The wider the market, the less monopoly power any seller can have over it. If households can choose between all of the many goods or services offered to them, there can be no monopoly power. No single seller can command more than a small share of household budgets, which can easily be reallocated in response to higher prices or inferior service, or changes in tastes and fashions. Households account for more than 60% of all final expenditure in South Africa.
Intense competition for their spend comes not only in the form of price setting but is revealed by the ability of suppliers to meet demand anywhere at the prices set with supply chain management — another area in which suppliers compete. Another important source of competition for household spend is innovation, in the form of new products or services introduced to the marketplace.
Consumer choice limits monopoly power
The all-important competition for revenues and profits is reflected in the updated menus presented to households and individuals. The new offers are disruptive of established interests in the status quo ante, a part of a dynamic evolutionary process that is good for consumers and tough on producers, who are given no guarantees of consumer loyalty.
Most business organisations will have a degree of power to set the terms at which they will transact, including the prices they charge and the payment terms acceptable to them. The economy is mostly made up of price makers, who must judge what prices their customers will bear and the prices and terms at which it is worth supplying them. They must make crucial business decisions to justify the scarce capital, labour and natural resources employed in satisfying their customers.
It is therefore best to let the many competitors for the household’s spending decisions slug it out without regulatory interference. That is, to accept that the market economy, broadly defined and left alone, will work well to satisfy consumers. And that the survival of any business will depend on its ability to compete successfully for scarce capital and labour with which to serve households the variety of goods and services they are willing to pay for.
Successful businesses have every incentive to increase output and add to the capital, labour and natural resources they employ — not to limit them with discouragingly high prices or unattractive terms. Meanwhile, businesses that fail for want of an ability to supply households at a profit should be encouraged to release the resources they are wasting for better use by other firms.
Economic efficiency demands no less. Given this competition by many firms that supply goods and services for a tiny, but potentially valuable, share of the household budget, is there any reason to worry about what could be a temporary and limited degree of monopoly power that might be abused? Worry enough to actively conduct an expensive pro-competition policy to force unknown changes in the evolving structure of an economy? I would suggest not.
Potential pitfalls of active competition policies
An active competition policy can, however, produce perverse incentives. Competition policy can be used to limit competition in the interest of established firms. The case of Lewis Stores intervening in the proposed amalgamation of the household furniture and appliances divisions of Shoprite and Pepkor seems an obvious case of this.
On the face of it, any merger that led to fewer competitors, in an artificially and narrowly defined market segment, would be welcomed by the other potential suppliers, especially smaller rivals with smaller market shares (so defined) hoping to take advantage of any complacency or abuse of market power.
But this presumably is not the Lewis Stores view. I presume it wishes to block the merger because it fears the extra competition for the household spend from a now stronger rival. In this dispute the specific market to be affected has been narrowly and arbitrarily defined as the market for household furniture and appliances, accompanied with credit provided by the retailer. Yet it is one where the potential seller also competes with the online offers of a Takealot or Amazon, offering goods sourced worldwide.
The share of furnishings and household equipment in the consumer price index (CPI) ― representing the share of the household budget spent on furniture in SA ― is now of the small order of 1.8%. And the price of furniture has risen by only half the rate of consumer prices in general, in line with cheaper communications.
Food and beverage prices with an 18% share have risen 20% more than the average. Housing costs — including the rent attributed to owner-occupiers with a weight slightly heavier than food — are now about 10% lower in real terms than they were in 2010. All of this is evidence of a highly dynamic economy with real price competition.
If they approve the Pepkor-Shoprite deal the South African competition authorities are likely to order the new venture not to reduce its workforce. That is, prevent it from reducing its costs to become more efficient and more price competitive, and hence make it less able to compete for a larger share of the household spend.
Yet another case of competition policy in South Africa inhibiting rather than encouraging competition and an efficient economy.
• Kantor is head of the research institute at Investec Wealth & Investment. He writes in his personal capacity.
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