South-Western College Publishing - Economics  
Supermarkets' Super-marked-up Prices
Subject Equilibrium and contrast with competition
Topic Monopoly
Key Words Prices, Profit Margins, Sales, Monopoly, Advertising, Predatory Pricing
News Story

Supermarkets in the UK are being criticized by farmers who see livestock prices plummeting while retail prices are falling only slightly. Supermarket prices are much higher in Britain than in the US or in Europe. Profit margins are about three times greater than in France, Germany, Italy and Spain.

As supermarkets have spread, they have squeezed out smaller stores: one consumer noted a reduction from 15 to 4 stores in her locality. The main four supermarkets have 60 to 70 percent of supermarket sales. A government report views supermarkets as islands of monopoly. They rarely establish stores close to competitors. Their size gives them buying power; they can afford costly advertising and can outbid smaller competitors for new sites; and they can produce own-brand, lower-priced, versions of foodstuffs. Bakers complain that their loss leader strategy results in predatory pricing below cost.

Nevertheless, consumers pay what is asked. They like the convenience of one-stop shopping.

(Updated November 11, 1998)
Questions
1. The government report states that although there are four main supermarket chains, supermarkets tend to be islands of monopoly.
  a) What is the four-firm concentration ratio in the supermarket industry in the UK as a whole?
  b) According to the report, what does it tend to be in a particular locality?
  c) What factors cause local supermarket monopolies?
   
2. a) One consumer remarked that there used to be many retail food stores in her neighborhood. What was the slope of the demand curve for one of those stores in those days?
  b) Now consumers pay what is asked. What does this imply about the elasticity of the demand curve compared to before?
   
3. a) Given that the supermarket food industry is characterized by monopoly at least in local areas, draw a price/cost-output diagram of a supermarket food monopoly. Include the demand and marginal revenue curves, and the marginal cost curve. Show the equilibrium price and quantity.
  b) Before supermarkets gained their dominant position, there was more competition. Assuming that perfect competition existed previously, illustrate the equilibrium price and quantity of supermarket food. What has happened over the years? Refer to your diagram.
  c) Can you hypothesize why British food prices are relatively high compared to those in other countries?
Source Stephen Bevan and David Smith, "A Raw Deal", Sunday Times, September 27, 1998.

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