1. Introduction
The UK grocery provision market has changed over time to fit the new needs from consumers. This includes the evolution from High Street multiple stores to large stores outside of the town in order to better fit the demand from e.g. working housewives leading to faster horizontally merged self-services with parking places.
But how is the market structured and what is the impact on the competition?

2. The UK grocery market description
Based on the July 16th 2009 report from Peter Davis and Alan Reilly (Groceries Market Investigation: Market Power, Market Outcomes and Remedies 2009), in 2007, an estimated £110 billion of grocery sales in the UK were made through almost 100,000 grocery stores, including both supermarkets and convenience stores.
The top 10 UK grocery market based on 5th of June 2009 publication includes supermarkets as ASDA 1965, Morrisons1899, Marks and Spencer 1884, Tesco 1919, Waitrose 1904, Sainsbury 1875, SPAR 1932, The Co-operative Group 1863, Iceland 1970, Aldi 1913.
Just over 65 percent of UK grocery sales were made by the four largest grocery retailers (ASDA, Morrisons, Sainsbury’s, and Tesco) from a combined total of around 3,600 stores. A further 20 percent of sales were shared among 4,000 stores belonging to an additional four grocery retailers (The Co-operative Group (Co-op), Marks & Spencer (M&S), Somerfield, and Waitrose). Within this group of eight large grocery retailers there is a degree of product differentiation. For example, M&S and Waitrose place an emphasis on high quality products, while ASDA emphasises its price competitiveness.
There is also differentiation in terms of the store formats offered by each of these retailers. For example, ASDA and Morrisons operate very few stores smaller than 1,000 sq. meters (approx. 10,800 sq. feet), while Sainsbury’s and Tesco operate large and mid-sized supermarkets as well as convenience stores.

3. Market structure
1. Definitions
Based on the market statistics and the different definitions of the oligopoly (Kumar and Sharma 1998):
• Mrs. John Robinson. “Oligopoly is market situation between Monopoly and Perfect Competition in which the number of sellers is more than one but is not so large that the market price is not influenced by any one of them”
• Prof, George J. Stigler. “Oligopoly is a market situation in which a firm determines its marketing policies on the basis of expected behaviour of close competitors.”
• Prof. Stoneur and Hague. “Oligopoly is different from Monopoly on one hand in which there is a single seller. On the other hand, it differs from perfect competition and monopolistic competition also in which there is a large number of sellers. In other words, while describing the concept of Oligopoly, we include the concept of small number of firms.”
• Prof. Leftwitch. “Oligopoly is a market situation in which there is a small number of sellers and the activities of every seller are important for others.”
that this market is oligopolistic in the sense that only 8 firms are sharing 85% of the market i.e. relatively large market shares. Another criterion that is met is that by owning that distribution channel, it creates barriers for others to easily enter the market unless they have enough funding to create such a network. Having this type of end-to-end management of the provision allows them to also have a better grip on the margins and so subsequently the prices as they can manage where to make the profits from (transfer prices).

2. Characteristics
Based on these definitions, that tend to go in the same direction, we can check whether the oligopoly characteristics are met by The UK grocery market:
• Small number of sellers as described in the statistics given in the market description.
• Interdependence of sellers, due to the small numbers no one has enough monopolistic power to shift behaviours i.e. they are all interrelated in changing policies and prices.
• Undifferentiated or differentiated product, unlike in a monopoly situation or perfect competition, we may have a mix in terms of product and service e.g. some may be open 24/7 and others offer on-line services.
• Restricted entry, this is not only due to the initial investment but also to the critical mass you have to offer to your supplier in order to please the demand (price competitiveness).
• Some control over price. There is space between price control and collusive oligopoly. Control is coming from the fact that only few competitors are to be monitored and price alignment is not mandatory.
• Size of the companies can vary as it does for the product differentiation.
• Demand curve uncertainty (due to the number of sellers) mainly due to the lack of opportunity to forecast policies changes by the competitors.

3. Kinked demand curve
“Kinked” demand curves like traditional demand curves are going downwards. They are distinguished by a convex bend with a discontinuity at the “kink” (Sloman and Wride 2009).
The theory assumes that we maximise profit when marginal revenue (how much people will pay for each additional unit) equals marginal cost (how much it costs to make each additional unit). Any change in the marginal cost or the marginal revenue will generate a new price and/or quantity sold of the item. This will not happen if there is a “kink” and so marginal costs could change without changing the price or quantity. It also implies that the industry will try to produce at the kink level i.e. before demand becomes inelastic. This theory can also explain why supermarkets are not starting pricing wars and also shows a lack of price competition. There is no incentive for the players to cut prices and subsequently decrease their profit.
From an academic perspective (George, Joll and Lynk 1992) this model has been criticised both on the theory and also the empirical viewpoints. From a theoretical standpoint, there are criticisms about the competitors’ reactions and also the how the price has been set-up first and also that companies getting interrelated overtime, the market will tend to remove the kink in the demand curve. From the empirical viewpoint, it appears that there is no evidence that rivals are less likely to follow price increases than decreases, secondly experience shows that prices are more stable in a oligopoly than in a monopoly and thirdly there is no evidence in a oligopoly the prices will follow the model.

4. Impact on competition
The leading 7 majors dominate the UK market and their impact on competition is very key, this is because competition keeps the market going, not only in the grocery provision but in all market areas. The fact is that rivalry and competition keeps each business on top of its game for the fear of losing its customers and eventually its business.
Almost all decisions made by any one of the 7 giants has an impact on the other players e.g. Waitrose introduced a new scheme, M&S would also launch something on the same lines.

The extreme competition between the giants have made the market to large extent a consumer oriented market.
This competitive aspect of the business also impacts on new companies that want to spring up into same business. A new business has to come into the market cheaper than all 7 giant grocery stores or already be an established global leader such as Carrefour to take on the UK market. As mentioned above there are de facto barriers to enter the market, for example:
• Getting competitive in terms of costs management versus the 7 large firms
• Acquiring enough land to get a critical mass of stores
• Having a decent distribution channel
Another impact on competition is illegal coordination between the 7 majors to avoid or block new competitors and/or agree on retail prices to maximise profits (interdependence). Collusion has already happen in the past and the Office of Fair Trading who found evidences of collusion lead as result that parties have accepted a liability in principle, and will pay penalties which amount to a maximum of over £116 million. ( http://www.oft.gov.uk/news-and-updates/press/2007/170-07 )
Customer services even in the grocery industry matters a lot, for example, if a customer is being treated badly, by a store attendant in ASDA, chances are that the customer may get upset and will rather go to Sainsbury where there is better customer service and even discourage others who have not yet experienced such treatment and by this, if care is not taken, ASDA might be losing a customer x 2 which can in a way affect the business.
Another important impact is the change in the market landscape since the mid-fifties. The market was lead at the time by High Street shops i.e. a mix of butchers, tobacconists, green grocers, etc… i.e. the so called “small shops”. Since then the self-service and supermarkets moved the market to a situation described in point 3 i.e. mainly large faceless out of town stores. ( http://www.historyandpolicy.org/papers/policy-paper-70.html )

5. Conclusion
The market is still mixing large companies and small shops so that all consumers can still, based on their class, ethnic background, etc…, find their preferred way of shopping.
The fact that the market is an oligopoly is a risk for consumers as it limits the competition in terms of pricing and market entry on top of the legal risk of collusion between the majors.

6. Reference list / Bibliography
THE UK COMPETITION COMMISSION, 2009. Groceries Market Investigation: Market Power, Market Outcomes and Remedies. (Deputy Chairman: Peter Davis). London.

OFFICE OF FAIR TRADING, 2010. OFT welcomes early resolution agreements and agrees over £116m penalties. London, UK: Office of Fair Trading. Available from: http://www.oft.gov.uk [Accessed 25 October 2010]

GEORGE, K., JOLL, C. and LYNK, E.L., 1992. Industrial Organization: Competition, Growth and Structural Change. London: Routledge

HISTORY AND POLICY, 2010. Regulating UK supermarkets: an oral-history perspective. London, UK: History and Policy. Available from: http://www.historyandpolicy.org [Accessed 26 October 2010]

KUMAR, A. and SHARMA, R., 1998. Managerial Economics. New Delhi, India: Atlantic Publishers & Distributors.

SLOMAN, J and WRIDE, A., 2009. Economics. 7th ed. Harlow, England: Pearson Education Limited.