Characteristics of oligopoly market and the supermarket industry in the UK

Characteristics of oligopoly market and the supermarket industry in the UK The supermarket industry in the UK -Oligopoly Market The leading supermarkets in the UK commonly are known as the big 4, Tesco, Sainsbury, Asda and Morrisons. (oppapers, n.d) It is not doubt that the UK supermarket industry is an oligopoly market because the industry fits the characteristics of the oligopoly. According to Anderton (2008: 322), An oligopolistic market is one where a small number of interdependent firms compete with each other. The UK supermarket industry is a dominant example of it. Anderton also points out oligopolistic market share a number of characteristics that the industry fits of them. First, there are only four large supermarkets in the market. Second, barriers to entry tend to be high. Third, competition in the UK supermarket industry tends to take the form of non-price competition. Fourth, firms are interdependent. For example, the actions of Tesco will have a direct impact on other forms. Some researches show that supermarkets in the UK have advantages for consumers, which include more products that are funct ional and special service such as home shopping service. However, this market structure creates a situation that is more disadvantages for consumers as collusion and high market share. The noted benefits of the market structure for consumers are the innovations of the industry and economies of scale. First, as AmosWEB (n.d) indicates that the innovations such as advance the level of technology, expand production function, increase economic growth are likely been developed by oligopoly and the motive of innovations comes from interdependent competition. According to the Anderton (2008:328), Supermarkets keep a close eye on the activities of other firms in the industry. Anderton (2008:328) also points out, the kinked demand curve model below assumes that if one firm increases its price, the other firms will react asymmetrically to a change in the price. As a result, the supermarket would not increase their price to earn more profits. Therefore, prices in oligopolistic markets seem not to change as much as perfectly competitive markets, which call price rigidity. (Anderton, 2008:323) The supermarket have to innovate so that they can improve their technology such as se lf-scanning machines, create some new productions for consumers and lead them to higher living standards. Secondly, non-price competition is a main characteristic of the UK supermarket industry and has some advantages for consumers. In oligopoly, the marketing mix is epitomized in the 4Ps- price, place, product and promotion. If one firm in this marketing structure wants to earn more profits, it has to take away sales from other firms. Thus, supermarkets will tend to produce products, which needed for their consumers, and offer some special services. According to tutor2u (n.d), there are some examples can show that consumers have benefit from it. For instance, store loyalty cards, home delivery systems, discounted petrol at hyper-markets, extension of opening hours (24 hour shopping in many stores) and internet shopping for consumers. As Supermarket (2008) found that Asda continued to improve its home shopping service. Asda is the UKs second biggest food home shopping business online and now covers more than 90% of the UK population. In order to meet demand in Christmas, Asda has increas ed plenty of delivery slots by 40% compared to 2007. Non-food products are also been offering to on-line shoppers by the supermarket in the UK. Therefore, the UK supermarkets indeed have benefit for consumers. However, the UK supermarket industry has several problems. The main disadvantage for the consumers is collusion. If one firm wants to increase the price in this market structure, it will not gain more profit because other firm will not react. As a result, firms may collude to set price. Collusion is two or more firms secretly agreed to control the prices, production or other aspects of the market. When the firms do so, collusion means the firms behavior tend to be a monopoly. Thus, they can set a monopoly price monopoly quantity produced, and allocate resources are inefficiently as monopoly. (Anderton, 2008:323) Major supermarkets in the UK have large amounts of power and may even collude to set prices, which is illegal. If the firms collude to set price, consumers need to worry about not only the high prices but also the possibility of a low quality product. As Harry (2007) reported that according to the Office of Fair Trading, Britains biggest supermarkets have been fixing the prices of milk, butter and cheese at a cost to the consumer of  £270 million. Because of colluding with five leading dairy producers to raise the prices of milk, butter and cheese between 2002 and 2003, Asda, Morrisons, Safeway, Sainsburys and Tesco were accused by the OFT. Andrew Groves, the leader of OFT investigation, said that Collusion between retailers is a serious illegal behavior and any exchange of information between retailers is certainly change prices so that the consumers become sufferers. (Harry, 2007) As Barriers to entry in the supermarket industry are extremely high, four main UK supermarkets have sharing the massive market. Small retailers are hard to compete with large supermarkets and survive although the government will incentives them such as grants and tax relief. (Socyberty, 2007) Alexander (2008) points out that the High Street 2015 reported the erosion of the small shop is likely to have a catastrophic impact on future consumer choice. Consumers will be the biggest losers because limited choice of store brands, limited choice of available products, and limited choice of shopping locations, higher prices and reduced consumer service are the possibilities in 2015. Therefore, consumers choice is reducing and may lose their benefits. To sum up, the supermarket industry in the UK is less to the benefit of consumers. The firms in the supermarket industry are able to collude and set price. It is bad for the market to adjust the price. The demise of the small shop would mean that consumers would be disadvantaged. However, in oligopoly market, not all the structure is bad for the consumers. The market competition between the supermarkets can improve the technology in logistics and creations new productions to decrease the cost. If the government interventions are able to use more efficient to prevent collusion, then the price of the production will be more stable and available. If the government can have more policy to protect the small shop for the convenience of consumer, the supermarket industry will be more benefit to the consumer. References Alexander, A; Bailey, A; Hamlett, J and Shaw, G (2008) [Online] Regulating UK supermarkets: an oral-history perspective http://www.historyandpolicy.org/papers/policy-paper-70.html (Accessed: 25th February 2010) AmosWEB Encyclonomic WEB*pedia (n.d) [Online] oligopoly http://www.amosweb.com/cgi-bin/awb_nav.pl?s=wpdc=dspk=oligopoly (Accessed: 4th February 2010) Anderton, A. (2008). Economics (5th Edition) Harlow: Pearson Education Harry W (2007) [Online] UK supermarkets fixed milk and cheese prices 2007 http://www.telegraph.co.uk/news/uknews/1563663/UK-supermarkets-fixed-milk-and-cheese-prices.html (Accessed: 7th February 2010) Socyberty (2007) [Online] Government Intervention In The UK Supermarket Industry http://socyberty.com/economics/government-intervention-in-the-uk-supermarket-industry/ (Accessed: 25th February 2010) Supermarket (2008) [Online] Middle class bargain hunters boost sales at Asda http://www.supermarket.co.za/news_detail.asp?ID=1082 (Accessed: 6th February 2010) Tutor2u (2004) [Online] A2 Economics http://www.tutor2u.net/economics/revision_focus_2004/A2_Oligopoly.pdf) (Accessed: 7th February 2010) Tutor2u (n.d) [Online] oligopoly http://tutor2u.net/economics/content/topics/monopoly/oligopoly_notes.htm (Accessed: 6th February 2010) Uk Grocery Market (n.d) [Online] Uk Grocery Market http://www.oppapers.com/essays/Uk-Grocery-Market/157719 (Accessed: 30th January 2010)

Butler Lumber Company Analysis Essay

Based on the information and corresponding financial statements provided, we concluded that: Bulter Lumber Company has to collect money from outside resources to compensate its funding gap of 383,000 USD. From the perspective of banker, we won’t approve Mr.Butler ‘s loan request From the perspective of firm’s financial advisor, it is better to finance from new shareholders than to borrow from bank. II. Analysis i. Funding gap There are three main reasons why Butler Lumber Company has to finance itself through outside resources. Firstly, It was mentioned in the document that Butler is offered a trade discount by suppliers, which is 2/10 with 30 days span of due. However, Mr. Bulter had never been able to use such a discount because of the shortage of funds. Purchase of Stark’s shares and expansion of current business both contribute to the lack of cash. The inability to take advantage of trade discount directly lead to the increase in COGS and further lower down the company’s profitability despite the fact that sales is increasing (statistics shown in table 10). therefore, it would be a wise choice for Mr. Butler to fully utilize the discount to ease his pressure on liquidity and further lower costs to increase profitability. Secondly, the situation of operating efficiency in Butler Lumber Company is worrisome. As showed in table 6, past three years have seen a rise up in days of accounts receivable, from 36.7 to 40.2 days, indicating that for every one receivable dollar , the company needs 40.2 days to collect from customers. Consequentially, the same increase applies to days of accounts payable which is rising sharply from 37 to 47.9 days. It means that for every payable dollar, the company needs 47.9 days to pay back. This combine contributes to the inefficiency of operating turnover which is of vital importance for a trade company. Therefore, in order to avoid illiquidity resulted from suddenly change of macroeconomic and support company’s continuous growth, Mr. Butler has to increase cash to buffer itself. Thirdly, We also noticed that notes payable should reach a higher level (382,000 USD) if the assumed sales volume (3,600,000 USD)of 1991 is to be achieved. We use statistics of 1990 as basis and calculate the proportion of some accounts to net sales. then we apply these proportion to forecast the income statement and balance sheet for 1991(the calculation process is shown in Table 3 ).since the amount of notes payable in 1990 should be paid back by the end of 1991, so the ending number of note payable in 1991 should be the amount of newly borrowed money from bank .In other words, to realize the sales goal, another 382,000 USD should be financed. Therefore, we disagreed with previously estimated amount of 465,000 USD by Butler and Dodge and we recommend a lower amount of 382,000 USD is enough to sustain the daily operations of the company for the whole year. ii. Prospective from banker Based on the grades of credit, capacity and collateral, we perceive the risks for lending money overwhelm the benefits and decide to veto Butler’s application for the loan. We evaluate Butler Lumber Company’s application for loan through grading the credit, capacity and collateral with three levels: poor, normal, and great. (1) Credit For small businesses, the character of the entrepreneur is very essential. Our customary investigation found out Butler is an energetic man totally dedicated to his business. Barker Company, one of Butler’s large suppliers, reckoned he possesses sound judgment and a willingness to devote into his work and keeps close eye on his own credit. Moreover, there is no evidence evincing Butler involving any delinquent event. Generally, we believe Butler is a reliable business man. However, the financial data of Butler Lumber Company is not that palatable. The company is mired by the debt (table 9). As of 1990, the current liability is 535,000, equivalent to 19.86% of net sale. In fact, leverage ratio is worsening during last three years. The ratio of debt and equity surges from 1.2 in 1988 to 1.68 in 1990. What’s more, the operation efficiency (table 6)still has room to elevate. Average account receivable days are too long. Account payable keeps ascending. To sum up, we give Bu tler a grade of â€Å"Normal†. (2) Capacity With regard to the capacity for repay the loan, we mainly consider the company’s profitability 〠coverage ratios and liquidity ratios In this aspect, the company’s performance is somewhat disappointing (table 10). The net sale reached 2,694,000 dollar in 1990 with a strategy mixed price competition and control of operating expenses and costs. Yet net profit margin experienced a downward trend during last three year. In addition, the liquidity is worsening (table 8). Both the ratio of EBIT/Interest expense and the current ratio slumped from 3.85 to 2.61 and from 1.8 to 1.45 respectively during last three years. Hence, our conclusion is Butler’s company is quite risky deserved a grade of â€Å"Poor†. (3) Collateral Until the end of 1990, the net property of the company is worth approximately 157,000 dollars. Butler held jointly with his wife equity in their house, which had cost 72,000 dollar in 1979, yet was mortgaged for 38000 dollar. These entire assets together amounts 190,000 dollars. If we lend 465,000 dollar to Butler and collect all his asset as collateral, the ratio of loan to value(LTV) is 40.86%, which is unacceptable. Thus, when it comes to collateral, we have to render a â€Å"Poor† to Butler. iii. Prospective from financial advisor As Mr. Butler’s financial advisors, instead of encouraging Mr. Butler to go ahead with debt financing, we recommend that it is more favorable to financing through new shareholders for the following reasons. Firstly, as the analysis showed above, we understand it is not that easy for the company to borrow money from banks. Even we successfully reach the agreement with bankers, we may subject to very severe debenture, which may form obstacles for company’s further development. Secondly, indictors of operating return, such as ROE and ROIC, both show a steady increase during the past three years. ROE increased from 11.48% to 12.64%, a 10% gain. ROIC jumped from 12.90% to 19.01%, an increase of 47.4%. These two ratios indicate that the company has earned on its past investments and it is able to find investment opportunities that are very profitable. These ratios may be attractive to introduce new shareholders. Hence, we suggested that it is better for the company to finance by equity than by debt. Moreover, the joint of new shareholders in the management team can help to improve the management and operation of the company, especially in the aspect of inventory and credit policy. III. Appendix Table 1 – Income Statement Table 2 – Common Size Income Statement Table 3 – Balance Sheet Table 4 – Common Size Balance Sheet Table 5 – Free Cash Flow to Firm Table 6 – Operating Efficiency Table 7 – Operating Returns Table 8 – Liquidity Ratio Table 9 – Leverage Ratio Table 10 – Profitability Ratio

Psychology experiments Essay

When conducting psychology research, there are several important standards that must be observed in order to protect study participants. Ethics are a set of moral principles used to guide human behaviour. When these guidelines are breached, they become ethical issues. Nowadays the British Psychology Society (BPS) uses a set of ethical guidelines for all psychology experiments to be bound to.  Most ethical problems in human research stem from the participant being typically in as much less powerful position then the experimenter. It follows that steps need to be taken to ensure that the participant is not placed in a powerless and vulnerable position. All participants must have the basic right in experiments to stop their involvement at any given point. Furthermore, they do not have to feel obliged to explain the basis on which they have decided to withdraw if they choose not to, and they may also insist the data they provided during the experiment should be destroyed. Informed consent is also another safeguard taken by psychologists to indicate a formal agreement between the experimenter and study participant.  However the experimental design, eg. field experiment, may not always enable this as it could potentially seriously affect the validity of the results. Yet a precaution used is to debrief participants on the true aim of the study after if has been conducted, in order to justify deception and then to obtain informed consent off the participants once valid results have been produced. A cost-benefit analysis helps weigh up the cost experienced by the participants as a consequence of their involvement in the study, to the social benefit of the results on society. This helps justify many experiments as the outcome of some studies could be of huge beneficial value to society and the cost of participants seems insignificant to the influence it has made outside the study. Despite many ethical guidelines, previous psychological experiments have breeched these, therefore leading to significant ethical issues. In order to compensate for these downfalls, the experimenters can justify them or use techniques after the experiment is over to restore their ethical values. Milgram’s (1974) research on obedience to authority was carried out in the days before most ethical guidelines were in place, however is still regarded unethical. The experiment involved asking participants to administer very strong electric shocks to another participant (although was in fact an experimenter who was involved in the study). The participants were deceived about key aspects of the study, such as the fact that the other person didn’t actually receive any of the shocks the true participant was administering. However you must consider the affect having the participants know about the false shocks would have on the study. The results would be totally invalid as they would not then be measuring the obedience to the participants. They were also deceived in that they believed they were participating in a memory learning experiment, yet really were involved in obedience to authority experiment. This was again necessary to obtain valid results. However this point also raises issues on informed consent, as p’s only gave consent to the fake experiment, not the true one. This was justified by the experimenters by giving all participants a full debrief of the true nature of the experiment after it had been conducted. During this debriefing the p’s were asked for informed consent to the true experiment instead, therefore making up for the lack of informed consent to start. One of the main ethical concerns which arose form this study was the high level of psychological harm caused to the p’s as a direct result of the experiment. Visible signs of distress, nervous behaviour, sweating, uncomfortable laughter, trembling and even seizers were recorded form the participants during the study. This strongly suggests to us that the participants were very effected by their participation in the experiment. Additionally after the experiment they may have been left feeling ashamed, lower self esteem and degrading thoughts of themselves for have acted like they did. However again the debrief at the end reassured that they had not actually harmed anyone and that the electric shocks were false. They were also told that their behaviour was normal and that many others had acted in similar ways. All p’s later received a detailed report on the study to illustrate the significance of their involvement in the study. Over 80% of the p’s said they were glad to have taken part and only 1% expressed negative feelings. Overall despite the cost to the participants, the results produced from this experiment have been invaluable in extending knowledge on obedience. Still years after this experiment was conducted, the study holds massive insight into obedience and remains one of the most influential psychology studies in this area. Thus justified by the cost- benefit analysis.

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