The advantages and disadvantages of the UK supermarket industry

The advantages and disadvantages of the UK supermarket industry to consumers

According to Anderton (2008:322), ‘An oligopolistic market is one where a small number of interdependent firms compete with each other.’ In addition, he also states another four main characteristics of it, such as ‘Non-price competition’; ‘Price rigidity’; ‘L-shaped average cost curves’ and ‘Collusion’. Based on this theory, the UK supermarket industry can be a prime instance. BBC NEWS (2007) reports that ‘Tesco, Asda, Sainsbury’s and Morrisons control almost 75% of the UK market’. The shares are illustrated below: Source: (BBC NEWS, 2008)

It can be seen from Figure 1, the majority of the grocery resources are held by these four supermarkets from 1998 to 2008. Especially, Tesco possesses over 30% in 2008. This reveals a clear situation of the British supermarket industry which is dominated by the four leading companies. Furthermore, in most cases, price plays a slightly less significant role between their competitions. Instead, there are another eight schemes which these companies focus on, including ‘internet shopping services’ and ‘extension of opening hours’ (Tutor2U, 2007). Theses are the non-price competitions that aim to maintain the stability of prices. BBC NEWS (2007) claims that these four powerful supermarkets negotiated to determine the price of diary goods which is relatively high. Another research of the food prices done by Telegraph (2010) also declares that ‘But while consumer prices remain high, wholesale prices have since declined.’ Both of these reports have proven that the big four supermarkets in the UK colluded with each other to form a cartel in order to hang the prices at an invariable level to gain monopolistic power and profits. Having said this, an oligopolistic market is likely to create a periodic price war, at least in the short run. Companies will have to anticipate the competitors’ next action before altering their pricing strategy. This is because every firm in an oligopolistic market has certain degrees of market power and mutual interdependency (Anderton, 2008). Game theory is more than often being used to deal with the pricing strategy given others actions and outcomes. The kinked demand curve of an oligopolistic firm also suggests an important theory, that the company should follow its competitor to reduce the price but maintain it when its competitor starts to increase the price level (Anderton, 2008). In fact, the similar situation exists in the UK supermarket industry. Daily Mail (2009) reports that Asda reduces the price of bananas, Tesco and Sainsbury’s follow to maintain as many customers as possible. In brief, the British supermarket industry possesses the characteristics of oligopoly; it therefore should be described as an oligopolistic market. This paper will firstly to prove that the UK supermarket industry is an oligopolistic market. Secondly, to explore the advantages and drawbacks of it to consumers, and to provide a brief discussion of their causes. Finally, to evaluate the extent of the oligopolistic market that tends to be beneficial to consumers.

The competition between oligopolistic firms will certainly bring considerable advantages. Firstly, consumers may benefit from the non-price competition. Tutor2you (2007) lists eight instances of their non-price competition strategies. The most effective and influential ones are online shopping services and 24 hours shopping services. A BBC NEWS (2007) report claims that ‘The amount of money spent by consumers shopping online increased by 33.4% to £10.9bn last year.’ This figure shows an increasing number of consumers prefer to make purchases online. Figure 2 reveals a continuous increase in online consumption as well. Moreover, this research claims that convenience and cheapness are the main contributors of this increasing consumption. In addition, extending opening hours spurs the consumption as well. Consumers now have the option of a more flexible shopping time schedule. Without lowering the prices, the one that offers longer opening hours will favorably attract more customer preferences.

Source: (BBC NEWS, 2007)

Secondly, consumers are likely to benefit from the price war. As mentioned above, Daily Mail (2009) reports that ‘the banana prices hit 14-year low.’ This is because Asda decided to lower its price, and it directly affected the other three supermarkets as they are interdependent. The kinked demand curve suggests that to avoid losing a large portion of customers, the firm should follow a price reduction. As a result, the average price of bananas in the UK started to decrease. Consumers are now able to purchase per unit bananas at lower prices.

However, the oligopolistic market structure also brings certain drawbacks. According to BBC NEWS (2007), the dairy prices in British supermarkets are relatively high and there is an approximately 270 million pounds overpayment from the consumers during a two-year period. Another data produced by Telegraph (2010) shows that the consumer price of a loaf of bread raised 0.1 pound whilst the wholesale price of wheat dropped 86.5 pounds per tone. It is evident that the dominating supermarkets in the UK have large economy of scale and are price makers. The oligopolistic supermarkets are turning the consumer surplus into their own profits, while consumers have no choice but to bear the higher price level.

Furthermore, despite these high levels of prices, there are also little substitutes for the consumers to purchasing. BBC NEWS (2008) claims that this is because the four big supermarkets possess the majority of market resources and thus the barriers for an extra company to join are significantly high. This issue is seen particularly critical given that fact that not all the customers from every corner of the British soil receive the same quality of services. A solitary county may not be covered by the home delivery services and yet they are still paying the identical prices like everyone else are. High barriers prevent the entry of smaller supermarkets which may otherwise provide better services.

In conclusion, the supermarket industry in Britain is indeed an oligopolistic market. Its own characteristics create several advantages and disadvantages. Based on the above discussion, consumers may benefit from both the non-price competition and price wars. However, the abnormal market share of these firms generates the incentive of collusion to capture consumer surplus for monopolistic profits.

REFERENCES:

Anderton, A. (2008). Economics (5th Edition). Harlow: Pearson Education.

BBC NEWS (2007) [Online] Grocery probe eyes local markets.

Available at: http://news.bbc.co.uk/2/hi/6289479.stm (Assess date: 02/02/2010).

BBC NEWS (2007) [Online] Online retailing ‘surging ahead’.

Available at: http://news.bbc.co.uk/2/hi/business/6690397.stm (Assess date: 02/02/2010).

BBC NEWS (2007) [Online] Supermarkets ‘fixed dairy prices’.

Available at: http://news.bbc.co.uk/2/hi/business/7004054.stm (Assess date: 02/02/2010).

BBC NEWS (2008) [Online] UK supermarkets set for shake-up.

Available at: http://news.bbc.co.uk/2/hi/business/7245944.stm (Assess date: 15/02/2010).

Daily Mail (2009) [Online] Supermarket price war as banana prices hit 14-year low. Available at: http://www.dailymail.co.uk/news/article-1218177/Supermarket-price-war-banana-prices-hit-14-year-low.html (Assess date: 17/02/2010)

Telegraph (2010) [Online] Food prices rise as supermarkets accused of profiteering.

Available at: http://www.telegraph.co.uk/finance/personalfinance/consumertips/household-bills/6645454/Food-prices-rise-as-supermarkets-accused-of-profiteering.html (Assess date: 15/02/2010).

Tutor2U (2007) [Online] benefits of competitive markets.

Available at: http://tutor2u.net/economics/content/topics/competition/competition_importance.htm (Assess date: 04/02/2010).