Monopoly power

The problems of monopoly are well understood but it seems the authorities are now powerless to break up mega-corporations, partially because of corporate control of media and politics but mainly because of consumer behaviour and preferences. In high streets, up and down the country, people have chosen convenience and price over individuality, character and resilience. We are victims of our own desires. Tom Lines (of the Occupy Economics Working Group), in response to a question about the economic impact of superstores on local shops and businesses, penned the following explanation which sums up the problem well:

Can I answer Em's question in a slightly different way?  It is that if I was going to London, or Lyme Regis, I wouldn't start from here.  The fact is that big chains and supermarkets are very popular.  That's why they keep on making money and expanding.  Taking Dave's example, one can well imagine many people in Lyme - as well as the Tesco board - thinking, 'Oh good!  Now we can do our weekly shop locally and we won't have to drive to Axminster for it! Well, that is an improvement!  A pity about that nice greengrocer and the newsagents, but isn't it convenient to buy everything under one roof and load it all into the car at once?'

 

The problem is one of market power: how it works in this case, who really has the power, who loses out from it, and who is in the best position to do something about it.  Conventional theories of anti-competitive behaviour are based on the idea of monopolies (one company controlling a market) and oligopolies (a handful of companies controlling it) - but in either case, at the production (supply or selling) end of the supply chain) the consumer ripped off by US Steel, Standard Oil or British equivalents of them pushing up prices because they faced no competition for their sales.  Therefore things like anti-trust legislation in the US and the Monopolies Commission in the UK were created (although they have been much watered down since the Reagan-Thatcher era).

But that is no longer the most serious problem: it is not 'seller power' of that sort, but 'buyer power': on food markets at least - and seemingly a lot of other consumer markets too - the narrowest points on the supply chain, with the smallest number of competing firms and therefore the greatest concentrations of power, are not at the production (farming) end but near the consumer end.  In most food markets they are with the retailers, although there are still some products (such as coffee) where processing firms like Nestle and Kraft remain the strongest.

But even then, the pressure they exert is largely forced backwards along supply chains, to the farmers ultimately, in the form of a squeeze on the prices and terms of sale that farmers have to accept.  In general, supermarkets are extremely competitive with each other when it comes to getting business off us, the consumers - even though only a small handful of them dominate the market.  Because of this 'buyer power' exerted by us, the consumers, they stock not only standard products but a lot of 'niche' lines such as organic, low-fat and vegan, in order to serve all tastes and income groups.  But their profit margins are very low: they make their income out of the sheer volume of sales, and by pushing all the pressure back down the supply chains to their suppliers, and not forwards to their customers.  Politically that is very hard to counter, because there are 60 million consumers and only 300,000 farms.

Another factor is the centralised warehousing done by the supermarkets, with all the transporting of goods backwards and forwards around the country between the original supply point, processing and warehouse units and the points of sale, as well as other wasteful uses of energy like open-fronted chill cabinets for products like milk.

I think that basically this is something for the government to sort out, but modern governments don't want to offend supermarket bosses any more than other corporate bigwigs.  Why, the saintly Tony even put Lord Sainsbury on the government's payroll!  (A year or two ago, I received an e-mail from a senior figure in the Fabian Society which referred, with a straight face, to 'Lord Sainsbury and other left-wingers'!!!!!!)  The government ought to break them up, perhaps by insisting on a maximum 10 per cent market share for any company in a major retail sector, and impose a lot of other restrictions on the exploitative ways they do business with their suppliers.

In the US in the last century the federal government did just that, and succeeded in debilitating an early predecessor of Walmart, which had the resonant name of the Great Atlantic & Pacific Tea Company, or A&P.  Here is a chart of its number of stores (from Wikipedia):

Year No. of Stores

1863 5
1878 70
1900 400
1915 1,600
1930 16,000
1950 4,500
1970 4,000
1980 2,000
1990 1,000
2000 600
2008 460
2011 338
2012 310

There is a long piece which covers this at http://www.alternet.org/story/39251/the_case_for_breaking_up_wal-mart.  It goes into the A&P story near the bottom, reporting:

'Over the years, the federal government repeatedly hauled the A&P into court for abusing its market power.  The government first began to scrutinize the firm in 1915…  The final antitrust case against the A&P was not resolved until February 1979, a month after a West German grocery mogul bought control over the remnants of the once-huge firm.'

In 2010 A&P eventually filed for bankruptcy protection - although it evidently emerged on the other side.

Part of the policy should be to insist that supermarkets all sell off any smaller shops they own, like the 'Sainsbury's Local' and so on which have smashed corner shops over the last few years.  And local authorities ought to be given strong planning powers to fix a point (which could be zero) beyond which they will not allow any more shops in a retail sector into their area, and to put limits on their size.  Each authority could then make its own judgment: is the convenience of having a big store in the town more important or the variety and competition which come with maintaining an independent greengrocer etc?  I wouldn't be dogmatic about that because it's a balance between one thing and another.  Different councillors and their electorates will reach different conclusions, and they should have the right to do so.  What matters is to give them the power to make such decisions when they see fit; and to sharply reduce the supermarkets' market power and make them subject to these democratic controls.

We are party to our own exploitation.

Tom also recommended study of "buyer power" in the UK food industry:

Food, Inc by Bill Vorley

Comments   

 
0 #6 Clive Menzies 2014-01-03 14:50
No problem.

Traditionally, monopoly power was regarded as pertaining only to producers, as you say. Constraints were placed on horizontal expansion, ie. market share. Corporates responded by vertical integration and expanding the scope of their operations.

But if we ignore that for the moment and focus on supermarkets in terms of their retail activity. Contrary to what you assert, the major supermarkets can cross subsidise products/activi ties to squeeze out competition - independents (and collude amongst themselves to do so). Their resultant market share grants them economic power to co-opt the planning process and politics, further cementing their power and dominance - this is highly corrosive. Concentrated power is the most significant obstacle to creating a freer, fairer world.

Once we get into the realm of vertical integration and divergence into other services: banking, insurance, telecoms energy etc. there is even greater power accrued and we move towards fascism where corporate and political power are synonymous - I would say, we've already reached that point in the UK and US and with the implementation of TTIP, TIP etc. it will be global.

This competitive economic model of scarcity is obsolete and will collapse. Supermarket power is merely one aspect of the Culture in Decline.
http://freecriticalthinking.org/daily-pickings/765-culture-in-decline
 
 
0 #5 T B Hall 2014-01-03 14:09
Thanks for the replies Clive- and I don't disagree on a good number of your points. Where I do differ in opinion though, is where you conflate the ability of supermarkets to make a more efficient market between suppliers and consumers (farmers and shoppers in this example), and certain suppliers themselves to grab enough of the market share to impose monopolistic traits.
I am concerned by the behaviour of large scale suppliers leveraging government influence and market position- as well as the ignorance of others to push their own agenda. I am not concerned by supermarkets (or online retails like amazon) making market more efficient, where ultimately the direction of travel is positive for fairness. Supermarkets landbanking however: don't get me started! Likewise the unfairness of a tax system that allows avoidance by big fish, but no such reprieve by small ones...
 
 
0 #4 Clive Menzies 2014-01-02 16:50
Well the notion of a free market is a fallacy. The biggest exercise their power in predatory fashion.

In the case of food, the risk is that the likes of Nestle, Monsanto and a few others will dominate the world's food supply. We've seen the lack of transparency in GM technology which will be rolled out leaving us vulnerable to cancers and collapse of the ecosystem.

Ever increasing profit is the motive which drives these behemoths and they control media, regulators and politics to achieve their aims irrespective of the consequences.
 
 
+1 #3 T B Hall 2014-01-02 16:34
But the whole thing about free markets is that supply is elastic. If prices are "forced" down so that farmers live a marginal existance, they are always free to do something else. Open a golf course/ run a festival/ self storage- if the farmer owns the land, they have plenty of options. In this case, supply drops, prices rise, maybe a few farmers rejoin the market, equilibrium is found. The problem of monopoly is when a product that is needed (food/land/wate r/energy etc) is monopolised, producing profits for producers above a free market rate (monopoly rent)- i.e. above the price that the good could be produced in a free market. Who is to say any activity should be profitable other than consumer demand? Free markets do make some activities less profitable over time, but luckily for farmers, there will always be at least some market for their goods, unlike say steam locomotive makers...
 
 
-1 #2 Clive Menzies 2014-01-02 16:13
There is a long answer to this but the point made in the post is that monopoly power has mainly been viewed as a problem of producers exploiting their power over "consumers" (a term which I usually resist - we are people). The point is that now consumer power is used to abuse producers (farmers in this case - squeezing them to a marginal existence).

In granting a huge market share to the likes of Tesco, we're trading "market efficiency" for resilience and placing undue power in the hands of yet fewer hands - this is why our world is riven with corruption. Economic power is concentrated. Power corrupts and the greater the power, the greater the corruption. To look at the problem merely in terms of prices people pay is to ignore all the attendant problems of concentrated power.
 
 
+1 #1 T B Hall 2014-01-02 15:26
I'm not really sure what you describe fits the accepted definition of monopoly, and I don't like the idea of restricting the number of shops in an area- a real danger of monopolistic behaviour if ever there was one.
Suppliers being squeezed is part of the market process. Perhaps they were enjoying too much profit beforehand? Who are we to say? Surely the whole point is to let producers and consumers find a market price that works for both. While I agree that some strategies to undercut competition to close them down, before jacking up prices are unpleasant, the opportunities for abuse are limited. In a free market, exploitation of monopoly position with high prices can only be countered by free competition. If supermarkets start to abuse their position, other retailers will open up. That is of course unless a competitor is legally forbidden from expanding their superior product by way of max market share rules, or forbidden from opening up a new shop due to retail store zoning limits.
 

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