The Competition Commission enquiry into supermarkets, which began in April 1999, followed a nine-month investigation by the Office of Fair Trading (OFT) into the major supermarket chains’ business activities. The OFT identified three major areas of concern: the use of barriers to entry, the lack of effective price competition, and the relationship between the large supermarket chains and their suppliers.

The main issue concerns the major supermarket chains’ huge buying and selling power. They have been able to drive costs down by forcing suppliers to offer discounts. Many suppliers, such as growers, have found their profit margins cut to the bone. However, these cost savings have not been passed on from supplier to shopper. The supermarket chains have adopted a system of ‘shadow pricing’, a form of tacit collusion whereby they all observe each other’s prices and ensure that they remain at similar levels: often similarly high levels rather than similarly low levels! This has limited the extent of true price competition, and the resulting high prices have seen profits grow as costs have been driven ever downwards.

Since the OFT referral, the £6.7 billion take-over of Asda by Wal-Mart, the world’s largest retailer, with a reputation of being a ruthless price cutter, promised to change the whole issue of pricing in the supermarket sector. Of the supermarket chains, Asda has always been one of the cheapest. With the Wal-Mart take-over, the drive to cut prices gained fresh momentum. Asda planned to slash prices on hundreds of products, with most seeing some price reduction.

Tesco in response, striving to maintain its position as the UK’s number one supermarket retailer, launched its own price-cutting campaign. It was determined not to get left behind in the price cutting war.

Despite these apparent price wars, the Competition Commission was still concerned that competition was being restricted. It sought to answer a number of questions. Is price competition is limited to a relatively small number of frequently purchased items, and at stores which face the most local competition? Are cost reductions ‘being rapidly and fully passed through to consumers’? Is ‘the pattern of prices and margins across different types of product, including branded and own label products, related to costs to the extent that would be expected in a fully competitive market? This would include products persistently sold at a loss, which may benefit consumers in the short term but which may distort competition and consumer choice, and may adversely affect the supply or availability of such products in the longer term.’

One solution suggested by the Competition Commission would be to force supermarkets to publish their prices on the Internet, thereby allowing consumers or consumers’ organisations to make easy comparisons of the prices charged by different supermarkets. 

By March 2006 the OFT had uncovered more substantive evidence of the potential abuse of market power in the grocery sector by the supermarkets. Specifically it noted four issues.

Supermarkets have acquired many plots of land near their own stores to prevent rivals from buying the sites. The rivals are often unable to find alternative sites in the area because of planning restrictions.

The power to drive down the prices paid to suppliers has increased since 2000. This makes it more difficult for convenience stores to compete, given that their wholesalers often do not have equivalent power to drive down prices from suppliers.

A possible distortion of competition by charging high prices where there is little or no competition and charging lower prices, often below cost, where competition is more intense.

Entry into the convenience store sector. With brands such as ‘Tesco Metro’ and ‘Sainsbury’s Local’, supermarkets have been successful in driving out many small stores from the market. So far, the result has tended to be lower prices, ‘but this may have been at the expense of choice of store at the local level’.

QUESTIONS

1. What did the EU do about the business practices of the car markets, supermarkets and banks? Support your answer with extracts from each of the case studies
2. Explain the role – from a legal perspective – of the EU in monopolies and anti-competition practices in general with specific reference to the EU’s position on dominance and monopoly and EU exemptions to potentially anti-competitive practices

CASE STUDY 2

Vanilla Ice became a household word for a while, not because of his talent, but because of the copyright infringement that occurred in 1990 when it came to light that he had sampled Queen and David Bowie’s “Under Pressure” without consent or license. Ice Ice Baby hit number one on the charts in the United States and Vanilla Ice became the one ‘under pressure’. Vanilla Ice altered the rhythm of the baseline thinking he would thereby avoid any question of credit, royalties, license or even permission. This case never went to court as it was clear that Vanilla Ice had stolen the sample without permission. He settled out of court with Queen and David Bowie for an undisclosed but very likely very high amount. Ice Ice Baby has been released in many different versions, since then, with all of the legal procedures followed.

QUESTIONS

Use Case Study 1 to help you answer these questions. You may need to do further research to complete your answer.

1. Was Vanilla Ice guilty of copyright infringement? Why? Why not?
2. What rights do Queen and David Bowie as copyright holders of the song ‘Under Pressure’? 

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