2017 paper 1 Flashcards
(7 cards)
a)
With reference to Figure 1 and Extract A, explain one likely reason for the change in the four-firm concentration ratio of the supermarket sector between 2010 and 2015. (5)
The 4-firm concentration ratio has decreased by 3.6% [Ap] from 76.1% to 72.5% [Ap]. This shows the market share held by the four largest supermarkets in the market has fallen [K]. The smaller discount stores such as Aldi and Lidl have increased their market share because Aldi and Lidl focus on low prices so their sales have risen faster than those of the big four (1) more convenient to shop at local stores
b) With reference to Figure 2 and Extract A, discuss the possible impact of supermarket monopsony power on both food suppliers and consumers (12)
Supermarkets” buying power enables them to pressure food suppliers into lowering their prices, which can result in lower prices for consumers [K].
Extract A states that food prices have fallen by 1.7% over two years, benefiting consumers by increasing consumer surplus [Ap]. This makes groceries more affordable, particularly for low-income households, allowing them to allocate more income to other essentials. Lower prices also encourage greater spending, which could stimulate further economic activity
However, the pressure on suppliers to accept lower prices can have negative consequences [K]. Figure 2 highlights that up to 30% of suppliers reported Tesco failing to meet the Groceries Code of Conduct, suggesting exploitation of suppliers. Many small suppliers, which make up 90% of struggling firms, face financial problems due to delayed payments or excessive packaging costs imposed by supermarkets [Ap]. This could force some firms out of business, reducing market competition and consumer choice in the long run
Supermarket monopsony power can also lead to suppliers cutting costs in response to lower prices [K]. This may result in reduced product quality, job losses in the food supply chain, and less investment in innovation [An].
Extract A states that suppliers often fund in-store promotions, further squeezing their profit margins [Ap]. If too many suppliers exit the industry, it may weaken the supply chain and reduce food availability
However, some suppliers may respond by increasing efficiency, allowing them to remain competitive despite pricing pressures [E]. The Groceries Code Adiudicator (GCA) also has the power to fine supermarkets up to 1% of annual sales for breaching the Code, reducing the risk of extreme exploitation [E].
Figure 2 shows that Aldi and Sainsbury’s performed better, suggesting that some supermarkets do not misuse their monopsony power
«Expert tuition version
Examine measures the government might use to restrict the monopsony power of supermarkets. (8)
The GCA has the power to fine supermarkets up to 1% of annual sales revenue [Ap]. One measure to restrict monopsony power is to increase financial penalties [K]. This could deter supermarkets from aggressively cutting the prices they pay to their suppliers [An]
Supermarkets make delays in payments to food suppliers [Ap] so another measure could be regulation
[K]. More stringent ruled could be enforced to ensure that supermarkets made timely payments to food suppliers [Anl
However, the GCA might not have enough information to regulate because food suppliers are reluctant to complain [E]. Regulatory capture could occur where regulators act in the interests of the supermarkets instead of society as a whole
Assess the extent to which ‘information gaps’ (Extract B, lines 5 and 6) and ‘irrational behaviour’ (Extract B, line 11) are the main causes of food waste in the UK.
(10)
Information gaps contribute to food waste as suppliers and supermarkets struggle to accurately predict supply and demand [K]. Farmers face uncertainty due to climate conditions, pests, and time lags, leading to overproduction or shortages. Similarly, supermarkets find it difficult to forecast consumer demand due to changing tastes and population shifts, resulting in excess unsold food [Ap].
This misallocation of resources leads to 4.1 million tonnes of food waste annually in the supply chain
Irrational behaviour also plays a role in food waste [K]. Many consumers struggle with computation issues, such as estimating how much food they need, leading to overbuying. Impulse purchasing, driven by advertising and special offers, encourages people to buy food they do not consume [Ap].
This behaviour contributes to 7 million tonnes of consumer food waste annually, making it a major factor
However, other factors may be just as important [El. Some food waste occurs due to logistical inefficiencies, such as transportation delays and storage failures, which are unrelated to information gaps or irrational behaviour [E]. Additionally,
supermarkets are actively working to reduce waste through better forecasting and packaging innovations, suggesting that information gaps may decline over time [E].
It is also questionable whether consumers always act irrationally
Some may purchase in bulk to save money, which can be a rational financial decision despite increasing waste
e) Discuss the likely problems for Sainsbury’s and Morrisons if the suggested merger between them goes ahead. Refer to Figure 1, Extract C and your own knowledge in your answer (15)
Amajor issue with the Sainsbury’s-Morrisons merger is the risk of Competition and Markets Authority
(CMA) intervention [K]. The combined firm would hold 27.4% of the UK supermarket market share, exceeding the 25% legal monopoly threshold (Figure 1) [Ap]. The CMA may block the merger if it is seen as reducing competition, particularly as lesco already holds 28.6% of the market [An].
However, the growth of Aldi and Lidl (Figure 1) could make it easier for the merger to gain approval [An]. Level 3
KAA
However, the CMA may approve the merger if it believes that competition from discount supermarkets and online retailers is strong enough to prevent excessive market power [E].
With Aldi increasing its market share from 2.8% in 2010 to 5.5% in 2015, and Lid growing from 2.2% to 4%, competition remains fierce [E]. The CMA could also approve the merger if it increases efficiency and benefits consumers through lower prices
Another challenge is diseconomies of scale, such as store location overlap, redundancy costs, and IT integration issues [K]. Sainsbury’s and Morrisons operate many stores in the same areas, so rationalisation may be required, leading to job losses and store closures (Extract C) [Ap]. Additionally, merging workforces and implementing a new IT system could increase coordination costs, making the transition difficult [An]. A lack of brand synergy may also harm consumer loyalty, as customers may not respond positively to a combined store brand
However, economies of scale may offset these issues. Bulk purchasing power could lower supplier costs, improving profitability in the long run [E]. Merging store operations could also lead to cost savings, making the firm more competitive [E]. If the merger boosts market power, it may allow Sainsbury’s-Morrisons to negotiate better deals with suppliers, helping sustain long-term profitability
