There is talk about the Commerce Commission investigating milk prices in New Zealand.
An interesting passage from this piece states:
At the moment, we basically have a monopoly supplier of milk and two supermarkets selling it,” she said. “I think an inquiry could be a really good thing for consumers.
I think this is a bit over the top, and plays on how poorly the idea of a monopoly is understood in general parlance. There is a general impression that the existence of a “monopoly” along some attribute indicates that we need government intervention – when the case is actually a lot more complicated then that. We need to ask why the market has a monopoly, what the characteristics of the market mean, and whether there a policies that can then genuinely improve outcomes – in many cases there are not.
Now note that I don’t necessarily disagree there might be issues – but we can’t just scream monopoly to ask for intervention. So lets do a primary run down ourselves shall we 😉
So lets start just with Fonterra as the monopoly supplier of milk for retailers.
Lets ask if there is effective competition? What do I mean here? Well the question has to be are there potential entrants into the milk provision market, and does this potential for entry in turn hold down milk prices?
This determines whether the world market for milk determines the price in NZ – if there are significant barriers to entry, Fonterra will be able to charge a premium on milk sold within the country. This alone doesn’t justify intervention – but if such barriers exist it creates a reason why the Commerce Commission can look into the issue.
People often talk about the cost of milk being set by the “global market” and this is true – the global price sets a “floor” on what NZ producers will sell it at. However, if Fonterra could sell it at a higher price without entry into NZ this is a possibility …
Then lets move down the chain to the supermarkets. We have two supermarket chains selling relatively homogeneous products and competing in close proximity. Do we really think there is a competitive issue here? Sure with two firms we may have tacit collusion, we have have firms limiting their own capacity in order to extract rents, we may even have explicit collusion between firms (which would be against the law). The reason the commerce commission will likely be willing to look into supermarkets again is because there is still some uncertainty regarding whether the industry is competitive following Woolworths merging into Progressive Enterprises.
I don’t have one. I’m looking forward to reading their preliminary results – and hope that they quickly discover that the industry is working spectacularly. If they do find issues, expect me to discuss them in very little detail on the blog 😉