German officials have instructed Wal-Mart and two other indigenous retailers to stop holding down prices below wholesale. This no doubt sounds counter-intuitive to most Americanas, since everyday low prices (EDLP) is the cornerstone of Wal-Mart’s raison d’etre. But for consumers, there is “too much of a good thing”, and that’s the heart of the Wal-Mart paradox. The major American media took this story about the German Cartel office slapping Wal-Mart’s hands, and ran headllines like “Wal-Mart told to raise prices.” The Germans determined that Wal-Mart had been selling milk, butter, flour, cooking oil and other products below cost on a regular, sustained basis. The last phrase is the key: on a regular basis. The Cartel office said: “The material benefit (of below cost pricing) to consumers is marginal and temporary, but the restriction of competition by placing unfair obstacles before medium-sized retailers is clear and lasting.” Here’s the Wal-Mart Paradox: EDLP are based on healthy competition in the marketplace. Competition among relative equals is more likely to resemble competition, than among unequals. Yet as Wal-Mart enters a market, and its “never be beat” list of 1,000 products or so begins to work its effect, ironically Wal-Mart becomes the engine that destroys competition, rather than fostering it. This is essentially what the Germans are upset about: Wal-Mart’s below cost pricing gives the consumer a short high, followed by a “clear and lasting” harm. American reporters spun this story to make it sound like German law was “heavily tilted toward protecting small shopkeepers”, and made Wal-Mart sound like the victim. The reality is just the reverse: In this country, you need an army of anti-trust lawyers, a small fortune, and years of patience to attempt to bring a predatory pricing suit against anyone. The Germans have an easier time labeling predatory pricing for what it is: anti-consumer. The Cartel Office, after all, only listed 19 staple products that they objected to, and only 6 of them sold by Wal-Mart. Achtung, Wal-Mart. The Germans are on to you!
Stories have been circulating for months that Wal-Mart has not been having an easy time with the complex German bureaucracy, with its regulations and limits on store hours, etc. The German officials went on to describe why they took the action against Wal-Mart: If allowed to continue, a policy of selling below cost could push smaller stores out of business, clearing the way for the big guys to raise their prices in the future. That’s the irony, the paradox of Wal-Mart. We consumers need the regional and smaller merchants to create competition in local markets. If Wal-Mart succeeds in making “our competitors eat dust”, then it is the consumer who ultimately eats dust, as those everyday low prices become everyday mediocre prices. The smaller merchants are needed as breaks against Wal-Mart’s dominating presence in small markets. So the German action, taken to help consumers, to many people in America sounds like an action that hurts consumers. The paradox of asking to raise prices to ultimately keep prices competitive is not likely to sink in to the 100 million Americans who disgorge their incomes at the Wal-Mart shrine each week. And to the American media, Germany is just a “highly regulated” economy with unhappy shoppers. All Wal-Mart was willing to say was they would “orient our pricing in line of these recommendations” but cynically added that Wal-Mart “remains committed to lowering the cost of living in Germany.” Apparently German officials saw it just the opposite: that Wal-Mart means a clear and lasting damage to retailing competition. You won’t find the Federal Trade Commission being as blunt-spoken as that.
