The transcript of last Thursday’s Senate Estimates hearing in Canberra reveals SA Senator Nick Xenophon has accused Coles of predatory pricing against SA-owned Drake Supermarkets, which has recently opened a store in Caboolture (see page E8 of the transcript). Questioning the Australian Competition and Consumer Commission (ACCC), Mr Xenophon noted:
In May 2010 Drake Supermarkets, which is a South Australian based company, opened a new store in Caboolture in Queensland. Within a week of opening Coles placed 10 per cent discount vouchers on the windscreens of the cars parked in the Drake supermarket car park. The offer was valid for three weeks, but only for the three Coles supermarkets in the immediate vicinity, as I understand it. We have corresponded with the ACCC and the ACCC’s view was that there was not enough evidence to prove that this was an act of predatory pricing.
Given that the voucher was only promoting discounts at stores in the immediate vicinity, it was not a state-wide discount, does the ACCC consider that that offer was done with the intent of taking away business from Drake, and in a sense to harm it because an across the board 10 per cent discount was not something that presumably would be sustainable across the whole state?
The ACCC officer was not well briefed, as he wasn’t across the particular case that Mr Xenophon has taken up. Still the ACCC officer noted correctly that the low prices would have to persist for a reasonable period of time (at least more than a month) for them to be considering predatory.
Economists have long considered that predatory pricing is unsustainable as a business strategy, because the new entrant (here Drake Supermarkets) would realise that the business cutting its prices couldn’t afford to do so indefinitely, so the new entrant just has to hold its nerve and wait for its rival to put its prices back up.