Countdown and wholesalers: Are consumers the ones benefiting?

By Matt Nolan 24/02/2014

There has been a bit of discussion about Countdown hurting wholesalers to get prices down, flexing their muscle shall we say (here and here).  The Commerce Commission is concerned about this and is investigating.

Via Twitter I noticed that the concerns about supermarkets being bullies has led to an increasing desire to do something about supermarkets in general in our papers.

Now having a government run supermarket enter and then arbitrarily mess around with the price and availability of goods and services “for our own good” makes me throw up in my mouth a little – honestly the anti-obesity rhetoric thrown in the piece is beside the point, and shows how a desire to “do something” can be taken too far.  Note:  A lot of the suggested policies such as “removing GST” or “adding vouchers” exist without randomly owning a supermarket, the point should be actually asking if they are a good idea in the first place – a point that seems to escape our columnist, unless she believes the analysis is well covered off by merely going ‘obesity is bad man’.

But there is a broader point here.  For some reason the author seems to have this vision where, given her policy suggestion, the wholesalers win, the government (taxpayer) wins, and the consumer wins – and some baddies in Australia lose somehow.  This view stems from a presumption that there are massive issues of competition.

Of course the competition issues are important, hence why the Commerce Commission rolls around looking at this industry!  However, before we just assume this I think it is interesting to also think about how entry by a big player failed, namely look at the Warehouse Extra saga (here, here, and here).  If the Warehouse couldn’t manage to break into the market, perhaps a duopoly IS competitive.  [Note:  Supermarkets is one place where I would like more of a focus on regulation – whether they are competitive is a big issue, and an important one.  But again, this becomes an issue of appropriate regulation – given there are sufficiently large firms around that can enter, I’m not buying the idea the government needs to enter due to “barriers to entry”.  This is also definitely not a reason to have the government fighting obesity through its very own supermarket!!!]

In that case, there are winners and losers from changes in policy – even if we ignore these Australian’s that we don’t seem to like, with all their dirty foreign investment and integrated supply chains ;) .

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.

Sidenote:  What is with all that tripe in the article about the “profit motive” and being “freed from” it.  Isn’t this the same “motive” that ensures that supermarkets stock what people desire, in a convenient place, and with sufficient variety.  The key idea should be to use regulation to prevent excesses of market power and rent seeking, and price in things that aren’t captured in trade between supermarkets and consumers – not to undermine these benefits through excessive managerialism.  This was the key benefit from the reforms – with the shift from direct government management to a broad regulatory framework which allowed voluntary trade we went from a country with very little variety in the goods and services available, to one with huge variety, which is massively valuable given that people are very different in terms of tastes and preferences.  Urg, I despise the untransparent nature of this anti-choice rhetoric we get sometimes …

Update:  Dim Post comments here, and I reply here.