MANAGERIAL ECONOMICS

Managerial Economics

Managerial Economics

British Grocery Oligopoly

The British grocery/retail market is may be heading toa death match between the twoleaders: Tescoand Asda. According toa BusinessWeek article ("Europe's Grocery War That's Not About Food" (10/20)03), the battle has arrive down tohigher-margin nonfood articles. The kicker is that while Tescois com pany that increased u pin England, Asda is a branch of US retail megalith Wal-Mart. It's adding new stores ra pidly. The question is, can any retailer argue with Wal-Mart for long? Sowhat ha ppens when the Wal-Mart of America goes after the Wal-Mart of Europe? A classic battle of titans, right in the shopping centers of Britain. Wal-Mart-owned Asda Grou pLtd. lately overtook J. Sainsbury PLC tobecome Britain's No.2 grocer. Now it's on a mission tobang Tescofrom its perch.

Both com panies have similar discount strategies, with a strong em phasis on the sale of such items as CDs toa pparel tocookware.The context for this cost war is the latest amalgamation of twoother food shopcom panies, William Morrison and Safeway PLC. Safeway (not a part of the US su permarket chain), the #4 food shopchain, went bankru pt, and while Asda, Tesco, and Sainsbury all vied toacquire it, anti-trust officials in Britain awarded it tothe #5 food shopchain, Morrison, tomake for a new owerhouse.(Schmalensee,1985)

The other large-scale story is the extending down turn of Sainsbury, which until 1995 was the UK's largest food shopchain, It lately sli pped into#3 s pot behind Asda, and seems tobe lowering market chare fast. All three of its rivals have constructed their re putations as discount chains, and the idea of Sainsbury as the high- price alternative is injuring the com pany.What is alsoremarkable is the exceedingly high concentration in the business in the UK, with 72.5% of the market belonging tofour com panies, a much tighter situation than in the US.

How dofirms in the industry com pete?

Oligopoly is a market structure in which a cou ple of firm dominate the industry, it is an industry with a 5 firm concentration ratioof greater than 50%.In Oligopoly, firms are interde pendent; this means their decisions ( price and out put) count u pon how the other firms behave:

* Barriers toa pplication are probable tobe a feature of Oligopol

* There are distinct models toex plain how firms may behaveThe kinked demand curve model suggest firms will be profit maxi misers.

Kinked Demand Curve Diagram

At p1 if firms increased their cost, consumers would purchase from the other firms thus they would lose a large share of the market and demand will be elastic. Therefore, firms will lose income from increasing price.If Firms slash Price then they would gain a large-scale increase in Market share, although it is im probable that firms will allow this. Therefore, other firms pursue suit and slash cost as well. Therefor,e demand will only increase by a small amount: Demand is inelastic for a cost slash and income would fall.

This form suggests cost will be rigid because there is noinducement for firms tochange the ...