The current Competition Com-mission inquiry into the grocery market is examining competition issues in three key areas. These are: retailers' behaviour towards suppliers, retail competition in local markets, and the planning regime and retailers' conduct regarding land acquisition and use.
So far the debate has focused on land banks and buyer power. But it is the nature and intensity of retail competition in local markets that most immediately affect consumer choice and value.
The analysis I submitted to the Commission on behalf of the ACS has focused on the practices retailers use to determine precisely the retail offer at each store. We call this practice micro-marketing.
So far, UK authorities have focused their attention on two pricing practices. These are persistent below-cost selling on certain known-value items and local price flexing, where a retail chain sets different prices across its stores
according to the intensity and
nature of local competition. This can mean consumers in less competitive local markets face higher prices. It can also be used to restrict competition by using predatory pricing against specific local rivals.
These practices have been viewed separately, but they could be part of a larger set of policies retailers employ to discriminate and segment offers across consumer groups, types, and even individuals. Persistent below-cost pricing and price flexing may just be the start of things to come. This customisation extends
beyond price and covers other store-level marketing elements such as local advertising, promotions, product range, sales service levels and, ultimately, store size and
location.
Micro-marketing is attractive to retailers when it allows them to target consumers effectively. It offers strategic benefits by allowing
retailers to employ soft and aggressive approaches towards different competitors.
The concern is that micro-marketing can give retailers a chance to exploit and extend market power. This may be more likely when
practices are used in tandem - as a "discriminatory cocktail" - to undermine smaller rivals. For instance, retailers could deliberately target customers in their area with lower prices on their key lines while raising
prices in other areas on other product lines.
However, this doesn't mean discriminatory and segmentation practices are always against the interests of consumers. Shoppers may benefit if they
increase the size and scope of markets and improve value and choice. But when they result in higher prices, less choice or reduced innovation, they work against consumers' interest. If anti-competitive effects are found to result from micro-marketing practices, the commission should consider solutions.
One option is to prohibit discriminatory practices found to be anti-competitive. Another is consumer information remedies to allow consumers to make more informed choices. And a third is the enhancement of store or fascia choice where local consolidation works in favour of certain retailers.
The Commission has the opportunity to ensure consumers are well served by fair and effective competition on an ongoing basis. The inquiry still has a long way to go, and we await its findings later this year with great interest.
Paul Dobson is professor of competition economics at Loughborough University Business School.
So far the debate has focused on land banks and buyer power. But it is the nature and intensity of retail competition in local markets that most immediately affect consumer choice and value.
The analysis I submitted to the Commission on behalf of the ACS has focused on the practices retailers use to determine precisely the retail offer at each store. We call this practice micro-marketing.
So far, UK authorities have focused their attention on two pricing practices. These are persistent below-cost selling on certain known-value items and local price flexing, where a retail chain sets different prices across its stores
according to the intensity and
nature of local competition. This can mean consumers in less competitive local markets face higher prices. It can also be used to restrict competition by using predatory pricing against specific local rivals.
These practices have been viewed separately, but they could be part of a larger set of policies retailers employ to discriminate and segment offers across consumer groups, types, and even individuals. Persistent below-cost pricing and price flexing may just be the start of things to come. This customisation extends
beyond price and covers other store-level marketing elements such as local advertising, promotions, product range, sales service levels and, ultimately, store size and
location.
Micro-marketing is attractive to retailers when it allows them to target consumers effectively. It offers strategic benefits by allowing
retailers to employ soft and aggressive approaches towards different competitors.
The concern is that micro-marketing can give retailers a chance to exploit and extend market power. This may be more likely when
practices are used in tandem - as a "discriminatory cocktail" - to undermine smaller rivals. For instance, retailers could deliberately target customers in their area with lower prices on their key lines while raising
prices in other areas on other product lines.
However, this doesn't mean discriminatory and segmentation practices are always against the interests of consumers. Shoppers may benefit if they
increase the size and scope of markets and improve value and choice. But when they result in higher prices, less choice or reduced innovation, they work against consumers' interest. If anti-competitive effects are found to result from micro-marketing practices, the commission should consider solutions.
One option is to prohibit discriminatory practices found to be anti-competitive. Another is consumer information remedies to allow consumers to make more informed choices. And a third is the enhancement of store or fascia choice where local consolidation works in favour of certain retailers.
The Commission has the opportunity to ensure consumers are well served by fair and effective competition on an ongoing basis. The inquiry still has a long way to go, and we await its findings later this year with great interest.
Paul Dobson is professor of competition economics at Loughborough University Business School.
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