Category: Economics for Business: Ch 14

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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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Economic games in the Iran war

Economists use game theory to understand decision making where the outcome for an economic actor – individual, firm, government, etc. – depends on the actions and reactions of other actors. It models how rational actors make optimal decisions based on their expectations about such actions and reactions of competitors. Sometimes these expectations will be based on considerable knowledge; sometimes they will be based on hunch or the degree of optimism or pessimism.

Perhaps the most famous game is the prisoners’ dilemma. This is where two or more firms (or people) independently attempt to choose the best strategy, thinking about how their rivals are likely to react. But they end up in a worse position than if they had co-operated in the first place. For example, if a firm is considering cutting price, it would gain market share if the other firm does not cut price; in such a scenario it is likely to gain by cutting price. If, however, the other firm is expected to cut its price, the first firm will have to cut price itself to avoid losing market share; in this scenario it will also cut price. Assuming the other firm reasons the same, the outcome is likely to be a price war, with both firms losing profit. However, if they both colluded to maintain prices or even raise them (assuming they can evade any legal restrictions on collusion), they will both gain.

Another example is the game of chicken. This is where two or more actors engage in brinkmanship, hoping that the other actor(s) will give in first. Take the above example of a price war. Assume that two firms are engaging in price cutting. They know that this will damage their short-term profit. But each hopes that the other will give up first and may then be willing to collude or, better still, be driven out of business. If either firm thinks it can win the game, it will reason that short-term pain is justified by long-term gain.

The war in Iran

A game of chicken is currently being ‘played’ by the USA and Iran. Iran is blocking the Strait of Hormuz; the USA is blockading Iranian ports, preventing ships from arriving or leaving. Both policies inflict economic pain. Blocking the Strait of Hormuz has driven up oil and gas prices and the prices of many other products exported through the Strait – products such as fertilisers, plastics, petrochemicals, sulphur, methanol and helium.

Each side hopes that the economic pain inflicted on the other will cause it to give up first.

But the game is ‘asymmetric’: the costs of continuing the blockades are different for each side and thus the pressures on each side to concede differ. For Iran, the blockade of its ports is massively curtailing its exports and is doing huge damage to its economy, already battered by bombing. But the war has so far seemed to allow the Iranian authorities to tighten their political grip and they may be prepared to play the ‘long game’ by rallying the Iranian population against the US and Israeli assault. The authorities may calculate that the Iranian people will be prepared to endure greater hardship for some time.

The USA is facing a much lower economic cost. Much of the hardship from the effective closure of the Strait of Hormuz is being borne by other countries. Energy and fertiliser shortages and the resulting rise in price of these critical inputs threaten a humanitarian disaster in some of the poorest countries. Harvests will be down, as will GDP; food prices will soar. There will be widespread economic hardship across Africa and much of Asia, particularly in those countries struggling with existing high debt burdens.

But for Donald Trump and his administration, those costs are likely to be seen as important only in so far as they affect the USA. However, oil prices are determined in international markets and, despite the US economy gaining from higher oil prices as the USA is a net exporter, the price of fuel to the US consumer has risen substantially. Petrol prices in the USA have risen some 45% since the start of the war and jet fuel prices have doubled, driving up air fares. With the prices of other key products, such as medicines, clothing and electronics increasing too, US inflation is now rising – aggravated by the effects of the tariffs on many products. These costs matter to the US consumer and, with mid-term elections approaching and with Donald Trump’s approval rate plummeting, the USA is likely to be more sensitive to short-term economic costs than Iran.

But the USA poses a much greater military threat to Iran than vice versa and this is seen in the USA as a major advantage in this high-stakes game of chicken. But the Iranian authorities’ willingness to endure further military strikes for what they see as long-term gain, may make them unlikely to concede first.

Podcast and video

Articles

Questions

  1. Explain the prisoners’ dilemma game and explain what is meant by the Nash equilibrium in the game.
  2. What is the Nash equilibrium of a game of chicken?
  3. Explain the asymmetries in the ‘game’ being ‘played’ by the USA, Israel and Iran?
  4. What other actors are there in the ‘game’ and do they play any significant role?
  5. How important is information and understanding held by the USA, Israeli and Iran about the likely consequences of their actions?
  6. What can mediators, such as Pakistan, do to de-escalate the situation?
  7. What are the likely long-term costs to the global economy if the blocking of the Strait of Hormuz persists for a number of months?
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When suppliers become the captains: Is Red Bull clipping rivals’ wiiings?

When we think about suppliers and retailers working together, we usually imagine negotiations over things like the price a retailer pays for products, the quantities ordered, or delivery schedules. However, some suppliers do much more than simply supplying products. In fact, suppliers to many supermarkets also advise them on which brands to stock, how much shelf space each brand should get, and which products to promote. In this role, known as a ‘category captain’, a supplier can influence not only its own products but also those of its competitors within a specific category of products.

For example, if Red Bull were acting as a category captain in the energy drinks category for a supermarket like Tesco, it could also advise on where its competitor, Monster Energy, appears on the shelves, or even whether it appears at all!

Sounds problematic? Arrangements like these are an example of vertical relationships between suppliers and retailers, something economists often study. Like other vertical arrangements, such as exclusive dealing, they can have both benefits and drawbacks. For example, while a category captain can result in efficiency gains, allow for a more organised category of products and improve consumer choice, it also raises questions when the supplier giving the advice also competes with the products it is advising on.

That is exactly what the European Commission (EC), the EU’s competition authority, began examining in November 2025, when it opened an investigation into potential anticompetitive conduct by Red Bull.

One of the key concerns is whether Red Bull used its role as a category captain to disadvantage competing energy drink brands.

Category management is common … but novel for enforcement

The practice of appointing a category captain is not new. Many large supermarkets appoint category captains from major consumer goods suppliers. For example, firms such as Kraft Foods and Procter & Gamble have long taken on category management roles in a range of consumer-packaged goods categories.

However, despite how common these arrangements are in retail, this is the first time the EC has formally investigated whether a supplier has misused its category management role to limit or disadvantage competing products, and it has said it will treat the case as a priority.

How Red Bull could be disadvantaging competitors

According to the Commission, Red Bull appears to hold a dominant position in the wholesale supply of branded energy drinks, at least in The Netherlands. In competition policy, a firm which holds a dominant position has a special responsibility to ensure that its actions do not unfairly restrict competition. Regulators are investigating whether the company abused this position by offering financial or non-financial incentives and/or leveraging its role as a category captain to disadvantage competing energy drinks sold in larger can sizes.

At an extreme, a category captain could advise a supermarket to stop selling a competitor’s product entirely, effectively excluding the brand from the shelves and potentially reducing consumer choice.

But there are also more subtle ways Red Bull could disadvantage its competitors. Insights from behavioural economics suggest that the placement of products on shelves can strongly influence what consumers notice and buy. By reducing the visibility of rival energy drinks, for example, products in less prominent locations are less likely to be purchased and are therefore disadvantaged.

These practices matter for consumers as well as competitors. By limiting which products are stocked or how prominently they are displayed, dominant suppliers could reduce choice and potentially keep prices higher.

Growing scrutiny of category management?

Competition authorities seem to be paying closer attention to how suppliers influence the management of product categories in retail stores. In April 2025, the Belgian Competition Authority fined three large pharmaceutical companies more than €11 million for co-ordinating the placement of over-the-counter medicines in pharmacies. The companies had created shelf layouts that favoured their own products, disadvantaged competing brands, and monitored whether pharmacies followed the plans.

Thus far there have not been many European cases related to category management.

Why the Red Bull case matters

The Red Bull investigation is the first EC case focusing specifically on the potential misuse of category management by a dominant supplier. There is currently little guidance on how these arrangements should be assessed under competition law, meaning the case could set an important precedent.

If the Commission concludes that category management was used strategically to disadvantage competitors, Red Bull could be found to have abused its dominant position under EU competition rules. Such a decision could reshape supplier–retailer relationships across Europe.

Articles

Questions

  1. Beyond prices, how might dominant suppliers influencing shelf space affect competition and consumer choice?
  2. How might category captain arrangements affect barriers to entry?
  3. What are the potential efficiencies of supplier-led category management, and what are the possible anti-competitive effects?
  4. What guidelines or safeguards could regulators provide to ensure category captains deliver the potential efficiencies without harming competition?
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Rival bids for Warner Bros. face competition scrutiny: a Postscript

A previous post detailed how Netflix and Paramount Skydance were competing to acquire part or all of Warner Bros. Discovery (WBD). In December 2025, Netflix announced that it had agreed a deal to buy WBD’s studio and streaming service business. However, Paramount has still pursued a hostile takeover of WBD.

In mid-February 2026, it emerged that WBD had reopened talks with Paramount. Paramount was given a week to make its final offer. Then, under the agreed deal, Netflix would have the right to adjust its bid. Things have developed quickly since then.

Paramount raised its offer price by $1 per share making the deal worth a total of $111bn. WBD stated that this was superior to Netflix’s offer and Netflix declined to increase its bid. Netflix executives stated that:

This transaction was always a ‘nice to have’ at the right price, not a ‘must have’ at any price.1

Paramount will also pay Netflix the $2.8bn fee WBD owes Netflix for terminating the deal.

Whilst it appears Paramount has won the race to acquire WBD, the deal still needs regulatory clearance from competition authorities in the USA and Europe. Paramount CEO, David Ellison, stated that the proposal offered WBD shareholders ‘superior value, certainty and speed to closing.’2

Should the deal go through, the merged company would be in a powerful position as one of the few remaining Hollywood film and television studios.

References

  1. Paramount set for $111bn Warner Bros takeover after Netflix drops bid

    2. BBC News, Danielle Kaye and Nardine Saad (26/2/26)

  2. Ibid

Articles

Questions

  1. What are the similarities and differences between Netflix’ and YouTube’s business models? How close substitutes do you think they are?
  2. Do you think cinemas are a closer or more distant substitute to Netflix than YouTube?
  3. Which of the possible deals, do you think, raised the most competition concerns? What might be a possible remedy that could alleviate these concerns?
  4. Was WBD’s decision to accept the Paramount takeover purely determined by the size of Paramount’s bid?
  5. What is the significance of legacy assets to the acquisition of WBD?