type of product. The existing firms are thus price makers while having interdependence in strategic pricing. This fits the grocery market sector of UK, where Tesco is playing a significant role. Other few firms like Aldi and Lidl are strictly challenging Tesco. They have acquired 8.4 percent of the market share in November 2014, up from 6.95 percent in the autumn of 2013. According to Kantar World Panel, this year Tesco is enjoying a market share of 28.47 percent, closely followed by Sainsbury with 16.78 percent and Asda 16.18 percent. The other main names worth mentioning are Morrisons, Aldi, Co-op, etc. this proves that Tesco is playing in the field of an oligopoly market. The profits of the above mentioned major companies are stable. The major firms including Tesco dominate the market with a market share of 72.22 percent (Statista 2016), which has gone down since 2011 with 75 perce nt. Here, the actions of one firm will have a significant effect on the outlining of other firms, making all the firms tacitly collusive (Uk.kantar.com 2016). The enterprises in an oligopoly are price setters. Their primary objective is to maximise profit. This makes the consumers vulnerable to the decisions of the firms. In an oligopoly, two scenarios are applicable regarding the actions of the firms. Either the firms will go for a price war to capture most of the market share, or they will take collusive decisions to maximise their profit. The first scenario is more benefiting for the consumers than the second one. According to the expectations of IGD, the UKs grocery market, in 2016 will be worth 179.1bn in 2016, with an rise of 0.6% on 2015 (Igd.com 2016). Tesco introduced several fictional farm brands to keep the market share in the pocket. The brands are Redmere Farms for vegetables, Suntrail Farms for imported fruit, Rosedene Farms for berries, apples and pears, Nightingale Farms for salad, Woodside Farms for pork, Willow Farms for chicken and Boswell Farms for beef. The consumers, National Farmers Union and Soil Association hardly criticised this move of Tesco (Fudenberg and Tirole 2013). Although the definition of oligopoly talks for a market with high barriers stopping the entry of other firms, firms are still joining the oligopoly market structure driven grocery sector of UK. This situation is going to make the market more competitive. Tesco, to save its market share, will start reducing its prices or, take non-price policies like giving exclusive offers, special promotions, compete over the quality of the products sold, providing customer care services, etc. The influence of an oligopoly market on a consumer depends on whether the firms in the market are competing or whether they opt for a collusion and form a cartel (Fonseca and Normann 2012). Since the number of companies is very low, the firms can agree on prices, which will be more profitable for them. If they go for a cartel, it will be harmful to the consumers. It will be in a monopoly situation. The consumers will be worse off here. On the other hand, if they compete, the consumers will get the benefit of l ower prices and good quality commodities. This is possible for the size of the firms. Large firms tend to engage in research and development to enjoy the economies of scale. As the number of firms offering the commodities is low, it is easy for a consumer to choose a product with full knowledge about the market (Okuguchi and Szidarovszky 2012). Consumers having knowledge of the market makes the prices of the products competitive. The market structure creates a natural barrier for the firms who want to join the market. One of the biggest problems faced by the consumers is less number of choices and lack of variability in the market. Again, the firms in the oligopoly market often get very established with their marketing. It makes the profits and the way they run the business guaranteed to work. References: Fonseca, M.A. and Normann, H.T., 2012. Explicit vs. tacit collusionThe impact of communication in oligopoly experiments.European Economic Review,56(8), pp.1759-1772. Fudenberg, D. and Tirole, J., 2013.Dynamic models of oligopoly. Taylor Francis. Igd.com. (2016). UK Grocery Retailing. [online] Available at: https://www.igd.com/Research/Retail/UK-grocery-retailing/ [Accessed 16 Aug. 2016]. Okuguchi, K. and Szidarovszky, F., 2012.The theory of oligopoly with multi-product firms. Springer Science Business Media. Statista. (2016). Consumer Goods FMCG | Statista. [online] Available at: https://www.statista.com/markets/415/consumer-goods-fmcg/ [Accessed 16 Aug. 2016]. Uk.kantar.com. (2016). Consumer Insights and Grocery Market Share - Kantar UK - Kantar. [online] Available at: https://uk.kantar.com/consumer/shoppers/ [Accessed 16 Aug. 2016].