The Extent of Price Competition in UK Food Retailing - Case Study Example

Pricing in Practice: The Extent of Price Competition in UK Food Retailing According to the law of demand, as the price of a commodity increases, the demand of the product lowers; also, as the price of goods decreases, the amount of the quantity demanded goes up, holding all factors constant. As such, any shrewd business person will always try to keep his or her prices down if his or her goal is to increase sales. To compete effectively, sellers will always attempt to offer prices that are lower relative to those of their competitors. This brings out the concept of price and non-price competition in a market consisting of many players. Given the above, this research paper will review prices of five commodities from different sources. The paper will further delve into economic concepts such as monopolistic competition, oligopoly, cost-plus pricing, profit maximisation, price discrimination, loss leader, price wars etc as they appear relevant to the above research. The prices of commodities that the paper has researched on include a can of Coke, a 420g can of Heinz baked beans, a loose lemon, a 300g Mc Vitie’s milk and chocolate digestive and a 300g can of Tesco baked beans. From the research done, it is evident that price competition does exist in UK food retailing. The table below consists of prices of the above commodities. Commodity Price at a local corner shop Price at a local Tesco express Price at a local Tesco supermarket Tesco’s rival supermarket A can of coke 80p 60p 60p 60p (Waitrose) A 420g can of Heinz baked beans 75p 68p 68p 70p (Waitrose) A loose lemon 35p 30p 32p 32p (Waitrose) A 300g Mc Vitie’s milk and chocolate digestive £ 2. £ 1.50 £ 1.75 £ 1. (Sainsbury) A 300g can of Tesco baked beans 48p 45p 45p 45p (Waitrose) Total £ 4.38 £ 3.53 £ 3.80 3.07 The local store from which the prices were researched enjoyed a local monopoly as there were no corner shops, convenient stores or supermarkets nearby. Most of its prices were inflated as the village mostly consisted of middle class to wealthy households, apart from the fact that the store enjoyed monopoly. The term ‘monopoly’ is a Greek word that stems from mono meaning one, and polein meaning selling or to sell (Dwivedi, 2006, p. 382). The monopolist is a firm that exists in an environment with no competition. The monopolist is the price maker, he determines the price; this is evident in the research. The economy has been particularly hard on most local corner shops and many in this area have since closed. Nevertheless, this corner shop has survived this economic turmoil and has established itself as a local monopolist. The store researched on is a family run business and has been around since the 60s. The local populace especially people aged 40 years and above derived a sense of affiliation to the corner shop as they had grown with it. One key characteristic of monopoly is brand affiliation. One of the older customers who had been in the area since the 70s felt that every time he was in the shop; memories of his youth were rekindled. Similar connections are derived by many other customers. His only concern was the prices of food stuff in the shop that seem to always be on the increase. From the above research, shopping at Tesco’s rival convenient stores in this case Waitrose or Sainsbury would have been cheaper for the above basket of goods. Prices at the local Corner shop were the most expensive followed by those offered by a Tesco supermarket (Tesco express). Homogenous oligopoly is prevalent as we review the above basket of goods. Oligopoly is a form of market organization in which there are few sellers selling homogenous or differentiated goods. (Dwivedi, 2006, 383) As many smaller retailers are closing shop due to their inability to compete with bigger convenient stores such as Tesco, the stage for an oligopolistic market has been set. Sainsbury employs loss leader as a price competition strategy. One of their snacks, a 300g Mc Vitie’s milk and chocolate digestive costs only one pound compared to £ 1.75, £ 1.50, and £2 at Tesco express, Tesco and at our local corner shop respectively. Though this price is relatively lower compared to what others are offering and most likely have a lower profit margin level, it is meant to increase sales of other commodities sold at Sainsbury. The aim of the loss leader pricing strategy is to keep old customers, attract new ones and increase sales. On the down side, if the strategy is not implemented correctly, it will lose money. Through this strategy, businesses can move unwanted merchandise, build their brand and attract repeat customers all this aimed at profit maximization (Strauss, 2012, 120). To be effective, the loss leader must be placed at a convenient spot in the store. Sainsbury understands this and the 300g Mc Vitie’s milk and chocolate digestive is placed just next to other digestives that cost as much as £3. Another characteristic of loss leader is that it must not encourage stock piling. The product must also lead customers to buy other commodities in the shop. Sainsbury achieves this by placing the 300g Mc Vitie’s milk and chocolate digestive opposite other snacks. This would encourage a buyer to buy the digestives with other snacks placed nearby. Through the research, price wars on who is offering the cheapest prices is rampant, this is a common characteristic of oligopoly. With the death of most small stake holders in the UK food retailing industry, the big five convenient stores such as Tesco and Sainsbury currently hold the biggest market share. One of the biggest characterizes of oligopoly is that there are very few sellers. With fewer merchants, any action by one firm influences what the other business does. Each firm has to be constantly on the watch of what the other is doing. Less than a week ago, prices of the 420g can of Heinz baked beans were the same with the exception of the local corner shop. At the time of our research, the prices at Tesco had dropped by 2p, another characteristic of oligopoly were firms are price setters. While this may appear insignificant, the margins can really add up. For a firm to realize the profit maximizing output quantity, the total revenue must exceed the total cost. Given a list of revenues and cost, we can compute equations or even plot the data on a Cartesian plane. Our profit-maximizing output should be what this difference reaches when on its maximum. An alternative approach relies on the fact that, for every unit sold, marginal profit should be equals marginal revenue less marginal cost. If marginal cost is less than the marginal revenue at some level the marginal profit should be positive. This holds that a greater quantity should be produced and sold. Alternatively, if marginal cost is greater than marginal revenue, then the marginal profit will be negative. This holds that a lesser quantity of the commodity should be manufactured (Sloman, et al, 2006, 80). Based on the above approaches a firm can determine how much profit they are going to make on the sale of their products. This brings us to the concept of cost plus pricing. Many businesses often have a difficult time in determining a reasonable marketing price. Cost plus pricing can be used to determine a suitable price of any commodity. Cost-plus pricing starts with an estimate of the cost incurred to build or produce a service and add a certain percentage to establish the price (Sloman, Wride & Garratt, 2012, p. 101). Though this concept may appear simple often it becomes difficult to determine which cost to include. Whether to include manufacturing overhead, variable product cost etc becomes an issue. Tesco cooperation employs price discrimination as a way to compete in the market. Based on our research, there are commodities that are cheaper at Tesco but are slightly expensive at a Tesco associated supermarket. From our basket of goods, the loose lemon is offered at 30 p at Tesco and 32p at a Tesco associated supermarket. Price discrimination sometimes referred to as price differentiation is a strategy in which identical goods are sold at different prices by the same seller in different territories or markets (The Supermarket Battleground, 2008, p.1). The aim of this pricing strategy is to ensure that the seller extract all the revenue they can from a particular group of buyers with the aim of profit maximization (Heisinger, 2008, p.56). It is atypical to find higher prices being offered at particularly affluent neighborhood relative to those offered at deprived or poor neighborhoods. This paper has reviewed economic concepts such as price discrimination, oligopoly, price wars, loss leader and cost-plus pricing. Based on products that were contained in the basket of goods, these concepts have been further discussed. The paper begins with the research of prices of five commodities from a local corner shop, a convenient store, a supermarket associated with the convenient store and a rival convenient store. The prices of the commodities researched on include a can of Coke, 420g can of Heinz baked beans, a loose lemon, a 300g Mc Vitie’s milk and chocolate digestive and a 300g can of Tesco baked beans. These commodities make up our basket of goods. The prices of these commodities are further analyzed to determine the extent of price competition in UK food retailing. From this research, it is evident that price competition is strife in UK food retailing. Bibliography DWIVEDI, D. N. (2006). Microeconomics: theory and applications. New Delhi, Pearson Education. HEISINGER, K. (2008). Introduction to managerial accounting. Boston, Mass, Houghton Mifflin. TRAUSS, S. D. (2012). The small business bible everything you need to know to succeed in your small business. Hoboken, N.J., Wiley. SLOMAN, J., & SUTCLIFFE, M. (2006). Economics for business. New Delhi (India), Pearson Education. SLOMAN, J., WRIDE, A., & GARRATT, D. (2012). Economics. Harlow, England, Pearson. The Supermarket Battleground. (2008). Retrieved from Read More