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UK Supermarket Oligopoly

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Economics

Did you know that a market is considered an oligopoly when 50% of the market share is controlled by four major firms? Well, the UK supermarket market is an oligopoly. The four biggest brands collectively hold a market share of approximately 67%. Surprised? Read on to find out more!

An oligopoly is a market structure with a small number of firms, in which none can prevent the others from having a significant influence in the industry.

In an oligopoly, there are two or more firms with significant market power that can dictate prices and supply. The main way to identify whether a market is an oligopoly is to use the concentration ratios. Read our explanation on Market Structures to learn how to calculate them.

Supermarket oligopoly in the UK

As we said, the UK Supermarket industry is a clear example of an oligopoly. It’s dominated by Tesco, the leading supermarket with the highest market share, followed by ASDA, Sainsbury'’s, and Morrisons, which all make up the ‘big four’. One of the main reasons why this supermarket industry is described as oligopolistic is due to the interdependence between the leading companies, especially in regard to additional and special features or services rendered.

A kinked demand curve

The Kinked Demand Curve theory highlights the high degree of interdependence that exists in an oligopoly market. The kinked-demand curve shows that at higher and lower prices, the elasticity of demand changes: there is a dual demand curve. As a result of this, prices remain relatively rigid in an oligopoly.

UK Supermarket Oligopoly Kinked-demand curve StudySmarterFigure 1. The kinked demand curve - StudySmarter Originals.

Figure 1 above illustrates the kinked demand curve. Firms are unlikely to be incentivised to increase or decrease their prices due to the significant impact of such an increase on the demand. Therefore, firms that increase their prices while others maintain theirs will lose customers. However, reducing the price won't increase the demand for a firm, as other firms will retaliate with a fierce price war.

To learn more about the price rigidity in an oligopoly and how to show the firms' interdependence check out our explanation on The Kinked Demand Curve.

Concentration ratios of the UK supermarket oligopoly

The United Kingdom’s grocery landscape has long been dominated by the ‘big four’. Other supermarkets such as Ocado, Co-op, and Iceland, however, managed to increase their market share during the Covid-19 Pandemic. Nonetheless, Tesco and Sainsbury’s remain the two largest supermarkets, with a combined market share of up to 42.3% as of May 2021.

A concentration ratio, in economics, is a ratio that indicates the size of firms in relation to their industry as a whole.

SupermarketMarket share %
Tesco27
Sainsbury’s15.3
ASDA14.8
Morrisons10
Aldi8
The Corporative (Co-op)6.2
Lidl6
Waitrose5
Iceland2.3

Source: Statista, ‘Market share of grocery stores in Great Britain from January 2017 to May 2021’.

For an industry to be termed as an oligopoly, the largest firms need to have a concentration ratio of more than 50%. Calculating the UK supermarket industry concentration ratio would require us to sum up the market shares of Tesco, ASDA, Sainsbury’s, and Morrisons, which is 67.1%.

Taken together, the ‘big four’ supermarkets make up almost two-thirds of the total grocery retail market. Nevertheless, due to the post-Brexit uncertainty and growing inflation, consumer behaviour has shifted in favour of cheaper alternatives such as the discount giants Lidl and Aldi. Furthermore, there has been an increase in the competitiveness of the grocery market, accompanied by ‘price wars’, which have led supermarkets to lower their prices in order to retain more of their market share.

UK Supermarket Oligopoly A Tesco StudySmarterPicture of a Tesco, the largest supermarket chain in the UK.

Features of the UK supermarket oligopoly

Let’s explore some features of oligopolies and of the UK supermarket one specifically.

Interdependence

Economic theory suggests that in an oligopoly industry firms are unable to act alone or independently as would be the case in a monopoly. This is due to the fact that the actions that one supermarket takes will greatly affect the actions of its competitors. This results in what we know as the prisoner’s dilemma in game theory.

The prisoner’s dilemma states that other firms in an oligopolistic market structure will operate based on how they believe their competitors will react. This means that firms will try to predict the outcome of decisions made by others even with incomplete information about them.

For instance, if Tesco expects ASDA to do a Christmas sale by lowering the prices of selected items during the holidays, Tesco might choose to do the same. However, this can have a sub-optimal effect as it reduces the competition in the market. This is because if indeed ASDA decided to do a Christmas sale and lower the prices of selected items, Tesco would not receive the full benefit of their strategy, as their competition already would have used it.

Barriers to entry

The barriers to entry into the UK supermarket industry are significantly high. It is particularly difficult to obtain the planning permissions required to build a new supermarket. These larger supermarkets have a credible reputation in the supermarket industry with a massive buying ability. Faced with this power, small retailers in the grocery industry would find it very difficult to compete against the leading supermarkets despite government aid.

Relationship between suppliers and supermarkets

Supermarkets with substantial buying ability and providers of essential products to suppliers might exploit their position. The producers could force the suppliers to provide their resources at discounted prices to reduce costs for themselves.

Non-price competition

This is one of the main characteristics of the UK supermarket oligopoly. Due to the fact that these supermarkets sell nearly homogeneous grocery products, and consumers would pick whichever was more convenient when shopping, supermarkets get more creative to increase their demand by engaging in non-price competition. They do this by engaging in activities and offering services that build brand loyalty among consumers. These can take the form of:

  • Enhanced quality of services (such as delivery time slots and free collections).
  • Extended guarantees on new products.
  • Longer opening hours (such as 24/7 shops).

By engaging in this form of marketing strategy, which includes skillful promotions and product enhancement, supermarkets can retain larger market shares and grow.

Price fixing

Price fixing occurs when suppliers with common interests fix the price at a certain level, which is usually set at a monopoly level. This is considered anticompetitive behaviour.

Lack of effectual price competition

Lack of effectual price competition is a form of collusion, where each supermarket would try to match the prices of other supermarkets and would keep them at similar levels. There are even instances where supermarkets would state that they sell at comparable prices to another known supermarket.

Price leadership

Price leadership operates as a pricing policy that sets limits on prices. The leading supermarket sets the prices and the smaller supermarkets in the industry would have to set their prices below those to avoid losing their demand.

Price rigidity

The prices in UK supermarkets rarely change significantly, if at all. They may change slightly in order to catch up with inflation. This would not be the case if it were a perfectly competitive market with intense price competition.

Effects of the UK supermarket oligopoly on consumers

How does this oligopoly affect the consumers? Let’s see.

  • In comparison to a monopoly, there is a good amount of competition, which leads to lower food prices on average.

  • Due to the incentive to build brand loyalty to retain customers, supermarkets have tried to make better quality goods available alongside premium services, which are beneficial to consumers.

  • Consumers have greater choices, as the number of supermarkets has increased along with the emergence of mini-markets.

  • Consumers are now less particular about branding due to the emergence of supermarkets such as Aldi and Lidl, which produce similar goods at reduced prices.

  • The prominence of collusion can be problematic for consumers, as supermarkets may collude to increase their prices in order to gain more profits. This would leave consumers with more expensive options.

UK Supermarket Oligopoly - Key takeaways

  • An oligopoly is a market structure with a small number of firms, in which none can prevent other from having a significant influence in the industry.
  • The four leading supermarkets in the UK supermarket oligopoly are Tesco, ASDA, Sainsbury’s, and Morrisons.
  • An oligopoly is most likely to have a kinked demand curve.
  • The market share of the top four firms in an industry is used to determine the concentration ratio.
  • The features of the UK supermarket oligopoly are interdependence, high barriers of entry, exploitative relationship between supermarket and suppliers, non-price competition, lack of effectual price competition, price fixing, price leadership, and price rigidity.

UK Supermarket Oligopoly

The features of the UK supermarket oligopoly include

interdependence, high barriers of entry, exploitative relationship between supermarkets and their suppliers, non-price competition, lack of effectual price competition (caused by collusion), price-fixing, price leadership, and price rigidity 

The UK supermarket industry is relatively competitive. However, it is a very tight competition between a few firms and is not as competitive as a 'perfectly competitive' market. 

The top four firms in the supermarket industry have a concentration ratio of 67.1%

Final UK Supermarket Oligopoly Quiz

Question

What is an oligopoly?

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Answer

An oligopoly is a market structure with a small number of firms, in which none can prevent others from having a significant influence in the industry. 

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Question

An oligopoly has _________ that have significant market power and are able to dictate prices and supply. 

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Answer

two or more firms

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Question

What four companies are a part of the UK Supermarket oligopoly?

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Answer

Tesco, ASDA, Sainsbury's, and Morrison. 

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Question

What does a kinked demand curve in the UK Supermarket indicate?

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Answer

This indicates that there is a high degree of interdependence in the UK supermarket industry. 

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Question

What is a concentration ratio?

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Answer

A ratio that indicates the size of firms in relation to their industry as a whole. 

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Question

In order for an industry to be termed as an oligopoly, the top firms would need to have a concentration ratio of ___________________. 


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Answer

...more than 50%. 

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Question

What are the features of the UK Supermarket oligopoly?

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Answer

Interdependence, high barriers of entry, exploitative relationship between supermarket and suppliers, non-price competition, lack of effectual price competition (caused by collusion), price-fixing, price leadership, and price rigidity.

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Question

How is the UK supermarket industry interdependent?

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Answer

Because the actions that one supermarket takes will greatly affect the actions of its competitors. This is seen in how actions taken by Tesco directly affect other supermarkets.

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Question

List three examples of non-price competition in the supermarket industry.

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Answer

  • Enhanced quality of services (such as delivery time slots and free collections).
  • Extended guarantees on new products.
  • Longer open hours (such as 24/7 shops).

Show question

Question

What are the effects of the UK supermarket oligopoly on consumers? 

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Answer

  • Lower prices may be charged for certain products.
  • Effort is made to build brand loyalty by supermarkets in the form of premium services and loyalty discounts.
  • Consumer have greater choices.
  • Collusion between supermarkets may be detrimental to consumers if the supermarkets decide to increase their prices.

Show question

Question

What is price fixing?

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Answer

Price fixing occurs when suppliers which have common interests and are on the same side in the market fix the price at a certain level, which is usually set at a monopoly level. This is considered to be anticompetitive behaviour.

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