Collusion and consumer rights

Britain's supermarkets and dairy groups have been fined £116m by the Office of Fair Trading, after admitting fixing the prices of milk, butter and cheese.

The Guardian reported that the OFT has levied large fines - on behalf of consumers - to various businesses that have been deemed to have artificially raised the price of dairy products. This case is fascinating for two main reasons:

• The defendants claim that they were charging above market prices to pass through the supply chain. Notice that this is similar - in terms of expressed intentions - to the principle of Fairtrade certification. If collusion is "artificially" raising prices, how do we distinguish between  these various forms?
• Notice how long it's taken for regulatory action, and contrast this to the speed at which companies suffer losses when they genuinely upset customers. For example, when two separate recalls of Mattel toys prompted investors to knock $2.75bn off the value of the company within about 5 months (see Mark Perry)

Those two discussion points are open issues - I've only caught a few whiffs of this issue, but haven't seen these points being made elsewhere.

Also. I've recently submitted a policy paper to the Competition Commission regarding their groceries investigation. It's called "Are Tesco acting competitively?"(.pdf). There seems to be two main ways to dismiss this paper: (i) claim that i'm in the pocket of big business and acting in my self-interest; (ii) view my economic analysis as faulty. The former should be dismissed out of hand given that I've never received a penny from Tesco (and indeed I currently refuse to shop there), especially given the nature of the majority of submissions. These "consumer" concerns are special interests, seeking to use the regulatory authorities to curtail a more efficient rival. My paper is a completely impartial economic analysis. The latter - whether that analysis is faulty - is open to debate. But please, take a look at the paper before deciding whether you agree with it.

Comments

[Quinn]

I’ve only heard about this issue in passing, but regarding your two points, I would say that the difference is one of information.

As a rule of thumb I would have thought that businesses colluding to fix prices is not a good thing; that it is okay for this to happen with Fairtrade goods is because it is transparent, the consumers is aware of the fact and indeed presumably only buys the product because of the promise that the producer is paid above the market price. That is not the same thing as a secret deal between supplier and retailer.

As for the case of Mattel, again it is a case of information. While they were selling the dubious stock in the first place the consumer bought regardless and oblivious to any dangers; it was the recall, and the release of the details of the fault, that damaged Mattel. So it is too early to judge the situation regarding dairy prices in the same light, as the information about collusion has only recently been made available.

That said, I doubt Sainsbury’s and Asda will suffer quite the same fate as Mattel, but that is more to do with the nature of the two cases, in that there are no such safety concerns with price fixing. But that doesn’t make it right.

[aje]

Isn't the only relevant information the price? Why should consumers care about the reason for price changes?

[Jim]

"indeed I currently refuse to shop there"

Heh, before I even clicked on that I knew it must have something to do with Everton.

As for Fair Trade, the price isn't fixed, but one element of the costs (payment to the producer) is partly fixed (% uplift on market price IIRC) so you can and do pay different prices for the same FT product in different shops. For me, the main distinguishing feature of FT is simply this better information about the wages received by the producer. This is surely different from collusion through secretly sharing commercial information of the kind that appears to have gone on in this case, though other aspects of the case (the professed aim of aiding producers) are similar.

[aje]

For me, the main distinguishing feature of FT is simply this better information about the wages received by the producer.

I bet British consumers know more about the wages of dairy farmers than coffee farmers.

[Jim]

I must be the exception then. And of course the information comes through different channels: British dairy farmers are effective lobbyists and know how to work the media, but most of what we know about coffee farmers' wages we know through FT's success in the market.

[Quinn]

Isn't the only relevant information the price?

Presumably not, or else Mattel's sales wouldn't have fallen while the price stayed the same but the safety of their goods was called into doubt.