It's time to let duopolists battle it out

Is the ACCC suing Coles and Woolworths for not engaging in a price-fix? It certainly looks that way.

On December 6, Coles and Woolworths undertook that they would stop competing on their petrol discounts and both offer only 4 cents a litre off. It was a price fix, officially sanctioned, and both grocers appeared to be only too happy to go along. They had been cutting each others' throats, to little effect.

But they couldn't help themselves, sneakily competing by offering discounts at the convenience stores and bundling those with the supermarket discounts. "Hullo, hullo, hullo", says Mr Plod of the ACCC. "You're nicked, sunshine. Off to the Federal Court". 

This, you must admit, is fairly curious. Most of these undertakings involve companies promising not to collude and fix prices. With this one, it's the opposite. 

The aim was to protect independent petrol retailers from being squashed by the battling elephants. But in fact, the ACCC's own petrol monitoring report shows that since petrol discounts had been offered, the independents, led by 7Eleven, had increased their collective market shares from 17 to 18 per cent – roughly the same percentage by which Coles and Woolworths increased theirs.

The ACCC is also trying to protect independent grocers, especially the IGA chain of franchised stores that is supplied by Metcash. IGA has also been offering petrol discounts of 4 cents a litre via reimbursements. If you spend more than $30 in groceries and present your petrol receipt, they can't afford any more than that, which seems to be why the ACCC fixed it at 4c.

But Metcash and IGA's problems go far deeper than petrol discounts. Cheap milk, for a start, not to mention a smaller range and, usually, higher prices on everything.

More broadly, perhaps it's time to accept that markets with two operators can be perfectly competitive and that, in principle, it is not necessary to protect smaller operators by preventing the big ones from competing with each other.

Australia is a small market. Many industries necessarily come down to two players slugging it out because of the need for some semblance of scale, even though it's not what a global operator would call scale. Is the role of the ACCC really to hold prices up so smaller, less efficient operators can gain some kind of protected foothold in the market? 

The two airlines, Qantas and Virgin, have their hands wrapped around each other throats, strangling each other. Third airlines have never been able to get a foothold in Australia because of competition between the big two, but that doesn't affect prices and customers are well served.

In some industries, duopolists can be picked off by small operators offering higher quality and/or better service at a higher price. That's happening at the moment in brewing in a big way: the two fiercely competing former duopolists, Lion Nathan and CUB, are being slaughtered by dozens of craft brewers making better, non-discount beers.

Our favourite supermarket is an expensive independent to which people, including me, drive across many suburbs to do the shopping, passing several Coles and Woolworths stores on the way. It's popular because the product range and service are much better. Sometimes we drive for miles to get to an Aldi or Costco for the cheaper prices.

In general, the two big supermarket chains have never had much trouble with IGA, but they are being seriously attacked by Aldi and Costco.

And the fact is that Coles and Woolworths are both excellent chains that compete vigorously with each other on service and price, which is why they remain dominant. 

The problem with petrol is that the product is the same everywhere. With the margins so thin, it's impossible for one operator to fund better service than self-service, with one underpaid person in the shop tethered to the counter. 

It's plain that petrol retailing in Australia is very competitive, with six big players: Coles, Woolworths, Shell (now owned by Vitol), Caltex, BP and 7Eleven. The public (and therefore politicians and the ACCC) have always been suspicious about collusion because their prices magically appear to be the same, but that's only because petrol is the one product where the price is on a board out the front of the shop for all to see, competitors as well as customers. Endless investigations have never shown there is any collusion or price-fixing.