Invisible claw of the market

Firms in oligopoly hate competing directly with each other on price. In a genuine price war, the consumer gains and they all lose. Photo: Getty Images
Firms in oligopoly hate competing directly with each other on price. In a genuine price war, the consumer gains and they all lose. Photo: Getty Images
New Zealand needs to ensure the Commerce Commission has the resources to continue to protect the public, writes  Peter Lyons.

The big news is the Commerce Commission has found that the major oil companies may have been ripping us off at the petrol pumps. They have been using loyalty schemes, occasional discounting, sundry competitions and giveaways to disguise the fact that they actually hate competing directly on price.

This is exactly as Economics 101 would predict. The oil companies operate in a market structure called an oligopoly. This market is characterised by a few large sellers, high barriers to entry for new firms and a high degree of market power for the firms. Firms in oligopoly generally make very high profits because of their control over prices due to a lack of genuine competitive pressure.

The big three oil companies in New Zealand control the supply chain infrastructure for the wholesale market for fuel in New Zealand. This makes it very expensive and logistically difficult for new firms, like Gulf, to enter the fuel market in New Zealand. In the few regions where new firms operate they can make a significant difference to local fuel prices for consumers.

Oligopoly markets are common in New Zealand. Oil companies, banks, building suppliers, phone companies, electricity companies and supermarket chains all operate in oligopoly markets.

Firms in oligopoly hate competing directly with each other on price. In a genuine price war, the consumer gains and they all lose. This is why pricing plans for cell phone data or electricity are often a confusing maze of packages with all sorts of bundling and differing terms and conditions. This makes it impossible for consumers to directly compare value for money for different sellers for the underlying product. It is a deliberate policy to minimise direct competition on price.

New Zealand's economy has been operated on the illusion of the efficacy of market forces in recent decades. Sadly, the invisible hand of the market often resembles a gnarled, grasping claw. Competition between firms is meant to ensure a fair deal for consumers. Yet crucial markets in New Zealand often lack genuine competitive pressures.

The role of the Commerce Commission in New Zealand is to ensure that consumers are protected from predatory practices by firms. This is most likely to occur in markets, such as oligopolies, where genuine competitive pressures may be absent. It is crucial that the Commerce Commission is well resourced especially in investigative and legal representation. It must also have very sharp teeth in penalties for those firms who exploit their market power. Otherwise we all get ripped off.

The share price of Z energy fell 3% when the Commerce Commission released its draft report. Some shareholders were obviously concerned about regulatory government action.

The likely response of the big oil companies will be to lawyer up, to employ the best legal talent in town to challenge the draft report and any proposed regulatory changes.

They have the most to lose if any meaningful change goes ahead. The Commerce Commission faces a serious battle.

Adam Smith , the father of modern economics wrote, ''people of the same trade seldom meet together either for diversion or merriment (without) the conversation turning to some conspiracy against the public, or some contrivance to raise prices.''

The Commerce Commission is the main protector of Kiwi consumers against predatory practices by firms. We need to ensure it is properly resourced to do its crucial job, otherwise we will all keep on paying the price.

-Peter Lyons teaches economics at St Peter's College in Epsom.

Comments

Like NZ is big enough to support the number of players needed for that invisible hand stuff to happen. Where does this guy live?

 

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