Nation of Beancounters

Free entry! Free entry! Free entry!

Posted in Uncategorized by Navin Kumar on October 8, 2012

Apologies for the hyper-active title – it’s merely a point I really want to emphasize. My friend and former roommate, Aditya Sudarshan, wrote a post opposing on FDI in retail on the grounds that it will lead to monopolization, hurting consumers with high prices, and monopsonization (a single buyer), hurting farmers with low prices. I direct him to this post.

The key reason that this won’t happen is that retail doesn’t have high entry barriers. There are no network effects, differentiated products, regulations, corner-able resources, patents or any of the usual suspects that prevent free entry into assorted markets.  If a cartel of big box retailers attempt to maintain monopoly-level prices for any extended length of time, even inefficient firms will find it profitable to enter the market by undercutting the oligopolists. You can compete with WalMart’s economies of scale if WalMart charges consumers a price that you can match.

the strategic under-pricing that Pepsi and Coca Cola had engaged in, to wipe out local competition like Goldspot, Campa Cola, Thumbs Up and others led to the creation of a monopoly in the beverage industry, the prices have risen considerably now.

Coca-cola and Pepsi sell differentiated products. People care about the brand. This is why it’s hard to compete with them: setting up a new company requires enormous advertising and marketing expenditure – and an appetite for risk. On the other hand, people don’t really care where they buy rice or atta from. The entry barriers that exist in the beverage market do not exist in the retail market.

After they eliminate all local competition, the retail giants will eventually raise prices; surveys done in Madagascar have shown a 50% rise in the prise [sic] of products after the entry of big retail firms.

Prices rise for many many reasons (how’s Iran doing lately?) so this argument, without links, is post hoc ergo propter hocIf this were an international tendency, surely there would be heaps of studies and court cases showing that it does so. Instead, WalMart wins most legal challenges that allege predatory pricing.

This part is very strange:

These firms which get into contract farming, will have the power to reject the crop on quality basis, or with the excuse of a glut in the market and the firms will be able to force the farmers to produce unwanted crops like BT crops.

Consumers (and firms) currently reject output that’s of low quality. Gluts aren’t caused by big firms; they’re caused by bumper harvests. And under what model do firms have to have an “excuse” to not buy something? Farmers grow BT crops without any coercion, and for good reasons. If BT crops are socially undesirable (for whatever reason), you’re going to have to ban it directly, not hope that keeping companies out will keep it out of production.

An alternate to this might be, the government itself investing in supply chain management, setting up of farmers cooperatives for procurement of loans and selling their products.

If Reliance Fresh and Big Bazaar and other assorted players who have much stronger incentives to do this haven’t been able to, why assume government bureaucrats, with even less expertise and drive, will? The PDS system, which actually does handle the kind of supply chains that firms must establish, wastes 71% of the amount allocated to it, due to fraud and excess cost. Outside dairy, India’s record with cooperatives and loans to farmers is abysmal.

The claim that the entry of large retail firms will raise employment is true in the short run but as the local small retail stores are pushed out of the market, unemployment will rise in the long run.

Unemployment has been stable for the last century-and-a-half despite technology shocks that render some unemployed temporarily. I direct Adi here.

I don’t see any economic reason to replace the current local mom & pop stores, which operate in close to perfect competition conditions, which employ about 23 million people with the big retail giants, other than political reasons.

If Big Box retailers cannot, in fact, improve the supply chain then there is nothing to fear – they cannot overrun the market. If they do, it’s because they can deliver goods more efficiently. Free entry will prevent them from charging more than the Kiranas stores do now – if they tried, these stores will simply spring up again and draw consumers away.

A small number of firms does not an oligopoly make.

Again, free entry is the key. If opponents of big box retailers want to keep them away, they must prove that monopoly-prices can be maintained.


2 Responses

Subscribe to comments with RSS.

  1. […] before that FDI in retail won’t lead to monopolization and underscored the importance of free entry. Aditya disagrees with me. He […]

  2. […] or not FDI in retail will lead to monopolies or not. I explain the why it won’t here and here. […]

Leave a Reply

Fill in your details below or click an icon to log in: Logo

You are commenting using your account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s

%d bloggers like this: