This document goes over a short answer describing the market structure of the UK supermarket industry, under the oligopoly structure. As well as a longer answer describing the extent to which the UK supermarket industry is becoming more contestable.
With reference to Figure 1, what can be inferred about the market structure of the UK
supermarket industry? (4)
The market structure of the UK supermarket industry falls under the oligopoly structure. An
oligopoly is a market structure whereby there is a small number of dominant firms within
the industry, firms are interdependent and barriers to entry are high. According to figure 1,
the seven most dominant firms (Tesco, Asda, Sainsbury’s, Morrisons, Waitrose, Aldi and Lidl)
in the industry amass 87% of the total market share. The rest of the supermarkets
accumulate 13% of total market share.
With reference to the information provided, to what extent is the UK grocery market
becoming more contestable? (12)
A contestable market is a market whereby there is freedom of entry to the industry and
where the costs of exit are relatively low.
The increase in small convenience stores and online
shopping suggests that the UK grocery market is
becoming more contestable. Line 10 of extract 1
states “Pressure on the ‘Big Four’ supermarkets also
comes from the rise of smaller convenience stores
and online shopping.” One of the main characteristics
of a contestable market is that new firms are able to
enter the market due to low barriers to entry and
exit. This makes it is easier for smaller firms to
compete with already established firms. The reason
new entrants come into the market is to capture any
abnormal profit being made in the short run. In the
diagram above, a profit maximising firm maintains production at the point MR=MC where
the price is P and the quantity is Q. The shaded area represents the supernormal profit
being made in the short run. As new entrants come into the market to capture supernormal
profit, in a contestable market, firms usually have to lower their prices from P to P1 and
increase the quantity of production from Q to Q1, where AR=AC, in order to remain
competitive. Which only allows for normal profits to be made in the long run. However,
given that Tesco and Asda are already well established, this may make it more difficult for
smaller firms to compete due to customer loyalty. Supermarkets like Tesco and Asda usually
have loyalty programmes that offer higher discounts to customers that visit their stores
frequently. So, it is unlikely that loyal customers would be willing to switch to online shops
or smaller convenience stores unless prices are substantially lower, which may then lead to
losses for smaller grocery stores as they do not benefit from economies of scale. Therefore,
this could be considered a relatively high entry barrier to the market, thus the UK grocery
market may not be considered contestable.
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