PRICE DISCRIMINATION –

The Source of Woolworths and Coles Power in Australia.

 

 

“……there has grown up in this country a policy in business that a few rich, powerful organizations by reason of their size and their ability to coerce and intimidate manufacturers have forced those manufacturers to give them their goods at a lower price that they give to independent merchants under the same and similar conditions for the same quantity of goods. Is that right or wrong? It is wrong.” [1]

 

Woolworths & Coles domination in Australia [2] has nothing to do with any superior efficiency or greater customer service.

 

They are dominant simply by reason of their size giving them the ability to bully and coerce their suppliers to give them their goods and services at a lower price independent retailers  can buy under similar conditions.

 

These special prices are often obtained through a rebate from suppliers, and the rebate is denied to independent merchants.

 

This shields Woolworths/Coles from the normal competitive forces of a free, fair and open markets – and puts them in an invincible position, and has enable to spread their tentacles across every area of retailing, from liquor, petrol, pubs and even poker machines, they have become a marauding beast roaming around the country, leaving a trail of destruction of small of businesses, driven to ruin and bankruptcy in their wake.

 

 

The Destruction of the the Level Playing Field

 

For free and fair markets to work, competition must be based on merits, and no-one should have an unfair headstart.  Just like a 100 yard foot race,  its not going to be a race on merit if some competitors has  a 20 yard headstart.

 

Price Discrimination gives Woolworths the equivalent of a 20 yard headstart against their small competitors.

 Turning the User Pays Principle Upside Down

The ‘user pays’ principle is a pricing approach based on the capitalist idea that the most economically efficient allocation of resources occurs when the users pays the full cost of the resources that they consume. However when an organization such as Woolworths/Coles has such market power, they can use price discrimination to turn the user pays principle upside down, therefore resources are not just in the most efficient ways.

Price Advantages from True Economic Efficiencies

 

It is a well recognized fact, that in the workings of any free, fair and open market, that a buyer purchasing only 1 unit will pay a higher price than a buyer purchasing a 100 units. Also, the 100 unit buyer may have to pay a higher price than a buyer purchasing 1,000 units if there are any economic cost savings in the bigger quantity.

Each product or service will have different economic cost savings, that result from the efficiencies that come about from the greater volume.

Therefore a quantity/discount structure for a product may look like this;

1 unit – nett price

10 units – less 5%

100 units – less 20%

1000 units – less 25%

The discounts for the different quantity purchases - should result from the higher economic costs of supplying in smaller quantities or result from the true economic efficiencies that flow from the large quantity purchase. This is one of the unwritten laws of business, and this allows the market to allocate resources in the most efficient manner, as efficiencies are rewarded.

This way where an individual firm increases it efficiencies from larger volumes - it also makes the entire economy more efficient, and the nation benefits.

Price Advantages from Bullying and Coercion

However, price differentials may also come about, not through any greater efficiency or economic cost savings of a larger quantity purchase - but simply because the bigger buyer can use their power and dominance over suppliers to bully them – forcing a bigger price advantage.  

These price differentials are often hidden in the form of a rebate or allowance paid by suppliers to large retailers which are over and above any discount related to any efficiencies achieved by a larger volume purchase.

Therefore a quantity/discount structure for a product may look like this;

1 unit – nett price

10 units – less 5%

100 units – less 20%

1000 units – less 25%

But Woolworths/Coles can use their buyer power to demand an extra 15% rebate over and above the discounts related economic efficiencies – and this is Price Discrimination.

Therefore the higher price that small firms have to pay (in relation to lower price Woolworths/Coles buy at) is not proportional to the extra costs directly attributable to the selling in such quantity.

Who Pays for the Discount ??

As the extra discount extracted by Woolworths/Coles through their buyer power and does not result from economic efficiencies – this cost must be paid by someone.

Woolworths suppliers still need to make a return on their investments, so they increase their prices to small independent suppliers.

Therefore the independent retailer (and his customers) are the one who pays for Woolworths/Coles increased discount.

Alternatively, the discount can be paid by the small supplier. Through bully, Woolworths/Coles can  force the supplier into a subservient roll, where they are forced to hand back profits to Woolworths/Coles in the from of the rebate for protection against bankruptcy.

This is exactly the same as the Feudal times when peasants had to hand over their wealth to the King for this protection.

 

False Efficiencies through Price Discrimination

When this happens, Woolworths/Coles may appear to become more efficient, buts it’s just an illusion – and their so-called efficiency is only at the expense of others – there is no benefit to the economy, just a benefit to Woolworths/Coles – this distorts the market, reduces competition and therefore has a detrimental effect on the entire economy and the nation.

Its exactly the same, when the biggest kid in the school playground uses his strength (the equivalent of buyer power) to bully the smaller kids to hand over half their lunch – the bully may seem well fed (more efficient), but his benefit has only come at the expense of others – which at the end of the day this a detrimental effect on the entire school.

 

Union Power Wage Discrimination - Buyer Power : Price Discrimination 

Woolworths/Coles bullying is also no different from the bullying of a powerful labour union.

There is a point to which the union fights to obtain a fair day’s pay for a fair days work, but if the union has too much power (like 40 % of an entire industry), they can make demands to force extra special payments and conditions that are unearned. With too much power and union can force a system of Wage Discrimination where they get paid a special subsidies denied to others.

It’s just a bullying tactic used by someone with power, which has no economic justification.

Just like Woolworths/Coles - a powerful union might think they are creating efficiencies by getting higher pay through special subsidies – but it’s just an illusion – what they call efficiency and higher pay is only at the expense of others.  The market is distorted and such bullying has a detrimental effect on the entire economy and the nation.

 

Locking in Power and Privilege

When Price Discrimination happens, those that hold the power are able to get an unfair advantage over others, and they are able to force others to pay for the costs of the resources that they use themselves. Power and privileges are locked in, and individuals and small family owned businesses are denied equality of opportunity.

In recent years the Australian government has rightfully taken extreme measures to curb labor unions obtaining and exploiting undue power - such as with the waterfront workers. The once powerful waterside unions are now prevented from exploiting their dominance by using bullying tactics to obtain payments and benefits denied to others. The result is that the docks in Australia now work more efficiently to the benefit of the nation.

However while the Government has prevented bullying from the unions, they have given the green light to giant corporations such as Woolworths & Coles to exploit their power and use bullying tactics to obtain payments and benefits denied to others.  

The result of the governments failure to prevent this, has seen thousands of efficient small independent family businesses, owned by good, honest and hard working Australians are being driven to ruin and bankruptcy everyday.

We are heading for a situation in Australia, where it shall soon be possible to go through life and buy almost everything (including buying petrol, a beer at the pub, playing the pokies and obtaining pharmaceuticals) from just two giant corporations - not because they are more efficient, but simply because they have been allowed to exploit their dominance and use bullying tactics, thereby destroying the equality of opportunity to small business.

International Comparison

In the UK – the four largest grocery retailers control 47% of the market – while in Australia just Woolworths/Coles control 80%. The Australian grocery industry has much higher levels of concentration than in the UK – therefore the effects of ‘buyer power’ can only be much more prevalent in Australia than compared to the UK.

In 2006 an All-Party Parliamentary enquiry by the UK House of Commons, investigating ‘buyer power’ of the major retailers in the UK stated;

 

“It is now believed that abuse of suppliers by larger competitors, whether intentionally or unintentionally, is now so widespread that even transparency in the prices paid by to suppliers by all retailers would not fully reveal the unbalance within the market. Suppliers find themselves paying the staff costs and funding the brand marketing for a handful of large buyers. This is the result of an apparent monopolistic situation and highlights the inherent problems with the current market structure and the power it affords a few key organisations……….

 

Damage will not be limited to small shops if current trends persist. The inequalities will lead to adverse effects across the primary, secondary and territory sectors. This is inevitable with producers, suppliers and other businesses seeing their customer base eroded. The wider business network will thus be affected with a negative impact on the economy………

 

The biggest losers however, will be the consumers. Restricted choice of store brands, restricted choice of available products restricted choice of shopping locations, higher prices and reduced customer service are all strong possibilities…………”[3]

 

If these are the findings of a Parliamentary enquiry in the UK, the effects of Price Discrimination and buyer power can only be substantially worse in Australia.

Is the Free, Fair and Open Market Working ????

* Is the free, fair and open market working, if two identical petrol tankers depart from an oil refinery, and one is delivered to a family owned independent petrol station, and the other is delivered to a Woolworths owned petrol station across the road – if the independent has to pay a higher price for the petrol ???

* Is the free, fair and open market working if a family owned independent newsagent is forced to pay $1,500 per m2 in rent, while in shop next door, Woolworths/Coles can sell the same newspapers and magazines yet only have to pay $150 per m2 in rent ???

* Is the free, fair and open market working if in a major shopping centre an independent family owned butcher, competes against a butcher in Woolworths when both enjoy the facilities of shopping centre – yet the independent is force to $170 per m2 in outgoings in while in shop next door - Woolworths only pays $25 per m2 in outgoings ???

* Is the free, fair and open market working when a major homewares brand deliveries two pallets of dinner sets of the back of the same truck to a shopping centre, one to an independent retailer and one to a department store – yet the independent is forced to a 10% higher price for these goods ???

* Is the free, fair and open market working when family owned Chemist is forced to pay $2,000 per m2 in rent, and that Woolworths/Coles can set up a Chemist inside their store and only pay $200 per m2 in rent ???

* Is the free, fair and open market working when retail rents for family owned independent retailers are 125% higher in Australia, that they are in the USA ???

* Is the free, fair and open market working when a brewery truck delivers 10 pallets of beer to an independent liquor store, and then delivers 10 pallets of beer across the road to a Woolworths owned liquor store, but the independent is forced to pay a higher price ???

* Is the free, fair and open market working when two consumers purchase identical goods at different stores with a credit card, yet the bank charges a higher processing fee to the independent retailer ???

When these policies,

- drive independent family owned businesses to ruin and bankruptcy

- reduce competition in the market

-  lead to Australia to have the highest market concentration in retailing in the history of world (except communist countries)

- enable an executive of one these companies to personally pocket over a $100 million, while employees of the same company earn just $12 an hour.

- destroy our country towns

- force consumers to pay an extra $1.2 Billion annually for groceries

- crush the entrepreneurial spirit of young Australians

- destroy equality of opportunity

………when we are creating a society where all the necessities of life are controlled by two giant corporations – these policies should be outlawed for the sake of the future of the nation – and this is why new Price Discrimination laws must be introduced.

 

The Need for new Price Discrimination Laws.

Australia made a huge mistake in 1995 when through the mis-guided policies of the Keating government, Australia became the only country in the world to repeal price discrimination laws. This has resulted in thousands of efficient small family owned businesses being sacrificed to enable Woolworths/Coles to increase their dominance and corporate profits.

If effective Price Discrimination Laws were introduced, the market distorting effects of bullying would be prevented. Woolworths/Coles could still expand into any market, but they would have to concentrate on finding real efficiencies and true economic cost savings, rather than just relying on being a bully to extract special unearned discounts – the cost of which they just pass on to others.

For Price Discrimination Laws to be effective they must also include services. For example in petrol retailing where profits are less than 1% - price discrimination in credit card processing fees charged by the banks, where Woolworths pay 0.52% and independents are forced to pay over 1.5% can completely destroy the level playing field. Such a disadvantage, unjustified by any economic differences in costs, can lead to ruin and bankruptcy of family owned independent businesses.

Woolworths & Coles claim to have superior efficiencies; therefore surely they are not afraid of having to compete on a level playing field against independent family owned firms where each is paying the true economic costs of the resources that they use.

This is what effective discrimination laws will do, they will put Woolworths/Coles to an honest test to see if their dominance is based on superior efficiencies, or whether it’s just based on being the biggest bully in the playground where no rules exists.

For the sake of the nation, new strong Price Discrimination laws are needed, – and they are needed urgently.

When the former Australian of the Year, Dick Smith warns;

……….. it's the end of the small businessman, the small farmer, the small food producer, the small shop owner. Part of our culture will just go.........where 35 years ago I was able to start Dick Smith Electronics with $610, the potential to start small businesses in the future will be destroyed."[4]

It’s time to introduce Price Discrimination Laws for Australia’s future.

---