Wednesday, July 11, 2007

Kevin Rudd's barking up the wrong tree

How else could I describe Kevin Rudd's election promise to investigate the pricing of groceries and further empower the ACCC to monitor prices.

Following Labor's assault on the petrol companies, the Opposition will today announce it wants the competition watchdog to launch an inquiry into the prices charged by grocery giants.

With fruit and vegetable prices increasing by 15 per cent in the past three months, Labor is attempting to capitalise on what it believes is the underlying anxiety of voters who feel they are not sharing in the benefits of a buoyant national economy.

This policy reeks of economic ignorance, stupidity, authoritarianism, and I would have to agree with the treasurer Peter Costello who described it as a bit of attention seeking and a massive media stunt.

The idea of having an a competition watchdog and regulator is unjustified. The ACCC is supposed to investigate anti-competitive behaviour and pricing in any industry. But what exactly is anti-competitive ? How do you know if a retailers pricing was determined by:
1/ real world inputs: supply factors, events, changes in the business environment, perceived risks, a sales strategy, changes in demand, exchange rates, interest rates etc etc...

or ...

2/ if a price is determined by a companies executives thinking that they have some kind of monopoly / duopoly power within that industry, and therefore they can raise prices well above "cost" and "reasonable profit levels", at any moment and sales will remain unaffected ? Or that the a large firm isn't trying to be a predator to the competition and lower its prices below "cost" to capture the market and destroy smaller competitors ?

An outsider can't tell the two apart. Entrepreneurs and business executives have a lot of factors to consider on a daily basis. How do you know exactly why a firm changes its prices ? Exchange rates, commodity prices and the cost of most inputs change on a daily basis. You have to factor in shipping and freight, storage, security, staff, I.T costs, marketing costs and you start to see there is a whole universe of factors that affect prices. The ACCC won't be able to determine if petrol prices or grocery prices are unreasonable.

Whats more important, is the fact that in free society, there is no principled reason to fine or penalise a company for setting whatever price level it pleases. Not one buyer is forced or compelled to purchase an item against their will. Millions of Australians grumble about petrol and grocery prices, and Kevin Rudd is trying to tap into this sentiment to help his campaign. But everybody is free to reject a price and look elsewhere !

In a free market, predatory (below cost) pricing leads to losses and monopoly pricing (well above cost) leads to less sales and smaller market share as your customers flock to your competitors.

These are both very harmful to a company's survival in the long run. You don't see firms do this in a competitive market. They have to compete and maintain market share to survive. But this is only the case in a free market. Sometimes the entry costs are prohibitive. And in every case, government sets barriers to entry - registering a business, obtaining licenses and permits etc.

Even Coles and Safeway already have massive competition. Fruit shops and independent grocers, butchers, fish shops, Aldi supermarkets and more. If Coles and Safeway were ripping people off, then they wouldn't be as successful as they are today and they would see sales drop off.

Kevin Rudd is barking up the wrong tree. He should look at the role of central banks around the world who have been recklessly inflating the supply of money.
Australian monetary growth has been thoroughly irresponsible. From March 1996 — John Howard’s electoral victory — to April this year currency grew by 95 per cent, bank deposits by 166 per cent and M1 by 150 per cent.
Kevin Rudd isn't the sharpest tool in the shed, and no ALP politician will ever clue on to the role of money and the effect of fractional reserve banking by central banks around the world. He could do us all a favor and just stop barking.

UPDATE: A couple of website polls tell us more about certain audiences than this issue. At the Herald Sun, some sanity prevails in a poll titled:
"Do you think Mr Rudd's plan will keep prices low?"
Yes: 21%
No: 78%

Over at the asylum on Spencer St, The Age readers were asked the more fundamental question: "Should the consumer watchdog monitor grocery prices?"
Yes: 88%:
No: 12%

A whopping 88% think that it is a necessary role of a government bureaucracy to monitor prices. So few people understand markets and the mechanisms involved. So many people have a cynical view of markets. So many people remain fans of big and intrusive government. Sigh...