Oligopoly in the Bakery Market

Despite barriers to entry of other large-scale firms, many oligopolies face competition on the margin from many small firms. The reason for this is that the small firms often produce a specialised product or service for a local market. These small firms are in opposition, 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, with 20 per cent and 19 per cent respectively of the British market in 1998. 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 mass-produced 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.

In the 1950s and 1960s, the main bakers gradually captured a larger and larger share of the market. This was due to technical developments that allowed economies of scale: developments such as mechanical handling of bread, processes that rapid large scale proving of dough, and bulk road tankers for flour. Also, with the development of supermarkets where people tended to shop for a week, there was a growth in large volume retail outlets where there was a demand for wrapped bread with a long sell-by date. These represented real barriers to the small baker.

But then in the 1970s, the rise in oil prices and hence the rise in transport costs gave a substantial cost advantage to locally produced bread. What is more, some other more technical developments of the 1960s were adapted to small-scale baking. Finally there was a shifting consumer tastes away from mass-produce bread and towards a more individual stars are bread produced by the small baker.

The effect was a growth in the number small bakers who now found the entry barriers were very small.

Question

1. Do large oligopolistic bakers such as Warburton’s and small bakers cater for the same market?