Does more competition raise real incomes?

Government these days are keen to create “policies which are designed to raise real incomes by obtaining more output from the resources available (both human and physical)”[1]. The logic is rather simple: “obtaining more output from the resources available” means shifting the supply curve to the right. Allowing for more competition, i.e. more suppliers, is such a shift. The graph says it all – prices drop, and real incomes rise as a result. Deregulation – eliminating constraints on the way firms are asked to produce – has an equivalent effect.

But is it so? My point of departure here is anecdotal reporting based on my experience as supermarket shopper in three countries, where an increasing number of supermarket chains battle each other for market share. A surfeit of choice The choice among roughly equivalent products has increased, and we observe size differentiation to fit individual needs – at a cost (the price-hike for small portions can be quite significant). Declinations of brands and products materialize, which makes comparison between homologous products and over time more difficult[2]. Pricing opportunism In theory pricing tracks demand and supply – the supplier is price-taker. Don’t you believe it! The supplier manipulates prices in overt or covert ways. Basically, he’ll count on the fact that while we can compare prices on individual items, we are unable to compare baskets of goods. First thing then is to “capture” the buyer; once in the store he’ll not buy just one good, but will do hopefully most of his shopping in the same place. We have loss-leaders aiming to capture the consumer, while counting on the fact that he’ll overlook or resign himself to price-gouging on other items. The same bottle of Campari costs twice as much in a French supermarket as in Italy; it is somewhere in between in Switzerland. We also have “bundling” of products (as when a service is sold as “experience” at mark-up; or the handy is part of the phone subscription), or “unbundling” (as when the coffee machine is sold cheap and capsules are priced extravagantly). And this is just the beginning of the various schemes to maximise margins. Obfuscation of (unit) prices When price becomes a critical factor, making access more difficult to information is a winning riposte. Current trend is to eliminate any price labels on the item on sale. The price is often only indicated on the shelf, but in an inaccessible way. Products come in all sizes and portions – unit pricing is mostly hidden, or minuscule, and often printed at a 90° angle for reduced readability. Some supermarkets have moved to creating a central code-bar reader, which one must interrogate to obtain answers. One seldom uses such a complicated option. Behavior manipulation How goods are displayed is of course critical. Cheap products are on the bottom shelves, or atop and out of reach. The number of psychological tricks used here is endless. I pride myself of outwitting some of the obvious tricks, while probably falling prey to the cleverly hidden ones. The result is complexification The response of the suppliers to increased competition then has not been to so much drop their prices as to make the shopping experience more complex. The consumer has a fixed budget of time, stress, and money. Tendentially he’ll choose to spend, rather than put up with aggravations: “convenience” covers a lot of gouging. The emergence of “minders” To counter complexification “minders” emerge to assist the shopper. Their function is to simplify the choice by offering advice. One choice – that of the appropriate “minder” – replaces many: for a fee, of course. Brands are age-old “embedded minders” – for a small mark-up one is “assured” of buying quality. Celebrities may work as embedded minders. “Third party minders” – who claim integrity – blossom like mushrooms after a summer rain. They range from test magazines or TV programs to “personal minders” for the super-rich. Public and private bureaucracies emerge providing guarantees – of more than uncertain integrity. Sharks need pilot fish to navigate and hunt; and better to handle the increasing complexity of the shopping experience a whole ecology of “minders” establishes itself. We have here the whole spectrum of predatorry behavior, from commensalism to parasitism. The added problem of course is that the consumer does not just delegate choice: he delegates competence. Just like the CEO (or the Chinese Emperor[3]) who is captive of the reports reaching him, the consumer has lost the immediacy of his knowledge: he no longer is a “craftsman”[4] Does real income increase? Well – it all depends on how one does the adding up. Certainly, if one takes the Statistical Office’s point of view, individual prices may have dropped. Whether my shopping basket is more full, or better filled, is another matter. To make matters worse – it also depends on who – consumer or supplier – appropriates the ensuing “gain in productivity”. More critically, some of the gains from competition may be syphoned off in an effort to master the ensuing complexity. The statistical office does not include in his calculations of the price index the added time and money I spend trying to make equivalently informed choices as prior to complexification. Nor, god forbid, does it include stress[5]. I suspect – but cannot prove it – that much complexification just yields “churning”. I shall also mention that the complexification process favors some, but fails others – those unable to cope with it. These are “marginal” groups like the elderly, single parents, and the poor. We need an ecological point of view The graph at the outset of this blog is grounded in a mechanical relationship between supply and demand. The process of complexification I’ve described is more akin to the emergence of an ecology – a complex biological system with many species feeding of each other, and one that obeys totally different, that s biological, laws[6] and evolves unpredictably over time. When confronted with biological systems we may carry out case studies, but predictions would be very tentative. We have no laws that would allow for overall policy prescriptions. Economic policy gurus (like Milton FRIEDMAN[7]) will argue that the first is a good approximation of the second. Logically this is affirmation, rather than proof, for the argument rests on an analogy or correlation, rather than common underlying causality. On a deeper level it is akin to arguing that we understand a living body because we have successfully dissected it. Ecological processes are all unique. When deregulation is “one policy to solve all problems” – it is snake oil, or patent medicine.

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