Revision:Oligopolies in Supermarkets Essay

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Analysis and evaluation of data

The main factor in an oligopoly is that there are only a few major competitors in the market. This is obvious in the UK supermarket industry, as there are three main companies (Tesco, Sainsbury's and Asda), although there are many smaller companies in the market.

All of the supermarkets carry similar products. Most food manufacturers, such as Kellogg's, Heinz and Bird’seye, will supply to all of the supermarkets. The only way in which supermarket's products differ is by each supermarket producing its own generic goods for some products, such as the Asda Smartprice range and Safeway Savers. However, many of these generic products are made at the same factory, and are simply labelled differently for the different stores, so this is a false differentiation of products. This means that all of the products available for sale in the different supermarkets are the same, which is another feature of an oligopoly.

One of the feature of an oligopolistic market is that firms compete on price, so that they can become a price maker and hopefully attract a larger market share. The UK supermarkets demonstrate this by having 'price wars', where one supermarket announces a range of price cuts in its products and the others follow. At the moment, Asda has a 'roll back' scheme, which has cut prices by around £0.5bn, and Tesco has also announced some price cuts, worth a total of £1.2bn. Each week Safeway announces a new assortment of 1000 goods that it is reducing, although this has been criticised as experts say that other goods in the stores have been increased in price to pay for this. Sainsbury's claims that there are many special offers on in its stores, but it came out as most expensive in my survey. It has also recently been said of Sainsbury’s "they have waited too long. If they were to put all their profits into price they would still be more expensive than Tesco" (see appendix of secondary data). Waitrose checks the price of more than 350 everyday items every week against other supermarkets, as part of its Price Commitment. Somerfield’s Megadeal campaign reduces the price of 300 items, although their “primary concern is to ensure that the overall 'basket' represents value”. In a previous price war, Tesco launched a range of price cuts worth between 3% and 25% of each product discounted. This lead to Tesco increasing its market share by 12% in eight weeks, although the other supermarkets soon followed and modified these gains. After this price war, Marketing Week calculated that the average consumer had saved £150 a year.

These features of price fixing and yet competing on price can be explained by the kinked demand curve theory. Above the market price (P○) the demand curve is elastic. This means that if one firm raised its prices, to P1, it would lead to a fall in total revenue, and so other firms will not follow. Below the market price the demand curve is inelastic, so if a firm lowers its price the others will be forced to follow, leading to price wars and a loss of revenue all round.

The market price is presumably reached by all of the firms colluding. Also, as any change in price will lead to a decrease in total revenue for the firm, there is no tendency to change prices, which means that firms could set prices as high as they wished and earn supernormal profits in the long run.

Supermarkets have to compete in other ways, besides price. Each supermarket has its own advertising slogan to create a sense of loyalty from its existing customers and to attract new ones. In 1994, Tesco spent £27.4m on advertising, followed by Sainsbury’s £25.1m and Asda £17.8m. Many of the supermarkets have their own loyalty card to reward their customers, and send out mailings and vouchers to loyalty card holders to encourage them to continue using their loyalty card. However, from my survey I found that only 5% of people chose which supermarket to use because of their loyalty card, although people may decide where to shop because of other factors and then still use a loyalty card. Supermarkets have extended their opening hours to make it more convenient for customers, with some, for example Asda, being open until 10 pm. This means that people who work late or need to do their shopping later will go to whichever supermarket is open at that time, which will increase the supermarket’s market share. Supermarkets are also competing by offering more facilities than just shopping. Some of the facilities offered include recycling centres, restaurants, petrol stations, banking and financial services, in store pharmacy, hire of glasses or other items for parties, crèches, although each supermarket tries to include a range of facilities unique to itself. As each supermarket has its own range of facilties, they can offer discounts or incentives to use those facilities. For example, Safeway gives customers a voucher for money off in its petrol station when they shop in store, and Morrisons operates a scheme where petrol station users can collect points for money off their shopping. Recently, internet shopping and home delivery has become more important, as more people are becoming connected to the internet. Thus supermarkets can promote their internet based services to encourage customers to use them and increase their market share. Also, as many people only do their shopping once a week supermarkets can offer home delivery free of charge or for a small fee, so that customers do not have to carry heavy bags by themselves. On top of this, some supermarkets such as Waitrose and Asda will offer help with shopping, including carrying it to the customers’ car and help with packing at the checkout. These non-price strategies increase product differentiation, thus increasing brand loyalty and making the demand curve less elastic, so in the future it becomes easier for firms to raise prices if they wish.

Comments

This was part of my A Level coursework on oligopolies in supermarkets. Unfortunately I only still have theis bit, but I got an A so i thought it might be useful anyway.