Picture two village shops. If both shopkeepers are doing nicely out of selling the same product at a high price, they may decide to keep their prices the same even when the wholesale price falls. This is known as tacit collusion. Both retailers have an incentive to co-operate with each other at the consumers’ expense.
But each shopkeeper also has an incentive to lower the price to make more sales and more profit. If another shop opens, this temptation will grow stronger. If a dozen shops open, it is almost certain that one of them will start a price war. Unless, that is, they form a cartel – which would be illegal.
Once again, the government is getting dangerously close to entertaining the idea of price controls
British supermarkets are certainly not a cartel. As Dominic Lawson notes in the Sunday Times this week, Tesco’s profit margin is 3.8 per cent. Aldi’s profit margin is just 0.25 per cent. He compares this with Unilever’s 16 per cent, the utility companies’ average of 10 per cent and mobile phone companies’ 15 per cent.
The Competition and Markets Authority (CMA) doesn’t think the supermarkets are a cartel either, nor do they suspect overt collusion. But they do think there is something fishy about their petrol and diesel prices. According to a report released yesterday, motorists are paying 6p a litre more than they should. The CMA’s estimates – and they are only estimates – suggest that their margins on petrol and diesel have risen from 4.4 per cent to 7.6 per cent since 2019.
Grant Shapps and Jeremy Hunt have been jumping up and down about these ‘rip off retailers’. Shapps has promised to set up a website where people can check the price of fuel in petrol stations nationwide (a nice idea, but such websites already exist). There is even talk of setting up a new quango to oversee fuel prices.
There is more to this than the familiar complaint that petrol stations are quick to increase prices when the price of oil goes up but are slow to cut them when it goes down. The CMA claims that the higher margins are proof that there has been a weakening of competition in this market – and among the supermarkets in particular – in recent years.
For their part, the supermarkets have offered two explanations for raising fuel prices. Firstly, they say that low fuel prices have always been used to get customers into their stores to do their grocery shopping, but that motorists are increasingly using them for cheap fuel and then shopping elsewhere. Secondly, they say that as the market for food has become more fiercely competitive, they have decided to cross-subsidise groceries through higher fuel prices.
This seems plausible, even desirable, and it is consistent with the fact that Aldi and Lidl (which do not sell fuel) have been putting downward pressure on grocery prices. It is also consistent with the fact that the increase in fuel margins began in 2020 when petrol prices, oil prices and inflation were all low, not in 2022 when they were high. Demand for fuel plummeted in the first year of Covid and online shopping went through the roof. With less petrol being sold and fewer people driving to the supermarket, luring customers in with cheap fuel became a less viable proposition.
As an explanation for higher margins at the pumps, this strikes me as more plausible than one of the world’s most cut-throat industries suddenly becoming a passive cartel. Yet the CMA are having none of it.
The CMA accept that cheap fuel is not pulling customers into the stores like it used to, but says that this is not enough to explain the rise in margins. In response to the claim that supermarkets are using higher fuel prices to make their food cheaper, the CMA essentially says that this isn’t their problem because they are only interested in fuel in this report. Having dismissed the first explanation and ignored the second, they do not consider the possibility that the two explanations combined could explain the higher margins.
The CMA is particularly displeased with Asda because it ‘took a decision in 2022 to achieve higher margins by reducing prices in some of its PFSs [petrol filling stations] more slowly than would previously have been the case’. It acknowledges that Asda has traditionally been the cheapest place to buy petrol and diesel. The CMA’s beef is that Asda realised that it could increase its fuel prices and still be the cheapest place to buy petrol and diesel. Since other retailers use Asda’s prices as a reference, the CMA argues this had led to higher prices across the board.
As a motorist, I would rather Asda had not done this, but Asda is not a charity and it is no business of the Competition and Markets Authority if the cheapest retailer in the market decides to make its product slightly less cheap. This is not anti-competitive or monopolistic behaviour in the least. The CMA is essentially saying that Asda must not only sell petrol and diesel at a lower price than its competitors, but that it must sell it at a substantially lower price.
This is regulatory over-reach. Once again, the government is getting dangerously close to entertaining the lunatic idea of price controls, using trumped up charges of profiteering to distract attention from the epic splurge of money-printing that was the primary cause of inflation in the first place.
It is true that petrol and diesel prices are higher than they were three years ago, but then so is the price of oil. In real terms, petrol and diesel prices are cheaper than they were ten years ago. The price of oil and the price of motor fuel follow each other remarkably closely, albeit with a slight lag. Meanwhile, the biggest component of the price of a litre of petrol is neither the oil nor the retailer’s profit. It is the tax.
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