econs+market+structure+(food+industry)

Tesco has built a monopoly position in the UK food retailing industry. Market share in the UK retail grocery industry for the 12 Weeks to 18 June 2006 **__ FEATURES __** ** Preventing competition - barriers to entry ** ** Barriers to entry ** are the means by which potential competitors are blocked. Monopolies can then enjoy higher profits in the long run as rivals have not diluted market share. There are several different types of entry barrier – these are summarised below: ** Monopoly, market failure and government intervention ** Should the government intervene to break up or control the monopoly power of firms in markets? This debate about the benefits and costs of government intervention revolves around the advantages and disadvantages of businesses holding monopoly power. A monopolist is able to enjoy and exploit some power over the setting of prices or output. But be careful of stating that monopolists can “charge any price that they like”! A monopolist cannot, charge a price that the consumers in the market will not bear! In this sense, the ** price elasticity of the demand ** curve acts as a constraint on the pricing power of the monopolist. ** PERFORMANCE OF THE FIRM (EFFICIENCY) ** ** The economic and social costs of monopoly ** The main case against a monopoly is that these businesses can earn ** higher profits at the expense of allocative efficiency **. The monopolist will seek to extract a price from consumers that is above the cost of resources used in making the product. And higher prices mean that consumers’ needs and wants are not being satisfied, as the product is being under-consumed. Under conditions of monopoly, ** consumer sovereignty ** has been partially replaced by ** producer sovereignty **. ** PRICE AND OUTPUT DECISIONS ** In the diagrams above we contrast a market where demand is price inelastic (i.e. Ped <1) with one where demand is more sensitive to price changes (i.e. Ped>1). The former is associated with a monopoly where consumers have few close substitutes to choose from. When demand is inelastic, the level of ** consumer surplus ** is high, raising the possibility that the monopolist can reduce output and raise price above cost thereby operating with a ** higher profit margin ** (measured as the difference between price and average cost per unit). One way of showing the loss of economic welfare that comes from monopolistic firms exploiting their power is to use supply and demand analysis and the concepts of ** consumer and producer surplus **. If a monopoly reduces output from the equilibrium at Q1 to Q2 then it can sell this at a higher price P2. This results in a ** transfer of consumer surplus into extra producer surplus **. But because price is now about the cost of supplying extra units, there is a ** loss of allocative efficiency **. This is shown in the diagram by the shaded area which is not transferred to the producer, merely lost completely because output is lower than it would otherwise be in a competitive market. ** Higher costs – loss of productive efficiency: ** Another possible cost of monopoly power is that businesses may allow the lack of real competition to cause a ** rise in production costs ** and a ** loss of productive efficiency **. When competition is tough, businesses must keep firm control of their costs because otherwise, they risk losing market share. Some economists go further and say that monopolists may be even less efficient because, if they believe that they have a protected market, they may be less inclined to spend money on research and improved management. These inefficiencies can lead to a waste of scarce resources. ** The potential benefits of monopoly ** The possible economic benefits of monopoly power suggest that the government and the competition authorities should be careful about intervening directly in markets and try to break up a monopoly.
 * ** Retailer ** || ** % Share **  ||
 * Tesco || 31.4  ||
 * Asda || 16.5  ||
 * Sainsbury's || 16.0  ||
 * Morrisons || 11.3  ||
 * Somerfield || 4.2  ||
 * Waitrose || 3.8  ||
 * Aldi || 2.5  ||
 * Lidl || 2.0  ||
 * Iceland || 1.6  ||
 * Netto || 0.7  ||
 * Farmfoods || 0.5  ||
 * ** Patents: ** Patents are ** legal property rights ** to prevent the entry of rivals. They are generally valid for 17-20 years and give the owner an exclusive right to prevent others from using patented products, inventions, or processes. The owners of patents can sell licences to other businesses.
 * ** Advertising and marketing: ** Developing ** consumer loyalty ** by establishing branded products can make successful entry into the market by new firms more expensive and less successful. Advertising can also cause an outward shift of demand and also make demand less sensitive to price
 * ** Brand proliferation: ** In many industries ** multi-product firms ** engaging in brand proliferation can give a false appearance of competition to the consumer. This is common in markets such as detergents, confectionery and household goods – it is ** non-price competition **.

Market power can bring advantages both to the firms themselves and also to consumers and these should be included in any evaluation of a particular market or industry. Huge corporations enjoying a high level of profits are well placed to allocate some of their profits to fund capital investment spending and research and development projects. The ** positive spill-over effects of research ** can be seen in a ** faster pace of innovation ** and the development of improved products for consumers. This is particularly the case in industries such as telecommunications and pharmaceuticals. This can lead to gains in ** dynamic efficiency ** and ** social benefits ** (i.e. ** positive externalities ** ). Because monopoly producers often supply goods and services on a large scale, they may achieve ** economies of scale ** – leading to a ** fall in average costs **. Lower costs will lead to an increase in profits but the gains in productive efficiency might be passed onto consumers through lower prices. Another key role for the regulatory agencies is to monitor the quality of service provision and improve standards for consumers. Examples of utility regulator web sites can be found by using the following links: Many markets have firms with monopoly power but they seem to work perfectly well from the point of view of the consumer. Although there is a consensus among many economists that ** competition ** is a force for good in the long-run, we should be careful not simply to assume that monopoly power is bad and competition is good. There are persuasive arguments on both sides. In recent years many markets have become more competitive with the entry of new suppliers and much greater choice for consumers. Many factors have contributed to this including:
 * 1) ** Research and Development Spending (DYNAMIC EFFICIENCY) **
 * 1) ** Exploitation of Economies of Scale **
 * ** Technological change ** – e.g. the rise of e-commerce and the internet
 * ** Globalisation ** – e.g. fresh low-cost competition from emerging market economies such as China and India
 * ** Deliberate government policies ** (in the UK and the European Union) to open up markets and give new businesses the right to compete (e.g. in the markets for postal services, car retailing and telecommunications)


 * __ Short Write Up. __**

An example of a food retail industry monopoly is Tesco. The firm controls 31.4% market share. Characteristics of this firm include significant barriers to entry consisting of state-granted and firm-created barriers. An example of state-granted barrier is patents and firm-created barriers are advertising and brand proliferation. As demand is relatively price inelastic, the firm is able to earn supernormal profit. They enjoy dynamic efficiency as they have the incentive and means to innovate. However, there is static inefficiency as price is higher than marginal cost curve and it operates on the falling portion of LRAC curve, not the minimum point.

=**__COMMENTS: please include your names after you commented!__**= - Hey!good job people!thanks for the thorough research and the stats! Can I ask? i thought monopoly can set any prices they like, but will just suffer a fall in the quantity demanded. so what do you mean by "A monopolist cannot, charge a price that the consumers in the market will not bear!" Oh and is it just me? cos i cant read the diagrams attached!!:D thanks again! xiangyue:D -Hellos! detailed research and analysis done but it is a pity that the diagrams couldn't be seen.Nevertheless, it is still a job well done!(: hueyshyuan(:

Hello! Well done for the work!(: According to xiangyue's que, do you mean that a monopolistic firm is able to set prices, but the price set depends on how much the consumers are willing or able to pay? -tzuchun(: