case price discrimination nescafe coffee

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CASE STUDY : How Price Discrimination Protects a Duopoly and Keeps Prices

High for Consumers.

One of the important principles behind Anti-Price Discrimination Laws such as the Robinson-Patman Act in the USA and the Competition Act in the UK, is toensure that competing purchases are fighting it out on a level playing field, andto ensure a large retailer – a “power buyer” is not able to extract unearneddiscounts over and above any discount for volume, that is unavailable to their smaller competitors. When this occurs, the smaller competitors are artificiallyhandicapped having to pay higher prices, and the ‘power buyer’ is able to shieldthemselves from the full competitive forces of the market.

Where this type of Price Discrimination occurs, resources are used inefficiently, small business has to cross subsidize large business, the level of competition in themarket is reduced, the power buyer increases his profits, and market share, andthe consumer pays higher prices.

However, in recent years the detrimental effects of Price Discrimination to society, and

its harm to both competition and the consumer, have been disputed by a groupof theoretical economists with little real world experience and also surprising bysome competition regulators. They have argued that these laws serve no

purpose, and may even harm competition.

However a classic example of the importance and necessity of laws such as the Robinson

Patman Act and how Anti-Price Discrimination laws work to protect bothcompetition and consumers, and how erroneous the speculations of thetheoretical economists where, recently occurred in Australia (the only country inthe developed world without Price Discrimination Laws) over Nescafe Coffee.

Australian Grocery Market.

For years the Australian market had been a cosy duopoly between Woolworths and Colescontrolling up to 80% of the dry grocery market, the highest level of marketconcentration anywhere in world history. Profit margins in grocery retailing inAustralia were two to three times higher than the international industry averagefor grocery retailers. The result was that Australian consumers were paying over $1.2 Billion more annually than would occur in a fully competitive market.

Attracted by the extremely high profit margins in grocery retailing inAustralia, the Aldi chain (with supermarkets in 15 countriesand worldwide sales of US$37 Billion) recently commencedoperations in Australia looking to get a spare of theses inflated

profits.

Nescafe Coffee

Nescafe Coffee is the leading coffee brand in Australia.

When Aldi entered the market in Australia, one of the linesthat they wanted to stock was the popular Nescafe

Southern Sydney Retailers Association Inc. – Case Study 1



Blend 43, - however it appears that Nestle had a policy of discriminatory pricingwhereby Coles/Woolworths enjoyed one price, but all other competitors in themarket were forced to pay a much higher price.

As a result, for Aldi to even match the shelf price that Woolworths/Coles were selling Nescafe 43, Aldi were forced to sell it at a loss.

It also appears that the higher price that Aldi was forced to pay, was not because of anyadditional costs that Nestle had in supplying Aldi, but the higher price was just

pure price discrimination, whereby the market power of Woolworths/Colesforced a higher price on Aldi.

Such a pricing policy would have been outlawed in the USA under the Robinson-Patman

Act , but with the repeal of the equivalent law (although much weaker law) inAustralia (Section 49 of the Trade Practices Act) by the Keating government in1995, there was nothing to prevent Nestle for adopting these Discriminatory

pricing practices in Australia.

The Australian competition regulator - the ACCC seemed completely blind to the anti-competitive effects of such price discrimination and all previous complaints andevidence of price discrimination by small business were just brushed off.

Forcing Higher Prices on Consumers.

Studies have shown the where previously Woolworths and Coles had existed side by sideclaiming that they were in “vigorous competition” with each other, when anAldi store opened close by, with the extra competition, Woolworths and Coles

were able to both drop prices by 5% - but in all other stores, not affected the bythe extra competition their prices remained higher.

However Nestle’s policy of price discriminatory, forcing Aldi to pay high prices, prevented Aldi from bringing any long overdue competitive pressure into themarket, and with the duopoly of Woolworths/Coles shielded from any additionalcompetition, coffee drinkers continued to pay high prices, andWoolworths/Coles both continued to make record profits, and handful of executives pocketed multi-million dollar salaries.

What would have happened with Price Discrimination Laws ?

Those that support Price Discrimination Laws believe that if Australia had the same asexist in the USA, Nestle would not have been able to charge a higher price toAldi.

First Nestle could only charge higher prices, if they actually had higher costs of supplying Aldi.

Secondly any price breaks for volume could not be set at quantities so high, that theywould result in just a few firms in the market being able to take advantage of thediscount. Therefore Aldi and many other independent retailers would have beenable to purchase at the equivalent price to Woolworths/Coles. Whatever special




terms and conditions Woolworths/Coles were able to get from Nestle, Nestlewould have had to give the same deal to Aldi and others.

Therefore Aldi and other independent retailers, not artificially handicapped with higher prices would have been able to bring more competitive pressures to the market,which in theory could only result in reduced the price to consumers.

Woolworths and Coles would continue to push for lower prices, but they would be actingas a proxy for all buyers, therefore any lowering of costs from Nestle, wouldflow through to all competitors, and then market forces would see the full costsaving passed on to consumers.

However if the reduced price was only granted to Woolworths/Coles, only a fraction of the reduced price would be passed onto consumers, with a substantial proportionof the reduced price being absorbed by Woolworths and Coles in higher profits,inefficiencies and higher executive salaries.

Likewise if there was an increase in the price of coffee from Nestle with a wide range of

competitors all paying the equivalent price from the Nestle, with morecompetition in the market, consumers could be sheltered from the full impact of the increase.

But this was all only a theory by the supporters of Price Discrimination laws – and thistheory was rejected by the government or the ACCC.

The ACCC ‘s Position – “There is no Price Discrimination in Australia”

In 1997 during the government enquiry into the retailing sector, the ACCC’s submissionstated, which left many observers shaking their heads in bewilderment;

“…….complaints about price discrimination often are not about price discrimination

but about price differences. In that sense they are pro-competitive and are beneficial

to the consumers because in a competitive market the discounted prices are passed

on to consumers”1

Then in 2002, to the amazement of those close to the industry, the ACCC, again informedthe Australian consumers that there was no evidence of anti-competitivediscrimination occurring the grocery market.

The ACCC released its Report to the Australian Senate in Sept 2002 on Prices Paid to

Suppliers by Retailers in the Australian Grocery Industry 2 and concluded

“... price differences in the sale of groceries by suppliers to the major chains and to

independent wholesalers do not appear to exhibit anti-competitive conduct ...”

However despite the methods used to reach this conclusion being totally flawed, TheDawson Committee, then cited this study and used it as an excuse not to re-introduce Anti-Price Discrimination Laws in Australia.

At the time the ACCC released its report to the Australian Senate, it was considered acomplete farce by those with knowledge of the industry, and many suggested

1 Finding A Balance : Towards fair trading in Australia - ACCC submission No. 62.22 http://www.accc.gov.au/content/index.phtml/itemId/307369




that like almost everything else in Australia from poker machines to petrolstations, that Woolworths & Coles had also taken over the ACCC.

The Government’s Position – “No Need for Price Discrimination Laws”

Australia’s price discrimination laws were repealed in 1995 by the Hilmer Committee,they concluded;

“price discrimination generally enhances economic efficiency, except in cases which

may be dealt with by s.45 (anti-competitive agreements) or s.46 (misuse of market

power)……..”3

Several years later a government Committee studying the repeal stated that,

“until 1995, section 49 of the Trade Practices Act contained similar provisions to the

Robinson-Patman Act. However, pursuant to reforms introduced in the Competition

Policy Reform Act 1995, section 49 was repealed. It was reasoned that anti-

competitive price discrimination could be adequately dealt with through other sections of the Trade Practices Act”.

Therefore in Australia, on one hand Small Business were claiming that anti-competitivePrice Discrimination was going on everyday, and that is was destroyingcompetition, and forcing consumers to pay higher prices – while on the other hand the ACCC was advising that Price Discrimination did not exist, andtherefore the Government believed there was no need for the re-introduction of Price Discrimination laws – it was a stalemate situation, just one theory againstanother.

The existence of, and the effects of Price Discrimination were just the speculations andeconomic theory of one group v. the speculations and economic theory of another.

The Theory Gets Put to the Test.

However Aldi gave the world a unique opportunity to put these opposing theories to thetest to see who was right and who was deluded.

Aldi weren’t going to charge their customers higher prices, and they weren’t going to sellat a loss for ever, and they weren’t going to let the cosy duopoly of Woolworths/Coles remain sheltered from competition in Nescafe Coffee.

Therefore Aldi, with their massive international operations began sourcing Nescafeinstant coffee from Nestle distributors in Singapore (a country with Price DiscriminationLaws), rather than through Nestle in Australia, were through Price Discrimination Aldiwere forced to pay higher prices than Woolworths/Coles.

Obtaining supplies from a country where Price Discrimination did not exist, Aldi were

now able to compete on a level playing field against Woolworths/Coles, an opportunitydenied to them by Nestle in Australia through Price Discrimination.

3 National Competition Policy : Report of the Independent Committee of Inquiry pp.79-80




What Happened to Prices on a Level Playing Field ??

Finally Woolworths/Coles now had a real competitor, not handicapped having to payhigher prices through Price Discrimination. So what was the result – was theAustralian grocery market vigorously competitive, with the worlds lowest

prices, as the ACCC and the government had claimed, or was it a cosy duopoly, protected and featherbedded through Price Discrimination, overcharging theAustralian consumer billions as claimed by small business ???

Here is the answer –

Previously where Woolworths and Coles were selling a 150 gram jar of Nestle Blend 43 for around $6.99 ($4.66 per 100 grams), without suffering from PriceDiscrimination Aldi were able to sell a larger 200 gram of Nescafe at just $4.99

($2.50 per 100 grams)

With competitive pressures back in the market, Colesreduced the price of 150 grams jar of Nescafecoffee to $4.99 ($3.32 p/100grams) down from the

previous price of $6.99.

Then on 14th Sept Coles advertised a 500 gram tin for $11.90 ($2.38 per 100 grams).4 This timeundercutting Aldi’s price.

The claims of the Australian Government and the ACCC,were finally exposed as complete erroneous – andsmall business that for decades that had beencomplaining about effects of Price Discriminationharming consumers were proved correct.

Finally the market was finally working like it should – without Woolworths/Coles protected by Price Discrimination the normalcompetitive forces of the market were workingto the benefit of consumers.

However the win for consumers may be short-lived. Intheir attempt to retain the status quo of the “existing retail hierarchy” and returnto previous market distorting policies of Price Discrimination to protect theWoolworths/Cole duopoly – the resulting in higher prices for consumers,

Nestle’s Australia executives last November asked colleagues at NestleSingapore to find out where Aldi was buying the coffee.

A month later the distributor supplying Aldi had been located and cut off completely by Nestle Singapore, according to an internal Nestle email.

The ACCC said Nestle Australia's attempts to shut down Aldi’s supply from Singaporeshows Nestle were not simply concerned about customer welfare 5 but with thecompetitive effect of the imported coffee.

4 The Daily Telegraph, 14th Sept 2006 p.16


Daily Telegraph 14th Sept 2006 p.16 “Here’s Proof alright” - No longershielded from competitive market forces,

by having competitors paying higherprices through Price Discrimination,

Coles were able to lower prices to



Gullibility of Australian Government Exposed

Nestlé’s Price Discrimination, its anti-competitive effects, and harm to consumers clearlyillustrate the gullibility of the Australian Government and the completelyerroneous arguments that have been used for the last decade.

The Nescafe Coffee situation also shows the flawed the reasoning of the individuals thatrepealed this law Australia’s prohibition of Price Discrimination.

“Other sections of the Trade Practices Act” are completely useless to deal with NestlePrice Discrimination that has forced consumers to pay higher prices for coffee.

Nestle can and have and will continue to use Price Discrimination resulting inharm to the consumer, and the current Australian Trade Practices Act iscompletely unable to do anything to prevent this activity.

The Gullibility of the ACCC exposed

The information that have been disclosed by Aldi, and that fact that even Aldi was forcedto pay higher prices from Nestle, thereby shielding Woolworths and Coles fromcompetitive market pressures and resulting in higher prices to consumers showshow hopelessly out of touch that the ACCC have been for the last decade, andhow the ACCC simply fail to understand the anti-competitive affects of pricediscrimination.

At least the ACCC now appears to have admitted that they had it completely wrong over

the last decade, their chairman Mr Graham Samuels is reported as saying;

“The ACCC believes that part of Nestles Australia’s anti-competitive purposes was to

remove the stimulus to other Australian grocery retailers, who might have responded to

Aldi’s [lower prices] by discounting Nescafe Blend 43……….”6

The ACCC is clearly restricted in what it can do with the existing laws, section 45 andsection 46, despite the previously claims of government are completely unless to prevent

Nestles Price Discrimination.

5 The giant mutli-national Nestle appear to be gaining a reputation of being unconcerned with “consumer

welfare”. Nestle is earns a substantial proportion of its profits from baby milk formula.

The World Health Organisation (WHO) estimates that 1.5 million infants die around the world every year because theyare not breastfed. Where water is unsafe a bottle-fed child is up to 25 times more likely to die as a result of diarrhoeathan a breastfed child. A marketing code was introduced in 1981 to regulate the marketing of breast milk substitutes.However consumer groups are now boycotting Nestle’s because of an alleged refusal to stick to World HealthOrganisation guidelines on the marketing of powdered baby milk on the third world.

To look at the activities of Nestle see http://babymilk.8k.com/ andhttp://www.babymilkaction.org/pdfs/nestlerussia04.pd where in developing countries they are actuallytelling children eat Nestle chocolates instead of a sandwich. Anyone that reads these websites may never buy another Nestle product again.

6 The Australian, “Nestle loses bid to stop Aldi Selling imported coffee” 10th August 2006


http://babymilk.8k.com/


http://www.babymilkaction.org/pdfs/nestlerussia04.pd


http://www.babymilkaction.org/pdfs/nestlerussia04.pd



The situation with Nescafe, and the harm of Price discrimination causes to consumers,shows clearly how foolish Australia was to repeal its Price Discrimination Laws, and howout of touch those were that supported this repeal – and why these laws urgently need to

be re-introduced, and strengthened to include services as well – and then they need to bevigorously enforced by an ACCC that appreciates the mistakes that it made in the past.

How Many Other Products are Consumers Paying Prices for due to Price

Discrimination ??

Nescafe 43 is just one of Nestle products. Nestle are one of the largest supplier’s of foodto the grocery market in Australia, their brands include Nescafe coffee,International Roast, Andronicus Coffee, Milo, Peters Ice Cream, Lean Cuisine,Maggi, KitKat, Allen’s Lollies, Minties, Smarties, LifeSavers, Milk Bar, etc.

The question that has to be asked - is their policy of price discrimination restricted to Nescafe 43 only, or do they use Price Discrimination across their entire productrange in Australia ???


case price discrimination nescafe coffee

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