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One of the important principles behind Anti-Price Discrimination Laws such as the Robinson-Patman Act in the USA and the Competition Act in the UK, is to ensure that competing purchases are fighting it out on a level playing field, and to ensure a large retailer – a “power buyer” is not able to extract unearned discounts over and above any discount for volume, that is unavailable to their smaller competitors. When this occurs, the smaller competitors are artificially handicapped having to pay higher prices, and the ‘power buyer’ is able to shield themselves from the full competitive forces of the market. Where this type of Price Discrimination occurs, resources are used inefficiently, small business has to cross subsidize large business, the level of competition in the market is reduced, the power buyer increases his profits, and market share, and the consumer pays higher prices. However, in recent years the detrimental effects of Price Discrimination to society, and its harm to both competition and the consumer, have been disputed by a group of theoretical economists with little real world experience and also surprising by some competition regulators. They have argued that these laws serve no purpose, and may even harm competition. However a classic example of the importance and necessity of laws such as the Robinson Patman Act and how Anti-Price Discrimination laws work to protect both competition and consumers, and how erroneous the speculations of the theoretical economists where, recently occurred in Australia (the only country in the developed world without Price Discrimination Laws) over Nescafe Coffee.
Australian Grocery Market. For years the Australian market had been a cosy duopoly between Woolworths and Coles controlling up to 80% of the dry grocery market, the highest level of market concentration anywhere in world history. Profit margins in grocery retailing in Australia were two to three times higher than the international industry average for grocery retailers. The result was that Australian consumers were paying over $1.2 Billion more annually than would occur in a fully competitive market. Attracted by the extremely high profit margins in grocery retailing in Australia, the Aldi chain (with supermarkets in 15 countries and worldwide sales of US$37 Billion) recently commenced operations in Australia looking to get a spare of theses inflated profits.
Nescafe Coffee Nescafe Coffee is the leading coffee brand When Aldi entered the market in Australia, that they wanted to stock was the Southern Sydney Retailers Association Inc. – Case Study in Australia. one of the lines popular Nescafe 1
forcing Aldi to pay high prices. but the higher price was just pure price discrimination. Aldi were forced to sell it at a loss. Whatever special Southern Sydney Retailers Association Inc. but with the repeal of the equivalent law (although much weaker law) in Australia (Section 49 of the Trade Practices Act) by the Keating government in 1995. was not because of any additional costs that Nestle had in supplying Aldi. Forcing Higher Prices on Consumers. for Aldi to even match the shelf price that Woolworths/Coles were selling Nescafe 43. Woolworths and Coles were able to both drop prices by 5% . prevented Aldi from bringing any long overdue competitive pressure into the market. Secondly any price breaks for volume could not be set at quantities so high. The Australian competition regulator . when an Aldi store opened close by. that they would result in just a few firms in the market being able to take advantage of the discount.however it appears that Nestle had a policy of discriminatory pricing whereby Coles/Woolworths enjoyed one price. Studies have shown the where previously Woolworths and Coles had existed side by side claiming that they were in “vigorous competition” with each other. if they actually had higher costs of supplying Aldi. As a result. coffee drinkers continued to pay high prices. Therefore Aldi and many other independent retailers would have been able to purchase at the equivalent price to Woolworths/Coles. However Nestle’s policy of price discriminatory. and with the duopoly of Woolworths/Coles shielded from any additional competition. – Case Study 2 . First Nestle could only charge higher prices. . whereby the market power of Woolworths/Coles forced a higher price on Aldi. Nestle would not have been able to charge a higher price to Aldi.the ACCC seemed completely blind to the anticompetitive effects of such price discrimination and all previous complaints and evidence of price discrimination by small business were just brushed off.Blend 43. and Woolworths/Coles both continued to make record profits. Such a pricing policy would have been outlawed in the USA under the Robinson-Patman Act . What would have happened with Price Discrimination Laws ? Those that support Price Discrimination Laws believe that if Australia had the same as exist in the USA. and handful of executives pocketed multi-million dollar salaries. with the extra competition. but all other competitors in the market were forced to pay a much higher price. It also appears that the higher price that Aldi was forced to pay. not affected the by the extra competition their prices remained higher.but in all other stores. there was nothing to prevent Nestle for adopting these Discriminatory pricing practices in Australia.
However if the reduced price was only granted to Woolworths/Coles. inefficiencies and higher executive salaries. to the amazement of those close to the industry. The Dawson Committee. Therefore Aldi and other independent retailers. would flow through to all competitors.complaints about price discrimination often are not about price discrimination but about price differences.terms and conditions Woolworths/Coles were able to get from Nestle. then cited this study and used it as an excuse not to reintroduce Anti-Price Discrimination Laws in Australia..ACCC submission No. with a substantial proportion of the reduced price being absorbed by Woolworths and Coles in higher profits.2 http://www.phtml/itemId/307369 Southern Sydney Retailers Association Inc. therefore any lowering of costs from Nestle. but they would be acting as a proxy for all buyers.. The ACCC released its Report to the Australian Senate in Sept 2002 on Prices Paid to Suppliers by Retailers in the Australian Grocery Industry 2 and concluded “.. which left many observers shaking their heads in bewilderment.. Woolworths and Coles would continue to push for lower prices. – Case Study 3 . with more competition in the market.gov. and then market forces would see the full cost saving passed on to consumers. Nestle would have had to give the same deal to Aldi and others. Likewise if there was an increase in the price of coffee from Nestle with a wide range of competitors all paying the equivalent price from the Nestle. price differences in the sale of groceries by suppliers to the major chains and to independent wholesalers do not appear to exhibit anti-competitive conduct . it was considered a complete farce by those with knowledge of the industry. which in theory could only result in reduced the price to consumers. But this was all only a theory by the supporters of Price Discrimination laws – and this theory was rejected by the government or the ACCC. At the time the ACCC released its report to the Australian Senate. not artificially handicapped with higher prices would have been able to bring more competitive pressures to the market. and many suggested 1 2 Finding A Balance : Towards fair trading in Australia . the ACCC’s submission stated. 62. The ACCC ‘s Position – “There is no Price Discrimination in Australia” In 1997 during the government enquiry into the retailing sector. “……. again informed the Australian consumers that there was no evidence of anti-competitive discrimination occurring the grocery market.accc.” However despite the methods used to reach this conclusion being totally flawed. consumers could be sheltered from the full impact of the increase. In that sense they are pro-competitive and are beneficial to the consumers because in a competitive market the discounted prices are passed on to consumers”1 Then in 2002. the ACCC.au/content/index. only a fraction of the reduced price would be passed onto consumers.
45 (anti-competitive agreements) or s. The existence of. The Theory Gets Put to the Test. – Case Study 4 . section 49 was repealed. However Aldi gave the world a unique opportunity to put these opposing theories to the test to see who was right and who was deluded. It was reasoned that anticompetitive price discrimination could be adequately dealt with through other sections of the Trade Practices Act”. Therefore Aldi. an opportunity denied to them by Nestle in Australia through Price Discrimination. just one theory against another. and forcing consumers to pay higher prices – while on the other hand the ACCC was advising that Price Discrimination did not exist. the speculations and economic theory of another. with their massive international operations began sourcing Nescafe instant coffee from Nestle distributors in Singapore (a country with Price Discrimination Laws). and they weren’t going to sell at a loss for ever. “price discrimination generally enhances economic efficiency.that like almost everything else in Australia from poker machines to petrol stations. on one hand Small Business were claiming that anti-competitive Price Discrimination was going on everyday. section 49 of the Trade Practices Act contained similar provisions to the Robinson-Patman Act. Obtaining supplies from a country where Price Discrimination did not exist. and the effects of Price Discrimination were just the speculations and economic theory of one group v. and therefore the Government believed there was no need for the re-introduction of Price Discrimination laws – it was a stalemate situation. pursuant to reforms introduced in the Competition Policy Reform Act 1995. and they weren’t going to let the cosy duopoly of Woolworths/Coles remain sheltered from competition in Nescafe Coffee.”3 Several years later a government Committee studying the repeal stated that. Aldi weren’t going to charge their customers higher prices.46 (misuse of market power)……. and that is was destroying competition. except in cases which may be dealt with by s. The Government’s Position – “No Need for Price Discrimination Laws” Australia’s price discrimination laws were repealed in 1995 by the Hilmer Committee. 3 National Competition Policy : Report of the Independent Committee of Inquiry pp. Therefore in Australia. that Woolworths & Coles had also taken over the ACCC. rather than through Nestle in Australia. were through Price Discrimination Aldi were forced to pay higher prices than Woolworths/Coles. “until 1995.79-80 Southern Sydney Retailers Association Inc. Aldi were now able to compete on a level playing field against Woolworths/Coles.. they concluded. However.
to the benefit of consumers.4 This time undercutting Aldi’s price. overcharging the Australian consumer billions as claimed by small business ??? Here is the answer – Previously where Woolworths and Coles were selling a 150 gram jar of Nestle Blend 43 for around $6.32 p/100grams) down from the previous price of $6. or was it a cosy duopoly.99 ($4. Then on 14th Sept Coles advertised a 500 gram tin for $11. In their attempt to retain the status quo of the “existing retail hierarchy” and return to previous market distorting policies of Price Discrimination to protect the Woolworths/Cole duopoly – the resulting in higher prices for consumers. not handicapped having to pay higher prices through Price Discrimination.No longer competitive forces of the market were working shielded from competitive market forces. Coles were able to lower prices to consumers. with the worlds lowest prices. without suffering from Price Discrimination Aldi were able to sell a larger 200 gram of Nescafe at just $4.99 ($3.What Happened to Prices on a Level Playing Field ?? Finally Woolworths/Coles now had a real competitor.99. 4 prices through Price Discrimination. Coles reduced the price of 150 grams jar of Nescafe coffee to $4. by having competitors paying higher th However the win for consumers may be short-lived. Finally the market was finally working like it should – without Woolworths/Coles protected by Price Discrimination the normal Daily Telegraph 14 Sept 2006 p. 14th Sept 2006 p. Nestle’s Australia executives last November asked colleagues at Nestle Singapore to find out where Aldi was buying the coffee.16 Southern Sydney Retailers Association Inc. according to an internal Nestle email. – Case Study 5 .50 per 100 grams) With competitive pressures back in the market. So what was the result – was the Australian grocery market vigorously competitive. The Daily Telegraph. The claims of the Australian Government and the ACCC.38 per 100 grams).16 “Here’s Proof alright” . A month later the distributor supplying Aldi had been located and cut off completely by Nestle Singapore. protected and featherbedded through Price Discrimination. were finally exposed as complete erroneous – and small business that for decades that had been complaining about effects of Price Discrimination harming consumers were proved correct.66 per 100 grams).90 ($2.99 ($2. as the ACCC and the government had claimed. The ACCC said Nestle Australia's attempts to shut down Aldi’s supply from Singapore shows Nestle were not simply concerned about customer welfare 5 but with the competitive effect of the imported coffee.
5 million infants die around the world every year because they are not breastfed. Where water is unsafe a bottle-fed child is up to 25 times more likely to die as a result of diarrhoea than a breastfed child. At least the ACCC now appears to have admitted that they had it completely wrong over the last decade. “The ACCC believes that part of Nestles Australia’s anti-competitive purposes was to remove the stimulus to other Australian grocery retailers. and the current Australian Trade Practices Act is completely unable to do anything to prevent this activity.pd where in developing countries they are actually telling children eat Nestle chocolates instead of a sandwich. However consumer groups are now boycotting Nestle’s because of an alleged refusal to stick to World Health Organisation guidelines on the marketing of powdered baby milk on the third world. A marketing code was introduced in 1981 to regulate the marketing of breast milk substitutes.8k. “Other sections of the Trade Practices Act” are completely useless to deal with Nestle Price Discrimination that has forced consumers to pay higher prices for coffee. 6 The Australian.org/pdfs/nestlerussia04. despite the previously claims of government are completely unless to prevent Nestles Price Discrimination. Anyone that reads these websites may never buy another Nestle product again. and how the ACCC simply fail to understand the anti-competitive affects of price discrimination. section 45 and section 46. – Case Study 6 . thereby shielding Woolworths and Coles from competitive market pressures and resulting in higher prices to consumers shows how hopelessly out of touch that the ACCC have been for the last decade.com/ and http://www.babymilkaction. The Gullibility of the ACCC exposed The information that have been disclosed by Aldi. 5 The giant mutli-national Nestle appear to be gaining a reputation of being unconcerned with “consumer welfare”. its anti-competitive effects. their chairman Mr Graham Samuels is reported as saying. and harm to consumers clearly illustrate the gullibility of the Australian Government and the completely erroneous arguments that have been used for the last decade. Nestle can and have and will continue to use Price Discrimination resulting in harm to the consumer. The World Health Organisation (WHO) estimates that 1. Nestle is earns a substantial proportion of its profits from baby milk formula.Gullibility of Australian Government Exposed Nestlé’s Price Discrimination. who might have responded to Aldi’s [lower prices] by discounting Nescafe Blend 43………. and that fact that even Aldi was forced to pay higher prices from Nestle. The Nescafe Coffee situation also shows the flawed the reasoning of the individuals that repealed this law Australia’s prohibition of Price Discrimination. To look at the activities of Nestle see http://babymilk. “Nestle loses bid to stop Aldi Selling imported coffee” 10th August 2006 Southern Sydney Retailers Association Inc.”6 The ACCC is clearly restricted in what it can do with the existing laws.
LifeSavers. Smarties.is their policy of price discrimination restricted to Nescafe 43 only. Milo. their brands include Nescafe coffee. Andronicus Coffee.The situation with Nescafe. Minties. – Case Study 7 . International Roast. or do they use Price Discrimination across their entire product range in Australia ??? Southern Sydney Retailers Association Inc. etc. How Many Other Products are Consumers Paying Prices for due to Price Discrimination ?? Nescafe 43 is just one of Nestle products. and strengthened to include services as well – and then they need to be vigorously enforced by an ACCC that appreciates the mistakes that it made in the past. Peters Ice Cream. shows clearly how foolish Australia was to repeal its Price Discrimination Laws. Maggi. The question that has to be asked . Milk Bar. and the harm of Price discrimination causes to consumers. Lean Cuisine. KitKat. Allen’s Lollies. Nestle are one of the largest supplier’s of food to the grocery market in Australia. and how out of touch those were that supported this repeal – and why these laws urgently need to be re-introduced.
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