Competitive Nature of Supermarkets

This essay will look at what a perfectly competitive marked is whilst giving the assumption made to characterise it as this. It will also look at the long run equilibrium and how it is achieved in costs of production, profit and output. Oligopoly will also be defined and ways in which its decisions will affect its rival touch on the barriers of entry.

Non-price competition will be explained in depth with the main 2 elements involved and the characteristics of these. Furthermore it will identify and explain the major forms of non-price competition in today's major supermarket stores which are Morrisons, Tesco, Asda and Sainsbury's and the differentiation used to enhance themselves in the eye of the consumers. There will be a few suggestions into methods used which can help them to differentiate themselves from the competition.

i) A perfect competition is the most competitive market imaginable. Sloman (2007) states that there are very many firms competing and that each firm is so small relative to the whole industry that it has no power to influence price and is therefore a price taker. All the firms share the same product and the same market knowledge and enjoy free entry/exit to and from the industry.

They are price-taker s and sell as much of the product as possible at the market price. "The market price is determined by the interaction of the market demand and market supply of a product" (Ezeala-Harrison, F.1999)

Output is set where marginal cost equals marginal revenue. In the long run, average revenue equals marginal cost and firms enjoy only normal profits.

Perfect competition is built on a model of four assumptions.

1) Each firm has its own share in the market meaning that it is too small relative to the overall market that it will not be able to affect the price of the product. Each individual firm is assumed that it is a price taker.

2) An identical product must be produced meaning that it must be homogeneous and standardised and has no advertising or branding for it.

3) There are assumed to be no barriers to entry & exit of firms in long run - which means that the market is open to competition from new suppliers. Existing firms are unable to stop new firms setting up business. The long run equilibrium for a perfectly competitive market occurs when the marginal firm makes normal profit only in the long term.

4) Producers and consumers must have perfect knowledge of the markets in which information about the prices all sellers in the market charge. If some firms decide to charge a price higher than the ruling market price, there will be a large substitution effect away from this firm.

If a typical market was making supernormal profit in the long run then new firms would be attracted to price and attempt to enter into