Supermarkets operate within an oligopolistic market, and so have a kinked demand curve. With a demand curve kinked round the prevailing price OP, a rise or fall in marginal cost will not affect the profit maximising level of output or price. Hence this model can be used to explain relative price stability in oligopolistic markets. Therefore in the supermarket market, firms are unlikely to compete using price competition.
Supermarkets are therefore more likely to compete using non-price competition as they cannot compete on price to such an extent as they all charge similar prices; the big firms are able to benefit from the same economies of scale. Many of them now operate using loyalty cards for example, Tesco’s Clubcard, Sainsbury’s Nectar Card, etc. The firms compete using these as loyalty cards allow you to build up points which are eventually converted into money to spend in store or vouchers off your shopping. People therefore have an incentive to shop in that particular shop, and are more likely to choose one firm which offers most in return for loyalty over another.
Firms have also begun to differentiate themselves by extending opening hours for example, which has appealed to those who work unusual working hours, e.g. Tesco’s opens 24 hours in a lot of stores now. Another was firms are competing is by the introduction of online shopping and home delivery, which again makes it far more convenient and easier for working families who do not have the time to shop, or for those who find it difficult to leave the house, for example.
Some supermarkets have also started to change the services or products it is that they offer. For example, Tesco’s now offer a wide range of insurance deals, and they also operate their own mobile phone network. They have used this to differentiate themselves from competitors and so therefore have attracted a far wider customer base. Another way firms compete is in promotions such as 5p off per litre of petrol when you spend £50 or more at Sainsbury’s. This helps to attract customers to their stores over others as there is an incentive or reward for shopping there. Supermarkets such as Asda have also differentiated by opening up their own chemist and opticians services which means that they have more to offer to a customer than some of its competitors.
Another way firms are competing in this industry is using innovation. Most firms are trying to keep up with the latest innovations, for example, the self-service checkouts which allow a faster more convenient shopping experience for those who have limited time to shop. Therefore if some firms can offer speed of service better than others, it is likely to give them a competitive advantage over other firms.
Overall, in my opinion, supermarkets are more likely to compete using non-price competition. This is because they are all able to offer more-or-less the same prices for goods, and so they cannot compete much in this way. Therefore they need some way of differentiating themselves from other firms; by diversifying what they offer, giving incentives to shop at their stores rather than others or simply establishing a strong brand image by advertising and marketing.
