Market Structure in the British Supermarket Industry - Essay Example

Supermarkets in the United Kingdom: An Analysis of the Market Structure of UK’s Supermarkets Industry I. Introduction There are two main types of markets: the perfectly competitive and the imperfectly competitive markets. In a perfect competition, it is said that many sellers produce a standardized product, where no single firm can control the price of that product (Mendoza & Tapang, 2001). A single firm’s contribution of output in the market is insignificant, and can produce as much output at the given price level. This makes the demand curve faced by the firm as horizontal, where quantity produced does not affect the level of price for such product. Imperfectly competitive markets, on the other hand, are those where firms will be able to exercise some degree of influence over the market price. This is mainly caused by the presence of only few sellers, and/or products are differentiated rather than standardized. There are three varieties of markets with imperfect competition. These are the oligopoly, monopoly, and market with monopolistic competition. While the description above tends to characterize market structures based on supply conditions, demand situation can also influence the emergence of imperfect competition. According to Mendoza and Tapang (2001), the size of the market in relation to the production capacity of the firm is likewise important. II. Market Share of UK’s Supermarket Industry The supermarket industry in the United Kingdom is dominated by four giant retailers, with few smaller supermarket chains at the bottom quarter of the industry. These giant retailers capture about 76 percent of the lucrative market, reported to be about £95 billion in 2006 (Finch, et al., 2006). These companies dominating the industry are Tesco, Asda, Sainsbury’s, and Morissons, operating stores with floor space of 40,000 sq. ft. or more. These four are followed by the Cooperative Group and Somerfield (TNS Wordpanel, 2008). According to the TNS Worldpanel, the market share of supermarket players as of July 2008 is as follows: Tesco 31.20 Asda 16.80 Sainsburys 15.90 Morrisons 11.40 Co-op 4.20 Somerfield 3.90 Waitrose 3.70 Aldi 2.90 Lidl 2.30 Iceland 1.70 Netto 0.60 FarmFoods 0.50 Source: http://en.wikipedia.org/wiki/TNS_Worldpanel Source: http://en.wikipedia.org/wiki/TNS_Worldpanel III. Market Structure of the Supermarket Industry In the British supermarket industry, the market structure is such that few big firms dominate while smaller firms take up only a fourth of the market. These firms at the top of the ranks are responsible for about sixty percent of the British food consumption, half of which are supplied by Tesco and Sainsbury (Paisley, 1993). In a market of imperfect competition, individual firms are able to exercise influence of some degrees over the market price. This is because firms are few and the products are differentiated. This is true for the market structure of British supermarkets. There are a few dominant firms who have differentiated their product offer to the consuming public. Most likely, economies of scale and the decreasing costs contribute to the emergence of such market structure. In a monopolistic competitive industry, firms and competitors focus on market segments where they can meet customer needs in a superior way and command a price premium (Kotler, 1994). While supermarkets industry in the UK tends to be more of having an oligopoly as a market structure, a semblance of monopolistic competition also exists. This is most likely to be true since nowadays there are no market structure in its purest or generic forms, and most are have something of everything. In an oligopoly, a market has few sellers with each one producing a significant share of the industry’s output. Modern markets have oligopolists amidst their market structures. In the British supermarket industry, there are only four dominant firms, and half of them are catering to at least sixty percent of British food consumption. Many firms have specialized to cater to the special needs of the localities where they exist. Texco, for example, has many forms and styles of store layouts to cater to a differentiated market. Since different features of each market structure can be identified in the supermarkets industry, then it can be said that such industry has a hybrid market structure between oligopoly and monopolistic competition. IV. How Firms Behave in an Imperfect Market Due to the presence of few sellers and/or the products being sold by them are differentiated rather than being standardized, the demand curve facing a firm in an imperfect competition is negatively sloped or downward sloping rather than horizontal as in perfect competition. In an imperfectly competitive market, firms will have a supply decision that will consist of choosing both the output and the price corresponding to its profit-maximizing equilibrium. The occurrence of declining costs is contributing to the emergence of imperfect competition, as marginal cost and the average cost decline because of the presence of economies of scale, where a firm is motivated to increase profit by expanding production (Mendoza & Tapang, 2001). Indeed, a few firms have taken this path in the supermarket industry in UK, where profit motivation brought about by expansion and economies of scale are inducing dominant firms to acquire more stores. Weak firms are gobbled up by stronger firms, and the Competition Commission is up on its toes trying to balance criticisms against increasing monopolistic tendencies of supermarkets firms in the UK. V. Case Analysis: The Safeway Takeover The purchase of Safeway by Morrisons exhibited the tendency of the market structure towards monopolistic environment. The long struggle to acquire Safeway by major firms ended in 2004 with Morrisons coughing at least three billion pounds (BBC News, 2004). By doing so, Morrisons has been provided with more grocery floor space in Southern England. Acquiring Safeway offered the winning bidder a tremendous opportunity to double up its sales, increase its economies of scale, and become highly visible through the “ready-made” store spaces which otherwise would have been too expensive to build. Anti-monopoly policies of the British government, however, have forced Morrisons to sell some of its stores to ensure the promotion of competition among industry players. Other giant players such as Tesco, Sainsbury, and Asda have been prevented by the Competition Commission from bidding in the acquisition of Safeway to “prevent one chain wielding excessive power” (BBC News, 2003). TOTAL WORD COUNT: 1,027 References BBC News. Safeway disappears after 43 years. 23 November 2005. Available: http://news.bbc.co.uk/1/hi/business/4463882.stm [23 November 2008] BBC News. Morrisons in £3bn bid for Safeway. 15 December 2003. Available: http://news.bbc.co.uk/1/hi/business/3319601.stm [23 November 2008] Finch, J., Lawrence, F. 10 March 2006. Supermarket competition inquiry may break stranglehold of big four. Available: http://www.guardian.co.uk/business/2006/mar/10/supermarkets.frontpagenews [23 November 2008] Kotler, P. 1994. Marketing management: analysis, planning, implementation, and control. Prentice-Hall International. New Jersey, U.S.A. Paisley, R. 1993. Structure of industry, the economics of supermarkets: British survey report. Longman Group Ltd. (UK) Mendoza, L., Tapang, B. 2001. Introduction to economics. UPOU. Quezon City. Philippines TNS Worldpanel. 2008. Available: http://en.wikipedia.org/wiki/TNS_Worldpanel [23 November 2008] Read More