Supermarkets and Economic Theory

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Discussion on Economics and UK Supermarkets: For A Level Economics

Types of Market Structure

An oligopoly: this is a market where there are a few large firms which dominate an industry. In this case U.K. Food Retailing. It is characterised by differentiated food retailers with well known brand names; such as Asda, Morrisons, Sainsbury and Tesco.

There are ‘barriers to entry’ which make it difficult for new entrants to come into the market and compete with existing firms. The big UK supermarkets may make supernormal profits, in the long run, because of barriers to entry.

Reference: Wall, N. (2003), Complete A-Z Economics Handbook, 2nd edition, London: Hodder Arnold

Concentration and Concentration Ratios

This measures the market share of the largest firms in an industry. A four-firm concentration ratio would measure the market share of Asda, Morrisons, Sainsbury and Tesco. In 2011, these four supermarkets had a combined share of 76 percent of the UK grocery market.

Barriers to Entry

Monopolies have market power. The basic model of monopoly suggests that there will be higher prices, inefficiency and a misallocation of resources.

Features that lead to Barriers to Entry in the UK Grocery Market

Capital costs: the purchase of an independent shop is cheap so it should be possible for a ‘new entrant’ to enter the industry. In practice, the threat of potential new entrants ; in the supermarket industry is limited. Major supermarkets can offer special offers, vouchers and longer opening hours to prevent small stores from competing. The reader needs to decide whether it is legitimate for a supermarket to offer special offers at the expense of independent shops. However, there is a problem that some shops, which may be thought of as independents by consumers, are in fact owned by the major supermarkets. Recently, there has been the growth of shadow brands in the UK grocery sector. Tesco has also been criticised for selling products on Amazon and masquerading as a small business.

Scale economies: supermarkets can buy more cheaply from manufactures compared with the independents. This is because they can offer to buy in greater quantities from the manufacturers; therefore the manufacturers will offer to sell for lower prices. The problem comes when there are anti-competitive practices: supermarkets may be prepared to reduce prices for enough time to ‘drive out’ new entrants or existing businesses.

Natural advantages: for firms, such as having good retail sites. Britain's supermarkets have used a fall in property prices to acquire sites for shops.

Legal barriers: large food businesses will find it easier to comply with food safety standards.

Firms can establish barriers through advertising and marketing. Smaller firms will find it expensive to advertise given their size; whereas Britain's supermarkets can spend a lot of money on advertising.

The growth of monopoly, and market power, and the affect on consumers

Supermarkets have been criticised for charging high prices to consumers. The supermarkets counter these criticisms by stating that they are in intense competition with each other; after acquiring smaller businesses. Supermarkets have benefitted from local monopolies. It is argued that where there are monopolies; prices are higher, than in areas where customers have a range of shops from where they can buy their food.

With monopolies there is arguably a misallocation of resources with the expansion of out-of-town hypermarkets and their associated depots. Such depots have to be paid for, and their costs have to be passed onto consumers. Arguably, efficiency is reduced if food is transported large distances, across the country. This is in contrast to local food being produced for local retailers.

Potential benefits from monopoly are ‘economies of scale’. As stated earlier, large retailers find it easier to negotiate with manufactures and so secure lower prices from them. These lower prices could be passed onto consumers.

The supermarkets have pioneered with internet delivery systems. Such systems have required much investment based on retained profit which has been re-invested in the business. These methods of internet related delivery could be socially acceptable; in terms of providing food for people who may have poor access to food. Also, it may be environmentally acceptable if supermarket vans replace shoppers’ car journeys to supermarkets.

There is potential harm to consumers with less choice as independent shops, and rival chains, have been forced out of business. Consumers could suffer from reduced choice if speciality businesses, such as local independent stores, are unable to compete. There is a possible poor allocation of resources as consumers do not have consumer sovereignty in the face of having to buy from large supermarkets.

The impact on manufactures:

Manufacturers may benefit from dealing with fewer distribution outlets.

Alternatively, they may suffer from increased bargaining power from fewer retail outlets, i.e. more powerful supermarket groups. The manufacturers have had their prices forced down as supermarkets negotiate more strongly with them.

There are resource allocation issues, perhaps with manufacturers producing a narrower range of goods to conform to a supermarket chains needs. Manufacturers could perhaps sell a wider range of goods if they were selling to a wider range of outlets.

The implications for retail employment:

The growth of supermarket food retailing has come at the expense of independent shops. In the present day, there is the possible loss of cashier jobs with this work being replaced by self-scanning tills. This is an example of technological unemployment.

Reference: Anderton, A., (2008), Economics: Fourth Edition, Harlow: Causeway Press

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