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.

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.
But the same thing can happen in reverse: If a business is the onlybuyer in a market, it can lower prices it pays to suppliers and theycan’t respond by selling to someone else.
It’s true that at a lower price fewer sellers will be found, but that’sthe price you pay for paying lower prices. If the monopoly is also amonopoly, they will gain coming and going: By limiting quantities onthe buying side, they can pay lower prices, and by limiting them on theselling side, they can command higher prices. So it is not surprisingthat the Antitrust Authority is authorized to deal with both kinds ofanticompetitive 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; itis anticompetitive only if it takes active steps to prevent other firmsfrom entering. These could include collusion, buying out competitors,threatening other market participants not to do business with the newkid on the block, etc.
Another problem is that a monopoly is not evaluated statically. Ifthere are no barriers to entry, then you may be a monopoly but youcan’t really enjoy it. When potential entrants are breathing down yourneck, the second you raise your prices, competitors will sprout up.
Obviously in a very capital-intensive industry it can take a very longtime for that to happen; for example, it takes years to build a newautomobile plant, and in the meantime the monopolist has market power.But no barriers to entry exist in the retail-food industry. A smallmarket can be launched within a few weeks, and even a supermarket doesnot take much longer than that.
But the biggest problem of all is that Shufersal is far from being amonopoly. It sells, and thus presumably buys, only about 37 percent ofthe food products sold in Israel.
The Food Manufacturers Association sidestepped this problem byasking the Antitrust Authority to define the relevant market as“nationwide chains,” but from the point of view of the market, there isno real difference between nationwide chains and local markets: Theybuy the exact same food products from the same suppliers.
Shufersal may have the majority of sales from supermarkets whose namesbegin with S, but that doesn’t seem to be a pertinent fact for theantitrust people to consider. Anyway, even on a nationwide level,Shufersal faces intense competition from Blue Square. They can hardlyget away with limiting quantities and raising prices in their stores.
That doesn’t mean that pressuring suppliers to lower prices can neverbe ethically problematic. In industries with very long-termrelationships and heavy capital investments, your suppliers may havemade large investments in meeting your needs on the tacit assumptionthat you will give them fair prices down the line.
When you then pressure suppliers on prices for unique items, you may betaking unfair advantage of their good will. But no food producers areinvesting millions in making unique products specially for Shufersal.
The retail-food industry is an intensely competitive business. Barriersto entry are extremely low and economies of scale are minimal. Theresult is that prices to consumers are driven down by competition, andprices paid to suppliers will also be driven down.
On the positive side, low prices means high sales volumes. No supplieris obligated to sell to Shufersal if they don’t like the pricesShufersal is offering, but no one wants to miss out precisely becauseShufersal has huge sales volumes, precisely because it is not amonopoly and has to compete on price.
Asher Meir is research director atthe Business Ethics Center of Jerusalem, an independent institute inthe Jerusalem College of Technology (Machon Lev).