- BARRIERS TO ENTER/EXIT THE MARKET: The barriers to enter and exit the supermarket industry remain high for firms. The typical barriers that new firms must overcome are:
- HIGH PROFIT MARGINS: Many of the supermarkets in the industry already are extremely profitable businesses and have had great success for a long period of time. For example, Tesco acquired a revenue of £955m just last year alone and profits of around £500m. This makes it difficult for new firms to enter the market as it is difficult for them to compete with the level of innovation and technology that is evident from the bigger firms due to their high profit margins which they are able to invest into the firm.
- HIGH SUNK COSTS: Renting a store to sell products in as well as employing staff and finding suitable suppliers can be an expensive and difficult job for new firms when many of the firms in the market already have acquired large business spaces and are able to pay staff higher wages from the amount of profit they gain and low costs they achieve from economies of scale.
- HIGH RISK: The risk of entering this market is high for new firms. There is little chance they would be able to compete with the dominating firms in the market as the concentration of the market leaves them little market share. This is particularly true with Tesco's monopoly power at 28.47% dominating the market massively over new, smaller firms.
- PRICING POWER: UK supermarkets, as part of an oligopolistic market tend to have some control over price to an extent but price is mainly dictated by the shifting of the demand and the supply curve. Because of the fact that it is easy for consumers to find a substitute in this market (as a result of the homogeneous products within the market, indicated before), supermarkets tend not to be price setters but rather, price takers. This is because if they were to price their products from their own accord and price them too high, it would be easy for consumers to look elsewhere in the market for what they need and this would consequently divert sales from their own firm.
...However, sometimes, the biggest firms in the market act together to set prices of certain products. This is called collusion. Despite this being illegal, in the past, supermarket firms have been fined for the collusion of the prices of products such as milk and cheese. While this does make more profit for the supermarket firm, it reduces consumer welfare as they are charged higher prices and exploits farmers/suppliers of the produce to the supermarket as well.
- INFORMATION: Despite being a monopolistic market, information in the supermarket industry is freely known by both consumers and producers as both parties have an understanding of what other firms are doing and the prices that they charge. An example of this from the past history of the market is Tesco's first introduction to loyalty schemes solely in the supermarket industry in 1994 when they introduced the Clubcard scheme. This was shortly followed by Sainsbury's own loyalty scheme in 1996 and later Morrison's and ASDA, giving an example of how information was circulated in the market and was available for other firms to copy and benefit from.
- Supermarket firms tend to advertise with non-price competition strategies eg. loyalty schemes. This is because of the fact that their prices tend to be the same or similar between the firms and therefore, leave them the option of finding other ways to differentiate their business from their competition in the market rather than through competitive pricing strategies.
- Supermarket firms also tend to have quite low prices despite being a monopolistic market. This is because, over time, the dominating firms have benefitted from economies of scale in terms of having modern technology, specialised labour and financial benefits which mean that they are able to keep their production costs at their lowest. It is reported that from 2012 to 2016, food prices on average fell between 12% and 13% for consumers and this is as a result of firms being able to use their large market share to keep business costs low.
THE IMPACT ON CONSUMER WELFARE
How can consumers benefit from the existence of an oligopolistic supermarket industry?
- Due to the existence of non-price competition in the market of grocery store firms as a result of their similar prices, consumers can benefit from the high innovation and technology this brings to their shopping experience. For example, many supermarket firms have introduced new home delivery services and self-scanning services, maximising the welfare of consumers as it improves their shopping experience and the efficiency of the service they receive from these firms.
- As a result of the success of the leading firms in the market, consumers can also benefit from the economies of scale that supermarkets gain. For example, managerial economies of scale achieved by supermarkets with the division of labour from the stocking of the shop to customer service allows customers to benefit from not only lower prices but a better quality of service received. Additionally, financial economies of scale achieved by supermarkets through negotiations of cheaper deals from suppliers also benefit consumers from the price reduction of some products.
How can consumers lose out from the existence of an oligopolistic supermarket industry?
- The biggest disadvantage of the oligopolistic supermarket industry to consumers is the existence of collusion. Big firms working together to set higher prices for the benefit of their own profit margins reduces consumer welfare in that consumers are being exploited by the price of certain products and may have to spend a bigger percentage of their disposable income on typical household needs, leading them towards lower living standards etc.
- Consumers also lose out from the fact that the barriers to enter and exit the market are so high. This tends to mean that less firms attempt to enter the supermarket industry from the difficulty of competing with such big firms which are located all over the country and are never far away from an ideal location for a local convenience store. Therefore, customers are provided with less choice of the goods they can buy and the goods can become less available to them on a local level.