Question

I have identified Walmart's Neighborhood Market, a subsegment of Walmart, as an oligopolistic market structure.

I need to answer the following:

How would possible changes in the industry’s market structure (oligopoly) impact Walmart's business strategy for the Neighborhood Market in the future?

Keeping your current business strategy in mind in your response. ( current strategy being to underprice competition)

Cited resources and scholorarly studies are appreciated.

Answer 1

Reference 1: The dynamics of retail oligopoly

Authors : Arie Beresteanu   Paul B. Ellicksony   Sanjog Misra

Reference 2: http://thismatter.com/economics/oligopoly-game-theory.htm

The characteristics of an oligopoly are:

i) A handful of large-sized firms

ii) Significant initial investments and hence, high barrier to entry

iii) Fierce price wars

iv) Competition for market share more than for revenue

v) Economies of scale

Since Walmart's Neighborhood Market (WNM) faces an oligopolistic market,

one can assume that the competitors large-sized firms with deep pockets.

There is a minimum price Pmin for each good, below which no firm can sell.

So, they have 2 options:

1. Conflict - Each firm uses Game Theory and operates separately to decide its own price.

In the process, it has to guess what other competitors might do and maximise its own payoff.

Such a model is hard to build if the number of players is more than 5.

The firm with the most efficient cost structure wins, since it can undercut prices the most.

2. Cooperation - The firms get together and form a loose 'cartel', with a tacit understanding

and agree upon a certain price Pcar. This enables them to protect their profit margins.

The drawback of this strategy is that smaller players have a temptation to break the cartel

and decide prices below the agreed level.

3. Consolidation - After intense price wars, larger firms can try to acquire one of the smaller firms.

It helps to achieve economies of scale and reduce marketing & advertising expenses.