Competition Between The Three Major Supermarkets Economics Essay

Competition Between The Three Major Super groceryplaces economics EssayFor my Extended Essay, I resolute to investigate the ch distributivelyenger mingled with the triple major super food markets in my local anaesthetic bea, and whether they cabal or not, proposition my research question To what uttermost do the bigger supermarkets in my local bea collude with individu entirelyy opposite? By analysing info retentiveness on price from the tether supermarkets, it was undercoat that cardinal of the trinity supermarkets at hand colluded unsoundedly with for each one round opposite(a), under and oligopoly market coordinate. The wrongs of fifteen undistinguishable prices were recorded across a magazine couplet of three weeks. The analyses of these prices deport to two remnants. Firstly, it was found that two supermarkets colluded with each other, but still had non-price competition amid them. This was brinyly collectable to the advantage of the two sto res acting as a monopoly by charging the same price. This everyowed the two supermarkets to aim ab median(prenominal) profit, which in turn they apply to create a stronger brand loyalty, and frankincense, a very much ine furthestic ingest curve. Secondly, it was found one of the supermarkets was undercutting the other two supermarkets prices. The main(prenominal) reason for this was that the supermarket could gain greater tax at the time by undercutting rivals, out-of-pocket to having to a greater extent customers. These findings show that on that point was secret approval in the midst of larger supermarkets in my argona, but not surrounded by all supermarkets. Finally, the essay could be improved if I included more merchandises in my data collection, as intimately as aggregation the data over a all-night time period.1. INTRODUCTIONTesco, Asda and Sainsburys argon the three main supermarkets that constitute periodic shopping for the public in my local ara, west C harlton. These three supermarkets are recognised for their vast range in goods and at affordable prices. It is no surprise because that in ground of market share, they each defend the top three places for having the most market share in the U.K.1 During the last couple of years, though, I piddle noticed that m each of the smaller supermarkets in the same scene of action begin begun to close overcome.Since enrolling in the IB Higher political economy course and studying market structures in particular, Ive developed an engagement into how supermarkets cope with each other, or even, how they collude unitedly. whitethornbe, given their large hold of the market share, the benefits from collusion would be unmatchable compared to other smaller supermarkets, in terms of increased sales revenue. Also, wee-weeal collusion, one of two forms of collusion, is amerciable as it goes against the Competition Act 1998 (the Act) Chapter 12.Therefore, the research question I go conjectur e is To what extent do the larger supermarkets in my local rural area collude with each other?To be able to explore this research question, I leave alone first pay a summary of the supermarkets, where the characteristics of them allow for be described. This will lead on to my next section where I will discuss relevant theoretical market structures and relate economic theories to them. later I have dictateded these theories, I will meditatione which market structure is adequate for the supermarkets present, thus creating a sufficient research design where the prices of standardised intersection points will be compared. Finally, I will analyse the calm data and prove or disprove my research question, leading to a conclusion of my essay and exploring possible limitations.2. MARKET SUMMARYIn the area I am studying there are three main supermarkets Asda, Tesco and Sainsburys, primed(p) in West Charlton (appendix 1.1). Each supermarket is alike(p) in size, satisfying the vas t needs of the inhabitants in the area. It is worth mentioning that repayable to the supermarkets organism of a secure size structurally, there must have been large start up be. Each of the three engages in non-price competition. This includes things such as advertising on T.V, having parking areas and the use of brand label. The offerings of these services are in the effort to attract more customers. Take for example, Asda, which has parking as well as various sectors to its stores such as electrical and clothing sections as well as groceries. The aim of this is that customers rouse visit only this store by satisfying all their needs from the vast offers of goods. Furthermore, each supermarket advertises their brand names to gain more customers due to the brand loyalty it has established. This could make their subscribe to curve more inelastic, meaning that an increase in the price of a good would result in the increased revenue exceeding the diminution of quantity sold (a ppendix 1.2).These three supermarkets also dictate the majority of market share, as I have mentioned. Lastly, it is worth mentioning that Sainsburys and Asda are propagate for 24 hours from Tuesday to F riday, otherwise it is from 7 in the morning to 11 in the evening. Tesco are aerofoil from 7 to 11 everyday, apart from Sunday when they open an hour later and close an hour earlier. I outweart think that the slightly lesser hours that Tesco is opened during the week will come to my research much, or at all. This is due to the accompaniment that I dont think Tesco make much of their sales in the midst of midnight and 7 in the morning.3. MARKET STRUCTURE THEORIESI will at one time present the four lineaments of market structure theories and their assumptions. I will not overtaking into great detail on the structure of a monopoly as this is not a possible market structure for the supermarkets, given the fact that there is evidently more than one unanimous in the area. This i s the same for perfective aspect competition, as the goods produced by supermarkets are not identical.Firstly, I will present the market structure of a monopolistic competition. The assumptions of this market structure are3* The constancy is made up by a large form of theatres* The firms each act independently of each other, due to each firm being small, relative to the size of the pains* The firms produce contraryiated harvest-times consumers pot rate one product from another* Firms are free to enter and issuing the industry, due to lack of barriers to entry and exit* Firms are able to make abnormal profits in the short run, however due to lack of barriers to entry this attracts other firms into the industry. This performer that in the huge run, only normal profits are able to be madeDue to the fact that the supermarkets in question are of a substantial size, I believe that the start up cost in itself will be of a great barrier to entry. Also, I dont believe the indust ry I am examining is made up of a large number of firms, as there are only three supermarkets of their type in the local area.Another market structure that the supermarkets could come under is an oligopoly. These are the basic assumption of an Oligopoly4* A few firms dominate the industry* There are barriers to entry and/or exit for the industry* The firms are price makers as they have a downward sloping necessitate curve* The firms are interdependent the action of one firm fire have an effect on another* brachydactylic profits can be made both in the short run and long runIn addition to these assumptions, firms in an Oligopoly can be each collusive or non-collusive.Non collusive oligopolies face price stability due to the kinked demand curve. This is shown in figure 1.Figure 15Due to the kinked demand curve, price will be stabilized at price P. This happens as the Price elasticity of Demand (PED The responsiveness of the quantity demanded of a good or service to a change in its price)6 above price P is greater than 1. This means that an increase in price above point P will result in a loss of revenue. Likewise, the PED below price P is less than one, meaning a reduction in price to this level will result in a loss of revenue again. Due to these factors, it is logical that firms do not favour either move, so they are said to be shelter at point P. This also results in the output being persistent at point Q as a change in b enounceline cost from MC1 to MC2 would still mean output would stay at Q. This is due to firms in this market structure producing at the profit maximising point, where MC=MR.7Firms in this market structure whitethorn also be collusive. This exists when the firms collude to charge the same prices for their products, in effect acting as a monopoly. There are two types of collusion, formal and tacit. Formal collusion exits when firms openly agree on the prices they will charge. In the case of supermarkets in the U.K, it is illegal for t his to occur as it is deemed to be going against the interest of the consumer due to it resulting in less output and higher prices. Tacit collusion, however, exists when firms charge the same prices without any formal collusion. The three supermarkets in question may have persistent to charge the same prices and not compete with each other, in commit to increase revenue. This is represented in figure 2.Figure 28As shown in figure 2, firms can make abnormal profits between their price and cost, due to the price exceeding the cost to the firm. This form of collusion is very possible as each supermarket is very akin(predicate) to each other and all produce same type goods.Firms in an Oligopoly can experience economies of carapace. Economies of scale are any decreases in the long-run average cost that occur when a firm changes all of its factors of production, in order to increase its scale of output. There are a number of assorted economies of scale that can benefit a firm as it increases its scale of output. These can be 9* Specialisation- Firms can be more effectual when they specialize in different areas of expertise* Division of labour- This is the breaking down of a longer production process into many smaller activities, do production more efficient by reducing unit cost* Bulk buying- As firms increase in scale they are oft able to negotiate discounts with their suppliers, as they are buying more altogether. This reduces the firms cost of input, and thus their unit costs of production* monetary economies- Larger firms are able to get loans at refuse interest rates, as they are seen as a lesser risk to channel money to than smaller firms, by the bankThe assumptions of a monopoly are as followed10* Only one firm producing the product at hand, so the firm is the industry* High barriers to entry and/or exit* Abnormal profits can be made in the long run, due to barriers to entryThis market structure is improbable to be present in my research area as there are clearly more than firm in the same industry.Finally, the basic assumptions of perfect competition are* The industry is made up by many firms, so fare output cannot be affected by one firm* The firms all produce homogeneous (exactly identical) products* No barriers to entry and/or exit* Producers and consumers all have perfect knowledge of the marketAgain, this market structure is unlikely to feature in my study, mainly due to the fact that there is product differentiation, as well as evident start up costs.4. guessAfter reviewing and comparing the discussed market summary and theories, I have hypothesised that the market structure the supermarkets are in are oligopoly. I have reached this hypothesis for the main reasons that* There are evident barriers to entry such as strong branding of products and start up costs* There are only three supermarkets in the local area, between them sharing just near 64% of the market share.11In addition to these points, I believe tacit collusion between the three supermarkets would greatly benefit their competition with other smaller supermarkets in the area. It would also avoid unnecessary competition between each other, and perhaps result in gaining more customers.After hypothesising that the three supermarkets are in an oligopoly, and thus capable of collusion, I will now be able to test my research question To what extent do the larger supermarkets in my local area collude with each other?5. RESEARCH DESIGNFor me to test my formulated research question, I will create a methodology. I will compare the prices of 15 different products across the three supermarkets. I will check the prices erstwhile every week for three weeks, so I can get a mean price at the end, making the result more reliable. I will make sure the prices of the same products are taken in the same time period, and where possible, use products produced in the U.K. This would avoid export costs affected and invalidating results. If not enough U.K based products can be found, I will make sure that any exported product used will have been exported from all supermarkets. This will maintain a dot of validity in the research. I will also avoid products produced by the supermarkets themselves. This would be because the cost of production may be very different from one supermarket compared to another, thus having a large impact on the last pricing. I will compare independent brands that feature across all three stores. Each supermarket in the area of West Charlton is located deep down one mile of each other.12In terms of the data collection, I will go to each supermarket and compare similar, or when possible, identical products and their prices. I will note down their current price at which they merchandise at. Also, I will go to each supermarket close to their opening generation on Saturday, as on this day the stores all open at the same time. The reason for not going later on in the day is because of price reduction on non- durable goods that are set to expire. If I include goods which prices have just been reduced temporarily to get rid of lasting stock, it would not represent the overall pricing of the good in regular situations.Lastly, I will compare the prices using adequate means of analysis thus deducing whether or not there is enough similar pricing evident to suggest collusion of some sort.6. DATA collecting ANALYSISFirstly, I will present my data put in for the prices of 15 products from all three supermarkets, across a span of three weeks, once a week. Table 1 shows my findings of the prices.Table 1Source Prices collected by me for all supermarketsTo analyse the bedspread of the data, I will impart out the standard deviation for each product, which will contend the spread of the data. A lower standard deviation would indicate a set of closer, similar prices, likewise a higher standard deviation would involve less chance of collusion evident.13The standard deviation for each product is represented in Table 2, along with the mean prices for each product over the three weeks.From the standard deviation, we can see they are all overall quite small, indicating the prices are all close to the mean price. This seems to indicate some form of collusion occurring between the supermarkets. However, there are some exceptions. For some goods the standard deviation is relatively high to the other products. Also, in most of these goods, such as soft drinks, crisp packs, pizza, ice glance over and cooked chicken, it is Asda who feature the lowest price out of the three, while Tesco and Sainsburys have similar prices to each other. This seems to show that there is possible collusion between Tesco and Sainsburys, while Asda undercuts their prices.The similar pricing between Sainsburys and Tesco suggests a form of collusion, tacit or formal. I inquired to the Office of Fair Trading (OFT) about my findings. The OFT are a government based organisation that visualize businesses are fair and competitive.14 In a reply they give tongue toAlthough similar prices might seem to suggest that companies are getting together to agree them, this is not needfully the case. For example, one company might have independently decided to price at a level similar to another or both may have independently decided to behave in the same way.15As similar pricing does not necessarily mean formal collusion is taking place, I will assume that the two supermarkets are tacitly colluding, although this area may be needed to be researched into further for a definite result.As well as colluding, I have also noticed that there is evidence of non-price competition between Tesco and Sainsburys. This included things such as the use of advertising, free delivery and other services situated in the store themselves. This has lead to each supermarket gaining brand loyalty, and as a result, creating a more inelastic demand curve for their products. This is possibly another explanation of wherefor e these two supermarkets in particular where of a higher price overall, compared to the other supermarket, Asda.For the case of Asda, they have employed in price war tactics, preferably than forming a collusion. In this case, undercutting rivals may be beneficial to them by increase their sales revenue. This can be represented by game conjecture.SupermarketThe table shows that if both supermarkets lower price, they will make less revenue than if they had colluded. However, it is still tempting to undercut the other store as then that would lead to greater revenue. The highlighted box shows the possible situation at the moment, with Asda undercutting the other supermarkets thus increasing revenue. This choice making situation is known as the prisoners dilemma. 16Another explanation for the lower price offered by Asda for goods could be down to lower unit costs caused by a greater fund capacity. The supermarkets cost of storage mainly depends on the material used to build them, wh ich is the surface area of the building. The level of output for the supermarket will depend on its storage capacity, so its volume area. As the size of a supermarket increases, the volume to surface area ratio increases. Therefore, the cost per unit overall will be much less than a smaller supermarket, such as Sainsburys and Tesco.Lastly, from analysing my collected data, I have reached the conclusions* Tesco and Sainsburys collude by charging very similar prices, but still have non-price competition between them.* Asda competes with a price-war tactic, by undercutting the other two supermarkets.7. CONCLUSIONThe aim of my research was to investigate the type of competition, if any, between the three major supermarkets in my area, West Charlton. The question To what extent do the larger supermarkets in my local area collude with each other? prompted me to gather the pricing of 15 identical products across the three stores. The prices were taken every Saturday morning one a week for three weeks.I found that two of the three supermarkets had signs of collusion, while the third supermarket engaged in a price-war by undercutting the other two supermarkets.Firstly, Tesco and Sainsburys have similar prices to each other, while having higher prices than Asda. This was mainly due to the two stores acting as a monopoly by colluding and charging similar prices. This meant that each firm could make abnormal profit, which they used to create greater brand loyalty, thus making the demand for their products more inelastic.Lastly, the final supermarket, Asda, engaged in price-war tactics. The main reason for this was due to the idea of gaining more revenue as indicated by the prisoners dilemma. In addition to this, Asda had a greater storage capacity, meaning an overall lower cost per unit.Therefore, after collecting data and analysing them, it is found that there was evidence of collusion, but only between two of the supermarkets, not all three studied.There are, though, ap parent limitations in my study. Firstly, my area of research was only in one town. If there is found to be some form of collusion between supermarkets here, it doesnt necessarily mean it is occurring all over the country with those same supermarkets. Also, the time span of my investigation was three weeks. This may not have been enough time to gather an appropriate amount of results to come to a reliable decision. This could be said the same for the amount of products used in my investigation 15 products may not have been enough to come to an appropriate result. As well as this, I could not make a judgement whether the collusion between Tesco and Sainsburys was either tacit or collusion. This would have to be investigated further. All of these limitations overlook the aim of my study and thus should be inspected further.8. BIBLIOGRAPHY/ACKNOWLEDGMENTAnderton, A. (2006). economic science Fourth variate. In A. Anderton, Economics Fourth Edition (pp. 63-64). Causeway Press.Dorton, I . (2007). Economics. In I. Dorton, Economics (pp. 119-123). Oxford University Press.Dorton, I. (2007). Economics. In I. Dorton, Economics (pp. 114-118). Oxford University Press.Dorton, I. (2007). Economics. In I. Dorton, Economics (p. 115). Oxford University Press.Dorton, I. (2007). Economics. In I. Dorton, Economics (pp. 81-82). Oxford University Press.Dorton, I. (2007). Economics. In I. Dorton, Economics (pp. 105-111). Oxford University Press.Garner, E. (2010, June 1). TNS Global. Retrieved June 1, 2010, from TNS Global Website http//www.tnsglobal.com/news/news-56F59E8A99C8428989E9BE66187D5792.aspx peak of Spreads. (2007). Retrieved June 3, 2010, from Stats4students http//www.stats4students.com/Essentials/Measures-Of-Spread/Overview_3.phpOffice of Fair Trading. (n.d.). Office of Fair Trading. Retrieved June 3, 2010, from http//www.oft.gov.uk/ http//www.oft.gov.uk/Office of Fair Trading. (2010, May 25). Office of Fair Trading Reply Letter. London, U.K.Prisoners Dilemma. (1997, Sept ember 4). Retrieved June 3, 2010, from Stanford Encyclopedia of doctrine http//plato.stanford.edu/entries/prisoner-dilemma/