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Free market in Lithuania: Friendly competitors unwilling to compete

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Šaltinis: 15min

Five litas per litre of petrol and eight litas for a ten-pack of eggs. Even though Lithuanians are famed for their patience, such rates have reignited a debate on prices. Are prices in Lithuania rising because we are catching up with the EU seniors – or is it all down to a lack of competition?

Size matters, economists warn, and smallness will always prevent Lithuania from having a perfectly competitive market. It can, however, go a long way towards the ideal. The only remaining question is whether there is a will for competition.

Competitors do not compete

For quite some time now, one could spot cosmetics ads in glossy women's magazine, listing product prices and, underneath, a note: “Available at Douglas, Kristiana, Sarma.”

Kristiana and Douglas are the biggest cosmetics retail chains in Lithuania. So when Douglas Holding, Europe's largest toiletries chain, stepped into the Lithuanian market in 2007 by acquiring Baltic Cosmetic Holding – owner of Sarma shops – everyone was jubilant: finally, a strong competitor had come, able to press down rocketing prices of Kristiana that had been reigning in an empty market.

The jubilation was soon to get a reality check. It turned out that many of the products on the newcomer's shelves came from the same warehouse – Douglas bought them from Fragrances International, an importer that shared same owners with Kristiana.

“We do not run joint advertising campaigns, even though our logos can appear in one mock-up, if suppliers want to indicate where to find their products,” Douglas LT marketing projects manager Jurga Kulickaitė explains the synergy. She admits that Douglas is not seeking to compete on prices with Kristiana, adding that, luckily, neither does Kristiana.

According to her, wholesalers do not put any conditions on pricing, yet they can put forward their recommendations.

Mobile services – best example of competition

“If you want to know if two competitors in a market provide for genuine competition, the answer is simple – if the two are willing to compete, the competition can be very effective,” assures Rimantas Stanikūnas, former chairman of the Competition Council and now competition consultant at Glimstedt law firm.

The best example in Lithuania is the mobile telecommunication market. Compared to other nations, Lithuanians pay rather little for high-quality services. “At the moment, Lithuania boasts the lowest mobile service rates in Europe,” says Chris Robbins, deputy CEO of Bitė.

The reason behind this is the fact that all providers offer the same product and service through the same network in the same area. According to Robbins, competition in the product market is fierce, driving prices down. He thinks that the only difference between competitors – offering as they are a perfectly identical product – lies in their customer services.

Excessive optimism?

According to Stanikūnas, it all comes down to market players: do they want to compete or not? If not, a newcomer simply adapts to the market, letting consumers know that they should not expect any major changes in pricing.

Such is the case in Lithuania's natural gas market. There is only one supplier – Gazprom – so we pay one of the highest prices in Europe. Even compared to Latvia and Estonia, Lithuania overpays by 400 to 500 million litas (116-145 million euros) each year.

Energy Minister Arvydas Sekmokas consoles his compatriots, struggling to pay their winter heating bills, by saying that the situation will markedly improve once a second player enters the market – the Liquefied Natural Gas Terminal in Klaipėda. The facility should launch operations by late 2014 and, according to the minister, gas prices should drop by a third.

Lithuania uses up 3 billion cubic metres of Russian gas a year. It is expected that the LNG terminal will supply at least 25 percent of that gas. So even though in several years time, the gas market will have two players, the figures show that their market shares will by no means be equal.

“The LNG terminal is needed to exert pressure on Lietuvos dujos (Lithuanian Gas, company supplying gas to final consumers) that will not be able to raise prices under competition. The pressure, however, will not be that big, since the LNG terminal will not have the capacity to supply gas to the entire country,” Stanikūnas notes.

Lietuvos dujos, therefore, is likely to remain the market leader. According to Stanikūnas, it would be wrong to expect cheaper gas from the LNG terminal, as no one is planning to subsidize the project.

Romas Švedas, political scientist at Vilnius University, says that one should look at the LNG terminal from a “wider and more strategic” perspective. The terminal and plans to separate gas mains from the supplier company (following EU's Third Energy Package) are, he explains, ice-breaking initiatives: “Competition will come only when the three Baltic markets have an alternative gas supplier. Some speculate that the first gas projects might not be economically viable. However, without those projects there will be no gas market at all.”

Diagnosis – oligopoly

“Lithuania, with a population of only 3 million, has small consumer market with only a few producers in it. Therefore, new producers or service providers are reluctant to enter the market – it is simply too tiny for them. Such environment has a high probability of the few competitors making an agreement,” Stanikūnas explains.

For example, the four major Lithuanian grocery chains take up about 80 percent of the market. Similar figures are in Scandinavia and other European countries.

The situation in the Lithuanian market is made worse, in addition to other things, by the fact that during their growth years, these major chains were allowed to build huge supermarkets in town centres. And as they could negotiate better terms with suppliers, these supermarkets have driven out small local grocery shops. That is why, in many countries, big shopping centres are only allowed in suburban areas.

On the other hand, a food product cannot have significant price variation across different chains, since the costs are the same, while retailers' surcharges are similar too.

“It is very difficult to prove that market players are acting in sync or there is a cartel agreement – or whether prices are rising due to so-called parallel factors. For instance, a market leader spikes up the price and all the rest follow the suit. There is a very fine line between parallel behaviour and cartel, so proving something is extremely complicated.”

He says that there is no hope for a small market to be perfectly competitive. In its essence, the Lithuanian market is an oligopoly, with the Competition Council charged with preventing oligopolistic companies from making deals and breaking competition laws.

“The competition theory has a notion of a perfect competition. Three factors are required for that – the market must be extensive enough, there must be many producers operating in it as well as many consumers,” Stanikūnas reminds. Besides, such a market must contain no barriers for import. And, of course, it must be perfectly transparent.

“Effective competition is achievable, but it requires a lot of time and, besides, all government and competition policy-makers must work in concert,” Stanikūnas summarizes.

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