Assignment Sample on Economics of Managerial Decision Making
Task 1
Introduction
The food and grocery market in the UK is expected to grow by 10% between 2019 and 2022 which would mean that the market would grow to approximately £211 billion. This is largely due to the impact of Covid-19 on the market, with the online and discount market shares being the primary components of growth. Online stores overtook hypermarkets in terms of valuation in 2020, and was the fastest growing channel in the year. Discount markets are looking to grow even faster, as consumers abandon brand loyalties and flock to Aldi and Lidl for discount offers.
- Grocery Stores in the UK are no longer open markets where grocers would sell vegetable, farmers selling eggs and bacon. Supermarket chains account for 95% of the total share of grocery shopping today. Tesco, Asda, Sainsbury and Morrisons, jointly referred as the Big-Four together account for approximately 68% of the market share of grocery stores in the UK as of January 2021 (Kim et al., 2021).
Value of Sales in Food Stores in Great Britain between 2011 and 2019, based on Index Number of Sales per Week. (Source: Office for National Statistics, UK)
- From the figure above, we can see that weekly retail sales index value in pre-dominant food stores has increased steadily over the years, with a minor fall between the years 2014 and 2015. The convenience of self-service and online shopping has maximized consumer convenience and preference. Wide-variety of products, efficient delivery systems, discount selling and aggressive store expansions have allowed Supermarket Chains to completely dismember small and medium scale businesses. Growing inflation and post-Brexit uncertainty has forced shoppers to shop at cheaper stores such as Aldi and Lidl (Wilshaw, 2018). In January 2017, Aldi overtook Co-op Foods to become the fifth largest grocery store in the UK. The Big-Four are facing price-competition, a tactic that was abandoned by the group in the 70s.
2a. Source: Kantar Group
Tesco’s wide range of products basically caters to all segments in the market, successfully attracting customers across income groups. Moreover, the company’s £3.7 billion acquisition of Booker in 2017 (Basso et al., 2018) integrated its supply-chain systems to supply products to convenience stores owned by their competitors. Critics fear that Tesco can resort to price-fixing to eliminate the market share of its competitors. Due to the lockdown, restaurants and pubs across the UK were closed- forcing consumers to cook food at home. This led to a massive spike in demand for groceries at a cheap rate, allowing discounters like Lidl and Aldi to make inroads in the UK grocery market.
2b.
The market structure of the supermarket industry is an oligopoly. Firms coordinate with each other to determine price and output. Tesco, Sainsbury and Asda together account for 57.5% of the total market share of Grocery Stores in the UK as of April 2021. Putting Morrison’s and Aldi into the mix, the share rises to a staggering 75.4%. Having an oligopoly allows consumers to enjoy the benefits of fixed prices, as prices set by firms do not change too much as each firm is aware that any price change will be met with immediate retaliation by their competitors (Thomas, 2019).
Economists calculate the concentration ratio of firms in an industry to assess whether it is an oligopoly or not. The fact that six firms in the UK own 75.4% of total grocery stores in the UK shows that the industry is indeed an oligopolistic industry.
2c. Comparing oligopoly with monopoly, duopoly, and perfectly competitive markets.
Monopolies can be defined as a single firm which produces goods with no close substitutes (for example, a conglomerate like Amazon does not have a substitute for its wide range of services and economies of scale) whereas in an Oligopoly several large firms produce similar (but not the same) goods. Both markets have high barriers to entry for new entrants.
A duopoly is a type of an oligopoly wherein two firms produce the exact same homogenous product (Chen and Chen, 2021). Just like a monopoly, there are no other firms apart from these two that offer the same or a close substitute to the good. There is a single market for the product and no other firms can enter the market. Unlike an oligopoly, firms cannot collude and coordinate their actions. If they collude, they become a cartel and act just as oligopolies. Duopolies can be classified into multiple types such as Cournot, Stackelberg and Bertrand. While the Cournot and Stackelberg models of duopoly differ in how the two firms make decisions on output, Bertrand model focus on price determination of firms. Bertrand duopolies can lead to a perfectly competitive market as well. A close example of a duopoly is the market for credit card payments, where Visa and MasterCard make up for more than 90% of the total market share.
In a perfectly competitive market, there are many buyers and sellers such that no single buyer or seller can have a considerable impact on the equilibrium output or price(Selcuk and Gokpinar, 2018). Products made by firms do not differentiate by much, there are no transaction costs and barriers to entry and exit do not exist. While Oligopolies offer differentiated products and ensure price rigidity, they do not allow consumers to have bargaining power. For instance, the top 5 supermarkets in the UK could agree amongst themselves to sell their breads at a higher price and not face strong backlash in the market. In a perfectly competitive market, consumers could simply shop elsewhere.
2d. Barriers to Entry in the UK Supermarkets
Primarily, there exists two major barriers to entry in the UK Supermarket Industry- (a) Massive Investments required to create effective distribution centres and efficient logistics networks to facilitate the supply chain of grocery stores and (b) the scale and scope required to maintain and manage multiple stores across the country. In order to manage the tremendous magnitude of daily orders in a single grocery store distribution centres worth hundreds of millions of pound sterling are required to supply to smaller convenience stores. Moreover, despite self-service and online ordering facilities, firms require adequate manpower in physical stores- especially during the holiday season.
Suppliers, local and foreign, try to sell their products to large supermarket chains even if they offer smaller margins than their independent competitors as these companies offer the benefit of assured and consistent payments. New entrants will find it difficult to compete with the size of large firms as they will not be able to reap the benefits of having multiple stores in a city..
3a.
The Global pandemic had an adverse effect on essentially every fragment of our society, notwithstanding supermarket supply chains. The supermarket sector in the UK comprises of a diverse range of large, medium and small businesses operating in a globally connected but fragile ecosystem (Trott and Simms, 2017). In order to maximize efficiency, stores operate using a just-in-time procedure wherein stores maintain stocks to last for a day as delivery systems ensure daily refilling. This is the most cost-efficient method of distribution as well as ensuring fresh produce for the consumer.
The system creates an area of uncertainty- what happens in the case of an unexpected variation? We observe that following the closing of the hospitality sector, grocery sales increased 14% by value and 13% by volume relative to the same time period in 2019. Prices in certain products were gradually increased, while some products saw severe hike in prices to offshoot demand. Restrictions on driver’s working hours were relaxed to facilitate transport of goods. The penalty on employees working for longer hours was removed and anti-trust regulations barring supermarket firms to collaborate together were relaxed as well. This led to better coordination and the industry survived the panic-buying spree.
3b.
Sainsbury’s was officially established in 1869, when John Sainsbury along with his wife opened a shop in London. Their motto was simple- “Quality perfect, prices lower.”The company has now grown over time, establishing itself as the second largest supermarket chain in Britain. Dealing with the pandemic, the company implemented crisis management protocols across their stores and distribution centres, analysing the measures taken by retail outlets in other countries dealing with the threat. Communication with suppliers and customers was essential to their crisis management plan.
Unlike most businesses, Sainsbury did not suffer from a decline in demand for their products and services due to the nature of their business. Stores were briefed with the adequate protocols required and higher-executives coordinated with the government to ensure order was maintained in the country. The diversified set of channels and brands helped Sainsbury in tackling issues of shortages in their stores. While certain brands ran out of supply, products rarely did. They actively recruited temporary and permanent employees to offshoot employment losses due to the pandemic as well as to counteract the spike in customers.
In order to maintain profitability, cost minimization and general sustainability, Sainsbury’s could focus on the following- Products with inelastic demand but of non-essential nature such as cigarettes, alcohol, and chocolates could be priced at higher rates, citing demand spikes (Mahode, 2017). This would have a great increase in profits for the company as well as mitigate any criticisms levied. Moreover, levies on these goods can be justified to allow citizens to make healthier lifestyle choices. Due to the nature of thesegoods, this would require some level of collaboration between supermarket chains as consumers could simply buy these products for cheaper without collaboration.
To minimize costs, Sainsbury’s could collaborate with other firms and coordinate their delivery systems and logistics such that efficiency is at its peak. Due to the pandemic, the government relaxed anti-trust regulations (Moran et al., 2020) and the supermarket chain should use this as an advantage to work with other chains and enjoy the benefits of a cartel. Moreover, payment of dividends was not carried out to ensure the company has funds to increase its infrastructure. While this did lead to losses in the financial market, this was a step in the right direction. These funds can be mobilized to assimilate stores and facilitate an integrated supply system with seamless flow of goods.
- Government relaxations and demand spikes have allowed the supermarket industry to grow despite being in a global pandemic. The sector did report paltry profits as additional costs were incurred to ensure stores and distribution centres were sanitized, workers were socially distanced and Personal Protective Equipment kits were acquired to minimize spread of the virus. Despite these issues, the industry can look to grow in the long term as the recruitment of employees from other sectors allows companies to acquire more stores and distribution centres across the UK and facilitate better delivery of goods and services.
The industry will grow after the pandemic, as collaborations between companies may cause worry to consumers. Higher executives have noted that they will adopt higher pricing in order to offshoot losses incurred to the pandemic, and this will thereby lead to surplus profits that were originally earned in the pandemic due to the surge in demand. The picture is clear- as the hospitality sector worsens, the retail sector grows more dominant (Antonetti et al., 2020) – one wave at a time.
Task Two
- Due to the pandemic, hand-sanitizer sales skyrocketed- leading to a surge in price. Hand sanitizers are efficient and easy to use and were advertised globally as the number one solution for the pandemic. Before the vaccines, anyone in the business of manufacturing hand-sanitizers was considered to be minting money by the day. However, to deal with the high demand, universities in the UK worked with the government to create large batches of locally produce hand-sanitizers (Dicken et al., 2020) which addressed the issue. Despite this, stores ran out of hand-sanitizers and people were duped into buying false products online. The regulatory barrier on hand sanitizers to be used by essential workers also posed a problem- these sanitizers required 70% Alcohol by Volume.
Due to the strong, negative demand shock and the mild positive supply shock, the price of sanitizers rose- from P1 to P2 in the diagram above, while the Quantity rose by a smaller amount- from Q1 to Q2. Essentially, dP>dQ.
Managers can use the models of demand and supply to analyse and better prepare themselves for future shocks in the market. For instance, if managers knew that the price of sanitizers would be at P2, they would try to increase manufacturing as much as humanely possible, and procure as much as they could in order to reap the benefits of the higher price. Moreover, this would better address the supply issue and reduce price, lessening the burden on the consumer. The firm would enjoy a bigger market share.
- The price elasticity of demand is defined as the degree of responsiveness of the quantity demanded of a product with a unit change in its price. It is measured by dividing the percentage change in quantity demanded by the percentage change in price. Generally denoted by ε, it ranges from negative infinity to zero. In absolute terms, the greater the price elasticity, the greater the change in demand subject to a unit change in price. If demand of a product is elastic, a change in its price will fetch a considerable change in the quantity demanded. However, if the demand of a product is inelastic, a change in price will have a very small change (if any) in quantity demanded.
From the above diagram, we can see that D1 is the case where the price elasticity of demand for X is inelastic. In this case, a substantial change in price (From P1 to P2) has a minor decrease in quantity demanded (From Q1* to Q2*). However, D2 shows the case of X having elastic demand. The resultant decrease in quantity demanded is much higher than the previous case, and is also greater than the change in price. Cigarettes are an example of an inelastic good, as consumers report that they are addicted to nicotine and thereby find it difficult to quit, despite increase in price. On the other hand, Soft-Drinks is an example of an elastic good. If Coca-Cola increases its price, consumers will simply shift to another brand such as Pepsi.
There are several factors that determine the price elasticity of a product. It primarily depends on the taste and preferences of the consumer, lifestyle choices, and the availability of substitutes. The elasticity of a product can have a considerable impact on its demand and supply. Managers must always ensure that the pricing strategy of products considers its elasticity. Governments impose taxes on products based on their elasticity- a major reason why alcohol and tobacco products are taxed exorbitantly compared to other goods (Thom, 2021).
3.
| Output (Units) | Total Revenue (£) | Total cost (£) | Profit (£) |
Marginal Revenue (£) | Marginal cost (£) | Change in profit (£) |
| 0 | 0 | 3 | -3 | 0 | 3 | N/A |
| 1 | 6 | 5 | 1 | 6 | 2 | 4 |
| 2 | 12 | 8 | 4 | 6 | 3 | 3 |
| 3 | 18 | 12 | 6 | 6 | 4 | 2 |
| 4 | 24 | 17 | 7 | 6 | 5 | 1 |
| 5 | 30 | 23 | 7 | 6 | 6 | 0 |
| 6 | 36 | 30 | 6 | 6 | 7 | -1 |
| 7 | 42 | 38 | 4 | 6 | 8 | -2 |
| 8 | 48 | 47 | 1 | 6 | 9 | -3 |
From the table, we can derive the economically rational equilibrium level of output- 5 units. At this level, MR=MC and there is no room for additional profits. Any output greater than 5 will lead Marginal Cost to exceed Marginal Revenue- implying that additional output is lessening profits while any output lesser than 5 will have Marginal Revenue greater than Marginal Cost implying that more profits can be increased by increasing output.
4a.
| Firms (down)
Choices(across)
|
Pollute | Do Not Pollute |
| Firm 1 | Firm 1 receives £50,000
Firm 2 receives £50,000 |
Firm 1 receives £5,000
Firm 2 receives £90,000 |
| Firm 2 | Firm 1 receives £90,000
Firm 2 receives £5,000 |
Firm 1 receives £70,000
Firm 2 receives £70,000 |
- b) From the given payoff matrix, it is clear that Nash Equilibrium is when both firms Pollute. The reason is simple- if the firms do not pollute, they run the risk of losing at least £45,000. Hence the solution without deviation is the first payoff matrix (Pollute, Pollute).
- c) The cooperative outcome is for both firms to work together and come to an agreement to not pollute- making them receive £70,000 each. This is also the best outcome as the collective payoff is the highest.
- d) Game theory is essential for managers to analyse the moves of their competitors in the market (Devece, 2019). It also allows them to make the best move for the firm, given the choices of all the other firms
5a) If Firm 1 has £10,000 to invest and it receives £11,000 at the end of 12 months, it should invest the amount only if it does not have an alternative guaranteed return on investment with a rate of interest exceeding 10%, compounded annually. Moreover, the rate of interest should not vary over a period of time.
- b)
| Project A | Project B | |
| Internal Rate of Return | 6% | 8% |
| Net present value | 88000 | 61000 |
Given the NPVs and IRRs of the two projects, we can see that Project A is the feasible project as it has a greater NPV – as the NPV and IRR method give contradicting results.
References
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- Basso, A., Bon, J., Tasker, B., Timan, N., Walker, M. and Whitcombe, C., 2018. Recent developments at the CMA: 2017–2018. Review of Industrial Organization, 53(4), pp.615-635.
- Chen, N. and Chen, Y.J., 2021. Duopoly competition with network effects in discrete choice models. Operations Research, 69(2), pp.545-559.
- Devece, C., Ribeiro-Soriano, D.E. and Palacios-Marqués, D., 2019. Coopetition as the new trend in inter-firm alliances: literature review and research patterns. Review of Managerial Science, 13(2), pp.207-226.
- Dicken, R.D., Gallagher, T. and Perks, S., 2020. Overcoming the regulatory hurdles for the production of hand sanitizer for public health protection: the UK and US academic perspective. ACS Chemical Health & Safety, 27(4), pp.209-213.
- Filimonau, V. and Gherbin, A., 2017. An exploratory study of food waste management practices in the UK grocery retail sector. Journal of Cleaner Production, 167, pp.1184-1194.
- Kim, S.H., Lan, H. and Dobson, P.W., 2021. Identifying price-leadership structures in oligopoly. Oxford Economic Papers, 73(1), pp.350-370.
- Mahode, N.D., 2017. A Study of the Behavioural Impact of the Imposition of a Tax(Doctoral dissertation).
- Moran, D., Cossar, F., Merkle, M. and Alexander, P., 2020. UK food system resilience tested by COVID-19. Nature food, 1(5), pp.242-242.
- Mortimer, G. and Grimmer, L., 2021. The rise and rise of Aldi: two decades that changed supermarket shopping in Australia. The Conversation, (22 January, 2021).
- Selcuk, C. and Gokpinar, B., 2018. Fixed vs. flexible pricing in a competitive market. Management Science, 64(12), pp.5584-5598.
- Thom, M., 2021. Taxing Tobacco. In Taxing Sin(pp. 87-121). Palgrave Macmillan, Cham.
- Thomas, S., 2019. Harmful Signals: Cartel Prohibition and Oligopoly Theory in the Age of Machine Learning. Journal of Competition Law & Economics, 15(2-3), pp.159-203.
- Tian, Q., Analysis on the Business Strategy of Tesco in the Chinese Market.
- Trott, P. and Simms, C., 2017. An examination of product innovation in low-and medium-technology industries: Cases from the UK packaged food sector. Research Policy, 46(3), pp.605-623.
- Wilshaw, R., 2018. UK Supermarket Supply Chains: Ending the human suffering behind our food.
Xiao, B., Chen, Q. and Yu, Z., 2021, April. Research on the Investment Value of Sainsbury’s. In 2021 6th International Conference on Social Sciences and Economic Development (ICSSED 2021) (pp. 108-115). Atlantis Pr
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