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February 04, 2008


Pavement Trauma

If only I had a need to go to the chemist for a twelve pack of condoms every 3 weeks...

It is hardly unique to Ireland that the business sector should seek to raise its profit margins. That is what all businesses, everywhere do - in the same way workers try to raise their wage rates.

Those higher margins attract other retailers to stock them and encourage existing retailers to sell more of them. If prices remain the same the same volume of condoms will be sold - but spread more thinly over all the retailers. Some retailers will reduce their prices to make more sales. It probably won't be sudden and dramatic but it will happen over time.

If consumers care about prices they will buy more in the lower priced retailers - which will encourage more retailers to cut their prices. If consumers don't care that much about prices, they will buy them wheverever and prices won't change. But if consumers don't care about prices, why are we even having this discussion?


Thanks, Pavement Trauma, for the comment. Yes, that's what the textbooks teach us. But as I tried to point out, when we get into the real world of business behaviour, much of our textbook learning can be thrown out the window. The attempts to bring down prices through lowering VAT on three different occasions shows that.

But let me pose another example: say a hypermarket opens up outside an Irish town. Let's say they engage in predatory pricing, thus driving out more local shops (so much for the benefits of competition). Let's say you have a social structure that leaves people 'time-poor'. This means that people will pay the extra cost of one-stop shopping (or, at least, won't have time to shop around for bargains in different types of shops). Now that the hypermarket has run the competition out it starts raising prices again - but nothing dramatic, nothing to get notice. Just a penny here and a penny there. Makes a big different when you're selling on volume.

All this of course is caught by classical economic theory. It's also caught by Marxist economic theory. Whatever theory catches it we still end up with the situation where there is no competition and because of our social practices, people just grin and bear it.

Where is Adam Smith when we need him?

Pavement Trauma

Which bit of the 'textbook' theory do you think breaks down when it encounters the real world?

Is it that additional sellers are not attracted by the higher margins?

Is it that the same sales will not occur at the same price level?

Is it that the same sales spread over more retailers will not mean less sales per retailer? (Presumably not, as that is just simple mathematics. I hope that at least textbook mathematics transfers to the real world intact).

Is it that no retailers will try to retain their existing sales (or gain extra ones) by lowering the prices they charge?

Or is that no consumers, faced with buying the same item from a choice of places with different prices, will tend towards the lower priced retailer?

If the theory does not translate to the real world, at least one of the above has to be happening. Which one(s)?

The genius of a competitive market based system is that you do not have to rely on the 'goodwill' of the participants to be nice or act fairly or do the right thing. You can, however, rely on them to pursue their own self-interests and by each doing so produce the better outcome (or a worse outcome, if you are a Catholic bishop).

Why it is like they are guided by some sort of invisible hand...


These are very relevant questions, Pavement Trauma, and I fear that a mere reply in commnet won't suffice to answer them all (indeed, one post won't answer them). Not wanting to sidestep the issue, can I have a think about these and come back with a post that might capture some of these issues.

But on the particular question of attracting more suppliers - this is always dependent on the nature and extent of the market in question. It can be substanitally different in, say, the utilities market (where states have to subsidise prices to induce more suppliers which in iteslf may be harmful to the market) and the retail market where simple gegography combined with local skill base can thwart additional sellers. In some cases, market-dictated margins play little role.

In any event, I have no doubt we will be coming back to the issues you have raised, over and over again, because they are important ones.

Pavement Trauma

Fair enough.

I was mostly thinking of the specific case of the retailing of condoms. There are undoubtedly some markets that are not (sufficiently) competitive, but on the whole, condom selling isn't one of them. Theory and reality can and frequently do coincide.

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