Tuesday, 18 February 2014

Countdown to disappointment?

It seems generally agreed that if what Shane Jones says is true, Countdown have been behaving badly and "something" should be done. Beating up on suppliers to extract one-off payments just sounds like bad form - right?

So its fair enough that the Commerce Commission has opened an inquiry and several suppliers have made statements. But just between you & me, those politicians and suppliers shouldn't get their hopes up. Here's why.

The first point is that there is no law against being a commercial bully. Suppose you own an airport or a sports ground or you attract a big crowd to a music festival. You've now got market power over a bunch of people, and you can use that power to jack up prices for drinks and food as high as you want. No problem. The same thing applies if your market power is in buying stuff rather than selling it. So, for example, lots of government agencies tender out work with the deliberate aim of getting the lowest possible price for a given level of quality. All good.


There are three exceptions to this under the Commerce Act.

  1. If you really face little or no competition (eg power line companies) then you might get regulated under part 4. This isn't a risk for the supermarkets because the Commission is looking for potential anti-competitive conduct not considering price control.
  2. It is a very serious sin to collude with your rivals and gang up on the consumer - i.e. form a cartel. No suggestion of that here though. This is unilateral conduct by Countdown.
  3. If your bullying results in a substantial lessening of competition, then you might be in breach of s36. This looks to me like the only possible angle in Countdown's case. 

Which is a problem for two reasons. First, s36 is widely viewed as being broken. Whether it really is broken is a subject for another day, but it is noteworthy that the Commerce Commission believes it to be so, and to my knowledge has prosecuted no s36 cases since it came to that view.

But more substantively, how does Countdown's conduct reduce competition? I would expect Countdown to argue that their supermarkets compete with other supermarkets. They don't all stock the same lines, so why is competition lessened if some suppliers don't get shelf space in Countdown?

There could be a plausible argument for why this lessens competition, but its not obvious. At first glance this looks more like your bog standard price gouging, which is perfectly fine under the law.

Tuesday, 11 February 2014

What's the inequality problem?

Inequality is a big issue these days. Lots of people are struggling to understand what it means, and what that might mean for public policy. The occupy movement, which was itself a response to the GFC, is probably responsible for much of this current wave of awareness.

Media attention is fickle though, and judging by some of the crap that gets coverage this inequality thing could all just be a non-issue media beat-up - amirite?

Yes yes, it could be. But "the media" do get it right sometimes and symptoms should be checked out anyway. The road from issue to policy is long & winding though. 

Problem definition is the first step on that road. It is tempting but foolish to jump to solutions. Following the spirit of Ernest Rutherford, we need to start by thinking hard about the problem. So let's have a go at inequality, specifically income inequality.

Income inequality has increased significantly in the USA (recently) and NZ (ages ago). Redistribution policies via the tax and welfare systems must have softened the blow, but it was still a biggie. That's my assumption. 

So what asks Paul Walker, twice, eager to profess ignorance though he obviously reads widely. Why should we care about inequality?

Poverty is one answer. Unless the whole country grows fast enough, an increase in inequality will push some into poverty. How sure are we that the worst-off citizen has a better deal now than they did before? If you take a Rawlsian view, progress has not happened unless the worst-off are better-off than they previously were.
Ghost of Paul Walker: "Oh, but anyway, that doesn't matter. Because (a) consumption, not income, (b) poverty is relative, (c) social mobility, and (d) let me take another look; I'm sure there's a 'd' down there somewhere."
Get the idea? In the immortal words of the Dude, there are "a lotta ins, a lotta outs, a lotta what-have-yous."

I agree, and they need to be considered, otherwise we'll stuff up the policy response. So let's do that. Paul is quite right to insist on rigorous analytical standards. Policy changes definitely should be properly analysed/justified.

But even while this is (hopefully) going on, let us notice that the multi-dimensional nature of "inequality" presents a huge challenge to analysts, for two reasons
  • it's complicated - causes and effects of inequality are both relevant; and
  • serious analysis might be revolutionary. 
Regarding the latter point managerialism is endemic, and it drives inequality in two ways:
  • by stretching out the top end of the income distribution; and
  • by suppressing bottom-end wages to enhance shareholder returns & justify managerialism.
So here's the deeper issue. Once you start thinking seriously about inequality, you will end up asking some very fundamental questions about how our society is organised and whether that should change. It seems to me that a proper inquiry into inequality would raise revolutionary questions.

So I'm not surprised that Paul doesn't want to talk about it, but I also think this attitude is unbecoming of anyone claiming to practice the virtues of economics. I get that you might just not care, but don't go suggesting that there's no argument when you haven't even thought about it seriously.

Also, kudos to Matt and Bill who both sense there is something interesting in here.

Tuesday, 4 February 2014

So long, and thanks for all the starfish

Price discrimination means charging different prices for the same thing.

It can certainly make people happy, such as students and pensioners who get discounts off travel and other stuff. 

Sometimes it's more subtle and insidious though, like those "loyalty" schemes whose main aim is to stop you defecting to another supplier, which weakens competition and raises the suspicion that these schemes might tend to increase prices.

Other times, like in the diagram below, price discrimination is just a way for the seller to get more revenue. The demand line tracks out the most each person would pay to buy a particular book (or movie or plane ticket etc). Put yourself in the seller's position: if you could only charge one price, it might be P1. But that burns off a lot of potential customers, so you could get extra revenue (the orange rectangle) if you could split them off and entice them in with a cheaper price. 

Notice though, that 
  • to be able to pull this trick, you need to have some market power to start with (P1 is obviously above cost); and
  • to want to pull it, you need to be targeting the low value customers or more generally, people who wouldn't buy without the discount. 

All of which brings me to the Starfish price discrimination plan run by AirNZ, but discontinued yesterday. I joined Starfish last September, when I paid $800 for 1 year of 30% off all airfares on flights to/from regional airports. This looked like a great deal to me and so it has proven. I've almost got my $ back and there are still 7 months to go.

But I'm not in that orange box. I'd be doing this flying anyway because it's part of my job. And it seems that I'm typical of Starfish members. As AirNZ put it 
The viability of the programme relied on the membership base increasing travel frequency but unfortunately this has not occurred in a material way over the three and a half years it has run and the result has been a $14m cost to Air New Zealand.
So there we have it. What the market gaveth, it hath now taken away, and all that's left is AirNZ's market power on regional routes.