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Sunday, 16 October 2011

Oligopoly Case Study

News of tough economic times ahead could be one of the driving forces behind a possible price war between Asda, Tesco and Sainsbury's, among others. The supermarket market is prone to have price wars frequently, particularly ahead of seasonal periods. This article here, explains the strategies used by Asda, Tesco and Sainsbury's, yet competition is getting stronger with European supermarkets Aldi and Lidl increasing their market share (measured by the concentration ratio). Apparently there is no price war going on, yet if consumer prices get lower and lower in the coming weeks, we may have to reconsider what really is happening.

This is a good case study to use and gives you an idea about oligopolistic markets at work.

Supply Side Economics

Supply side economic policy is a set of government initiatives that aim to improve the economic performance of markets and industries. Policies tend to be more microeconomic because they focus of individual economic agents. Policies aim to:

· Increase competition within markets
· Increase efficiency within markets
· Increase the economy’s potential production – PPF/LRAS (see here for more)

Supply side fiscal policy

· Creating personal incentives to improve economic performance of the supply-side of the economy
· Since 1979, supply-side fiscal policy had been used by Labour and Conservative governments
· Supply-side economists believe that high levels of government spending, taxation and borrowing lead to crowding out (see below) of the public sector.

The intended effects of supply-side policies are shown below:

It is the free market view that supply-side policies should be used to increase efficiency and competition within markets.

Crowding out

Resource crowding out

Assuming there is no spare capacity in the economy and full employment of all resources, resource crowding out is when employing more labour and capital in the public sector sacrifices the use of the same resources by the private sector. Resource crowding out does not happen when there is spare capacity in the economy because government spending can be seen as ‘picking up the slack’ of the private sector. The private sector can be stimulated and crowding in can occur.

Financial crowding out

Increasing taxes to facilitate for high levels of government expenditure reduces the spending power of private sector firms.