Analysis of TESCO's Market Structure in Management Economics (2024)

This report delves into the market structure of TESCO, a prominent retail brand in the UK and globally, using the framework of managerial economics. It examines TESCO's operations within the context of both oligopoly and monopolistic competition, highlighting the competitive dynamics and strategic decisions influenced by these market structures. The report identifies TESCO's position in the UK grocery market, characterized by a few dominant players, and analyzes the interdependence among firms, barriers to entry, and the evolution of market structures over time. Furthermore, it contrasts the current oligopolistic environment with the historical context of monopolistic competition, discussing how changes in the business landscape, such as business scale and digital advancements, have shaped the market. The analysis includes discussions on how market structure influences firm behavior, including pricing strategies, competitive responses, and the impact of government interventions. The report concludes by assessing the optimal market structure for TESCO and its implications for strategic decision-making.

Management
Economics

Contents
INTRODUCTION.......................................................................................................................................3
TASK 1.......................................................................................................................................................3
TASK 2.......................................................................................................................................................3
TASK 3.......................................................................................................................................................5
TASK 4.......................................................................................................................................................6
Determining optimal market structure.....................................................................................................6
Government Interventions.......................................................................................................................7
CONCLUSION...........................................................................................................................................7
REFERENCES............................................................................................................................................9
Books and Journals..................................................................................................................................9

INTRODUCTION
As per the definition propounded by T.J. Webster, “Managerial economics is the
synthesis of microeconomic theory and quantitative methods to find optimal solutions to
managerial decision-making problems?” Through this definition, it can be interpreted that
Management economics is that specialized branch of Management which involves major and
minor economics concepts as well, for the facilitation of better strategic and administrative
decisions. In this report, the concept of Microeconomics related to different market structures
have been analyzed, in alignment with the managerial decision making for a very popular retail
brand of not only United Kingdom, but of entire World, TESCO.
TASK 1
TESCO is one of the largest grocery retailer store of the United Kingdom, and also
counted as one of those topmost retail brand in the entire world. Its outlets are being sold in all
major continents of the world and the supply chain that TESCO has maintained has well off
connectivity in far reaching areas as well, where businesses of this nature is successful. This has
been possible because of the time and money invested by company in growing as well as
maintaining its services. Also, because of the experience that this has gained in more than a
century, since inception of the company in 1919. Not limited to just grocery operations, as of
now, TESCO have made success in product diversification as well. Also, it has expanded in
operating numerous stores across the world. The motive with which TESCO works is entirely
customer oriented. Company highly believes in customers satisfaction and customer happiness. It
also believes that, this approach of expanding business operations is more cost effective than
acquiring new businesses and properties.
TASK 2
TESCO is the largest grocery store in the market of United Kingdom. However, the
company is not free of competition and there exists many close competitors of company, like
Sainsburry. TESCO is one of the largest stores in grocery retail market of United Kingdom and
with existence of close competitors in this market, the market is seen regulated by these large

firms, holding majority of the stakes in this market. Therefore, the structure can be seen like
much of the Oligopoly (Gnanakumar, 2017). Although it is worth to be noted that, these firms
are not only operational in the market of United Kingdom, but in international market as well.
All these firms have good stakes in market and operate in much closer competition with each
other. Now, since it is understood that the nature of businesses and firms in this market have
made up relevant market structure in this industry, also it can be seen that limitations and nature
of this market also implies over this firm and induces them to behave in a particular manner.
Therefore, nature of firms makes up the market and nature of Oligopoly market channelizes
behavior of these firms in market. It can be comprehended in much better manner, if one studies
the characteristics of market and the business operations of firms in one alignment. This is
attempted in the report.
Few sellers- This is the foremost characteristics of Oligopoly market, where there are only few
sellers operational and all of them exercise a significant control over marketing activities. This
can be seen where big tycoons of grocery store market are exercising major control over market
operations in retail industry of United Kingdom, businesses here include TESCO and Sainsburry.
This is the prior characteristic of this market. Also, these businesses have significant operating
scale and sizes, thus they have prominent market shares in this industry, however TESCO is
most significant among them and holds market share of no less than 20%. But, that does not
mean that these companies are operational in the market freely with their own market share
(Mehra, 2019). Meaning, it is not like that these companies serves their individual market shares
independently, but they intend to compete with each other and try to snatch market shares of
each other. Hence, competition is also seen stiff.
Independence of firms- This is another important characteristics of this market. As, there are
many important and big firms are operational in this market structure, they exercise good control
over market and holds major market shares in the industry. Also, at the same time they compete
with each other for expanding their market operations and profits of business, and try snatching
each other’s market share. In this manner, there exists a stiff competition among them. Due to
this reason of stiff competition in the market, firms are seen getting dependent over each other.
This can be explained, for example, Sainsburry, a close competitor of TESCO brings a policy
change in pricing where it intends to use penetration pricing policy for entering in to new

markets. With this objective Sainsburry is intending to expand its business operations. TESCO,
as a close competitor of Sainsburry will be watching this step of Sainsburry keenly and it will
also brings a similar policy change or will apply some other strategy, where it will also try to
expand its business. The main reason behind such move of TESCO is that, if it will not bring
such policy change in its mechanism, the company can be seen losing major market share to
Sainsburry and its profit shares will be falling down comparatively. Many consumers can also be
seen shifting towards Sainsburry due to its evident growth in the market. Hence, interdependence
between firms is necessitated (Geras’kin and Chkhartishvili, 2017).
Barriers to entry- Barriers to entry is that characteristic of this market where entry of new firms
are seen restricted. There can be many reasons in a market, because of which new firms cannot
enter into that market. There can be legal, governmental and environmental barriers. In the
context of Oligopoly market, where, TESCO is operational, barriers to entry exists in business
environment. Like the barrier of investment. Although, the industry is called grocery retail
industry, but there are not local departmental stores but big Multinational corporations, having
significantly large scale businesses, operating various stores worldwide. Therefore, they have
significant investments and if any new player is intending to compete with them, then that new
entrant will also be required to pool such investments. Next big barrier in this line, is the
competition itself. TESCO and similar established business players have put efforts of years and
had bring strong market worthiness and trust of consumers. Firstly, new entrants will be required
to put extra efforts for attracting consumers and establish worthiness in the market, which will
again be requiring investments on advertising and marketing strategies. Secondly, TESCO will
also be keeping watch over these moves of new entrants and then will be trying its best to save
market, making everything more challenging for new players. Hence, there exist environmental
barriers over entry of new firms in the market.
TASK 3
In this section of report, it has been analyzed that, the market in which TESCO is
operating, and the market structure of oligopoly that is currently prevailing in this market, have
had any different structure in history or not. That means, the business firms that are currently
operating as big retain businesses and competing with each other stiffly in this market have been

part of some different market structure or not. In this manner, it can be said that, grocery retail
market have grown significantly and expanded kits market after many business developments
that has occurred in business environment with time (Wang and Werning, 2020). These include
grown nature of business scales and sizes, and also the digital developments that have led to
online delivery system of grocery markets. Also, the investment levels have facilitated the
operation of multiple big departmental stores across borders. This has created the emergence of
Oligopoly market structure in this industry. But, before these developments appeared in business
environment and played their effective role in transforming market structure, big tycoons like
TESCO were also not evident, and neither stiffness in competition was evident at this scale. At
that time, there were many small scale business players, selling similar type of products with a
little differentiation in products. However, these players also competed with each other but the
stiffness of competition was not that much, as seen oligopoly where competition creates
interdependence of firms over each other. Therefore, the market structure of that time was
Monopolistic competition. The report has attempted to comprehend this market structure and its
alignment with business nature of TESCO at that time, while discussing each and every
characteristics of the market structure.
Many buyers and many sellers- Unlike Oligopoly, in Monopolistic competition there are many
sellers and many buyers in the market. These sellers are available with their products, which are
almost of same type but can have little differentiations in them. On the basis of this
differentiation in products, branding of products are made by sellers through which consumers
are seen attracted. But, the buyers are also having good knowledge about the available products
inn market and they make procurement decisions after making full and thorough analysis about
the available products in market (Ara, Ghosh and Zhang, 2017). Therefore, at such time TESCO
was not facing that big threat from the competitions, because the business scales and sizes were
not that big, and also consumers were well aware of the available products in market.
Low barriers on entry and exit- This is the most prominent characteristics of this market
structure. That there are no significant restrictions over entry of new players and also there are
incur of significant losses or any other restriction over exit of new firms. This can be seen in
current market structure of Oligopoly, where TESCO is operational. In current structure there
exist barriers of Investments and competition. As new players are not available with significant

investments and capabilities to compete with existing players efficiently. But, in Monopolistic
competition, there no such barriers seen on entry and exit of new players. This is because the
levels of investments required are not that big and business scales are not that higher. Similarly,
as all buyers in market are supposed to having sufficient knowledge about products and the
prices, then competition levels are also not considerably higher (Dhingra and Morrow, 2019).
Supernormal profits- There comes time, in Monopolistic market when firms are seen making
supernormal profits, because of the any strategic changes that they bring in business operations.
Through these strategic changes, firms are seen making supernormal profits, although for a short
time, but to a considerable levels in that time. For example, of TESCO brings a little
differentiation in the product that is helpful in bringing more values to the consumers than any
other product in this market. Then, at that time TESCO will be seen making huge gains as
majority of the consumer base will turn their faces towards TESCO. But these gains will be for a
short while as all other players in the market will quickly bring similar changes in their products
and of this consumers will be having sufficient knowledge as well. Ease of bringing these
changes before other players can be noted from the fact that differentiations in products are not
that big and significant, and also investments requirement will be smaller, within the capacity of
all other players. In this manner, the differentiation offering more values to consumers, will sopn
become part of new normal in the market as a whole (Thisse and Ushchev, 2018).
TASK 4
Determining optimal market structure
In the above discussions in the report, two market structures has been discussed, in which
TESCO was operational at different prods of time. Also, these structure themselves has been
influencing over channelization of behavior of business operations in TESCO, and TESCO also
levied good impression of its business operations in creating character of these market structures.
But, from the discussion it can be seen that Oligopoly market structure seems to be more
beneficial for the company. Also, this structures forms most necessitated requirements of modern
time. This can be understood from the following points:

Competitive strategy- Under the Oligopoly market structure, TESCO is seen focusing keenly
over the strategies of its competitors, through which also helps framing its business policies in
that manner. This characteristic of Oligopoly market structure ensure that TESCO always
remains in the mainstream of the industry and keep gathering profits along with gaining
competency. Also, under this market structure TESCO will be aware of all necessary moves and
developments that helps its business to grow and offer more values in its products for consumers.
In this way, new heights in business will be ensured for TESCO (Parenti, Ushchev and Thisse,
2017).
Stable pricing- As seen, in Oligopoly market structure, all the business players keeps a close
watch on the policies of competitors and try framing their own business policies accordingly, so
that they can remain in the mainstream of business environment. In this manner, all business
players are seen enforcing competition over each other, and induce each other in remaining in
main stream of business. Also, through this mechanism no business player and manipulate
pricing in market as well. As, if one player will reduce the prices, than all other players in market
will be reducing the prices, which will establish as new normal for the market. In this way,
market will automatically start operating at low costs. Similarly, opposite to this, if prices are
raised that entire market will start operating at higher cost and consumer bases will be affected as
inflation will trigger in industry as a whole.
Government Interventions
As the market structure for TESCO is an oligopoly market structure. Therefore
in this market government intervention is not suggested in all types of businesses and firms.
The most important reason is because there is high degree of competition. All firms are highly
motivated to create range of value additions in their products, so that they can present their
products in best values before their customers. Also there are strong motivations for value
addition in firms. Dynamics of these motivations are high and very efficient, and all firms are
seen equally participating here.
In case, when there is absence of government intervention completely for TESCO in
oligopoly market, then situation is considered good. As there will be free competition and free
flow of market forces, driving variants of growth automatically. But, it is good as long as
there is no collusive oligopoly. Collusive oligopoly is one where two or three firms in market

makes cartels and decide to operate together. Here, these cartel firms make such policies to
erase other firms from market and establish their joint monopoly in market. Therefore, in case
of Cartel competition faced by TESCO in market, then government interventions are required
to sustain healthy competition in market, where no firm could gain unhealthy and illicit
dominant position over other and every player is provided equal opportunity too carry
business and earn profits (Escrihuela-Villar and Gutiérrez-Hita, 2019).
CONCLUSION
From the above discussion it can be concluded that, Market structures and the nature of
business operations in the firm are very well co-related with each other. Both of them are seen
giving impulsive force and stimulation to each other. This was comprehended in the report when
discussion was carried over Oligopoly or prevailing market structure in the business environment
of TESCO. Here many characteristics like barrier to entry of new firms highlighted that market
structure as well as business operations are seen completing each other. Secondly, the discussion
over historical market structure of this industry helped understanding the manner in which
transformation have occurred in this industry, and also the factor that has given boost to this
transformation. At last, discussing governmental interventions, provided the insight about
relevance and extent of government interventions in this market.

REFERENCES
Books and Journals
Gnanakumar, B., 2017. Vicious Cross-licensing Strategy for Technology Spread: Case Study of
Samsung Electronics. In International Business Strategy (pp. 301-315). Palgrave Macmillan,
London.
Mehra, P., 2019. Samsung smartSSD: Accelerating data-rich applications. Proceedings of the
Flash Memory Summit.
Geras’kin, M. I. and Chkhartishvili, A. G., 2017. Structural modeling of oligopoly market under
the nonlinear functions of demand and agents’ costs. Automation and Remote Control. 78(2).
pp.332-348.
Wang, O. and Werning, I., 2020. Dynamic Oligopoly and Price Stickiness (No. w27536).
National Bureau of Economic Research.
Ara, T., Ghosh, A. and Zhang, H., 2017. Tariffs, Vertical Oligopoly, and Market Structure.
RIETI.
Dhingra, S. and Morrow, J., 2019. Monopolistic competition and optimum product diversity
under firm heterogeneity. Journal of Political Economy. 127(1). pp.196-232.
Thisse, J. F. and Ushchev, P., 2018. Monopolistic competition without apology. In Handbook of
Game Theory and Industrial Organization, Volume I. Edward Elgar Publishing.
Parenti, M., Ushchev, P. and Thisse, J. F., 2017. Toward a theory of monopolistic
competition. Journal of Economic Theory. 167. pp.86-115.
Escrihuela-Villar, M. and Gutiérrez-Hita, C., 2019. On competition and welfare enhancing
policies in a mixed oligopoly. Journal of Economics. 126(3). pp.259-274.