Author: Elizabeth Jones

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A grocery duopoly: New Zealand supermarkets



The grocery retail market in New Zealand is worth billions of dollars each year and is one of the most concentrated supermarket sectors in the world. The industry is dominated by two large groups: Foodstuffs and Woolworths New Zealand. Together, these firms account for around 80–90 per cent of grocery sales, with Foodstuffs operating brands such as Pak’nSave, New World and Four Square, while Woolworths operates the Woolworths supermarket chain.

The market displays many of the characteristics of an oligopoly. The two dominant firms compete through store location, loyalty schemes, advertising and product range, and to some extent through pricing. At the same time, they benefit from substantial economies of scale, extensive distribution networks and strong relationships with suppliers. These factors mean that there are significant barriers to entry in the market and this can prevent new firms from entering the market and surviving.

Competition concerns

Concern about competition in the sector has led to investigations by New Zealand’s Commerce Commission. The Commission concluded that although there was competition in the market, it was less than optimal and both firms were earning higher profits than they would have been able to earn had they been in operating in a more competitive market.

It identified various barriers to entry that limited competition, including access to suitable retail sites, ownership of distribution networks and the difficulty of establishing large-scale supply chains in a country with a relatively small population.

Despite the market being dominated by these two big firms, there are also many smaller retailers operating within the market, including independent grocery stores, convenience stores and specialist food retailers. However, they lack the scale that is needed to challenge the dominance of Foodstuffs and Woolworths at a national level.

Potential international entrants, such as Aldi and Lidl, have often been suggested as possible competitors, but the costs of establishing a nationwide network of stores and distribution facilities in New Zealand are significant. There have been examples of large and dominant supermarkets in one country attempting to enter the market in other countries but failing to survive or deciding to exit the market early. For example, Tesco entered the Chinese market in 2004 but, despite its efforts, exited the market in 2020.

Response by the New Zealand government

In response to concerns about competition, the New Zealand government has introduced a series of measures designed to make market entry easier. These include restrictions on anti-competitive land covenants, the introduction of a Grocery Commissioner and changes intended to improve access to wholesale grocery supply.

But, despite these measures, recent reports suggest that the overall market structure has changed little, with the two major firms continuing to dominate grocery retailing.

The public interest

Supporters of the current market structure argue that large supermarket chains deliver lower costs through economies of scale and provide consumers with extensive product choice.

Critics counter that limited competition leads to higher prices, reduced innovation and weaker bargaining power for suppliers.

The debate illustrates the difficulties faced by policymakers when attempting to balance efficiency against the promotion of competition.

Whether greater competition will emerge in the future remains uncertain. Much will depend on whether existing reforms can encourage new entrants or whether the structural advantages enjoyed by Foodstuffs and Woolworths continue to deter potential rivals.

Articles

Questions

  1. What are the characteristics of the New Zealand supermarket industry that create barriers to entry for new firms?
  2. To what extent is the New Zealand grocery market consistent with the characteristics of an oligopoly?
  3. Evaluate the likely effectiveness of government measures designed to increase competition in the supermarket sector.
  4. Australia too has two main supermarket chains: Coles and Woolworths. However, Aldi has entered the Australian market and in some parts of the country had provided significant competition to the two major chians. Why may Aldi have more difficulty in entering the New Zealnd market
  5. Investigate the grocery retail market in another country (not the UK). Who are the major competitors and what is their market share? What barriers to entry exist? Has the competition authority expressed concerns about the market and if so, what are they?
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AI: benefits but catastrophic risk



Artificial intelligence (AI) has become a key technology in the 21st Century. Businesses use AI systems to analyse data, automate routine tasks, improve customer service, write software, create content and even assist with decision-making. As AI improves and becomes even more capable, governments, economists, businesses and society are debating its effects on productivity, employment and economic growth – and also its potentially extreme dangers.

Some commentators compare AI to earlier technological revolutions such as the steam engine, electricity and the Internet. They argue that AI will continue to increase productivity, create new industries and improve living standards. Others worry that AI may eliminate a large numbers of jobs, increase inequality, concentrate economic power in a few firms and, in the most extreme scenarios, pose a threat to humanity itself.

These debates raise important questions including how society should evaluate the potential risks of a technology whose benefits may be enormous but whose long-term consequences remain uncertain.

AI and the labour market

Historically, technological change has had both positive and negative effects on employment. Automation reduced the demand for many agricultural workers, while creating jobs in manufacturing. Computers automated clerical tasks but generated entirely new industries in software, telecommunications and digital services.

AI appears likely to follow a similar pattern. According to the World Economic Forum, advances in AI, robotics and information-processing technologies are expected to transform labour markets significantly during the second half of the 2020s, creating demand for new skills while reducing demand for others. The fastest-growing skills are expected to include AI and big data, technological literacy and cybersecurity.

The potential benefits

AI may benefit labour markets in several ways:

  • Higher productivity: Workers can complete tasks more quickly with AI assistance.
  • New occupations: Demand has emerged for AI engineers, prompt specialists, data scientists and AI governance professionals.
  • Better decision-making: Firms can use AI to improve forecasting, inventory management and customer service.
  • Complementing human skills: AI may perform repetitive tasks, allowing employees to focus on creativity, problem-solving and interpersonal activities.
  • Economic growth: Higher productivity can increase profits, wages and living standards over time.

Many economists argue that AI will not simply replace workers but will change the tasks they perform. Research from the OECD suggests that even highly AI-exposed occupations continue to require management, communication, collaboration and social skills that technologies struggle to replicate.

The potential costs

At the same time, AI may create significant labour-market challenges. Many white-collar occupations previously considered relatively safe from automation are becoming vulnerable. Generative AI systems can draft reports, analyse legal documents, write computer code and create marketing content. This means that some professional and administrative roles may face considerable disruption.

The World Economic Forum reports that business leaders have differing expectations about the effects of AI. In a 2026 survey (see link below), around 54 per cent expected AI to displace existing jobs, while only 24 per cent expected it to create new jobs within their organisations. Economists have identified several potential problems:

  • Structural unemployment: workers in industries that are in decline may struggle to find employment requiring their existing skills.
  • Increased income inequality: there may be a growing income disparity between highly skilled and less-skilled workers.
  • Growing market power: the largest technology firms that own the most advanced AI systems may see their market power grow further creating dominance in certain areas.
  • Regional inequalities: AI-related investment may become concentrated in particular cities and countries, exacerbating regional inequalities within and between countries.
  • Pressure on governments: to address issues of structural unemployment and increasing inequality, governments may be forced to expand retraining and social-support programmes.

AI and catastrophic risk

Most economic discussion around AI focuses on employment and productivity. However, some researchers argue that the most significant risks from AI may be much broader.

Economists distinguish between ordinary risks and catastrophic risks. Catastrophic risks involve events with a very low probability of occurring but potentially enormous consequences. Examples include nuclear accidents, pandemics and certain climate-related disasters.

AI raises similar concerns. Advanced AI systems could potentially be used to conduct cyberattacks, spread misinformation, disrupt critical infrastructure or support the development of dangerous technologies. Some researchers have even suggested that highly advanced AI systems could pose an existential risk to humanity if they become sufficiently powerful and are not properly controlled.

This became a widely discussed topic in the media in September 2026 following the resignation of an employee, Jacob Coxon, from AI firm, Anthropic. He said that people working on AI were ‘genuinely frightened’ about how quickly AI was advancing and what it might mean for the future of humanity. He said:

I believe that if we don’t slow down at the current rate of progress, there is a strong chance that we could all die in the immediate future.

Other researchers have raised similar concerns and there have since been calls from some of the biggest AI companies for regulation of AI to prevent this.

The policy debate and CBA

All of this creates a challenge for cost-benefit analysis. Suppose AI generates trillions of pounds of economic benefits. But, if there is also a very small probability of catastrophic harm, how should policymakers weigh up the two?

Traditional cost-benefit analysis values risk by multiplying the size of a potential outcome by its probability. However, this approach becomes problematic when both the probability and the consequences are highly uncertain. The risks may be extremely difficult to estimate, while the potential costs could be vast and affect future generations. For this reason, governments and firms increasingly use scenario analysis, stress testing and AI safety assessments to evaluate potential risks. These approaches attempt to prepare for extreme outcomes rather than relying solely on probability calculations.

Supporters of AI argue that technological progress has historically improved living standards and that restricting AI too heavily could reduce innovation and economic growth. Critics argue that uncertainty about potentially catastrophic outcomes justifies a more cautious approach.

The debate therefore extends beyond labour economics to the wider issue of managing catastrophic risk. As with nuclear power or climate change, policymakers must decide how much risk society is willing to accept in exchange for potentially large economic benefits.

Articles

Reports

Questions

  1. How might AI increase productivity while also causing unemployment in some sectors? Which sectors are likely to be affected the most?
  2. Why is it difficult to estimate the costs and benefits of advanced AI?
  3. Assume that a disaster is estimated to cost society £1000 billion (£1 000 000 000 000). The chances of the disaster occurring are said to be minute, however. Estimates vary from a probability of one in a million to one in a billion. What estimate of this cost would you include in a cost–benefit analysis?
  4. Why are many low-income countries apparently prepared to accept riskier projects than are high-income ones?
  5. Discuss whether the greatest economic challenge posed by AI is (a) job displacement; (b) increased inequality; (c) market concentration and the power of large technology firms; or (d) catastrophic long-term risks.
  6. Read the article by Bill Gates, The turbulent AI era is here. The choices we make now are critical. According to him, what steps should the world take to ensure that ‘AI will be a force for good and leave everyone better off’?
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Game Theory: Rafa is the King

Together with Formula 1, tennis is the other sport I love – and my favourite player by far is Rafa!

We often apply game theory to various sports and consider how players, teams and individuals can think strategically. One of the big debates in tennis is ‘who is the best ever’ and I argue that Nadal is the greatest, based on a huge range of metrics.

I saw this article in the Economist, providing analysis and comparison between some of the best tennis players. It shows how we can use economic thinking, probability, game theory and analysis to come to something of an answer about who is the greatest, considering the various players’ runs to the title in the Grand Slams. Of course the reason I’m posting this is because according to the Economist, Rafa is the best! And the reasoning is very sound. Enjoy. I certainly did.

Sorry Roger: Rafael Nadal is not just the King of Clay The Economist (13/09/17)

Questions

  1. What is game theory and why is it useful?
  2. How does the rating system aim to measure the skill of a tennis champion?
  3. In this particular scenario, why is it important to use probabilities?
  4. We can use game theory to think about penalty shoot outs and whether footballers play to the Nash equilibrium. Can we also use the Nash equilibrium when thinking about tennis? (Think about the serve!)
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Google it

The term ‘Google it’ is now part of everyday language. If there is ever something you don’t know, the quickest, easiest, most cost-effective and often the best way to find the answer is to go to Google. While there are many other search engines that provide similar functions and similar results, Google was revolutionary as a search engine and as a business model.

This article by Tim Harford, writing for BBC News, looks at the development of Google as a business and as a search engine. One of the reasons why Google is so effective for individuals and businesses is the speed with which information can be obtained. It is therefore used extensively to search key terms and this is one of the ways Google was able to raise advertising revenue. The business model developed to raise finance has therefore been a contributing factor to the decline in newspaper advertising revenue.

Google began the revolution in terms of search of engines and, while others do exist, Google is a classic example of a dominant firm and that raises certain problems. The article looks at many aspects of Google.

Just google it: The student project that changed the world BBC News, Tim Harford (27/03/17)

Questions

  1. Is Google a natural monopoly? What are the characteristics of a natural monopoly and how does this differ from a monopoly?
  2. Are there barriers to entry in the market in which Google operates?
  3. What are the key determinants of demand for Google from businesses and individuals?
  4. Why do companies want to advertise via Google? How might the reasons differ from advertising in newspapers?
  5. Why has there been a decline in advertising in newspapers? How do you think this has affected newspapers’ revenue and profits?
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The oil see-saw

In the blog OPEC deal pushes up oil prices John discussed the agreement made by OPEC members to reduce total oil output from the start of 2017, with Saudi Arabia making the biggest cut in output. The amount of oil being provided is a key determinant of the oil price and this agreement to reduce oil output contributed to rising prices. However, now oil prices have begun to fall (see chart below) with Saudi Arabia in particular recording an increase in output but all OPEC nations noting that global crude stocks had risen.

Supply and demand are key here and over the past few years, it has been a problem of excess supply that has led to low prices. OPEC nations have been aiming to achieve greater stability in global oil markets. Given the excess supply, it has been output of oil that the cartel member have been trying to cut. That was the point of the agreement that came into effect from the start of 2017. However, even with the recent increase in production Saudi Arabia notes that its output is still in line with its output target. The 10 percent fall in crude prices over such a short period of time has led to renewed concerns that pledges to reduce production will not be met. However Saudi Arabia’s energy ministry stated:

“Saudi Arabia assures the market that it is committed and determined to stabilising the global oil market by working closely with all other participating Opec and non-Opec producers.”

There were already concerns about the oil market relating to a potential increase in US shale oil output. Oil producers include OPEC and non-OPEC members and so while the cartel has agreed to cut production, it has little control over production from non-cartel members. This was one of the main factors that contributed to the oil price lows that we previously saw. OPEC’s forecast for oil production from non-OPEC member has been raised for 2017 and overall production from all oil producing nations looks set to increase for the year, despite OPEC curbing output by 1.2 million barrels per day. However, despite the 10% drop, the price of crude oil ($50) still remains well above its low of $28 in January 2016.

Oil prices are one of the key factors that affect inflation and with UK inflation expected to rise, this fall in oil prices may provide a small and temporary pause in the rise in the rate of inflation. There are many inter-related factors that affect oil prices and it really is a supply and demand market. If US shale oil production continues to rise, then total oil output will rise too and this will push down prices. If OPEC members undertake further production curbs, then this will push supply back down. Then we have demand to consider! Watch this space.

Report
OPEC Monthly Oil Market Report OPEC (14/3/17)

Articles

Saudis stand by commitment to oil production cuts Financial Times, Anjli Raval and David Sheppard (15/3/17)
Oil prices fall after Opec stocks rise BBC News (14/3/17)
Crude oil price slumps to new three-month low after OPEC supply warning Independent, Alex Lawler (14/3/17)
Opinion: Saudi Arabis has a big motivating interest in keeping oil prices high MarketWatch, Thomas H Kee Jr. (14/3/17)
Why oil prices may come under even more pressure next month Investor’s Business Daily, Gillian Rich (13/3/17)
Oil price crashes back towards $50 as Opec raises US oil forecasts The Telegraph, Jillian Ambrose (14/3/17)

Data and Information
Brent Crude Prices Daily US Energy Information Administration
OPEC Homepage Organisation of the Petroleum Exporting Countries

Questions

  1. What are the demand and supply-side factors that affect oil prices? Do you think demand and supply are relatively elastic or inelastic? Explain your answer.
  2. Use a demand and supply diagram to illustrate how OPEC production curbs will affect oil prices.
  3. If we now take into account US shale production rising, how will this affect oil prices?
  4. Why have OPEC members agreed to curb oil production? Is it a rational decision?
  5. What are the key points from the oil market report?
  6. How do oil prices affect a country’s rate of inflation?
  7. What, do you think, are oil prices likely to be at the end of the year? What about in ten years? Explain your answer.
  8. Should the USA continue to invest in new shale oil production?