The Uk Supermarket Industry, And Analysing The Condition Of The Current Market

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1.Introduction

This report is about the UK supermarket industry, and analysing the condition of the current market. It will focus on its market structure, barriers to entry and contestable market to analyse if the supermarket industry is an oligopoly market and if it is a contestable market or not.

2.Findings

2,1 Definition of oligopoly
To examine if a market is oligopoly market, it has to meet the following conditions:
Few firms in an industry
Firms under oligopoly market are price setters.
Long-run abnormal profit can be made
Products can be homogeneous(e.g., sugar) or differentiated(e.g., mobile phone)
Barriers to entry - Sunk cost, technology, economies of scale, limiting pricing and brand loyalty of incumbents can all be barriers
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Therefore, interdependence makes oligopoly market uncertain.
Due to uncertainty, firms may want to ensure a stable amount of profit, collusion may be an option for them.
Cartel - firms ,especially dominant players, gather together to set up a price according to the profit maximisation in the whole market. In this case, firms act like a monopoly. The price of products of each firms is fixed, thus reduction of price competition will be achieved. Instead of pricing strategy, firms will compete each other over non-price competition, for example, advertising. Like monopoly, customers’ interest might be sacrificed because price is constructed according to the market’s profit maximisation point, whole industry can gain abnormal profit, which means customers pay more than they actually need to. According to the figure 1, price of products under cartel is set up at P because of profit maximisation E (MC=MR), and abnormal profit is PP2FG. However, cartel is illegal in many countries, including UK.
Tacit collusion - Firms will follow the price set up by established leader. Established leader can be dominant company in this industry. This is called dominant firm price leadership. Price can also be set up by company which may not be the dominant one, but other firms might follow its action because it is reliable on price setting. This is called barometric price leadership.
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