Rough and Tumble in the Marketplace
- May 2004
This Opinion was featured in the May 2004 issue of the the Anglia Farmer
Innovation will be stifled if competion watch dogs clamp down too much on the way supermarkets deal with farmers agues David Walker.
The natural instinct of any business, whether it is a supermarket chain or a farm, is to avoid the competition, wherever and whenever possible. Perhaps the most usual way of doing this is to create, in the widest sense of the word, an improved product and charge a little more for it. And, thereafter, by some means sustain the advantage created. It is the means chosen that are often the problem.
The issue is an old one and far from being black and white. If there is no escape from the treadmill of competitive pricing then there is no incentive to innovate and enhance quality. Patent and copyright laws recognise this, providing protection to encourage new ideas.
But this process itself has to be subject to competition or other check. Any firm that dominates its market is a threat to all and needs to be bridled to prevent abuse.
What is sufficient protection, however, to reward innovation adequately but not excessively is, of course, subjective and necessarily conditional to political control. Further, what is acceptable to society will vary over time and between jurisdictions.
It is, therefore, probably very appropriate that the government agency that currently arbitrates such matters was given the name of The Office of Fair Trade(OFT), "fair" being a concept that surely defies objectivity. So while OFT may go to great lengths to set trading standards, codes of practice and such which give the appearance of being fair to most people and even objective, and assess market behaviour relative to those standards, it is as often as not frustrated.
And this certainly seems to be the case with its current dealings with the food market.
In 2000 a Competition Commission investigation report did not attribute the relative high cost of UK food to a lack of competition between supermarkets. It did, however, express concern about the bullying behaviour of supermarkets towards their suppliers.
This included requiring unjustified discounts, sometimes retrospectively; making changes to contracts without warning; and having their suppliers take most of the risks. It concluded that as a result of this monopolistic behaviour "suppliers are likely to invest less and spend less on new product development and innovation, leading to lower quality and less consumer choice."
The accusation was that the supermarkets, having signed contracts which reflected the values sought by their suppliers, were not well inclined to honour the detail of their commitments.
As a result of the Competition Commission’s recommendation on this, a binding Code of Practice was agreed to by the five biggest retailers and their suppliers. And in response to political momentum created by the Curry Commission’s report on the Future of Food and Farming in December 2002, the OFT was instructed to undertake annual reviews of compliance with this code.
The first of these annual reviews was published in February. But, as anticipated by the Competition Commission three years earlier, suppliers, while claiming the code was frequently contravened by retailers, were for fear of retribution, unwilling to quote chapter and verse or indeed make more direct claims. And the situation was further complicated by the inclusion of a highly subjective concept of reasonableness in the code.
The OFT now plans spot checks. Like the teacher watching the play ground at break time, this should be welcomed. But the danger is that it will inhibit market behaviour and limit innovation. Even for an experienced eye, distinguishing between acceptable rough and tumble of the marketplace and bullying is difficult. By guarding too much against the later there is the danger that the former will be inhibited.
May 2004
top of page