TABLE OF CONTENTS

SR. NO. TITLE PAGE NO.

1 Introduction 3
2 Summary of the Case 4
3 Case Study Questions and Analysis 5-8
4 Conclusion & Suggestions 9-10
5 References 11
 Manegerial Economics 2nd Internal Assessment-Case study Analysis

INTRODUCTION

As a child, I loved to visit the giant supermarket nearby my house with my mother. I was
fascinated by the sheer abundance – from cereals stacked like skyscrapers to aisles lined with
chocolates from around the world. Looking back, I now realize that our weekly routine wasn’t
just about buying food – it was a firsthand experience of how the supermarket industry
operated, competed, and evolved.

In today’s dynamic and highly competitive global economy, the structure and behavior of
industries play a pivotal role in shaping consumer experiences and economic outcomes. One
such influential sector is food retailing, particularly the supermarket industry in the United
Kingdom. With a market valuation nearing £190.9 billion as of 2024, supermarkets have
transitioned from small, community-based shops to large, efficient enterprises that dominate
the nation's food supply. This case study explores the factors behind the success of
supermarkets, the market structure they belong to, and the broader implications of their
operations on consumer sovereignty and market competition. Through the lens of managerial
economics, the analysis integrates relevant economic theories and decision-making concepts
to evaluate the industry critically.

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 Manegerial Economics 2nd Internal Assessment-Case study Analysis

Summary of the Case

The case presents a compelling narrative about the supermarket industry's rise to dominance in
the UK. Supermarkets, by offering consumers benefits such as variety, affordability, and
convenience, have come to account for 75% of all food purchases intended for home use. The
industry is led by the “big four” Tesco, Sainsbury’s, Asda, and Morrisons, which collectively
hold two-thirds of the market. Tesco, in particular, leads with a market share of 28.5%.

The growth of supermarkets is attributed to customer-centric strategies, such as offering both

premium and value-based products, launching private-label brands to minimize advertising
costs, introducing store loyalty programs, and expanding to online platforms. However, this
rise has led to criticisms regarding monopolistic behavior, the decline of small shops, and the
exploitation of suppliers in developing countries. The article raises a crucial question, does the
industry truly support consumer sovereignty, and should the size of dominant firms be a
concern?

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 Manegerial Economics 2nd Internal Assessment-Case study Analysis

Case Study Questions and Analysis on the Case-Success of

Supermarkets

1. What Type of Market Structure Characterizes the Supermarket Industry and Why?

To determine the market structure, we consider characteristics such as the number of firms,
entry barriers, product differentiation, pricing power, and the level of competition.

The UK supermarket industry aligns most closely with an oligopolistic market structure. This
is evident through the following features:

• Few Dominant Firms: The “big four” (Tesco, Sainsbury’s, Asda, and Morrisons)
control approximately 66% of the market. This concentration of power is a classic
hallmark of oligopoly.
• Product Differentiation: While all supermarkets offer groceries, each firm
differentiates through pricing strategies, product quality, brand loyalty programs, and
exclusive partnerships (e.g., Tesco’s Clubcard or Sainsbury’s Taste the Difference
range).
• Barriers to Entry: High capital requirements, economies of scale, and brand loyalty
act as significant deterrents for new entrants, another core characteristic of oligopolies.
• Price Rigidity and Non-Price Competition: In oligopolies, firms often avoid price
wars and instead compete through non-price means, branding, advertising, and
customer experience as we observe with loyalty programs, extended operating hours,
and online services.

Economic Theories being Applied:

• The price theory (microeconomics) explains how prices are maintained at competitive
levels due to rivalry, yet do not fluctuate excessively due to tacit understanding.
• The production theory supports the presence of economies of scale, where large firms
reduce per-unit costs by operating at larger scales, thus dominating the market.
• The profit theory highlights how firms in such markets aim to maximize long-run
profits by maintaining strategic advantages.

Comparison with International Markets:

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 Manegerial Economics 2nd Internal Assessment-Case study Analysis

• USA: Similar oligopoly with Walmart, Kroger, and Costco leading. However,
Walmart's dominance (~25% of US grocery market) is even more pronounced.
• Germany: Aldi and Lidl have created a unique duopoly with a focus on deep
discounting and no-frills stores.
• India: In contrast, India’s food retailing is still fragmented, with kirana shops (mom-
and-pop stores) dominating despite the rise of giants like Reliance Retail and Big
Bazaar.

Thus, the supermarket industry clearly falls under the oligopoly model, not a perfect
competition, due to barriers and product differentiation; and not a monopoly, because multiple
dominant firms exist and compete aggressively.

2. Does the Article Support the View That the Consumer Is Sovereign in Food Retailing?

Consumer sovereignty is the principle that consumer preferences determine the production of
goods and services. A sovereign consumer is free to choose, with their preferences dictating
market outcomes.

The article presents a mixed stance:

Supportive Evidence:

• Consumer-Centric Strategies: Supermarkets have evolved by offering products

tailored to diverse consumer needs, high-quality goods for premium buyers, and lower-
priced alternatives for budget-conscious shoppers.
• Loyalty Programs and Online Services: These are designed to enhance consumer
convenience and choice, reflecting responsiveness to customer behavior.
• Product Range and Availability: From organic produce to international brands,
supermarkets offer vast selections that empower consumers with more options.

These behaviors are consistent with the demand theory in microeconomics, which states that
producers react to consumer demand to maximize profit. Supermarkets track consumer trends

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 Manegerial Economics 2nd Internal Assessment-Case study Analysis

and modify supply accordingly, exemplifying the concept of “man guided by the stomach,” as
quoted in the lecture slides.

Contradictory Evidence:

• Market Power and Influence: Despite competitive appearances, the dominance of a

few players restricts true consumer freedom. Smaller competitors are edged out, and
suppliers are allegedly exploited, indirectly impacting consumers who may not have
access to ethically sourced alternatives.
• Media Criticism: The claim that supermarkets function as monopolies undermines the
notion of sovereignty. If few firms dictate terms to suppliers and control major
distribution channels, consumer choice may be more illusion than reality.

Economic Frameworks Referenced:

• Demand Theory: Consumer preferences guide supermarket offerings, but within

structurally constrained options.
• Normative Economics: Ethical implications of limited supplier power and
environmental degradation challenge the idea of true sovereignty.

This reflects the normative side of economics discussed in the module, the ethical and value-
laden aspect of market structures, questioning whether power dynamics truly favor the
consumer.

Thus, while the article initially suggests that the consumer is sovereign, a deeper analysis
reveals this sovereignty is limited by structural constraints and corporate dominance

3. Do You Agree with the Article’s Conclusion That the Size of the Firm Should Not Be a
Source of Concern?

The article suggests that firm size should not be worrisome since consumer choice ultimately
determines market outcomes. However, from a managerial economics perspective, this
conclusion is partially flawed.

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 Manegerial Economics 2nd Internal Assessment-Case study Analysis

v Arguments Against Concern:

• Efficiency and Cost Advantages: Large firms like Tesco benefit from economies of
scale, allowing them to lower prices and offer better services, a direct advantage to
consumers.
• Innovation and Investment: Big firms have resources to invest in technology, such as
online shopping infrastructure, AI-driven supply chains, and sustainable practices,
improving customer satisfaction and industry growth.

This is supported by the capital theory and production theory, large capital allows better
investment and output efficiency, benefiting both firms and consumers.

v Arguments for Concern:

• Market Concentration Risk: Excessive concentration can lead to tacit collusion, price
fixing, and reduced incentives for innovation. Consumer sovereignty is compromised
when few firms dominate choices.
• Supplier Exploitation and Unfair Trade Practices: The media’s concerns about low
supplier prices and wages in developing countries highlight ethical and long-term
sustainability issues.
• Barrier to Entry and Monopoly Behavior: Smaller firms are unable to compete due
to predatory pricing or preferential deals, potentially stifling innovation and diversity.

This aligns with managerial decision-making under uncertainty, while large firms can reduce
short-term uncertainty through data and capital, they may create long-term risk through
monopolistic behavior and market rigidity.

Hence, while firm size brings certain benefits, it should be monitored, and competition policies
must ensure fair play. An unregulated oligopoly can easily lean into monopolistic territory,
making size a valid concern under specific circumstances.

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 Manegerial Economics 2nd Internal Assessment-Case study Analysis

CONCLUSION & SUGGESTIONS

• Conclusion:

The supermarket industry in the UK offers a textbook example of an oligopolistic market,

shaped by high entry barriers, product differentiation, and a few dominant firms. While the
case study highlights many consumer-friendly developments, wide product choices, loyalty
programs, and online convenience, it also raises critical concerns about competition, fairness,
and true consumer sovereignty. Managerial economics helps dissect these layers through
frameworks such as demand theory, production theory, and decision-making under risk.
Ultimately, while firm size brings innovation and efficiency, unchecked dominance can erode
market fairness. Balanced regulation and consumer awareness remain essential to ensure that
the industry continues to serve societal welfare without tipping the scales toward monopolistic
control.

The article argues that firm size should not be a concern if consumers have choice. However,
this oversimplifies the power imbalance inherent in oligopolistic markets. While firms do
respond to demand, consumer sovereignty is constrained when only four players dominate
access, set standards, and squeeze suppliers.

From a normative economics lens, unchecked size leads to supplier exploitation, as seen in
Fairtrade reports of underpaid cocoa farmers linked to UK supermarket chains.

Therefore, while size brings efficiency and innovation, it requires regulatory counterweights
to preserve fairness, sustainability, and choice.

• Suggestions:

1) Regulatory Oversight for Fair Competition: To prevent monopolistic behavior and

ensure small retailers aren't unfairly pushed out, regulatory bodies should closely monitor
pricing practices and market share thresholds of large supermarket chains.

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 Manegerial Economics 2nd Internal Assessment-Case study Analysis

2) Support for Local and Ethical Sourcing: Supermarkets should be encouraged to source
more products from local or fair-trade suppliers. This would improve sustainability and
mitigate concerns about exploitation of workers in developing countries.

3) Incentivizing Innovation from Small Retailers: Government programs or tax benefits

can be introduced to help smaller shops adopt technology and diversify offerings, enabling
them to compete in niche markets.

4) Transparent Consumer Information: Consumers should be educated and provided

transparent information about supply chains, pricing structures, and ethical practices to
make more informed choices and exercise true sovereignty.

5) Balanced Growth Strategy: While firm size can promote efficiency, it must be balanced
with social responsibility. Supermarkets should adopt CSR strategies that promote fair
wages, environmental care, and community support.

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 Manegerial Economics 2nd Internal Assessment-Case study Analysis

REFERENCES

1. Competition & Markets Authority (2024). Market Study of UK Grocery Sector.

www.gov.uk
2. Office for National Statistics (ONS). (2024). UK Retail Sales Overview.
3. The Guardian (2024). “Supermarkets and the Squeeze on Suppliers.”
www.theguardian.com
4. Tesco PLC Annual Report 2024. Strategic and Financial Review. www.tescoplc.com
5. Baumol, W.J., & Blinder, A.S. (2021). Microeconomics: Principles and Policy.
Cengage Learning.
6. Varian, H.R. (2019). Intermediate Microeconomics. W.W. Norton & Company.
7. Kotler, P., Keller, K.L. (2020). Marketing Management, Pearson Education.

8. https://www.ibisworld.com/united-kingdom/industry/supermarkets/2915/

9. https://www.emerald.com/insight/content/doi/10.1108/09590550810859150/full/html#i
d19

10. https://www.investopedia.com/terms/o/oligopoly.asp

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