Analyse the impact on grocery consumers of interdependence between supermarkets

AQA A-Level Economics Paper 1 June 2022

Extract E (lines 16–17) states that, ‘Supermarkets set prices interdependently, and price wars look very likely.’ With the help of a diagram, analyse the impact on grocery consumers of interdependence between supermarkets. (9 marks)

The supermarket sector is an oligopolistic market structure. This means that there are a few firms dominating the market. Firms in an oligopoly are interdependent, which means that one firm's decisions affect the other firms, especially in terms of pricing. The Kinked Demand curve model demonstrates the effects of interdependence as unlike a regular demand curve, firms in an oligopoly have a demand curve which is price elastic in demand at higher prices, and price inelastic in demand at lower prices. PED is the responsiveness of quantity demanded to a change in price. The diagram below shows that firms would lose significant market share if they raise their prices, since they would be more expensive than their competitors. The diagram also shows that firms only gain a small amount of market share if they reduce their prices. This is because other firms would be forced to reduce their prices as well, and this would start a price war. Many supermarkets have a policy of Aldi Price Match to scare Aldi away from further reducing their prices. Overall, any time a firm decreases their prices, there is an effect on the other firms as it could start a price war. Alternatively, firms could maitain a stable price and this would encourage forms of non-price competition such as improving branding and customer service.

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