Economics -
Prices
Toy
manufacturer Hasbro was fined almost £5 million
by the Office of Fair Trading for preventing
distributors selling its toys and games below
list price. An OFT investigation found Hasbro and
10 distributors broke competition law by entering
into price-fixing agreements. The distributors in
the case escaped any fines because the OFT found
they had no choice but to accept Hasbro's threat
not to go below the list price. Some of the
firm's best-selling toys were at the centre of
the inquiry, including Action Man, Monopoly,
Pictionary and Twister. In a statement it said,
"We are surprised and disappointed at the
level of the fine imposed by the OFT, which we
believe to be disproportionate.
"The activities cited by the OFT occurred
over a very short period of time and through a
limited number of wholesale distributors.
"Hasbro believes that such activities had no
significant effect on competitiveness within its
small network of distributors or on
consumers." The OFT had initially proposed
to fine Hasbro £9 million but agreed to reduce
it because the company co-operated fully with the
investigation. The £4.95 million penalty is
still the largest the OFT has imposed since it
gained new powers under the Competition Act 1998,
which came into force in March 2000.
The victim culture of
modern Britain has taken wholeheartedly to the
idea that we, the public, are the hapless victims
of a vast conspiracy by manufacturers and
retailers. The Office of Fair Trading ordered an
inquiry into car prices recently or rather, one
should say it ordered "another"
inquiry, since we have had one before without any
obvious result. But after people have fully
indulged their "ain't it awful"
emotions, they generally have not got much of a
theory to explain exactly why prices are so high.
There have been remarkably few serious attempts
to nail down the real reasons.
One suggestion has been that British businessmen
and women have a particular kind of high-margins
mentality. According to this theory, American
culture is such that US businesses "pile 'em
high and sell 'em cheap", but the British
have limited horizons and can think only of high
mark-ups as a way to make money. This
"cultural theory" of high prices tends
to be offered by those who have no experience of
business - or even reporting on business. It is
also unsustainable, being undermined by examples
of supposed business cultures that have changed
when legal, tax and other circumstances change.
A second - similar - theory doing the rounds is
that British businessmen and women are uniquely
greedy. This idea seems to have some bases in
fact: British super-markets do indeed have bigger
profit margins than, for example, French ones.
The profit margin of both Tesco and Sainsbury is
5.6 per cent, whereas the profit margin of
Carrefour, in France, is only 3.8 per cent. That
difference - less than 2p in the pound - does
not, of course, go very far in explaining some of
the much bigger differences in prices. But the
gross profit margin of a business is not the key
thing, as anyone concerned with business knows or
ought to know. The key thing is the return on
equity - ie the return on the capital put into
the business by shareholders. On that
measurement, the British supermarkets are no more
"greedy" than the French.
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