The ‘Big 4’ supermarkets in the UK – Tesco, Sainsbury’s, Asda and Morrisons – have a 69.5% share of the Great Britain grocery market (see data link below). The next four – Aldi, Co-op, Lidl and Waitrose – have a 23.8% share. If two of the Big 4 were to merge, would there be a significant decline in competition? This is a question the Competition and Markets Authority (CMA) has been considering in the light of Sainsbury’s planned £7.3 billion takeover of Asda (owned by the US retailing giant, Walmart).
In a recently published provisional report, the CMA argues that “the merger could lead to a substantial lessening of competition at both a national and local level.” The CMA has concerns that the merger:
…could lead to a worse experience for in-store and online shoppers across the UK through higher prices, a poorer shopping experience, and reductions in the range and quality of products offered. It also has concerns that prices could rise at a large number of Sainsbury’s and Asda petrol stations. …The combined impact means that people could lose out right across the UK and that the deal could also cost shoppers through reduced competition in particular areas where Sainsbury’s and Asda stores overlap.
Sainsbury’s and Asda currently have a combined market share of 31.2%. This is slightly larger than Tesco’s 27.7%. But would this give the merged companies too much market power? Would there not still be intense competition between the new Big 3? And, with the growth in the German discounters, Aldi and Lidl, as well as competition from Waitrose, the Co-op, Marks & Spencer and Iceland, would there be any significant decline in competition and choice and a rise in prices?
To answer this, it is crucial to define the grocery market. The CMA argues that the major competitors to any Big 4 company are the other Big 4 companies, rather than the German discounters or other supermarkets. Unlike Aldi and Lidl, the Big 4 have a range of facilities, such as fish and meat counters, delivery and a large range of branded products.
At a national level the CMA finds that the merger would reduce competitive pressure, so that a Big 3 would be less competitive than the Big 4, with higher prices and with reduced quality, range of products and in-store services.
At the local level the effects are likely to be serious. Often the consumer has very limited choice of supermarkets at a local level. If a particular area has just two supermarkets, Sainsbury’s and Asda, then the merger of the two could result in a substantial loss of competition. The only alternative for consumers in such areas would be to use small shops, which tend to be more highly priced anyway and do not compete head-to-head with the supermarkets, or to drive to another area or to shop online, depending on how far rival supermarkets are prepared to deliver. Similar arguments apply to supermarket petrol stations, where the only competition to supermarkets is from roadside petrol stations, often selling more highly priced petrol.
In response to the CMA’s findings, Sainsbury’s chief executive, Mike Coupe, claims that they focus too much on competition between the Big 4 and do not take into account competition from Lidl and Aldi, both of which are expending rapidly and now have a combined market share of 12.8% (compared with 10.7% two years ago).
Sainsbury’s and Asda also claim that there would be considerable scope for economies of scale, with lower costs being achieved through purchasing and logistics. In a joint statement they state that:
Combining Sainsbury’s and Asda would create significant cost savings, which would allow us to lower prices. Despite the savings being independently reviewed by two separate industry specialists, the CMA has chosen to discount them as benefits.
The two companies and other interested parties have until 13 March to respond to the provisional findings. The CMA will then issue its final report by 30 April 2019. If it sticks to its provisional findings, then either the merger will be blocked or the merging companies would have to ‘sell off a significant number of stores and other assets – potentially including one of the Sainsbury’s or Asda brands – to recreate the competitive rivalry lost through the merger.’ This might be very difficult to achieve as the new buyer would have to be big enough to provide effective competition to the remaining Big 3. Perhaps this could be an opportunity for Amazon to move into in-store grocery retailing. Or there may be some private equity company that would like to do the same.
It is likely that if the CMA sticks to its ruling, the two supermarkets will apply for a judicial review of the CMA’s decision.
Competition and Markets Authority Report
- In what market segments do the Big 4 supermarkets compete?
- Research earlier investigations of the supermarket sector by the UK competition authorities. What were their findings?
- In what ways might the proposed takeover of Asda by Sainsbury’s affect consumers’ interests (a) at a national level; (b) at the local level?
- What is the ‘GUPPI index’? How is it calculated and how is it used in assessing the effects of the proposed takeover? (See pages 88–91 and 109–11 of the CMA’s Provisional Report and pages I5–I15 of the Appendices and Glossary.)
- Distinguish between horizontal and vertical mergers. How is the distinction relevant in drawing lessons from the Tesco takeover of Booker for the Sainsbury’s takeover of Asda?
- Rather than blocking the takeover, one alternative would be for the CMA to permit it, subject to the sale of specific stores where there are problems of the merger limiting competition in a particular locality. Do you think that this would be a better alternative than blocking the takeover? Explain.
The Competition and Markets Authority (CMA) has imposed a record fine of £84m on the American pharmaceutical manufacturing company Pfizer and of £5.2m on its UK distributor, Flynn Pharma. The CMA found that the companies charged unfair prices to the NHS for phenytoin sodium capsules, the anti-epilepsy drug.
The price was previously regulated, but Pfizer deliberately de-branded the drug in September 2012 and immediately raised the price to Flynn Pharma by between 780% and 1600%, which, in turn, raised the price to the NHS by nearly 2600%. This made the drug many times more expensive than in any other European country.
The cost to the NHS rose from around £2m per year to around £50m in 2013. Although other generic drugs are available, there would be serious health risks to patients forced to switch drugs. The NHS thus had no alternative to paying the higher price.
Pfizer claimed that the drug was loss-making before it was de-branded. However, the CMA calculated that this did not justify the size of the price increase; that the higher price enabled Pfizer to recover all these claimed losses within just two months.
The usual practice is for pharmaceutical companies to charge high prices for new drugs for a period of time to enable them to recover high research and development costs. Later, the drugs become available as generic drugs that other manufacturers can produce. The price then normally falls dramatically.
Phenytoin sodium was invented many years ago and there has been no recent innovation and no significant investment. But, unlike with many other drugs, there has been no switching by the NHS because of possible dangers to patients. This has given Pfizer and its distributor considerable market power. As the CMA states in its press release:
Epilepsy patients who are already taking phenytoin sodium capsules should not usually be switched to other products, including another manufacturer’s version of the product, due to the risk of loss of seizure control which can have serious health consequences. As a result, the NHS had no alternative to paying the increased prices for the drug.
In conclusion, the CMA found that “both companies have held a dominant position in their respective markets for the manufacture and supply of phenytoin sodium capsules and each has abused that dominant position by charging excessive and unfair prices”.
Pfizer fined record £84.2m for overcharging NHS 2600% Independent, Zlata Rodionova (7/12/16)
Pfizer fined record £84.2m over NHS overcharging The Guardian, Angela Monaghan (7/12/16)
CMA fines drug firms £90m for over-charging NHS nhe (7/12/16)
Pfizer hit with record fine after hiking price of NHS epilepsy drug by 2,600pc – costing taxpayer millions The Telegraph (7/12/16)
Pfizer, Flynn Get Record Fine on 2,600% Drug Price Increase Bloomberg, Patrick Gower (7/12/16)
Phenytoin sodium capsules: suspected unfair pricing Competition and Markets Authority: Case reference: CE/9742-13, Competition and Markets Authority cases (updated 7/12/16)
CMA fines Pfizer and Flynn £90 million for drug price hike to NHS CMA Press Release (7/12/16)
- What are the arguments for drug companies being allowed to charge high prices for new drugs?
- How long should these high prices persist?
- Sketch a diagram to illustrate Pfizer’s price for its anti-epilepsy drug before and after it was de-branded. Illustrate the effect on Pfizer’s profits from the drug.
- What determines the price elasticity of demand for (a) a drug which is branded and unique; (b) a drug produced by a specific producer but which is generic and can be produced by a number of producers; (c) a generic drug produced by many producers?
- How should a regulator like the CMA decide what price a firm with market power should be allowed to charge?
- Under what legislation did the CMA fine Pfizer and Flynn Pharma? What is the upper limit to the fine it is able to impose? Did it impose the maximum fine on Pfizer?
In June 2014, the Gas and Electricity Markets Authority (which governs the energy regulator, Ofgem) referred Great Britain’s retail and wholesale gas and electricity markets to the Competition and Markets Authority (CMA). The market is dominated by the ‘big six‘ energy companies (British Gas, EDF, E.ON, npower, Scottish Power and SSE) and Ofgem suspected that this oligopoly was distorting competition and leading to higher prices.
The CMA presented its report on 10 March 2016. It confirmed its preliminary findings of July and December 2015 “that there are features of the markets for the supply of energy in Great Britain that result in an adverse effect on competition”. It concludes that “the average customer could save over £300 by switching to a cheaper deal” and that “customers could have been paying about £1.7 billion a year more than they would in a competitive market”.
It made various recommendations to address the problem. These include “requiring the largest suppliers to provide fuller information on their financial performance” and strengthening the role of Ofgem.
Also the CMA wants to encourage more people to switch to cheaper suppliers. At present, some 70% of the customers of the big six are on default standard variable tariffs, which are more expensive than other tariffs available. To address this problem, the CMA proposes the setting up of “an Ofgem-controlled database which will allow rival suppliers to contact domestic and microbusiness customers who have been stuck on their supplier’s default tariff for 3 years or more with better deals.”
Another area of concern for the CMA is the 4 million people (16% of customers) forced to have pre-payment meters. These tend to be customers with poor credit records, who also tend to be on low incomes. Such customers are paying more for their gas and electricity and yet have little opportunity to switch to cheaper alternatives. For these customers the CMA proposed imposing transitional price controls from no later than April 2017 until 2020. These would cut typical bills by some £80 to £90 per year. In the meantime, the CMA would seek to remove “restrictions on the ability of new suppliers to compete for prepayment customers and reduce barriers such as debt issues that make it difficult for such customers to switch”.
Despite trying to address the problem of lack of competition, consumer inertia and barriers to entry, the CMA has been criticised for not going further. It has also been criticised for the method it has chosen to help consumers switch to cheaper alternative suppliers and tariffs. The articles below look at these criticisms.
Competition and Markets Authority Energy Report BBC You and Yours (10/3/16)
Millions could see cut in energy bills BBC News (10/3/16)
Shake-up of energy market could save customers millions, watchdog says The Telegraph, Jillian Ambrose (10/3/16)
UK watchdog divided over energy market reforms Financial Times, Kiran Stacey (10/3/16)
How the CMA energy inquiry affects you Which? (10/3/16)
UK watchdog accused of bowing to pressure from ‘big six’ energy suppliers The Guardian, Terry Macalister (10/3/16)
CMA sets out energy market changes CMA press release (10/3/16)
Energy Market Investigation: Summary of provisional remedies Competition and Markets Authority (10/3/16)
- Find out the market share of the ‘big six’ and whether this has changed over the past few years.
- What, if any, are the barriers to entry in the gas and electricity retail markets?
- Why are the big six able to charge customers some £300 per household more than would be the case if they were on the cheapest deal?
- What criticisms have been made of the CMA’s proposals?
- Discuss alternative proposals to those of the CMA for dealing with the problem of excessive prices of gas and electricity.
- Should Ofgem or another independent not-for-profit body be allowed to run its own price comparison and switching service? Would this be better than the CMA’s proposal for allowing competitors access to people’s energy usage after 3 years of being with the same company on its standard tariff and allowing them to contact these people?
In a blog post on 1 May this year, What’s really on offer?, we looked at the ‘super-complaint‘ by Which? to the Competition and Markets Authority (CMA) about supermarket special offers. The complaint referred to bogus price reductions, ‘cheaper’ multi-buys which weren’t cheaper, smaller pack sizes and confusing special offers. Under the rules of super-complaints, the CMA had 90 days from the receipt of the complaint on 21 April 2015 to publish a response. It has now done so.
Here is an extract from its press release:
In its investigation the CMA found examples of pricing and promotional practices that have the potential to confuse or mislead consumers and which could be in breach of consumer law. Where there is evidence of breaches of consumer law this could lead to enforcement action.
However, it has concluded that these problems are not occurring in large numbers across the whole sector and that generally retailers are taking compliance seriously to avoid such problems occurring. The CMA also found that more could be done to reduce the complexity in unit pricing to make it a more useful comparison tool for consumers. …Nisha Arora, CMA Senior Director, Consumer, said:
‘We have found that, whilst supermarkets want to comply with the law and shoppers enjoy a wide range of choices, with an estimated 40% of grocery spending being on items on promotion, there are still areas of poor practice that could confuse or mislead shoppers. So we are recommending further action to improve compliance and ensure that shoppers have clear, accurate information.
Although the CMA believes that misleading pricing is not as widespread as consumer groups have claimed, in some cases the supermarkets could be fined. The CMA also says that it will work with the supermarkets to eliminate misleading information in promotions.
In addition it recommends that the Department for Business, Innovation and Skills (BIS) publishes guidelines for supermarkets on displaying unit prices in a consistent way. It also recommends that legislation should be simplified on how items should be unit-priced.
The following articles look at the implications of the CMS’ findings.
Some UK supermarket promotions are misleading, watchdog says Financial Times, Andrea Felsted (16/7/15)
Shoppers beware: Grocers ‘confusing’ consumers with special offers, unit pricing, says government investigation International Business Times, Graham Lanktree (16/7/15)
Supermarket pricing: CMA finds ‘misleading tactics BBC News, Brian Milligan (16/7/15)
How special are special offers? BBC News, Kamal Ahmed (16/7/15)
Response to super-complaint: link to elements of report CMA (16/7/15)
- Give some examples of the types of promotion used by supermarkets?
- In what ways might such promotions be misleading?
- How is competition from Aldi and Lidl affecting pricing and promotions in the ‘big four’ supermarkets (Tesco, Sainsbury’s, Asda and Morrisons)?
- What cost and other advantages do Aldi and Lidl have over the big four? How might the big four reduce costs?
- Are misleading promotions systemic across the industry?
- How can behavioural economics help to explain consumers’ response to promotions in supermarkets?
- What is meant by ‘heuristics’? How might supermarkets exploit consumers’ use of heuristics in their promotions?
For years, the UK consumer organisation, Which?, has exposed misleading supermarket pricing practices. These include bogus price reductions, ‘cheaper’ multi-buys, smaller pack sizes and confusing special offers. Claiming that these practices are still continuing, Which? has made a super-complaint (available to designated consumer bodies) to the competition regulator, the Competition and Markets Authority (CMA).
Commenting on this action, Which? executive director, Richard Lloyd said:
“Despite Which? repeatedly exposing misleading and confusing pricing tactics, and calling for voluntary change by the retailers, these dodgy offers remain on numerous supermarket shelves. Shoppers think they’re getting a bargain but in reality it’s impossible for any consumer to know if they’re genuinely getting a fair deal.
We’re saying enough is enough and using one of the most powerful legal weapons in our armoury to act on behalf of consumers by launching a super-complaint to the regulator. We want an end to misleading pricing tactics and for all retailers to use fair pricing that people can trust.”
The CMA will consider the issues raised under the super-complaint to establish whether any of them are significantly harming the interests of consumers. It will publish a response within 90 days from the receipt of the complaint on 21 April 2015. The possible outcomes include:
||recommending the quality and accessibility of information for consumers is improved
||encouraging businesses in the market to self-regulate
||making recommendations to government to change the legislation or public policy
||taking competition or consumer enforcement action
||instigating a market investigation or market study
||a clean bill of health
Some 40% of groceries are sold on promotion. Supermarkets are well aware that consumers love to get a bargain and use promotions to persuade consumers to buy things they might not otherwise have done.
What is more, consumer rationality is bounded by the information and time available. People are often in a hurry when shopping; prices change frequently; people are often buying numerous low-value items; and they don’t know what competitors are charging. People may thus accept an offer as genuine and not spend time investigating whether it is so. Supermarkets know this and use all sorts of tactics to try to persuade people that they are indeed getting a bargain.
Supermarkets Face Super-Complaint On Pricing Sky News (21/4/15)
UK supermarkets face possible probe over pricing practices Reuters, Neil Maidment (21/4/15)
Which? launches ‘super-complaint’ against supermarkets BBC News, Stephanie McGovern (21/4/15)
UK supermarkets dupe shoppers out of hundreds of millions, says Which? The Guardian, Rebecca Smithers (21/4/15)
Supermarkets face inquiry into ‘rip-offs’ The Telegraph, Dan Hyde (21/4/15)
15 supermarket rip-offs that led to an inquiry The Telegraph, Dan Hyde (21/4/15)
What does Which?’s supermarket pricing complaint mean for you? The Guardian (21/4/15)
Supermarkets hit back over Which? report on pricing Financial Times (21/4/15)
Which? ‘super-complains’ about misleading supermarket pricing practices Which? (21/4/15)
CMA case page
Groceries pricing super-complaint Competition and Markets Authority (21/4/15)
- Give examples of supermarket offers that are misleading.
- Why are supermarkets able to ‘get away with’ misleading offers?
- How can behavioural economics help to explain consumer behaviour in supermarkets?
- Identify some other super-complaints have been made to the CMA or its predecessor, the Office of Fair Trading. What were the outcomes from the resulting investigations.
- What is meant by ‘heuristics’? How might supermarkets exploit consumers’ use of heuristics in their promotions?