Matt Nolan

Cheese prices: Competition issues or random bleating?

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This article from David Hargreaves on cheese prices got me thinking. He is saying that domestically produced food prices are too high.

At first I completely disagreed with, especially when he says things like:

There’s no doubt the excuse will come out about how much lower the Kiwi dollar is this year. And clearly that is a valid excuse when you talk about imported goods. But what about the goods produced at home?

This is a misnomer – as a lower exchange rate increases the return New Zealand exporters can get overseas, increasing the price New Zealander’s need to pay for a product.

However, there is another issue regarding the price of diary products in New Zealand that is important – and where the bleating about the price might make some sense: Collusion in the supermarket industry. If supermarkets are colluding on the price of diary products, the price would be higher than the socially optimal level. In this case there might be a competitive issue with supermarkets.

Do you think there is a competition issue – or do you think this is a whole lot of bleating about nothing?

Matt Nolan

On the RMA reforms

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So the National government is reforming the Resource Management Act, interesting.

Now anyone that says the changes are to help “during the crisis” is tripping – changing the RMA is a structural, long-term, issue not a “stimulus” issue. Framing it as a stimulus issue may help National to sell it – but that is not really why, or why they should be, doing it.

From listening to people (and reading this from Nick Smith) talk about it there appears to be three main thrusts of attack on the RMA:

  1. Stop the use of the RMA as an anti-competition device,
  2. Reduce the ability of the RMA to be used as a “hold-up” device against initiatives.
  3. “Streamline” consents of “national interest”.

The first change is brilliant and well needed – any policy that can be used in an anti-competitive fashion needs to have provisions to deal with it.  The second concept is also very true – there are times when people use the law to increase the return they will make from the consent, this is no good.  However, the third concept is a bit dodgy for me – I think we need to be a bit careful when using it.  Here is the way I see “national interest”:

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Matt Nolan

The value of a brand

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Kiwiblog links to an interesting story about Vodaphone Vodafone (fixed for my illiteracy). In the story Vodafone begun charging for sending out paper statements after setting up a text statement service. Sure enough customers were unhappy – so they reversed the decision and now are not charging for the statements again.

What was important for me wasn’t what they are doing – but how they are doing it. They termed the change their mistake and that they were now listening to what their customers told them. Whoever decided to make this u-turn obviously knows what happened with New Coke.

In the case of New Coke, the Coke company replaced Coke with a new receipe – but some deeply loyal customers were hurt. When Coke turned around and stated that it made a mistake and changed the formula back they experienced an increase in market share (beyond initial levels) – and customers said they felt “flattered” that Coke actually listened to them.

Who knows, Vodafone might experience the same thing here! It just goes to show, building a differentiated brand both lets the company extract rents and allows customers the “value” associated with having a role in the brand. Sounds good to me!

Matt Nolan

Do those who pay with cash subsidise credit card users?

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At the Freakonomics blog Steve Levitt mentions how high credit card fees are for retailers.

Now as consumers when we make our purchases we only make a decision on whether to use a credit card or cash/eftpos based on the relative cost to us and the whether the option of different types of payment are avaliable. In fact, since I get charged to use an eftpos card I prefer to use my credit card when I’m in a shop. The information about which you can see more at their website

For some reason firms do not charge a different price based on payment method – and as a result when setting prices they will treat credit card fees as part of the cost of production.

In order to figure out if this translates into higher prices than in the case of price discrimination (and ignoring entry and exit) we need to ask – are the credit card fees seen as a fixed cost, or a variable cost. Assuming for fun that firms believe that some proportion of total sales will involve credit cards, the credit card fee becomes a variable cost – and as a result the price charged will be higher.

This makes me wonder – why do firms not charge me extra for using a credit card? If it is a framing issue why don’t they provide a cash/eftpos discount?

Experts from 53.com (https://www.53.com/content/fifth-third/en/personal-banking/bank/credit-cards/secured-card.html ) can provides full information about credit card usage and the difference between secured and unsecured cards.

Update A reader says it is because credit cards are a two-sided market. So credit card companies effectively “subsidise” consumers so that they can charge retailers more. When this is combined with Grant’s statement that it is a contractual obligation that firms cannot price discriminate based on payment method this all makes sense.

goonix

Cheers! We’re (possibly) efficiently taxing ourselves – Alcohol in NZ

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A few medical experts and lobbyists are calling for a “massive” hike in alcohol prices to solve a “national booze problem”.

According to the article, alcohol costs $425 million in ACC payouts, $655 million in the public health sector, and $1.17 billion in lost productivity each year and is a contributing factor to 70 per cent of emergency hospital admissions and well over half of all crime.

Alcohol is a product that is already heavily taxed. The question is: is the current level of alcohol tax sufficient to internalise all costs of alcohol consumption (including those outlined above)?

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Matt Nolan

Taking another quick look at petrol prices

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So since the last post I’ve thought of a few other things I could do to get an idea of pricing behaviour.

First, lets compare the price of petrol per litre (excluding tax) to the $NZ price per barrel of oil:

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