How does market power affect the resilience of food supply?

The aspects of market power and resilience considered in the paper are:

• Market concentration. For example, in the UK, 67% of the food retail market is controlled by four supermarkets. Some studies argue that market concentration causes vulnerability to shocks, because of the large disruption that could result if a dominant firm is affected. However, note the authors, it is important to distinguish between industrial concentration and economic diversity: a large firm may retain some resilience through having numerous parts that function independently of each other, such as contractors, regional business location or business divisions.
• Firm size. The paper reports a tension between larger conglomerates having the knowledge, capital, infrastructure and economies of scale to safeguard supply during crises, and the greater flexibility of small businesses to adapt to changes, such as small farms switching from selling to hospitality to consumers during COVID-19. At the industry level, resilience might best be achieved through having a variety of sizes of firm.
• Conflicts between resilience and efficiency. In some cases, the additional profit margins that can be extracted by companies with a high degree of market power can act as a buffer against supply shocks. For example, in 2017 there was disruption to supplies of fresh vegetables from Southern Europe to the UK because of weather conditions; because of the financial capacity of packers and retailers, lettuce supplies were maintained from a different source with higher transport costs.
• Costs and benefits of power imbalances. Market power in part of a supply chain can result in less power for other, smaller actors. For example, powerful buyers can dictate conditions for producers. This power can be used for beneficial purposes, such as promoting sustainable production practices, but it can also have harmful effects, for example by retailers failing to pass on price signals that would have alerted consumers to dangerously low levels of North Sea cod.
• Competition vs. cooperation. Cooperation between firms is usually regulated by competition authorities to control market power. However, in a crisis such as the COVID-19 pandemic, cooperation between firms can contribute to resilience by helping to overcome distribution problems.

Abstract

Food system shocks are mediated through value chains and underlying market structures, characterised by elements of power. Power imbalances are assumed to be detrimental to food security and to economic welfare, but the links between market power and food system resilience have not been extensively explored. This paper considers how shocks are potentially mitigated or amplified by the increasing consolidation of market power in globally interconnected food supply chains. We use UK examples to highlight evolving power-resilience dynamics and challenges from the perspectives of supply chain actors and regulators. We find that the impact of market power on the resilience of food supply is mixed. Low functional diversity levels, inflexible contracts and homogenous processes may increase supply chain vulnerability. A degree of power in terms of financial capacity, robust logistics and cooperation can enable firms to better mitigate shock impacts. Episodic crises appear to highlight the value of cooperation and of supply chain redundancy or slack, rather than the efficiency of perfect competition. This suggests a more nuanced perspective on market power than the largely detrimental perception implied by dominant economic theory. The discussion of the role of power in the food system should also consider social and environmental accountabilities of dominant food system actors, and whether these are sufficiently considered by existing regulatory structures.

Reference

Merkle, M., Moran, D., Warren, F. and Alexander, P., 2021. How does market power affect the resilience of food supply?. Global Food Security, 30, p.100556.

Read the full paper here. See also the TABLE report What scale for the food system? Moving beyond polarised debates and our podcast Season 1 Recap: What scale for the food system?