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Local Economy and Monopoly Power.

 

LocalMarket

A question was asked by Em Wierdigan, about Local Economies.

I’ve asked the economics boffins, now widening this out as the figures/references I’m searching for seem to be elusive.

I need to know some simple stats about how much more a £ spent in a local independent shop is worth (compared with big supermarket of coffee chain, for example), also anything about how many local shops/jobs are lost when a big chain moves in.

I know I’ve read some simple figures on this but can’t remember where. I need a link…

Cheers,
@emweirdigan

These were the replies provided by other Occupiers.

A link from Saskia: These are the results of a year-long collaboration between nef (the new economics foundation) and Northumberland County Council, released by nef today, Monday 7 March 2005.
Buying local worth 400 per cent more

David: Hm, enjoyable article. I sympathise with Northumberland, but what if all areas did it?
For a start £1.76 /36p = 489% not ‘nearly 400%’
So follow the logic of the 36p in the £ which comes back when spent externally (repeatedly). It stabilises (chokes off) at about 54p in the £. By the same logic the £1.76 repeatedly spent internally soon spirals to infinity and if we all had local trade barriers – let’s say for each Local Authority, we would all soon become infinitely rich. Something wrong here.

Effectively Northumberland would be making money out of everywhere else, selling Northumberland goods & services, and refusing them the opportunity to make money by selling to them. This is why a moderate amount of ‘free trade’ is a good thing, but not when it is used to legitimise one company forcing another country to abandon health, welfare, environment & employment regulations (TTIP) or ‘dumping’ goods below cost price to break a developing industry.

Arguably weaker & exploited economies (London kind of exploits Northumberland imo (I was born there)) should be allowed a degree of protectionism, although there are better ways to grow their economies. If the Dukes of Northumberland had to pay death duty on their estate the land would get (have got) shared around more &, according to the statistics on size of land holding, become more productive.

Em: David, is it better, in your opinion, that a small town keeps big chains/supermarkets out? If so, why? If not, why not? (Interested to have your mathematical brain shine its light on this subject!)

David Dewhurst: I’m not absolutely sure but that won’t stop me giving an answer. Also if you can’t answer well, answer badly and let other people correct you.

You can split it up; better for the welfare/utility/wealth/conviviality/ecosystem of 1/ the town 2/ humanity & a/ short term b/ long term? … other things being equal.
Arguably the big chain will close down smaller competitors (by initially lower prices) & employ others at lower income levels, and more of the profit will leave the town & go to remote shareholders/funds, as well as suppliers being squeezed, oligopolies growing and less responsiveness to local concerns (standard Walmart effect). So a default response would be keep ‘em out.

Last year Tesco’s moved into Lyme Regis (population 3671). The main greengrocer folded and the other mixed shops (cafes newsagents) selling food have a far narrower range (much less & slightly specialised). Tesco’s seem to employ slightly more people, on less pay looking more miserable. However previously loads of residents drove to the Tesco’s in Axminster (5.2 miles away population 16,500) so Lyme has been effected already. Also the Co-op in Lyme amazingly still survives. Personally I reckon a more ethical co-operative or mutual large organisation can be less malign, but my mum gets most of her pension from the Co-op.

I could go on adding ifs & buts (I’ve been greatful for ‘Tesco Value’ – different demographics may get different impacts) but I think it’s Saturday night. Not sure it’s so much of a mathematical issue as the model you bring to the situation in the first place. Logic is only useful if your assumptions are correct and you don’t miss out anything relevant. This is rare.

Tom Lines: Can I answer Em’s question in a slightly different way? It is that if I was going to London, or Lyme Regis, I wouldn’t start from here. The fact is that big chains and supermarkets are very popular. That’s why they keep on making money and expanding. Taking Dave’s example, one can well imagine many people in Lyme – as well as the Tesco board – thinking, ‘Oh good! Now we can do our weekly shop locally and we won’t have to drive to Axminster for it! Well, that is an improvement! A pity about that nice greengrocer and the newsagents, but isn’t it convenient to buy everything under one roof and load it all into the car at once?’

The problem is one of market power: how it works in this case, who really has the power, who loses out from it, and who is in the best position to do something about it. Conventional theories of anti-competitive behaviour are based on the idea of monopolies (one company controlling a market) and oligopolies (a handful of companies controlling it) – but in either case, at the production (supply or selling) end of the supply chain: the consumer ripped off by US Steel, Standard Oil or British equivalents of them pushing up prices because they faced no competition for their sales. Therefore things like anti-trust legislation in the US and the Monopolies Commission in the UK were created (although they have been much watered down since the Reagan-Thatcher era).

But that is no longer the most serious problem: it is not ‘seller power’ of that sort, but ‘buyer power': on food markets at least – and seemingly a lot of other consumer markets too – the narrowest points on the supply chain, with the smallest number of competing firms and therefore the greatest concentrations of power, are not at the production (farming) end but near the consumer end. In most food markets they are with the retailers, although there are still some products (such as coffee) where processing firms like Nestle and Kraft remain the strongest.

But even then, the pressure they exert is largely forced backwards along supply chains, to the farmers ultimately, in the form of a squeeze on the prices and terms of sale that farmers have to accept. In general, supermarkets are extremely competitive with each other when it comes to getting business off us, the consumers – even though only a small handful of them dominate the market. Because of this ‘buyer power’ exerted by us, the consumers, they stock not only standard products but a lot of ‘niche’ lines such as organic and fair-trade, in order to serve all tastes and income groups. But their profit margins are very low: they make their income out of the sheer volume of sales, and by pushing all the pressure back down the supply chains to their suppliers, and not forwards to their customers. Politically that is very hard to counter, because there are 60 million consumers and only 300,000 farms.

Another factor is the centralised warehousing done by the supermarkets, with all the transporting of goods backwards and forwards around the country between the original supply point, processing and warehouse units and the points of sale, as well as other wasteful uses of energy like open-fronted chill cabinets for products like milk.

I think that basically this is something for the government to sort out, but modern governments don’t want to offend supermarket bosses any more than other corporate bigwigs. Why, the saintly Tony even put Lord Sainsbury on the government’s payroll! (A year or two ago, I received an e-mail from a senior figure in the Fabian Society which referred, with a straight face, to ‘Lord Sainsbury and other left-wingers’!!!!!!) The government ought to break them up, perhaps by insisting on a maximum 10 per cent market share for any company in a major retail sector, and impose a lot of other restrictions on the exploitative ways they do business with their suppliers.

In the US in the last century the federal government did just that, and succeeded in debilitating an early predecessor of Walmart, which had the resonant name of the Great Atlantic & Pacific Tea Company, or A&P. Here is a chart of its number of stores (from Wikipedia):
Year No. of Stores
1863 5
1878 70
1900 400
1915 1,600
1930 16,000
1950 4,500
1970 4,000
1980 2,000
1990 1,000
2000 600
2008 460
2011 338
2012 310
There is a long piece which covers this at http://www.alternet.org/story/39251/the_case_for_breaking_up_wal-mart. It goes into the A&P story near the bottom, reporting:

‘Over the years, the federal government repeatedly hauled the A&P into court for abusing its market power. The government first began to scrutinize the firm in 1915… The final antitrust case against the A&P was not resolved until February 1979, a month after a West German grocery mogul bought control over the remnants of the once-huge firm.’

In 2010 A&P eventually filed for bankruptcy protection – although it evidently emerged on the other side.

Part of the policy should be to insist that supermarkets all sell off any smaller shops they own, like the ‘Sainsbury’s Local’ and so on which have smashed corner shops over the last few years. And local authorities ought to be given strong planning powers to fix a point (which could be zero) beyond which they will not allow any more shops in a retail sector into their area, and other points with limits on their sizes. Each authority could then make its own judgment: is the convenience of having a big store in the town more important or the variety and competition which come with maintaining an independent greengrocer etc? I wouldn’t be dogmatic about that because it’s a balance between one thing and another. Different councillors and their electorates will reach different conclusions, and they should have the right to do so. What matters is to give them the power to make such decisions when they see fit; and to sharply reduce the supermarkets’ market power and make them subject to these democratic controls.

On the question of ‘buyer power’ in food, not just in Britain but globally, download a study called ‘Food, Inc’ at www.ukfg.org.uk/docs/UKFG-Foodinc-Nov03.pdf. It’s by Bill Vorley of the International Institute for Environment and Development. There’s plenty of evidence in there.

    
We are party to our own exploitation.

    
    
LINKS:
Monopoly Power.

 
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