Further, they argued that if two big players in the market (Safeway and Morrison have had the 3rd and 4th largest market shares) came together, Morrison’s brand loyalty would increase; it would gain not only Safeway’s customers but also other customers who might be attracted to the 2 big names. Hence it is evident that there is primarily brand competition in the market. All the firms offer similar prices, there is price rigidity, but it is the recognition of the firm that dictates its market share. People choose one supermarket over the other because of factors like the shopping experience it offers, its infrastructure, its attractiveness, its placement near residencies more that the price factor because they offer similar prices and consumers who visit such huge stores are not grudging about minor pricing differences. Firms compete to gain market share and consumer loyalty is given maximum importance. For example, Tesco found out that consumers preferred its express stores as they had great sales per square feet. Thus, in order to gain more customers it set up more express stores.
There is scope for collusion as the main competitors may agree to come to an agreement and charge high price, eliminating price competition. The fact that one competitor is acquiring the other can be looked upon as a possibility for collusion because now no. of main competitors is less.
2. The competition commission proposed that Safeway be sold only to Morrison and not to any other supermarket like Tesco, Asda or Sainsbury who are main competitors with larger market shares as compared to Morrison’s. It listed several drawbacks of possibly selling it to one of these main competitors. One of the main disadvantages of a big player taking over Safeway would be that that competitor would gain Safeway’s market share and become the strongest player in the market and will be able to control pricing to an extent. Also, if such acquisition was to take place the number of main competitors would reduce, making the market more susceptible to collusions. They would raise general prices. In an oligopoly there is product and brand differentiation. Now that the no. of sellers decreases consumers will have a smaller number of product brands to choose from. Their bigger size will give dominating firms greater power and economies of scale. They will use this to obtain high quality goods at low prices from suppliers thus taking away from their profits and exploiting their weakness. By doing so the firm decreases its marginal cost, cost of producing every extra unit. Its price will remain stable as long as the MC is within the gap in the MR curve but when the MC falls below the kink its prices will fall and qty will increase. This will force competitors to lower prices. They might not have decreased costs and thus might not be able to survive in the market for long and the market might move towards a monopolistic structure. By using Economies of scale the market leader can make a long term supernatural profit. It may lower its MC and AC and keep prices constant because the MC lies in the demand kink. Now that the AC curve shifts downwards, price remaining constant, AC might fall below AR and thus the firm might make a long run profit and become monopolistic.
The severity and possibilities of such an outcome is less than if a firm with a big current market share was to acquire Safeway. Thus, the CC recommended that a firm like Morrison’s, whose present market share is not too high, is allowed to take over Safeway.
3. The CC fears that if a major market share holder like Asda is given permission to take over Safeway it might become very large and gain a tremendous market share, around the same as Tesco’s present market share. This would cause firms like Sainsbury with lower shares to become uncompetitive and thus the market would be dominated by only two firms. This decrease in the number of competitors will reduce consumer choice and might cause prices to rise if the competitors collude.
Asda have appealed against this ruling of the CC on the grounds that the decrease in competition in the National Market will cause a greater price competitiveness which will in turn benefit the consumer. If both the main competitors are very large they will enjoy huge economies of scale as their costs of production will fall on buying supplies in bulk. They will pass this benefit onto consumers in the form of lowered prices in a price war to gain greater market share. Thus both Tesco and Asda would offer lower prices to consumers and there would be greater price and brand competition. As of now, Asda offers 15% lower prices than Safeway and if they merge Safeway’s consumers can enjoy this price benefit.
Even if Asda was to increase its price, the increase in price would cause sales to fall greater than proportionate because as prices will increase competitors will respond by offering lower prices to gain consumer favors and hence Asda will suffer. The top of the demand curve in an Oligopoly is elastic because of competition and thus if the firm increases price drop in qty demand will be greater.
Asda proposed that in order to counteract the overlapping of Safeway’s and Asda’s outlets in localities it will divest, sell Safeway’s outlets where both are present in one locality. This will prevent Asda from dominating the market in that locality. They also proposed to be responsible towards supplier and said that they would not exploit them to get lower costs.
