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 nationwide market. There !plant bakers" are of a similar si#e
and between them account for about $% per cent of the market by value, with other large
bakeries accounting for a further &' per cent of the market (including )arburtons, the third
largest plant baker*. But then there are thousands of small bakeries, often where the bread is
baked in the shop. Their bread is usually more expensive than the massproduced bread of the
two giants, but they often sell a greater variety of loaves, cakes, etc., and many people prefer
to buy their bread freshly baked.
+n the ,-$.s and ,-/.s, the giant bakers gradually captured a larger and larger share of the
market. This was due to technical developments that allowed economies of scale:
Market share of bakeries (by value), 2006
Allied Bakeries
28%
British Bakeries
26%
Other large bakeries
23%
!"store bakeries
#$%
%&all a!d &ediu&"
si'ed bakers
6%
developments such as mechanical handling of bread, processes that allowed rapid largescale
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 largevolume
retail outlets where there was a demand for wrapped bread with a long sellby date. These
presented real barriers to the small baker.
But then in the ,-0.s, the rise in oil prices and hence the rise in transport costs gave a
substantial cost advantage to locally produced bread. )hat is more, some of the technical
developments of the ,-/.s were adapted to smallscale baking. 1inally there was a shift in
consumer tastes away from massproduced bread and towards the more individual styles of
bread produced by the small baker.
The effect was a growth in the number of small bakers, who now found that entry barriers
were very small.
+n recent years, however, the small baker has faced a new form of competition. This is
from the instore bakeries in supermarkets, which now have about ,0 per cent of the market.
These produce not only the standard loaves, but also the more specialist breads which were
previously produced only by the small bakers. 2ot to be outdone, the plant bakers are now
also producing a wider range of breads, many produced for the supermarkets to be sold under
their own brands. 3ife is becoming harder again for the small baker.
Questions
Are the large oligopolistic bakers and the small bakers catering for the same market4