This week, my ECONS101 class has been covering market structures and market power. By definition, market power is the ability of a seller (or sometimes a buyer) to have control over market prices. The degree of market power that a seller (or buyer) has depends on the amount of competition in the market. A big component of competition is the contestability of the market - how easy it is for other sellers (or buyers) to enter the market. When a market is highly contestable, it is difficult for a seller to maintain high prices (and high profits) because other sellers will be able to easily enter the market, increasing competition and lowering prices. But when a market has low contestability, high prices and high profits are likely to persist for sellers.
So, I was interested to read this article in the Waikato Times today [*]:
Raglan business owners say a landlord monopoly in the small beach town is jacking up rents, forcing them out.
Prominent Raglan music venue and bar Yot Club will soon be up for sale because the owner Andrew Meek says he’s “had enough of the landlords”.
Other operators spoken to by the Waikato Times said there was a power imbalance between tenants and owners with some having seen up to 95% rent increases in less than a decade...
Meek wanted to sell his business and said if it didn’t sell, he would shut the Yot Club by May.
“I hope that someone else can find a way through to maybe deal with the landlords, to maybe have a better relationship with police and licensing.
“This place means a lot to the community and there’s nothing like this in Raglan.”...
A business owner in the town centre, who did not want to be named, said they can’t move anywhere else because of what they called a monopoly on commercial rents.
“This is our life and livelihood, so they know that we are not going to leave and run.
“So they keep increasing the rent and compared to the whole country, the rent here is way too high.”
They said the 60m2 shop was renting for over $55000 for a year - nearly double the same-sized property in Hamilton’s Te Rapa.
“Every two years or whatever the document says, they put up the rent and then they take a management fee as well.
Another small business saw more than 90% increase in rent in the last six years.
“My landlord basically says he can do whatever he wants.”
In downtown Raglan, a few commercial landlords own most of the properties. The commercial property market in Raglan is not a monopoly (in contrast to what the business owner quoted above says), but it is an oligopoly - a market with few sellers. That limits competition and grants some market power to the commercial landlords, which they can use to increase rents. To make matters worse, this is a market with low contestability. Even though rents are high, and commercial landlords are making high profits, there is limited land in downtown Raglan zoned for commercial uses. Since the existing commercial landlord oligopoly holds all (or most) of that property, it is difficult (if not impossible) for other commercial landlords to enter this profitable market and compete. Moreover, Raglan is a long way from the next nearest commercial area which, excluding Whatawhata, is probably the Dinsdale shopping centre in Hamilton, over 30 minutes away. So, there is little alternative for businesses in Raglan other than to deal with the existing commercial landlord oligopoly.
However, things are even worse for the Yot Club than for other tenants. An iconic venue like the Yot Club is known for its current location and setup, including the outdoor area. That gives the Yot Club owner even less bargaining power in negotiating with the landlord than other tenants, since other tenants are more likely to be willing and able to move to a new location (even if that new location is outside of Raglan entirely).
So, the commercial landlord oligopoly in Raglan has a lot of market power. The commercial property market in Raglan lacks contestability. The tenants are paying high rents (note the comparison in the quote above with rents in Te Rapa, where there will be much higher competition between commercial landlords, because there are many alternative commercial areas within Hamilton that a tenant may choose to locate in). The landlords are likely making high profits as a result of their market power.
Having said all that, there are meaningful limits to how high the landlords can push the commercial rents. If rents get too high, then the commercial tenants will start to walk away (exiting the market), as it becomes unprofitable to continue their operations. This appears to be exactly what is happening now. And given the extra challenges that the Yot Club faces in dealing with the landlords, it shouldn't be a surprise that they were one of the first tenants to exit.
*****
[*] In the interests of full disclosure, I was a member of District Licensing Committee panels that have twice declined to renew the alcohol on-licence for the Yot Club. On both occasions, the Committee's decision was overturned on appeal to the Alcohol Regulatory and Licensing Authority. If you're interested, you can read the Committee's decisions here and here, and the corresponding ARLA appeal decisions here and here (and for completeness, you can read a further ARLA decision here, in which the final two sentences are particularly telling). Despite any perceptions that may have formed to the contrary, I bear no ill will towards the Yot Club or its owner, as the tenor of this post should demonstrate.
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