Running Hеad: Business Economics
1. Type of Market Structure
The UK grocery sector has been engaged in creating a monopoly over the entire market through the implementation of several policies and procedures. A monopoly is described as an economic market where particular organizations enjoy clout and authority over the sale of goods and services. They have the ability to determine the prices of goods and services due to their strategies and techniques. This can be fatal for free trade because it stifles the competitive edge of the market. It prevents other organizations from competing in a fair and transparent manner (Blinder, Baumol & Colton, 2001: Pg 64).
Consumers are forced to buy products and services for particular organizations due to the lack of substitute merchandize. Monopolies are able to exert control over the market because they have reduced operational and administrative costs. They have access to capital, expertise, and technology that can increase their output and productivity. Natural resources might be controlled by the organization which helps it maintain control of the entire market. A monopoly can be formed when organizations seek to annihilate competitors by using a number of strategies. Organizations could push prices down for goods and services which would eliminate new entrants. They can lobby governments to safeguard their economic objectives and interests. A monopoly is considered to be the opposite of free market principles (Blinder, Baumol & Colton, 2001: Pg 69).
It can lead to inefficiency and ineffectiveness through the development of illicit practices and procedures. It can lead to the creation of powerful organizations that are able to manipulate the market according to their own whims and desires.
2. UK Grocery Sector
The UK retail sector has come under public scrutiny for its monopolistic policies and procedures. A monopolistic environment can be an anathema to free trade policies that encourage competition and innovation. Further such an environment can lead to the creation of powerful entities that might not be responsive to consumer concerns and needs. This includes price fixing which seeks to increase rates of products in order to curb the activities of competitors. Some leading supermarkets have increased prices even though consumer spending levels were below average. This strategy was adopted to prevent new entrants into the market. The leading players in the supermarket industry have control over vacant plots. This gives them a competitive edge since they can deny new organizations the right to open up supermarkets. Other leading players have imposed stringent conditions about the sale or usage of land (Johnson, 2008: Pg 8). The supermarkets have increased clout as they control the various partners in the supply chain management system. This means that vendors, suppliers, distributors, and raw material providers are part of the entire supermarket chain. This gives them a significant edge over competitors that are trying to establish supply chain management systems in specific areas of the United Kingdom. Hurdles and obstacles have also been imposed as planning commissions are under the payroll of large supermarkets. This enables several supermarkets to maintain their monopoly in areas where they have a significant presence. Tesco, Asda, Sainsbury, etc have often been accused of implementing monopolistic practices in order to maintain their clout and authority. A comprehensive strategy has been implemented in order to prevent the creation of monopolies.
3. Tacit Collusion
Supermarkets in the United Kingdom have increased their investments in order to enhance their clout and authority. They have been able to implement efficiency and effectiveness in the entire sector. Many of these organizations could have engaged in tacit collusion in order to improve their bargaining power. Price fixing is a strategy in which several organizations could have banded together in order to raise prices of products and services. Such a strategy would have forced consumers to buy products due to the lack of alternatives in the market. The giants in the industry could have also maintained their links with the network of suppliers (Johnson, 2008: Pg 8). This would mean that the suppliers would be imposed penalties if they traded with new entrants into the market. Tacit collusion can also occur if the supermarkets formulate a joint policy to influence local politicians. Lobbying is an extensive strategy that can help supermarkets to maintain their monopoly in the economic environment. Each member must agree to a collusive path in order to protect and safeguard their mutual interests. A system of higher prices can be negotiated between the supermarkets through consent and accord. Any partner that does not adhere to the conditions would be penalized through reprisals by other organizations. Each supermarket also needs to correlate the current profits with future profits in order to draft a superior business strategy. Such an approach helps to maintain tacit collusion that ensures the creation of a monopolistic environment.
Question No 2
A) Economic Downturn in UK
The United Kingdom has witnessed a significant decline in economic activity since the mid of 2008. Economic growth has shrunk by more than two quarters due to a number of reasons. A major problem has been the economic fluctuations in the international stock markets. This was precipitated by the real estate bubble that burst in the United States of America (Haigh, 2010: Pg 14). The consequences of the crisis were an international credit crunch that has hit the financial institutions in the United Kingdom. Real estate has traditionally been a major source of investment in the United Kingdom. The downturn has led to a significant plunge in real estate prices which has been disastrous for the entire economy. The lack of potential investors within the industry has led to a severe credit crunch. Another major cause of the downturn is that consumer spending has been significantly curtailed due to inflation and unemployment. Finally the international economic crisis has seemed to inhibit the growth and development of British organizations. The results have been catastrophic for the country.
B) Future Prospects and Stable Recovery
The economic downturn has caused considerable fluctuations in the economy. As a result there have been a number of short term and long term strategies that are being used to weather the storm. The United Kingdom has sought to fight the downturn by using a number of strategies. The Bank of England has lowered interest rates and increased capital flows in order to stimulate the economy. Unemployment, inflation, and stock market fluctuations will continue to pose a serious problem for the economy. The government will continue to support financial institutions with bad debts. It will introduce regulatory measures that are designed to eliminate discrepancies in the financial sector (Haigh, 2010: Pg 19).
The economic downturn has remained stable in the first months of 2010. This is a positive sign because it will eventually lead to economic recovery. Recovery is strongly correlated with the international financial markets because fluctuations in them can provoke strong reaction within the UK economy. A comprehensive recovery program should focus on removing the discrepancies and contradictions in the financial system. Further the system of social support should be enhanced to shield individuals that are suffering from unemployment and inflation. A robust and flexible strategy can be used to produce excellent results for the entire economic system.
Question No 3
A) Benefits of Trade and Principle of Comparative Advantage
Trade has been defined as the planned interchange of products and services between several parties. It is conducted through a structural framework that is referred as the market. The development of money has greatly facilitated the trade process since it offers a mechanism to achieve efficiency and effectiveness. Trade can be beneficial for countries because it enables them to sell products and services for which they have a competitive advantage. It helps to increase the industrial capacity of nation states in a robust and flexible manner (Hardwick & Langmead, 1990: Pg 56). The principle of comparative advantage can be used to explain the benefits and advantages of trade for countries. This principle states that every entity has the ability to develop products and services at lower rates when compared with its competitors. This principle extends into the context of international trade where two countries can derive benefits from mutual trade and commerce. Each trading partner has the ability to develop cheaper products and services. Both partners can exchange these cheaper products and services in order to ensure efficiency and effectiveness in the economic system. The principle of comparative advantage enables countries to develop specialized and customized products and services (Hardwick & Langmead, 1990: Pg 57). This can have a positive impact upon the local economies as industrial growth is stimulated and developed in a complex and profound manner. The principle of comparative advantage calls for a country to acquire specialization in certain products and services instead of attempting to gain absolute advantage. If a country is comparatively superior in manufacturing electronic items than toothpaste, it is appropriate to invest into electronic items so that it might be exported to pay for the importation of toothpaste. A country should seek to achieve specialization in economic initiatives for which it has enhanced expertise and resources. This augments the productivity and output of the country because it enables the effective allocation of scarce resources into specific economic sectors. Therefore in the international economy, a country can be successful by its proportionate edge in the production of certain goods and services (Hardwick & Langmead, 1990: Pg 58). Trade becomes beneficial for countries because it leads to the development of flexible and versatile business initiatives. It increases revenues and profits through a systematic and logical process.
Source: Economic policies to reduce a balance of payments deficit. (2009). Retrieved from http://www.tutor2u.net/economics/content/topics/trade/boppol
B) Protection of Domestic Industries
Protectionism is an economic method that seeks to curb international trade between countries. National governments seek to impose tariffs and quotas in order to protect their domestic industries. A number of regulations are formulated in order to restrain the flow of imports into the country. The protection of domestic industries is harmful for the growth and development of national economies. It leads to high levels of inefficiency and ineffectiveness for domestic industries that have no incentive to develop innovative products and services (Ghironi & Melitz, 2005: Pg 865). It creates a bureaucratic form of management that is unwilling to introduce innovative management concepts and techniques. India is a major example where protectionism led to the dismal performance of the industrial sector. For decades the country pursued a policy of protectionism in order to stimulate industrial growth and expansion. The results were that the industrial sector witnessed stagnation, rigidity, and inflexibility that were harming the progress of the country. A free market system was created with the purpose of trade liberalization, privatization, and reduction of government barriers. The results have been spectacular as India has been the top ten growing economies for the past ten years with an annual growth rate of 8% (Anderson & Van Wincoop, 2004: Pg 694).
Protectionism limits the development of the export sector that can increase job opportunities for workers. It retards the ability of workers to acquire economic advancement and development. Another argument against protectionism is that the competitive edge of certain industries is halted because it leads to the development of monopolies. The organization does not have an incentive to develop creative products and services because the consumer market is forced to purchase from its outlets. The United States, European Union, and Japan have frequently imposed protectionist policies in order to safeguard their industries. An example is the United States that sought to impose subsidies for its agricultural products in order to combat the threat of banana products from the Caribbean islands. Protectionism prevents the free exchange of goods and products across international markets. This can curtail the economic freedom that is enjoyed in the global market (Anderson & Van Wincoop, 2004: Pg 695).
Protectionism should not be followed because it can lead to closed and isolated economies. It inhibits the economic development of society by creating numerous obstacles and barriers.
Word Count: 1992
Blinder, Alan S; William J Baumol and Colton L Gale (2001). . Microeconomics: Principles and Policy. Thomson South-Western
Johnson, Andy (2008). ‘Why the Supermarkets’ Big Brother Tactics Might Come Back to Haunt Them’, in ‘The Economist’, 15th May 2008
Hardwick, Khan and Langmead (1990). An Introduction to Modern Economics – 3rd Ed. Oxford University Press
Heroin, F. and Melitz, M. J. (2005), “International Trade and Macroeconomic Dynamics with Heterogeneous
Firms”, Quarterly Journal of Economics, 120, 865–915
Anderson, J. and Van Wincoop, E. (2004), “Trade Costs”, Journal of Economic Literature, 42, 691–751