Pricing Strategies in Different Market Structures

This assignment compares the pricing strategies of two companies operating in different market structures. Tesco, a supermarket chain facing perfect competition, must lower prices to maintain market leadership. British Petroleum, an oil company operating in an oligopoly, benefits from price interdependence with competitors. The analysis explores how market structure influences pricing decisions and product portfolio considerations for each company.

Running head: MARKET STRUCTURE
Market structure of Tesco and British Petroleum
Name of the Student:
Name of the University:
Author note:

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Executive summary
The purpose of this report is to analyse the market structure of two different competitive market
structures of two different companies. The report analyses the pricing strategies, cost curves,
elasticity of goods and portfolio of goods that Tesco sells. Another company in the market
structure of oligopoly has been analysed. Tesco being in perfect competition faces a challenge
that they have to lower their price to remain in the market leadership where as British
Petroleum’s oligopoly market structure helps them in building a price by mutual interdependency
with their competitors. Reviewing the companies in their pricing strategy, elasticity of goods,
cost curves and their competitive pressure are also analysed in the following report.

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Table of Contents
Introduction......................................................................................................................................4
Discussions and analysis of Tesco and British Petroleum...............................................................4
Conclusion.....................................................................................................................................11
Reference.......................................................................................................................................12

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Introduction
The following report contains the analysis of the two organisations. Tesco and British
Petroleum. Both of the company are based on United Kingdom. The competitive structure of the
companies are analysed in the following discussions. Based on the analysis their pricing strategy,
elasticity of goods, cost curves and their competitive pressure are also analysed in the following
report. The two companies selected for analysis belongs to two different market structure
(Barreto 2013). Tesco belongs to a perfect competition and British Petroleum belongs to an
oligopolistic market. The elasticity of goods provided by TESCO is different to British
Petroleum. Therefore, different type of economics factors influences the market as well as the
companies (Kumar and Siddharthan 2013).
Discussions and analysis of Tesco and British Petroleum
TESCO
1. Price theory
The pricing theory of companies is based on the competitive structure, demand, and supply of
the market. The super market Tesco operates in a highly competitive market in United Kingdom.
Though the market has more than 30% of share, they cannot be labelled as monopolistic industry
(Kumar and Siddharthan 2013). A monopoly is where the company dominates the whole market
or the industry. However, by the regulation of UK the company cannot operate in monopoly, as
it is a hindrance in healthy competition (Kumar and Siddharthan 2013). The UK grocery market
consists of perfect competition. However, the markets have some major competitors like
Sainsbury, Morrison and Asda. ASDA is second largest food chain in UK according the market
share data.

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Figure : Supply vs. demand curve
Source : (Barreto 2013)
Figure: Price takers firm the equilibrium market (perfect competitive market) demand and supply
is same.
Source: (Kumar and Siddharthan 2013)
The interaction force of market determines Price of the commodities. Equilibrium price occurs
when market have equilibrium demand and supply (Yang and Ng 2015). Tesco faces competition
in pricing as it is determined by the market demand and supply. The market penetration in UK
grocery market has high risks for new entrants (Kumar and Siddharthan 2013). Though Tesco
applied multiform non-pricing strategy to capture the market, they were forced to lower its cost
due to financial problems.
British Petroleum

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1. Pricing theory
British Petroleum is known as the market challenger in the oil and gas industry. The industry has
different competitors that have saturated the market. The company faces price competition.
Major players like Royal Dutch shell corporation, Exxon, Chevron dominates British Petroleum
faces oligopoly as the industry (Wetzstein 2013). The interdependent decision making of the
prices of oil and gas of the company helps them having the upper hand in controlling the market.
The entry barriers help them in being the consistent with the feature of competitive strategies.
Pure oligopoly in the market of oil and gas are highly influenced by the OPEC (Oil and
Petroleum Exporting) (Wetzstein 2013). OPEC authority does the price fixing and market
sharing and other price related policies. The exchange rate of the country plays a major role in
the building the pricing foundations. The crude oil and gas demand is also dependent on the car
industries (Wetzstein 2013).
TESCO
2. Elasticity of goods
Elasticity of goods is dependent on the demand and supply of the goods and their reaction to the
changes in prices. Therefore, the elasticity is dependent upon the demand of that product (Yang
and Ng 2015). If there is slight change in price leads to huge change in demand of the product, it
is considered a highly elastic product. Tesco belongs in a perfectly competitive market.
Therefore, elasticity of demand of its product is less. The change in prices of grocery will lead to
less change in demand of those products (Wetzstein 2013). As grocery cannot be consumed by
the people in excess. The recent change in the company’s pricing to increase its market reveals
that the company is facing challenges in terms of grocery sells. There are many kinds of goods

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like normal goods and normal necessities, inferior goods, luxury goods. All this kinds of goods
are having different kind of elasticity. The super market has portfolio of different kind of
products. Based on the prices demand elasticity of the products changes. The grocery and
vegetables prices (Fresh vegetables, fruit juice, instant coffee, shampoo, natural cheese,
toothpaste, detergents) would not affect the demand, as these are less elastic products (Yang and
Ng 2015). However, the demand of alcohol is very elastic in nature, which can be influenced by
the prices changes. The luxury brands of clothes and goods are also elastic in a supermarket. The
substitutes of the products sold in Tesco can influence the demand of the product. As less cheap
products can replace the products and brands sold by the company.
British Petroleum
1. Elasticity of goods
Oil and gas’s demand is said to be elastic. If there is small change in price the demand of oil and
gas increases slightly. Demand of petrol is quite inelastic. As there is no alternative of petrol, the
product does not have threat of any substitutes. The income elasticity of demand is very much
affected by the price changes. Increase in prices of oil and gas can lead to loss of market share of
the company. British Petroleum has a lot of market power. The company is dependent on the
government regulation to change the prices accordingly (Barreto 2013). As the government
revises the set price, the economy of the country affects the pricing strategy. The goods that the
company sells is less elastic in nature. The demand of oil and gas can be interpreted to be less
elastic as it does not change with the price.

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3. Cost curve
Tesco belongs to the perfect competition market. If the demand increases for the industry, the
price will increase. Therefore, the average revenue curve will shift upwards and profits will
increase. Increase in firms cost will decrease the revenue of the company. The average cost curve
of the company will increase if the firm cost increases(Silva 2016). Thus, there will be loss in the
firm, this will cause the supply to fall, and the prices would increase.
Figure : firm’s cost curve
Source : (Fuss and McFadden 2014)
Figure: industry cost curve
Source: (Fuss and McFadden 2014)

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The total cost of production of the company for Tesco is dependent upon sourcing the material of
the company (Xie 2016). The fresh foods, vegetables of, and clothing’s brands are the source of
cost included the delivery cost of the company (Shepherd 2015). The change in variable cost is
dependent on the rise in the market demand and supply of products. The average revenue of the
company is dependent upon the average cost of the products. The variable cost is dependent on
the packaging, sourcing, and transportation of the products (Silva 2016).
British Petroleum
1. Cost curve
The cost curve is the pictorial depiction of the cost of production of the product. The cost of
production of the company is must be efficient. To produce a barrel of oil it costs up to 53 dollar
in UK. The economic theory of cost says that the market is competitive if they are parallel
upward shift in the marginal cost and supply and demand curve (Jones et al. 2016). However, the
crude oil is sourced through the oil mines and countries with rich resources of oil, the cost of
refining and making it usable by the engines and producing other side products and
transportation costs are bore by the industrial players like British Petroleum, Royal Dutch Shell
and others (Shepherd 2015). As discussed earlier company is in oligopoly where the few
competitors decide the price by considerations of mutual interdependency. The International
monetary fund raises questions on the price of oil (Shepherd 2015). The oil exporters of the
company revise their policies regarding the oil as this affects the economy of the oil rich
countries of the world like Saudi Arabia, Bahrain and Oman. As evidence, the huge turnover of
the companies reveals their structure of profit maximisation (Hyman 2014). As the exchange rate
of the countries affects the pricing strategy of the company, the marginal cost changes with the

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change in variable cost. According the basic cost curve graph, the total cost and total variable
cost changes with a decreasing rate at the initial stage and then increases at an increasing rate
(Rios et al. 2013). Therefore, the company’s marginal cost also increases with the factors
affecting the changes like exchange rate, increase in variable cost of transportation.
4. Competitive pressure
Tesco has a market share in UK near about 30%. The main competitors in this industry are
ASDA, Morrisons and Sainsbury. The companies are also involved in price war, which makes
the demand decrease (Andreu et al. 2016). As Tesco is headed to profit maximisations, it affects
their pricing strategy. The price rigidity of the products are affects the market demand of the
company (Hyman 2014). Tesco’s pricing and non-pricing strategy helps the companies in being
ahead of its rivalry (Alexandrov et al. 2014). Tesco is the market leader of the industry. The low
prices help them in having a competitive edge in the market. Market domination of the large
retailers in UK is most important part preventing other new challengers to enter the market (Balk
2013). The barrier to enter the markets is high. Having also the advantage economies of scale has
served the company well too (Fuss and McFadden 2014). The competitive commission of UK
presented competitive test to make the whole industry more effective in nature. According to the
competition act 1998, this sector in US has gone different scrutiny, Tesco has been ordered to
implement divesting remedies in the company (Rios et al. 2013).
British Petroleum
Competitive pressure

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Oil and gas have a very competitive market in the UK. The huge capital investments make it
huge barriers for the companies to enter the market (Hyman 2014). In addition, the huge turnover
makes the competition among the industry very efficient in cash flow; British Petroleum yielded
around $ 25 billion in the year 2015 (Rios et al. 2013). The company has cost leadership as they
as they are at an advantage of having the lower cost than its competitors have have have. The
main competitors of British Petroleum are Royal Dutch Shell plc, Halliburton, Transocean,
Exxon Mobil Corporation, and Chevron Corporation, the most important competitors
(Alexandrov et al. 2014). As an oligopoly is affecting the prices and position of the competitors
in UK is quite different from the competitive structure of perfect competition faced by Tesco.
Where the company is faces challenges in lowering their price (Francetich 2013).
Conclusion
Therefore, it can be concluded that the companies in different industry with a different
market infrastructure faces different problems regarding the pricing strategy based on elasticity
of their products or the portfolio of products. Tesco being in perfect competition faces a
challenge that they have to lower their price to remain in the market leadership where as British
Petroleum’s oligopoly market structure helps them in building a price by mutual interdependency
with their competitors. The two-market structure is different and dependent on the industry
regulations. British Petroleum is dependent upon the regulation to set the price of their product
where as TESCO is dependent much on the consumer behaviour of the company. The two
companies have different position in their respective industries. Tesco goes by the cost
leadership and British Petroleum goes by the oligopolistic competition in the market.

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