Supermarkets
turn sour over milk
price-fixing
The UK's big four supermarkets and dairies were accused in September 2007
of anti-competitive behaviour by the Office of Fair Trading (OFT). The OFT
accused these businesses of illegally colluding to increase the price consumers
pay for milk, cheese and butter.
The companies concerned have denied wrongdoing
and claim that that any price increases were handed
down to the farmers. The OFT estimate that the
alleged deal led to consumers overpaying for milk,
cheese and butter by an estimated £270m.
An OFT official commented that "this is a very serious
case. This kind of collusion on price is a very serious
breach of the law." The Competition Act of 1998
prohibits agreements, practices and conduct that
may have a damaging effect on competition in the
UK. If found guilty, those charged could face heavy
fines, although the OFT’s final report on the case is
not expected until late 2008.
In its initial investigation into the dairy market, the
OFT provisionally found that the supermarkets colluded
to exchange information concerning the future prices
of milk, butter and cheese in 2002-3 and that this
was exchanged through the dairy processors. Dairy
processors are the link in the supply chain between
dairy farms and the retail outlets.
The OFT found that, on average, UK consumers
were overpaying by 3p on the price of a pint of milk,
and by 15p on a quarter pound of butter.
Speaking in a radio interview, director general of the
British Retail Consortium Kevin Hawkins insisted
there had been no collusion among supermarkets.
He claimed that the price rises had been made
individually and were part of an effort by
retailers to help raise farmgate
prices, and so secure the supply
of milk for consumers.
Questions
However, dairy farmers have long
complained that the bargaining
power of retail buyers meant that
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they faced pressure to keep their milk prices low
whilst supermarkets were able to increase retail
prices. The supermarkets were making profits out of
selling milk but farmers were struggling to breakeven.
The supermarkets deny that they were giving farmers
a rough deal and pointed to the increased processing
costs of getting milk to supermarkets.
The UK dairy industry is suffering badly. Since 1996
the number of dairy farms has nearly halved, closing
at a rate of 25 a week, while the price that farmers
are paid for milk has dropped by 30 per cent, according
to the Milk Development Council.
What are the reasons for the high level of business
failure? Observers point to fluctuating commodity
prices, massive increases in the cost of running a
farm and unrelenting demand from the UK's large
supermarkets for the best possible terms from farmers.
Define what is meant by price collusion.
Explain how the bargaining power of between suppliers and
customers can affect competition in a market.
There is a high rate of business failure amongst UK dairy farmers.
Outline a possible diversification strategy that a struggling dairy
farmer might implement in order to survive.
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