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No, the tycoons are not driving up prices in Israel

More regulation and busting up monopolies is not the answer: Israeli prices are high because costs are high
The Beitar Illit branch of Rami Levi (Nati Shohat/Flash90
The Beitar Illit branch of Rami Levi (Nati Shohat/Flash90

In Sue Surkes’s “Monopoly nation: How a handful of firms control prices, hold Israelis ransom” I find yet another press article espousing the same tired arguments about rich tycoons, large corporations and monopolies being the root cause of high prices in the country. 

This depiction is worryingly inaccurate. A high level of concentration (whereby an economy is controlled by a limited number of players) is just one of many factors leading to high prices. Such concentration is a common phenomenon in many small and emerging economies and should decline over time. Moreover, whereas Surkes argues for more government intervention (to break-up monopolies) the opposite needs to happen. Less not more government involvement is needed to allow real free market competition to flourish. There is no better allocator of resources than the free market. There is no better price control. 

Let’s take a step back and try to understand some of the factors that contribute to high prices in Israel.

Surkes’s article compares Israeli prices to US prices. But the US is a huge market with more than 300 million consumers. Israel is tiny by comparison, with only nine million consumers. The smaller the market, the higher the unit cost for producers, and the higher the marketing costs.

Israel is an island – perhaps not literally, but figuratively. We have limited trade and transport links with our neighboring countries. Most goods arrive by boat through our ports. Moving raw materials and finished product in and out of the country is cumbersome and expensive. 

And there are other characteristics that make the Israeli market unique: 

  • Our language is not shared with any other markets. 
  • Most food products are required to be kosher. 
  • Our ports, factories and economy shut down for one day a week, as well as for various Jewish holidays. 
  • Israel has high labor costs and a relatively rigid labor market.  
  • Real estate costs are high.
  • There is a high level of government involvement and bureaucracy in every sub-segment of the economy. 

All these factors contribute to higher costs, whether related to production, imports, marketing or doing business generally. They all lead to higher consumer prices. 

A number of these factors are beyond our control and there is little we can do aside from bear the higher cost. We can’t simply alter the size of the market (although, at its current growth rate, the population will surpass 15 million by 2050). Nor can we change the language, or physically move the country closer to the US or Europe. Also, many believe that offering kosher products and honoring the day of rest is a (higher) price worth paying.

Take broadcasting (mentioned in the article) as one example. Even though production costs in Israel may be lower than elsewhere, these costs must be shared by a much smaller number of households than other markets. This leads to higher prices payable per household. If we want high quality Hebrew language content in news and other TV shows, we will have to accept this higher cost and pay for it. No amount of government interference is going to help us find a cheaper way to produce the same content.

In fact, what the government can and must do is reduce its involvement and bureaucracy so that free market competition can flourish. Think of Rami Levy’s entry into food retail in the late eighties, offering food products at wholesale prices significantly lower than larger competitors. Consider the success of parallel imports in recent years. Or look at the recent growth in private label (own brand) in Israel, whereby consumers can buy almost identical product in most categories at much lower prices than the branded product. Private label now accounts for a huge 25% of Shufersal sales. Today technology is helping new and smaller brands overcome many of the traditional barriers to entry in the consumer space, and enabling them to take on larger more established brands.

These free market competitive forces are what brings prices down – not increased government interference – and certainly not government assistance for global retail heavyweights like Next and Amazon. Their exemption from local customs tax and VAT for orders below $75 (something that Surkes wants to see maintained) gives them a huge price advantage versus mostly struggling local retailers. 

And if a producer like Osem (now owned by Nestle) can create a unique product such as Bisli or Bamba, that no competitor can better or successfully copy, then let the market decide its fair price. Let the consumer choose, certainly not government.  

Where government does have an important role to play is in ensuring high quality and affordable infrastructure, such as ports, roads and telecoms networks – crucial cogs that allow a modern economy to function efficiently. 

However, even here, government obsession with low prices has negatively impacted quality and investment. Prices of a mobile data package in Israel may be amongst the lowest in the world, but so is the level of investment in mobile networks. The latest 5G networks now being rolled out around the world are unlikely to be built in Israel any time soon, due to the poor financial health of mobile operators. There is a cost to our endless pursuit of low prices. 

Similarly, if we want individuals and corporates to risk their own capital investing in infrastructure (or in the very risky business of offshore gas exploration Surkes discusses), then government needs to provide a stable investment framework for them to do so. We can’t drastically change the rules based on a certain outcome once they have already made large capital investments. That is unfair and bad practice which deters investment, capital flows and competition – ultimately leading to higher not lower prices.

 

About the Author
Michael Klahr has been covering Israeli companies and the economy as a research analyst for more than 15 years.
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