1A Main economic characteristics of an oligopoly and cardinal economic theories of monetary value repair
This essay aims to place chief economic characteristics of an oligopoly. An oligopoly is a market construction where few houses portion a big proportion of industry end product among them. This state of affairs occurs when new houses are non able to come in the market and vie with existing houses and demand of end product is non fluctuating. As under oligopolistic market few houses hold the market portion, houses concern determinations are mutualist. Essay besides explains the economic theories of monetary value repair.
Features of oligopolistic market construction
There are few features of oligopoly that distinguishes it from other market constructions:
Few houses portion big part of industry, the houses under oligopoly may bring forth indistinguishable merchandises or differentiated merchandises, mutuality of the houses determination devising, long term monetary value stableness and non fluctuating demand. To understand that why merely few houses portion big part, the factors set uping entry of new entrants in market demand to be explained. Harmonizing to Maunder et Al. ( 1991 ) these factors can be licencing policy of authorities, patents, and control over critical resources, immense investing required to fit maximal efficiency graduated table achieved by economic systems of graduated table, amalgamations of houses and trade name development.
Harmonizing to Maunder et Al. ( 1991 ) , degree to which end product of the industry is concentrated in a few custodies is industry concentration, Industry concentration can be measured by utilizing concentration ratio and Herfindahl-Hirschman Index ( HHI ) .As per Wonnacott & A ; Wonnacott ( 1986 ) a concentration ratio measures the per centum of an industry end product produced by largest n houses, it is summing up of per centum of market portion of single house. The concentration ration is expressed as CRn
Mathematically concentration ration can be expressed as
CRnA =A A X1A A +A A X2A A +A A X3A A +A A … A … A +A A Xn
where Xi= market portion per centum of ith house
Another step of industry concentration is HHI, “ the herfindahi index is defined as the amount of the squared market portion of all the houses ” ( Wonnacott & A ; Wonnacott, p. 536 )
HHIA A =A A X12A A +A A X22A A +A A X32A A +A A … A … A +A A Xn2
where Xi = market portion of the ith house.
Cooperation or competition
Firms under oligopoly are strategically mutualist to other houses, to understand the consequence of this mutuality on houses ‘ behavior apprehension of game theory is helpful. “ Game theory seeks to understand whether strategic interaction will take to competition or co-operation among challengers ” ( Begg & A ; Ward, p.131 ) . Harmonizing to Sloman & A ; Sutcliffe ( 2001 ) houses may wish to collaborate for net income maximization or they may be tempted and seek to vie with the challengers to derive bigger portion of industry net income each scenario has different net income out comes ( pay-off ) . The scenario which is optimum for house can be explained with the aid of Nash equilibrium. “ Nash equilibrium occurs when each participant does what is best for themselves, given what their challengers may make in response ” ( Begg & A ; Ward, p. 137 )
Pay- Off Matrix Source: Begg and ward
Taking illustration of two houses A and B to understand Nash equilibrium, each house has two options: cooperate or monetary value war, value on left is pay off to house B and value on right is ever pay off to tauten A. While taking determination house A analyse the base of house B which can be either collaborate or competition. Looking at wage off matrix we can state that whatever be the determination of B, optimal place of house A is to get down monetary value war.
Monetary value repair and monetary value leading
When oligopolistic house decide to join forces or conspire it reduces the fright of monetary value war. Collusion is farther defined as formal collusion and silent collusion. A formal collusion is formal understanding among the houses under oligopoly to command monetary values and end product. A formal collusion is besides called as trust. As per Sloman & A ; Sutcliffe ( 2001 ) trust will maximize industry net income if members of trust act as a individual house. This state of affairs will make market status similar to monopoly.
Tacit collusion is another signifier of collusion where houses have understanding among them to collaborate and non prosecute in monetary value war or aggressive selling and apprehension of monetary value leading. Harmonizing to Maunder et Al. ( 1991 ) monetary value rise enterprise can be taken by market leader to which other houses follow and raise their monetary values this scenario is known as dominant steadfast monetary value leading. Similarly monetary value rise enterprise can be taken by house which is non market leader but asses the alteration in demand and cost status better that other houses whereas all other houses in the industry will follow. The house which took monetary value enterprise is called barometric house hence it is called barometric house monetary value leading.
Non conniving oligopoly: Competition among challengers
Firms under non conniving oligopoly compete with challengers, house reduces monetary values to derive market portion but still monetary values instead remains stable. Harmonizing to toilet Sloman & A ; Sutcliffe ( 1991 ) the theory is based on premises that if oligopolistic house reduces its monetary value, challengers will besides cut down their monetary values to forestall loss of market portion. But if oligopolist increases its monetary value, challengers will non increase their monetary value so that challengers can increase their market portion. The demand curve for each oligopolist house will be kinked demand curve. As the steadfast addition its monetary value clients will exchange to moo priced merchandises hence demand is elastic. On the other manus if oligopolist house reduces its monetary value, challengers will besides follow and cut down their monetary value therefore market portion will stay same. As the market portion remains same demand curve is inelastic
Kinked demand graph shows that at monetary value ?5 demand is 100 units and demand is elastic above monetary value ?5 but inelastic below monetary value ?5.
1B Extent to which UK supermarket is oligopoly and extent to which it can back up monetary value repair
To discourse about oligopoly market construction, illustration of supermarkets in UK will be analysed in this portion of essay. Supermarket is a self service shop merchandising food markets, confectioneries, dairy merchandises, baccy, intoxicant and merchandises required for day-to-day family intent. Large proportion of UK supermarket industry is captured by few supermarkets. UK ace markets are perfect illustration of oligopoly construction of market. The essay will besides discourse the factors act uponing entry of new entrants in market and besides the extent to which houses under oligopoly can back up monetary value repair. Decision by each house on merchandise monetary values is made maintaining in head the scheme of rival houses. Few big houses influence the monetary values of merchandise for whole market. Competition among houses is non merely on monetary values but besides on non monetary value issues like advertisement, service, and gap hours etc.
Looking at the information available, market portion of supermarket industry is distributed in such a manner that few big houses are keeping the big proportion of entire market. To find the extent to which market is an oligopoly criterion theoretical accounts are concentration ratio and Herfindahl-Hirschman Index ( HHI ) .
12 Weeks to 22 March 2009
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Four largest houses in footings of market portion are Tesco, Asda, Sainsbury ‘s and Morrision.
The concentration ratio of these four houses is summing up of per centum portion of each house.
CR4 = 30.4+17.5+16.10+11.80 = 75.80
Therefore the concentration ratio of four largest houses in supermarket industry is 75.80 %
HHI for ace market industry comes out to be 0.17
Both concentration ratio and Herfindahl-Hirschman Index suggest that this is a oligolpolist market construction
For ace market industry there are batch of entry barrier for new entrants. Supermarkets like Tesco, Asda, Sainsbury ‘s, Morrison has big figure of shops across the state. These shops can negociate efficaciously on monetary values on footing of their high buying power hence they can offer minimal monetary value to client. To fit with monetary values provided by supermarkets new entrant demand to put immense sum. Brand loyal is besides a factor that discourages new entrants to come in the market.
Monetary value repair and monetary value leading
By using game theory on supermarket oligopoly we can state that if all houses cooperate with each other, houses can maximize their net income. This cooperation can be formal collusion or trust under which all supermarkets can repair monetary values and measure of merchandises to be sold. The supermarket under trust can besides repair monetary values for merchandises to be purchased from providers. This type of cooperation or trust is illegal under UK jurisprudence. In 2007 Sainsburys ‘s and Asda were fined ?116m for repairing the monetary value of milk, cheese and butter. Another type of cooperation is silent collusion ; supermarkets can be identified as following barometric steadfast leading. Taking a scenario when net income reduces due to be force per unit area on industry one supermarket will increase its merchandise monetary value and all other supermarkets will follow.
Price competition is fierce in supermarket industry, as each house attempt to increase its market portion seek to pull client by cut downing their monetary values. Tesco, Asda and Sainsbury ‘s started monetary value war in 2009 to pull new client. Asda announced to cut down monetary values on 1000s of merchandises shortly it was joined by Tesco and Sainsbury ‘s by declaring to cut down monetary values of merchandises. Apart from monetary value competition houses try to happen out to pull clients from rival ace market and retain their bing client this is called as non monetary value competition. Firms use different ways for non monetary value competition such as aggressive selling, publishing trueness card to client by which client can acquire price reduction of future purchase therefore retaining bing clients, extension of gap hours, place bringing system and cyberspace shopping. If there is no cost force per unit area and one supermarket decide to increase monetary values to increase net income border, other supermarkets will non increase their monetary value so that they can pull clients of the house that has increased monetary values. But if one supermarket reduces their monetary values, all other houses will follow and cut down their monetary values to keep their market portion. Hence in absence of any cost force per unit area houses in supermarket industry will follow kinked demand graph as explained above in this essay.
Therefore after analyzing characteristics of oligopoly and analyzing UK supermarket industry for which concentration ration of four largest houses is 75.80 % and features such as strategic mutuality and entry barriers we can state that UK supermarket industry falls under oligopolistic market construction. The houses in supermarket industry can officially conspire and repair monetary values as purchaser and marketer. But as we have seen in illustration mentioned in essay that the houses involved in monetary value repair were fined by authorities. Though supermarkets can non back up formal monetary value repairing but they can hold understanding among them which can maintain monetary values stable as we have seen in silent collusion
Maunder, P, Mayer, D, Wall, N, Miller, RL 1991, Economics explained, 2nd edn, The Bath Press, London
Wonnacott, P, Wonnacott, R 1988, Economics, 3rd edn, McGraw-Hill, Singapore
Begg, D, Ward, D 2007, Economics for concern, 2nd edn, McGraw-Hill, Berkshire
Sloman, J, A Sutcliffe, M 2001, Economics for Business, 2nd edn, Pearson Education. Essex
Another record portion for Asda ( Plus an update on grocery monetary value rising prices ) , 2009, tns intelligence, viewed 22 Nov 2010, hypertext transfer protocol: //www.tnsglobal.com/news/news
Market Share, n.d, viewed 22. Nov 2010,
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