United KingdomSupermarkets In October 2000 the competition Commission reported o
ID: 1242076 • Letter: U
Question
United KingdomSupermarkets
In October 2000 the competition Commission reported on the supplyof groceries from supermarkets in the United Kingdom. It containedthe following information.
- the prices of groceriesin the UK tended to be higher than in other European countries.
- there was a clear difference between farm gate prices and theretail prices of the groceries sold in the supermarkets
-there was an overall decline of 9.4% in the real price of foodfrom 1989 to 1998.
-supermarkets face high competition from small grocery stores ascustomers are tied to shops closest to their homes (not more than15 minutes away) to do their main weekly shopping.
-however some large supermarkets were able to price their productsmuch lower than small grocery shops due to their long run averagecosts.
-supermarkets also varied their prices in different geographicallocations.
a) using demand and supplyanalysis identify one reason for grocery prices being higher in UKcompared to other European countries.
b) from the information given,was it cheaper to purchase food in1998 than in 1989?
c)why are large supermarkets able to price their products muchlower than small firms?
d)discuss whether it can be concluded from the passage thatsupermarkets were maximizing profits.
Explanation / Answer
A- due to the article mentioning an increase in competition betweengroceries that indicates an increase in demand for groceries whichinturn causes an increase in prices versus other Europeancountries. B- yes, the article indicates that the real prices have dropped9.4% from 1989 to 1998. the Real price is inflation adjusted toreflect an actual comparison, which in this case has dropped. C-Large supermarkets are able to lower their prices due to beingable to buy in larger quantities (savings in cost of delivery andprice of product) and being able to sell a larger volume thusmaking up for the lower pricing. D-the supermarkets are not maximizing profits with regards to theprice-demand chart of the whole market because they are sellingbelow the optimal price/demand point, they do so to undercut thesmall shops.
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