URBAN ZONING RESTRICTIONS AND THEIR EFFECT ON CONSUMERS ON THE BASIC BASKET GOODS

Transcription

1 URBAN ZONING RESTRICTIONS AND THEIR EFFECT ON CONSUMERS ON THE BASIC BASKET GOODS Workshop 3. Capacity Building System for Regulatory Impact Evaluation.- Session 1. Benjamín Contreras Astiazarán Comisión Federal de Competencia Económica November 8, 2013

2 Introduction In 2011 the Assembly of Representatives of Mexico City approved an amendment to the zoning rules, that regulates the establishment of modern, large-scale retail businesses and prohibits the establishments of new self-services stores, supermarkets, mini-supers and convenience stores in certain areas of the city. 2

3 Norma IMPROVING THE CONDITIONS OF EQUALYTY AND COMPETITIVENESS FOR PUBLIC SUPPLY Commercial establishments that intend to engage primarily in the sale of articles that make up the basic goods basket and, in a complementary manner, the sale of clothing an footwear, under the self-service system, with the use of self-service stores, supermarkets, mini-supers or convenience stores, may only be located on premises for which the secondary zoning is mixed residential (Habitacional Mixto, HM), and on street-front properties covered by some road planning standard under the HM zoning indicated in the corresponding official urban development program 3

4 Unconstitutional Action (Challenge) In June 2011, the Federal Government challenged the Norma 29 at the Supreme Court. On August 3, 2011, the Supreme Court asked the Federal Competition Commission (CFC) to issue non-binding opinion of the Norma 29, as the unconstitutional action challenged the possible violation of constitutional Article 28. The CFC issued the opinion on August 29, This opinion involved a regulatory impact assessment (RIA). 4

5 Given that CFC had limited time to prepare the opinion, we used data from public sources (i.e. Ministry of Economy of Mexico City, Banco de México, and INEGI.). We also used some articles and papers on related topics. Banco de México processed some information at our request. We used as well some international experiences. 5

6 It is an useful analogy to view the opinion as RIA of the regulation with special focus on social welfare, particularly consumer welfare. It is also useful to assess the possibility that the regulation (any regulation) might be promoted by special interest groups, and it might be a mechanism to redistribute resources from consumers, and others, to these interest groups, but it is not a zero sum game. The CFC was viewed by the Supreme Court as the official institution in charge of applying the constitutional mandate for protection of the competition process. 6

7 Effects of the amendment to the zoning rules Create an advantage for businesses that do not fall under the self-service system and protects them against competition from businesses that would find entry profitable. (Inhibit new entrants) Give an advantage to supermarkets and other self-services businesses that are already located in restricted zones. (unduly benefit incumbents) Inhibit the incentives for traditional establishments that sell products forming the basic basket to become more efficient by lowering their cost.. 7

8 Competition in the retail distribution of consumer goods The retail supply of food, clothing and other essential goods through commercial establishments is characterized by a high diversity of marketing formats. Similar products may vary in price as a result of the merchant s business strategies. Business Trademark Formats exhibit great price variability Promotions Presentation A competitive market in which there is free access and freedom of format and marketing strategies can boost business an investment opportunities for economic agents an generate benefits for consumers, especially those in precarious economic situation. 8

9 Types of formats in the retail distribution of consumer goods Banxico, by June 2011 in Mexico City: 9,000+ items, in 283 concepts of expenditure*. Format type Quantity of items % Club de precios % Mercado Público 1, % Subsistema % Supermercado 3, % Tianguis o comercio informal % Tienda de Conveniencia % Tienda departamental 1, % Tienda especializada 2, % 9, % * It is important to mention that sampling was done to obtain a representative sample of prices. 9

10 Competition in the retail distribution of consumer goods The benefits of multiple formats comes from lower prices through more competition, but also from an offering of wares better adapted to consumer needs. The absence of certain marketing formats implies a loss of options and the generation of additional search costs for consumers. Competition policy should protect the process of competition rather than the private interests of participating firms. In this respect, the fact that new economic agents, regardless of their size, attempt to penetrate a given geographic area will benefit consumers, as it will generate competitive pressure and efficiency enhancing pressure in markets and consequently yield greater options, better quality, and lower prices. 10

11 Empirical analysis of market prices and conditions Data from the Ministry of Economy of Mexico City An analysis of retail prices for various products in commercial establishments in Mexico City suggests that in all likelihood, the impact of the Norma 29 will be negative. The conclusion emerges from the Comparative analysis of prices for products and articles of the basic basket published by the Ministry of Economy of Mexico City between 2002 and That comparison was published in order to shed light prices. The basic basket consisted of 10 groups of products*. More than 900 products were rated. 11 * (i) Oil an fats; (ii) Personal care an hygiene products; (iii) Household cleaning articles and accessories; (iv) sugar, coffee and beverages; (v) poultry, pork and beef; (vi) fruits an vegetables; (vii) dairy products and eggs; (viii) bread, tortillas and cereals; (ix) fish and seafood, and (x) delicatessen goods.

12 Empirical analysis of market prices and conditions Data from the Ministry of Economy of Mexico City An initial analysis data shows that in November 2007 *, 85.5% of products listed were offered at a lower price in supermarkets or self-service stores. The lowest price was to be found at the central wholesale market (Central de Abastos). * Last report published Number of products 994 Supermarkets an convenience stores 85.5% Central whole market 11.3% Public and street markets 3.2% Source: D.F., Sedeco. (2007). Comparativo de Precios de Productos y Artículos de la Canasta Básica. Available at http//: (15/08/2011) 12

13 Empirical analysis of market prices and conditions Data from the Ministry of Economy of Mexico City This figure illustrates the long-term trend in the percentage of minimum prices reported by the Mexico City s Government by type of establishment. Lowest prices by type of establishment % Formats restricted by the Norma 29 13

14 Empirical analysis of market prices and conditions Data from Banco de México (Banxico) CFC also analyzed the information supplied by Banxico on prices* in Mexico City establishments. The data analyzed consisted of 1,873 observations of products prices in various types of establishments in the first half of Supermarket prices were compared with those of all other businesses taken together (public markets, street vendors, grocery stores and specialized business). 14 * That information was originally used by Banxico to calculate the Consumer Price Index, and so it can be considered a representative sample of prices in Mexico City.

15 Empirical analysis of market prices and conditions Data from Banco de México The results shows that supermarkets are the lowest-price option for consumers in the case of nearly half the products investigated. Percentage of lowest prices in supermarkets v. other stores January 48% February 48% March 47% April 51% May 50% June 50% 15

16 Empirical analysis of market prices and conditions Data from Banco de México Percentage of lowest prices observed in supermarkets v. each type of store (2011 data) More over, when we analysed the data by type of business, we found that the supermarkets format offers the lowest prices in approximately half of the products surveyed. 16

17 . Empirical analysis of market prices and conditions Data from Banco de México Grocery and convenience stores* offer a limited variety of products. In the Banxico survey there are 32 products that are sold both in supermarkets and in convenience stores. The supermarkets have lower prices for around half the products classified as groceries, while convenience stores have lower prices for fruits and vegetables. Frecuency of lowest prices in supermarkets vs convenience stores 17 *(Banxico groups traditional corner stores and their modern chain equivalents together under the heading convenience stores )

18 Empirical analysis of market prices and conditions Data from Banco de México/ENIGH The following table compares household expenditure on each of these products and the prices charged for them in supermarkets and other types of store. As will be appreciated, in half the cases the lowest price for the product considered is to be found in the supermarket. Impact on low-income consumers (lowest prices shaded) 18

19 Other empirical evidence A study showed that: In Mexico, 30% of the household budget was spent on 14 products and services for which markets could suffer from to little competition; In those markets, the exercise of monopolistic or oligopolistic power could impose an additional cost to the consumers or around 40% with respect to their current expenditure. This situation is worse for the poorest population groups, as their outlays on the product considered are proportionately greater: up to 40% of their total budget in the case of the lowest income decile. Some products offered in establishments that sell items of the basic basket, such as tortillas, processed meat, sugar, chicken, eggs, milk, soft drinks, juices and water, figure among the 14 products indicated in the study. The Norma 29 would exacerbate the loss of welfare occasioned by the lack of competition that can exist in markets for those products, especially for the poorest population. 19

20 Conclusions The provisions of the Norma 29 are harmful to the competition and contrary to the public interest and consumer welfare. The Norma 29 generates exclusive advantages for establishments that sell products of the basic basket, as well as creating barriers to new entrants. Provisions such as Norma 29 inhibit free competition by restricting the number of establishments, their format, their marketing strategy and their location. Restrictions allow businesses to avoid finding ways to offer their wares more efficiently. 20

21 Supreme Court s judgment In June 2013 the Supreme Court declared unconstitutional the Norma 29 as it: Inhibits competition process, which violates the constitutional Article 28. It defines the location of new self-service establishments (supermarket and convenience stores) as it can only be installed in urban zones, such a restriction is unjustified. Excluded grocery stores. Therefore, prohibits new self-service system of the permitted areas for groceries, which inhibits competition process. The geographic exclusion of players in certain areas inhibits competition process. By allowing grocery stores dominate the market, it implies that they exert influence on prices of these products. 21