Is buyer power of retailers conducive to collusion?
The Italian Competition Authority or AGCM has condemned 26 pasta makers and two industry associations for having put in place price-fixing practices in the market for durum semolina pasta. The cartel was aimed at coordinating increases in selling in prices of pasta the cartelists applied to supermarket chains over the October 2006-March 2008 period. In this way, the pasta producers tried to protect their margins which were squeezed between the buyer power of supermarket chains and the rising prices of ingredients to make pasta.
The most important finding of the AGCM decision was that the supermarket chains had a relevant buyer power that they could exert with regard to any pasta producers, regardless of their size. And, accordingly, the only way for pasta manufacturers to counter the buyer power of supermarket chains was to develop a common pricing policy and jointly implement it. Though, so the AGCM argument run, the more efficient pasta producers could react to increasing production costs by charging lower prices than less efficient rivals, this was an hazardous strategy while supplying large retailers. Then, should manufacturers independently negotiate with retailers the selling prices of pasta they would have been unable to obtain the sought after price increases due to the bargaining power of supermarket chains.
However, it is generally acknowledged that buying power is not a favourable condition for collusion. Strong buyers, as supermarket chains, should stimulate competition, rendering it more difficult for suppliers to collude, instead giving then an incentive to collude as held by the AGCM. Nor, the AGCM paid much attention to the asymmetries among the cartelists. Collusion is more unlikely when there exist asymmetries among undertakings. In particular, some of the cartelists were large undertakings with higher margins because they produced branded pasta, thereby enjoying a high degree of consumer loyalty. The branded pasta producers might have a selling power that enabled them to counter the buyer power of large retailers. Should it be so, why they ought to coordinate their pricing policy with that of the smaller ones? Would it have been easier for them to aggressive pricing policy and drive the less efficient rivals off the market?
The most important finding of the AGCM decision was that the supermarket chains had a relevant buyer power that they could exert with regard to any pasta producers, regardless of their size. And, accordingly, the only way for pasta manufacturers to counter the buyer power of supermarket chains was to develop a common pricing policy and jointly implement it. Though, so the AGCM argument run, the more efficient pasta producers could react to increasing production costs by charging lower prices than less efficient rivals, this was an hazardous strategy while supplying large retailers. Then, should manufacturers independently negotiate with retailers the selling prices of pasta they would have been unable to obtain the sought after price increases due to the bargaining power of supermarket chains.
However, it is generally acknowledged that buying power is not a favourable condition for collusion. Strong buyers, as supermarket chains, should stimulate competition, rendering it more difficult for suppliers to collude, instead giving then an incentive to collude as held by the AGCM. Nor, the AGCM paid much attention to the asymmetries among the cartelists. Collusion is more unlikely when there exist asymmetries among undertakings. In particular, some of the cartelists were large undertakings with higher margins because they produced branded pasta, thereby enjoying a high degree of consumer loyalty. The branded pasta producers might have a selling power that enabled them to counter the buyer power of large retailers. Should it be so, why they ought to coordinate their pricing policy with that of the smaller ones? Would it have been easier for them to aggressive pricing policy and drive the less efficient rivals off the market?
Comments