In these lectures we focus on market structure and the implications for market power rather than on consumer behaviour issues.
The welfare loss due to market power can be measured by the welfare triangle when firms face a downward-sloping demand curve and price above marginal cost.
Market power issues can arise at various stages of the marketing chain:
Horizontal consolidation: The merger or combination of two or more firms in the same industry engaged in the same stage of the production cycle
Vertical coordination or integration: When one firm acquires or allies with another firm in the same industry but at another stage in the production cycle.
Concentration indices include the share of the total market held by an absolute number of the largest firms in the market, e.g. the largest 4, 8, 20. CR4 ratio over 60% generally taken as representing a concentrated industry.
Herfindahl-Hirschman Index: The sum of squares of market shares of firms. Markets with HHI over 1,800 are considered highly concentrated.
We discuss the broad findings from the papers in the Reading Suggestions below. Interesting constrasts exist between the US and Europe. In the US, there is high and growing national concentration of food processing firms, led initially by the branded goods industries but followed by the more undifferentiated goods industries; however, retail concentration is low as there are no national supermarket chains, apart from Walmart). In Europe, retail concentration is very high, in part because of low national market sizes, and even higher when collaboration between retailers in purchasing supplies is factored in; while growth in food processing firm concentration lags behind, although rapidly catching up.
Traditionally, economists have focused on horizontal market performance issues. Assessing vertical (distribution channel) performance is more difficult and less settled, and requires somewhat different tools and data sets.
Two case studies which demonstrate the potentially anti-competitive effects of vertical coordination.
The nature of the supply chain has changed considerably. Traditionally, manufacturers have driven distribution by developing brands and then using a network of wholesalers and retailers to distribute goods to consumers; now large retailers control of shelf space and limited retail competition offering few alternatives for suppliers means they are 'gatekeepers' to consumers. Supply chains are now fundamentally retailer-driven, giving retailers the potential power to extract more favourable terms.
Buyer power arises both from the buyer's ability to substitute away from a supplier, and the supplier's ability to substitute between different sales channels to reach consumers. Substitution is more credible for the buyer and less credible for the supplier as the buyer increases in size. Size has thus been viewed as good proxy for buyer power, measured either in absolute terms or more usually by considering the proportion of sales accounted for by each firm.
Role of technology in allowing improved logistics, greater knowledge of consumer preferences from EPOS data, allowing supermarkets to plan and source supplies much more accurately.
The increasing prominence of own label brands is likely to contribute to increase in the buyer power of retailers.
Greater use of business-to-business electronic commerce and Internet-based auctions for awarding supply contracts for unbranded and own-label products entails a shift away from the development of long-term supplier-retailer partnerships in favour of short-term price-based contracting.
The increasing tendency to source globally widens the supply base available to grocery retailers and the extent to which they can use alternative suppliers, and thus also contributes to increase their market power.
The growth in large-store formats offering one-stop shopping for food and other daily consumer goods has led to a sharp decline in the the number of traditional and specialist retailers.
Connor, J., 2003. The changing structure of global food markets: dimensions, effects and policy implications, Paper presented at the Conference on Changing Dimensions of the Food Economy: Exploring the Policy Issues, The Hague, Netherlands, 2003.
Democratic Staff of the Committee on Agriculture, Nutrition and Forestry, United States Senate, 2004. Economic Concentration and Structural Change
In the Food and Agriculture Sector:
Trends, Consequences and Policy Options, Washington, D.C.
(although written from a US perspective, provides a succinct summary of the issues in the debate on market power in the food chain).
Lang, T., 2004, Food Industrialisation and Food Power: Implications for Food Governance, Gatekeeper Series No. 114, International Institute for Environment and Development. (NB. Large file > 1.3 MB)
Henchion, M. and McIntyre, B., 2004, The changing face of food retailing in Ireland: developments in conventional food supply chains, Rural Development Conference Proceedings, Teagasc.
Supplementary readings
Forfas, 1999, The Dynamics of the Retail Sector in Ireland, Dublin.
Keating, M., Coughlan, P., Fellenz, M., and Kilbride, F., 1998. A Strategic Analysis of the Irish Food Industry: Implications for Human Resource Practice, Occastional Paper No. 2, Dublin, Labour Relations Commission.
Department of Health and Children, Report of the National Task Force on Obesity, 2005.
Howe, S., 2002. Retailing in the European Union: Structures, Competition and Performance , London, Routledge.