Yesterday I received a phone call asking why New Zealand supermarkets offer petrol vouchers with purchases, and whether consumers are really paying for it all anyway!
(Update: I’ve been informed that they were actually discussing this on Close Up yesterday, and they were trying to say that for some reason people pay “more” – because people who don’t use the vouchers are cross-subsidising people who do use the vouchers. This sort of issue fits into point 2 below – and I’m not convinced that we are seeing a welfare loss due to this, in fact I think even this view would lead to better outcomes for consumers … ignoring point 3 below which strongly shows why this is likely to be the case.)
I decided the best way to answer the question was to try and understand the reasons why supermarkets and petrol companies would set up an agreement where these vouchers are offered and there is some (unknown) transfer between supermarkets and petrol companies.
Now remember, for the supermarket and petrol companies to come to an arrangement, it must be in both of their interests. They must decide that offering a voucher to consumers who shop at the supermarket increases the sum of total profit in both markets – if that occurs, then they can negotiate over any “surplus” gained when they set up the contract.
At first brush we might say that it must somehow make consumers worse off, because profits are higher then they were without the supermarket and petrol company coming to that arrangement. But if we think a little deeper, we are going to find out this is not the case
Off the top of my head I can pick out three reasons why this agreement exists:
- Assume a monopoly supermarket and petrol station to start with. The first reason may be weird behaviour by consumers. For some reason, the fact the voucher is offered gets them to spend more at supermarkets and petrol stations overall. This is the least compelling explanation in my opinion – but it is the only one that could create the result of consumers genuinely being worse off.
- Price discrimination: Stick with our monopolies. Lets remember that some people drive, and some don’t. People who don’t drive tend to live in big cities, and are often environmentally conscious – both factors correlated with higher incomes, and more inelastic demand for supermarket goods. This tell us that, by offering petrol vouchers our monopoly supermarket can then increase prices – thereby imposing a form of implicit price discrimination. And of course, price discrimination shouldn’t be seen as a bad thing!
- A prisoner’s dilemma: Now our assumption of a monopoly has been ridiculous – we actually have a duopoly in the supermarket industry in New Zealand, and even greater competition in the fuel industry. This gives us another way to justify the use of vouchers – competition. Take our two supermarkets – if neither supermarket agreed set up a deal with a petrol station, they would both sit there making tidy profits. However, if one of them offers vouchers, a lot of customers would go to that supermarket – making the supermarket offering the vouchers heaps better off, and the other one much worse off. If both offer vouchers, then consumers once again don’t really care where they go – so the supermarket does better than in the case when their competitor offers vouchers and they don’t, but worse than in the case when no-one offers vouchers (due to the cost of the voucher). In this case, it is in the supermarket’s interest to enter the scheme – as they make a higher profit by offering vouchers no matter what the choice of the other supermarket is. But the existence of the scheme makes consumers undeniably better off!
Overall, this suggests to me that the existence of the petrol vouchers is adding to consumers welfare – and we should encourage any sort of scheme that increases competition in the marketplace