An assortment of bread products made by Weston Bakeries and Canada Bread, purchased at Loblaw. Despite the grocer and parent company George Weston paying $500-million for their deeds, relative bread prices remain about 25% higher than before the period of price fixingJ.P. MOCZULSKI/The Globe and Mail
D.T. Cochrane is the senior economist with the Canadian Labour Congress and former policy analyst with Canadians for Tax Fairness.
The story of bread sellers colluding to fix bread prices has been resurrected by the recent news that grocery giant Loblaw Cos. Ltd., and its parent company George Weston Ltd., settled a class-action lawsuit for their role in the scandal.
Although the formal collusion to fix bread prices has ended, there are reasons to doubt that Canada’s bread market is now competitive.
From 1985 until 2001, bread prices increased by 2.3 per cent per year. This was essentially in line with grocery prices overall. Then, during the price-fixing scandal, bread prices increased 50 per cent more than other groceries. Since the price-fixing ended, relative bread prices have fallen. However, prices remain 25 per cent higher than before bread sellers conspired to fix prices.
This fact raises questions about how not only bread prices, but all prices, are set.
In May, a loaf of white bread cost $2.93 in Ontario, $3.39 in Saskatchewan and $4.04 in Newfoundland. Why? Were these prices really set by the invisible hand as theorized by orthodox economists?
The recent bout of high inflation experienced in Canada, and around the world, drew attention to pricing with various claims about what was driving pricing higher. Was it strictly due to higher costs induced by supply-chain disruptions? Was it the outcome of large increases in government deficits? Was it greedy corporations gouging customers?
Loblaw, parent company George Weston agree to pay $500-million to settle bread price-fixing lawsuits
After $500-million Loblaw price-fixing settlement, lawyers set sights on other industry players
Most adhere to the theory that prices are set by the invisible hand of the market. In the parlance of Econ 101, all market participants are “price takers.”
But what about when we’re not all price takers? How are prices set when some are price makers?
A recent study from the Competition Bureau found evidence that corporate pricing power has become greater over the last two decades, with increased market concentration playing an important role.
Even in the absence of a complete monopoly, market concentration facilitates price co-ordination. With fewer major players, there is less risk that one of the players will defect and attempt to undercut established prices. Formal collusion, of the sort exposed by the bread price-fixing scandal, is just one way that nominally competitive companies can co-ordinate prices to their mutual advantage. There are forms of tacit collusion, such as a strategy of “follow the leader,” where one dominant firm hikes prices as a signal to its competitors, who then follow suit.
However, as David Dayen and Lindsay Owens write in The American Prospect, concentration is just one element of current price-setting. They also describe the increased use of technology to set prices, as well as the exploitation of tumultuous economic conditions induced by the pandemic.
The use of algorithmic pricing by online merchants, which tailors the price that each potential buyer sees based on information collected about that buyer, is getting increased scrutiny. However, it is not just companies with access to digital data about their customers that exploit data to set prices advantageously. Information about prices in different markets gets compiled by research companies and used by sellers to co-ordinate.
Companies have an obvious incentive to charge customers the highest price they can. At the same time, there are obvious limits to how much they can charge. Where do those limits come from and how do we ensure they benefit consumers? Orthodox economists insist that competition is the singular mechanism to ensure that prices are set fairly and efficiently. However, competition may not always be the best answer.
For example, when Loblaw pushed back on Frito-Lay’s attempt to increase the price of chips, it was only able to do so because it is a major player who could stand up to the large U.S. company. Of course, it is not clear that this clash was resolved in the best interest of consumers.
We need much greater transparency of how prices are actually set, especially in concentrated markets. Why are bread prices still 25 per cent higher than before the price-fixing scandal? Are bread sellers just being more subtle in their co-ordination? Or is it because the price of flour has increased? If so, why? Maybe the price of wheat has increased.
Only when we have better information about how prices are being set can we determine if they are being set fairly.