The representatives of Santa Claus' toy industry in France, being
accused of anti-competitive practices, went through a difficult
Christmas time. The Competition Council issued a decision, on December
20, 2007, with multi-million-euro fines, on a supposed price-fixing
agreements among several manufacturers and distributors. Beyond the
ruling, current regulations are those that paralyse companies aiming to
do better than their competitors. It is those regulations that are anti-competitive,
and consumers end up bearing the brunt.
But didn’t french consumer advocacy group UFC-Que Choisir claim to have
investigated certain toys in 2006 and 2007, finding almost identical
pricing at various stores?
And didn’t the General Directorate on Competition, Consumers’ Affairs
and Fraud Prevention urged the Competition Council to fine Lego and
Carrefour for running a promotion called “Carrefour refunds 10 times the
difference”? This allegedly let Lego monitor whether the prices of its
toys sold by other retailers were the same.
In short, there was a campaign that would have us believe that the
existence of a single price for a product on the market indicates lack
of competition and a need for public authorities to intervene.
The mere existence of a single price does not, however, run counter to
free competition – for a number of reasons.
First, even if the price shown appears identical from one store to
another, there are often differences in the real price consumers pay.
Some retailers have loyalty programs that provide reduced-price coupons
or customer rebates and discounts – including Carrefour, which gives its
loyalty cardholders 25% off the price of about 100 toys. Saying that
toys are sold at the same price to consumers glosses over this.
Second, even if the price to consumers of a particular toy truly is
identical at various points of sale, competition – especially from rival
toy makers – remains fully in force.
If prices went too high, rivals would not hesitate to compete in price
to attract consumers and gain market share. Lego is in competition with
other makers of construction toys, such as the Canadian firm Mega Bloks,
and it has no interest in setting prices that would chase consumers away.
To allege, as UFC-Que Choisir did, that the presence of a single price
means that “competition is just a big joke” ignores the very nature of
competition.
Third, free competition is based on respect for property rights and
contracts in the economy. There is nothing abnormal about producers – in
any sector – agreeing with distributors on the retail price of their
products. Such control over retail prices is in no way unusual: it
applies to any manufacturer that sells directly to consumers, like Dell
or even Lego, which has opened its own stores in several countries. If
“agreements” on prices were to be banned, direct sales to consumers with
manufacturers necessarily setting their own prices would, by this logic,
also have to be banned!
The fact remains that the decision to go after the toy industry because
of identical pricing is all the more absurd in that such prices – even
if suppliers and distributors preferred to avoid them so as to satisfy
better their customers – are the result of another French regulation.
The Galland Act, which regulates relations between suppliers and
distributors/retailers, prohibits distributors and retailers from
selling more cheaply than certain bureaucratically decided level. It
also forbids “price discrimination”: different prices and offers from
manufacturers to distributors and retailers can be easy targets for
prosecution.
To avoid being prosecuted, suppliers tend to follow the same prices, the
same discounts and even the same sale conditions. Why as a supplier
would you offer advantages and lower prices to a distributor if other
distributors could demand from you the same favourable conditions under
the law?
Similarly, why as a distributor would you negotiate better deals for
your customers if any of your competitors could get the same favourable
conditions by invoking “price discrimination”?
This regulation is actually what blocks competition between various
distributors, preventing them from negotiating lower prices and better
sale conditions for consumers whenever it's economically possible.
The whole regulation binding suppliers and distributors is truly
Kafkaesque. First they are pushed into avoiding different prices because
they could risk sanctions under the Galland Act. Then they are accused
of agreeing on prices, and the Competition Council sets out to prosecute
them. In both instances, the regulations run counter to free competition,
and their harmful effects always end up being passed on to consumers.
To offer higher-quality and lower-priced toys to our kids, Santa Claus
doesn’t need more regulations or government intervention in an industry
that is already over-regulated. On the contrary, what he needs is real
deregulation !
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