Friday 1 April 2011

This is one for the X-files (updated)

There have been some seriously weird things said about the price of milk recently but this comment in an article from has to be the strangest yet:
Dairy market heavyweight Fonterra is artificially inflating the price of milk in New Zealand in a deliberate campaign to lessen competition, says an official complaint to the Commerce Commission.
Now I can not for the life of me see how inflating the price of milk can lesson competition. That is just weird. Predatory pricing or limit pricing are anti-competitive but involve lowering the price of a good to force out or keep out competitors. Raising the price of milk would increase the number of competitors; its competition increasing, if its anything.

The stuff article goes on to say:
The allegation, formally laid with the competition watchdog late last week, is understood to have triggered the commission's announcement it is starting an investigation to determine whether a price control inquiry into retail milk is needed.
The Commerce Commission is taking this idea seriously?! I really would like them to explain how increasing your price is anti-competitive.

The thing to keep in mind is that the price of milk in New Zealand will be the world price. For a good like milk the market is the world market and the price is set by supply and demand conditions in the world market. So the correct question to ask is, Are we paying the world price? If so, then there is no problem.

If the article had been published April 1st it would have made a lot more sense.

Update: Matt Nolan at TVHE seems as confused as I am.

1 comment:

Anonymous said...

i think they are referring to the raw milk price, i.e. the amount Fonterra pays farmers. Think of Fonterra as if it was a monopsony.

rival processors need to match this price to entice farmers to leave the cooperative and supply their processing businesses, so Fonterra keeping the price articially high (e.g. hiding dividend payments in the milk payout) keeps the rival processors at bay.