Writing Skills - IGCSE Example - 1
The market share of supermarkets in the Netherlands in 2017 are as follows.
Albert Heijin. - 35%
Super Unie - 29%
Jumbo - 18%
Lidl - 8%
Aldi - 6%
Others - 4%
With reference to the data above and your knowledge of economics, evaluate how firms might be influenced by competition in an oligopoly, such as supermarkets in the Netherlands. (Source : Edexcel May 2019)
Possible answer -
Before I dive into the evaluation let me first present my basic understanding on oligopoly.
Oligopoly is a market structure with few large firms dominating the market with or without colluding with each other. Some of the characteristics of oligopoly market are few large firms dominating the market, firms are interdependent on each other, firms tend to collude with each other, non-price competition and price is sticky in the market.
As we can see only five firms including Albert Heijin, Super Unie, Jumbo, Lidl and Aldi are holding 96% of the market share in Netherlands. This shows how much these firms are able to dominate the market.
The competition level in oligopoly market is less than severe but not without any competition.
Firms face less competition due to high barriers to entry such as high start-up cost, economies of scale and high marketing budget. These barriers are successfully created by firms like Albert Heijin and Super Unie due to their high profitability which they use to reinvest to create massive capacity that allow them to enjoy the benefit of economies of scale meaning they are able to lower their average cost of production. This ability to enjoy the lower average cost helps them to lower the price to compete with any new entrants. As a result, the new entrants find it very hard to survive in the market. Though they price compete with new entrants but cooperate with existing firms by charging the same price. This helps them to enjoy higher revenues vis-e-vis profits. As a result, firms are quite interdependent on each other.
Though the majority of the market share is dominated by the large firms but that does not mean that small firms do not exist in the market. From the case study we can see 4% market share is owned by other firms. These are smalls firms which coexist with the large firms due to their willingness to follow the price set by the large firms or they may provide exclusive goods or services that cater to the customers exact needs that large firms are unable to provide. Generally this segment of the market is called niche market.
However, large firms do compete with each other through non-price competition. This means firms invest quality advertisements, loyalty rewards, customer services and after sales services etc.
This means, if one firms spends a lot on providing more advertisements or hiring celebrities to advertise then it will force other firms to do so as the fear of losing market share will always loom over them.
On the other hand, as consumer demands and preferences always change so firms will always have to keep up to the market demand in a way that they always have to come up with something new to attract customers. If in case not being able to do so, there is a possibility that they may go out of the market. This is particularly true, when firms deal with using technology to produce a product or a product that has been being updated technologically quite often.
Though firms in the oligopoly market do cooperate but not without an effort to buy each other. This is particularly true if any small firms grow in the market because of their unique selling point, then the large firms try to takeover them as soon as they start bearing fruits.
To conclude, if firms in oligopoly do not collude then they are likely to face competition which may benefit consumers and the society both. On the other hand, if they collude then they are likely to face less competition as they can form a cartel leading to higher price and lower output mean higher profit and lower competition for them.
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