A row erupted in mid-October between Tesco, the UK’s biggest supermarket, and Unilever, the Anglo-Dutch company. Unilever is the world’s largest consumer goods manufacturer with many well-known brands, including home care products, personal care products and food and drink. Unilever, which manufactures many of its products abroad and uses many ingredients from abroad in those manufactured in the UK, wanted to charge supermarkets 10% more for its products. It blamed the 16% fall in the value of sterling since the referendum in June (see the blog Sterling’s slide).
Tesco refused to pay the increase and so Unilever halted deliveries of over 200 items. As a result, several major brands became unavailable on the Tesco website. The dispute was dubbed ‘Marmitegate’, after one of Unilever’s products.
This is a classic case of power on both sides of the market: a powerful oligopolist, Unilever, facing a powerful oligopsonist, Tesco. With rising costs for Unilever resulting from the falling pound, either Unilever had to absorb the costs, or Tesco had to be prepared to pay the higher prices demanded by Unilever, passing some or all of them onto customers, or there had to be a compromise, with the prices Tesco pays to Unilever rising, but by less than 10%. A compromise was indeed reached on 13 October, with different price increases for each of Unilever’s products depending on how much of the costs are in foreign currencies. Precise details of the deal remained secret.
An interesting dynamic in the dispute was that Tesco and Unilever were acting as ‘champions’ for retailers and suppliers respectively. Other supermarkets were also facing price rises by Unilever. 
Their reactions were likely to depend on what Tesco did. Similarly, other suppliers were facing rising costs because of the falling pound. Their reactions might depend on how successful Unilever was in passing on its cost increases to retailers.
This example of ‘countervailing power’, or ‘bilateral oligopoly’, helps to illustrate just how much the consumer can gain when a powerful seller is confronted by a powerful buyer. The battle was been likened to that between two ‘gorillas’ of the industry. Its ramifications throughout industry will be interesting.
Podcasts and Webcasts
Tesco-Unilever row: Can unique shop explain ‘Marmitegate’? BBC News, Dougal Shaw (13/10/16)
Tesco, Unilever in Brexit price clash Reuters, David Pollard (13/10/16)
Brexit price-rise warning to shoppers BBC News, Simon Jack (10/10/16)
Tesco in Brexit Pricing Spat With Unilever Wall Street Journal (13/10/16)
Tesco battles Unilever over prices Financial Times on YouTube (14/10/16)
Tesco vs Unilever: Who won? ITV News, Joel Hills (14/10/16)
Articles
Tesco removes Marmite and other Unilever brands in price row BBC News (13/10/16)
Marmite Brexit Shortage ‘Just The Beginning’ Of ‘Gorilla’ Grocery Battle As Pound Slumps Huffington Post, Louise Ridley (13/10/16)
Unilever sales increase despite dozens of its brands being removed from Tesco shelves Independent, Ben Chapman (13/10/16)
Tesco-Unilever price row: Why pound value slump has caused Marmite to disappear from shelves Independent, Zlata Rodionova (13/10/16)
Tesco pulls Marmite from online store amid Brexit price row with Unilever The Telegraph, Peter Dominiczak, Steven Swinford and Ashley Armstrong (13/10/16)
Tesco runs short on Marmite and household brands in price row with Unilever The Guardian, Sarah Butler (13/10/16)
Tesco pulls products over plunging pound Financial Times, Mark Vandevelde, Scheherazade Daneshkhu and Paul McClean (13/10/16)
Brexit means…higher prices The Economist, Buttonwood’s notebook (13/10/16)
Tesco, Unilever settle prices row after pound’s Brexit dive Reuters, James Davey and Martinne Geller (14/10/16)
Questions
- To what extent can Tesco and Unilever be seen a price leaders of their respective market segments?
- What would you advise other supermarkets to do over their pricing decisions when faced with increased prices from suppliers, and why?
- What would you advise manufacturers of other consumer goods sold in supermarkets to do in the light of the Tesco/Unilever dispute, and why?
- What determines the price elasticity of demand for branded products, such as Marmite, Persil, Dove soap, Hellmann’s mayonnaise, PG Tips tea and Wall’s ice cream?
- What factors will determine in the end just how much extra the consumer pays when supermarkets are faced with demands for higher prices from major suppliers?
- Give some other examples of firms in industries where there is a high degree of countervailing power.
- What are the macroeconomic implications of a depreciating exchange rate?
- If, over the long term, the pound remained 16% below its level in June 2016, would you expect the consumer prices index in the long term to be approximately 16% higher than it would have been if the pound had not depreciated? Explain why or why not.
This time last year bookmakers Ladbrokes and Coral announced their intention to merge. This was closely followed by a merger between Betfair and Paddy Power. This wave of consolidation appears to have been partly motivated by the rise of online gambling, stricter regulation and increased taxation.
The UK Competition and Markets Authority (CMA) commenced an initial investigation into the Ladbrokes-Coral merger in late 2015 and, at the request of the merging parties, agreed to fast track the case to a detailed phase 2 investigation.
Despite the growth in the online market, the CMA’s investigation recognised the continued importance of high-street betting shops:
Although online betting has grown substantially in recent years, the evidence we’ve seen confirms that a significant proportion of customers still choose to bet in shops – and many will continue to do so after the merger.
The CMA identified almost 650 local markets where it believed there would be a substantial lessening of competition. It concluded that this could have both local and national effects:
Discounts and offers of free bets to individual customers are 2 of the ways betting shops respond to local competition which could be threatened by the merger. Such a widespread reduction in competition at the local level could also worsen those elements that are set centrally, such as odds and betting limits.
Therefore, earlier this week the CMA announced that before it is prepared to clear the merger, the parties must sell around 350 stores in order to preserve competition in the problem markets (many of these overlap so the number of store sales required is less than the number of problem markets). This divestment represents around 10% of the total number of stores currently owned by the two merging parties. It appears that rivals Betfred and Boylesports, plus a number of private equity investors, are already interested in purchasing the stores.
This may also not be the last consolidation in the industry with the struggling leading bookmaker William Hill apparently attracting merger interest from rival 888 in combination with a casino and bingo hall operator.
Articles
BHA warns CMA over Coral-Ladbrokes merger Racing Post, Bill Barber (7/7/16)
Ladbrokes-Gala Coral must sell 350-400 shops to clear merger BBC, (26/7/16)
William Hill is lukewarm on ambitious three-way merger deal The Telegraph, Ben Martin (25/7/16)
Questions
- Why might the merging parties in this case have been so keen to fast track the case to phase 2?
- What are the key factors in defining the market in this case? How do you think these would have affected the decision?
- Are there arguments that wider social issues in addition to the effect on competition should be taken into account when considering mergers in this market?
- Which of the potential purchasers of the divested stores do you think might be best for competition?
- How do you think this market will evolve in the future?
Record fines have been imposed by the European Commission for the operation of a cartel. Truck makers, Volvo/Renault, Daimler, Iveco and DAF have been fined a total of €2.93bn. The fines were considerably higher than the previous record fine of €1.7bn on banks for rigging the LIBOR rate.
Along with MAN, they were found to have colluded for 14 years over pricing. They also colluded in passing on to customers the costs of compliance with stricter emissions rules. Together these five manufacturers account for some 90% of medium and heavy lorries produced in Europe.
The companies have admitted their involvement in the cartel. If they had not, the fines might have been higher. MAN escaped a fine of €1.2bn as it had revealed the existence of the cartel to the Commission.
A sixth company, Scania, is still in dispute with the Commission over its involvement. Thus the final total of fines could be higher when Scania’s case is settled.
In addition, any person or firm adversely affected by the cartel can seek damages from any of the companies in the national courts of member states. They do not have to prove that there was a cartel.
The Commission hopes that the size of the fine will act as a disincentive for other firms to form a cartel. ‘We have, today, put down a marker by imposing record fines for a serious infringement,’ said Margrethe Vestager, the EU’s competition commissioner.
Also, by being able to exempt a cartel member (MAN in this case) from a fine if it ‘blows the whistle’ to the authorities, it will help to break existing cartels.
There are some other major possible cartels and cases of abuse of market power currently being considered by the Commission. These include Google and whether unfair tax breaks were given to Apple and Amazon by Ireland and Luxembourg respectively.
Articles
Price-Fixing Truck Makers Get Record E.U. Fine: $3.2 Billion New York Times, James Kanter (19/7/16)
Truckmakers Get Record $3.23 Billion EU Fine for Cartel Bloomberg, Aoife White (19/6/16)
EU fines truckmakers a record €2.93bn for running 14-year cartel Financial Times, Peter Campbell, Duncan Robinson and Alex Barker (19/7/16)
Truckmakers fined by Brussels for price collusion The Guardian, Sean Farrell (19/7/16)
Europa Press Release
Antitrust: Commission fines truck producers € 2.93 billion for participating in a cartel European Commission (19/7/16)
Information
Competition DG European Commission
Questions
- How have the various stakeholders in the truck manufacturing industry been affected by the operation of the cartel?
- What incentive effects are there, (a) for existing cartel members and (b) for firms thinking of forming a cartel, in the fining system used by the European Commission?
- Unlike the USA, the EU cannot jail managers for oligopolistic collusion. Compare the relative effectiveness of large fines and jail sentences in deterring cartels.
- What determines the profit-maximising price(s) for a cartel?
- Apart from the threat of action by the competition authorities, what determines the likely success of a cartel in being able to fix prices?
- Choose two other cases of possible cartels or the abuse of market power being examined by the European Commission. What is the nature of the suspected abuse?
In the following article, Joseph Stiglitz argues that power rather than competition is a better starting point for analysing the working of capitalism. People’s rewards depend less on their marginal product than on their power over labour or capital (or lack of it).
As inequality has widened and concerns about it have grown, the competitive school, viewing individual returns in terms of marginal product, has become increasingly unable to explain how the economy works.
Thus the huge bonuses, often of millions of pounds per year, paid to many CEOs and other senior executives, are more a reflection of their power to set their bonuses, rather than of their contribution to their firms’ profitability. And these excessive rewards are not competed away.
Stiglitz examines how changes in technology and economic structure have led to the increase in power. Firms are more able to erect barriers to entry; network economies give advantages to incumbents; many firms, such as banks, are able to lobby governments to protect their market position; and many governments allow powerful vested interests to remain unchecked in the mistaken belief that market forces will provide the brakes on the accumulation and abuse of power. Monopoly profits persist and there is too little competition to erode them. Inequality deepens.
According to Stiglitz, the rationale for laissez-faire disappears if markets are based on entrenched power and exploitation.
Article
Monopoly’s New Era Chazen Global Insights, Columbia Business School, Joseph Stiglitz (13/5/16)
Questions
- What are the barriers to entry that allow rewards for senior executives to grow more rapidly than median wages?
- What part have changes in technology played in the increase in inequality?
- How are the rewards to senior executives determined?
- Provide a critique of Stiglitz’ analysis from the perspective of a proponent of laissez-faire.
- If Stiglitz analysis is correct, what policy implications follow from it?
- How might markets which are currently dominated by big business be made more competitive?
- T0 what extent have the developments outlined by Stiglitz been helped or hindered by globalisation?
In April 2015 the European Commission (EC) opened a formal investigation into the behaviour of Google in the market for smartphones and tablets. On the 20th April Google was sent a preliminary judgment (referred to formally as a Statement of Objections) in which it was accused of abusing its dominant market position. The European Commissioner argued that the case was similar to the famous and protracted investigation into the conduct of Microsoft.
In the early 2000s Microsoft had a dominant position in the market for desktop operating systems. It has been estimated that 97% of all computing devices at the time used Microsoft Windows. This market power attracted the attention of the EC who accused the company of using its dominance in the operating systems market to restrict competition in complementary markets for software such internet browsers and media players. This led to a complex legal battle between the two parties.
Windows is proprietory software and computer manufacturers have to pay Microsoft a licence fee to install it on their machines. Before the rulings by the EC, Microsoft could make a licence for Windows conditional on other Microsoft software such as Internet Explorer and Media Player being pre-installed. This is known as bundling and in this case the EC came to the conclusion that it restricted competition. The European Commissioner, Margrethe Vestager recently stated that
“If Microsoft’s media player was already there when you bought a PC, it would be hard to persuade people to even try an alternative, so innovators would be at a big disadvantage”
Microsoft lost most of its competition battles with the EC and had to pay a total of €2.2 billion in various fines. It was also forced to change its conduct. For example, the EC instructed Microsoft to provide its users with a choice of internet browsers.
The marketplace for operating systems has gone through some significant changes since the early 2000s. By 2016 Microsoft’s market share had fallen to 26 per cent. One of the major reasons for this decline has been the increasing popularity of smartphones and tablets.
Google’s Android operating system dominates the mobile market with a market share of over 80 per cent. However, the economics of the Android operating system are very different from those of Windows. Unlike Windows, Android is an example of ‘open-source software’. This means that, rather than having to obtain a licence fee, mobile handset or tablet manufacturers can freely install Android on their devices and are not obliged to pre-install other Google software – both Amazon and Nokia have done this. ,
Another major difference is that it is relatively straightforward for rival firms to develop software that can run on Android. Microsoft was accused of making it very difficult for rival software companies to develop products that would run smoothly on the Windows operating system.
It would appear far easier for rival firms to compete with Google than it ever was with Microsoft when it had a dominant market position. It might therefore seem surprising that the EC has accused Google of abusing its dominant market position.
Rather than any restrictions surrounding the licencing conditions for the operating system the EC’s objections to Google’s behaviour focus on its licencing conditions for other proprietary software products it provides. In particular, the EC has focused on the Google Play Store.
The pre-installation of the Google Play Store is seen as vital to the commercial success of any Android phone. Google Play Store was launched in 2012 and brought three previously separate services together – Android Market, Google Music and Google eBookstore. It is the official app store for all users of a device with an Android operating system. It has been argued that a mobile phone store would not stock an Android phone unless it had Google Play Store pre-installed because it is so highly valued by customers.
Therefore it is vital for Android smartphone and tablet manufacturers to obtain a licence for the Play Store. The conditions for obtaining a licence are outlined in the Mobile Application Distribution Agreement. This specifies that a number of other Google apps must also be pre-installed on the device in order for a licence to be granted for the Play Store. These apps include Gmail, Google Chrome, Google Drive, Google Hangouts, Google Maps, Google Search and YouTube. The manufacturer is free to install any other non-google apps.
The EC has specifically objected to the condition that Google Search has to be installed and set as the default search engine. It is concerned that this that will make it very difficult for other search services to compete with Google because (1) manufacturers will have limited incentives to pre-install any competing search engines and (2) consumers will have less incentive to download competing search engines.
The EC has also expressed concerns that the pre-installation of Google Chrome as the mobile browser will also have a negative impact on competition and innovation in this market.
Companies are given 12 weeks to respond after they have received a preliminary judgment. If they do not accept the objections, then the EC will take several months to come to a final ruling and suggest some appropriate remedies. In this case, the most likely remedy is the removal of the licence conditions for the Google Play Store. If Google appeals the ECs decision to the General Court of the EU, it could take years until a final judgment is made.
Murad Ahmed, the European Technology Correspondent at the Financial Times commented that
“One lesson Google might want to learn from Microsoft’s example is while it fights the EU watchdog it is not overtaken by a less distracted competitor.”
Articles
Europe v Google: how Android became a battleground The Guardian (20/4/16)
EU accuses Google of using Android to skew market against rivals The Guardian (20/4/16)
Google faces EU charge over Android ‘abuse of dominance’ BBC News (20/4/16)
Google hit with EU competition charges for ‘abusing’ dominant position with Android Independent (20/4/16)
Everything you need to know about Google and its EU battle The Telegraph (20/4/16)
Questions
- Draw a diagram to compare and contrast the price and quantity in a competitive market with a situation where a firm has market dominance. Clearly state any assumptions you have made in the analysis.
- What factors does the EC consider when judging if a firm has a dominant position in the market?
- This blog has focused on one aspect of Google’s behaviour/conduct that has raised concerns with the EC. What other elements of Google’s conduct has the European Commission objected to?
- Explain the difference between pure and mixed bundling.
- What impact does bundling have on consumer welfare?
A row erupted in mid-October between Tesco, the UK’s biggest supermarket, and Unilever, the Anglo-Dutch company. Unilever is the world’s largest consumer goods manufacturer with many well-known brands, including home care products, personal care products and food and drink. Unilever, which manufactures many of its products abroad and uses many ingredients from abroad in those manufactured in the UK, wanted to charge supermarkets 10% more for its products. It blamed the 16% fall in the value of sterling since the referendum in June (see the blog Sterling’s slide).
This is a classic case of power on both sides of the market: a powerful oligopolist, Unilever, facing a powerful oligopsonist, Tesco. With rising costs for Unilever resulting from the falling pound, either Unilever had to absorb the costs, or Tesco had to be prepared to pay the higher prices demanded by Unilever, passing some or all of them onto customers, or there had to be a compromise, with the prices Tesco pays to Unilever rising, but by less than 10%. A compromise was indeed reached on 13 October, with different price increases for each of Unilever’s products depending on how much of the costs are in foreign currencies. Precise details of the deal remained secret.
Their reactions were likely to depend on what Tesco did. Similarly, other suppliers were facing rising costs because of the falling pound. Their reactions might depend on how successful Unilever was in passing on its cost increases to retailers.
