Competition and prices
As Adam Smith said, “People of the same trade seldom meet together, even for merriment and diversion, but the conversation ends in a conspiracy against the public, or in some contrivance to raise prices.”
Two things stop them doing this: competition and the law. Unless all of those in the same trade join in the conspiracy, the public will flock to buy at the lower prices offered by the non-members. A common reaction by those in the conspiracy is to lobby for regulation to thwart the transgressors. All too often those in power have introduced regulations to make it harder for competitors to spring up or to operate. The law can be used the other way, as it should, to make it illegal for such price-fixing conspiracies to operate.
Long-haul flights used to be dominated by joint membership of the International Air Transport Authority (IATA), which fixed prices so tightly that it forbade airlines from competing on sandwich quality. It was broken by non-compliers such as Icelandair, and by new entrants such as People’s Express and Laker’s Skytrain.
A classic case of the proper use of the law was in 1964 with the abolition of retail price maintenance (RPM) in the UK, led by Edward Heath, then President of the Board of Trade. Some think it was perhaps the only good thing he did in his career.
RPM allowed manufacturers to set fixed minimum prices for their goods in shops. Retailers were legally required to sell at those prices; they could not offer discounts. This meant that prices for branded goods were often the same everywhere, preventing price competition.
Once RPM was banned, most goods could be discounted freely. Supermarkets and large chain stores used this to undercut traditional small retailers. Prices of many branded consumer goods (toothpaste, soap, tinned food, household goods) fell sharply as price competition intensified.
The Retail Price Index in the late 1960s showed a dip in price rises for consumer goods affected by the change. Studies at the time estimated that the abolition of RPM cut the prices of affected goods by 10-20% on average. Since these were everyday household items, the overall cost of living for consumers fell relative to what it would have been with RPM still in place.
In the short term: cost of living decreased because shoppers could find cheaper prices. In the longer term, some small shops closed due to being undercut by larger retailers, leading to more market concentration, but the general level of prices stayed lower than under RPM.
The UK used to be nicknamed ‘Treasure Island’ by motor manufacturers who, without an illegal price ring, kept UK car prices very much higher than the same models sold at other places in Europe. It helped that European models had left-hand drive, making them unsuitable for British roads. But it was widely believed that UK car makers pressurized their European counterparts in not offering right-hand drive models.
More recently, the entry of German firms such as Lidl and Aldi, has had a downward pressure on UK supermarket prices. Competition drives down prices. Everyone likes competition when they are buying; no-one likes it when they are selling. And those lobbying for regulation to ‘protect’ the consumer should have five words stamped onto their walls. ‘Competition is the best regulator.’
Madsen Pirie