The hazard of market dominance

On the wrack again

If a business loses a working day, through power failures, absenteeism or other unexpected acts, it can cause bankruptcy. The only way to make up that loss is through price rises.

Small problems can become large corrections. Prices are set on the margins, rather than from any large movement. The more power or influence a particular market actor has then the larger these deviations can be, and the greater the impact on price inflation.

Effective control of the economy is in very few hands. The South African government comprises over 34% of the economy, as well as defining prices through legislation. Small business in South Africa has very little negotiating power, and even major manufacturers are frequently at the mercy of larger retailers or service providers. And let's mention again the power that both Telkom and Eskom have through the "delivery" of their services.

When businesses compete against each other individually it can be very hard for them to get a price that allows them any real profit. They are especially vulnerable if they are in a position where they have to take whatever price is offered, or accept power failures or other external factors as an immobile consequence of business.

Business owners can respond in many ways to these external perils. They can consolidate by buying up smaller competitors to get larger volumes, decrease relative costs, and so increase their profits. They can differentiate their products by going upmarket and so charge higher prices. Or they can simply go out of business.

If all the manufacturers in a particular industry are struggling with a similar problem, there is another option: they can gang up.

It is as if all the geeks ganged together to beat up the biggest bully in the school. The geeks response may have been disproportionate and unfair, but they still have a concern that needs addressing.

It isn't ethical, or even good business, but it is quite straightforward for two competing CEOs to meet over lunch and pour out their troubles to each other. This invites an "understanding."

Consider the bread price. Supermarkets are price makers. They have such large proportions of the average spend of the general public that they act as a gateway to your wallet. They compete based on price and are able to drive down the purchase price of consumer goods by simply threatening to deny access to the market to their suppliers.

The government, as a major buyer of medication and therapeutic products, has declared that they are fixing the price of medicines. They produce their price by studying the actions of different manufacturers.

It should be unsurprising that the result has been collusion and price-fixing amongst small manufacturers and service providers. And so we get bread price fixing, milk price fixing, and medication price fixing. Even labour union setting of wages is a form of price fixing.

Sometimes price fixing is a result of too much concentration of power in too few hands, but sometimes it is just a fearful response to seeing profits disintegrate.

It is difficult to maintain a conspiracy for very long. All parties to the conspiracy know they're doing wrong and fear reprisals. There are a lot of benefits to betraying the others first and cutting a deal with the law.

That said, there are plenty of drivers that will lead business executives into temptation. Price fixing is one symptom of a wider economic problem.

During the Competition Tribunal investigations into collusion, it is just as essential that they pay attention to the environmental factors that have encouraged this behaviour. If price makers continue to have undue control over suppliers then we should all expect price fixing to continue.