Business stragegy (Oligopoly): vertical integration/ potential benefits and costs/ potential anti-competitive effects – Case Study Example
Business Strategy The ability of a firm to withstand competition in a particular industry depends on the competent of its operations and its products. An analysis of a firm’s market position is an important part of strategic management of a business. Recently retail outlets such as supermarkets have been involved with the production and selling of their own products as a competitive strategy. This essay will therefore give an analysis of this strategy by the supermarket in the retail outlet industry.
The Bertrand Model is a useful tool in the analysis and determination of competition in a market, this model describes how firms and customers interact in a free market to set the prices of commodities (Parkin 212). According to this strategy, the supermarkets are involved in the production of homogeneous products and this increases rivalry among competing firms. Bertrand Model assumes that firms compete entirely on prices of their commodities and therefore competing firms will set a competitive price for their commodities (Hildebrand 139). By producing branded products, Australian supermarket are able to sell their products at a competitive price. Production of such item also guarantee the business a higher marginal profit making them sell their products at a competitive price.
According to Cournot model, competing firms use the volume of their production as a tool for competition (Daughety 33). According to this model the move by the supermarkets is aimed at increasing the firms output. The production is however constrained to the market equilibrium. Market equilibrium is the quantity of a product that fit a particular market at a given time (Hirschey 45).
The Australian competition and consumer commission has role to examine the practice. Supermarkets that produce and market their own branded item offer unfair competition to other producing firm and hence the issue is of interest to the commission. Such supermarkets are not fully subjected to taxation and hence they have a competitive advantage over producers of such commodities. The commission also needs to ensure that the supermarkets are not involved with the production of substandard commodities in its duty to protect consumers.
Although the strategy is aimed for competitive purpose, it has some anti-competitive effects. Supermarkets have settled for this strategy in order to reduce the various stages in the supply chain. Wholesalers are important players in the chain of distribution. Due to their large-scale operation, supermarkets are able to eliminate wholesalers from the supply chain. Production of branded commodities by supermarket removes wholesalers from the supply chain or reduces their role (Prentice 117). This move increases competition among wholesalers since there are only a small number of small-scale buyers.
The move is however beneficial to consumers since they are able to obtain products at a reduced price from the stores. Competition among different players in the industry also leads to a reduction of prices as implied by Bertrand model. As the firms strive to compete though output, excessive production results and this will lead to a reduction of price as implied by Cournot model. This strategy has great benefits to the supermarket since it enables them to produce commodities that are according to their customer’s specifications.
Daughety, Andrew. Cournot Oligopoly: Characterizations and Application. New York: John Wiley and sons. 2005. Print.
Hildebrand, Doris. The Role of Economics Analysis in the EC competition rules. Alphen: Kluwer Law international. 2009. Print.
Hirschey, Morgan. 2009. Fundamentals of Managerial Economics 9th Ed. Boulevard: Cengage Learning. 2009. Print.
Parkin, Michael. Microeconomics (10th edition). New Jersey: Prentice Hall. 2011. Print.
Prentice, David. 1998. Corporate Personality in the 20th Century. Oxford: Hart Publishing.