The USA has seen many horizontal mergers in recent years. This has turned industries that were once relatively competitive into oligopolies, resulting in lower output and higher prices for consumers.
In Europe, by contrast, many markets are becoming more competitive. The result is that in industries such as mobile phone services, airlines and broadband provision, prices are considerably lower in most European countries than in the USA. As the French economist, Thomas Philippon, states in a Guardian article:
When I landed in Boston in 1999, the United States was the land of free markets. Many goods and services were cheaper than in Europe. Twenty years later, American free markets are becoming a myth.
According to Asher Schechter (see linked article below):
Nearly every American industry has experienced an increase in concentration in the last two decades, to the point where … sectors dominated by two or three firms are not the exception, but the rule.
The result has been an increase in deadweight loss, which, according to research by Bruno Pelligrino, now amounts to some 13.3 per cent of total potential surplus.
Philippon in his research estimates that monopolies and oligopolies “cost the median American household about $300 a month” and deprive “American workers of about $1.25tn of labour income every year”.
One industry considered by the final two linked articles below is housebuilding. Since the US housing and financial crash of 2007–8 many US housebuilders have gone out of business. This has meant that the surviving companies have greater market power. According to Andrew van Dam in the linked Washington Post article below:
They have since built on that advantage, consolidating until many markets are controlled by just a few builders. Their power has exacerbated the country’s affordable-housing crisis, some economists say.
According to research by Luis Quintero and Jacob Cosman:
… this dwindling competition has cost the country approximately 150 000 additional homes a year – all else being equal. With fewer competitors, builders are under less pressure to beat out rival projects, and can time their efforts so that they produce fewer homes while charging higher prices.
Thanks to lobbying of regulators and politicians by businesses and various unfair, but just about legal, practices to exclude rivals, competition policy in the USA has been weak.
In the EU, by contrast, the competition authorities have been more active and tougher. For example, in the airline industry, EU regulators have “encouraged the entry of low-cost competitors by making sure they could get access to takeoff and landing slots.” Politicians from individual EU countries have generally favoured tough EU-wide competition policy to prevent companies from other member states getting an unfair advantage over their own country’s companies.
- What are the possible advantages and disadvantages of oligopoly compared with markets with many competitors?
- How can concentration in an industry be measured?
- Why have US markets become more concentrated?
- Why have markets in the EU generally become more competitive?
- Find out what has happened to levels of concentration in the UK housebuilding market.
- What are the possible effects of Brexit on concentration and competition policy in the UK?
UK Supermarkets: a prime example of an oligopoly. This industry is highly competitive and over the past decade, but particularly since the onset of the credit crunch, price wars have been a constant feature of this market. You could barely watch a full programme on commercial TV without seeing one of the big supermarkets advertising that their prices were lower than everyone else’s! So, despite oligopoly being towards the ‘least competitive’ end of the market structure spectrum, this is an example of just how competitive the market can actually be.
With household incomes being squeezed, in particular by another oligopolistic industry (energy) and with the ‘middle market’ being pinched by higher-end retailers and budget retailers, the supermarket sector is facing uncertain times. Asda’s sales growth has continued to slow and in response, the giant supermarket chain will be launching a £1 billion price-cutting campaign. Tesco is the market leader, but Sainsbury’s and Asda have been battling over the second spot. One of Asda’s selling points is its low prices. Perhaps not as low as Aldi and Lidl, but this new pricing strategy will aim to bring its prices further below Tesco, Sainsbury’s and Morrisons and close the gap with the two big discount supermarkets. As Andy Clarke, Asda’s Chief Executive, said:
We regard ourselves as the UK’s leading value retailer and it is against this backdrop that I have today set out our strategic priorities which will improve, extend and expand the business over the next five years.
So, what will be the impact of lower prices? It appears as though Asda is marketing itself towards the budget end of the pricing spectrum, perhaps aiming to become fiercer competitors with Aldi and Lidl and let Tesco and Sainsbury’s do battle with the higher-end retailers, such as Waitrose and Marks and Spencer. Lower prices should cause a substitution effects towards Asda’s products, as many of them will have relatively price elastic demand. If the other supermarkets don’t respond, this should lead to sales growth. However, the key to an oligopoly is interdependence: the actions of one firm will affect all other firms in the market. The implications then, are that Tesco may react to this pricing strategy by engaging in its own price cuts, especially as the Christmas period approaches. The characteristic of interdependence was evident in the aftermath of Asda’s announcement when shares in Tesco and Morrisons both fell, showing how the markets were responding.
Of course, there are many other factors that affect a consumer’s decision as to whether to shop at Asda, Tesco or any other big supermarket. In the area where I live, we have a Tesco and a Morrisons (a few years ago, we had neither!). I don’t shop at Asda, as the nearest branch is over 30 miles away – even if prices were significantly lower, it would be more expensive to get there and back and a lot less convenient. For others, it may be loyalty and not just of the ‘I’ve shopped there all my life’ kind! For some, clubcard vouchers from Tesco may be preferred to Asda’s offerings and thus tiny price differences between the supermarkets may have little effect on a consumer’s decision as to where to shop. Many products at supermarkets are relatively cheap and thus as the proportion of our income that we spend on these goods is pretty low, any change in price doesn’t cause much of an effect on our demand.
It’s not just a pricing strategy where money is being invested by Asda. More investment will be going into their online services and more stores will be created, kin particular in London and the South East where their presence is low, but demand appears to be high. Improving ‘product quality, style and design’ will also be on the agenda, all with the aim of boosting sales growth and securing its position as the second largest retailer in the sector, perhaps with a long term aim of one day overtaking Tesco. The following articles consider the supermarket battleground.
Supermarket battle heats up as Asda announces £1bn price-cutting plan The Telegraph, Graham Ruddick (14/11/13)
Sainsbury’s profits make it second biggest supermarket BBC News (13/11/13)
Asda to launch £1bn price-cut plan AOL, Press Association (15/11/13)
Asda takes fight to rivals with £1bn investment plan The Guardian, Angela Monaghan (14/11/13)
UK’s Asda promises £1 billion investment in price cuts Reuters (14/11/13)
Asda makes bid to woo shoppers with vow of five-year £1billion price war after it was overtaken in market share by Sainsbury’s Mail Online, Sean Poulter (15/11/13)
Sainsbury’s overtakes Asda on demand for its premium lines Independent, Simon Neville (14/11/13)
Asda to put £1bn into lowering prices over five years The Grocer, Thomas Hobbs (14/11/13)
Wal-Mart posts $3.7bn quarterly income BBC News (14/11/13)
- What are the key characteristics of an oligopoly?
- What is meant by a price war? Who benefits?
- How important is the concept of price elasticity of demand when deciding whether or not to cut the price of a range of products?
- Why is the proportion of income spent on a good a key determinant of the elasticity of demand of a product?
- How can market share be calculated?
- Many suggest that the ‘middle market’ of the supermarket sector is slowly disappearing. Why is this?
- How effective will Asda’s price cutting strategy be? Which factors will determine its effectiveness?
We frequently hear about two companies merging with each other, whether for certainty, market share or economies of scale. However, in this case, we’re looking at a de-merging of one company to create two companies. Foster’s will be split to create two stand-alone companies.
With Foster’s retaining its beer business, a new company called Treasury Wine Estates will take over its ailing wine division. This split comes after 99% of investors cast their votes in favour of the split. The future profitability of this demerger is uncertain and how the stocks of the two separate companies trade in the coming months will give a clear indication of whether or not this divorce is the right move.
Foster’s votes to split beer and wine business Telegraph, Richard Fletcher and Jonathan Sibun (29/4/11)
Investors agree to split Foster’s into beer, wine units BBC News (29/4/11)
Two halves: Foster’s to split its beer and wine operations Mail Online (29/4/11)
Foster’s wine-beer demerger to clarify divisions’ value The Australian (30/4/11)
- What type of de-merger could we call this?
- How do you think the share prices of the 2 separated companies will fare following the de-merger?
- How concentrated is the beer and wine market? What effect will the de-merger have?
- In the BBC News article, Donald Williams says ‘The wine business needs a better pricing environment before it is likely to perform.’ What does this mean?
- Why has the wine division been a financial drain for so long?