Monday, 17 July 2017

The Dark Side of Supermarket Warfare


All competition is good competition... right?



Entering through the doors of your local Tesco, you are not just entering a supermarket. You are entering a battleground. But in this battle, there are no guns or swords- instead, you'll find weapons of words scattered around the place- "I'm cheaper", "Brand Guarantee", and the like.

The supermarket industry has reached saturation point, and as a result, the players are all scrambling to win the pound in your pocket. One of the most prominent tactics to do this, that has risen to fame in the past decade, is the phenomenon of 'Price Matching'. The essence of this is that if you go to your local Tesco, for example, and find that the cereal you are buying could be had for less money in Sainsbury's, if you can prove this to the cashier at Tesco, they will match the cheaper Sainsbury's price in store. In some stores, the offer is made to go even lower than the competitor price.

Seems great, doesn't it? On the surface, yes. Competition is very important in any market, especially one that is as large a part of our daily lives as our supermarkets. Competition leads to better service, better stores, and, perhaps most importantly, lower cost to customers.

And at first glance, price matching seems to be competition set in stone by the supermarkets- a written promise to compete with each other. Furthermore, one could argue that price matching means setting low prices is not enough to compete- it arguably puts stores on a level playing field to compete on other aspects of the customer experience, such as customer service.

But not all is as rosy as it seems, because in reality, price matching is unlikely to lead to a better outcome for the consumer.

Firstly, the notion of price matching allows stores to set higher prices than competitors in the first place. Price matching means stores can attract those who are so sensitive to higher prices that they may have avoided the store if it wasn't a policy. In the case of direct price matching, where one store exactly matches, and doesn't beat, another store's price, the incentive to 'compete' and set truly lower prices is dulled. Essentially, price matching weakens the link between demand and supply that otherwise would drive a store to cut prices.

There are more practical arguments against price matching too. These are well set out in Morten Hviid and Greg Shaffer's 1999 paper on the subject, but in reality these weaknesses are not too difficult to comprehend.

Firstly, the procedure for actually gaining the right to a price match is not so simple- this is usually designed to be an inconvenience by supermarkets. For example, the very act of providing another store offers the same product at a cheaper price is often a hassle. The customer must provide written proof of the competitor's offer, usually a difficult task unless the customer is willing to travel between multiple stores in search of the best price. And if he does so, why would he then not purchase the product at the originally cheapest store?



And once the proof is provided, the ultimate approval is given by the store- who may disagree that the two compared products are the same, or have some other quarrel with the proof provided. The terms and conditions make the process far less open than it first appears.

Furthermore, as Hviid and Shaffer point out, "In every instance it takes longer to complete a transaction when price matching is requested than when it is not". This means there is a non-financial cost to entering a price matching deal, and often the amount you are saving is not enough to make this a cost worth bearing.

So while price matching is indeed a form of competition, it is not as beneficial to the consumer as advertised. It arguably allows stores to be less proactive in setting low prices, and also provides many practical stumbles that to many consumers will just not be worth it. It's a form of what is called imperfect, oligopolistic Bertrand competition- in which there are a few firms who compete with each other on price. In theory, Bertrand competition leads to an optimal solution for the consumer. But the painstaking realities of the price matching process mean this, in practice, is far from the case.

As consumers wise up to this reality, it seems some supermarkets are too- Sainsburys announced the removal of their price matching program last year, highlighting the need for "clear, simple pricing". The question that remains is whether other supermarkets will follow suit.
Mohammad Lone Editor