Below-cost legislation: lessons from the Republic of Ireland

Abstract

This article traces the emergence, evolution and demise of below-cost legislation in the grocery industry in the Republic of Ireland. The article adds to our understanding of the legislation by adopting the view that, by using the net invoice price as its definition of cost, the legislation increased two streams of quasi-rents, first on suppliers' brands and second on retailers' own brands, which acted to depress competitive forces and direct supplier–buyer negotiations to off-invoice discounts. Supplier-generated quasi-rents financed discounts and, when coupled with retailers' higher margins on their own brands, provided little incentive for a return to a price-competitive environment. Two factors undermined this situation: the substitution of discounters' products for suppliers' brands as the discounters share of the market grew and the increase in cross-border shopping. These had the combined effect of reducing the available quasi-rents earned in the Irish market, resulting in the breakdown of the status quo and a return to price competition. Through its impact on negotiations, the legislation also introduced inefficiencies to both retailers' and suppliers' businesses, representing additional waste that could have been more productively used to reduce consumer prices. The article endorses the Government's decision to rescind the order and remove an important constraint on both vertical and horizontal competitions. Lessons from the Republic of Ireland suggest that the competitive response to the removal of below-cost legislation, and reductions in prices, may take time and will depend on economic circumstances and a change in the prevailing norms of organisational behaviour and quasi-rent seeking opportunities.