Thursday, March 09, 2006

The OFT investigates supermarkets

The BBC reports that the Office of Fair Trading is set to launch a probe into the dominance of the UK market by a limited number of supermarkets. The problem is that it appears to be struggling to find a harm. There is the question of monopsony power allowing supermarkets to drive down prices but, as supermarket margins remain low, this operates as a transfer of wealth from producers to consumers which is not a suitable candidate for OFT action.

All the evidence is that the supermarkets have been an unambiguous good thing for the consumer with prices falling and increased choice thanks to the supermarket's expansion into non-food items. An anti-trust case could exist to block a merger between any of the top players but beyond that the watchdog should clearly be stepping back and letting the supermarkets tear each other to pieces.

The move towards increased shopping in supermarkets instead of small shops surely has its origins in the same trend that is leading to reduced fertility. With the decline of discrimination against women in the workplace there are increasing opportunity costs to time spent not earning. When women could not work the value of the time they spent travelling between different shops is of far less concern than when that time could be spent earning or in scarce leisure time.


Dave Cole said...

The problem, O angel of right-wingosity, is that falling prices is not necessarily a good thing and that the OFT needs to be kicking the shit out of the supermarkets.

Prices have fallen, but not at the expense of profit. Instead, price reductions have been passed on to farmers, both at home and overseas. Farm-gate prices have fallen to unsustainable levels, which has three effects. Firstly, farmers are just giving up and either selling to agribusiness (not in and of itself a bad thing) or, worse, leaving the land fallow (farmers do have a stewardhsip role, IMHO). Secondly, reliance on subsidies through the single farm payment is increasing, strengthening the NFU's case that the subsidy system of Single Farm Payment needs to be maintained and gaining support for that position in certain circles. Thirdly, farmers are leaving the country - the NFU (and I know it stands for No Fucking Use) report increasing numbers of farmers leaving for the MidWestern states of the US and NZ.

I accept that the creation of the problem I am about to outline is the fault of farmers and the NFU, but the problem is maintained by supermarkets. There is no effective intermediary between farmers and supermarkets. Supermarkets can dictate prices because there isn't anyone else to sell to (village shops just don't have the capacity) as the only real alternative is another supermarket. The supermarkets, because of their predatory and mutually self-regarding pricing, act as a cartel.

I think that supermarkets expanding into other areas is a good thing and I think that low prices, particularly on key products such as food, is good, but food prices have fallen so low that we will end up ending farming in this country. Before someone jumps up and says that, while sad, this is necessary for the free market, there are skills in British farming - particularly in the raising of high quality livestock (beef, pork and lamb) - that I would not like to see lost. Moreover, as I said above, I do believe that farmers not only have a stewardship role but are well able to fulfil it.

With reference to small shops, I don't much care if small shops are run by Mom & Pop or MomCorp (spot the Futurama reference) so long as they exist. There is a convenience argument - people are prepared to pay a little extra to have a shop on their doorstep (and before you say anything, the reason that Costcutter is that much more expensive is because Tesco et al. have spectacular economies of size and if Tesco starts opening proper local stores, not TescoMetro, I'm happy) - and a necessity argument. While particularly pronounced in rural areas, it applies in urban areas: some people cannot travel distances to buy products and carry them back. In villages, providing sub-Post Office services (effectively an interface with the state) is necessary. If Tesco et al want to do something about CSR and raise their profitability, they should take over every village shop in the country (don't run it like a TescoMetro but as a village shop, using locally sourced products where appropriate and the supply chain otherwise) with a sub-Post Office.

The issue is that, while marginal profits are low, volume assures spectacular prfoits. I would add that, given the way that Wal*Mart treats its staff, I am entirely happy to regulate and legislate so they can't apply that model here.

A Labour person concerned about the countryside? Shurely shome mishtake!

Matthew Sinclair said...

Cartels are rarer than people make out and there is no serious evidence that one exists in supermarkets. If it did the objective would be to increase the margins of supermarkets. At the moment the prices paid to farmers and paid by consumers are falling in line which suggests that the farmers are getting squeezed but this is welfare neutral as a transfer to consumers (this makes a big difference to the incomes of the poor though which is good if you care about equality).

As for the role for farmers as stewards of the countryside you've bought far too much of their crap. The thing keeping land green isn't agricultural earnings or agricultural subsidies. Even with both the difference in price between agricultural and urban land is vast (1000s of %). The thing keeping land green is planning regulations. Land going fallow and slowly returning to wilderness is no bad thing for the environment. Bear in mind that we added lots of agricultural land during the wars and some of it returning to wilderness would be a reflection of the fact that there is no sense working marginal land with declining prices. I don't see such logic as in anyway bad... it won't turn rural Britain into LA with our present (or most conceived future) planning regulation.