Bob Katter’s six year plan to penalise supermarkets with a market share greater than 20% with a $50 million fine would be a huge disaster for the Australian consumer and supermarket industry.
Hearing the discussion on the ABC radio morning show last week, emphasized the lack of education in this Country and around the world into the dangers of government intervention into the market. The ‘Reducing Supermarket Dominance Bill 2013′ recently introduced by Mr Katter to the parliament and supported by independents Andrew Wilkie and Senator Nick Xenophon would require Coles and Woolworths to reduce the size of their companies by half within the next six years. This intervention will inevitably lead to less competition, higher prices, and decreased quality within the supermarket industry.
In his media release Mr Katter says:
“Here we have two supermarkets with a market share of over 80 per cent, so if they decide to cut down the amount of money they are going to pay farmers and jack up the price to the consumers, they can, because there is no competition”
“We have to preserve what little competition we’ve got left so that we can get a fair go. It is vitally important to head off the untrammelled greed of the supermarket giants.
There are number of untruths in his statements:
- The belief that there is little to no competition. To have no competition means the existence of a monopoly, as these two are opposites. Clearly a monopoly does not exist within the supermarket industry in Australia as there are a number of companies (e.g. Coles, Woolworths, IGA, Aldi) in direct competition (i.e. where two or more companies provide essentially the same good or service within the same market).1
- That they can cut down the amount they they are going to pay farmers. Naturally all companies want to purchase their goods at the lowest possible price and all producers want to sell their goods for the highest possible price, however a voluntary transaction will only take place when two parties agree on a price. Therefore to state that the supermarkets can just cut down the amount they will pay is a fallacy, for a transaction to take place requires a willing farmer to sell his goods at that price.2
- That they can jack up the price to consumers. In the free market for a company to maximise its profit it will try to gain an advantage over its competitors by constantly manipulating its prices downwards and quality upwards to gain a greater market share.3 If a company were to ‘jack up’ its prices then it’s competitors would gain a significant advantage.
- The importance to head off the greed of the supermarket giants. I have no problem with a company maximising its profits in a free market (i.e. that all transactions are between two voluntary parties). However for the sake of Mr Katters argument let’s assume it is bad. Analysis of the annual reports for Wesfarmers (Coles) and Woolworths indicates that Mr Katter’s statement of “untrammelled greed” is a bit of an exaggeration. The chart below shows the net profit margin (net income / revenue) for the two major supermarkets varies between 3% to 4% for the last four years, this can hardly be classified as ‘untrammelled greed’.
- That imposing a cap on a company’s market share would be beneficial. There are two main opposing points to this:
Firstly a number of different factors affect the optimal firm size in a given market, where only the free market can truly determine the optimal firm size. This is best summed up by the late American economist Murray Rothbard in his book ‘Man, Economy, and State’:
Any existing situation on the free market will tend to be the most desirable for the satisfaction of consumers’ demands.
Neither economists nor engineers can decide the most efficient size of a firm in any situation. Only the entrepreneurs themselves can determine what size of firm will operate most efficiently, and it is presumptuous and unwarranted for economists or for any other outside observers to attempt to dictate otherwise.
If a man who was the dean of the Austrian School of economics, the founder of libertarianism, and the author of thousands of articles and 25 books states that he nor any other outside observer could determine the optimal size of a company, I do not have high hopes that this bill could. Even a government with perfect knowledge of the market would be unable to determine the optimal size, as markets, people and their values are always changing.
Secondly and the most important point of all, companies in seeking to maximise profits strive to obtain a greater market share (where profits are maximised in supermarkets by selling large amounts of goods at low prices). The profitability in increasing ones patronage results in a free market trending to have lower prices and higher quality goods as companies compete with each other for more consumers. However if a cap is in place as proposed in Mr Katter’s bill, once the company reaches the 20% cap, instead of being rewarded for attracting more customers they will be punished.
The removal of this drive to attract more customers, will mean companies will no longer have any incentive to offer a lower price or have a higher quality good then their competitors. Instead to maximum profits, it will be a balancing act of having prices and the quality of goods set at a level to only attract 20% of the market. Once the supermarkets are no longer competing with each other for a consumers’ patronage, the costs of goods will increase and the quality of goods will decrease.
“Government intervention more often than not worsens the problem it is actually trying to fix”
Question: What other government interventions raise the cost of living? Leave a comment by clicking here.
- Robert LeFevre, The Fear of Monopoly – Part Two, Ludwig von Mises Institute, http://mises.org/media/1159/The-Fear-of-Monopoly-Part-Two (accessed 26 June 2013) [↩]
- Rothbard, Murray N, Man, Economy, and State, http://mises.org/rothbard/mes.asp (accessed 26 June 2013) [↩]
- Robert LeFevre, The Fear of Monopoly – Part One, Ludwig von Mises Institute, http://mises.org/media/1158/The-Fear-of-Monopoly-Part-One (accessed 26 June 2013) [↩]