No matter who takes it over the Warehouse brand will stay there. The commission said in the report:

“E13. The acquisition would foreclose the potential for The Warehouse to be used by any other independent party as a springboard to entering the market.”

That is the situation I can see the commission envisaging when they talk about a future hypermarket.

I think another issue involves how the two supermarkets interact. When they let Progressive and Woolworths merge it was because Foodstuffs was a dominant player in the Wholesale and retail markets. Now that they are on even terms I don’t think the commission wants to give either of them an edge, which a merger with the Warehouse may give.

I think if they did merge, the warehouse brand would remain and be used to compete against which ever firm missed out on taking it over

I agree that the focus should be on effective competition, and that is where the commerce commission and the two supermarkets differ. The two supermarkets believe they are playing a bertrand game, and so prices are being kept down (i’m actually looking at some data to do with that now, and so far it seems like a fair case). However, the commerce commission believes that the two firms are extracting rents, and that the introduction of a competitor will lower prices.

However, the commerce commission also thinks that the only way we can have more competition is if the Warehouse remains, as it already has established infrastructure and a brand name, things that a new competitor will find difficult to establish.

I’m suspicious that maybe there are other players that the commerce commission wants to take over the Warehouse, it will be interesting to see how that unfolds.

As a quick aside I think it’s important to note that the warehouse only charges higher prices than budget brands of progressive and wool worths, it is still undercutting the premium brands prices.

I think the focus should be more about effective competition rather than simply the number of firms operating in the market.

I agree that a hypermarket will be able to extract some of the surplus from the reduction in opportunity cost, however it would be constrained by the prices set by the supermarket competitors. Firms in monopolistic competition are allowed to charge different prices after all. In a sense we can see this in the fact that the Warehouse is able to sell groceries, even though they sell them at a higher price than the supermarket.

I agree that a hypermarket would require access to a large wholesale network equivalent to that owned by foodstuffs or progressive. That is why I’m not particularly keen on the idea that the Warehouse will become a hypermarket by itself.

I think there is an argument that a grocery firm from outside the country might buy-out the Warehouse, and with its connections to the wholesale market, make it a competitive hypermarket. This could occur if the Warehouse joined either foodstuffs or progressive, however that way of achieving a hypermarket would lead to a reduction in competition for grocery goods.

I’m not convinced that they operate in the same market. Hypermarkets offer a different “good” or “service” than supermarkets. Because they lower transaction costs to consumers they would be able to implement a SSNIP without losing demand as long as that SSNIP didn’t outweigh the benefits of reduced transaction and travel costs from being able to purchase everything at one store.

If Hypermarkets rely on returns to scale then surely they are much more likely to be a success if they are able to draw on the scale that food stuffs or progressive have in the wholesale market.

I am sure that supermarkets and hypermarkets operate in the same market, as hypermarkets are simply are supermarket and a department store put under the same roof to reduce the transaction costs of consumers. Progressives main point is that it wants to broaden into department stores, but I think even they were not thinking about establishing a hypermarket.

The real question for we is if a hypermarket is feasible in NZ, with our small population. Hypermarkets take advantage of increasing returns to scale, and possibly returns to scope (tenuously). If it is feasible, and if the Warehouse is going to provide that medium is a reasonable timeframe, then the choice to prevent a merger may make sense.

Sorry if I have been misunderstood, I’m not trying to make arguments about the effect of merger on the wholesale market, an argument there would have to be along the lines of a merger would increase the market power of the merged firm int he wholesale market which the commerce commission has dismissed as matt pointed out. What I was trying to point out is that woolworths and foodstuffs have market power in wholesale the warehouse doesn’t, so like rauparaha pointed out, if the firms merged the the warehouse would have benefit from that market power int he form of lower input costs, which would allow it to be a more effective competitor as it would have to cost advantage relative to the case where the merger didn’t go through.

The real question to me is, will the merger increase the speed with which a hypermarket appears in NZ (eg by turning progressives into a walamart equivalent) or is the Warehouse the only player that could commit to creating a firm in the hypermarket type structure.

Also note that a hypermarket is only preferable if increasing returns to scale exist, would increase returns to scale exist in a market like NZ’s, which is only a 100th the size of the US market?

Economists often talk about welfare as the sum of consumer surplus and firms’ profits; however, governments seem to weight consumer surplus higher than profits. This seems to be a case where the Commerce Commission has done the right thing for consumers. Whether it is welfare improving in an economic sense is another question…