Tuesday, 24 April 2018

Now you see it

You want to buy a widget. Bugsy's has the model you want, it's $6. Malone's also sells it, for $5. You may not know Malone's got it cheaper, so you end up paying a dollar too much at Bugsy's.

But suppose Bugsy's and Malone's are required by the Prevent-A-Widget-Ripoff Authority to post their prices online?  With a moment's search you can find Malone's cheaper price. You're a dollar ahead.

But Bugsy and Malone can also now see each other's prices (or at least more easily than they could before). It's possible that Bugsy will reckon he'll never sell another widget at $6 and cut to $5. But it's also possible that Malone will reckon he can safely raise his price to $6 and still share the market with Bugsy.

Which is a long-winded way of saying that compulsory price transparency might or might not be pro-competitive. Generally, you might philosophically lean to the proposition that transparency is a good thing, information asymmetries favouring sellers are unlikely to be good news for consumers, and less opaque markets should work better than murky ones, but there's no certainty you're right.

There's even suggestive evidence that the bad outcome can happen in real life. The petrol market report that MBIE commissioned last year (more detail here and here) noted (p87) that a scheme to make German petrol prices more transparent had backfired:
One study of the German scheme found that prices for petrol increased by between 1.2 and 3.3 euro cents per litre as a result of the scheme, while the price of diesel increased by about 2 cents per litre.
Oddly in this era of big data and far more online shopping, there's remarkably little empirical evidence either way. Step up two Israeli researchers, Itai Ater (Tel Aviv University) and Oren Rigbi (Ben Gurion University), with their paper, 'The Effects of Mandatory Disclosure of Supermarket Prices'.

It's a neat bit of analysis, which is able to use before and after data when Israel's Food Act had made it compulsory for the supermarkets to put their prices online from May 2015. Have a read: it's more or less accessible for the intelligent lay person, while still doing all the econometric heavy lifting (it's differences-in-differences, with fortuitously rich sets of control groups).

Bottom line: transparency turned out to be strongly pro-competitive. Sample results (all from pages 5-6):
after prices became transparent, the average number of distinct prices that a given item was sold for in brick-and-mortar supermarket stores decreased significantly
after the regulation took effect, prices of items in the treatment group [i.e. the supermarkets] decreased 4 to 5 percent more than did the prices of items in the various control groups
prices primarily decreased among chains that are considered more expensive, whereas the impact of the regulation on heavy-discount chains was largely insignificant
prices have declined less in supermarkets that faced fiercer local competition
This empirical analysis suggests that the prices of more expensive and less popular products fell more. We also find that the prices of branded products, that could be compared across retailers, decreased more than did the prices of “similar” private-label products
the reduction in prices is negatively associated with the extent to which customers used the price comparison websites [i.e. the more info consumers accessed, the more the supermarkets were forced to compete]
Interestingly, the very sharp fall in the number of different prices a supermarket charged for the same item across its range of stores - from around 16 different prices for the same widget to around 5 - was, the researchers think, down to the supermarkets' fears of being seen as unfairly ripping people off (p23):
in our setting fairness concerns probably best explain the observed effect on price dispersion ... chains recognized the reputational costs associated with charging different “transparent” prices in different markets
These are remarkable results: a 4% to 5% reduction in supermarket prices is a seriously large payoff, as is the 'fairness' disciplinary constraint on supplier behaviour. I wondered whether 4% to 5% might have been neither here nor there in an Israeli context - maybe inflation is rattling along at 10%, and 4% to 5% gains are lost in the inflationary fog - but not so. Israel's got the same inflation target as we do - 1% to 3% - and has been hitting it. Inflation if anything is below target, with the Economist picking 0.9% as likely for this year. So a 4% to 5% saving is as much of a big deal in Israel as it would be here.

Generalisability elsewhere?  To New Zealand? Who knows. If you were to characterise our supermarkets as a duopoly, then the potential for more transparent competition to deal to potentially fat margins could be large. But on the other hand only two big players increases the potential for (legal) coordination, whereas the Israeli market is more diverse and less susceptible. And it could be that, if it works, enforced price transparency works in some kinds of markets more than others, and I wouldn't want to rush to a one-size-fits-all judgement.

All that said, the Israeli experience rather changes the burden of proof. Before reading it, I was agnostic about regulating for price transparency. Now, I'm more in the camp that feels it's more likely to help than not.


  1. The difference between the German and NZ motor fuel markets is that NZ prices are relatively static, with price changes being rolled out by all participants as if coordinated whereas the German market is characterised by significant price differentials (€1.35-€1,42/l over 10 petrol stations within a 5km radius.Source: clever-tanken.de) and multiple price changes of up to 10c/l PER DAY with prices yo-yoing wildly. (Don't fill up Monday mornings, wait for mid-afternoon mid-week appears to be a good strategy.)
    The claim that "prices for petrol increased...as a result of the scheme" is at best questionable, given that "price" is a rapidly moving and ephemeral target.

    1. Thanks for the comment, John - I don't know the details of the German study and was relying on third party summary of the research. It may well be, as you say, that getting a good measure of "price" may have been tricky.

      I've read some of the ACCC's price reports on the various Australian petrol markets, and big differentials seem to be the order of the day there too, which is why the ACCC has been encouraging people to use price comparison apps.