Geographic price discrimination in Australia
What is geographic price discrimination?
Geographic (or 'spatial') price discrimination is a form of price
discrimination. The economic literature identifies price discrimination as
where a firm sells two identical units of a good at different prices, either to
two different buyers or to the same customer.
A common example is the sale of identical tickets to an event which are priced
lower for students and pensioners. Geographic price discrimination refers to
the sale of an identical good (wholesale or retail) or service at a different
price in a different location. It differs from 'price dispersion', which occurs
when different sellers offer different prices for the same good in a given
In a 1987 book on pricing strategy, Dr Thomas Nagle referred to
geographic price discrimination as segmenting by purchase location. He noted
that 'dentists, opticians, and other professionals sometimes have multiple
offices in different parts of a city, each with a different price schedule
reflecting differences in their clients' price sensitivity'. He observed that
many grocery chains classify their stores by intensity of competition and apply
lower markups in localities where competition is most intense.
Dr Nagle also noted that price discrimination by location is quite
common in international marketing. He gave the example of Deutsche Grammophon
which has historically sold its records 'for up to 50 percent more in the
European market than in the highly competitive American market'.
Another example are the region codes applied to DVDs which allow movie studios
to charge different prices in different parts of the world without customers
being able to buy DVDs where they are cheapest. The region codes thereby enable
Supermarkets' pricing policies in Australia
In March 2008, ALDI became the first grocery retailer in Australia to
introduce a national pricing policy across all its stores.
Its website claims that through this strategy, the company is 'keeping things
fairer for all Australians'. ALDI cited a recent poll it had conducted which
found that '83 per cent of Australians were unhappy with the way supermarket
prices vary from suburb to suburb'.
In its submission to this inquiry, the Institute of Public Affairs noted that
geographic price discrimination is widely viewed as being 'somewhat immoral'.
Coles and Woolworths have different arrangements. The head office of the
major supermarket chains sets the shelf prices for most of its products in each
of its stores. It also sets promotional prices, although not all stores
necessarily have the same promotions at any one time. The local store manager
can reduce prices below the standard shelf price in a range of circumstances
including clearances of discontinued stock and stock approaching its use-by
At a public hearing on 28 October 2009, the Senate Economics References
Committee took evidence from both Coles and Woolworths representatives as part
of its inquiry into the GROCERYchoice website. Mr Robert Hadler, General
Manager of Corporate Affairs at Coles, told that committee that Coles gives its
store managers the discretion to compete with their competitors' prices. In
their submission Coles argued that:
Compliance with the Bill for medium to large businesses would
be so onerous that it would create the likelihood of a general reluctance to
engage in existing discounting practices. The Bill would also significantly
affect the ability of retailers to respond quickly to prices offered by their
competitors. Coles considers that preserving the dynamic nature of retail
pricing is fundamentally important to maintaining a highly competitive retail
Compliance with the Bill would necessitate retailers adopting
homogenised prices for identical items across most or even all of their
respective sites. The likely effect of this would be that retailers would
adopt price points at the upper end of their existing pricing bands. This is a
result that would not be in the best interests of consumers.
ANRA told this committee that:
prices within the same chain can be quite different. Having asked our own
customers why this practice occurs, the response that has been given to me by
the national retailers is simply that discretion is given generally to the
store manager to engage in whatever discounting he feels appropriate to be able
to maintain his stock levels. He has a certain degree of freedom in eliminating
certain stock. Head office does not prescribe those costs and in fact probably
does not find out about those costs until they have been reported through the
normal business communication channels. There is this dynamic flexibility at
store level which is simply a managerial function.
The ACCC report on grocery prices
The July 2008 ACCC report into the competitiveness of retail prices for
standard groceries contains an empirical analysis of Woolworths' and Coles'
local store pricing.
The aim of the study was to analyse the effects of local competition in grocery
retailing. The ACCC compared the prices consumers paid for the same products in
different Woolworths supermarkets and, in a separate exercise, compared the
prices consumers paid for the same products in different Coles supermarkets.
It did not compare Woolworths with Coles prices.
The ACCC report found that:
- the local presence of a competing supermarket (Coles or
Woolworths) has a significant effect on Woolworths' and Coles local pricing. In
2007, consumers shopping at Coles stores with a Woolworths supermarket within
one kilometre paid prices that were on average 1.36 per cent lower than the
prices paid by consumers at Coles stores without a Woolworths within five
- the local presence of an ALDI store lowers considerably the
prices consumers pay at the nearby Coles or Woolworths. In 2007, customers
shopping at a Coles store with an ALDI within one kilometre paid prices for
Coles 'ALDI price check items' that were on average around 5.15 per cent lower
than the prices for the same items paid by consumers at Coles stores without an
ALDI within five kilometres;
- Woolworths is moving to more uniform pricing across most of its
stores. As a result, the local presence of a Coles supermarket on Woolworths
local pricing was smaller in 2008 than in 2007. The local presence of an ALDI
store still affects Woolworths' local pricing but only for those products that
have not been subject to more uniform pricing;
- Coles head office sets lower prices for certain products in
stores that have an ALDI store in close proximity. These are mainly products
that Coles considers to be comparable to products offered by ALDI; and
- local pricing of Coles and Woolworths' supermarkets has been
influenced by discounting to attract customers to a new store, higher
transportation costs for remote stores and varying costs of sourcing and
distributing products from local distribution centres.
The ACCC noted that while there is a high degree of standardisation of
shelf products across stores, the major supermarket chains:
...do vary these prices based on factors including freight
costs (especially for remote stores) and the degree of competition.
The continuing presence of geographic price discrimination is indicated
in the GROCERYchoice website which was established by the federal government in
August 2008 to monitor and compare grocery prices for typical shopping baskets.
The ACCC collected grocery price information in 61 regions across Australia.
The website—which has now been discontinued—explains that the regions were
established 'to ensure GROCERYchoice is relevant to all Australians' by
reflecting 'the lifestyles and shopping practices of Australian consumers'.
The practice of varying prices for the same product between regions is
also apparent from the websites of Coles and Woolworths. Both companies'
websites offer their catalogues and weekly specials by requiring the user to
enter a postcode. Prices may differ according to the postcode, although the
basis for these differences is not clear.
As part of its inquiry into the GROCERYchoice website, the Senate
Economics References Committee asked Woolworths to comment on the discretion
that individual store managers have to vary their prices (other than
discounting perishables). Woolworths responded that its:
...store managers can match a price on any product they think
places the store at a competitive disadvantage (compared to other retailers in
the area) in particular remaining competitive on key value items.
The References Committee also asked Woolworths the extent of, and the
reasons for, cost differences in the price of products sold at its different
chains. Woolworths responded that while 'it has many thousands of products with
uniform prices', these are mostly for dry grocery items. For fresh foods, such
as fruit and vegetables:
...prices frequently and unpredictably fluctuate on the basis
of factors such as availability, quality, competition, stock levels, etc. Thus,
despite Woolworths’ uniform national pricing, the base price fluctuates over
the course of each week with the prices of over thirty percent of products moving
up or down at various times in different stores to reflect factors such as
supplier cost changes, weekly or daily specials, competition matching centrally
or at individual store discretion etc.
A separate analysis seems to support the finding that prices differ more
for fresh fruit and vegetables than for packaged produce. On 10 May 2008, Mr
Craig Kelly, President of the Southern Sydney Retailers Association, recorded
prices for a basket of 26 fruit and vegetables at Woolworths in Fairfield in
western Sydney and, an hour later, at the closest Woolworths in the
neighbouring suburb of Greystanes. Mr Kelly's bill at Woolworths in
Fairfield came to $45.72. For the same items at Woolworths in Greystanes, his
bill was $105.54.
Mr Kelly noted in his submission that the quality of the items he
purchased at both supermarkets was identical. He gave the example of a one
kilogram bag of red onions which had the same packaging, labelling, barcode and
use by date with the Woolworths in Greystanes charging a 112 per cent higher
price than the Woolworths in Fairfield.
Mr Kelly noted in his submission and in verbal evidence to the committee
that the low prices in Fairfield had driven a neighbouring independent green
grocer out of business. Twelve months later, in May 2009, he returned to
Woolworths in Fairfield to purchase the same 26 items. He found that Woolworths
in Fairfield had increased its prices 'on average 80 per cent after the
independent was driven from the market'.
The committee has some concerns with this research. In particular, the
2008‑09 comparisons for Woolworths Fairfield are inflated by a few items
which should probably have been excluded from the analysis. For example, the 80
per cent increase in prices across the basket as a whole includes a 181 per
cent increase in the rice of Navel oranges, a 231 per cent increase in the
price of longans and a 436 per cent increase in the price of garlic. 
Petrol retailers' pricing policies
In its December 2007 report into petrol prices, the ACCC noted that
wholesale prices available to customers in Australia vary considerably. The
report noted various reasons for these price differences including the
discounts and more favourable terms offered to larger players and the exclusive
supply arrangements between the supermarkets and respective suppliers.
The ACCC report also recognised that geographic price discrimination
exists as some petrol retailers adopt strategies to capitalise on the lesser
competition in some areas. It noted that:
Company data also shows that margins in regional areas are
generally higher than in metropolitan cities. Higher margins in country areas
has affected the strategy of some businesses such as United Petroleum, which
states that it is looking to expand its business by focusing on regional rather
than metropolitan sites because there is less competition, lower volumes and
higher margins in regional areas.
In his submission to this inquiry, Associate Professor Zumbo noted that
the website www.motormouth.com.au shows:
...that the same oil company and Coles and Woolworths operated
service stations sell petrol at different prices at different locations, not
only across a geographic area, but also along and across the very same street.
These price differences reflect local competition, with lower prices being
found in price competitive local markets.
He noted that the data from the website revealed 'no
necessary link' between lower retail petrol prices and a service station being
closer to a terminal or refinery, and no necessary link between lower retail
prices and 'lower cost' suburbs having lower occupation costs.
At the public hearing on 25 September 2009, the National Association of
Retail Grocers of Australia (NARGA) tabled two photographs of Caltex/Woolworths
petrol stations on opposite side of Parramatta Road in Burwood, Sydney. NARGA
estimates that the two locations are 'about 70 metres apart'.
The first photograph, taken at 12.15pm, showed the price of 'Discounted
Unleaded' fuel at 125.9 cents a litre. The second photograph, taken at 12.16pm,
showed the price of 'Discounted E10' at 122.9 cents a litre.
Mr Ken Henrick, Chief Executive Officer of NARGA, added:
The picture we did not get was when we were going back to our
office in fairly heavy traffic and could not stop, but there is another
Woolworths service station at Roselands on King Georges Road...The price there
was 109.9, the reason being that it is right next door to a Mobil service
station. The petrol price inquiry which the ACCC conducted said that the
average profit margins for the petrol industry are 4.9 cents per litre. So that
is a difference between the Roselands store and the other two of 13 or 16 cents
per litre, which would seem to suggest that it may be predatory.
NARGA argued in its submission to this inquiry that the large petroleum
retailers 'appear to have a substantial price advantage' in addition to which
'they can adjust their prices across the outlets they control to apply
competitive pressure as and where they choose'. It gave the example of a petrol
retailer charging higher prices at its stations along the Princess Highway the
further south from Sydney they are sited.
The Service Station Association claimed that its members are 'particularly
disadvantaged' by geographic price discrimination. The Association noted that
the large industry participants have large and widespread networks of outlets
It is common practice for them to vary the price at which
they sell their petrol to suit the nature of competition at each location. It
is the norm, and has been for quite some time, that the large retailers will
set lower prices in more competitive areas and higher prices where competition
is absent. The key point here is that the price is determined by the
competitive nature of the market, not by the socio-economic status of the area.
For example, the lower north shore of Sydney maintains a competitive price
structure even though it has a very high socio-economic status. It exists
because of diversity of competition in the region.
The Association claimed that large retailers could subsidise lower
prices in competitive areas by setting higher prices in areas of ineffective
competition. It alleges that the common effect of this cross subsidy is that
independent operators are priced out of the market. However, the Association
was cautious in its support for the bill, calling for an examination of similar
legislation in other jurisdictions to check for any unintended consequences. It
also expressed concern that the bill would involve high compliance costs which
may outweigh the benefits of the legislation.
The committee believes that the Blacktown Amendment, and the issue of
geographic price discrimination, reflects legitimate concerns about the
concentration of Australia's retail grocery and petrol markets. There is an
important debate about the costs and benefits of having only two players owning
a significant share of Australia's retail grocery market, and addressing the
barriers to entry of new Australian and foreign competitors.
In this context, the committee welcomes the recent moves by the ACCC to
remove restrictive clauses in rental tenancy agreements in shopping centres.
More consideration should be given to similar types of reform with a view to
encouraging greater local competition for the major chains. It is encouraged by
the federal government's recent announcement that it will work through the
Council of Australian Governments to free up restrictive planning laws. The
available empirical evidence suggests that the presence of a second and third
competitor in close proximity can deliver lower prices for consumers.
The lack of adequate research
The committee is surprised how little conceptual and empirical work has
been done on the economic theory of geographic (or 'spatial') price
discrimination in retail markets and its welfare effects. As Phlips has noted:
'discrimination might be as common in the marketplace as it is rare in the
To the committee's knowledge, there has been no comprehensive empirical
study in Australia of the extent of, or the reasons for, geographic price
This inquiry has produced some claims as to why a company might price
differently at its different sites:
- Coles listed several factors in its submission including freight,
utility, rent and wage costs, different wholesale prices in different regions
and 'subtle quality distinctions' for fresh food;
- Woolworths downplayed the influence of freight costs, noting that
'only a handful of Woolworths stores in the remotest parts of Australia have
marginally higher prices due to the extra transportation required';
- ANRA explained price differences across stores in terms of stock
management, with store managers given discretion to price according to the
supply and demand for a product at the store; and
- Associate Professor Zumbo, NARGA and the Southern Sydney
Retailers Association saw the rationale as the company wanting to maximise its
profits by keeping prices high in uncompetitive locations and lower in areas of
These explanations may all have merit. However the committee has had
very little evidence of either a qualitative or quantitative nature to indicate
why a company does vary its price from one store to another. Without this
analysis, it is difficult to quantify the problem that the bill seeks to
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