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Is Australia suffering the curse of supermarket duopoly? The layman would probably answer with an emphatic yes. Practical experience affirms our intuition. Whenever an independent competitor arises, Coles and Woolworths quickly stamp them out. With Coles’ latest campaign to halve fresh fruit prices, Australian farmers are crying poor once again and the evidence is mounting for what we all know. Or what we suppose we know.

You see, the question is entirely wrong.  There is no such thing as a single ‘supermarket’ market – it is an aggregation of several sub-markets loosely labelled as a market. Whether it is anti-competitive for Woolworths to drop its milk prices is a very different question from whether it is anti-competitive for Coles to drop its fresh food prices. The supply chains are different; the competitors are different; consumer demands are different. Whilst Woolworths was on pretty firm legal and economic ground by dropping milk prices, Coles may be on shakier ground.

Coles and Woolworths hold a massive market share in staple foods, but a much smaller market share in fresh food. The reason for this is obvious when you think about it. Fruit and veg from Coles is simply of a lower quality than from independents. Or, to put it in econo-speak, it’s a heterogenous good and the large chains’ quality control simply isn’t as effective as a small fruit store owner who inspects fruit himself and buys the best. Milk, on the other hand, is a homogenous good.

Coles may be seeking to drop fruit prices now, then when the mum and dad stores are bankrupted, it can raise them again. Or, Coles’ strategy may be to get people in the door more frequently; you only buy staples once or twice a fortnight; you buy fresh fruits far more frequently. The first strategy is anti-competitive; the second is pro-competitive. We just can’t tell which it is.

Coles’ clearly has market power in the sub-market for staple foods. It is using this market power to gain market share in another sub-market in which it doesn’t have as much market power, fresh foods. Whether this use of market power breaches the Competition and Consumer Act will turn on details I simply don’t have on hand.

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