Oligopoly Cases
Case 7.4
Oligopoly or Monopolistic Competition
Big firms and little firms: the case of bakeries
Despite barriers to entry of other large-scale firms, many oligopolies face competition at the margin from many small firms. The reason for this is that the small firms often produce a specialist product or serve a local market. These small firms are in a position somewhat like monopolistic competition: they produce a differentiated product and face few if any entry barriers themselves.
A good example of this is bakers. Two giant producers, Allied Bakeries and British Bakeries, produce bread for a nation-wide market. There ‘plant bakers’ are of a similar size and between them account for about 54 per cent of the market by value, with other large bakeries accounting for a further 23 per cent of the market (including Warburtons, the third largest plant baker). But then there are thousands of small bakeries, often where the bread is baked in the shop. Their bread is usually more expensive than the mass-produced bread of the two giants, but they often sell a greater variety of loaves, cakes, etc., and many people prefer to buy their bread freshly baked. In the 1950s and 1960s, the giant bakers gradually captured a larger and larger share of the market. This was due to technical developments that allowed economies of scale: developments such as mechanical handling of bread, processes that allowed rapid large-scale proving of dough, and bulk road tankers for flour. Also, with the development of supermarkets where people tended to shop for the week, there was a growth in large-volume retail outlets where there was a demand for wrapped bread with a long sell-by date. These presented real barriers to the small baker. But then in the 1970s, the rise in oil prices and hence the rise in transport costs gave a substantial cost advantage to locally produced bread. What is more, some of the technical developments of the 1960s were adapted to small-scale baking. Finally there was a
Oligopoly or Monopolistic Competition
Big firms and little firms: the case of bakeries
Despite barriers to entry of other large-scale firms, many oligopolies face competition at the margin from many small firms. The reason for this is that the small firms often produce a specialist product or serve a local market. These small firms are in a position somewhat like monopolistic competition: they produce a differentiated product and face few if any entry barriers themselves.
A good example of this is bakers. Two giant producers, Allied Bakeries and British Bakeries, produce bread for a nation-wide market. There ‘plant bakers’ are of a similar size and between them account for about 54 per cent of the market by value, with other large bakeries accounting for a further 23 per cent of the market (including Warburtons, the third largest plant baker). But then there are thousands of small bakeries, often where the bread is baked in the shop. Their bread is usually more expensive than the mass-produced bread of the two giants, but they often sell a greater variety of loaves, cakes, etc., and many people prefer to buy their bread freshly baked. In the 1950s and 1960s, the giant bakers gradually captured a larger and larger share of the market. This was due to technical developments that allowed economies of scale: developments such as mechanical handling of bread, processes that allowed rapid large-scale proving of dough, and bulk road tankers for flour. Also, with the development of supermarkets where people tended to shop for the week, there was a growth in large-volume retail outlets where there was a demand for wrapped bread with a long sell-by date. These presented real barriers to the small baker. But then in the 1970s, the rise in oil prices and hence the rise in transport costs gave a substantial cost advantage to locally produced bread. What is more, some of the technical developments of the 1960s were adapted to small-scale baking. Finally there was a