NOTES OF CASES
| Published date | 01 July 1978 |
| DOI | http://doi.org/10.1111/j.1468-2230.1978.tb00812.x |
| Date | 01 July 1978 |
NOTES
OF
CASES
PRICE
COMMISSION REPORT ON CADBURY
SCHWEPPES
FOODS
LTD.-
GROCERY
PRODUCTS
The control
of
price discrimination
THE Price Commission has been given power by the Price Com-
mission Act
1977
to make reports recommending that the Secretary
of State should restrict prices and charges
so
far as appears to
the Commission to be consistent with the making of adequate
profits by efficient suppliers of goods and services. In its
Report on
Cadbury Schweppes
Foods
Ltd.-Grocery Products,l
it concluded
that the prices charged by a particular subsidiary were not exces-
sive, but the Commission did disapprove of two pricing practices
widespread in the grocery trade
on
the ground that they were
discriminatory.
Overall
Profits
The amount of the price increase notified to the Commission
by C.S.F. for a wide range of grocery products was due in large
part to the very large increase in its cost of buying cocoa.2 The
Commission found, however, that the company had
on
average
over a period
of
years managed to buy at prices significantly below
the market level and had not sought to take advantage of this by
raising the prices of cocoa-based products to the full extent the
market would bear. It looked to C.S.F.'s profits expressed both as
a percentage of turnover and of capital em~loyed,~ but in looking
to the overall level of profit used the latter figures, presumably
because profit
on
turnover is irrelevant unless it is known
how
fast
stock is turned over. The Commission found that the percentage
rate of profit
on
capital employed was far lower than the percen-
tage for 'the Cadbury Schweppes group as a whole and, more to the
point, it also found that
in
1974
and
1975
respectively,
C.S.F.
had
earned profits of
4.6
per cent. and
5.4
per cent.
on
capital
employed, when the average for quoted companies in food manufac-
ture and distribution was
15.85
per cent. and
17.47
per cent. Con-
sequently, it is not surprising that the Commission found that
1
March
13, 1978,
H.C.
293.
2
Consequently the increase was allowed in
full
pending the investigation under
the Prices and Charges (Safeguard
for
Basic Profits) Regulations
1977
(S.I.
1977
No.
1282).
Even had the Commission condemned the increase as excessive, the Secretary
of
State could not have ordered the price to be rolled back. The increase
in
the
price
of
drinking cocoa was
54
per cent. although the weighted average for all
the
products supplied by the subsidiary was only
7.4
per cent.
3
i.e.
the profits
of
the subsidiary. Although products supplied to
or
by other com-
panies in the group were charged at
full
costs, without any profit margin, an adjust-
ment to capital costs to allow
for
this would result in an increased return
of
only
0.2
per cent.-para.
6.14-21.
In several
of
its investigations the Commission has looked to the level
of
profits
expressed as a percentage
of
capital employed.
464
July 19781
NOTES
OF
CASES
465
profits were not excessive. Since it considered that the subsidiary
was efficient, it followed that prices were not excessive. Since the
company being investigated was earning such modest profits the
problems of evaluation were not as acute as they might have been
had the company been more profitable.
Neveatheless, the writer is very sceptical about the ability of
any outside body to assess the efficiency of a firm, except at the
extreme, and the Price Commission unlike the Monopolies Com-
mission, has only three months for its investigations.' The prob-
lems of deciding what rate of profit would suffice 'to attract effi-
cient firms into the industry are
also
fraught with difficulties:
the assessment of
a
premium for risk; the valuation of capital in
periods of rapid inflation; the apportionment
of
joint costs and
profits between the products and market subject to the inquiry
and those not
so
subject; and the ascertainment of the level
of
profits earned by competitive firms.'
Price Discrimination
My
reason for writing about this particular report, however,
is
the Commission's suggestion that
the
food manufacturing industry
in
general should consider two examples
of
price discrimination.
"
5.1
1
Section
2
of the 1977 Act requires
us
to have regard
to
efficiency and competition; the structure
of
prices
set by a firm
with market power may have adverse effects on both. Ineffi-
ciency may
arise
when prim are not
based
on costs, and while
firms in competitive markets may charge different prices
if
the
cost of supply
so
justifies, they will not be able to make custo-
mers or groups of customers contribute disproportionately
to
their profit targets. Because the costs
of
supplying the three
types of customers
'
differ considerably we think it more appro-
priate to examine profitability by customer group, rather than
the prices charged, and
this
we
do
in
para.
6.5.
However, we think
it right to comment on the two components
of
the pricing struc-
ture which seem
to
us to conflict with the objectives set out in
section
2
of
the 1977 Act.8
5.12
The first is the overriding discount? Our view is that
5
The Commission has occasionally acknowledged that in three months, and on a
limited investigation it could not make extensive efficiency audits-e.g.
Tate and
Lyle Refineries Lfd.-Sugar and Syrup Products,
H.C.
224 (1978),
para.
0.4;
and
British Railways Board-Increase
in
Passenger Fares,
H.C.
225 (1978),
para.
0.4.
6
The Monopolies Commission has experienced all the difficulties
listed.
Its
staff
have produced more complete figures than those otherwise published for comparison
of
the
profits
on capital employed on both historic and replacement costs earned
by
various private sectors
of
the economy. The Price Commission, however, took
pub-
lished
figures, and, unlike the Monopolies Commission recently, made no adjust-
ments for inflation. It did however, look to figures on a Current Cost Accounting
basis in
Metal
Box,
cited note
7
below, at para.
4.13.
Ever Ready Company (Great
Brifain)
Ltd.-Dry
Primary Batteries, March
13, 1978,
H.C.
284.
The
latter was one
of
the few reports in which the Cornmission recommended that prices be restricted,
so
it was more important to give the company the benefit of any adjustments that
might affect the result.
7
It supplied dealers, own brands and caterers.
*
The Commission does not refer to any particular criterion under that section.
9
An overriding discount was given to dealers who achieved a target volume.
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