Tacit Oligopoly of the Original Supermarkets of Bogor

Extended Essay in Economics Tacit Oligopoly of the Original Supermarkets of Bog Written By B Diploma Candidate #: Session Word Count: Abstract The grocery market of Bog has been facing a significant change during the past several years. Sudden emergence of new suppliers has more than doubled the number of existing supermarkets. I took interest at the fact that despite of the sudden increase in the number of suppliers, there never was a price decrease. This signifies that the market is experiencing Over Supply.I decided to investigate whether the strain caused by the over supply have hanged a particular part of the market structure of the supermarkets of Bog. I took to compete against new competitors. My first step was to investigate whether the supermarkets shows characteristics of an oligopoly. Several factors are apparent; the number of firms in the market is small, their size is relatively big, their products are slightly differentiated, and the entry barriers are high. To further strengthen my claim concerning the barrier, I have studied a small portion of two legal documents that concerns starting a supermarket business.Afterwards, I have recorded product prices and performed statistical analysis to determine whether the price range is narrow. I then compare the prices of the new supermarkets and all the supermarkets of Bog as a whole. The result shows that indeed there is an oligopoly; yet it extends to reach the new supermarkets. This meaner that the original supermarkets have not segregated themselves to attempt gain business power (e. G. In pricing). New questions are formed based on the results. Among them is whether the oligopoly intentional or has competition with other suppliers, e. G. The traditional markets, caused the price range to be limited?These questions require further researches that are likely to orientate to the Business Studies disciplines. Word count: 295 Table of Contents Part 1: An Introduction to the Essay Part 2: The Present Marke t Profile Part 3: Review of Relevant Theories 2 3 5 7 Part 4: Hypothesis and Methodology of Research Part 5: Data Collection and Analysis Part 6: Conclusion and Evaluation 17 10 12 Bibliography 18 Appendix 2 Appendix 3 Acknowledgements Part 1: An Introduction to the Essay 20 21 Bog is a minor city that is founded over two centuries ago, thus by now it is well known by its surrounding cities and villages.The city was established as a center of trade for local agricultural industries (Incarnate). As a citizen of the city ever since birth, I know well that the grocery market of the city is massive. The vast and well known open air market of fresh produces called Papas Bog (or the Market of Bog'), numerous minor grocers, five notable supermarkets, and the easily accessible shopping centers in Jakarta have supplied the household demands of the 3,696,848 citizens residing in Bog (the figure was recorded at a 1997 census) (Incarnate). The market status, however, have taken a significant tu rn during the last 10 years.Numerous new suppliers entered the market; among them are as much as five new supermarkets (doubling the present number), two hypermarkets, and two new mini- market chains. Among the very basic principles taught to economics students is the Market Equilibrium law. It states that the demand and supply of a product is dependent of the price level. The consumers prefer lower prices while the suppliers prefer higher prices. Where the two quantities met, it is called the Equilibrium point. (Collier, 201) Diagram 1. 0 shows this point of importance as (SQL, Pl). Diagram 1. 0.The Micro Economic Model of the Grocery Market shift in the Supply line. Diagram 1. 0 portrays this scenario by having the line labeled ‘Supply 1' shift to become ‘Supply 2'. This shift will cause the equilibrium to increase in quantity but decrease in price (Collier, 191). However, there never was a significant price decrease in the grocery market of Bog. The supply line may sh ift, but the price is maintained at Pl, and theoretically this must result in an Over Supply. An Over Supply occurs when the quantity of supply exceeds the quantity of demand. (Collier, 203) [pick] Diagram 1. 1 . Illustration of the market experiencing Over SupplyThe Over Supply strains the suppliers, since it meaner that some of their stock will remain stagnant and inevitably experience depreciation -which in turn will result in business failure. Despite, logically thinking, the side that was experiencing the biggest lost of consumers will be the suppliers (supermarket, etc. ) in Jakarta; inevitably the local suppliers of Bog too will share part of the strain. However, the pressure will not be as hard on the new competitors as it would be to the original suppliers since all new competitors belong to a nationwide company (details are located in part 2: the Present Market Profile).There is the possibility that the demand line has shift along (or even preliminary) to the shift of the supply line. However, through observation I have noticed that there never was an apparent change in the factors that may trigger a shift of the demand line. Those factors are: price of substitute products, price of complementary goods, general income and taste (preference), the population, and advertisements (Galilee, 24). The original supermarkets (from this point this term will be used to refer to the supermarkets that have existed before the sudden emergence of new competitors) concerned me the most.The Market of Bog and other minor suppliers surely offered the least prize, thus they have a separate market segment. My concern would be whether the business pressure is strong enough for the original supermarkets to from a tacit oligopoly. Thus was formed the research question: Did the original supermarkets of Bog form a tacit oligopoly to compete against the new competitors? The next part of the essay will reveal the present market profile. Following it will be a review of relevant theories, which serves as a base for the hypothesis.After discussing my methods of research to verify my hypothesis, the ATA collected will be presented and analyzed. Thus, a conclusion will be formed, along unanswered questions and possible sources of error. Part 2: The Present Market Profile Original Supermarkets: Ingest Supermarket (3 outlets) Grand Supermarket Shanghai-La Supermarket New Supermarkets: Hero Supermarket Matriarch Marketplace A;G Groceries DAD Supermarket Ramadan Supermarket New Hypermarkets: Giant Hypermarket Hypermarket Hypermarket.New Mini-markets: Intimidator Alfalfa's Other competitors: The Market of Bog Minor Grocers Suppliers (supermarket, etc. ) of Jakarta A ‘minor grocer' is a reference towards traditional Indonesian grocery suppliers, known locally as Warnings'. It tends to be a small store, not often would you found one the size of a typical bathroom. The goods it sells are usually minor needs, such as cigars, sweets, and hygiene products. The app earance of the outlets tends to be ignored and they could be found dispersed around the vicinity of the city.However, the term ‘mint-markets' refers towards literal small supermarkets. Its design and facilities equal those of a supermarket and thus it presents its customers with every benefits of a supermarket besides variety of product. The mint-markets belong to a nationwide chain and they have an outlet in seemingly every residential area of the city. Despite being under the same brand, the three outlets of Ingest Supermarket belong to different people. It originated as a Private Limited company, but now the three branches are run separately by three children of the original founder. Note: ‘Opt†¦ Tab is the Indonesian label for a Public Limited company) Hero Supermarkets and Giant Hypermarket belong to OPT. Hero Supermarket Tab. Matriarch Market Place (a supermarket) and Hypermarket (a hypermarket) belong to OPT. Matriarch Putter Prima Tab. ? Ramadan Supermarket belongs to OPT. Ramadan Alistair Santos Tab. GAG Mart Groceries and DAD Supermarket belong to different companies but both own more than one outlet situated in different cities of the country. The mint-market chain Intimidator belongs to OPT.Indicator Prismatic (a Limited company that belongs to the Indoors group, whose owner once so far as become Indonesian richest entrepreneur). The Alfalfa's mint-market chain belongs to OPT Summer Alfalfa Trinity Biding Shah (a Limited company) and is about to be integrated to OPT Ramadan Alistair Santos Tab that owns the Ramadan Supermarket (see above). Art 3: Review of Relevant Theories Sisters Paramus Sisters Paramus is an assumption that every factor other than the one being discussed remains constant (Galilee, 10). Every part of this essay is written on Sisters Paramus.To investigate whether the original supermarkets of Bog have formed an oligopoly, first the characteristic of that particular market structure and other alternatives must be p re-determined. 1). A Monopoly This is a market where there is a single seller. It has absolute control over the prices of the market due the unavailability of substitute products. Due to this fact, often times monopolies are placed under strict control of the government. (Galilee, 120) A monopolized market requires the highest forms of barrier of entry.This meaner that people interested in entering the market ought to proceed through many difficult requirements which often was impossible to attain. The highest barrier that one may encounter is governmental laws, and indeed it was often intentionally employed to create monopolies. (Collier, 269) A good example would be Indonesian PLAN, its sole electricity supplier for the whole nation. It was the only entity n the market for mass electricity and legal laws forbid any enterprise to enter the market. In this particular case, the government owned the company. This grants them maximum control over the market.The huge sales volume was di rected towards the government's fund. 2). Assumptions of an Oligopoly An oligopoly is a market situation where there are few sellers and each firm may be aware of the activities of another. There are high barriers of entry -but these are lower than those of a monopoly. The products they offered tend to be differentiated goods, this refers to goods that are derived from an original form (e. . Shampoos may be differentiated to anti-hair-loss, scalp oil controlling, etc). (Galilee, 140) The few firms in the market collude together and act like a monopoly formed by many entities.A formal collision is called a cartel, and the original supermarkets of Bog do not belong to a formal cartel. An unofficial collusion is referred to as a tacit oligopoly. (Galilee, 140) The colluding firms will have an agreement about price range, advertising, market share, and possibly corporate business strategies. Their semi-monopoly allows the firm sizes to be big. (Galilee, 140) 3). Assumptions of a Monopol istic Market A monopolistic market is when many firms compete in the same market, selling similar yet differentiated goods or services.The barrier of entry is relatively low compared to the previous two market structures discussed. (Galilee, 114) each other but are differentiated. A consumer may switch his preference from one brand to another and will not experience a significant change in utility. Note however, that when talking about such products, there are several items on the market with very distinguished feature (special brand of clothing, etc. ) that belongs to ice markets. These products are not part of a monopolistic market.The degree of price control (however weak) of a monopolistic market is attributed towards this slight differentiation. If the product is entirely homogeneous, no firm will have control over its prices, turning it into a Perfect Competition Market. (Galilee, 114) 4). Assumptions of a Perfect Competition Market A perfect competition market houses extreme amounts of producers, none of which possessing a high rate of market share. The products are homogeneous (exactly the same), and the barrier of entry is near to non-existent. No firm has any influence over the market's price.The homogeneity of the product does not allow selling above market price (since it will result in severe loss), and the fierce amount of competition did not allow the firms to engage in a price war strategy (setting price lower), since the market price is already set as close to the cost of production as it could be. If indeed the current price is a degree above the average cost of producing the goods, then a firm may employ a price war strategy and enjoyed supernormal profit for a period of time, but other competitors will follow suit immediately.Part 4: Hypothesis and Methodology of Research My hypothesis is the original supermarkets of Bog have formed a tacit oligopoly that is separate from the new supermarkets to gain business power. As discussed in the intr oduction and the market profile section of this essay, it is unquestionable that the original supermarkets experience a degree of pressure from the sudden establishment of new competitors. I believe that it is only logical for them to attempt making the overall competition more endurable by forming a segregated oligopoly.This way, they may attempt corporate business strategies, especially on the matter of racing. To prove this hypothesis, I must attempt to correlate the supermarkets with characteristics of an oligopoly. Those are: Number of firms: few. Products are slightly differentiated (as in groceries). Big. High barrier of entrance. C] Similar price range. Size of firms: relatively The first three characteristics are theoretical and apparent. There are a small number of firms (compared to the monopolistic food and beverage business or the perfect competition green grocers, for example).All supermarkets sell many identical products (common brand and package size) and the nature of these products is in neural only slightly differentiated. The size of the firms too is relatively big, proven to us by the existence of mint-markets which are smaller representatives of supermarkets. As of the barrier of entering the market, it is only logical that it is high. A supermarket is visibly a large scale business -meaning that it requires a big amount of capital to start. Furthermore, the products offered by a supermarket are numerous in variety.For every single product they would have to prepare legal methodologies of payment, storage, delivery, and shelf placement -this surely is a significant entry to the supermarket business is high. The last missing information is their product prices. I will record the prices of all supermarkets and perform statistical analysis to determine their price range. If the prices posed by the original supermarkets are similar to each other, then it is proven that they indeed do form a tacit oligopoly.The next part of the research would be comparing the price of the original supermarkets to the new supermarkets. Afterwards I shall perform identical mathematical analysis as before. If indeed the two results (the first being the price range of the original supermarkets alone and the second data being the price range f all supermarkets) are different, then indeed we would know that the original supermarkets of Bog have formed an oligopoly that segregated them.Diagram 4. 0 shows the Market with the original supermarkets segregating themselves and formed an entirely new team (oligopoly). This way, possibilities to compete better will open to them, e. G. A corporate pricing strategy. However, if their price range is similar, then we may conclude that all the supermarkets as a whole is an oligopoly and so the original supermarkets have not segregated themselves by making an oligopoly of their own. Diagram 4. Wows an oligopoly that includes both the original and the new part 5: Data Collection and Analysis Before proceedin g with the price analysis, I would like to strengthen my claim concerning the high entry barrier. Here are parts of two legal documents that concern opening a new supermarket business. Note that the documents are written in the Indonesian language (Bass Indonesia), thus the translations present are my personal attempt. Here is a transcript from the ‘Peered tenting Pentagonal Shah Industry Separate Bog [Regional Regulation Concerning the Managing of Industries in the Bog Region]':