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May 09th 2014 print

Peter Smith

What Do We Want? Higher Prices!

You notice the absence of complaints about unfair competition when businesses are doing well. They complain only when things are going badly. Unfortunately, a culture has been created in Australia of regulatory protection and taxpayers’ dollars being used to prop up businesses that should face only two options: get efficient or get out.

toddler screamingThe nanny state is alive and well. What? Do you mean all those entitlements going to people who should take care of themselves and their children? Well I could be meaning that but Joe’s going to start ending the age of entitlement next Tuesday. Ain’t he? Ain’t he? He Ain’t? Ah, well!

No, what I’m talking about is businesses running off to the federal government, or its regulatory consigliere, the ACCC, whenever competition rears its ugly head.

You will recall the kerfuffle over milk and petrol prices a little while ago. Coles and Woolworths had the temerity to sell milk and petrol at very low prices to the chagrin of dairy farmers and those businesses wanting to charge higher prices for petrol and which believed they had a God-given right to go on doing so. I think they may have done the same thing with bread prices, the bastards.

Now, apparently, the ACCC is alleging that Coles is demanding that two hundred of its suppliers discount their prices or else stuff won’t be bought. Where will it end, this rampant competition?

I spoke to an elderly pensioner doing her shopping in Coles and she told me, and I’m quoting here, “Well I can’t speak for anyone else but I would much prefer to pay higher prices for everything than to see those poor businesses supplying goods to Coles being squeezed. I don’t mind keeping my heater off unless it gets really cold to save the money to pay more for my groceries. And really, I don’t need to buy chocolates”, she said as she put the box of chocolates back on the shelf.

Thank God for the ACCC. Where else could we turn to keep supermarket prices up?

In case anybody, obviously including the ACCC, is in any doubt, a sure sign of competition is lower prices. I thought, mistakenly, apparently, that the ACCC was in favour of competition — but not, certainly not, when it actually does result in lower prices. There the ACCC draws the line.

What does competition mean? Why is it good? And why do lots of businesses dislike it?

Competition happens when two or more independent businesses, producing similar goods and/or services in the same market try to outdo each other. One of the main ways they try to do this is to lower their prices. In turn, this means, among other things, that they bargain as toughly as is practicable with their suppliers.

This is good because those buying from these competitive businesses enjoy lower prices. It is also good because it drives uncompetitive suppliers out of business (yes, out of business) or makes them operate more efficiently. In the end result the whole economy benefits. In other words, we look more like we do now than Eastern Europe in 1989. And we could have looked a lot better if governments hadn’t mollycoddled so many industries, like the car makers, for so long.

Many businesses don’t like competition, particular those at the sharp end of it. Why would they? Competition is uncomfortable and demanding. Their time-honoured response is to approach the consigliere for protection rather than improve their business processes. You never know, an offer that can’t be refused might be made to those causing you competitive angst.

OK, I don’t know the details of the case being brought by the ACCC against Coles in the Federal Court. But, what the ACCC shouldn’t care about is businesses being squeezed by other businesses in the competitive marketplace. They shouldn’t be concerned about lower prices unless they are result of a predatory intent to drive a competitor out of business before jacking up prices in the future. From the information available, it is hard to see how that applies in this case.

The free market is a hard, impersonal, taskmaster. That is one of its advantages over all other systems. We don’t want businesses protected and mollycoddled by the government or its agencies. That is a step closer to the inefficiencies and corruption of socialism.

You will always notice the absence of complaints when businesses are doing well. They complain only when things are going badly. Importantly, like children who fall over, they complain more loudly the more they think they will be listened to and given succour. Unfortunately, for many years a culture has been created in Australia of regulatory protection and taxpayers’ dollars being used to prop up businesses that should have been faced with only two options: getting more efficient or getting out.

The fiscal pressures that Australia will face in the future can only be solved by increased productivity. Part of that involves lowering business taxes and regulatory obstacles. Part also involves allowing relatively untrammelled competition to drive efficiencies.

Peter Smith, a frequent Quadrant Online contributor, is the author of Bad Economics  and the holder of a modest number of shares in Westfarmers, parent comapny of the Coles chain

 

Peter Smith, a frequent Quadrant Online contributor, is the author of Bad Economics

Comments [4]

  1. wisernow says:

    This is a pretty idealistic article. As a former large supplier to the major supermarkets I have first hand experience of the negotiating tactics used by them. Admittedly it is experience of a of a decade or so ago, but I’d be reasonably confident that the policies haven’t changed much, if at all.

    For every $100 we invoiced, we received a payment of $81 after they had taken their warehousing charges, rebates and promotional costs in addition to a discount for payment within 30 days. Sometimes it could reduce to $71 when items were on special promotion and a discount to the list price was demanded. Product deletion with the majors was always on the table.

    In my experience the major chains provided volume, exposure and maybe cost – often not. The top ups came from the smaller chains and the catering industry. They seemed more interested in quality and consistency than price.

    The trick to maintaining a healthy operation was to keep the majors to around 30 – 40% of your turnover but today I’d guess that would be difficult with the closure of so many smaller outlets and the rise and rise of the bigger groups.

    Like your pensioner I seek the higher priced and branded Australian product rather than the house labels that are dominating the shelves today. I have some idea of how difficult it has been for the brands to maintain their shelf space and I do like to support Australian manufacturers.

    • RealWorld says:

      Hmm, ideological, or very naive? If the duopolies screwing their suppliers is really in the national interest, then why can’t we know what their margins really are? Because they are very powerful schemers and lobbyists who have huge influence in government. Nothing good comes from having just 2 retailers with over 80% market share, which is why other countries don’t allow it. Imagine if there were 2 groups of producers with 80% market share, can anyone imagine that being allowed. No and rightly so, but currently 2 farmers with a wheelbarrow of carrots each are by law precluded from bargaining together, what a joke. Two first hand examples I can give, Potatoes: Farmer 40c/kg, Retail $3 – 4/kg Beef: Farmer $3.30/kg, Retail $10 – 40/kg. It is no accident that information is not available on what producers are paid – other countries like the US publish weekly lists so that consumers are informed, but not here – 2 retailers, 2 political parties and not a shred of transparency to be seen!
      The author can be forgiven for his naivety, few people bother to look deeper into market power, but our governments cannot. The duopoly are killing off our food producers and farmers, which will be to all our detriment in the long term.

    • Peter says:

      Dear Ian, thanks for your comment. I found your real world example to be instructive. You wanted $100 but only $81 or $71 was offered. That, so far as I am concerned, is the market working as it should. What is the alternative – some commissar setting fair prices? Kind regards, Peter

  2. wisernow says:

    It is difficult to recall all the experiences of dealing with the duopoly Peter and the tactics they adopted during negotiations and even more demanding to go into detail in a forum like as the reply section in Quadrant online. $100 was negotiated but then they added on the costs of doing business with them $81 was all you got – even less when the items were on a negotiated special. And if you complained – look out.

    However I do recall my grimace when the Howard government allowed the pair to retail petrol and forecast the inevitable result just as David Flint and Jai Martinkovits have in their opinion Mortgages Available in Aisle 4.

    With hand on heart I am able to say that I have never used a shopper docket for a petrol discount and continue to seek out independent petrol retailers, though the number is diminishing and I dare say in time I shall be forced to buy my petrol from them as well.

    I do have empathy for the producers and manufacturers who are seeking solace by talking to a government agency like the ACCC even though there is little they can do to remedy the situation. I never really saw the duopoly as the market at work, more like a bully at work.

    The answer isn’t a a regulator setting fair prices but a legislation related to monopolies. I know it wont happen but one can live in hope. This government seems to have more pressing issues to pursue and I’m unsure if any of them are in the national interest.