Regional Australia is being shafted at the bowser
Have you ever driven around regional Australia and found large discrepancies in the petrol prices at different regional centres? Do you ever wonder why petrol prices are different in different suburbs? And have you ever been annoyed that the price of the same item may be different at different Coles or Woolworths supermarkets in the same neighbourhood?
Well, what you’re witnessing is the practice of geographic price discrimination. It’s common among our major supermarket chains and oil companies. At its simplest, geographic price discrimination means that consumers in some areas are paying a higher price for the same item than they would otherwise have paid elsewhere.
There are plenty of examples of geographic price discrimination. Petrol pricing is a well known example. Those who live in the city see it every day when they drive to work, school or the shops. Petrol prices will vary from suburb to suburb with the same petrol retailer charging a different price for the same petrol at their different outlets.
It’s even worse in regional areas. Here motorists will not only be hit with prices generally higher than those in metropolitan areas, but they are typically hit with prices higher than other comparable regional centres in the particular State or Territory. In fact, the prices in regional centres across a State or Territory can be up to 15 cents or more a litre higher than the cheapest regional centre in the particular State or Territory.
For many regional motorists there’s no such thing as everyday low petrol prices given that it’s more like an everyday rip off as compared to their city cousins and fellow motorists in the cheapest regional centres. And don’t be fooled by suggestions that it’s the cost of transport that inflates the price of petrol in regional areas. Transport is a tiny fraction of the price of petrol and, more importantly, doesn’t explain what can be significant discrepancies in the price of petrol in adjoining regional centres.
Also don’t be fooled into thinking that price discrepancies can be explained by differences in volumes of petrol sold in a regional centre as this doesn’t explain the significant discrepancies in petrol prices in regional centres where comparable volumes may be sold and which are comparable distances from terminals where petrol supplies are obtained.
There’s no disguising that geographic price discrimination is a blatant tactic to extract more money from some consumers. These consumers are being ripped off by a retailer every time they are charged a higher price for a product that other consumers can buy for a lower price from the same retailer at another location.
Why the difference in price? Quite simply it’s because the retailer can get away with charging a higher price in some locations. Here the free market theorist will get excited and say that the price differences are a reflection of “competition” and consumers should be pleased to be getting “cheaper” prices in some locations.
But what about those consumers who are getting ripped off? Interestingly, the free market theorists generally don’t have anything to say about the rip off in those locations where retail prices are higher.
As usual the free market theorists tend to be simplistic in their analysis. Could it be that the free market theorists consult for or are just apologists for the dominant players ripping off consumers at some locations? Or could it just be a case of the free market theorists failing to properly acknowledge market failures or distortions?
All too often market failures or distortions cost consumers dearly and geographic price discrimination is no different. A dominant player charging different prices in different local markets creates a market distortion because some consumers are being gouged as a result of a lack of true competition in a particular local market.
To fully understand the price gouging nature of geographic price discrimination we need to delve deeper into the price gouging tendencies of dominant market players. Put simply dominant players are there to raise prices and profit margins at the expense of consumers. Dominant players will only discount where they need to. Typically, it’s to take on a local competitor.
In the absence of a local competitor to take on the dominant player it’s clear that a dominant player will generally have no inclination to unilaterally reduce the price of products over a prolonged period as that would simply cut their profit margins.
Naturally, there may be sporadic or highly publicised price cuts on particular products by a dominant player, but these are just gimmicks to give the impression of a “competitive” player. Here the mindset of the dominant player is simply to hook the punters through a pricing gimmick on some products so as to fleece them on the other products they may buy while they are shopping at the dominant player’s outlets.
Apart from these gimmicks to lull consumers into a false sense of security, a dominant player will only lower the price of a product when it’s forced to by the competition in the marketplace. It’s the presence of independently minded competitors in the marketplace that keeps the dominant players honest.
Reduce the numbers of independently minded competitors in the marketplace and you reduce the level of real price discounting in the marketplace. Likewise, reduce the number of independently minded competitors in the marketplace and you reduce the depth and duration of any price discounting.
Clearly, it’s the type of competitor in a local market that’s important. Since comparable competitors tend to compete or behave in a comparable way we need competitors in local markets that are independently minded.
So while Coles and Woolworths may be competitors in a general sense they are really just comparable competitors in that they generally copy one another’s pricing strategies. Ultimately they are like-minded competitors who will behave in a like-minded way. It’s only where there is an independently minded player in a local market that we see lower prices from Coles and Woolworths in that market.
It’s no surprise that the ACCC has found that grocery prices are lower at a Coles and Woolworths where there is a strong independent in the local market. Even with petrol it’s clear that prices are lower where there is a strong independent in the local market.
That’s why we need strong independents in local markets around Australia to keep Coles and Woolworths in check and that’s why the Federal Government and the ACCC need to toughen up our merger laws to stop Coles and Woolworths from acquiring independents where that lessens competition in a local market.
With the cost of living pressures almost certain to be a Federal election issue you would like to think that all political parties will make a big push to strengthen our competition laws during 2012 for the benefit of all consumers.
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