Hard-nosed duopolists

By Eric Crampton 10/04/2014

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.