Two years ago, I wrote a Troppo post on Coles’ decision to sell milk for a dollar a litre.
I took particular aim at the claim by consumer group Choice that regulators should investigate whether Coles is engaged in predatory pricing. Said Choice: “It is difficult to see why any retailer would sustain such losses if it were not seeking to eliminate or damage its competitors”. Said me: Shouldn’t a consumer group know a little about how retailers operate?
My view was that Coles’ decision looked more like an implementation of the basic retail strategy known as “low-high” – price the basics like milk and bread cheaply, advertise the heck out of those basics, get people into the store, and then rely on them buying items which have more margin in them: frozen blueberries, dishwashing powder, ready-to-cook kebabs, flea collars, Tom Cruise DVDs, broccolini.
In July 2011, the ACCC rejected Choice’s predatory pricing claims and said the milk price cuts were good for consumers.
It looks to me like time for the ACCC (and me) to declare victory. Two years on, milk is still cheap, not just at Coles but at Woolworths and Aldi and IGA. Coles’ strategy is widely viewed within the industry as a success for the company, but there’s still plenty of competition to sell milk to you and me. And of course low-income people have cheap access to food basics. This hasn’t been the Choice organisation’s worst call, but it might make the top ten.
Choice’s dodgy claims about milk are just one example of a broader belief in what we’ll call the kill-them-all business plan, which seems common among consumer advocates. This is the idea that companies or industries can drive all of their competitors out of business, take over and charge what they like. The problem is that this rarely happen in real life, except in a small list of very special circumstances. Predatory pricing is generally very tough to pull off.
There are ways in which companies can control markets, but they are more common in service industries and they generally fit one of several well-known profiles:
- The market is a natural monopoly. This is an issue in all sorts of infrastructure markets. Think of parking at Australian airports, or electricity transmission.
- The market started with a giant government player. That was the case for the Victorian electricity industry and for national fixed-line telecommunications before the 1990s. One market (Victorian electricity) was redesigned fairly well under former state treasurer Alan Stockdale; the other (telecommunications) is still a regulatory mess, with a new monopoly player being put in place.
- The market is subject to lock-in, often because people use the product to interact. Think Microsoft Office, which evolved into people’s default choice because they had to share files with other people. This is one case of a product market where competitors really are pushed out over time. For what it’s worth – and it might not be worth that much – consumers get a benefit (interoperability) as well as higher costs. These markets don’t stay monopolies forever – hello Google Drive! – but they can last a long time.
Feel free to nominate more special cases in the comments.
But in general, companies struggle to control goods markets. When you see someone claiming they can, it seems to me best to take a deep breath and then ask: how, exactly? If the answer is “they’ll slowly drive all their competitors out of business”, you might want to be sceptical.
Update, May 2016: A colleague pointed out another problem with predatory pricing: since it is an extremely long-term strategy, you have to also believe that the companies doing it are capable of running very long-term strategies. Not everyone believes that this is very easy for many companies to do.
Oh, and in May 2016, milk is still a dollar a litre. After five years I think we can say that if this is predatory pricing, it’s a) failed and b) hard to walk away from. Note to people trying to corner a market by cutting prices: your strategy runs a substantial risk of failure.