Readers Question: How do oligopoly and oligopsony work in the UK supermarket industry?
Oligopsony occurs when a few firms dominate the purchase of goods / services / factors of production. This means that the few firms have considerable market power in paying low prices for inputs.
For example, in the Supermarket industry, the big supermarkets have market power in buying supplies from farmers and other producers. This enables them to pay lower prices and makes it more difficult for the farmers to make a profit.
After producing milk and other agricultural goods, farmers have little choice in who to sell to because most is bought by the big supermarkets.
In theory, this gives the supermarkets greater bargaining power in paying lower prices to farmers. For example, sometimes farmers have protested that the price they get paid from supermarkets is barely more than the cost of production.
A big supermarket could give a contract to a dairy producer that they will buy all their produce. The farmer agrees to the contract and sets up supply to meet the supermarket contract. However, later on the supermarket may pay less and less. But, because the farmer has geared production to meeting demand of big supermarket it is hard to sell anywhere else and so they are forced to accept lower price of food.
For example, the President of the National Farmers Union accused the supermarkets of ‘bullyboy tactics’
“…This week should have been marked by a sea change in grocery supply chain relationships with our farmer and grower members but instead in the past 10 days I have heard how suppliers to major retailers have faced some of the most unreasonable demands for retrospective payments and changes to trading terms that we’ve ever seen…” (Big supermarkets using bullyboy tactics)
An oligopoly occurs when a few firms dominate the market for selling goods / services. For example, one definition of an oligopoly is when the five biggest firms have more than 50% of the market.
Market Share of UK Supermarkets
- Tesco: 31.6%
- Asda: 17%
- Sainsbury’s: 15.8%
- Morrisons: 11.1%
- Somerfield: 3.7%
- Waitrose: 3.8%
- Aldi: 3.0%
- Lidl: 2.4%
- Iceland: 1.7%
- Netto: 0.7%
It is a five firm concentration ratio of around 79 % (source: BBC)
Therefore we can say supermarkets have market power in two ways
- Selling to consumers (oligopoly power)
- Buying from producers (oligopsony power)
Regulation of Oligoposony Power
It has been proposed that there is greater regulation of the price supermarkets pay producers like farmers. The Regulation would guarantee a minimum price paid to farmers and prevent unfair changes to contracts.
Supermarkets argue this would lead to higher prices for consumers. But, farmers say it will help prevent the abuse of monopsony power and diminish supernormal profits of supermarkets.
Oligopsony in Labour Markets
Firms can have market power in employing workers. Workers may only have a few companies to choose from. This gives firms market power in employing workers and means they may be able to keep wages low.
Monopsony occurs when firms dominate the market in buying goods/services. (A pure monopsony would be 100% of market share) For example, if there was just one supermarket through merger of Tesco / Sainsbury / Asda then farmers could only sell to this giant buyer. A monopsonistic firm would have even more market power.
Monopsony in Labour Markets
This occurs when a firm has dominant market share in employing workers. See: Monopsony