Price wars in the UK grocery market:

Price wars are a phenomenon that occurs in companies in various industries throughout the world economic system. In an oligopolistic market structure, players closely control each player’s prices and respond to any price cuts. This article seeks to explore the strategic business methods employed in the British food industry oligopoly and determine their effects on the economy using a game-theoretic model. I will conclude that such price wars will put independent retailers out of business, leading to an established industry dominated by no more than four UK supermarket chains.

By definition, price wars indicate a state of intense competitive rivalry accompanied by a multilateral series of price cuts. In the short term, price wars can be ‘good’ for consumers due to a lower price structure in existing product offerings, and ‘bad’ for competing companies due to a decrease in profit margins, as well as well as possible threats to their survival. In the long run, dominant companies in the industry could benefit as smaller and more marginalized companies are unable to compete and close down. However, it could be bad for consumers, as the remaining companies may agree to raise prices, possibly colluding even beyond the price set before the price wars.

Main Players: Tesco and Asda:

In the UK grocery industry, both Tesco and Asda have used similar discount strategies to gain market share. Prices in both stores are virtually the same as of spring 2005. Tesco’s market share in 2002 was 27.1% and Asda’s was 16.9%, according to a study in BusinessWeek magazine. Sainsbury, a luxury supermarket chain which in 1995 was the UK’s largest supermarket chain, has fallen behind to third place with 16.1%. Safeway has a small market presence with a 12.4% market share. The dominant players in this market are Tesco and Asda, and both are committed to price reductions, especially with non-food items. Both Tesco and Asda are aiming to open 10 to 12 new stores per year across the UK.

Tesco was founded in 1924 in North London by Sir Jack Cohen with the profits he made from army services in World War I. By 2005, the company is an international grocery and retail chain with 2,365 stores worldwide and a workforce of approximately 367,000 employees. Tesco has had steady growth in revenue and sales for the past five years through 2005, with customers making ten million visits per week to its stores. Tesco has four key businesses; its core business in the UK, non-food business, retail services and international business. Tesco’s main market is in the UK

Asda was acquired by Wal-Mart in June 1999. There are 265 super centers and 19 warehouses across the UK and approximately 122,000 employees in the company’s operations. Grocer magazine named Asda “Britain’s best value supermarket” five years in a row to 2005. Since 1999, there have been more than $ 915 million in price cuts (adjusted from British pound sterling to US dollars). Non-food items growth has exceeded expectations as 5,000 new general merchandise lines have been added since 2002, including specialty items in pharmacy, optician, jewelry and photography departments.

Game theory – “Hawk-Dove” strategic game:

It appears that both players in the UK grocery market are involved in a strategic game similar to the Dove and Hawk Game, devised and named by Maynard Smith and Price (1976). This game has been a very important tool to understand the role of aggression between players in economic systems. The Hawk-Dove game has been studied in many settings in various academic disciplines and has been instrumental in the area of ​​evolutionary game theory.

The idea here is that Hawk is a very aggressive player, always fighting for some resource; La Paloma is a pacifist, never fighting for that same resource. The objective of this game is to choose between the two strategies to determine how to share a common resource.

Other assumptions in the Hawk-Dove game are as follows: (1) the fights between Hawks are brutal; (2) the loser is the first to suffer an injury; and (3) the winner takes exclusive possession of the resource. Each Falcon has a 50% chance of defeating another Falcon. The Dove retreats in any conflict with a Falcon and therefore always loses. When two pigeons interact, they both share the resource.

This game has two pure strategy Nash equilibria, which determines the dominant strategy: one chooses to be a hawk and the other chooses to be a dove. There is also a mixed strategy equilibrium, in which each animal chooses Hawk with a probability of one third and Dove with a probability of two thirds. This is indicative of a distribution of strategies in a population in which Hawk is played one third of the time and Dove is played two thirds of the time. In other words, playing just Hawk or Dove exclusively, or in any other proportion, would be evolutionarily unstable.

In reality, Tesco and Asda have been playing Hawk’s strategy. Why would this happen when it is not an equilibrium of the game and is, in fact, the most suboptimal outcome? Neither company may know that you are playing this game. A more likely explanation is that both companies are willing to sacrifice short-term profits to be the dominant players in the UK grocery industry in the long term. Public records show that Tesco executives view Asda as a major threat, even though Tesco’s quarterly sales are 1.5 times Asda’s. Tesco is very focused on this price war environment, and the company has even displayed on its grocery shelves the listing prices of its products against Asda and Boots, a UK drug chain.

This defense has apparently paid off for Tesco as it remains the market leader in terms of UK market share and net income. In addition, the company has been following a unique marketing strategy based on a rich database of ten million customer surveys, customer panels, and mailed questionnaires with the goal of engaging consumers so they can redesign Tesco to satisfy better your needs and expectations.

Meanwhile, Asda has been growing at 10% annually and is a viable competitor for Tesco. Another player, Sainsbury, has been in continuous market share decline since 1995 due to the failed execution of a high-priced alternative. Safeway, another major player and a household name in the UK grocery market, filed for bankruptcy in 2005 and subsequently merged with William Morrison. These four players together represent 72.5% of the industry, as of 2005.

Concluding thoughts:

Price wars in the British grocery oligopoly market have hit more than just Tesco and Asda. Both companies have been playing a Hawk-Dove strategic game, in which both players act as Hawks. Their resulting actions have hurt the business prospects of independent retailers, such as local supermarkets and food stores, many of which have closed as a result. Furthermore, local businesses across the UK grocery industry value chain, such as suppliers and distributors, have also been negatively affected.

Tesco and Asda have been following this strategy since Asda entered the market in June 1999. Such actions will likely result in continued consolidation within the UK grocery industry, with no more than four dominant players in this space, with the increased market share underway. to Tesco and Asda.