The retail industry involves diverse companies and organizations sending end products to end consumers. In recent years, critics admit that monopolies in the retail industry occupy an important position changing the nature of the market and structure.We will write a custom Wal-Mart’s and Tesco’s Monopolies in Retail Industry specifically for you
for only $14.00 $11,90/page 308 certified writers online Learn More
Monopolies possess strength that is sometimes insignificant, sometimes considerable. A broad definition of a retailer as any entity that sells products or services to consumers means that certain forms of business are included that would not be included under a more narrow definition (Posner, 1999). An obvious definitional consequence is that the dollar volume ascribed to retailing changes dramatically as a function of the definition. Wal-Mart is one of the giant US retailers that occupied a monopolistic position on the market. Tesco occupies a similar position in the UK with 30% of the market share.
The paper will discuss Wal-Mart’s past performance and market position in relation to other companies in the retail industry in the UK (Tesco Home Page 2008; Wal-Mart Home Page 2008). In ordinary competitive conditions, when one isolated process requires a considerably larger scale of operations for its efficient conduct than is required by the other processes of manufacture, it tends to be “disintegrated” from the remaining processes, to be handed over to larger, specialist firms who perform the required tasks for the output of a number of firms in the main industry.
If for any reason such disintegration becomes impossible, a new firm must be large enough to perform this disintegrated process efficiently before its competition becomes a danger to established firms. But quite obviously, the larger the capital required, and the larger the addition of output in relation to the existing output of the industry, the less likely is any competitor to think it profitable to attempt to force his way into the industry, and the more enduring is the existing quasi-monopoly likely to be (Posner, 1999).
Wal-Mart is the world’s largest retailer company, which has operated on the market since 1983. The existence of such a type of store on the market becomes urgent.
Wal-Mart is targeted at the customers, which buy discounted and unpackaged goods from manufactures at extremely low prices. Global expansion strategy, followed by Wal-Mart, has helped the retailer to maintained high-speed growth through market expansion (Anderson, 2005). External factors include opportunities and threats, which have a great influence on the company’s market position. From the environmental perspective, the end of the 1990s was marked by the changes in the European market, which altered many of the parameters of competition and thus enforced a period of reassessment and adaptation.
The opening up of the market and the resultant increased competition has widened the perspective of the planning framework with profound implications. The threat is that the removal of physical barriers to trade and the newfound freedom of movement around the European market has served to catalyze European expansion and, in so doing, raise the degree of European trade. According to the market survey, Wal-Mart faced a decline in its operations during this period. According to Davison and Smith (2005)Get your
100% original paper on any topic done
in as little as 3 hours Learn More
Wal-Mart … faces formidable competition in Western Europe, where retailers often have larger market shares than Wal-Mart has in its home market. … Wal-Mart has found it difficult to leverage the economies of scale it has become accustomed to in North America. In Europe, Tesco has shown that it is equal to Wal-Mart not only in market muscle, but also in deploying advanced IT, merchandising and supply chain systems” (Davison and Smith, 2005, p.2).
Wal Mart was not able to sustain market leadership in Europe and could not “win” the price competition. A period of rationalization, while painful for firms who fail to react successfully to the new competitive challenge, is an essential part of the raised profile in the world economic order, promoting competitive firms with the capacity to thrive on a global scale (Wal-Mart Home Page 2008).
The main Wal-Mart’s competitors are Tesco and Asda, Metro, Ahold, Carrefour. “Wal-Mart has found it difficult to leverage the economies of scale it has become accustomed to in North America. In Europe, Tesco has shown that it is equal to Wal-Mart not only in market muscle, but also in deploying advanced IT, merchandising and supply chain systems” (Davison and Smith, 2005, p.2). The gap itself depends on the inability or the unwillingness of individuals to satisfy some wants in a different way.
A monopoly like Tesco must be based, obviously, on the inability of other producers to bring into the market further substitutes during the period of the monopoly. The monopolist makes his profits by restriction of output, and the raising of price is thereby made possible. Tesco’s revenue reached £46.6 bn, and Wal-Mart’s revenue was $351.1 bn (2007) (Tesco Home Page 2008).
Monopoly in Retail Industry
In the retail industry, the greater the volume of goods to be sold, the more efficiently can the territory be covered, and yet the more cheaply in terms of cost per unit of sales. Moreover, as the scale of distribution increases, it becomes more likely that the producer will find it profitable to market his goods directly. This will not necessarily bring any substantial economy of human power, though that is often possible. In contrast to Tesco, Wal-Mart has only 20% of the retail grocery market and 22% in the toy market. Tesco controls 30% of the grocery market (Wal-Mart Home Page 2008; Tesco Home Page 2008).
The monopolistic position of both retailers shows that the closer touch between manufacturer and retailer often leads to the development of a cooperative sales policy, in which the retailer with window-space assists the manufacturer, and the manufacturer by window-dressing experts and local advertisement helps the retailer. Where the monopoly is of the restrictive types, maintaining separate identities of individual constituent undertakings, and not allocating output within the monopoly on the basis of the lowest cost, but rather with some intention to equalize outputs to a greater degree than competition would do, the efficiency of the monopoly will almost certainly be less than that of competition, whatever the form of the latter (Has Tesco become a monopoly 2007).
Apart from the special economies of monopoly, it would, in all cases, be less efficient. The real problem then is what sort of competition and what sort of monopoly critics are considering. If a perfectly coordinated monopoly is to succeed in a markedly imperfect condition of competition, the monopoly is likely to be the more efficient. If a restrictive monopoly is to succeed in an almost perfect condition of competition, the monopoly is likely to be less efficient (Bernstein, 2005). Critics admit that unless we can know in some detail both the form of monopoly and the degree of competition, we can say nothing definite a priori regarding their relative efficiencies (McKenzie & Lee 2008).We will write a custom
Wal-Mart’s and Tesco’s Monopolies in Retail Industry
specifically for you!
Get your first paper with 15% OFF Learn More
Price as Important Factor of Monopolistic Position
Price cutting is the main tool used by Wal-Mart and Tesco to attract and potential retail consumers. The price-cutting by the larger firm may be a local cut off all its prices, or a general cut of the price of one or more products closely competing with the smaller firm’s most profitable lines, or again a local cut of these particular products. But it frequently happens that there are difficulties in the way of such local price cutting.
It may be forbidden by law to sell a product at exceptionally low prices in certain markets for the purpose of destroying competition or creating a monopoly. There may be, indeed there very often is, prejudice against monopolists who attempt to destroy small producers, and the knowledge of what is happening may rally consumers to the defence of the small producer (Bernstein, 2005). There will often be obstacles to local and temporary cuts in the price of nationally advertised goods whose price is well known and is likely to be restored at a short interval. Where any or all of these difficulties have arisen, various devices have been employed to achieve the end of local price-cutting without its ostensible employment (McKenzie & Lee 2008).
Price competition over the whole field is an ordinary and entirely proper weapon of economic competition. Price competition, even in a part of the field, cannot be avoided where a younger firm challenges an older. For this reason, certain countries have attempted to forbid price discrimination except in so far as differences in local prices can be justified by differences in cost. It may be that such a policy is the best when all considerations are taken into account. But it is important that it should be realized that such a policy does harm as well as good. It may often happen that some measure of price discrimination is a necessary condition before any of some service can be provided (Anderson, 2005).
There may be no uniform price per visit that would enable a country doctor to make a living; there may be no uniform charge per ton-mile at which a railway in an undeveloped territory could be made to pay. Even where a uniform price would give some service, if costs fall considerably with output and the optimum undertaking is greater than the demand of the local market, discrimination may benefit the parties paying the higher as well as those paying a lower price (McKenzie & Lee 2008).
Impact on Consumers
Monopoly in the retail industry is bad for consumers because it manipulates their interests and prevents fair competition on the market. Many consumers have no choice ‘forcing’ to buy goods and food at Wal-Mart and Tesco. There is a transfer of purchasing power from consumers to the producers of the monopolized goods. Thus society as a whole may be better off in the sense that these goods have required fewer resources to bring them into existence; it may at the same time be worse off to the extent that purchasing power has been transferred from one group to another group. The practical problems of monopoly are thus very largely concerned with the issue of the better or worse distribution of wealth.
The amount of damage that is done by the monopoly, with any given volume of output, depends first on the amount of the undesirable monopoly revenue which is secured by the monopolists, and second on the amount of that revenue which can be recovered by taxation or other devices (McKenzie & Lee 2008). In spite of financial documents and financial analyses, “Tesco has been refused permission to open a mini-supermarket in Finchley, north London, specifically on the grounds of the harm it would cause to 24 independent traders in the area. The decision was hailed as an example of a council ‘standing up to huge retailers’ (Tesco refutes monopoly charges 2007).
In general, in a country that enjoys a fiscal system that can recover for social expenditure or diminish taxes in other directions, a large part of the profits of monopolists will have less motive for attempting to destroy its monopolies than will a country that fails to tax them so heavily, or a country which suffers from the depredations of monopolists of alien domicile who succeed in transferring some substantial part of their monopoly revenue abroad without payment of full taxation.Not sure if you can write
Wal-Mart’s and Tesco’s Monopolies in Retail Industry by yourself?
We can help you
for only $14.00 $11,90/page Learn More
But not all monopoly revenue is necessarily undesirable (McKenzie & Lee 2008). It has long been held, for example, those trade unions which, by monopolizing the supply of labour of a given trade, raise its income above that which would rule in conditions of unmitigated competition, or associations of poor agricultural producers, are as likely to improve as to impair the distribution of wealth (Tesco refutes monopoly charges 2007).]
There may therefore be cases where the creation of a monopoly is desirable rather than undesirable from this point of view. The answer in any particular case must depend largely upon the distribution of the monopoly revenue among the various participants in the monopoly. The monopoly revenue accrues primarily to those who perform in any given industry the functions of entrepreneur and risk-bearing.
They are the residuary legatees of industry, and they enjoy the surpluses. And their share may be increased from another source. A monopolist is not infrequently the sole, or at least the chief, employer of a given grade of labour in the country as a whole or in a particular area. If the monopolist curtails his output in order to raise the price of the commodity, he will cause unemployment and may thus be able to secure the quantity of labour that he requires more cheaply (Posner, 1999; Ghemawat & Mark, 2006).
The amount of utility or disutility measured by a dollar is different according to as the shilling is spent or earned by a poor man or a rich man. Something profitably produced by poor men and consumed by the rich may cause far more disutilities in production than it creates utilities in consumption. Something produced by richer and consumed by poorer individuals may yield, even beyond the limit of profitability, an excess of utility over disutility.
A monopolist like Tesco and Wal-Mart might come closer to, and would in the latter case depart even more widely from the socially desirable output. Since, therefore, monopolies are likely in general to do damage in these two ways, it is desirable to exercise control over their activities, a control that may sometimes be mild but may on occasions require to be stern (McKenzie and Lee 2008). Critics begin by distinguishing the two alternative policies of preventing monopoly and of accepting monopoly but regulating it (Tesco refutes monopoly charges 2007). The former suppresses not only the disadvantages but also the advantages of monopoly where such exist. The latter seeks to retain the advantages while mitigating the disadvantages.
Some monopolies like Tesco and Wal-Mart enjoy powers that range widely; others enjoy a purely local monopoly, which is effective only so long as it is not made profitable to import goods into the monopolized area from another outside source of supply (McKenzie and Lee 2008). It is convenient, perhaps, to call the latter type of circumscribed monopoly a conditional monopoly and monopolies not so circumscribed by possible competition from outside, an unconditional monopoly. Since, obviously, a conditional monopoly, for example, may be either of a long-term or of a short-term character, we have here four separate categories that we can distinguish.
It is obvious that, short of vertical integration, an existing manufacturer can do no more than to present a retailer with the alternatives of handling only his products or handling none of his products. The efficacy of this threat depends upon how far it is possible for a shop selling only the new product to survive in competition. This, in turn, depends on a series of further considerations; first, upon the size of shops in that particular trade; second, upon the extent of other products of a similar nature, made by non-monopolistic firms, which can be freely obtained for sale (Posner, 1999).
Negative Impact on Society and Local Communities
Thus it would certainly be true to say that a monopoly will often have inducements to resist an innovation where one of a group of competing firms would introduce it. But before condemning the monopoly for being conservative in these respects, we must pause to consider what is here most in the public interest. Every individual naturally desires to be allowed to have the precise variety of every product, which most perfectly satisfies his own needs and taste (Tesco refutes monopoly charges 2007).
But any reasonable efficiency of production requires a certain degree of standardization. Individuals must be asked to accept something that only approximates their ideal (McKenzie and Lee 2008). Clearly, it is desirable to add a new product only if the additional satisfaction yielded by it exceeds the addition to the cost. But it is by no means easy to define or measure these two concepts. As regards the addition to satisfaction yielded, much will depend upon whether we regard the momentary impulse of the buyer as paramount, as reflecting his true long-period satisfaction (Posner, 1999).
It is a criticism often levelled against competition that forces competing firms to change purely for the sake of change and that by advertisement, they cajole consumers against their true interest to buy these new products. If critics regard the consumer as always perfectly rational in his own interest, his action must show that he derives greater satisfaction to the measure at least of his greater expenditure. It is only if companies are prepared to say that he is sometimes irrational and to put aside price offered as an index of satisfaction that we can argue (apart from changes of costs) that competition is wasteful in this direction.
Some of us, perhaps, would be prepared rather hesitantly to make this plunge and to say that when a monopoly increases its efficiency by enforcing some measure of standardization on consumers, it may not always diminish satisfaction by so much as the criterion of relative demand prices for competitively advertised goods would suggest. In a world of competitive prices, it is virtually impossible, where costs fall with increased output, to arrange things so that a marginal consumer pays only the additional cost involved in producing his additional unit of output. He pays, as a rule, something that approximates its average cost (Posner, 1999).
Critics admit that “large supermarkets destroy local wealth in towns across the UK, creating “an economic vacuum where the money gets taken out of these towns and then ends up back with the shareholders” (Has Tesco become a monopoly? 2007).
Thus the financial inducement to a marginal consumer to accept the standard product is frequently less than it ideally should be. The monopolist’s calculations in introducing a new product will often approach substantially nearer to the calculations that from the national point of view are desirable than will the calculations of one individual firm in a situation in which competition is less than perfect. Thus, the monopolist has been shown to be more conservative than a group of competing firms in introducing new products. If, however, it finds that it pays to introduce a new product at all, a monopoly will very probably do so more rapidly than would competing firms.
For the patent will be common to all the plants of the monopoly. The extension of output will be less limited by considerations of manufacturing capacity, and its progress will be less resisted by competitive advertisement to prevent inroads into the markets for the older product (McKenzie and Lee 2008).
Vertical integration, local price-cutting, restrictive contracts, special agencies, deferred rebates may all in their places be proper and legitimate forms of business conduct. But besides these, there are other devices that have been employed by monopolists for the destruction of their rivals which cannot be so charitably described. The bribery of employees of the rival producer to disclose trade secrets, or the identity of customers, or to give information regarding tenders, or to withdraw their services, has been sometimes a weapon of offence (Posner, 1999).
The bribery of designers to specify products of a particular character, if possible of a particular firm, has probably been even more frequent. Intimidation of customers, or of employees, or of suppliers of raw materials, or of credit, has been used as a weapon in certain instances (McKenzie and Lee 2008). The financial resources of small undertakings have been exhausted by vexatious legal proceedings against them. Some of these methods of competition, defamation of character, for example, are, of course, illegal even apart from special legislation dealing with monopolistic practices. But the evidence is, in most cases, difficult to obtain, and the damage done may be irretrievable by the time that proceedings can be taken (McKenzie and Lee 2008).
All competition is designed to inflict financial injury on a rival, to reduce a competitor’s profits to the point where he will transfer his services elsewhere. The fact that certain competitive practices accelerate or increase this injury is not in itself evidence that they should be made unlawful. The system was built upon the framework of the organization designed to prevent the use of unfair practices. Unfairness was merely extended to include destructive price competition of certain kinds. Thus, if we too strictly protect existing firms against the attacks of potential monopolists, we may end in preventing the creation of one monopoly by ourselves creating another (Tesco accused 2007).
“Tesco’s domination in the UK marketplace has drawn criticism from small business advocates, environmental groups, trade unions and supermarket rivals. Friends of the Earth has called on the UK Competition Commission to “urgently investigate” what it described as Tesco’s “monopoly position” (Has Tesco become a monopoly? 2007).
The public has a right to be supplied by the cheapest producer. A practice that detracts from this right should thus be made illegal. If that criterion is employed, the same practice may be fair when used by an efficient, unfair when used by an inefficient producer.
Moreover, in very many cases, the potential monopolist is the more efficient producer, producing at lower costs. It must be a matter of uncertainty whether his lower costs will lead him to sell at lower prices or his greater monopoly powers will lead him to sell at higher prices. Again, if we think that we can control monopolies and redress the inequalities of wealth that they cause, our test of unfair competition will be different from what it will be if we fear monopolies or prefer to stabilize an economy of relatively inefficient small firms rather than see the concentration in a few giant undertakings (Posner, 1999).
The examples of Wal-Mart and Tesco show that both companies occupy a real monopolistic position in the retail industry and prevent fair competition between small companies. By the prevention of vertical disintegration, the minimum size of effective competition may be increased, and the difficulty of competition thus enhanced. The second main group of offensive devices is found, when analyzed, to secure its end also by limiting competition to undertakings of great size and financial strength. The drastic cutting of prices by monopolists or quasi-monopolists threatened by competition has always been a main weapon of offence.
- Anderson, S. 2005, “Wal-Mart’s Pay Gap”. New Press. Web.
- Bernstein, A. 2005, Declaring War On Wal-Mart. Web.
- Davison, J., Smith, S.E. 2005, “Wal-Mart Finds Dominance Harder to Achieve in Europe”. Gartner Research. Web.
- Goetz, S.J., Swaminathan, H. 2004, Wal-Mart and County-Wide Poverty. Web.
- Ghemawat, P. & Mark, K. (2006). The real Wal-Mart effect. Web.
- Has Tesco become a monopoly? 2007. Web.
- Posner, R., A. 1999, Natural Monopoly and Its Regulation. Cato Institute; 30th edition.
- McKenzie, R. B., Lee, D. R. 2008, In Defense of Monopoly: How Market Power Fosters Creative Production. University of Michigan Press.
- Tesco accused of ‘near monopoly’ 2006, BBC News Online. Web.
- Tesco refutes monopoly charges. 2007. Web.
- Tesco Home Page 2008. Web.
- Wal-Mart Home Page 2008. Web.