Shopper docket deep discounting

News today of a one day pricing experiment by both Coles and Woolworths offering 40 cent per litre vouchers for big spends (> $300) on groceries. I assume that that means that there will be some big grocery shopping days with the petrol vouchers used over the next week (if not you had better have an empty tank to get mileage out of this offer).

There are competition concerns although if this truly is temporary this is just a promotion. Moreover, the Coles/Woolies impact might just be against each other. I guess we will find out just how ‘sticky’ people’s shopping preferences really are. However, if this was a regular occurrence (i.e., monthly or more frequent) then this looks like the nightmare competition scenario that Stephen King and I identified in our papers on this subject (e.g., here). That scenario involved deep bundled discounts basically, with the main impacts potentially increased concentration but also mismatches in consumer choices of grocery and petrol retail outlets (i.e., they drive more than they want to those amenities). It will be interesting to see whether the ACCC considers persistent discounts predatory or not.

Grocery Choiceless

The Government finally killed the Grocery Choice website late last week. As regular readers know, I found it useless in intended function, distortionary and not at all supported by the ACCC’s grocery inquiry. This was unlike FuelWatch that had the potential to do good and was based on evidence from WA that it would at very least do no unintended harm. The Government’s child care choice information site still remains the model for what good can potentially be done with these sorts of activities.

The Government is set to press ahead with unit pricing or, as I have termed it, the repeal of the innumeracy tax. I think this is probably fine although not the top of the list of economic priorities.

Making switching easy is not the same as switching

In the Sydney Morning Herald today, an article looking at the issue of bank switching costs. It argues that the government moves last year to make it easier for people to switch banks has been unsuccessful as evidenced by a lack of take-up.

[DDET Read more]

Despite widespread outrage about mortgage rate increases and the introduction of direct charging of ATM fees, a spokeswoman for the NAB told the Herald only two customers a week had used the “listing and switching” service since it was launched in November.

The chief executive of the Australian Bankers Association, David Bell, also told the Herald that uptake of the service had been very low.

The Government said last year it would inject competition into the banking sector by helping customers “vote with their feet”.

The scheme is a very limited one — allowing customers a list of direct debits and some help re-organising those. But when it comes down to it, that still takes time and paperwork. So it isn’t surprising that there is limited use of what doesn’t look like a very valuable service.

Instead, we need to think larger.

A professor at the Melbourne Business School, Joshua Gans, has called for all bank account numbers to be made portable, like mobile phone numbers, to enable people to switch easily. “The problem is this is not a piecemeal policy issue. This requires a lot of major changes to do it. It does require some serious investment and legislation to be passed.”

There are all manner of estimates as to the cost of this but our experience in telecommunications — an industry with much greater challenges than banking — was that the costs were exagerrated by an order of magnitude and implementation occurred in a timely fashion. The problem is that we also need to deal with switching of accounts in debit (e.g., mortgages) in order to make this work. I don’t have time in this post to outline how that could be done but I think there are mechanisms that could be deployed there too.

That said, the measure of success of any system to reduce switching costs is not how many people use it. Indeed, in principle, the existence of the service is all that is required and by facilitating competition — in particular, to retain customers — it will promote the social good. What we, in fact, want is for consumers to have the option of switching easily so that when they complain to banks about terms and conditions banks will adjust those terms and conditions to stop them from leaving.

Instead, the measure of success is an improvement in competition. And that is where the system is currently not effective. With news that the major banks command major market share and now major profit margins post-GFC, surely the pressure on the government to do something meaningful about bank competition should be on the cards. Resting on the laurels of a functional financial system relative to the mess the rest of the world is in, is simply no excuse.

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Have Optus just conceded that mobile isn’t competitive?

Optus have announced their iPhone tethering deals. This is where you use your iPhone as a modem to connect your laptop or computer to the Internet wirelessly. They will charge $10 per month for the privilege. Think about it: that is an extra $10 per month to use some of your already paid for usage allowance for data on the iPhone through a computer instead. (Go over your usage charge and it will cost you $0.35 per MB which I think is higher than other providers). Vodafone will allow this without charge. The critical thing here is that this charge is for a service that involves no additional cost to Optus as the network will not recognise data coming direct from the iPhone or passing through it.

Why is it doing this? Presumably because it is worried that the iPhone tethering will cause people not to buy their separate mobile broadband products. But if mobile telephony is competitive, why would it care about that? After all, it would earn no additional above-normal profits from pushing customers over to other products. Add to that, that Optus’ move is a boon to any mobile broadband provider and this is quite a puzzle.

The only explanation that comes immediately to mind that rationalises this is that mobile broadband is far from competitive and Optus and other carriers who charge for iPhone tethering in this way are earning super-normal margins on those activities. I guess this sort of thing will make the ACCC think twice when working out regulation of that sector.

Parallel imports in The Age

With the Productivity Commission’s final report on parallel imports for books around the corner, I wrote a piece about their current proposal in today’s Age.

[DDET Read the article]

Read between the lines: book protection has failed

Joshua Gans

The Age, June 9, 2009

Some publishers might suffer, but removing restrictions would help authors and readers.

HERE is a curious fact: as an Australian, I cannot buy my own book. Now that isn’t quite true. I can buy the locally published version of Parentonomics in bookstores here or I can get overseas bookstores to send me the non-Australian version. Even factoring in shipping costs, I would save about $7 by getting the book from the US and it would be hardcover to boot (although you would have to put up with reading “diaper” instead of “nappy”).

But that isn’t the cheapest way to get the book. If you have a Kindle – Amazon.com’s e-Reader – you can get the book for $A12.59, which is 40 per cent of the Australian bookstore price. I’ve had an opportunity to try it out and it is by far the best way to read my book as well as being the most cost-effective. Not being a US resident, I cannot own my book that way – well, at least not without jumping through hoops to violate Amazon’s terms and conditions or something like that. Let’s face it, when an author is barred from owning a copy of their own book, something is wrong.

So why is it possible for hard copies of books to move across international borders but not electronic copies? The answer is that publishers, who have intellectual monopolies over these works, for their own reasons have not done the deals to make it possible. Regardless of what I, as an author, might like, a gatekeeper is standing between my readers and my book.

At the moment, the Productivity Commission is reviewing a related area by which copyright restrictions prevent Australian consumers from accessing the cheapest options. At present, books printed overseas that have a local version cannot be simply imported by booksellers. Those booksellers have to go through local publishers and those publishers take their cut. Why wouldn’t they? Moreover, some of that cut might find its way back to authors which, all other things being equal, can’t hurt them either.

But, as with any area where choice is restricted, those harmed are those who might want to choose – the consumers. The Productivity Commission recognised this and so has put forward the possibility of a weakening of the restrictions to cover only the first 12 months following publication. The rationale for a weakening, rather than an elimination, of the restrictions was to preserve Australian culture by keeping book prices high for a time. But, in reality, the only books that sell significantly in the first year are best-sellers. For the rest, it takes a year or more for anyone outside of Australia to notice enough to even find an importing route. In this respect, the weakened law protects those least in need of protection on cultural grounds.

All this points to a complete relaxation of restrictions as the desired route, especially given that the Productivity Commission has already noted a lack of evidence for cultural destruction where such restrictions have been removed. In my mind, the importance of opening up is that it would foster innovation. For instance, Amazon.com would surely not have to deal with local publishers to parallel import electronic books. Indeed, it wouldn’t have to do so to open up an Australian online store-front. This would provide much-needed competition at the retail level for bookselling.

But there is more. The whole notion that local culture or producers are harmed by international competition is not new. Indeed, many submissions to the Productivity Commission cite a desire from readers to promote that. At the moment, the only option is apparently for readers to pay a tax on all books read.

But think about how the same forces generated new ways of selling in coffee. Concerned about grower treatment, the fair trade movement puts a price premium on coffee sold to protect far-flung growers. For books, there is no reason why the same forces could not come to play. Bookstores could tailor themselves to promote local authors and guarantee those authors are getting a fair deal. Those consumers who want to pay a premium for that diversity or culture would have options to do so and, at the same time, wouldn’t have to pay more to overseas publishers or authors. That seems to leave more money around for local authors, not less.

Parallel import laws are a blunt way of promoting culture and stand in the way of more innovative solutions. Our Government needs to be designing these laws to promote reading and think about other ways of promoting creation. As an author, I can’t in good conscience stand by while my readers are forced to pay higher prices so that I can be protected from myself.

Joshua Gans is an economics professor at Melbourne Business School. His book, Parentonomics, is published in Australia by New South and the rest of the world by MIT Press.

[/DDET]

Merger policy just got interesting

Core Economics contributor, Stephen King, was in charge of mergers while at the ACCC. In today’s AFR, his picture adorns page 11 with perhaps the most lewd byline ever for competition policy.

Stephen King sends a message that ‘we’re not looking at any quickie backdoor acquisitions in Australia.’

Maybe that is just me but, message received! And if you haven’t been paying close attention to Stephen’s blog posts, it is time to change.

Allow parallel importing

Apparently, Australian authors are against allowing parallel importing of books, specifically, their books. This is where, if an Australian author publishes their book overseas, then overseas publishers can sell that book back in Australia. They claim that their publishers here can’t earn enough if they face that competition (from themselves!).

[DDET Read more]

LINGERING in an American warehouse is a threat to Morris Gleitzman’s wellbeing. Books. His books. Books he has written that have been sold for publication in the substantial US market. The problem, as he concedes, is that he is not well known there and his books do not do as well as in Australia.

So the books in this particular warehouse are ones that have been remaindered — sold to a specialist bookseller by his American publisher at a substantially reduced rate to get them off its hands.

What worries Gleitzman is that a proposed change to the Copyright Act would allow the American dealer who bought his remaindered copies to dump them in the Australian market.

So let me guess this straight. Gleitzman does well in Australia but his publisher makes mistakes overseas. And remember that overseas publisher exists at the choice of Gleitzman and his Australian publisher. So apparently we need laws to protect Gleitzman’s royalties from himself?

The theme of lost profits in Australia is common. But let’s take the argument further. Suppose that I publish a book and it does well in Melbourne but not so well in Sydney. My publisher can support publishing the book so long as they can charge a price of $30 but they also publish in Sydney were the book can only fetch $15. What my publisher wants is the ability to prevent books coming across the NSW/Victoria border but the nasty government wont give them that “support.”

Well, they could (a) not sell in Sydney; (b) not discount wholesale to Sydney; (c) not ship as many books to Sydney; all of which would preserve Melbourne profits. But they don’t. Why? Because even facing some competition between cities, they do better. Seen in this light, publishers are gunning for more profits.

And we can see the effect. My book, Parentonomics, retails in Australia for around $30 ($27 if you find a cheaper bookstore). But around the world, you can get it for as low as $23.87. So Austalians are paying 15-20 percent more for books published by Australian authors (and others too). It might cost me but I would happily forgo royalties to see cheaper books across the line in Australia.

[/DDET]

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