Matthew Lau: Colluding on bread prices shouldn’t be a crime

A worker walks around a Metro Inc. grocery store in Toronto, Ont. (Credit: Cole Burston/THE CANADIAN PRESS files)

People who bought packaged bread in Canada between 2001 and 2021 can now file for compensation for allegedly being overcharged, as the claims process has begun for the $500 million that Loblaw and parent company George Weston Ltd. agreed to pay to settle class-action lawsuits last year. I bought bread during this period so I have filed a claim, because who turns down free money? When the Ontario government sent everyone those ridiculous $200 cheques ahead of this year’s spring election, I deposited that, too.

The bread lawsuit money isn’t exactly free, however. The price of accepting it is an uneasy conscience, because Loblaw and George Weston shouldn’t owe anyone a dime. There is simply no good reason price collusion among grocers selling bread should be illegal. Moreover, in contrast to another form of price collusion — the unionization of workers, which is legal — grocers charging higher prices for bread probably isn’t even bad for consumers.

A question for anyone who thinks collusion to raise the price of bread should be illegal: should it also be illegal for Loblaw to stop selling bread altogether? If Loblaw raising the price of bread is worth a $500-million penalty, should making bread unavailable in all its stores be worthy of a $1-billion penalty? $2 billion? Even higher? These are rhetorical questions. Nobody thinks to condemn or penalize companies for exiting a certain business or product line. So it is odd when many of those same people condemn companies for raising their price.

In his 2023 article “In defense of allowing collusion,” economist Don Boudreaux points out that “If you press the mainstream economist to explain why, if collusion is so terrible, a seller’s quitting the industry is perfectly acceptable, that economist will stumble.” Economists, and even most ordinary people, understand that if some producers exit a market, other sellers will expand their supply or new sellers will emerge to meet that demand (assuming consumers do continue to demand the product). It is a failure of reason not to apply this same logic to price collusion.

“There is simply no good reason to worry,” Boudreaux concluded, “that in markets unprotected by government-erected barriers to entry, reduced output caused by collusion will create any more consumer harm than is created whenever producers voluntarily leave the industry.” Boudreaux granted that the case for legalizing collusion among competitors, as long as there are no government-imposed barriers to entry, was “radical.” But it’s not new to economists. For example, in 1979, Donald Dewey, professor of economics at Columbia University, published “Information, entry, and welfare: The case for collusion” in the prestigious American Economic Review.

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A possible objection to allowing collusion is that perfect competition does not exist and new sellers cannot simply spring up overnight to offer cheaper bread. True enough, but there are important counter-arguments. Collusive agreements are inherently unstable since colluding firms have an incentive to “cheat” and gain market share. They’re also generally expensive since colluding firms must pay to maintain — but not use — capacity with which to credibly scare off new market entrants by threatening increased production. And beyond that, even if some sellers do collude on bread prices, Canada’s grocery market is fiercely competitive overall.

The upshot is that even if certain sellers colluded on bread prices over an extended period, consumers overall were likely not worse off. Yes, some people paid more for bread some of the time, but this was not a windfall to the stores at the expense of shoppers. Because of fierce competition in the grocery sector, expensive-bread stores would only be able to keep customers if they outperformed cheaper-bread stores on other margins, such as quality, service, convenience, cheaper other products or some combination of all these factors. If customers sometimes faced higher prices for bread, those higher prices subsidized the cheaper other offerings customers were able to get at Loblaw.

Finally, what is the difference between grocery stores colluding on bread prices and labour unions colluding to inflate wages? Basically none — except that Loblaw couldn’t call on government to stop independent grocers from selling bread more cheaply, while unions use government to restrict competition all the time.

Yet labour unions, which often use coercion and are economically harmful, are not illegal. It is therefore odd and unfair that Loblaw, which did not harm consumers, faces penalties and condemnation.

Matthew Lau is a Toronto writer.