Thursday, January 6, 2011

Tesco Ups The Ante

Prompted by competition, U.K. supermarket Tesco is raising the price they'll pay for 9 karat gold to £10 per gram until the end of January. Not only has it cut a competitive swath, but also it's stirred up some competitive countermeasures.
Tesco’s move into the cash for gold market has caused ripples amongst pawnbrokers leading to promise its customers 10 percent more than Tesco for their gold, up to 90 percent of the bullion value.

At an exchange rate of US$1.55 per pound and 24 karats' worth of gold in the pure stuff, ten pounds per gram amounts to $41.33 per gram of 24k gold. With 31.1 grams of gold in a troy ounce, Tesco's buying price is at about $1,285/oz. That's not so far away from the spot price.

The Tesco incursion makes for a good illustration of one of the basic principles of economics. High profit margins invite competition, which drives the profit margins down. Sadly for the small-is-beautiful crowd, a large competitor with economics of scale behind it can compete more effectively in a standardized field. Since refining is fairly standardized - it's a lot less finicky than farming or a personalized business - a large competitor is the one that can offer a near-spot price.

It also makes a good illustration for the Austrian school, which emphasizes time and discontinuity. The margins don't equilibrate until some economic agent takes steps to do so. Human action is required, which requires specific humans to act. They doing so sometimes takes time, because we as individuals only know a small amount of the total economic information in society. We humans can't act on something unless we know about it first.

No comments:

Post a Comment