12 May WHAT DID THE EU DO ABOUT THE BUSINESS PRACTICES OF THE CAR MARKETS, SUPERMARKETS AND BANKS?
The Competition Commission enquiry into supermarkets, which
began in April 1999, followed a nine-month investigation by the Office of Fair
Trading (OFT) into the major supermarket chains’ business activities. The OFT
identified three major areas of concern: the use of barriers to entry, the lack
of effective price competition, and the relationship between the large
supermarket chains and their suppliers.
The main issue concerns the major supermarket chains’ huge
buying and selling power. They have been able to drive costs down by forcing
suppliers to offer discounts. Many suppliers, such as growers, have found their
profit margins cut to the bone. However, these cost savings have not been
passed on from supplier to shopper. The supermarket chains have adopted a
system of ‘shadow pricing’, a form of tacit collusion whereby they all observe
each other’s prices and ensure that they remain at similar levels: often
similarly high levels rather than similarly low levels! This has limited the
extent of true price competition, and the resulting high prices have seen
profits grow as costs have been driven ever downwards.
Since the OFT referral, the 6.7 billion take-over of Asda
by Wal-Mart, the world’s largest retailer, with a reputation of being a
ruthless price cutter, promised to change the whole issue of pricing in the
supermarket sector. Of the supermarket chains, Asda has always been one of the
cheapest. With the Wal-Mart take-over, the drive to cut prices gained fresh
momentum. Asda planned to slash prices on hundreds of products, with most seeing
some price reduction.
Tesco in response, striving to maintain its position as the
UK’s number one supermarket retailer, launched its own price-cutting campaign.
It was determined not to get left behind in the price cutting war.
Despite these apparent price wars, the Competition
Commission was still concerned that competition was being restricted. It sought
to answer a number of questions. Is price competition is limited to a
relatively small number of frequently purchased items, and at stores which face
the most local competition? Are cost reductions ‘being rapidly and fully passed
through to consumers’? Is ‘the pattern of prices and margins across different
types of product, including branded and own label products, related to costs to
the extent that would be expected in a fully competitive market? This would
include products persistently sold at a loss, which may benefit consumers in
the short term but which may distort competition and consumer choice, and may
adversely affect the supply or availability of such products in the longer
term.’
One solution suggested by the Competition Commission would
be to force supermarkets to publish their prices on the Internet, thereby
allowing consumers or consumers’ organisations to make easy comparisons of the
prices charged by different supermarkets.
By March 2006 the OFT had uncovered more substantive
evidence of the potential abuse of market power in the grocery sector by the
supermarkets. Specifically it noted four issues.
Supermarkets have acquired many plots of land near their own
stores to prevent rivals from buying the sites. The rivals are often unable to
find alternative sites in the area because of planning restrictions.
The power to drive down the prices paid to suppliers has
increased since 2000. This makes it more difficult for convenience stores to
compete, given that their wholesalers often do not have equivalent power to
drive down prices from suppliers.
A possible distortion of competition by charging high prices
where there is little or no competition and charging lower prices, often below
cost, where competition is more intense.
Entry into the convenience store sector. With brands such as
‘Tesco Metro’ and ‘Sainsbury’s Local’, supermarkets have been successful in
driving out many small stores from the market. So far, the result has tended to
be lower prices, ‘but this may have been at the expense of choice of store at
the local level’.
QUESTIONS
1. What did the EU do about the business practices of the
car markets, supermarkets and banks? Support your answer with extracts from
each of the case studies
2. Explain the role – from a legal perspective – of the EU
in monopolies and anti-competition practices in general with specific reference
to the EU’s position on dominance and monopoly and EU exemptions to potentially
anti-competitive practices
CASE STUDY 2
Vanilla Ice became a household word for a while, not because
of his talent, but because of the copyright infringement that occurred in 1990
when it came to light that he had sampled Queen and David Bowie’s “Under
Pressure” without consent or license. Ice Ice Baby hit number one on the
charts in the United States and Vanilla Ice became the one ‘under pressure’.
Vanilla Ice altered the rhythm of the baseline thinking he would thereby avoid
any question of credit, royalties, license or even permission. This case never
went to court as it was clear that Vanilla Ice had stolen the sample without
permission. He settled out of court with Queen and David Bowie for an
undisclosed but very likely very high amount. Ice Ice Baby has been released in
many different versions, since then, with all of the legal procedures followed.
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