Does the Dominance of the Big Four Supermarkets Hinder and Damage Competition and What is in the Best Interest of the Consumer?
Introduction
Competition is the best way of ensuring the interest of market stakeholders (Stucke, 2013). Competition in the UK grocery sector has become an issue with the big four supermarkets controlling around 71.7 percent of the market. As of the end of 2015, the individual market shares of the big four supermarkets are 27.9 percent for Tesco, 16.6 percent for J Sainsbury’s, 16.4 percent for Asda, and 10.8 percent for Morrisons (Kantar World Panel, 2016). The UK grocery market is an oligopoly. Convenience stores, discount stores, and other grocery retail formats account for the remaining 28.3 percent of the market. However, market shares may change depending on trends in the grocery sector. Given the possible increase in the current market share of the big four supermarkets, an important issue is whether the dominance of the big four supermarkets hamper and cause detriment to competition and what is in the best interest of the consumer.
Impact of the Dominance of the Big Four Supermarkets on Competition
Although markets are unlikely to exhibit perfect competition, benefits occur in markets that are close to perfect competition (Stucke, 2013). Oligopoly in the UK grocery market means imperfect competition. Dominance of the big four supermarkets has hindered and damaged competition to the extent shown by their impact on the aspects of perfect competition. In a perfectly competitive market, information is accessible, the parties behave rationally, there are little or no barriers to entry and exit, there are only similar unbranded products, and there is no need for government regulation (Whish & Bailey, 2015).
A market is competitive when information is available to aid sellers and buyers in making selling or purchasing decisions and considering opportunities or alternatives (Whish & Bailey, 2015). Dominance of the big four supermarkets does not significantly hamper access of market stakeholders to information, but the oligopoly creates imbalance in the flow of information between retailers and suppliers that decreases the market power of suppliers.
The big four supermarkets access information by requiring suppliers to provide information on their ongoing and future product development initiatives as part of the distribution agreement (Consumers International, 2012). As a result, suppliers usually end up with the big four supermarkets copying their product development plans and implementing these plans ahead of time (Seely, 2012).
Rational Behavior
A perfectly competitive market also facilitates voluntary exchanges or transactions, through which market participants maximize gain and minimize loss (Hovenkamp, 2016). In the process, all parties benefit through voluntary transactions based on the equal flow of information and negotiating power (Whish & Bailey, 2015). Dominance of the big four supermarkets has disadvantaged suppliers.
Oligopolistic behavior is not always rational. According to the game theory, dominant firms make decisions on pricing and other areas depending on expectations of the actions of competitors (Geckil & Anderson, 2009). When an increasing number of consumers opted to shop more frequently at convenience and discount stores for items they need to lessen waste instead of shopping less frequently at supermarkets for bulk items, Tesco started to acquire convenience stores and the other big supermarkets followed (Ruddick, 2015). In 2015, convenience stores operated by Tesco reached more than 2,000 and comprised 69 percent of its total store volume (Euromonitor, 2016). Each of the big four supermarkets also sought to outdo each other in decreasing cost at the expense of the profit of suppliers (Research and Markets, 2014).
Little or No Barriers to Entry and Exit
Ease of entry and exit is a feature of a perfectly competitive market (Whish & Bailey, 2015). Together with access to information, little or no barriers to entry and exit results to multiple sellers and buyers to create a match between supply and demand at the best price per unit that is acceptable to sellers and buyers (Hovenkamp, 2016).
Dominance of the big four supermarkets has created barriers to entry in the grocery market. The big four supermarkets obtain real property and permission to build or expand operations in an area to prevent the entry of competitors. Regulations provide that a retailer can no longer build or expand in an area where a competitor already received permission to build or expand. The big four, especially Tesco, purchased or leased real property and obtained permission in many areas. According to the 2007 report by the Competition Commission, there are 110 areas where stockpiling of real property and permission by the big four supermarkets could restrict competition (Seely, 2012).
Similar Unbranded Products
Substitutability of similar unbranded products limits the market power of any single supplier and retailer (Whish & Bailey, 2015). In the real world, strong incentives for differentiation make branding inevitable (Lambin & Schuiling, 2012). Dominance of the big four supermarkets created disadvantages for consumers and suppliers. The big four supermarkets introduced in-store brands to reduce product price. Moreover, to increase profit margin, the big four supermarkets controlled consumer access to the range of grocery brands. In-store brands received larger shelf space and better shelf positions. Some supplier brands were dropped to give way to in-store brands. At the same time, the big four supermarkets also copied the features of popular brands. (Berasategi, 2014) Although the Competition Commission did not consider this practice as unfair, it remains a concern of suppliers.
Little or No Need for Government Regulation
In perfect competition, government regulation is not necessary because access to information and equal bargaining power prevents unfair situations that result to undue advantage to one party and disadvantage to another party (Hovenkamp, 2016). In reality, as the Office of Fair Trading (2009) explained, the government’s role is to provide regulations to prevent unfair competition. In the UK grocery market, the Office of Fair Trading and the Competition Commission provide and implement regulations on the grocery market. Dominance of the big four supermarkets caused concern on the part of consumer groups and suppliers. After its investigation, the Competition Commission reported that, in general, the oligopoly does not constitute unfair competition (Consumers International, 2012). Tesco’s control over more than a quarter of the UK grocery market does not hamper the competitive position of other players (Young, 2009). However, areas requiring improvement emerged, especially on the stockpiling of land and permits as well as the lack of a venue for suppliers to raise their concerns (Seely, 2012). Moreover, the regulatory bodies recognized that shifts in market conditions do not prevent the big four supermarkets from further expanding their dominance (Young, 2009). Thus, there is need for government regulation.
Securing the Best Interest of the Consumer
Improving competition remains in the best interest of the consumer. Competition can result to lower costs and prices, better quality, more choices and variety, more innovation, greater efficiency and productivity, and economic development and growth (Stucke, 2013). Dominance of the big four supermarkets negatively affected the expected price, quality, range and innovation benefits.
Price
It is in the best interest of consumers for them and suppliers to have significant influence on price. Consumers have some influence on the prices of grocery items through shifts in consumer behavior. However, a report (Research and Markets, 2014) also showed evidence of the profit-maximizing practice of the big four supermarket chains of cutting the price of particular products and offsetting the price cut by increasing the price of other products. Suppliers have lost their influence on price. The big four supermarkets pressure suppliers to accept lower prices or offer unscheduled discounts with the suppliers assuming the risk of loss (Berasategi, 2014). An investigation by the Competition Commission did not find evidence of unfair practice by the big four supermarkets in their pricing arrangements with suppliers, but this was due to lack of information on the actual negative experiences of suppliers. Stronger bargaining power of the big four supermarkets prevented suppliers from voicing their complaints to the Commission because of fear of reprisal (Seely, 2012). The big four supermarkets also refused to provide information on the terms of agreement with suppliers (Young, 2009). Decrease in the profit of suppliers could lead to exit that could raise prices.
Quality
Expectations of decrease in market share, sales, and profit justify the production of quality products (Eagle & Dahl, 2015). It is in the best interest of consumers for them and suppliers to exercise market power in ensuring the quality of grocery products. Again, the report by the Competition Commission found no evidence of unfair practice that affects the quality of grocery products. Dominance of the big four supermarkets puts quality at risk by developing in-store brands and delisting suppliers offering products that directly compete with their own brands (Consumers International, 2012). The risk maybe offset by the trend in consumer behavior of paying more for ethical and green products so that retailer success in the future requires the dual focus on controlling cost and enhancing value differentiation (Grewal et al., 2010).
Range
It is in the best interest of consumers to have choices when making purchasing decisions. The Competition Commission did not consider to be unfair the practice of the big four supermarkets of introducing their own brands and products that are marketed in a similar manner as the brands of suppliers and producers because of lack of evidence from the affected parties (Consumers International, 2012). The Commission also did not consider as unfair the closure of many small stores because of the entry of the large supermarkets (Young, 2009). This could be due to the focus of the UK competition regulation on preventing exclusion and neglecting the imbalance in the negotiating power of existing players in the market (Grewal et al., 2010). Nevertheless, it cannot be denied that in acting as gatekeepers, the big four supermarkets control choices available to consumers by selecting the brands and types of products to display on store shelves (Eagle & Dahl, 2015). Yet, consumers may prevent loss of control over range by paying for the value of quality and choice.
Innovation
It is in the best interest of consumers for suppliers to address their current and future demands through innovative practices. Dominance of the big four supermarkets has a negative effect on innovation. Cost control measures by the big four supermarkets are reducing the profit margin of suppliers that prevents further investment in the development of new products (Berasategi, 2014). Making the disclosure of product development plans of suppliers a part of the retail agreement are causing the suppliers and producers to lose their intellectual property advantage (Consumers International, 2012). The big four supermarkets should not be allowed to squeeze the profits of suppliers to the extent of preventing future product innovation.
Conclusion
Dominance of the big four supermarkets has caused some hindrance and damage to competition. Oligopoly in the grocery market has limited the ability of suppliers to use information and exert market power. The big four supermarkets do not act rationally and instead act according to the actions of any one of them. Hoarding real property and permits created barriers to entry. The supermarkets launched in-store brands to the detriment of suppliers. Potential abuses require government regulation. While suppliers directly experience most of the adverse effects, these would likely spill over to consumers. In the context of oligopolistic competition, the best interest of consumers requires improvements in the competitive environment. Several areas for improving competition emerged. One area involves narrowing the gap between the market power of the big four supermarkets and suppliers. It appears that expanding the focus of government regulation towards addressing and preventing abuses of the stronger market power of the big four supermarkets is a solution, at least, until the suppliers are in a position to exert market power and prevent abuses by the four big supermarkets. Another area is consumer awareness. Shifts in consumer buying behavior still influence the big four supermarkets. Informed consumers are in the position to influence the big four’s decisions on balancing cost and value to facilitate benefits for all stakeholders, especially consumers and suppliers.
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