Supermarkets and the free part of free markets

There are indeed those drongoes out there who insist that as no market is ever entirely free of rules therefore there are no free markets. Which is to entirely miss the point actually being made. Markets where it is free - even if expensive - to enter can usefully be described as free markets.

The British supermarkets being a useful example. Tescos’ results are out:

But, he said, Tesco was not buckling under the pressure. In fact, the supermarket was in rude health. In the first half of the year, profits rose a fifth to £1.39bn and profit forecasts for the full-year were raised to £2.9bn.

Tesco achieved its highest market share since in 2017 in the 12 weeks to Dec 1, according to industry data from Kantar: £28.10 in every £100 spent in supermarkets went to Tesco, compared with £27.40 a year earlier.

And:

Tesco has not only cemented its position as Britain’s biggest supermarket but also seen off the threat of Aldi and Lidl, the German discounters who just a few years ago posed a significant threat.

Ooooh, dominance, eh? Market power - something must be done!

Except something has been done. And Tescos hasn’t seen off Aldi and Lidl at all.

Back 25 years the margins - profit on sales - at Tescos were some 6%. British supermarket margins were, generally, some of the highest in the rich world. Much was muttered about this. There was an Office of Fair Trading report and reference to the Competition Commission. We recall one report that divided the country up into triangles so as to work out where there were fewer than four, or three, or even two, reasonable options for consumers and therefore little useful competition. A law about who may use which piece of land even (tho’ given the speed - or not-speed - of the British planning system that won’t have had much effect as yet being only 14 years old as it is).

These latest Tescos results show profits at 3% of turnover. That is, profit margins have halved over the past couple of decades. And no, it’s not because of anything government has done.

Rather, Aldi and Lidl looked at those 6% profits and saw that they were good. As good little capitalists they also decided that they’ll have them some of that. So, they expanded mightily. The result has been that halving of margins in the sector.

The beneficiaries of capitalist competition are the consumers. Just like we’ve always said.

It was possible to enter the British supermarkets business - it was free to enter. It was, in this sense, a free market. To that benefit of the consumer. Which is the point to be made about free markets - if they’re free to enter then they will benefit the consumer as the capitalists vie, compete, to make profit from said consumers.

For the cure for high profits is high profits. If, that is, the market is free to enter.

There’s also an interesting point to be made for those who insist that all such markets are rigged. The big companies don’t compete and so have those fat profits. And, well, that’s certainly possible, of course. Could be a direct cartel, like the European vitamin industry, collusion and nefarity all ‘round. Or maybe only a few companies isn’t enough to create proper and meaningful competition. Say, four national supermarket chains isn’t enough. Maybe, could be. But six obviously is enough if moving from four to six halves the profit margins right across the entire sector.

That is, we don’t need all that many competitors in the market for us to be able to usefully model the economy as one in which no one does have market power - that is, that other definition of free market.

Sure, markets can be not free in either definition. But as long as they are free to enter then those high profits made by incumbents will be such a tempting target that over time they’ll be free in both senses.

Tim Worstall