Here in the UK, there is much talk of Supermarkets becomming too powerful and using their power to restrict compeition:
http://news.bbc.co.uk/1/hi/business/7245944.stm
In particular, they are accused of buying up available land near their stores and selling it again with restrictive covenants so as to prevent other supermarkets posing direct competition. My question is this: Do restrictive covenants infringe upon consumer sovereignty? Are they compatible with a free market?
Surely, they enable the powerful supermarkets to restrict supply in a given locality thereby obtaining a monopoly price?
Any means by which an enterprise devises barriers to entry and restricts competition adversely impacts a free market and optimal consumer choice. And that's why a society passes laws that prevent this kind of abuse.
assuming that a supermarket has sold land to buyers with a restrictive covenant, what is the penalty that would apply against the new landowners were they to break the covenant?
p.s. the article you qoute doesnt mention restricted covenants even in passing. it just has supermarkets 'holding' land. which i have no problem with......
I don't know what the penalty is. Does it matter?
And the article I linked does mention restrictive covenants:
The commission is expected to recommend changes to the planning system to combat this problem.These could involve a limit on the length of time supermarkets can keep undeveloped land and stopping supermarkets from imposing restrictive covenants on land to prevent competitors building on it.
These could involve a limit on the length of time supermarkets can keep undeveloped land and stopping supermarkets from imposing restrictive covenants on land to prevent competitors building on it.
In principle restrictive covenants are perfectly compatible with the free market and are to some extent necessary. The question I would raise in this context is what land are the supermarkets buying up? I would expect they are buying quite a lot of "public land" and since the council doesn't own the land they have no justification for selling it; this is the problem not restrictive covenants.
Fried Egg: Surely, they enable the powerful supermarkets to restrict supply in a given locality thereby obtaining a monopoly price?
Not for free. Would it make any difference if the supermarkets only bought and kept the land to themself, renting it out for farming?
Buying and selling property rights, such as the right to build supermarkets, is fully compatible with the definition of the free market.
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Physiocrat: In principle restrictive covenants are perfectly compatible with the free market and are to some extent necessary. The question I would raise in this context is what land are the supermarkets buying up? I would expect they are buying quite a lot of "public land" and since the council doesn't own the land they have no justification for selling it; this is the problem not restrictive covenants.
You cracked it there. If the land was private property, and belonged to say, me, after getting a buyout offer from a supermarkert that wanted to monopolise, I would simply go ahead and contact it's direct competitors, and create a bid-war, whereby the supermarket that plans to use the land, as opposed to just keeping it, would end up bidding more.
"What we do in life, echoes in eternity."
This is a practice that worries me a bit.
I've given it some thought in the context of anarcho-capitalism and covenant restricting the right to provide law / security. The land that we buy now is not that expensive, from that some economists have concluded that land ownership was not a big issue (David Friedman for example). The problem is that the land we are buying now is attached de facto to a monopoly of law.
The land attached to a geographical supermarket monopoly is cheaper because it doesn't have the option to be used as a supermarket, similarly, the land price we currently observe reflect the monopoly of law. Imagine trying to buy in today's world sovereign land. Even though there are hundreds of country, none will sell you even a square meter of sovereign land... ok some might, but you would have to shed billions. This may be an indication of the real price of unrestricted land.
Now for the nightmare scenario. Start with a happy anarchocapitalist society. Private cities form, they rely on a fee to provide services to their citizen. If the fee is too high, the citizens move or at least stop coming. What might happen ? In order to capture externalities and limit competion, the cities might start buying all surrounding land and selling it with a covenant. In fact, the real value of land, that is the value of land free of any covenant might be so high that war becomes economically profitable.
Restrictive covenants are almost universal among anchor tenants in shopping center leases. Any organization that tries to “force” supermarkets not to use them is certainly fighting free market forces. Restrictive covenants are far preferable to zoning and other types of government coercion.
Before a major retailer decides to open a store, they study the demand for their product within various drive times of the prospective store. They then conduct an analysis of competing stores that sell similar products. If there is an excess of demand over supply that justifies the location of a store in the area then they will buy or lease the appropriate amount of space and create a store. Obviously, before undertaking such an investment, the retailer wants to make sure that a competing retailer won’t open up nearby and disrupt their careful calculations.
If the Competition Commission outlaws restrictive covenants, the retailers would need to take the risk of having competing stores open nearby into account in any decision to build a new store. The market will have to support significantly more supermarket space than they are planning to build so that the opening of another supermarket will not decimate their sales. They will create fewer stores and those that they do create will be smaller. Consequently, the efforts of the Competition Commission will result in less supermarket space and fewer choices for consumers.
I'll begin to care about the opinions of these publications when they start documenting all the illicit activities governments perform. Until then, could not care less.
I agree largely with Doug and Physiocrat.
DougM: "If the Competition Commission outlaws restrictive covenants, the retailers would need to take the risk of having competing stores open nearby into account in any decision to build a new store."
A government body's decision, by whatever means, determines the degree of restrictions - and everyone's content (here) to call it "free market", but please remember that that's not synonymous with consumer sovereignty.
Fried Egg:Are they compatible with a free market?
Absolutely. It is a basic freedom of contract. Any contractual relationship entered into willingly without fraud, duress, etc. is compatible with a free market.
Doug's post was most helpful in helping me to understand why restrictive covenants, whilst obviously being compatible with a free market, are also not an infringement of consumer sovereignty.
Furthermore, in the context of supermarkets in the UK, land available for supermarkets to build on is so limited because of planning laws and zoning controls that it makes it far more of an effective policy for supermarkets to control the land around their stores