There is no doubt that the emergence over the past 40 years of a very dominant group of supermarkets has changed the face of the high street, and it has not always been for the better. However, there is also no doubt that consumers have seen some enormous gains as a result. The solution for the high street, perhaps, is for empty shops to be converted into homes. But the wider issue is whether the Competition and Markets Authority (CMA) should step in and prevent further consolidation amongst the main retailing groups. This morning the CMA published its provisional findings with regard to the proposed merger between Sainsbury’s and Asda.
According to the BBC, Stuart McIntosh, chair of the CMA’s independent inquiry group, said: “We have provisionally found that, should the two merge, shoppers could face higher prices, reduced quality and choice, and a poorer overall shopping experience across the UK.”
I think this reveals a fundamental misunderstanding of the nature and impact of competition amongst the supermarket groups (and another case of the tyranny of the so-called ‘expert’). Far from being detrimental in terms of product pricing, quality and choice, the consolidation of retail supply has had exactly the opposite effect. The reason can be found in the dynamics of oligopolistic competition (game theory provides many insights in this area). In recent years, competition amongst a small number of very large suppliers has been cut-throat. Margins have been forced down and price reductions have been pushed back down the supply chain, sometimes to the very significant disadvantage of small producers (think of the situation that emerged in the milk supply chain). But in price terms, this has been massively beneficial to consumers.
At the same time, supermarkets have looked for other ways to compete. Quite often this has been on product quality, but it has also become evident in product ranges and retailing styles. In almost all cases, this has benefited consumers – not accidentally, but because that is exactly what the supermarkets are trying to achieve. The supermarkets live or die by their ability to attract shoppers, by presenting a retail offer that suits their circumstances. And if there is a group of consumers that does not seem to be serviced adequately, then it is not long before that retailing gap is filled.
I suspect the mistake the CMA has made is to carry out a largely static analysis, rather than think about the dynamics of the industry, and the ways in which earlier consolidation has had very favourable consequences for consumers – in contrast to many warnings to the contrary while the process was underway.
You only have to consider where you get the best choice, the highest quality and most satisfactory consumer experience for the majority of products that we buy, to realise that oligopolistic competition has been much to the consumer’s benefit. That does not mean there is no room for smaller retailers. There is, but they have to have a very strong niche offering in order to compete, survive and thrive.
Of course, retailing is not the only area in which there has been consolidation over past decades. By and large this has benefited consumers in terms of quality, choice and price. Think of the car industry, for instance, or even, in the service sector, estate agents. Whereas very fragmented industries may seem to offer more choice and a more bespoke service, the reality is that there is often massive inefficiency leading to poor-quality and high-priced goods and services.
Evidently, supermarkets and other suppliers can abuse their market positions – this is happening at the moment in the internet-technology sector. The key is for the CMA and other regulators to ensure that the market place remains fair, transparent and competitive. Most importantly, the authorities have to make sure there is no collusion amongst suppliers. But they do have to understand what constitutes a competitive, vibrant and thriving market place.
Sadly, the CMA in today’s comments seems to have displayed a fundamental lack of understanding with regard to what is (and is not) good for consumers.
Categories