EconFather Blog

Ooh Ah Just a Lidl Bit!

March 4, 2021 - 4 min read

The song reference may go over your head if you’re a student rather than a teacher of a certain age but stick with it! Like my students you’ll tune into my sense of humour as we go, and you’ll learn a lot of Economics along the way. At least I didn’t choose “Let’s go Aldi Way” as the title.

Actually, this may have been more appropriate. I’ve been inspired to write by Sainsbury’s recently launched price match scheme – “The Sainsbury’s quality you expect now price matched to Aldi” which follows a similar scheme launched by Tesco in March 2020.

The UK grocery market is a classic oligopoly with a four firm concentration ratio well in excess of 60%, though this has been eroded by competition from the likes of Aldi and Lidl in recent years. Aldi and Lidl are part of a discount sector that competes fiercely on price, selling a narrower range of products to gain economies of scale and cutting cost to the bone by eliminating waste and inefficiency – a till at Aldi never stays open if there’s not a queue of customers there!

The outcome of oligopolistic markets is unpredictable due to the interdependence between the large firms that dominate the market. I always tell my students “You’ll never write about oligopoly”. Hang on. I’ll finish that sentence in a moment. “Without using interdependence.” The concept really is central to the market structure.

This means that the results of any strategy a firm may adopt depends on the actions and reactions of rivals and cannot be understood in isolation. However, we can comment on which outcomes are more likely according to the conditions in a particular oligopoly. In the grocery market, everything points towards price competition and even price wars. The fact that the overall market is scarcely growing (the market is saturated) means that firms can only grow by winning market share from rivals. Price competition is one way of doing this. Add in that the products offered by rival supermarkets are pretty homogenous (a high cross elasticity of demand) and the cost advantages enjoyed by some firms (who might think they can sustain a price war for longer than rivals) and the scene is set. Finally, the disruption caused to the market by Aldi and Lidl in recent years makes price competition the most likely outcome.

And Aldi and Lidl have enjoyed considerable success. Although their market shares are around 8% and 6% respectively, this has grown from just 3% and 2% in the past eight years, enough to give market leaders such as Tesco (27%), Sainsbury’s (15%) and Asda (14%) a headache. These stores may be able to sustain some price premium in relation to the discount stores through a better shopping experience (less crowded aisles, shorter queues and loyalty schemes to reduce elasticity of demand) but they’ve undoubtedly felt the need to respond – there’s that interdependence thing.

Which brings us full cycle to Sainsbury’s price match against Aldi. It covers only 250 products, so it’s not comprehensive. It may also be misleading. I’m suspicious of the competitive credentials of price match schemes. Sainsbury’s has been criticised by The Grocer because some of the 250 products were already cheaper in Sainsbury’s than Aldi and have actually had their price raised! Moreover, a public commitment to price match gives other Aldi a reason not to cut prices further, knowing that these cuts will be matched and relative prices of the two firms will remain unchanged.

In fact, I often see price match schemes as an anti-competitive strategy! This said, both Sainsbury’s and Tesco (whose price match scheme covers a broader range of 500 products) have made significant price cuts in initiating this strategy. Arguably, the broader significance of Sainsbury’s strategy is a recognition that Tesco’s strategy is winning customers and Sainsbury’s are competing against the market leader.