Collaboration between competitors is illegal, but tough to prove. It is also the natural state of affairs in an oligopoly.
When a competitive market evolves over time into an oligopoly, the focus of management attention of the remaining oligopolists moves from the customer to the competitor. With the resources available to an oligopolist in any decent sized market, they will know in considerable detail the strategies, internal processes, pricing, and resource allocation choices made by their competitors almost as quickly as they happen.
Supermarket competition in Australia has evolved in this manner. It has turned from ruthless competition for customers 40 years ago, to ruthless collaboration between the two major players now.
Collaboration is illegal, and I am sure that the leaders of the two supermarket gorillas are not setting prices together, or collaborating in other ways that would be contrary to the competition laws in this country. However, given there are only two of them, and they have the resources to watch the other very carefully, there is a sort of quasi co-operation that emerges.
It is driven by the commonality of their activities: The need for shareholder returns, driven by market share acquisition costs, both fixed and variable. They work aggressively on both, and if they did not, the senior management would be fired. In addition, directors have legislated fiduciary responsibilities under the Corporations act in relation to shareholder interests and importantly, returns.
We must also remember that via our superannuation funds, we are all shareholders in Coles and Woolworths.
Once again, just like the ‘housing crisis’, we have short term populist press release driven band-aids being suggested. They are touted as the remedy for long term strategic choices made in the past that to some, have turned sour.
The time for institutional concern about the increasing power of supermarket chains was when they were assembling the scale they now have. All of the take-overs and mergers that have happened have been waved through by the ACCC. This is despite commentary at the time about the impact of the lessening of competition for the consumers dollar.
Now it is too late, other remedies must be found, which do not include a forced break-up. Apart from the immorality of retrospectively applying new rules to the conduct of business, there is no logical or practical way to break apart either of the supermarket chains.
We should stop bleating, and get on with life, while ensuring we do not make the same mistake again.
Header credit: Gapinvoid.com. The cartoon put a huge amount of meaning into a simple graphical form. Thanks Hugh!!
