Reference no: EM13971629 , Length: word count:1750

Topic: UK supermarket industry and its competition

Details: You have to write my assignmnt under uk economics theories. You also have to draw diagram where its appropriate UK supermarket industry and its competition

Read news articles for the essential background information and answer following questions by using appropriate economic theories. Your assignment should be between 1,500 and 2,000 words and include diagrams where appropriate. Formal academic sources (e.g. economics textbooks) have to be used for constructing your answers.

Articles - UK supermarkets industry is largely dominated by big four - Tesco, Sainsbury?s, ASDA and Morrison?s. In the past, these four biggest supermarket chains had be accused of price fixing e.g. on dairy products.

1) Using economic theory explain why the UK supermarkets industry can be seen as an example of oligopoly and how oligopoly arises?

2) Using appropriate economic theory explain why firms in an oligopoly industry try to avoid price wars and are likely to collude?

3) Why does collusion among oligopolists tend to be unstable? How can this be used to explain the recent price war among supermarket chains?

£50million fine for Great Milk Robbers: Price fix by supermarkets cost shoppers £270m

Supermarkets and dairy firms have been fined almost £50million over price rigging on milk and cheese that cost families £270million.The collusion put up the price of milk by 2p a litre - 1.2p a pint - and added 10p to the cost of a 500g block of cheese. The punishment was announced by the Office of Fair Trading, following an investigation triggered by whistle blowers at the Arla dairy company. First revealed by the OFT in 2007, the 'Great Milk Robbery' took place in 2002 and 2003. But only now has a fine of £49.51million been handed down.

Tesco, Sainsbury's, Asda and Safeway, which is now part of Morrisons, were all implicated in the collusion.They did not share price information directly, but rather the details were passed on by intermediaries who worked for dairy processing companies.

Richard Lloyd, executive director at consumer champion Which?, said: 'Any sort of collusion between retailers and suppliers that harms the consumer is unacceptable.' These penalties send a clear signal that price fixing is bad for consumers and that the regulator is willing to take tough action.'

Dairy companies Wisemans and Dairy Crest, along with Asda, Sainsbury's and Safeway were fined for price collusion on milk and cheese. Processors McLelland and The Cheese Company were only fined in relation to the price of cheese, as was Tesco.

John Fingleton, OFT chief executive, said: 'This decision sends a strong signal to supermarkets, suppliers and other businesses that the Office of Fair Trading will take action and impose significant fines where it uncovers anti-competitive behaviour aimed at increasing the prices paid by consumers.'Competition in the supermarket sector is generally intense and has delivered significant benefits to shoppers. 'Our investigation and this final decision will help ensure that this competition is maintained.'

All the companies - except for Tesco - have been given reduced fines for co-operating with the OFT and admitting breaking the 1998Competition Act. The big four supermarkets were hit with the bulk of the penalty. Sainsbury's has been fined £11.04million; Tesco £10.43million; Asda £9.39million; and Safeway (Morrisons) £5.69million. Among the dairy processors, Dairy Crest will have to pay £7.14million; Wiseman £3.2million; McLelland £1.66million; and The Cheese Company £1.26million. Arla has escaped any penalty after reporting the collusion to the OFT.

Tesco yesterday denied any wrong-doing and said its reaction to the OFT decision was one of 'surprise and dismay'. The chain said it would defend its position 'vigorously' and 'through the courts if necessary'. Lucy Neville-Rolfe, Tesco's director of corporate and legal affairs, said: 'We are disheartened and disturbed that the OFT continues to pursue this costly and time-consuming case at the expense of both the taxpayer and UK business.' Tesco has lobbied the Government to strip the OFT of its powers to both investigate and punish firms under the Competition Act.

Asda and Sainsbury's kick off new supermarket price war: Asda announces £300m in price cuts, including bread for 50p, with Tesco and Sainsbury's set to follow TELEGRAPH 06 Jan 2015

Asda and J Sainsbury have kicked off a new round of price cuts in the supermarket industry, with Tesco set to follow, as the "big four" prepare for a brutal 2015.

Asda, the country?s second biggest food retailer, said it will commit £300m to lowering prices in the first quarter of 2015, while Sainsbury?s, the third biggest, said it would lower prices on 1,000 products by investing £150m this year.

The moves by Asda and Sainsbury?s come ahead of Tesco?s highly-anticipated trading update on Thursday, when new chief executive Dave Lewis is expected to announce major price cuts alongside an update on his strategy for the retailer and its performance over Christmas.

Bruno Monteyne, analyst at Bernstein, said: "This means that this will be no ordinary trading update. Unusually, the invitation for the analyst call suggests what management will specifically talk about: restoring competitiveness in core UK business, protecting and strengthening the balance sheet, and rebuilding trust and transparency in Tesco?s business and brand."

The price cuts by Asda and Sainsbury?s are part of investments already announced by the companies. Asda started the price war in the industry by announcing a £1bn, five-year price drive unveiled in late 2013, and the £300m is part of this.

Nonetheless, the company, which is owned by Walmart, said the latest wave of price cuts represented its "biggest ever single investment in lowering prices" and cover 2,500 items.

The cuts include reducing four pints of milk from £1 to 89p, a loaf of granary farmhouse bread from 80p to 50p and reducing Birds Eye fish fingers from £4.24 to £2.77. However, most of the price cuts will not be permanent, running until the end of January or the end of March.

Barry Williams, chief merchandising officer for food at Asda said: "We?re going further than ever before, rolling back those everyday, can?t live without items at a bigger percentage than we?ve ever been able to do previously."

Sainsbury?s said its price cuts represent an annual investment of £150m and cover 1,000 lines. The latest cuts follow a first round in November. The products reduced in price include own- brand pork sausages, which will cost £1.10 for eight instead of £1.40, and tomato ketchup, which has been cut from £1.10 to £1.

Mike Coupe, chief executive of Sainsbury?s, said: „We are investing £150m per year for the next three years in some of our customers? most popular purchases, with a total of 1,000 prices cut since we announced this investment in November. This will come as welcome news to customers who might be feeling the pinch after Christmas."

The price cuts are an attempt to move the major supermarkets closer to the discounters, Aldi and Lid, and reverse a sharp fall in sales. Clive Black, analyst at Shore Capital, said: The British grocery market had a tumultuous 2014, amongst the worst in living memory for investors and management alike."

City analyst believe all the "big four", which includes Tesco, Asda, Sainsbury?s and Wm Morrison, could report a fall in Christmas sales. However, there are growing expectations that Tesco could show an improvement in its performance after early moves from Mr Lewis to lower prices and increase the number of staff in stores.

No# of Pages: 7 pages (1,750 words)

Paper Style: Harvard

No# of Sources Required: 7

Language: English (U.K)