1. It must be blindingly obvious and a matter of general application that if there are barriers to entry into any particular industry, the industry is smaller but faces less competition and can thus charge higher prices (moving leftwards and upwards on the demand curve) than if there were full, free and fair competition.
2. Some barriers to entry are practical, if you want to be a mini-cab driver, you need to own a minimum of one car (OK, two or three drivers could share and work shifts, gloss over that), or in a small village, there might only be demand for one taxi driver, if there already is one, no new entrant will ever break into the market (unless he engages in a price war and drives the other out of business), but most are down to insider lobbying or government regulations.
3. So if there is demand for two taxi drivers in a slightly larger village and the parish council only issues one permit, the incumbent can rake in extra profits (and half of potential passengers have to walk). The grey market price of the permit is thus the NPV of that extra future income. If our newcomer wants to be a taxi driver, he has to pay a high entry charge to the previous incumbent. That permit is to all intents and purposes the same as "land" where supply of usable land is limited (whether for natural, economic or regulatory reasons).
4. Our new incumbent might apologetically say to his passengers, "I'm sorry that my fares are so much higher than in the other village, but I am paying off a £10,000 loan which I took out to buy the permit and I add that the minimum price I have to charge" and his passengers might even accept that. But what if the parish council then abandons the permit system, or introduces an excellent bus service..?
5. Allister Heath in City AM gave an example a couple of days ago Daft planning rules are pushing up the price of food in shops, in brief: if the number of available sites for shops is restricted, then there are fewer shops, who can thus sell more goods per sq ft retail space and/or charge higher prices; this pushes up the rental value of the restricted number of such sites. That is the chain of cause and effect.
More recent estimates cited by the authors suggest that the cost of land for UK supermarkets is at least five to ten times greater than in similar Continental European countries. No wonder food and other retail goods are cheaper in those countries; excessive land prices are being passed on to the consumer, as ever.
6. Nope, here he gets it all wrong again, this is putting the cart before the horse. Restrictions lead to higher prices lead to higher rental values for the favoured plots. It is idiotic to say that higher rental values lead to higher prices. The customer is not paying extra because rents are higher*, he is paying extra because there is limited competition.
* Actually, with physical goods, this effect is barely measurable across the UK. Retail prices for similar goods are pretty much the same everywhere, despite there being a wild disparity in retail rents between a glitzy shopping centre in Westminster and a run down high street in Anytown. It is only with goods and services consumed at or very near the point of purchase where there are noticable variations, so there is "embedded rent" in cups of coffee, hotels, pints of beer, cinema tickets and so on, but not in 500 sheets of 80 gsm printer paper.
Thursday, 10 January 2013
Economic Myths: "Monopoly profits are passed on to the consumer as higher prices"
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15 comments:
The dead weight costs of NOT collecting unearned incomes.
Add that to the list.
BJ, was that supposed to be on KLN #298? If so, that's included in the sweep up item number 7.
I might be being a bit dense here, but isn't this argument a bit circular? I see that restrictions in supply lead to higher prices that leads to higher rents, but don't daft planning rules add to this?
I have to say that every time I walk down Ipswich High Street I wonder about all this. Clearly the ability of shops to turn a profit is gobbled up by the rents that prime locations can command, and that these rents follow the prices, not the other way about, but won't freeing up planning help this?
Ultimately it seems to me that it is all about rents, and how you can stop all profits ending up with landlords.
L, in this case, the "daft planning rules" and the "restrictions in supply" are to some extent the same thing.
There is also a practical limit, there can only be one centre in every town, whatever the planners allow, there will still only be one centre and one main shopping street/area. If it's a seaside town, there is only one sea front. If it's in London commuter belt, there is only one station etc etc.
@MW There is also the competition invariably brings down prices fallacy: if you have a one supermarket Tesco town with a customer base of I00,000, introing a second supermarket will end up with them divvying the market up 50/50 and strenuously not competing on price.Or the existing supermarket with big reserves can sell everything at a loss for two years,put the upstart rival out of business and then go back to dominating the market.House prices should be rock bottom with all these well-capitalised developers in competition.But they're not.For much the same reason: plus the added issue of land and location having a monopoly effect .Which is where we came in.
Pesonally I would nationalise or municipalise all the big shopping centres and use the rents to defray local taxation and help We the Workers (says he sitting in his dressing gown at 8.45).
You are also ignoring the freedom supermarkets have acquired since the quashing of Resale Price maintenance to set price levels.Any price reductions hit the manufacturers and, if you believe Helen Mercer's brilliant LSE paper on RPM, finished off British manufacturing as decisively as the abolition of the Corn Laws finished off farming.
DBC: "There is also the competition invariably brings down prices fallacy: if you have a one supermarket Tesco town with a customer base of I00,000, introing a second supermarket will end up with them divvying the market up 50/50 and strenuously not competing on price."
That's called operating a cartel. Which is not full and free competition.
"Pesonally I would nationalise or municipalise all the big shopping centres and use the rents to defray local taxation and help We the Workers."
Yes, that's called Business Rates or LVT.
DBCR - By observation the supermarkets tend to 'category kill' existing shopping centres/high streets etc. They also try and locate themselves as satellites around conurbations, probably as a result of planning policy, and therefore make it harder for consumers to easily shop around to compare prices.
From my own pesonal habits I know I tend to stick to a small range of suppliers and one or two supermarkets, and I am very aware of different pricings for the same goods. And I am happy to trade time for price - after all survival rations and Harpic only use up about 10% of a family budget.
But I am implacably against nationalising anything as it always spawns bureaucratic producer capture and arbitrary rationing and massive inefficiencies, let alone being an assault on private property. Better to capture monopoly rent by way of LVT.
L, from the OFT report:
3.30 Data provided by one of the supermarkets suggest that over 80 per cent of consumers in Great Britain can reach three or more different one-stop shop fascias [sic] within 15 minutes.
If mid-range stores are included, then around 93 per cent of customers have access to three or more operators within 15 minutes drive time.
The same supermarket has acknowledged that there has been a slight reduction in the level of choice since 2000 due to the CC-approved acquisition of Safeway by Morrisons.
MW. Bears out my experience. But, it seems to me that as this is based on 'drive time' and by association easy parking, it is quite easy to see why traditional high streets might suffer, unless good parking is also provided.
Hmmm. As I have works parking near the town centre I tend to use local suppliers for meat, fish, cheese and some specialist veg. And I can state categorically that it is better value than the supermarket equivalent. Pork Loin and fillet steak (!) being particular cases in point.
So are the better quality/lower prices of these high street vendors a result of the extra costs of getting to them? Do they pay lower rents than the supermarkets? Are their margins thinner?
It's a conundrum.
L: "it is quite easy to see why traditional high streets might suffer, unless good parking is also provided"
I intend to cover town centre parking and easy access thereto in my 'town planning' series.
"So are the better quality/lower prices of these high street vendors a result of the extra costs of getting to them? Do they pay lower rents than the supermarkets? Are their margins thinner?"
Yes (with supermarkets you pay for convenience), yes (probably), and probably (no monopsony buying power).
L, supermarkets have been with us long enough that it has been established that the list of things you buy from specialists is exactly, with the addition of wine and the possible exception of veg, the list of things the supermarkets don't do very well. In my experience, what they sell in those categories tends to be boring and/or tasteless, dunno why, must be something to do with their buying policies.
Would have thought supermarkets get built nowadays on the roads leading in and out of towns, one in each direction/quadrant,so they become local monopolies.(Big town centre supermarkets are a fairly basic stage of retail evolution,possibly?)They are thus dependent on how the town is configured/planned.If you are slightly right of centre ,you might say that they they should be LVT'd till the pips squeak but if all the location benefit is taxed away,would n't they as Silvio Gesell conjectured get out and try to sell up,in which case the Local Authority could step in and pick up a big shopping centre on the cheap.If the LVT is really eye watering they might be glad of the get-out especially for land banked for later supermarket development.I cannot see much difference between the Duke of Westminster owning a Shopping Centre and ownership by Crown Estates,as discreet cover for the Gov.
B, I'd ave to ask her indoors about that.
DBC, I have often seen these statistics saying that x% of people live within y travelling minutes of z supermarkets, I've no reason to assume they are wildly incorrect, so I don't think that each supermarket is a monopoly. But they are cartel, it would appear.
@MW Became very friendly with a magnificent Scottish woman who used to park outside her place of work (Focus) and smoke ferociously before bowling acros the car park and entering the shop at exactly nine o'clock.In charge of the returns ,she used to say "This is rubbish you could have got it miles cheaper ar B&Q".So when she was demoted to the tills,she had to record the postal codes of the customers and let me see them: all the customers came from within about one mile of the shop: anybody from south of town would go to B&Q; anybody from West would go to Wickes.There is a local monopoly effect here.
What there is n't is the hectic competition bringing down prices for the customer.If there is any bringing down of prices, it is off the wholesale prices they're paying manufacturers (thanks to our abolishing RPM: the Yanks have relegalised it)>
Anyway there is n't much difference in price setting between monoplies and cartels is there really?
DBC, broadly speaking and in the grander scheme of things, these retail cartels do not particularly rip off the consumer.
e.g. If stuff at Focus was noticeably more expensive, then people would be happy, once in their cars, to drive the extra ten minutes to Wickes or B&Q. As a matter of recorded fact (the ONS says so), retail prices for physical goods are pretty much the same all over the UK for this very reason (and then the internet flattens prices even more).*
Where the retail cartel exercises its power is two fold:
a) Rigging the planning system to prevent competitors setting up in the immediate vicinity (which mainly affects potential competitors)
b) they use their monopsony buying power to push down prices paid to manufacturers or farmers.
* The problem is that if all large retailers charge similar prices, is this evidence of competition pushing prices down or price fixing pushing prices up? Most of the evidence points to the former.
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