This task for Business environment is split in two parts. For Part 1 I will be describing the 4 different market structures that economist usually talk about are perfect competition, monopolistic competition, oligopoly and monopoly. Using the 4 market structures I will illustrate using real life case studies and examples how a selected business of my choice has behaved/responded to its market structure and finally describe how the OFT and other regulatory bodies check against anti – competitive behaviours.
In the second part of the assignment I will describe the value of international and EU markets to UK firms. My description will include an evaluation of the pros and cons of UK joining the Euro along with that I will describe the impact of 2 EU policies on UK businesses. The business that I have chosen for this assignment is Tesco; this is because Tesco is a multibillion pound international business.
Different Types of Market Structures
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Market structures are the business orientated characteristics of a market; all businesses must focus on these characteristics of the market because these have an effect on the degree of competition in the industry and influence the business product or service pricing decisions.
In a perfect competition there are few entry and exit barriers, in this type of competition the companies target the mass audience and they differentiate their product with minor changes in the product attributes (Homogenous).
Homogenous products are identical products or business e.g. aviation all airlines prove one service which is to get their customers from one location to their destination and most customers have no preference or specific type of airline that they want to travel with, most customers will just look for the cheapest airline.
In such type of competition most of the companies use Push strategy, i.e. huge efforts will be done through their sales team, the main focus is the product availability. In this type of competition the companies are forced to follow the competitive pricing strategy in order to survive in the industry, i.e. the buyers have the power to influence the price of the product or services.
Examples of a perfect competition to its closest definition are in the financial market like stock exchange, currency exchange market and the bonds/certificates market. As the companies are bound to follow market prices the only way the company can have advantage over its competitors is by reducing its operating costs and working at optimum level of efficiency
Under monopolistic competition, the market consists of many buyers and sellers who trade over a range of prices rather than a single market price. A range of prices occurs because sellers can differentiate their offers to buyers. Either the physical products can be varied in quality, features, style or the accompanying services can be varied. Buyers see different in sellers, products and will pay different prices for them. Sellers try to develop differentiate offers for different customer segments and, in addition to price, freely use branding advertising and personal selling to set their offers apart.
In this sort of environment the businesses and trades people have somewhat control over their prices because of the products differentiations. Most common examples of monopolistic competitions are: restaurants as in the right area and right type of food they can have their own small portion of monopoly, professional solicitors, building and project managing firms and finally plumbers as there are less of them and more required.
In this type of competition the industry has a small numbers of large dominant firms that have a firm control over the market. In oligopoly there are many entry and exit barriers such as huge investments etc. In this type of industry firms usually follows pull strategy and make huge efforts in marketing and advertising to attract its target customers, the products in the industry could be highly differentiated or even be similar but hard of getting a hold and this is why businesses use branding or homogenous.
Due to the low degree of competition theses big giants can decide on their own price which is most suitable for its target audience and these prices will be non-competition prices however there could be potential for collusion and price fixing so that each dominant business can enjoy their market share and have profits accordingly i.e. their profits margin will vary but still always high.
Example of oligopolistic business industries are: supermarkets such as Tesco which alone owns 30.4% which is nearly 1/3 of the UK supermarket retail share market share, banking industry, chemicals industry, oil and energy industry, medical drugs and also the news and media broadcasting industry.
A monopoly has high barriers to entry and firms have strong controls over their prices and they also control the supply of their product which can increase demand of popular products, because a firm with a monopoly has majority of the market share it can decide to have low prices in order to destroy their competitors.
A good and most current example of a monopoly is the Apple Company which has created the iPhone, because of the degree of the monopoly there is a high possibility of price discrimination where the customers and the consumers have their choices limited to what is available in the market.
There are three different types of monopolies listed as below:
Pure monopoly in where the firm is the industry, for example Transport for London, the firm which owns all buses and underground tubes in and around London, this is where consumers have no or very limited choice.
Actual monopoly is where the firm has somewhat majority of the market share in the industry, in this case Tesco is the most famous example, Tesco owns over 30.4% of the market share and is the leader in supermarket industry.
Natural monopoly is where there are high fixed costs for example the energy industry like gas and electricity as well as water, telecommunications and the transportation industry like underground and rail.
The disadvantages of a monopoly is that customer are exploited to high prices and potential supplies have limited choice for demand and this means that the consumers have less choice and again might have to pay higher prices than normal or the monopoly can even use very low price to push their competitors towards administration or bankruptcy.
What is Tesco’s market structure?
Tesco’s market structure described by the media is believed to be a monopoly, Tesco has also been through the legal proceedings to prove their innocence, Tesco has accused of being manipulative and gaining monopoly by building stores across towns and cities through the country and Europe but realistically Tesco is an oligopoly, although Tesco is the dominant supermarket it has fairly large competitors who also partly control the market.
“A ‘competition test’ to curb the power of the supermarkets was unveiled by the Competition Commission last year as part of a planning shake-up designed to boost competition in the multi-billion pound grocery market.
But the tribunal agreed with Tesco that the commission did not fully take account of the fact that the test, relating to planning decisions for larger stores, might have “adverse effects for consumers”, among other matters.”
How has Tesco Responded to this Structure?
Monopoly Vs Oligopoly
Tesco has over 4,000 stores across the world and out of those 4,000 Tesco has more than half of them in the UK around 2362 stores and this does not include all the Tesco metro and express stores. (http://www.tescoplc.com/plc/about_us/map/)
Tesco themselves say that it is an oligopoly, this is because Tesco is not the only supermarket in the UK, Tesco is the dominant shareholder but cannot be called a monopoly as there are many other firms which are in competition with Tesco e.g. Sainsbury which owns 16.3% of the UK supermarket shares and Morrisons which owns 11.5%, this means the entry barriers to entry are very high because the industry is dominated by small number of large firms which control and own that share market.
OFT (Office of Fair Trading)
The ‘Office of Fair Trading’ is the UK’s consumer and competition authority and their mission is to make markets work well for consumers. OFT is a non-ministerial government regulator that was established by government in 1973.
Another organisation that does similar commerce to what Office of Fair Trading do, Ofcom is an independent regulator and competition authority, for the UK communications industries, with responsibilities across television, radio, telecommunications and wireless communications services. Competition regulators are important in business and are required to ensure equality and a fair deal for all,
How does OFT checks anti-competition?
OFT plays a leading role in promoting and protecting consumer interests throughout the UK, while ensuring that businesses are fair and competitive. This work is done using the powers granted to the OFT under consumer and competition legislation.
OFT gathers intelligence about markets and trader behaviour from a wide range of sources and then they respond to complaints about markets from nominated consumer bodies, where the OFT is able to see potential problems, the OFT undertakes market studies and recommends to take action respectively.
In a recent investigation by the OFT has reviled that British Airways has been found guilty over the price of ‘long-haul passenger fuel surcharges’ and has paid a penalty of ï¿½121.5m to be imposed by the OFT, therefore enabling the OFT to close its civil investigation and resolve this case. This penalty to the British Airways has been the highest ever imposed by the OFT for violation of competition law and this demonstrates the determination of the OFT to deal strongly with anti-competitive behaviour.
In another case, The Royal Bank of Scotland or RBS has also paid a fine of ï¿½28.59 million about 2 months ago in March 2010, after admitting breaches of competition law between October 2007 and February or March 2008, the fine for the bank was reduced from ï¿½33.6 million to ï¿½28.59 million and this was done to reflect RBS’s admission and agreement to co-operate.
The OFT has a 5 step method of keeping a good eye on business and other organisations these 5 steps start with Analysis, Prioritisation, Prevention, Partnership and Evaluation, the details of all the steps are on their website under ‘What we do’. (http://www.oft.gov.uk/ about/what/#named2)
How do other supervising bodies monitor anti-competition?
As the OFT only supervises what happens in the United Kingdom, there is the European Union which is active in a wide range of policy areas, from human rights to transport and trade, the European Union monitors all of the 27 countries that are part of the union, using similar techniques as the OFT but on a much larger scale, the policy to monitor and control competition is said as “A fair deal for all” and this policy is described as:
“Effective competition to provide goods and services cuts prices, raises quality and expands customer choice. Competition allows technological innovation to flourish. The European Commission has wide powers to make sure businesses and governments stick to EU rules on fair competition. But in applying these rules, it can take account of the interests of innovation, unified standards, or small business development.”
United Kingdom supermarket share
Following are the 4 leading supermarket chains in the United Kingdom Tesco, Asda, Sainsbury’s and Morrisons, these fantastic four have a combined share of 75.6 percent of the UK grocery market accord to the research done in the 12 weeks ending 1 November 2009 (Source: Kantar World pane) http://TNS_Worldpanel
What is European Union?
European Union is a unique economic and political society which is in partnership between 27 democratic European countries.
What are its aims?
Some of the basic aims of the European Union are peace, prosperity and freedom for its 498 million citizens in a fairer, safer world.
What results so far?
Under the European Union the members can travel and trade freely without any constraints as long as the members are trading in euro (the single European currency).
European Union policies ensure safer food and a greener environment, better living standards in poorer regions, joint action on crime and terror, cheaper telecoms and communication, millions of opportunities to study abroad and more
How does it work?
To make these things happen, EU countries have set up bodies to run the European Union and adopt its legislation. The main ones are:
The European Parliament (representing the people of Europe)
The Council of the European Union (representing national governments)
The European Commission (representing the common EU interest).
How can the members have their say?
The European Union is not a perfect society but it is an evolving project and constantly has to be improved. If a community or even an individual has an important point to show to the union they must do some of the following starting with:
Contacting their local MP – European Union policies are part of national politics.
Contacting their MEP and cast vote at the European Parliament elections the European Parliament enacts EU laws: (www.europarl.europa.eu)
Contacting their NGOs (consumer associations, environmental pressure groups, etc.) they work with the EU on shaping policies.
The EU has developed a single market system of laws which apply to all member states, and ensures the free movement of people, goods, services, and capital, including the elimination of passport controls by the Schengen Agreement between 26 European Union states which I have listed below. European Union executes legislations in justice and home affairs, and maintains common policies on trade, agriculture, fisheries and regional development.
Austria, Belgium, Czech, Republic, Denmark, Estonia, Finland, France, Germany, Greece, Hungary, Iceland, Italy, Latvia, Lithuania, Luxembourg, Malta, Netherlands, Norway, Poland, Portugal, Slovakia, Slovenia, Spain, Sweden and Switzerland. (http://www.axa-schengen.com/en/schengen-countries)
Value of International markets to UK
Non EU Exports
In June 2010 the total value of UK’s trade-in-goods exported to countries outside the EU was ï¿½10.9 billion.
As a comparison the total value of UK’s trade-in-goods exported to countries outside the EU in May 2010 was ï¿½9.4 billion and for June 2009 was ï¿½8.2 billion.
June 2010 showed a 15.5 per cent increase in exports compared to May 2010 and a 33.0 per cent increase in exports compared to June 2009.
The total 2010 year to date value of UK’s trade-in-goods exported excluding June 2010 was ï¿½45.5 billion, which has been downwardly revised by ï¿½6.9 million.
The final total value of UK’s trade-in-goods exported for January 2009 to December 2009 was ï¿½101.5 billion.
Non EU Imports
In June 2010 the total value of trade-in-goods imported to the UK from countries outside the EU was ï¿½15.4 billion.
As a comparison the total value of UK’s trade-in-goods imported to the UK from countries outside the EU in May 2010 was ï¿½14.0 billion and for June 2009 was ï¿½12.0 billion.
June 2010 showed a 9.6 per cent increase in imports compared to May 2010 and a 28.4 per cent increase compared to June 2009.
The total 2010 year to date value of UK’s trade-in-goods imported excluding June 2010 was ï¿½67.5 billion.
The final total value of UK’s trade-in-goods imported for January 2009 to December 2009 remains at ï¿½147.3 billion.
It can be concluded that UK has less exports to the non EU zone compared to the European market, in June 2010 total value of goods exported to Europe was ï¿½11.3Billion compared to the total value of goods exported to the international market which was ï¿½10.9Billion.
International business traffic is an important feature of the UK economy’s survival; almost 50% of UK’s export is in the Non European Union zone, there fore international market has a vital role to play in UK’s economy.
The imports of UK data shows that the import from the non European Union zone is increasing i.e. from ï¿½14.0 billion to ï¿½15.4 billion, hence the UK economy is dependent on the import of essential raw and prepared materials; today the service sector is more and more important to the UK economy as a result of the weakening of the manufacturing sector now imports are crucial and that is why using the international market the UK economy is on the growth as the export data depicts that UK’s export is increasing from ï¿½8.2 billion to ï¿½10.9 billion.
Value of European markets to UK
In May 2010 the total value of UK’s trade-in-goods exported to Member States of the EU was ï¿½11.3 billion.
As a comparison the total value of UK’s trade-in-goods exported to Member States of the EU in April 2010 was ï¿½11.6 billion and for May 2009 was ï¿½9.3 billion.
May 2010 showed a 2.9 per cent decrease in exports compared to April 2010 and a 21.3 per cent increase in exports compared to May 2009.
The total value of UK’s trade-in-goods exported for January 2009 to December 2009 was ï¿½124.2 billion, which has been upwardly revised by ï¿½48.5 million.
The total 2010 year to date value of UK’s trade-in-goods exported excluding May was ï¿½46.2 billion, which has been upwardly revised by ï¿½273.6 million.
In May 2010 the total value of trade-in-goods imported to the UK from Member States of the EU was ï¿½14.7 billion.
As a comparison the total value of UK’s trade-in-goods imported to the UK from Member States of the EU in April 2010 was ï¿½15.3 billion and for May 2009 was ï¿½12.2 billion.
May 2010 showed a 4.2 per cent decrease in imports compared to April 2010 and a 20.8 per cent increase in imports compared to May 2009.
The total value of UK’s trade-in-goods imported for January 2009 to December 2009 was ï¿½162.7 billion, which has been upwardly revised by ï¿½238.0 million.
The total 2010 year to date value of UK’s trade-in-goods imported excluding May was ï¿½59.2 billion, which has been upwardly revised by ï¿½96.7 million. (https://www.uktradeinfo.com/index.cfm?task=euearlypub)
The single market benefits the firms, by making it easier & cheaper to do business in other EU countries. No customs tax is charged on goods that are sold or transported between member states. The EU also tries to make each market as similar as possible to ensure fair competition across national borders.
Free Movement of Citizens:
European citizens have the freedom to live, work, study, and travel in any other EU country. Since 1995 alone, about 100,000 young Britons have spent time studying in another European country.
It is estimated the 3.5 million British jobs are dependent on* Britain’s membership of the EU. (Source: UK Jobs Dependent)
UK joining the Euro (Pros & Cons)
Below I have listed the advantages and disadvantages which were discussed by the chancellor Gordon Brown at the times of between 1999 and the year 2002 when the waves of countries in Europe joined the European Union and the currency:
A single currency should end currency instability in the participating countries (by irrevocably fixing exchange rates) and reduce it outside them. Because the Euro would have the enhanced credibility of being used in a large currency zone, it would be more stable against speculation than individual currencies are now. An end to internal currency instability and a reduction of external currency instability would enable exporters to project future markets with greater certainty. This will unleash a greater potential for growth.
Consumers would not have to change money when travelling and would encounter less red tape when transferring large sums of money across borders. It was estimated that a traveller visiting all twelve member states of the (then) EC would lose 40% of the value of his money in transaction charges alone. Once in a lifetime a family might make one large purchase or transaction across a European border such as buying a holiday home or a piece of furniture. A single currency would help that transaction pass smoothly.
Likewise, businesses would no longer have to pay hedging costs which they do today in order to insure themselves against the threat of currency fluctuations. Businesses, involved in commercial transactions in different member states, would no longer have to face administrative costs of accounting for the changes of currencies, plus the time involved. It is estimated that the currency cost of exports to small companies is 10 times the cost to the multi-nationals, who offset sales against purchases and can command the best rates.
A single currency should result in lower interest rates as all European countries would be locking into German monetary credibility. The stability pact (the main points of which were agreed at the Dublin summit of European heads of state or government in December 1996) will force EU countries into a system of fiscal responsibility which will enhance the Euro’s international credibility. This should lead to more investment, more jobs and lower mortgages.
Twenty seven separate countries with widely differing economic performances and different languages have never before attempted to form a monetary union. It works in the United States because the labour market is mobile, helped by the common language and portability of pensions etc. across a large geographical area. Language in Europe is a huge barrier to labour force mobility. This may lead to pockets of deeply depressed areas in which people cannot find work and areas where the economy flourishes and wages increase. While the cohesion funds attempt to address this, there are still great differences across the EU in economic performance.
If governments were obliged through a stability pact to keep to the Maastricht criteria for perpetuity, no matter what their individual economic circumstances dictate, some countries may find that they are unable to combat recession by loosening their fiscal stance. They would be unable to devalue to boost exports, to borrow more to boost job creation or cut taxes when they see fit because of the public deficit criterion. In the United States, Texas could not avoid a recession in the wake of the 1986 oil price fall, whereas demand for Sterling changed in the light of the new oil price, adjusting the exchange rate downwards.
All the EU countries have different cycles or are at different stages in their cycles. The UK is growing reasonably well, Germany is having problems. This is the reverse of the position in 1990. Since the war the UK economy has tended to have an economic cycle closer to the US than the EU. It has changed because interest rates are set in each country at the appropriate level for it. One central bank cannot set inflation at the appropriate level for each member state.
Loss of national sovereignty is the most often mentioned disadvantage of monetary union. The transfer of money and fiscal competencies from national to community level would mean economically strong and stable countries would have to co-operate in the field of economic policy with other, weaker, countries, which are more tolerant to higher inflation.
One of the few reasons that the United Kingdom did not want to join the single European currency with the first wave of countries on 1 January 1999 is that according to the chancellor of the Exchequer at that time in 1999 who was Gordon Brown our current prime minister said that, “although the government supported the principle of the single currency Britain would not be ready to join at least until the second wave of countries” which occurred in 2002 and during that time he told the European Union that the country should begin to prepare for monetary union but up till now there have been no indications of the United Kingdom joining the European Union currency, Euros.
From my understanding there are many possible reasons that the government should consider while joining Euro, joining Euro would reduced exchange rate uncertainty for UK businesses and lower exchange rate transactions costs for both businesses and tourists. Eliminating exchange rates between European countries eliminates the risks of unforeseen exchange rate revaluations or devaluation, further those businesses who involved in commercial transactions in different member states would no longer have to face administrative costs of accounting for the changes of currencies.
The loss of national sovereignty is the most often mentioned reason for the UK not joining the monetary union is the transfer of money and financial proficiency from national to community level would mean that economically strong and stable countries would have to co-operate in the field of economic policy with other weaker countries.
The European Union is currently active in a wide variety of policies from ‘human rights’ to ‘transport and trade’; below is the list of some of the policy areas of the European Union.
Agriculture Media Competition Consumers Education
Employment Environment External trade Fight against fraud Human rights
Taxation Transport Justice, freedom Internal market Customs
Impact of European Union’s Competition policy on Tesco
A fair deal for all
Effective competition provides goods and services cuts prices, raises quality and expands customer choice, allows technological innovation. The European Commission has wide powers to make sure businesses and governments stick to EU rules on fair competition.
Competition must be fair
It is illegal under EU rules for businesses to fix prices or carve up markets between them. A multinational company like Tesco cannot merge with another giant if that would put them in a position to control the market, though practice this rule only prevents a small numbers of mergers going ahead.
If Tesco plans to merge with its competitor, Tesco needs approval from the European Commission, the EUC (European Union Commission) marks their decision depending on the amount of business that Tesco has within the European boundaries.
The Commission may agree to a company having a monopoly in special circumstances – for example where costly infrastructure is involved (‘natural monopolies’) or where it is important to guarantee a public service.
The large may not exploit the small
In doing business with smaller firms, Tesco cannot use their bargaining power to impose conditions which would make it difficult for their supplier or customer to do business with its competitors. The Commission can, does and has fined companies for all these practices.
No props for lame ducks
The Commission also monitors closely how much assistance EU governments make available to business (‘state aid’). This aid can take many forms – loans and grants, tax breaks, goods and services provided at preferential rates, or government guarantees which enhance the credit rating of a company compared to its competitors but in this case this does not apply to Tesco till today as Tesco is already on top of its game.
Exceptions that prove the rule
Some exceptions to the general rules are possible. The European Union Commission can allow companies like Asda and Morisons to cooperate in developing a single technical standard for the market as a whole. It can allow smaller companies to cooperate if this strengthens their ability to compete with larger ones such as Sainsburys and Tesco.
Aid for research and innovation, regional development or small and medium-sized enterprises is often allowable because these serve overall EU goals.
Checks and balances
The Commission’s extensive powers to investigate and halt violations of European Union competition rules are subject to legal review by the European Court of Justice. Businesses regularly have to make appeals against Commission decisions if it seems like a unfair deal.
The competition policy stops the Tesco from growing further from their potential market share, something which Tesco has known to be done in the recent years. Effective competition provides goods and services, automatically raises quality and customer choices increase with competition. The policy also allows technological innovation and the European Commission makes sure that these innovations are in the European Unions fair competition policy.
The European Union has some of the highest environment standards in the world, developed over decades to address a wide range of issues. Today the main priorities are combating climate change, preserving biodiversity, and reducing health problems from pollution and marking sure that natural resources are being used more responsibly.
Climate change is one of the gravest challenges facing humanity. The European Union plans to reduce greenhouse gases at least 20% by 2020 (compared with 1990 levels), raise in renewable energy’s share of the market to 20% and cut overall energy consumption by 20% (compared with projected trends).
All businesses like Tesco’s are directly affected by this policy as this aims to cut energy consumption and greenhouse gasses by 20%, meaning Tesco will have to recycle more, reuse materials more and reduce wastage and use of non-biodegradable equipment which will have a small dent on their profit.
European Union’s rewards businesses and organisations, which reduce their CO2 emissions and penalises those that exceed limits. Introduced in 2005, the scheme takes in about 12,000 factories and plants responsible for about half the EU’s emissions of CO2.
Under the system, European Union governments set limits on the amount of carbon dioxide emitted by energy-intensive industries and if they want to emit more CO2 than their quota, they have to buy spare permits but most supermarkets stores do not manufacture and this means that they will have to use eco friendly methods of business and equipment. Tesco has already proven that they are committed towards being eco-friendly, “Tesco Plc, the world’s No.4 retailer, plans to spend over 100 million pounds with British green technology companies over the coming year as it steps up its drive to halve carbon emissions by 2020.”
Noise, swimming water, rare species and emergency response -these are just some of the areas covered under the extensive body of environmental legislation that the EU has established over the decades.
EU has set binding limits on emissions of fine particles known as PM2.5. Released by cars and trucks, these microscopic particles can cause respiratory diseases. Under the new law, EU countries will have to reduce exposure to fine particles in urban areas by an average 20% by 2020. In 2007 Tesco received the Top online green award for their zero-emission delivery vans.
Sustainable development has long been one of the overarching objectives of EU policy. EU leaders launched the first EU sustainable development strategy in 2001 and updated it in 2006 to tackle shortcomings and take account of new challenges. Since then there have been significant efforts in terms of policy. Now the focus is on putting policy into practice in to UK’s market.
As Tesco manly sells general groceries they are affected by the European Union’s environment policy, in a way that it has to source materials from the suppliers who obey and follow the European Union’s environment policy, this means that Tesco has limited p of potential suppliers.
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