How the ACCC facilitates collusion

Update from Stephen Dawson: Well, that didn’t take long. The terms of the agreements with the ACCC were that fuel discounts would not exceed four cents per litre, and that cross subsidisation would occur entirely within the petrol stations and their attached retail sections. That is, no more cross subsidisation from the supermarkets.

Today I went to Coles and spent the requisite $30 on groceries for tonight’s dinner. No discount voucher. Not even four cents per litre. I checked with the service desk. There are no vouchers.

ACCC: Mission Accomplished!
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Stephen Dawson has a magnificent explanation of the ACCCs latest strike against consumer interests.

Coles and Woolworths aren’t allowed to talk to each other about how they do their business for the reasons identified by Adam Smith more than 230 years ago. If they could, then there is indeed a strong possibility that their talks would end “in a conspiracy against the public, or in some contrivance to raise prices”.

But they aren’t allowed to do so under the very laws that the ACCC administers.

Woollies and Coles compete vigorously in many ways, some obvious and some less so. There is price competition, of course. There is product-line competition (do they carry all the products that purchasers could possibly want?). There is service competition (who has the most pleasant staff) and shopping environment competition (wide aisles, clean stores).

Fuel discount vouchers are another way of competing – competing remarkably aggressively, it seems clear, when discounts can get up above 20 per cent on fuel purchases.

But it’s almost certain that both businesses would benefit if neither of them offered vouchers, or if there was some firm limit on the discounts that removed most of the uncertainty in the business.

Too bad that it’s illegal for them to come to such an agreement with each other.

But it’s not illegal for them each, individually, to agree with a certain third party to limit their voucher programs. That third party is the ACCC.

The bottom line?

Good one, eh? A government body which purports to protect the consumer from anti-competitive business practices has done something that the businesses, in their wildest fantasies of market-rigging, couldn’t.

It has long been evident that the ACCC needs to be reined in – if not abolished. These are the same people who brought us credit card price gouging believing that prices would decline (strictly speaking they convinced the RBA to introduce that “reform”).

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48 Responses to How the ACCC facilitates collusion

  1. Notafan

    I still can’t figure out why the ACCC intervened in petrol discounting. What mechanism will get the supermarkets to reduce the prices of instore items that are ‘overpriced’ to cover the cost of discounting? They can’t even identify what items are ‘overpriced’
    Most of us have figuered out that loss leaders are made up somewhere else.

  2. Mike of Marion

    Oh and the gouging of LPG fuel in Australia at the moment. State Governments won’t care – they are getting the increased GST. LPG used to be approx 40% of petrol, now its 60+% of petrol. For a by-product!!!!

  3. Rabz

    I still can’t figure out why the ACCC intervened in petrol discounting.

    It’s a practice that really does seem to drive certain preposterous numpties absolutely bonkers.

    “Oh no, the peasants are buying discounted petrol, we cant have that, Hedley, it must be stopped, stopped, I tells ya!”

  4. Notafan

    Bring back introduce fuel fool watch , I say

    I think the ACCC thought it was opposites day :)

  5. rebel with cause

    Oh and the gouging of LPG fuel in Australia at the moment.

    LPG will always be more expensive in the Australian summer as it has a high value alternate use in the northern hemisphere during this time where it is used to keep homes warm through their vicious winters. If you have been keeping an eye on weather reports from that part of the world you would know that this winter has been particularly cold indeed.

    Just because prices increase does not mean you have been gouged – there is no evidence of price gouging in commodity markets. Please don’t use this pejoritive term if you want to promote rational discussion.

  6. The ACCC is a ‘rogue agency’. I have quite a few examples of it acting contrary to the best interests of consumers. Abolition, as John Roskam wrote recently, is the only solution.

  7. Notafan

    I think the ACCC has some useful functions, but like a few of these statutory bodies, seem to exceeded their bailiwick.

  8. Andrew

    9 years ago they were whining about the petrol discounting cycle (10c cheaper on Tues, price shoots up Fri afternoon). In fact, they even contemplated whether this cycle should be banned, in the interests of consumers of course. (I think it had been the subject of discussion in the press.)

    My submission was to the effect of
    a) If the price can’t change rapidly, WHICH FUCKING PRICE do you think will stick? The Tuesday one, or the Friday night one?
    b) Next time you want to help me, PLEASE FUCK OFF AND DON’T.

    Ultimately they announced they were dropping the idea as they couldn’t work out how to intervene without making consumers worse off. It seems they can comprehend basic facts, if someone points them clearly out to them.

  9. Percy

    I’d have settled for a massive scale back in the size and scope of the ACCC and its activities. Roskam however, has managed to convince me. Thanks for the link David.

  10. Andrew

    Mike, didn’t Gillard attack LPG (mainly because the incentives like lower excise for LPG were a Howard policy – something about the fact that we actually make it here rather than import it from Saudi)? I don’t think changes in price are to be blamed on manufacturers here.

  11. Notafan

    One little niggle about the discounting is whether that squeezes out other sellers leaving a duopoly?

  12. Kingsley

    Big assumption being made here that the big two went to sleep at night wishing all so hard that the ACCC would stop them doing what they have so energetically pursued of their own free will.
    My competitors vigorously compete against me on some similar things I compete on, but I would be very very angry if the ACCC stopped them and I doing it, I would not be delighted as is being claimed here.
    Why? Because I don’t win much off the ones who compete against me hard but I do off the lesser operators and I dare say my better competitors do too.
    People seem supremely confident on this site that it is about the big two ding donging it out between themselves not taking market share of the rest

  13. gnome

    Tell me Notafan, is duopoly a made up word summarising the term “perfect competition” or what?

  14. Notafan

    People seem supremely confident on this site that it is about the big two ding donging it out between themselves not taking market share of the rest

    Is what I was thinking

    Tell me Notafan, is duopoly a made up word summarising the term “perfect competition” or what?

    I am not sure but my rusty brain remembers something about oligarchies and artificial low pricing to force others out of the market. Does that end up being good for consumers?

  15. Mitch

    To say it needs to be reined in – if not abolished – seems to me to be an ideological difference between conservatives and libertarians. Which to me is a huge difference, because if its reined in under a Liberal government, as soon as a Labor government inevitably gets back in that comes to nothing.

    But if you take the libertarian stance that the government has no role here and abolish it, that’s at least a lot harder case for Labor to reintroduce an entire government body.

  16. Dan

    You haven’t mentioned the point that there is no reason for them to bring down the price of coffee or whatever in the supermarket even though the cross-subsidized petrol is now not requiring higher grocery prices for the subsidy. People will lose out on the petrol and the supermarket as well.

  17. I agree with most of the comments here, but I’d like to share something personal related to the credit card comment.
    In 2002 Visa Japan got wind of the report that had been prepared by the RBA, and because Australia (and NZ) is sometimes seen by Japan as an administrative reform test tube, they wanted advance information on what might come to pass in Japan. My company produced the Japanese translation of this document, and the reading I had to do for the job I mark as the point at which I became avidly interested in economics, started reading Cafe Hayek and then this blog etc.
    What impressed me at the time though was how the work of the ACCC is misrepresented in the press. To sell papers you inevitably have to shoe-horn the facts into some good guy bad guy narrative, and of course in Australia the bad guys are the corporations and the good guys the poor consumers.
    But my overall impression of that report was that the ACCC themselves were not at all concerned with winners or losers, but rather addressed themselves exclusively to the problem of structural or systemic impediments to competition. It seemed arcane and highly technical at the time but in the end I was convinced that it was work well done.
    I’m not making any comment at all on the petrol pricing issue. I agree it seems absurd, and perhaps in the past 12 years they have been marched through by the Gramschians, but having crawled letter and space through the credit card report I would keep an open mind.

  18. rebel with cause

    I am not sure but my rusty brain remembers something about oligarchies and artificial low pricing to force others out of the market.

    Please provide examples of where this has happened – not in theoretical textbooks but real-world quantitative studies (not anecdotes) that provide evidence that sustained periods of low prices make consumers worse off in the long run by eroding competition. GO!

  19. Combine Dave

    Is there any evidence at all that the large petrol sellers were suffering as a result of Coles/Woolies petrol price wars? (Suffering as in going out of business not in terms of reduced profit margin).

    I am sure that plenty of smaller independent retailers are going out of business, but wouldn’t this likely to occur regardless of the discount prices of Coles and Woolies.

    According to the Australian Institute of Petroleum:

    “The most significant trend in the retail fuels sector has been the reduction in the number of retail service station sites and the move to higher volume outlets located in busy areas and on highways where there is greater traffic volume, thus reaping economies of scale.”

    http://www.aip.com.au/pricing/facts/Facts_About_the_Australian_Retail_Fuels_Market_and_Prices.htm

  20. Tel

    One little niggle about the discounting is whether that squeezes out other sellers leaving a duopoly?

    Aldi and Costco don’t seem overly bothered.

    IGA is hanging in OK… there will always be a market for Shin Ramen and it’s far too dangerous for other supermarkets to stock.

  21. JohnA

    Ahem, aren’t people forgetting the circumstances when the vouchers first came in?

    We had just seen the Canberra Mint stop doing 1 & 2c coins, and we went through the rounding up and down rorts as customers sought to win something from the supermarkets.

    A couple of egregious cases well-publicised and the problem receded. Then the supermarkets saw a way to claw back more of those rounding differences – push up the average ticket through the turnstiles. More items means less rounding impact.

    So Woolies (then Coles joined in to remain competitive) introduced an incentive to boost your checkout value to above $30. This minimised their losses due to rounding effects and, coupled with the improvements in barcoding and pricing, improved the productivity of the lanes enough to afford the discounts on fuel. NB: price errors, price checks and under-rings are/were the biggest loss-makers in the checkout lanes.

    And when the barcoding was complete, then self-checkout could be introduced.

    None of this was pushed as a consumer benefit by the ACCC, but a lot of us now are happy checking ourselves out of the supermarket, are we not?

    Meanwhile, I have separate questions:

    Is there anywhere in the ACCC legislation a prohibition on collusion via a third party, who is not party to the collusion?

    Could an argument be mounted that prosecutable collusion has occurred, even though the parties did not speak directly to each other, but worked via an intermediary?

    Alternatively, does this give rise to uncompetitive impacts upon consumers, so that the ACCC has failed to adhere to its Prime Directive?

    Or, does the existence of other retailers who don’t do discounts blunt the force of the argument about restricting the dockets to 4c being anti-competitive?

  22. Notafan

    sustained periods of low prices make consumers better off

    I am not going to do that you know. I stop by here from time to time when I need a break from work (small business operator) the concern here is artifically low prices, ie below the wholesale price, where other/the same consumers are paying higher prices for other goods in order for the seller to increase market share. So it might look like the consumer is better off but they aren’t really, are they? I see that Coles and Woolworths are probably not interested in a share of the petrol market only but the discounting is driven by a desire to take a greater share of the grocery market.
    The seller could sell below wholesale to increase market share and make a loss in the short term but it wouldn’t be rational to do that indefinitely would it? They would have to able to continue to subsidise the loss from another part of their business.
    I am not sure what the ACCCs motivation is here. If I have time I might do some reading.

  23. rebel with cause

    Will the ACCC be clamping down on shop-a-dockets next? The back of my grocery receipt is full of offers for discount dry cleaning and cheap meals at the local pub – what is the difference between this and the discounted petrol offer? I can’t wait for Chicken Schinitzel watch to roll out.

  24. grumpy

    @JohnA. I’m not happy about self checkout! When ColesWorth pays me to operate a checkout then I’ll use self service. I’ll wait in line thank you. BTW can I get a grant for creating jobs :-)

  25. Sinclair Davidson

    I suspect that Coles and Woolies will ramp up their alcohol discounting next.

  26. JohnA

    According to the Australian Institute of Petroleum:

    “The most significant trend in the retail fuels sector has been the reduction in the number of retail service station sites and the move to higher volume outlets located in busy areas and on highways where there is greater traffic volume, thus reaping economies of scale.”

    That’s correct, Dave. There has been a long-term trend to reduce the number of sites, because Australia was over-supplied with them, and retailers were having a tough time. There are still sites with a service station on each corner, and some locations with an apparent oversupply, but the trend is definitely in the right direction

    And the second most significant factor is that Mobil-Exxon and Shell have completely withdrawn from the politically difficult retail sector, and Caltex is mostly out too. Now they supply Coles, Woolies and the independents at prices they don’t have to defend publicly. Only BP has retained the full retail approach.

  27. JohnA

    @grumpy, but at least you have the choice to be different from me, and it wasn’t imposed on you by an all-knowing ACCC.

  28. I suspect that Coles and Woolies will ramp up their alcohol discounting next.

    Can’t wait to see the advertising campaign, especially Coles’ ‘Down, Down, Prices are Down’ take on this. Gangs of tattooed hoons and hoboes in a carefully choreographed dance sequence in Liquorland.

    I am all in favour of cheap booze, because I drink responsibly …

  29. Obio

    Its interesting that some comments still refer to Coles & Woolies as a duopoly. Aldi and IGA have around 500 stores each, if i recall correctly, and both are still opening new sites. And there is also Costco entering the market.

    The fuel rebate is calculated as part of the overall promotions budget, however some of the cost of the fuel promotion is recovered through increased fuel volume during the bigger discounts. Product prices are no more increased to subsidise fuel than they are to pay for grocery price reductions or the cost of advertising.

    I am also pretty confident that one of the the two chains being discussed will not be happy about the new ACCC directive, they were using fuel discounts effectively to drive supermarket and fuel volume increases.

    I can also tell you the McLeod at Coles is genuine about increasing volume to increase profits while reducing prices to consumers. He is the first CEO at Coles to really understand how to grow the business in at least 20 years.

    (Disclaimer: Before I get accused of being a Coles or Woolies exec like happend last time i posted on retail,I have worked in retail for 30 years but no longer do so)

  30. rebel with cause

    I am not going to do that you know.

    That’s cool, I’m not going to continue to argue with you then – I’ll just point out that the scenarios you are imagining are just that – imaginings of your mind, not real world outcomes. Like you, the ACCC is very good at imagining business practices that lead to bad outcomes for consumers, but very, very bad at providing evidence of such outcomes occuring in the real world.

    Best of luck with your business.

  31. Walter Plinge

    JohnA: There are still sites with a service station on each corner, and some locations with an apparent oversupply, but the trend is definitely in the right direction

    There are still 3 petrol stations on the major intersection just down the road from me and a 4th a block further on. They’re all just petrol and minor groceries. None offers car servicing. It’s a wonder to me how they all survive.

  32. Rabz

    something about oligarchies

    Sorry, I don’t mean to go all spudpeeler on you, but such an egregious error is crying out for correction.

    The term is “Oligopoly”, good sir.

  33. Walter Plinge

    Philippa : I am all in favour of cheap booze, because I drink responsibly …

    That’s what I like about Europe and SE Asia (and possibly many other regions). Beer is the same price as Coke and sold at the corner store. And I haven’t noticed a problem with public drunkeness (during the day at any rate).

  34. Rabz

    I am all in favour of cheap booze, because I drink responsibly …

    I’m even more in more in favour of it, because I drink totally irresponsibly!

  35. Rob MW

    “………………………carefully choreographed dance sequence in Liquorland.”

    I thought it had been claimed !!!

  36. wreckage

    the concern here is artifically low prices, ie below the wholesale price,

    There is no evidence that this is happening.

  37. I am all in favour of cheap booze, because I drink responsibly …

    There is plenty of room for them to discount grog. They are making plenty from it.

  38. Notafan

    That’s cool, I’m not going to continue to argue with you then – I’ll just point out that the scenarios you are imagining are just that – imaginings of your mind, not real world outcomes.

    My intention wasn’t to imagine; rather speculating as to try to get an understanding of the motivations of the retailers and the ACCC.
    Oligopoly sorry I did say I was very rusty (and I’m not a sir either).
    I can certainly understand pushing to more low margin high volume but was thinking of the impact on businesses that just sell fuel remaining competitive.

  39. grumpy

    @JohnA (again). Fair call. If you build it (self service checkouts) I suppose they will come. I’m looking forward to the day in NSW when I can pick up my booze and groceries and only have to go to one checkout. (Not holding my breath tho’)

  40. Rob

    That last comment (re: the credit card rules) reminded me of another great market intervention. The ATM fee regulation to save us all from big bad banks. If you live in a small country town with only 1 or 2 ATMs, the banks used to have an informal arrangement where they would not charge the ‘other bank’ fee to use the only ATM in town. They all reciprocated so their customers could use each others ATMs without cost, and they didn’t have to have ATMs in every town to service their customers. Under the new rules the Reserve forced in under Ruddy, this is no longer allowed and we all pay $2 a shot even though the nearest ATM for our bank is an hours drive away. I’m so glad the government was here to help.

  41. Bons

    Even the world’s most boring totalitarian sphere outside the ACT – Sweden (the Nirvana of all lefties and public servants), permits booze sales from corner stores. If you sell the house you could probably afford two tinnies.

  42. Shelley

    Just came back from Woolies – managed to get a 4c discount voucher with my $38 spend.

  43. Chris M

    Perhaps the ACCC will rule in favour of the native land rights claims over Liquorland and Foodland then. Used to be a joke, fairly sure these numbnuts will take it seriously.

    I’m quite unhappy about this, been getting 40c / l discounts for months now and always max out the full 150 litres for a $60 saving (from $200 worth of groceries), would have saved over $700 in the past 6 months. Oh well, as soon as Costco come I will dump Coles anyway, most of their groceries are well overpriced.

  44. Docket62

    I never used fuel vouchers. There are so many ways to claim fuel through tax, they are a waste of time. If I use $5,000 in fuel PA, on marginal rate of 40% then I reduce my tax by $2,000. That’s better than any damn voucher, and the ACCC can’t do a thing about it, or the gumment!

  45. Andrew

    @Docket62, what stops you doing both?

  46. wreckage

    Andrew, depending on where you are in the tax margins, maximizing your fuel expense might make more sense than minimizing it.

  47. Andrew

    If your effective MRT exceeds 100%

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