Tuesday 8 April 2014

Hard-nosed duopolists

If a duopolist manages to cut its costs, do customers benefit?

The Greens don't like some of the hardball plays that our two main supermarkets run against suppliers. They want a compulsory code of conduct; the government doesn't seem all that opposed.
The Greens' move comes a day after Commerce Minister Craig Foss indicated a compulsory code of conduct, rather than a voluntary one as he has previously suggested, might be considered by the Government.
Competition watchdog the Commerce Commission is currently investigating supplier complaints of anti-competitive conduct by the Countdown chain and its owner Progressive Enterprises.
The investigation follows allegations made by Labour MP Shane Jones that Countdown was blackmailing suppliers into making retrospective payments to keep their products on supermarket shelves.
This sounds like slotting fees: pay the slotting fee, or you can't keep your product on the shelf.* I've not delved recently into that literature, but what I recall of it from a few years ago had it that these fees wound up being consistent with efficiency. See Klein and Wright in the Journal of Law and Economics, for example. They find slotting fees are paid on products that have the highest margins.

The more competitive is the NZ duopoly, the greater the pass-through of cost savings to consumers. Matt Nolan commented usefully on a related proposal a few months ago:
Let us think about Progressive vs Foodstuffs a bit here.  If both organisations are thumping around their wholesalers, and the duopoly is competitive (due to the organisations selling a homogeneous product where consumers have good information about prices), then the lower cost for products is PASSED ON TO THE CONSUMER!
If Progressive is bullying, and Foodstuffs isn’t, then Progressive has a lower cost structure than Foodstuffs.  As a result, Progressive can bid down prices, but is likely to keep a large part of the surplus to themselves.  In this case, Foodstuffs is squeezed, and may lose market share, so they have an incentive to bully their wholesalers as well!
If neither firm bullies their wholesalers, they both just charge higher prices, and the consumer pays the difference.
So here is the thing.  We feel bad for the wholesaler being bullied by these big companies – understandably!  However, if we look at the issue more broadly, their bullying activity may well be reducing the price of some goods and services for the consumer.  If we force them to give up their bullying, the consumer then pays a higher price.  There are always trade-offs, let’s at least make a slight attempt to remember that – instead of pretending that government ownership will somehow come in and make everything magically better.
Fine for the Commerce Commission to have a poke around, but I do worry about both voluntary and compulsory codes of conduct for duopolists' relations with suppliers. It shouldn't be hard to run a version of such a code that makes the duopoly rather less competitive.

 * The slotting fee literature is mostly about buying particular hot spots on the shelves: eye-level, or row-end.


  1. A couple of thoughts. I recall communicating with Mat when he wrote his post, and pointing out that from the information published to that date that it appeared that there were roque managers making demands on suppliers rather than the supermarket itself. In which case, if the manager got away with it I am guessing that s/he gets a windfall at the expense of the supplier. But in general I would have thought we should be aiming for a price outcome that would approx a world in which there were many buyers and many sellers. So if the sellers dont like one buyer they can try elsewhere and if the buyer does not like the price they can try and buy elsewhere. On the face of it - when I see supermarket prices here and overseas - I wonder why supermarkets are not under more regulation than they are. Electricity suppliers are much more numerous and competitive than supermarkets - but they get some heavy regulation while supermarkets don't. I too look forward to reading what the CC reports

  2. I get the feeling that the govt is trying to do the minimum it can, while appearing to respond to some voter concern/outrage. And, yes, I had noticed that when people try to build new supermarkets that there is always a lot of litigation. (Which suggests that the supermarkets are making good profts, I think)

  3. The answer to your question depends of course on how competitive the duopoly is. If each has a fair bit of market power pass through will be low, even negligible. If the allegations are true then there is a fair bit of market power, at least in the input side of the business.

    Personally I don't think the RMA can be blamed for weak competition. The recent reforms have stopped the worst of the abuse, though there are still court cases.

    The bigger barrier is probably the cost of standing up a distribution network and getting enough stores running to gain some scale economies out of your advertising. My suspicion is that, having allowed mergers to duopoly we are now stuck with this structure.

  4. The Warehouse would have had the scale and distribution, but still didn't reckon they could make a go of it.