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When one oligopoly screws another

Understanding Australia's internet shopping tax row

Exchange rate? What’s that got to do with anything?

Over recent months, Australia has experienced a startling appreciation of its currency, compared to the American dollar: around 20 per cent since June 2010. Australian exporters hate it – coal and wheat traded in American dollars fetch fewer Australian dollars than six months ago – while shoppers and travelers love it. Strangely, however, some imports to Australia seem immune to exchange rate fluctuations.

The price of an iPad 64G with Wi-Fi and 3G in June 2010 was $1,049, and it’s exactly the same today; the price of Microsoft Office Professional is unmoved at $849; the price of a 250GB PS3 has declined by just $30 (small enough to be attributed to retailer discounting rather than the rising dollar).

Some products – like the iPad – don’t suffer the same indignities of competitive retail as others, but the way some retail products defy gravity are hard to explain without asking how much control their vendors hold over retail pricing. How this is achieved without breaching laws against “resale price maintenance” (where suppliers or distributors enforce contracts banning retail discounting below manufacturer-set levels) is another question entirely, but in a brief analysis of 37 actions taken by the ACCC against this practice over more than 10 years, we could only identify one case in which an IT company was the target.

There’s much more action in the sports equipment market. Even though it looks more competitive than some IT segments, with lots of suppliers, lots of importers and lots of channels to market, eight of the cases examined by The Reg were against companies manufacturing or distributing sports equipment.

So we’re forced to conclude that either the IT industry doesn’t enforce resale price maintenance (in which case the immovability of retail pricing has some other source, such as monopoly providers who don’t adjust wholesale prices no matter what happens to the currency), or the IT industry manages to write contracts that break the spirit, but not the letter of the law.

The GST distraction

Whatever other factors come into play, it seems clear that Australia’s 10 per cent GST is too small to account for the gap between Australian and American prices.

So why have the retailers left out the other factors, which may have gained them sympathy from their customers, and focused instead on trying to extend an unpopular tax?

It boils down to who holds the power. Although consumers believe that Harvey Norman wields awesome power over its suppliers, Australia really is a small market at the edge of the known world, tacked onto the territory of a minor sales rep who has no real incentive to offer discounts. Whether by contract or simply by controlling supply and having insufficient competition, vendors have far greater power over retail prices in Australia than they do in America.

The vendors don’t have to care at all. If a consumer chooses America as the source of his or her next laptop, the vendor gets a sale – and gets to sidestep the often inconvenient business of providing warranty support, so it probably protects its margin even at a lower retail price. Vendors, in other words, are happy to screw Australian consumers and retailers by price discriminating in favour of other markets.

Retailers – even large retailers – have decided not to rock that particular boat. Rather than risk their vendor relationships by exposing practices that are probably anti-competitive and certainly work against the interests of Australian consumers, the retailers thought that an attack on government would garner more sympathy, more quickly.

They miscalculated. As a result, consumers are more interested in online shopping than ever before. The oligopoly of Australian retail is finding itself betrayed by the oligopoly of international suppliers.

Perhaps, in reassessing their position, retailers might have to consider how much good they’re getting out of their high-profile brand relationships. ®

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