Yesterday we learned the Commerce Commission's decision on the merger application by Foodstuffs North Island and Foodstuffs South Island (which I posted about last month). As NBR reported yesterday (paywalled, but you can read this briefer New Zealand Herald story instead, or the Commerce Commission's decision here):
Foodstuffs wanted to see the co-ops merged within and under the management of a single national grocery entity, which it claimed would be better able to compete with the national Woolworths NZ chain.
It argued the proposed merger would lead to cost reductions (including overhead and product costs), efficiency gains, increased agility and innovation, and a more cohesive national offering, which would ultimately deliver better value for retail consumers at the checkout.
But ComCom chair John Small said today the proposed merger would reduce the number of major buyers of grocery products in New Zealand from three to two, reducing the number of buyers to which many suppliers can supply their products, and creating the largest acquirer of grocery products in the country.
“This would result in the merged entity having greater buyer power than Foodstuffs North Island and Foodstuffs South Island each do individually, which would harm the competitive process, and we consider is likely to substantially lessen competition in many acquisition markets.
“As a consequence of the substantial lessening of competition and the associated increase in buyer power, the merged entity would likely be able to extract lower prices from suppliers and/or otherwise adversely impact suppliers in the relevant markets.
“We are also concerned that the consolidation with the proposed merger would lead to reduced investment and innovation by suppliers, meaning reduced consumer choice and/or quality of grocery products in New Zealand for consumers.”
As I noted in my previous post, it is interesting that the Commerce Commission does appear to be considering competition as it relates to suppliers, and not just consumers. The problem is that, when there are fewer supermarkets, there is less competition among the buyers of suppliers' products. And the supermarkets could use their market power as a buyer to drive down the prices that they pay to suppliers. The Commerce Commission seems to consider there to be a real risk that the merger would lead to a substantial lessening of competition among the supermarkets in buying from their suppliers.
One thing that has disappointed me about the coverage is the lack of the use of a rarely-used word in economics: the oligopsony. What's an oligopsony?
When a market has a single seller, it is a monopoly. When a market has a single buyer, it is a monopsony. When a market has just two sellers, it is a duopoly. When a market has just two buyers, it is a duopsony (which is essentially what we have avoided by this merger not being approved). When a market has a few sellers, it is an oligopoly. The retail market for supermarket products is an oligopoly, since consumers can only buy from one of a few sellers. When a market has just a few buyers, it is an oligopsony. With only three large supermarket chains (Foodstuffs North Island, Foodstuffs South Island, and Woolworths), New Zealand has a supermarket oligopsony in the wholesale market for supermarket products, since suppliers can only sell to one of a few buyers. The Commerce Commission decision ensures that the wholesale market remains an oligopsony.
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