Submission: The Market study into the retail grocery sector draft report

Dr Eric Crampton
26 August, 2021

This submission in response to the Commerce Commission’s (Commission) Market study into the retail grocery sector draft report, is made by The New Zealand Initiative (the Initiative), a think tank supported primarily by major New Zealand businesses. In combination, our members employ more than 150,000 people.

The Initiative undertakes research that contributes to the development of sound public policies in New Zealand and the creation of a competitive, open and dynamic economy and a free, prosperous, fair and cohesive society.

The Initiative’s members include two New Zealand supermarket operators, Woolworths New Zealand and Foodstuffs North Island. However, the views expressed in this submission are the views of the authors, not those of our members.

In summary, we submit:

(a) The Commission has not established its methodology based on an assessment of market outcomes is a sufficiently reliable test of whether there is workable competition in supermarkets. Findings from this approach depend on the Commission’s judgment about outcomes under a workably competitive counterfactual. Those outcomes may be unknowable. The Commission is vulnerable to accusations of assuming its answer.

The outcome metrics used by the Commission are not reliable indicators of competition in the presence of fixed and sunk costs and network effects (which may be relevant even in bricks-and-mortar businesses). High concentration and other market outcomes which the Commission is concerned about are common in other markets which appear to be highly competitive and deliver large consumer benefits.

Conversely, if the substantive barrier to entry is land use planning restrictions, even a perfect monopoly could be observed as providing only normal profits because supernormal profits would be capitalised into the value of land zoned to be the only allowed supermarket. Profits are a poor guide to whether the market here is workably competitive.

(b) A more reliable basis for the Commission’s assessment is to focus on competition processes, especially market entry. The Commission’s work on barriers to entry, in Chapter 6, is commendable. Where the combination of tight zoning rules and title encumbrances mean entry is effectively impossible for anyone wishing to launch a full service nationwide supermarket chain, anticompetitive effects should be expected.

(c) The Commission should focus, in the first instance, on easing barriers to entry so that the threat of entry and the potential for actual entry might provide stronger market discipline. 

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