British supermarkets - oligopoly case study

The UK has had four 'big supermarkets' since the 1980's. The market changed from one where the largest retailer held just 7% of the market to one where the largest, Tesco' had more than 25%. The chart below shows the 2014 market shares (the article linked below has a more up to date set of data, which you should compare).

Note that while there is technically a 'Big Four' the relative market shares of the four vary considerably.

Economic theory tells us that in the oligopoly market structure there are significant barriers to entry and firms are highly interdependent. It also tells us that there is a strong likelihood that firms will avoid damaging price wars because they fully understand their mutual interdependence and they all loose if they compete on price.

The article below describes how Asda are loosing both sales and profits as the market fights exactly the sort of price war we have been led to believe won't happen. This is because there are several players trying to gain additional market share. This is Aldi and Lidl, who are aggressively expanding.

So what is wrong with the oligopoly theory in this case? Actually nothing. There are strong barriers to entry in this market. The existing players have strong brand loyalty and occupy many prime locations, and they have the money to fight by advertising and discounting. However Aldi and Lidl have the money to fight too.

The barriers to entry are not high enough to prevent them entering the market and engaging in a price war. Their tactic is to sell cheap, the existing supermarkets like to emphasise quality as well, but that isn't enough to stop them.

The supermarket market is contestable if you have the financial reserves to obtain the stores and accept low profit margins. 

Who are the winners? Consumers are getting lower prices as a result of this competition, also the 'monopoly power' of the biggest players is falling which will make it harder to raise prices in the future. 

Who looses? The existing firms for sure. However suppliers of the supermarkets are coming under pressure to cut their prices so the supermarkets can cut theirs due to the market power of supermarkets as buyers. There are already stories of farmers who cannot survive on the prices they receive and other firms feeling 'bullied' to cut prices or lose the contract.

The BBC covers the story here

Work out the changing four firm concentration ratio in this market. Google can provide charts that show shares that go back further than 2014.

This article is most appropriate for IB students who require a firm understanding of how oligopoly markets might work and need examples they can compare to theory. VCE students do require a knowledge of market structure and so it is still useful for them.