The Reykjavik District Court has ordered Hagar to pay ISK 315 million in fines for abuse of market position.
The District Court has upheld a Competition Authority ruling from December 2008 that Hagar should pay a fine of ISK 315 million (USD 2.45 million) for abusing its leading market position. The fine is the biggest such punishment ever handed out in Iceland.
Hagar runs large Icelandic retail chains including Bonus supermarkets.
Hagar’s national share of the grocery market is over 50 percent; and over 60 percent in the Reykjavik region. The company broke competition laws by selling certain products at below cost price – especially by selling dairy products far below their true cost in its Bonus stores in response to a competitor’s newly lowered prices on a wide variety of products in 2005, Visir.is reports.
The owners of Bonus put the whole chain into a loss-making position purely to starve out its rivals before putting prices up again, which the Competition Authority felt was against the law.
Kaupass (Kronan supermarkets) and Samkaup (Samkaup, Netto and Kasko supermarkets) hoped to increase their market positions during the 2005 ‘price war’, but Hagar’s tactics ensured that Bonus remained on top.
Arion Banki recently re-floated Hagar on the stock market after taking it over due to the bankruptcy of its former mother company.
So, is what you describe what did happen?
Arrgh! Connection died just as I posted!
On the plus side, I’ve found an Icelandic article on the subject. You can use Google translation:
http://frettir.ruv.is/frett/hagar-daemdir-til-ad-borga-sektina
Anyway, going on the article here, it looks like the others did not sell at a loss, otherwise they’d have been in court too.
Loss leaders are one thing, but perhaps the key here was that the whole chain was loss making for a period of time, not just a few lines.
I am surprised at your point about it being acceptable to drop into loss making if someone else started it, but even if that is the case elsewhere, it’s obviously not in Iceland. Presumably the fragility of a competitive market when the total market is so small and isolated means that they feel that they have to be somewhat stricter to avoid a monopoly establishing.
Not that any of that invalidates your question about insitutional bias. From all I’ve read in the past year or so, it would certainly be possible.
Hey Bromley86,
So, is what you describe what did happen? The others cut only to cost? Or did they also cut to below? This is what I asked. If Hagar was the largest it should have been able to use economy of scale to be able to lower its cost to below the cost bottoms its competitors could lower to, since not buying as much they could not demand as much wholesale quantity discount.
Most places if a dominant firm cuts its prices to loss levels to squeeze out smaller competitors it is illegal, but if they cut their prices to respond to another squeezing them it is legal, even if they drop to a loss level. Those who start price wars and lose should not have government help to reverse their losses to make them wins. As far as lowering prices to below cost, it is commonly done in retail to draw customers. The below cost items are called loss leaders. Customers who come to buy the loss leaders will usually buy other items, too, the profits on those making up the loss taken on the loss leader items. Is this normal practice not legal in Iceland?
The article looks to say the Competition Authority and the courts took a side in the price war, and fined Hagar for being biggest and for winning the war. My question is, is this what happened?
suggests Hagar’s competitors began the ‘price war’ and Hagar responded by cutting prices more, to win the ‘war’.
Well, a price war is not illegal. However, it appears that selling at below cost is, “The company broke competition laws by selling certain products at below cost price.”
Therefore, if the others cut to cost or cost-plus and Bonus cut to below cost, only Bonus broke the law. There was nothing to stop it making use of its market position and selling at cost for a longer period to try to achieve the same result.
The article here, especially where it says,
“Kaupass (Kronan supermarkets) and Samkaup (Samkaup, Netto and Kasko supermarkets) hoped to increase their market positions during the 2005 ‘price war’, but Hagar’s tactics ensured that Bonus remained on top”
suggests Hagar’s competitors began the ‘price war’ and Hagar responded by cutting prices more, to win the ‘war’. Is this what occurred? Did Hagar not start the ‘price war’? And if it did not, were those who started it, or all who cut their prices to loss levels prosecuted? Or was only Hagar, because it was larger and cut lower to win?
If Hagar started the ‘war’, by cutting its prices to loss levels the prosecution and fine would be justified, but if it did only what the others did, but further, would its doing so be wrong while the others doing the same was not?
It is very good that now the authorities are wide awake. Competition is very good but when it is cut-throat eventually the comsummers will suffer and it will be more difficult with the present situation when supply will be greater than the demand. Not everything is available in Iceland. What ever is done must give better chance for the future and that we must learn a lesson from this melt down.
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Good to see the Icelandic authorities focusing on the important things: supermarket fines for selling milk too cheaply 5 years ago. That should ensure another kreppa doesn’t occur.