Economics for Business: A Reflection of the UK Market

Table of Contents

Assumptions and Characteristics
Question 2
Question 3
Reference list

The type of market structure that seems to be operational in the United Kingdom raising concerns in the recent past from the Office of Fair Trading and Competition Commission is an Oligopolistic Market Structure. An oligopoly is a type of market that is dominated by a single class of sellers known as oligopolists. This is evidenced in the UK grocery industry by the fact that it is controlled by big supermarkets who work in collusion with suppliers to entrench and fortify their market positions. The grocery market being an oligopoly means that the participants in the market (oligopolists) are aware of each others actions thereby a decision made by one supermarket chain influences the decisions made by all the other supermarkets (The Economist, 2008).

Oligopolistic market structures often employ restrictive market practices to secure their interests as is one of the concerns of the office of fair trading and competition commission. Collusions are always made all in a bid to create stability in especially most markets that are considered unstable.

Assumptions and Characteristics

The characteristics of an oligopolistic market are as follows: First, entry and exit in the market. In a typical oligopolistic market like the case is with the grocery market in the United Kingdom, there are high restrictions to entry. The usual and most significant barriers of access to this market form include economies of scale, the behavior of incumbent firms to employ strategies that will push away entry by competitors and access of exclusive suppliers or technology in that particular market (BBC News, 2009).

Secondly, the number of incumbent firms operating in this industry is significantly few. The conduct of an individual firm in this market is watched closely by the other firms and greatly influences their activities as well. Actions in retaliation are therefore a common phenomenon in this set up (BBC News, 2008).

Thirdly, prices of commodities. In a market exhibiting oligopolistic tendencies, the firms set the price rather than accepting the existing prices and submitting into the demands of customers. This characteristic is perhaps the origin of the phrase oligopolists are price setters not price takers. This behavior is partly attributed to the fact they are always working in cahoots with each other to chart the destiny of the market.

Fourthly, is the market assumption is the fact that firms have perfect knowledge of all prevailing economic variables that not only affect them but also their counterparts. They have sufficient inter firm information and clearly understand their own cost functions and demand functions (BBC News, 2010).

Fifthly, oligopolist markets have interdependence of Firms. This assumption comes about because firms in an oligopoly are few and large operating their own chains or subsidiaries. The firms are interdependent by default and not by their own liking, this is because they are all aware of the influence they have on each other because as afore mentioned, the action of one player shall determine that of their counterpart. A good example is the case of price reduction, a firm that is considering reducing its prices will certainly consider its counterparts retaliating and reducing theirs even further. This firm will definitely back off this idea lest it wants to ignite a ruinous price tag of war the result of which all firms in the industry (including the one that started the war) will lose (BBC News, 2009).

Finally, is the issue of profits. Perhaps the most undesirable characteristic that make oligoplists be treated with so much contempt by other small players in the industry is the fact that they earn abnormal profits and that this profits are sustainable in the long run yet because of high barriers other firms are completely sidelined and prevented from entering in this market to partake of the profits (Office for National Statistics, 2009).

Evidence advanced by the Office of Fair Trading and Competition Commission in the United Kingdom justifiably describes and portrays the fact that the large supermarket chains are single handedly calling the shorts in the grocery market. The first evidence that is of concern is the presence of barriers to free entry into to the market, as discussed above this is a striking characteristic of oligopolistic tendencies. The main disadvantage of this preposition is the fact that this discrimination will result in the exploitation of the final consumer, as earlier observed, oligoplists are more of price setters rather than price takers, they may use their influence to lock out all other competitors and over price their products a burden which is borne ultimately by the final consumer (BBC News, 2010).

Other legitimate concerns raised by the commissions office include the absence of an effective competitor to check the large supermarket chains. This problem is compounded by the collusion that exists between the large supermarket chains; they have formed associations with suppliers of grocery and formed a network that makes the market virtually impenetrable. The strategic alliances seen between the supermarket chains and suppliers make the supermarkets the sole firms that have access to the products.

Question 2

What has generally been agreed to be partly the immediate cause of the economic downturn in the United Kingdom that resulted in the contraction of the economy by 4.9% is the bursting of the housing bubble, both in the United Kingdom and the Unites States of America. This was as a result of the high default rates that were witnessed in the Adjustable Rate Mortgages (ARM) considered to be sub prime.

Increased incentives and seemingly easy long term arrangements to pay for mortgages encouraged many individual potential home owners to take up mortgages. There was a general belief among home owners that they will quickly refinance their mortgage obligations on more favorable terms of lending. Interest rates however steadily rose against their initial thoughts and therefore refinancing became extremely difficult leading to tremendous defaults. There was suddenly a dramatic turn of events when easy terms witnessed earlier expired and home prices substantially failed (Sloman, 2007).

Another likely cause is the fact that there existed comparatively lower rates of interests a factor which encouraged massive borrowing. In the earlier years, the central bank reduced interest rates substantially, this also happened in the United States where the Federal Reserve is on record having reduced the target of the federal fund rate from 6.5% to a record 1%. This was largely seen as steps meant to check deflation.

Interest rates experienced a further downward pressure occasioned by rising deficits in the countrys current account. Such deficits required financing and this was mainly done through borrowings from abroad to those allies that had surpluses in Asia and the oil exporters. Subsequently there was increased demand for an array of financial assets while at the same time increased attempts of reducing the interest rates. Increase in the cost of these financial assets substantially raised the levels of inflation in the country.

In order to mitigate the effects of the economic downturn, there should be a number of both short and medium term responses that should include specific steps taken to increase the money supplies and therefore assuage any further possibilities of a deflationary spiral. The government must also move to moderate the situation through major stimulus packages and spend more resources to counterbalance the decline in consumption by the private division.

Government should also consider the bail out of specific strategic and major firms that are considered big employers and contributors to the countrys Gross Domestic Product (GDP). Generally prospects of a stable recovery are achievable through those main factors highlighted above and others such as enacting legislation that ensures financial institutions maintain sufficient contingent capital and restricting the levels of leverage they can adopt.

Question 3

Trade refers to the exchange of goods or service for a consideration. International trade is essentially this exchange done across the borders. There are a number of benefits that accrue to a country as a result of trading. These are discussed as follows: First, favorable Balance of Payment: A favorable balance of payment would arise when a countrys exports supersede its imports. When a country exports more than it imports (volume) or when the value of its exports is substantially higher than imports, this positive balance is maintained. Without cross border trade, it would be impossible for a country to improve its balance of payments. The balance of payment is an essential barometer in measuring the economic growth of a nation.

Second, increase in the Gross Domestic Product. The GDP of a state ascertains the total worth of both goods and services produced by that nation in a given period. GDP is the most important gauge of a countrys economic performance. The Per Capita GDP on the other hand measures the individual contribution of one person to the economy and is computed by dividing the total GDP to the total population. It can be argued that, without trade the entire concept of GDP will be baseless, the reason for this is that GDP in itself is as a result of values obtained from trade and therefore no trade, no GDP.

Third, the creation of Cross Border Understanding: Trade facilitates international relations. Diplomatic relations usually apply in ally countries that trade together. This argument is evidenced by what is seen nowadays when countries send their envoys abroad and station them in embassies in order to facilitate trade and other beneficial interactions between the countries. The net effect of this understanding is the maintenance of peaceful coexistence and harmony among member states (UK Government, 2010).

Fourth, the improvement in the standards of living: Trade enhances the living standards of the citizens of a nation. Through trade, a country is able to create employment opportunities occasioned by the establishment of industries that produce trade products. It is such employment opportunities that will enable citizens earn a living when they work in manufacturing, processing or service industries.

The principle of comparative advantage was advanced to signify the importance of specialization in the conduct of international business. Taken literally, it means a country should concentrate in the production of goods or services which it is best suited or which it has a comparative advantage in producing than its allies in trade. Assuming a country will spend less in the production of a food crop like coffee than say industrial machinery, then the company has a completive edge over others in the production of this crop and thus should emphasize this production rather than spend excessive resources in the production of machinery. The country is better off acquiring machinery from its trading partner than producing itself because of cost and logistical implications.

It is in fact the concept of comparative advantage that gave rise to advancements in international business. This is clearly manifested in the examples of such countries like Taiwan and Singapore with a comparative advantage in the production of a number of machinery and industrial products, they produce this items at a relatively lower cost of raw materials and labor and can thus export this to developing countries in Africa like Kenya and Tanzania. In return, since the economies of these developing countries are primary and majorly depend on agriculture, they in turn export agricultural products like coffee and tea to these countries. They spend less resource to produce these food crops than their counterparts in Asia.

Countries protect their domestic industries because of a number of reasons advanced one of which is the strategic industry argument: The United States of America for instance has protected its agricultural sector from completion brought about by the Chinese and the Brazilians. The US has achieved this through substantially subsidizing the cost of agriculture therefore making the market exclusive and impenetrable to any competitors. The essence of providing subsidies to its local producers is to ensure that their cost of production of the various agricultural products is substantially reduced. This will mean they will be able to sell their goods at cheaper prices as compared to competitors (Reuters UK, 2009).

Another reason for the protection of a countries industry is the Infant Industry argument. This is usually witnessed in the developing countries. Such countries would want to shield their infant industries (industries that are young and still in the delicate stage of their growth) from competition from those other countries whose industries are comparatively more developed. Since the production of textiles instance is fairly underdeveloped in a country like Kenya, the country may be tempted to issue quotas, embargoes or some other forms of trade restrictions to protect her infants.

The Anti Dumping Argument was effectively applied by the United States of America to prevent China from selling her tyres in its market. This is partly because China has come to be known of late for her production of cheap and substandard goods to be sold to especially the developing countries. Countries would ensure that their industries are protected from instances of dumping since this compromise the sale of locally produced goods (The Economist, 2009).

The above reasons coupled by others such as prevention of capital flight to other countries and creation of more job opportunities locally have made the concept of protection of local industries more justified.