Tacit Collusion in Oligopoly Market

So after the brief introduction about the literature our objective is to analyze the condition of British supermarkets in a descriptive way initially. Then the analysis about the tacit collusion in oligopoly market will be taken into the consideration. These two analyses will be going to provide a clear idea about tacit collusion and market situation in British supermarket and help to criticize the presence of tacit collusion in real world considering British supermarkets as a case study. Finally we will go for a concluding result with some recommendation on market structure. In the words of Bougoure and Lee (2009) it is stated that the tacit collusion can differ depending on the market structure and the supply and demand elasticity and an occasional change also comes in front in the real world for the changes in tastes and psychology of the consumers regarding the product quality and for the shifting of brand loyalty as the effect of different advertising and marketing strategy.

Description of British Supermarkets

The largest retail sector and the most important market in the UK economy is the grocery retailing. According to a famous market researcher East (2010), around 42% of the retail sector of UK is dominated by the grocery land food retailing. In UK, there are mainly four biggest supermarkets which are dominating the whole food and grocery retailing (Bougoure and Lee, 2009). Tesco is the bigger among these biggest where Kantar was holding the 30% of the market share in 2011. Asda is the second largest one is this sector and it is growing in the retailing sector very rapidly. Other two British supermarkets are Sainsburys and Morrisons. The further analysis will be done on the basis of these four supermarkets.

The following diagrammatic analysis of figure 1 is going to depict the position of the whole grocery market in UK economy. The biggest fours, Tesco (24%), Asda (13%), Sainsburys (13%) and Morrisons (12%) are holding the 62% of the whole UK grocery market jointly (Bailey, 2014). 

The main concept which is going to be analyzed about these supermarkets are the structures of these super markets, the pricing in these supermarkets and the behavior of the sellers as well as the consumers of these supermarkets because these topics can express the perfect nature of the tacit collusion existing in the supermarkets. So following the concept of Hearson and Eagleton (2007) before the discussion about the tacit collusion, the pricing behaviors in these markets are going to be criticized. Initially it will be clear that the changes in the cost of production are not going to affect the price making decisions of the sellers in these markets because the market structure here is dependent on the loyalty and the response of the consumers. For example, if the cost of production of a seller of Sainsburys supermarket increases then the price rise behavior of the seller will affect the total sales as well as the revenue earning of the producer because the other competitors are not going to follow the price hike decision of this producer (ELLICKSON, 2012). More generally it can be argued that the price completion exists between the two rivals – Asda and Tesco, whereas the third firm is Morrisons which has less aggression regarding the price change and it reacts as an idiosyncratic in the practical world of price setting. There are various reports as well as official investigations on the supermarkets telling about the market share holders leading the main market trend of grocery retailing. Now for further analysis the growth of three British supermarkets – Tesco, Asda and Sainsburys from 10th December, 2003 to 3rd November, 2010 is taken into consideration in figure 2.

Tacit Collusion in Oligopoly Market

The basic economic literature regarding the existence of tacit collusion in oligopoly market should be explained to take a step towards the analysis of the presence of tacit collusion in British supermarkets (Knittel and Lepore, 2010). There should be a good concept regarding the tacit collusion and it should be clear also that tacit collusion is different from the explicit collusion. In the writing of Amelio and Biancini (2010) it is clarified that if the existing firms take some active steps to minimize the responses of the other firms in the market and the other firms do not follow the decision of price cut then there is a possibility of occurrence of tacit collusion. A certain strategy is followed by two or more firms simultaneously but they never are explicit about this strategy under the tacit collusion.in the oligopoly market structure the price cutting behavior is very rare from the side of the firms but the other forms of creating the competition like, advertising, are present is this particular type of collusion (Awaya and Krishna, 2015). For instance, the words of Gilo and Spiegel (2011) can be taken into consideration who had written on the basis of a practical study on super markets of UK that when Tesco had changed the advertising strategy to attract the customers, Asda had walked on the same path of advertising strategy giving a healthy completion to Tesco.

In this way, the analyzed price leadership model which is also called tacit collusion follows the unwritten rules of strategic behavior of collusion. Under these circumstances there is a possibility of the emergence of a price leader to set the price in the general industry with other following suit of firms in the whole market structure (Dal Bo, 2014). The case study on the Cheshire Salt Works Limited and the British Salt Limited can be taken into consideration in the regard of this analysis.

Tacit Collusion in British Supermarkets

The analysis of the existence of tacit collusion in the supermarkets of UK must depend on some specific choices regarding the price setting behavior of the sellers in the market and the behavior of the consumers towards any price change (Gan and Hernandez, 2011). The definition of pricing under tacit collusion comes in front of the analysis because in the retailing in the supermarkets the reduction in price is a very common and successful tool. But it should be kept in mind that the main focus of our analysis is the leadership attitude of the existing firms in the supermarkets through the price setting behavior rather than the response of the consumers towards the price change. The TPRs and some other price movements are taken into consideration as a concerned tool for the analysis of price leadership behavior. In accordance of Sanlier and Seren Karakus (2010) the TPRs are led of all the falls in price temporarily from a proportion that is relatively small and so the other price movements should be in the consideration for more subsequent analysis.

The follower responds within a very short period and that’s why it is placed in the second position of the analysis. The studies of Bajari and Yeo (2008) regarding the sales in supermarkets explored that in the four biggest British supermarkets the most grocery shopping is done fortnightly or weekly and the data perused for the analysis also varies as often as weekly. The multi-product nature of the sales in supermarkets of UK should be taken into consideration to determine the structure of existing tacit collusion in the British supermarkets.

Hence after testing the whole pricing structure of the British supermarkets and the existing market situation of the British supermarkets and also the behavior of the existing firms as well as the consumers, using the proper economic and statistical tools it can be concluded following the writings of Seaton and Waterson (2013) that the tacit collusion of oligopoly market structure is present in the current market condition of British supermarkets. For example, the widespread comparative data on the biggest British supermarket, Tesco can be taken into the consideration to analyze the upward or downward movements of price in this British supermarket.

Conclusion

A very tight and falsifiable definition of tacit collusion in oligopoly is proposed and developed in this literature and then this definition is applied in the existing market structure of British supermarkets to analyze the presence of tacit collusion in British supermarkets. The definition of tacit collusion is very tight in this analysis but according to Goldman (2009) it is also true that the existence of pure tacit collusion for a long period is very much rare in the practical world. The tact collusion has become a very important economic phenomenon for the British supermarkets to guard the loss of profit margin due to the existence of price match guarantee in the British supermarkets but an either supermarket of UK cannot be considered as a leader in the retail market of UK.

The leadership in the retail market of UK supermarket base is pretty much inconsistent in the practical world which is analyzed as a consistent behavior of the UK based supermarkets in the theoretical analysis of (East, 2010). It is emphasized in the theoretical literatures that the occasional changes in the leadership in price is engendered by the shifting of the consumers from their brand loyalty rather than a dominance strategy of a single dominant firm who reacts as the biggest supermarket in UK for retail marketing strategy. In practice there is no evidence of either the tacit collusion or the dominant price leadership in the British supermarkets. The downward price movement of the leadership is consistent with the Edgeworth kind cycle in some instances of the British supermarket (LU, 2012). Therefore, it can be critically concluded from this analysis following the word of Awaya and Krishna (2015) that the tacit collusion is one of the determinants of price making decision of the sellers in the oligopoly market structure of British supermarkets.

References

 

Books

East, R. (2010). First-store loyalty to US and British supermarkets. Kingston Upon Thames: Kingston Business School.

Goldman, M. (2009).British supermarkets and superstores. London: Jordan & Sons (Surveys) Ltd.

Hearson, M. and Eagleton, D. (2007).Who pays?. London: ActionAid.

Bajari, P. and Yeo, J. (2008).Auction design and tacit collusion in FCC spectrum auctions. Cambridge, Mass.: National Bureau of Economic Research.

Gan, L. and Hernandez, M. (2011).Making friends with your neighbors?. Cambridge, Mass.: National Bureau of Economic Research.

Knittel, C. and Lepore, J. (2010).Tacit collusion in the presence of cyclical demand and endogenous capacity levels. Cambridge, Mass.: National Bureau of Economic Research.

Schultz, C. (2012). Transparency and tacit collusion in a differentiated market. Munich: CESifo.

Journals

Bailey, K. (2014). Is there a need for automated external defibrillators in supermarkets?.Br J Cardiac Nursing, 9(4), pp.171-175.

Bougoure, U. and Lee, B. (2009). Service quality in Hong Kong: wet markets vs supermarkets. British Food Journal, 111(1), pp.70-79.

ELLICKSON, P. (2012). SUPERMARKETS AS A NATURAL OLIGOPOLY.Economic Inquiry, 51(2), pp.1142-1154.

Sanlier, N. and SerenKarakus, S. (2010). Evaluation of food purchasing behaviour of consumers from supermarkets.British Food Journal, 112(2), pp.140-150.

Seaton, J. and Waterson, M. (2013). Identifying and characterising price leadership in British supermarkets. International Journal of Industrial Organization, 31(5), pp.392-403

Amelio, A. and Biancini, S. (2010). ALTERNATING MONOPOLY AND TACIT COLLUSION*.The Journal of Industrial Economics, 58(2), pp.402-423.

Awaya, Y. and Krishna, V. (2015).On Tacit versus Explicit Collusion.SSRN Journal.

Dal Bo, P. (2014). Tacit Collusion Under Interest Rate Fluctuations. SSRN Journal.

Gilo, D. and Spiegel, Y. (2011).Partial Cross Ownership and Tacit Collusion.SSRN Journal.

LIU, Q. (2012). TACIT COLLUSION WITH LOW-PRICE GUARANTEES*.The Manchester School, 81(5), pp.828-854.

LU, Y. (2012). TACIT COLLUSION WITH QUANTITY-MATCHING PUNISHMENTS