Ethics@Work: Israel’s supercompetitive supermarket market

Low prices means high sales volumes. No supplier is obligated to sell to Shufersal if they don’t like the prices Shufersal is offering.

February 11, 2010 22:57
3 minute read.
Ethics@Work: Israel’s supercompetitive supermarket market

asher meir 88. (photo credit: )


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The Food Manufacturers Association has lodged a complaint with the Antitrust Authority asking to have the Shufersal supermarket chain declared a monopoly. They claim Shufersal’s buying policies are anticompetitive.

We are used to the Antitrust Authority working to prevent a monopoly. If a business is the only seller in an industry, they can lower quantities and thus raise prices without fear of competitors rushing in. The result is less supply and higher prices to the consumer.

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But the same thing can happen in reverse: If a business is the only buyer in a market, it can lower prices it pays to suppliers and they can’t respond by selling to someone else.

It’s true that at a lower price fewer sellers will be found, but that’s the price you pay for paying lower prices. If the monopoly is also a monopoly, they will gain coming and going: By limiting quantities on the buying side, they can pay lower prices, and by limiting them on the selling side, they can command higher prices. So it is not surprising that the Antitrust Authority is authorized to deal with both kinds of anticompetitive behavior.

There are however a lot of problems with the food manufacturers’ story. A firm is not anticompetitive merely by being the only guy in town; it is anticompetitive only if it takes active steps to prevent other firms from entering. These could include collusion, buying out competitors, threatening other market participants not to do business with the new kid on the block, etc.

Another problem is that a monopoly is not evaluated statically. If there are no barriers to entry, then you may be a monopoly but you can’t really enjoy it. When potential entrants are breathing down your neck, the second you raise your prices, competitors will sprout up.

Obviously in a very capital-intensive industry it can take a very long time for that to happen; for example, it takes years to build a new automobile plant, and in the meantime the monopolist has market power. But no barriers to entry exist in the retail-food industry. A small market can be launched within a few weeks, and even a supermarket does not take much longer than that.

But the biggest problem of all is that Shufersal is far from being a monopoly. It sells, and thus presumably buys, only about 37 percent of the food products sold in Israel.

The Food Manufacturers Association sidestepped this problem by asking the Antitrust Authority to define the relevant market as “nationwide chains,” but from the point of view of the market, there is no real difference between nationwide chains and local markets: They buy the exact same food products from the same suppliers.

Shufersal may have the majority of sales from supermarkets whose names begin with S, but that doesn’t seem to be a pertinent fact for the antitrust people to consider. Anyway, even on a nationwide level, Shufersal faces intense competition from Blue Square. They can hardly get away with limiting quantities and raising prices in their stores.

That doesn’t mean that pressuring suppliers to lower prices can never be ethically problematic. In industries with very long-term relationships and heavy capital investments, your suppliers may have made large investments in meeting your needs on the tacit assumption that you will give them fair prices down the line.

When you then pressure suppliers on prices for unique items, you may be taking unfair advantage of their good will. But no food producers are investing millions in making unique products specially for Shufersal.

The retail-food industry is an intensely competitive business. Barriers to entry are extremely low and economies of scale are minimal. The result is that prices to consumers are driven down by competition, and prices paid to suppliers will also be driven down.

On the positive side, low prices means high sales volumes. No supplier is obligated to sell to Shufersal if they don’t like the prices Shufersal is offering, but no one wants to miss out precisely because Shufersal has huge sales volumes, precisely because it is not a monopoly and has to compete on price.

Asher Meir is research director at the Business Ethics Center of Jerusalem, an independent institute in the Jerusalem College of Technology (Machon Lev).

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