By Edward Hadas
The author is a Reuters Breakingviews columnist. The opinions expressed are his own.
British supermarkets are doing something unusual. They are following the rules of textbook economics: responding to competition by cutting prices. Such behaviour is rare. While business bosses often say they admire free enterprise, we actually live in a restrained enterprise economy. Everyone should be grateful.
J Sainsbury, the No. 2 in the British grocery market, is the latest established competitor to suggest that its profit is sliding. Its admission follows grim announcements from market leader Tesco and Wm Morrison. Tesco has already cut its interim dividend by 75 percent, and Sainsbury is likely to follow.
The big problem for the established UK chains is the advent of so-called hard discounters, most notably German chains Aldi and Lidl. They have lower costs so can charge less and still earn good profits. The main response from the market leaders has been to cut prices. The battle is an excellent example of how capitalism spawns creative destruction. Shareholders of the losing companies suffer, but the overall economy benefits.
Creative destruction, though, is usually much more civilised than this British food fight. In most industries, price competition is limited and all but the weakest companies stay in reasonable financial health. Prices do decline in times of overcapacity, but not ruinously. As a consequence, companies can earn reasonable profits and can therefore afford to re-invest in their businesses.