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Industrial Economics Case Study Notes

Economics Notes > Industrial Economics: Market Structure Notes

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Joven Liew Jia Wen 12001778

Industrial Economics I: Case Study The supply of groceries in the UK market investigation Q1: Describe the market that is being investigated in your competition case study (e.g. nature of good, number of players, geography, etc). Make sure to provide the facts and link to your economics terminology. Oligopoly market (a few large and dominant firms with many small firms)
Large grocery retailers that carry a full range of grocery products namely Asda, Morrisons, Sainsbury's, CGL, M&S, Somerfield, Tesco and Waitrose
4 largest grocery retailers: Asda, Morrisons, Sainsbury's, Tesco
The 4 largest grocery retailers account for just over 65% of total grocery sales in 2007
There are other regional grocery retailers, symbol group retailers, convenience store operators, limited assortment discounters, frozen food retailers
nature of product: homogeneous (groceries such as food, pet food, drinks, cleaning products, toiletries and household goods are similar in different stores)
many consumers, none large relative to market
High barriers to entry that constrain competition in grocery retailing by impeding growth of competitors Ex. Cost advantages that large grocery retailers have over other grocery retailers and new entrants Planning regime for grocery retailing Control of land by large grocery retailers that may frustrate competitor entry into local markets

Q2: What are the competition concerns that the competition authority is investigating (i.e. what are the theories of harm)? Be specific to the case for example, don't just say they are looking to see if merger has or may reduce competition. Be careful to talk about what they hypothesis the problems are/were at the start of the case rather than what conclusions they reached (more on that later).

(a) What is the competition issue?

Joven Liew Jia Wen 12001778 90% of all larger grocery stores are operated by 8 large grocery retailers. There is a high concentration of market power between the 4 largest grocery retailers (Asda, Safeway, Sainsbury's, Tesco in 1998). This results in prices of groceries higher in the UK than in comparable EU countries. Presence of market power can lead to the abuse of dominant position as the firms carry out exploitative and exclusionary behaviour For instance there may bePredatory pricing with persistent selling of some products below cost distorted competition and damaged smaller grocery retailers and convenience stores, thereby adversely affecting elderly and less mobile customers, who tend to rely on smaller retailers (Predatory pricing is a form of strategic barrier to entry and it is an anticompetitive conduct)Practice of varying prices in different geographic locations where these locations seem to be not related to costsBehaviour of the five grocery retailers towards suppliers seem to be against public interest as wellLand holdings of large grocery retailers and their use of restrictive covenants could be used to reinforce their existing market position (High barriers to entry determine the market structure directly according to SCP model and this will affect the conduct and performance of the firms, resulting in a restriction of effective competition. Barriers to entry are conditions that allow the established firms to earn abnormal profits without attracting entry. This is probably a structural barrier.)Buying power of major grocery retailers increased and this may harm consumer choice by undermining viability of alternative business models

Thus, there is a need to investigate if there are features of the market that are suspected of distorting or preventing competition. (b) What economic analysis/tools/methods are used to investigate the issue?
The competition authorities used several measures of market concentration to determine whether there is a high concentration of market power. These include measuring the number of competitors in a market, the relative size of competitors as measured by sales shares (either by revenue or volume) and indices, such as concentration ratios or the HerfindahlHirschman Index, which reflect both the number of firms in a market and their relative size. In addition, the competition authorities use the ACS model and look into?Features of the allgrocerystores product market Extent of concentration in local markets for grocery retailing and its impact on the retail offer Barriers to entry and expansion in grocery retailing due to cost advantages of large retailers

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