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ECON1077: Intermediate Economics for Bus Short Essay HJ Mercer

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Intermediate Economics, Short Essay:

The UK food industry has been often characterised as having very high levels of competition along with many different price lowering strategies. However, with the rise of supermarkets, and the downfall in the number of high street retailers, the statement that it is competitive maybe widely disputed. The market is currently

dominated by several supermarket chains such as Tesco and Asda, who do seem to pursue lowering prices for the consumer. But the prices of food goods in the UK, is stated to be higher than in other European countries as well as the USA. Most food retailing shops are often found on the outer cities, compared to the city centre shops that have declined in the past few decades, meaning people can no longer simply walk to get there weekly shop. Most customers are willing to travel up to 15 minutes to get to their local supermarket meaning that the choice of shop they wish to choose is very limited. This is saying that if the closest supermarket to you will most probably be the one you have to shop at unless you are willing to travel greater distances for another option. However, in recent years there has seen the rise in the supermarket convenience chain stores such as Tesco Express which cater to your needs during the week, but at an elevated price. In this market, the supermarkets have a strong hold over the

suppliers, enabling them to drive down prices at the threat of losing a contract, owing to the ease for the supermarkets to find a new supplier. This depicts that the market it heavily influenced by the supermarkets demands rather than the supplier having a dominant grip over demand. Suppliers worry that they may lose a contract with a supermarket which will probably mean they lose their main source of income. Thus allowing supermarkets to drive down prices, and pay when it suits them, without the suppliers being able to do anything about it.

Supermarkets pricing practices have been seen to distort or reduce completion, especially when selling products below the cost price. This is as when selling

products below the cost that they were paid for, the products are not fully exposed to competitive pressure (Competition Commission report , 2000) so that they are not allowing people to actively compete with this certain product. Although this could be seen as an advantage to the consumer, there are adverse effects upon certain consumer segments of the market. For example, if an elderly person wishes to purchase this product, and they do not have a means of travel to the supermarket, they are unable to purchase this product. It also effects the elderly and less mobile as many high street stores that sell this product will not be able to compete with this price, making them un competitive which may eventually lead to them going out of business. Therefore the customers unable to reach the supermarkets will be unable to even purchase this product. Arguably with the rise of internet shopping,

customers unable to reach the stores can purchase these products online. However the segment of people unable to reach the supermarkets, are also the segment that are most likely not be computer literate, or even own a computer.

Another pricing practice supermarkets use is price flexing. This is where the prices of goods are reflected by the geographical location of the stores. This is perfectly acceptable usually as it is fact that the north of England has an average lower income than larger cities such as London or Manchester. So it is only logical for supermarkets to charge more in areas where people have higher levels of disposable income, therefore able to afford slightly elevated prices. However many supermarkets have been seen to set prices in light of local competition, enabling

them to drive them out thus giving them a local monopoly. Once the competition is no longer operating in that area, they then are able to push prices up, and charge what they can get away with (Chapter 4, p 131, Andre Simms, 2007). This acts against public interest as they will be paying higher prices than they would be if there were other stores competing in the area.

Even though supermarkets are perceived to be ferociously competitive on products, it is often exaggerated by aggressive marketing campaigns. In reality, most

supermarkets are only competing on a small number of products. This pricing allows supermarkets to lure in the consumer with a few products on offer for cheap prices, whilst the rest of the store is at a normal price, or higher than its competitors. However, once the consumer is in the store, they are not realistically able to switch between each competitor from product to product. This therefore goes against

perfect competition as the customers are un informed about all the prices that they could be purchasing the product for. After the commission had writted their report on this competition, they concluded that this distorts competition in the retail supply of groceries (chapter 4, p 131, Andrew Simms, 2007).

They way supermarkets treat their suppliers does often acts against public interest. This is as they have an indefinite hold over the suppliers; they can dictate the prices which they buy their goods at. This is often a much lower price than the suppliers would wish to sell at or can even afford to sell at. This can have detrimental effects on the products as the competition is distorted owing to the fact that manufactures are not able to spend time and money on research and development of their products. This has a negative effect on the consumers, as they are not given the

choice of a new product they may be developed from research, meaning less alternative products.

Mentioned earlier was that supermarkets often have a certain number of cheaper products on offer in order to lure customers into the store. However, what wasnt mentioned is that the supermarkets themselves rarely lose out on profit when doing this. This is as they are able to use their commanding power to drive down the

prices of these selected items, and sell them at a much cheaper price, but still attain the same levels of profit. This is fully at the cost of the supplier, rather than the supermarket themselves. This is one of the reasons why in many markets of these products, there are high barriers to entry, again acting against perfect competition. This is owing to the fact that anyone who wishes to enter the market needs a high level of capital in order to begin producing the product. If they are not able to have a higher mark up in the first few years of trading in order to cover these costs, they are highly unlikely to survive, or it may just not be worthwhile to start up in the first place. These barriers to entry also act against public interest as less competitors means the suppliers will not be forced to develop new more efficient ways of production, as well as a smaller variety in brands offered. I feel that the Competition Commissions conclusions were widely inconclusive, and much of them find them sitting on the fence between what could be done, and what should be done. The solutions to the problems found were backed up with reasons why it would not be appropriate or possible for the supermarkets to implement these solutions. I almost feel that the commission is weary of offending the supermarket, or even slight scared of them. Throughout there were findings of malpractice from the supermarkets, with them acting unethically or even in some circumstances

illegally. However they do not appear willing to do anything about confronting and stopping this from happening. They do of course see fines from some of these actions, but they are never large enough to really deter them from doing it again. There have been findings on supermarkets ignoring planning regulations, as well as breeches of contracts to the supplier, even being able to take free loans from suppliers in the form of late payments. But no one seems to be willing to try and stop this. It could almost be compared to the Sicilian Mafia, where everyone knows what theyre doing, even the government, but they are more than happy to let this continue as long as they get there taxes, and the consumers are able to buy relatively cheap products as well as the ease of supermarket shopping. I believe that if changes are to be made in how supermarkets are run, allowing more competition, as well as more rights for suppliers, they must be very drastic, and perhaps harsh on the supermarkets. However, I also feel that in the long run, with supermarkets now days being the main source of all groceries, that this type of behaviour will just become the norm, of which too many degrees it already has.

References 1. Tescopoly: How One Shop Came Out on Top and Why It Matters; Andrew Simms, 2007. 2. Food Retailing in the United Kingdom, Richard Bell, 2000. 3. Supermarkets: A report on the supply of groceries from multiple stores in the United Kingdom, Competition Commission, 2000, OFT 4. Cut-price supermarkets gain ground as shoppers hunt for bargains, Julia Finch, The Guardian Newspaper Online, 2009.

(http://www.guardian.co.uk/business/2009/mar/03/sales-growth-at-cutpricesupermarkets) 5. UK Food Retailing Industry, Scribd, 2009.

(http://www.scribd.com/doc/31435082/UK-food-retailingindustry%E2%80%99) 6. Supermarkets and price flexing an argument for a regulator?

(http://www.urban75.net/vbulletin/threads/318773-Supermarkets-and-priceflexing-an-argument-for-a-regulator)