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There is no magic in numbers

Published in Insights, The New Zealand Initiative’s newsletter, 17 April 2014

New Zealand’s supermarket chains often get bad press and are suspiciously eyed by the public because, allegedly, they form a duopoly. With this characterisation comes the innuendo that they might be ripping off either their customers, their suppliers or both.

However, this begs at least two questions: are they really a duopoly? And even if they were, would it matter?

Doubts are appropriate on both counts. First of all, there is no point denying that Progressive Enterprises (Countdown) and Foodstuffs (New World) together account for a large share of the New Zealand retail market. However, that does not necessarily make them a duopoly – or at least not in every product category.

For example, milk and beer are both sold by other retailers, too. Over-the-counter, non-prescription medicines are also available from pharmacies. Magazines and newspapers can be bought at newsagents and bookshops. Sheer total size does not equal domination in individual product categories.

We may well be talking about a retail market exhibiting significant concentration. But strictly speaking, real duopolies look different. A duopoly is defined as two players – not two big players and lots of small ones.

However, even if the retail market were to be described as a duopoly, this would not automatically mean an absence of competitive behaviour. Competition is not a numbers game, and the number of competitors alone says little about the intensity of competition between them.

Some of the fiercest battles in business are fought in markets where there are only a couple of large players. Think of the epic rivalry between aircraft producers Boeing and Airbus. In soft drinks, the competition between Coca-Cola and Pepsi is legendary, and Google’s Android and Apple’s iOS are both vying to dominate the market for mobile operating systems.

All these are examples of heavily concentrated and yet ultra-competitive markets. It is well possible that market concentration, rather than leading to collusive behaviour, actually makes companies compete even harder for their customers.

Finally, even in markets with only one big player, competitive behaviour is possible. For that to happen it takes the credible threat of market entry. If markets are open to newcomers, this possibility alone has a disciplining effect on incumbents.

Whether there is enough competition in the New Zealand retail sector, is hard to tell. First of all, you would need to decide on how to measure it. But one thing is clear: a superficial look just at the number of competitors is not enough to accuse them of anti-competitive behaviour.

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