John McGee, a student of Aaron Director, wrote that the history of cartels is the history of double- crossing.

“I guess we disagree regards how serious the threat of entry actually is, I don’t give the Warehouse experience the same weight you do for various reasons”

This is a fair call, and is something I definitely could be overselling here. It is one of those areas where my priors can easily be swayed by new evidence 🙂

“which are influenced to some extent on ComCom’s previous position”

Indeed – the fact the CC has indicated that they would not have allowed the merger if they were following current regulatory standards is a huge point, and one I definitely am not disagreeing with (given they are the experts). This is part of the reason I’m concluding everything by saying I would like them to look at it 😛

“Whilst obviously not a totally anti-competitive, monopoly type market, we are to some extent likely suffering once again from our small population and low population density.”

Indeed, low population density making it difficult to have real competition in industries that have large scale – this type of argument I buy, but of course if we go down that track the entry of a government supermarket doesn’t in of itself make sense.

Actually, it is a damned interesting issue. I remember when Woolworths entered my hometown, it significantly undercut the competing stores. But now it is really the only supplier left. Do we view there entry and initial pricing as predatory pricing? In what way does effective competition really hold in a rural town where competing supermarkets are still 30 mins away?

“As for whether ComCom can help, they are constrained by the law as it currently stands.”

Indeed. Perhaps the concern about wholesalers will inadvertently lead to greater focus on the industry from the regulatory angle?

It piggybacks well on the Productivity Commission discussing the importance of giving the Commerce Commission more scope (and in that case hopefully a lot more resourcing) to deal with competition issues in “service sectors”!

I guess we disagree regards how serious the threat of entry actually is, I don’t give the Warehouse experience the same weight you do for various reasons I wont go into here, but I appreciate you were being a little contentious – always something to be encouraged IMO ;-). And I wasn’t aware of Tesco’s comments, which perhaps would give me greater reason to perhaps adjust my priors, which are influenced to some extent on ComCom’s previous position.

Perhaps the supermarket sector is more like the market for domestic flights. Competition in some geographic areas but not others, large sunk costs (RMA) and economies of scale that effectively block a proper 3rd entrant, but nevertheless still with some fringe competitors (vege stores, dairies or farmers markets playing the role of buses). Whilst obviously not a totally anti-competitive, monopoly type market, we are to some extent likely suffering once again from our small population and low population density.

As for whether ComCom can help, they are constrained by the law as it currently stands. However, that’s probably a matter for another day…

There is undeniably a threat of entry – the Warehouse attempted given their scale (but the big issue there was the supply chain) and at a regional level there are competing firms. However, in both cases the supermarkets have the advantage of there well developed supply chains – as a result, any surplus they make comes directly from this. Threat of entry isn’t a catch all to say the market is competitive – and I in no way hold the view that it is completely competitive – it just tells us that trying to treat the industry as a form of monopoly without reference is going to exaggerate the degree of market power.

“As for the homogenous product and observability of prices”

Observability of prices does imply greater scope for collusion, yes – that was the direction I was linking it in my comment. And given the amount the two firms invest in observing each others prices this is an important thing to keep in mind. However, I also noted other factors that do influence collusion – and that fact that we have overinvestment in supermarket space is one of the clear indicators against it.

There is no way this post is suggesting the market is competitive in an ideal sense. And as I note in the post, I would like to see the Commerce Commission look at supermarkets, I always have. But the assumption that pushing in another supermarket would be the best, or even a positive, way to deal with any perceived uncompetitive behaviour misses the point of trying to analyse what it was.

Honestly I am amazed how much people seem to take it as given that since we have a duopoly it HAS to be anti-competitive – this question can only really be answered by having the Commerce Commission look into the details in full.

In the post I said that the Warehouse’s inability to enter was a sign that “perhaps” the industry was competitive – this was supposed to be a little contentious, but was also a note that the Warehouse’s inability to enter had led me to change my own priors. Until the Warehouse tried and failed, and Tesco said they wouldn’t enter because of the low profit margins in NZ, I was convinced the industry was uncompetitive – now I simply leave my mind open.

The threat of entry?

So you’re saying an entrant could easily absorb all the upfront RMA costs and establish in short order a nationwide supermarket chain of sufficient size to enable it to obtain the necessary ecos of scale in logistics and sufficient buyer power over suppliers to enable it to do battle with the existing duopoly? This being a duopoly that has reasonable density coverage over all existing urban areas and, you suggest, has committed to excess capacity.

And there’s a constant threat of entry. Really?

As for the homogenous product and observability of prices, one could suggest that facilitates collusion within a duopoly rather than prevents it.

Sure, the idea of a govt-run supermarket is as harebrained as making existing supermarkets pay their suppliers higher prices. But are you trying to tell us this market is effectively competitive and that there’s nothing to see here?

“But Hampsta turned to Supermarket Online as a place where its cardholders could go for their groceries.”

Hehehe, how about that!

Agreed, looking forward to seeing what the CC turns up!

Did I just speak of the devil? (See the sidebar at the bottom of the article)

http://www.stuff.co.nz/business/industries/9753438/Code-to-crack-supermarket-bully-tactics

Yes – it would be a good idea to move those folk on – if they can be identified. Actually the whole supermarket investigation process should be pretty interesting.