In the majority of modern mixed economies, the government can be hugely influential in specific industries by intervening with the five forces, thus affecting the firms within. It is important to at first define the five forces, and for clarity I will use the original theorist Porter (1979.) He defined the five forces as: “bargaining power of suppliers; bargaining power of buyers; threat of new entrants; threat of substitute products and competitive rivalry within an industry1.” Porter's theory is now widely recognized by economists and the Government has realised its significance within industry.
The industry I have decided to look at is UK supermarkets. Tesco is the UK's largest supermarket and accounts for “approximately one pound in every eight spent in the UK.2” This is clearly a significant amount of money and a large amount within the UK economy. Given these figures it is important for a Government to monitor and intervene if necessary. The chart3 below shows the market power held by firms in the UK supermarket industry. As is evident from the graph there are four major firms (Morrison has recently merged with Safeway) making the market oligopolistic in theory. Therefore the first force I am going to address is degree of rivalry.
Many economists measure rivalry by calculating a concentration ratio. This shows the percentage of market share held by the four largest firms. As we can see from the above pie chart, there are few dominant firms, which theoretically should be less competitive. With Tesco controlling almost one third of the UK grocery market, many called for government investigations into the almost monopoly power Tesco holds. At one stage Tesco was opening a new Express store everyday4 and therefore rapidly increasing market share and putting many smaller retailers out of business.
It was important for the government to notice this fast growth and investigate into Tesco's practices and ensure they were legal. Without this intervention, rivalry in the supermarket industry would dwindle and Tesco could potentially exert its monopoly power to out-price its major competitors. With government monitoring Tesco's power through the OFT (Office of Fair Trading) many of its' potential store purchases have been stopped. In one case Tesco could be forced to sell a major store to a rival to aid competitiveness5.
Government intervention in this case is clearly an effective way to control the power of major firms. However it is hard to decide whether or not Tesco, or indeed any other major player in the UK supermarket industry, is exploiting the power it has for the good or bad of consumers. For example in a perfectly competitive market, prices would be arguably lower compared to the relative lower rivalry in the current oligopolistic market conditions. By forcing Tesco to sell large stores to rivals it could decrease trust between the government and Tesco and decrease incentives to improve its customer service. So in theory, the government can create more intense rivalry by intervening and forcing Tesco to sell off major stores and restrict growth into other areas.
In reality however, I believe that Tesco is an extremely powerful economic force, and unless it partakes in illegal activities such as pricing cartels, it will be hard for the government to intervene and slow down growth.
The next force I will consider is threat of substitutes. Substitutes could be considered negligible as everybody needs food and there are no realistic substitutes. However I believe more acute substitutes are available, such as from specialist food retailers. For example, the government has been publicized to encourage healthy eating. It recommends eating "5 a day" which is indirect intervention, but has still been noted by many of the major food retailers, who now label their foods with in depth nutritional information.
Without this reaction from the big four, many smaller niche food retailers may have increased market share with healthier options, so it could be argued that the government have inadvertently decreased the threat of substitutes by making issues such as healthy eating more public. Substitutes are still available, and when a product is price inelastic or a relative luxury, consumers may be happy to pay a higher price. For example organic vegetables at a farmer's market may be more expensive than Tesco, but some consumers are still willing to pay a higher price, even if the quality is similar.
Barriers to entry in the supermarket industry are obviously extremely high, due to the massive market share held by the four main UK supermarkets. Small food retailers can be assisted in their growth by the government, with incentives such as tax relief and grants. However, it is unrealistic for these firms to ever compete due to a number of other factors.
All of the major retailers benefit from economies of scale, leading both an absolute and relative cost advantage over the new firms. If we consider barriers to entry on a microeconomic scale, the government has imposed policies to restrict the supermarket's entry into new localities as “Every new development for a supermarket needs planning permission and the developer/ supermarket must submit a planning application to the relevant local authority6” This will restrict the potential growth of supermarkets and allow some smaller, weaker retailers to retain control of some areas. There is also another aspect of barriers to entry that needs to be considered. Large multinational firms may also look to enter the UK market through mergers and acquisitions.
