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Coupon Wars and Supermarkets

Economic theory can help explain the behavior of supermarket chains engaging in coupon wars, even though the behavior appears to be self-destructive. Economic theory can also shed some light on the consequences of using discount bonus coupons for both the supermarkets and consumers.

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?FL? In the case of the supermarket bonus coupon wars, the supermarket chains continue to engage in behavior which tends to reduce profits. Generally, the introduction of bonus coupons is initiated by smaller competitors for the purpose of increasing their market share. The larger competitors soon follow suit. In fact, one chain was reported as having signs ready for use when-ever competitors begin using bonus coupons. The head of one supermarket chain stated that he would not give up the use of bonus coupons, because he wanted to protect his "market share." Such behavior inevitably reduces profits. One chain saw its profits fall 10% because of the use of bonus coupons, while it took another chain six months to recover the profits lost in just "four days" of honoring "triple" coupons.?FN1"Bonus Coupon Wars Hit Supermarket Profits," p. 276.

This indeed appears to be self-destructive behavior, and it causes one to contemplate why supermarket chains continue the practice. The answer lies in the fact that the supermarkets are competing in an oligopolistic market and that the competitors are highly interdependent.

Oligopoly exists when a market is characterized by only a few competitors. In recent decades, many small independent grocery stores found it difficult to compete with large supermarkets, which are able to operate on smaller margins because they have a much greater sales volume. Another trend has been that large chains have been buying out smaller chains. Thus, the result has been an increasing trend toward oligopoly in the supermarket business. Economic theory tells us that "firms in an oli...

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Coupon Wars and Supermarkets. (2000, January 01). In LotsofEssays.com. Retrieved 17:11, October 20, 2014, from http://www.lotsofessays.com/viewpaper/1687961.html