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Competition Between The Three Major Supermarkets Economics Essay

For my Extended Essay, I absitively to investigate the antagonism amid the three aloft supermarkets in my bounded area, and whether they coact or not, bidding my analysis question: To what admeasurement do the beyond supermarkets in my bounded breadth coact with anniversary other? By analysing abstracts calm on appraisement from the three supermarkets, it was begin that two of the three supermarkets at duke colluded tacitly with anniversary other, beneath and cartel bazaar structure. The prices of fifteen identical prices were recorded beyond a time bulk of three weeks. The analyses of these prices advance to two conclusions. Firstly, it was begin that two supermarkets colluded with anniversary other, but still had non-price antagonism amid them. This was mainly due to the advantage of the two food acting as a cartel by charging the aforementioned price. This accustomed the two supermarkets to accomplish aberrant profit, which in about-face they acclimated to actualize a stronger cast loyalty, and thus, a added breakable appeal curve. Secondly, it was begin one of the supermarkets was undercutting the alternative two supermarkets prices. The capital acumen for this was that the bazaar could accretion greater acquirement at the time by undercutting rivals, due to accepting added customers. These allegation appearance that there was bunco amid beyond supermarkets in my area, but not amid all supermarkets. Finally, the article could be bigger if I included added articles in my abstracts collection, as able-bodied as accession the abstracts over a best time period.

1. INTRODUCTION

Tesco, Asda and Sainsburys are the three capital supermarkets that aggregate account arcade for the accessible in my bounded area, west Charlton. These three supermarkets are recognised for their all-inclusive ambit in appurtenances and at affordable prices. It is no abruptness afresh that in agreement of bazaar share, they anniversary comprise the top three places for accepting the best bazaar allotment in the U.K.1 During the aftermost brace of years, though, I accept noticed that abounding of the abate supermarkets in the aforementioned breadth accept amorphous to abutting down.

Since enrolling in the IB College Economics advance and belief bazaar structures in particular, Ive developed an absorption into how supermarkets attack with anniversary other, or even, how they coact together. Maybe, accustomed their ample authority of the bazaar share, the allowances from bunco would be unmatchable compared to alternative abate supermarkets, in agreement of added sales revenue. Also, academic collusion, one of two forms of collusion, is actionable as it goes adjoin the Antagonism Act 1998 (the Act) Chapter 12.

Therefore, the analysis catechism I accept formulated is To what admeasurement do the beyond supermarkets in my bounded breadth coact with anniversary other?

To be able to analyze this analysis question, I will aboriginal present a arbitrary of the supermarkets, breadth the characteristics of them will be described. This will advance on to my abutting breadth breadth I will altercate accordant abstract bazaar structures and chronicle bread-and-butter theories to them. Afterwards I accept presented these theories, I will hypothesise which bazaar anatomy is able for the supermarkets present, appropriately creating a acceptable analysis architecture breadth the prices of agnate articles will be compared. Finally, I will analyse the calm abstracts and prove or belie my analysis question, arch to a cessation of my article and exploring accessible limitations.

2. MARKET SUMMARY

In the breadth I am belief there are three capital supermarkets; Asda, Tesco and Sainsburys, anchored in West Charlton (appendix 1.1). Anniversary bazaar is agnate in size, acceptable the all-inclusive needs of the citizenry in the area. It is account advertence that due to the supermarkets actuality of a abundant admeasurement structurally, there allegation accept been ample alpha up costs. Anniversary of the three engages in non-price competition. This includes things such as announcement on T.V, accepting parking areas and the use of cast names. The offerings of these casework are in the attack to allure added customers. Take for example, Asda, which has parking as able-bodied as assorted sectors to its food such as electrical and accouterment sections as able-bodied as groceries. The aim of this is that barter can appointment alone this abundance by acceptable all their needs from the all-inclusive offers of goods. Furthermore, anniversary bazaar advertises their cast names to accretion added barter due to the cast adherence it has established. This could accomplish their appeal ambit added inelastic, acceptation that an access in the bulk of a acceptable would aftereffect in the added acquirement beyond the abridgement of abundance awash (appendix 1.2).

These three supermarkets additionally behest the majority of bazaar share, as I accept mentioned. Lastly, it is account advertence that Sainsbury¿½s and Asda are accessible for 24 hours from Tuesday to Friday, contrarily it is from 7 in the morning to 11 in the evening. Tesco are accessible from 7 to 11 everyday, afar from Sunday back they accessible an hour afterwards and abutting an hour earlier. I don¿½t anticipate that the hardly bottom hours that Tesco is opened during the anniversary will affect my analysis much, or at all. This is due to the actuality that I don¿½t accept Tesco accomplish abundant of their sales amid midnight and 7 in the morning.

3. MARKET STRUCTURE THEORIES

I will now present the four types of bazaar anatomy theories and their assumptions. I will not activity into abundant detail on the anatomy of a cartel as this is not a accessible bazaar anatomy for the supermarkets, accustomed the actuality that there is acutely added than one abutting in the area. This is the aforementioned for absolute competition, as the appurtenances produced by supermarkets are not identical.

Firstly, I will present the bazaar anatomy of a monopolistic competition. The assumptions of this bazaar anatomy are3:

* The industry is fabricated up by a ample cardinal of firms

* The firms anniversary act apart of anniversary other, due to anniversary abutting actuality small, about to the admeasurement of the industry

* The firms aftermath differentiated products; consumers can acquaint one artefact from another

* Firms are chargeless to access and avenue the industry, due to abridgement of barriers to access and exit

* Firms are able to accomplish aberrant profits in the abbreviate run, about due to abridgement of barriers to entry; this attracts alternative firms into the industry. This agency that in the continued run, alone accustomed profits are able to be made

Due to the actuality that the supermarkets in catechism are of a abundant size, I accept that the alpha up bulk in itself will be of a abundant barrier to entry. Also, I don¿½t accept the industry I am analytical is fabricated up of a ample cardinal of firms, as there are alone three supermarkets of their blazon in the bounded area.

Another bazaar anatomy that the supermarkets could appear beneath is an oligopoly. These are the basal acceptance of an Oligopoly:4

* A few firms boss the industry

* There are barriers to access and/or avenue for the industry

* The firms are bulk makers as they accept a bottomward angled appeal curve

* The firms are interdependent; the activity of one abutting can accept an aftereffect on another

* Aberrant profits can be fabricated both in the abbreviate run and continued run

In accession to these assumptions, firms in an Cartel can be either accommodating or non-collusive.

Non accommodating oligopolies face bulk adherence due to the kinked appeal curve. This is credible in bulk 1.

Figure 15

Due to the kinked appeal curve, bulk will be counterbalanced at bulk ¿½P¿½. This happens as the Bulk animation of Appeal (PED: The admiration of the abundance accepted of a acceptable or account to a change in its price)6 aloft bulk ¿½P¿½ is greater than 1. This agency that an access in bulk aloft point ¿½P¿½ will aftereffect in a accident of revenue. Likewise, the PED beneath bulk ¿½P¿½ is beneath than one, acceptation a abridgement in bulk to this akin will aftereffect in a accident of acquirement again. Due to these factors, it is analytic that firms do not favour either move, so they are said to be abiding at point P. This additionally after-effects in the achievement actuality abiding at point ¿½Q¿½ as a change in bordering bulk from MC1 to MC2 would still beggarly achievement would break at ¿½Q¿½. This is due to firms in this bazaar anatomy bearing at the accumulation maximising point, breadth MC=MR.7

Firms in this bazaar anatomy may additionally be collusive. This exists back the firms coact to allegation the aforementioned prices for their products, in aftereffect acting as a monopoly. There are two types of collusion, academic and tacit. Academic bunco exits back firms aboveboard accede on the prices they will charge. In the case of supermarkets in the U.K, it is actionable for this to action as it is accounted to be activity adjoin the absorption of the customer due to it consistent in beneath achievement and college prices. Tacit collusion, however, exists back firms allegation the aforementioned prices afterwards any academic collusion. The three supermarkets in catechism may accept absitively to allegation the aforementioned prices and not attack with anniversary other, in adjustment to access revenue. This is represented in bulk 2.

Figure 28

As credible in bulk 2, firms can accomplish aberrant profits amid their bulk and cost, due to the bulk beyond the bulk to the firm. This anatomy of bunco is actual accessible as anniversary bazaar is actual agnate to anniversary alternative and all aftermath agnate blazon goods.

Firms in an Cartel can acquaintance economies of scale. Economies of calibration are any decreases in the long-run boilerplate costs that action back a abutting changes all of its factors of production, in adjustment to access its calibration of output. There are a cardinal of altered economies of calibration that can account a abutting as it increases its calibration of output. These can be: 9

* Specialisation- Firms can be added able back they specialize in altered areas of expertise

* Division of labour- This is the breaking bottomward of a best assembly action into abounding abate activities, authoritative assembly added able by abbreviation assemblage costs

* Bulk buying- As firms access in calibration they are generally able to accommodate discounts with their suppliers, as they are affairs added altogether. This reduces the firm¿½s bulk of input, and appropriately their assemblage costs of production

* Financial economies- Beyond firms are able to get loans at lower absorption rates, as they are credible as a bottom accident to accommodate money to than abate firms, by the bank

The assumptions of a cartel are as followed:10

* Alone one abutting bearing the artefact at hand, so the abutting is the industry

* Aerial barriers to access and/or exit

* Aberrant profits can be fabricated in the continued run, due to barriers to entry

This bazaar anatomy is absurd to be present in my analysis breadth as there are acutely added than abutting in the aforementioned industry.

Finally, the basal assumptions of absolute antagonism are:

* The industry is fabricated up by abounding firms, so absolute achievement cannot be afflicted by one firm

* The firms all aftermath constant (exactly identical) products

* No barriers to access and/or exit

* Producers and consumers all accept absolute ability of the market

Again, this bazaar anatomy is absurd to affection in my study, mainly due to the actuality that there is artefact differentiation, as able-bodied as axiomatic alpha up costs.

4. HYPOTHESIS

After reviewing and comparing the discussed bazaar arbitrary and theories, I accept hypothesised that the bazaar anatomy the supermarkets are in are oligopoly. I accept accomplished this antecedent for the capital affidavit that:

* There are axiomatic barriers to access such as able branding of articles and alpha up costs

* There are alone three supermarkets in the bounded area, amid them administration about 64% of the bazaar share.11

In accession to these points, I accept tacit bunco amid the three supermarkets would abundantly account their antagonism with alternative abate supermarkets in the area. It would additionally abstain accidental antagonism amid anniversary other, and conceivably aftereffect in accepting added customers.

After hypothesising that the three supermarkets are in an oligopoly, and appropriately able of collusion, I will now be able to analysis my analysis catechism ¿½To what admeasurement do the beyond supermarkets in my bounded breadth coact with anniversary other?¿½

5. RESEARCH DESIGN

For me to analysis my formulated analysis question, I will actualize a methodology. I will analyze the prices of 15 altered articles beyond the three supermarkets. I will analysis the prices already every anniversary for three weeks, so I can get a beggarly bulk at the end, authoritative the aftereffect added reliable. I will accomplish abiding the prices of the aforementioned articles are taken in the aforementioned time period, and breadth possible, use articles produced in the U.K. This would abstain consign costs afflicted and abandoning results. If not abundant U.K based articles can be found, I will accomplish abiding that any exported artefact acclimated will accept been exported from all supermarkets. This will advance a bulk of authority in the research. I will additionally abstain articles produced by the supermarkets themselves. This would be because the bulk of assembly may be actual altered from one bazaar compared to another, appropriately accepting a ample appulse on the final pricing. I will analyze absolute brands that affection beyond all three stores. Anniversary bazaar in the breadth of West Charlton is amid aural one mile of anniversary other.12

In agreement of the abstracts collection, I will go to anniversary bazaar and analyze similar, or back possible, identical articles and their prices. I will agenda bottomward their accepted bulk at which they advertise at. Also, I will go to anniversary bazaar abutting to their aperture times on Saturday, as on this day the food all accessible at the aforementioned time. The acumen for not activity afterwards on in the day is because of bulk abridgement on non-durable appurtenances that are set to expire. If I accommodate appurtenances which prices accept aloof been bargain briefly to get rid of abiding stock, it would not represent the all-embracing appraisement of the acceptable in approved situations.

Lastly, I will analyze the prices application able agency of analysis; appropriately advertent whether or not there is abundant agnate appraisement axiomatic to advance bunco of some sort.

6. DATA COLLECTION & ANALYSIS

Firstly, I will present my abstracts calm for the prices of 15 articles from all three supermarkets, beyond a bulk of three weeks, already a week. Table 1 shows my allegation of the prices.

Table 1

Source: Prices calm by me for all supermarkets

To analyse the advance of the data, I will assignment out the accepted aberration for anniversary product, which will announce the advance of the data. A lower accepted aberration would announce a set of closer, agnate prices, additionally a college accepted aberration would betoken beneath adventitious of bunco evident.13

The accepted aberration for anniversary artefact is represented in Table 2, forth with the beggarly prices for anniversary artefact over the three weeks.

From the accepted deviation, we can see they are all all-embracing absolutely small, advertence the prices are all abutting to the beggarly price. This seems to announce some anatomy of bunco occurring amid the supermarkets. However, there are some exceptions. For some appurtenances the accepted aberration is almost aerial to the alternative products. Also, in best of these goods, such as bendable drinks, brittle packs, pizza, ice chrism and adapted chicken, it is Asda who affection the everyman bulk out of the three, while Tesco and Sainsbury¿½s accept agnate prices to anniversary other. This seems to appearance that there is accessible bunco amid Tesco and Sainsbury¿½s, while Asda undercuts their prices.

The agnate appraisement amid Sainsbury¿½s and Tesco suggests a anatomy 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 ensure businesses are ¿½fair and competitive.¿½14 In a acknowledgment they stated:

¿½Although agnate prices ability accept to advance that companies are accepting calm to accede them, this is not necessarily the case. For example, one aggregation ability accept apart absitively to bulk at a akin agnate to accession or both may accept apart absitively to behave in the aforementioned way¿½.15

As agnate appraisement does not necessarily beggarly academic bunco is demography place, I will accept that the two supermarkets are tacitly colluding, although this breadth may be bare to be researched into added for a audible result.

As able-bodied as colluding, I accept additionally noticed that there is affirmation of non-price antagonism amid Tesco and Sainsbury¿½s. This included things such as the use of advertising, chargeless commitment and alternative casework anchored in the abundance themselves. This has advance to anniversary bazaar accepting cast loyalty, and as a result, creating a added breakable appeal ambit for their products. This is possibly accession account of why these two supermarkets in accurate breadth of a college bulk overall, compared to the alternative supermarket, Asda.

For the case of Asda, they accept affianced in bulk war tactics, rather than basic a collusion. In this case, undercutting rivals may be benign to them by accretion their sales revenue. This can be represented by ¿½game theory¿½.

Supermarket

The table shows that if both supermarkets lower price, they will accomplish beneath acquirement than if they had colluded. However, it is still appetizing to attenuate the alternative abundance as afresh that would advance to greater revenue. The accent box shows the accessible bearings at the moment, with Asda undercutting the alternative supermarkets appropriately accretion revenue. This best authoritative bearings is accepted as ¿½the prisoner¿½s dilemma¿½. 16

Another account for the lower bulk offered by Asda for appurtenances could be bottomward to lower assemblage costs acquired by a greater accumulator capacity. The supermarket¿½s bulk of accumulator mainly depends on the actual acclimated to body them, which is the credible breadth of the building. The akin of achievement for the bazaar will depend on its accumulator capacity, so its aggregate area. As the admeasurement of a bazaar increases, the aggregate to credible breadth arrangement increases. Therefore, the bulk per assemblage all-embracing will be abundant beneath than a abate supermarket, such as Sainsbury¿½s and Tesco.

Lastly, from analysing my calm data, I accept accomplished the conclusions:

* Tesco and Sainsbury¿½s coact by charging actual agnate prices, but still accept non-price antagonism amid them.

* Asda competes with a price-war tactic, by undercutting the alternative two supermarkets.

7. CONCLUSION

The aim of my analysis was to investigate the blazon of competition, if any, amid the three aloft supermarkets in my area, West Charlton. The catechism ¿½To what admeasurement do the beyond supermarkets in my bounded breadth coact with anniversary other?¿½ prompted me to accumulate the appraisement of 15 identical articles beyond the three stores. The prices were taken every Saturday morning one a anniversary for three weeks.

I begin that two of the three supermarkets had signs of collusion, while the third bazaar affianced in a price-war by undercutting the alternative two supermarkets.

Firstly, Tesco and Sainsbury¿½s accept agnate prices to anniversary other, while accepting college prices than Asda. This was mainly due to the two food acting as a cartel by colluding and charging agnate prices. This meant that anniversary abutting could accomplish aberrant profit, which they acclimated to actualize greater cast loyalty, appropriately authoritative the appeal for their articles added inelastic.

Lastly, the final supermarket, Asda, affianced in price-war tactics. The capital acumen for this was due to the abstraction of accepting added acquirement as adumbrated by ¿½the prisoner¿½s dilemma¿½. In accession to this, Asda had a greater accumulator capacity, acceptation an all-embracing lower bulk per unit.

Therefore, afterwards accession abstracts and analysing them, it is begin that there was affirmation of collusion, but alone amid two of the supermarkets, not all three studied.

There are, though, credible limitations in my study. Firstly, my breadth of analysis was alone in one town. If there is begin to be some anatomy of bunco amid supermarkets here, it doesn¿½t necessarily beggarly it is occurring all over the country with those aforementioned supermarkets. Also, the time bulk of my analysis was three weeks. This may not accept been abundant time to accumulate an adapted bulk of after-effects to appear to a reliable decision. This could be said the aforementioned for the bulk of articles acclimated in my investigation; 15 articles may not accept been abundant to appear to an adapted result. As able-bodied as this, I could not accomplish a acumen whether the bunco amid Tesco and Sainsbury¿½s was either tacit or collusion. This would accept to be advised further. All of these limitations discount the aim of my abstraction and appropriately should be inspected further.

8. BIBLIOGRAPHY/ACKNOWLEDGMENT

Anderton, A. (2006). Economics: Fourth Edition. 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

Measure of Spreads. (2007). Retrieved June 3, 2010, from Stats4students: http://www.stats4students.com/Essentials/Measures-Of-Spread/Overview_3.php

Office 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 Acknowledgment Letter. London, U.K.

Prisoner’s Dilemma. (1997, September 4). Retrieved June 3, 2010, from Stanford Encyclopedia of Philosophy: http://plato.stanford.edu/entries/prisoner-dilemma/

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