Great evaluation on the government’s intervention in the five forces of the UK supermarket industry.
In the majority of modern mixed economies, the government can be hugely influential in specific industries by intervening with the five forces, thus affecting the firms within. It is important to at first define the five forces, and for clarity I will use the original theorist Porter (1979.) He defined the five forces as: “bargaining power of suppliers; bargaining power of buyers; threat of new entrants; threat of substitute products and competitive rivalry within an industry1.” Porter’s theory is now widely recognized by economists and the Government has realised its significance within industry.
The industry I have decided to look at is UK supermarkets. Tesco is the UK’s largest supermarket and accounts for “approximately one pound in every eight spent in the UK.2” This is clearly a significant amount of money and a large amount within the UK economy. Given these figures it is important for a Government to monitor and intervene if necessary. The chart3 below shows the market power held by firms in the UK supermarket industry. As is evident from the graph there are four major firms (Morrison has recently merged with Safeway) making the market oligopolistic in theory. Therefore the first force I am going to address is degree of rivalry.
Many economists measure rivalry by calculating a concentration ratio. This shows the percentage of market share held by the four largest firms. As we can see from the above pie chart, there are few dominant firms, which theoretically should be less competitive. With Tesco controlling almost one third of the UK grocery market, many called for government investigations into the almost monopoly power Tesco holds. At one stage Tesco was opening a new Express store everyday4 and therefore rapidly increasing market share and putting many smaller retailers out of business.
It was important for the government to notice this fast growth and investigate into Tesco’s practices and ensure they were legal. Without this intervention, rivalry in the supermarket industry would dwindle and Tesco could potentially exert its monopoly power to out-price its major competitors. With government monitoring Tesco’s power through the OFT (Office of Fair Trading) many of its’ potential store purchases have been stopped. In one case Tesco could be forced to sell a major store to a rival to aid competitiveness5.
Government intervention in this case is clearly an effective way to control the power of major firms. However it is hard to decide whether or not Tesco, or indeed any other major player in the UK supermarket industry, is exploiting the power it has for the good or bad of consumers. For example in a perfectly competitive market, prices would be arguably lower compared to the relative lower rivalry in the current oligopolistic market conditions. By forcing Tesco to sell large stores to rivals it could decrease trust between the government and Tesco and decrease incentives to improve its customer service. So in theory, the government can create more intense rivalry by intervening and forcing Tesco to sell off major stores and restrict growth into other areas.