The British supermarket is dominated by four main suppliers, Tesco, Sainsbury, Asda and Morrison which formed a large retail market chain in the UK for several years. This is called oligopoly market [Oligopoly Watch, 2003]. According to 123helpme.com (2009), an oligopoly is a market controlled by a few number of bulky firms which are interdependent. First of all, four main groceries in the UK have high degree of concentration. For example, in 2003, four supermarkets together have approximately three fourths market share in the retailers market which can be seen in the diagram. [Oligopoly Watch, 2003]. Moreover, based on the huge economics of scale and enable lower the price to consumers, the barriers to entry for other suppliers in the market are high. It is believed by Climate Change Crop (2006), “consumer research told them that price, quality and convenience were the key criteria for the mass of shoppers”. Therefore, the UK leading firms in supermarket chain begin the high competitions in price rivalry and non-price strategies. This essay will concentrate on analyzing both price competition and non-price competition among Tesco, Sainsbury, Asda and Morrison, and then evaluates the advantages and disadvantages for the customers.
Grocery market share
Tesco 27.1%
Asda 16.9%
Sainsbury 16.1%
Morrison/Safeway 12.4%
Sept 2003 rankings, Source: The Guardian
Consumers have benefits for saving money because of immense high competition and low-price strategy among the main retailers in the UK. Those oligopoly firms such as Tesco, Sainsbury, Asda and Morrison are interdependence. It can be easy to lead to price rigidity among major UK supermarkets which assumes that oligopoly market have cooperation in setting stable price in similar products. In addition, if one firm increases its price while other companies stay constantly, the firm who increase the price will lose market share because consumers do not want to purchase high price if they can also buy in original price in other groceries. This is called kinked demand curve theory. [Revision Guru, 2010]. As can be seen in the following diagram, P equals to price. Q equals to quantity. MC equals to marginal cost and MR is for marginal revenue. Demand curve is more elastic for a price rise than for a price fall. MC1 then a rise in costs to MC2 would result in stable price.
Kinked demand curve theory [Revision Guru, 2010]
Furthermore, it is reported by 123helpme.com (2009) that an action of one firm contributes to the change of other competitors. For example, rivals will be compelled to prevent to loss market share if a retailer lower its price. In UK supermarket chain, apart from Sainsbury which focus on produce quality and outstanding value to meet consumers’ need, other three retailers include Asda, Tesco and Morrisons are mostly low-priced based. To be more specific, Asda offers the cheapest price of the three companies [Thinking Made Essay, 2009]. Consequently, an ardent competition happens as a result of lowering price of those three rivals. Consumers are in favour of choosing the cheapest one to buy because they can save money. However, when competitors stay their products in high price, customers should have a positive aspect in charging more money.
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Both branded and qualitative products can satisfy consumers’ needs but should be paid in higher price than unbranded products. Owing to the effectiveness of the advertising and marketing which made by large firms, customers are willing to pay more money to buy branded products to satisfy their psychological needs. The Leading firms in the UK supermarket tend to produce branded products to attract more attentions from consumers and then increase sales. Morrisons, for instance, has eight different categories for food selling which consist of ‘The Best’ a premium range; ‘Eat Smart’, a healthy range; ‘Bettabuy’, economy products; ‘Organic’ and the free-range ‘Free From’ collection [Whitwell, 2006]. These strategies are also barriers to those companies which want to come into the market. As a result, more consumers make their first choice to the branded products. If the companies want to obtain more market share among those competitors, they must also produce products which are in good quality. Therefore, the fixed and variable cost cause the mark-up of the qualitative and branded products higher than other plain products. Even though consumers spend more money to buy these products, they also obtained the quality guarantee of the production [Tutor 2u, 2010]
Other price competition such as discount by these UK groceries results in more money cost by consumers. In oligopolistic market, because major firms want to maximise their profit, they would get together and make a same agreement on product quantity or price which means collusion [S-cool.co.uk (2010)]. According to Oligopoly Watch (2003), Asda, Tesco and Morrisons built their reputations as discount chains to gain market share quickly, this lead to the decline of Sainsbury which has been the biggest retailers since 1995. However, those three large supermarket chains hope their discount can stimulate their consumers spend more money on other profitable products. This price strategy leads to the revenue of the chain increase sharply. The whole things cost costumers much more money than they spend as usual because of the discount on cheap products.
Though the price strategies help a lot on increasing consumers’ expenditure and reputation, non- price competitions which concentrate on other strategies for rising market occupancy are also an essential part of attracting more purchasers. Consumers have power to change the shopping place if they do not think the service and quality of the original retailers satisfy them [Biz/ed, 2005]. Non-price competitions comprise numerous strategies such as mass media advertising and marketing, home delivery systems, innovative use of technology and internet shopping for consumers [Tutor 2u, 2010]. According to Thinking Made Essay (2009), the proportion that make consumers switch to other brands are correspondingly low. The leading UK supermarkets use non-price competitions to hope customers finish shopping and continue to purchase in the next time. Therefore, each of them focus on good service to shopping people because consumers may alter their choice to other grocery if they consider the one they buy usually do not content them.
In summary, Tesco, Sainsbury, Asda and Morrison use different price strategies such as price stability and discount and non-price competition such as service. Consumers in the UK retailer chain have both positive and negative aspects. Owing to the interdependence of oligopoly, Tesco, Sainsbury, Asda and Morrison use price rigidity to control the market. Consumers have benefits for low-price strategy. Furthermore, the retailers use loss leader strategy; concentrate on good value but high price to consumers who may spend more money on those qualitative products. What’s more, customers can choose the best service supermarket because every groceries use non-price strategies to attract consumers’ attention. Nevertheless, price competition such as discount may cost more money in other profitable things.
References Section:
Biz/ed.co.uk (2005) “Supermarkets and Oligopolies”
http://www.bized.co.uk/dataserv/chron/news/2449.htm
Climate Change Crop (2006)
“UK supermarkets – Waking up to sustainability marketing”
http://www.climatechangecorp.com/content.asp?ContentID=4503
Oligopoly Watch (2003) “British grocery oligopoly”
http://www.oligopolywatch.com/2003/10/13.html
Revision Guru.co.uk (2010) “Oligopoly”
http://www.revisionguru.co.uk/economics/oligopoly.htm
S-cool.co.uk (2010) “Other features of oligopoly”
http://www.s-cool.co.uk/alevel/economics/market-structure-2/the-kinked-demand-curve-model.html
Thinking Made Essay, 2009 “Strategic Analysis of Morrison, Asda and Tesco”
http://ivythesis.typepad.com/term_paper_topics/2009/07/strategic-analysis-of-morrison-asda-and-tesco.html
Tutor 2u.net (2009) “Oligopoly”
http://tutor2u.net/economics/content/topics/monopoly/oligopoly_notes.htm
Whitwell Stuart, 2006 “Stretch potential: the supermarket brands”
http://www.intangiblebusiness.com/Brand-services/Marketing-services/News/Stretch-potential-the-supermarket-brands~390.html
123helpme.com (2009) “First 1500 characters of UK supermarkets – Oligopolistic competition”
http://www.123helpme.com/preview.asp?id=97935]
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