Economics is a social science, that studies the production, distribution and consumption of goods and services, and can be used to quantitatively and qualitatively analyze a given market. The question I selected for further investigation through economics is, “To what extent do supermarkets in Singapore resemble an oligopoly market structure?”
THEORY AND MARKET INFORMATION
The supermarkets in Singapore are an indispensible part of society. Catering to the needs of all, Supermarkets are said to be “the building blocks of the society. The phrases “I’m going to NTUC” and “I’m at Cold Storage” have found a common place within the Singaporean society with over a million people or approximately 25% of the population regularly visiting a supermarket. Despite the numerous supermarkets in Singapore, the market is dominated by four large firms; NTUC FairPrice, Cold Storage, Sheng Siong and Giant.
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An oligopoly is a market form, in which firms are ‘few and large’; the entire market is dominated by a small number of sellers, where the top 4 or 5 sellers control over 40 % of the market share. Based on the fact that the market under examination has the assumed scenario, where the four largest firms control over 40% of the total market share, the market under investigation has been hypothesized to be an oligopoly. There are several factors that are inherent in the structure of an oligopoly. These include assumptions and characteristics such as the following:
Barriers to Entry: Most oligopolies have distinct barriers to entry, usually the large-scale production or the strong branding of the dominant firms. Barriers to entry may also be legal restrictions such as patent rights, or collusion among the existing firms to keep new entrants out by cutting prices sharply to make it impossible for the new entrant to be competitive or produce at that price. In the case of the market for supermarkets, there are substantial barriers to entry, which include the size of the plants of the existing firms, import made from abroad and strong brand name of the firms. These act as a barrier to restrict the entry of potentially new firms into the market, further enhancing the position of existing firms in terms of market share
Interdependency of Firms and Price Stability: In an oligopoly, firms are said to be interdependent as the outcome of an action of one firm depends on the reaction of the rival firms. As there are just a few firms, each firm needs to take careful notice of each other’s actions. Interdependence tends to make firms want to collude and so avoid surprises and unexpected outcomes. If they can collude and act as a monopoly, they can maximize their profits. Thus the firms are very interdependent and this is shown by the concept of the kinked demand curve (Figure 1). The kinked demand curve applies the effect of interdependency in respect to the supply, demand and price fluctuations within an Oligopoly market. The kinked demand curve works on the assumption that, in reality, the firm knows only 1 point on the demand curve, the one that it holds at present (‘A’). If the firm were to raise its price, then it would be unlikely that the competitors would raise theirs and so, the firm would lose its demand to the other firms. Thus, demand would be elastic above point ‘A’, where the firm is currently operating at, as a small increase in price would lead to a large fall in quantity demanded. However, if the firm were to reduce its prices, it would be likely that the other firms would reduce theirs too. Also, instead of reducing it to the level of the firm, the other firms may lower it even further to make up for the lost sales, by gaining more. Hence, demand would be inelastic below point ‘A’, as a decrease in price would lead to a negligible increase in quantity demanded. Hence, it is said in an oligopoly that if a firm were to change its prices, it would be the only loser. This reduces the incentive of the firms to compete by lowering their prices. This helps in maintaining price stability in an oligopoly market. Thus it is unlikely that one supermarket would cut their prices to draw market share away from other competitors. However, firms may gain an advantage by lowering their production cost per unit (economies of scale) to cut costs to a more competitive level, while still making super-normal profit. Also, being profit-maximizers, the firms operate at MC=MR. But the shape of the MR curve is such that, even if the marginal costs were to increase, it would still equal their marginal revenue and the firms have a range for profit maximizing.
Benefits of economies of Scale: Large firms, in an oligopoly, have an advantage of benefits to scale. Larger firms enjoy discounts when buying raw materials in bulk, and borrow capital at lower interest rates. Thus in the Long Run, the firm would reap in the benefits of the economies of scale. An economy of scale is defined as an advantage of increased production where the cost of production or servicing one unit decreases with each additional unit produced or serviced [1] . These more efficient firms would be able to wipe out competitors in the Long Run and may become the lone producer, i.e. the monopolist. In diagram 2, it is clearly evident that a firm is able to sell a larger quantity Q2 at a lower price per unit than producing a lower quantity Q.
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Non-Price Competition: As firms do not compete in price competition, they engage themselves in non-price competition. In contrast to the homogenous goods of a Perfectly Competitive Market, an oligopolistic producer relies heavily on differentiating its products. Although the products may be substitutes, they have minor differences. Product Differentiation can create a strong foothold for a company and increase their market share. Another way for a company to do this is through branding. This effect can be seen in Apple’s “itouch” which has help Apple gain a considerable share of the MP3 market. Advertising also also plays a critical role in the firm’s market share. In the context of this investigation the effect of product differentiation will be a key area for the collection of data. The factors that are taken into account are membership benefits, location, free samples, amount spent by each firm on advertising and operating hours.
These theories presented help structure the basis for testing how the market under investigation conforms to an Oligopoly.
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