Andrew Leigh

Competition is the best way to fuel growth and end tacit collusion, Herald Sun, 5 February 2017

Do you know which day of the week is cheapest to buy groceries? Or which day of the week is cheapest to buy whitegoods, cars and home appliances? Spoiler alert: there isn’t one! So why is there a cheap day to buy petrol? If hundreds of petrol stations really are engaged in dog-eat-dog competition, why do they all raise prices on the same day of the week?

After decades of researchers trying to understand bowsernomics, a new study may have cracked the nut.  Economists David Byrne from the University of Melbourne and Nicolas de Roos from the University of Sydney analyse nearly 2 million daily petrol prices. Alarmingly, they find that petrol retailers have been engaged in ‘tacit collusion’, resulting in coordinated prices, less competition and higher margins for retailers.

To be clear, these experts are not alleging the type of collusion that involves secret meetings, fake moustaches and disposable mobile phones. Rather, it is ‘tacit’ collusion where, through a gradual and unspoken process, firms slowly converge on the same pricing strategy so as to maximise revenues.

Sifting through the data, the researchers produce the economic equivalent of an Agatha Christie novel. They find that the dominant firm, BP, performed the role of the price leader. BP’s prices acted as a focal point for the broader market to converge on. Through a long process of trial and error, by 2010 all petrol stations had adopted the same pricing strategy.

Here’s how the game ended up being played. Every Thursday prices went up by 15-20 cents per litre. Then, for the next six days, the price fell by 2 cents each day. Like clockwork, the cycle repeats itself week after week. The only change was in 2015, when all petrol stations switched from Thursday price jumps to Tuesday price jumps.

The economists show that the outcome of this tacit collusion has been higher margins and reduced competition. From 2003 to 2016, the margins they study tripled from 5 to 15 cents per litre – meaning that drivers paid an extra $7 to fill up a Toyota Camry. Similarly, the numbers of ‘price wars’ between competitors, and the duration of those price wars, have dropped dramatically. Although the researchers focus on Perth, that’s only because it was the place with the best petrol data. Indeed, there’s every reason to think that the same patterns may have been occurring across other Australian cities.

The threat of tacit collusion is a huge challenge for policymakers. Make no mistake: tacit collusion is anti-competitive. It’s bad for consumers and bad for the economy. But it is not necessarily illegal nor easily enforceable. So what can we do about it?

The first step is to identify the circumstances in which tacit collusion is likely to occur. Tacit collusion is most likely to occur in industries that tend to be more concentrated, particularly when there is one large dominant player that can act as the price leader.

This is bad news for Australia, where the largest four fuel retailers have more than 70 percent of the market (in the United States, the comparable figure is less than 20 percent). And it isn’t just a problem at the pump. According to the standard measure of market concentration, more than half of Australia’s industries are concentrated. This means we need to be much better at identifying competition problems before they cause damage.

That’s why Labor has committed to give the competition watchdog a market studies power will do just that. It will allow it to undertake in-depth analysis of particular industries to identify competition problems before they wreak havoc.  

We also need to look for ways to make Australia’s industries less concentrated, particularly by encouraging new businesses to get going. For all the chatter about start-ups and innovation, there are now 11,000 fewer businesses in the economy than in 2011.

We must also ensure that mergers and acquisitions, which have increased three-fold since the early nineties, are only being allowed to proceed if they are in the public interest and do not result in unnecessarily concentrated markets.

Finally, we have to make sure that tacit conclusion doesn’t become explicit. The criminalisation of cartels by Chris Bowen in 2010 was vital in deterring anti-competitive conduct in Australia. Labor is building on this reform through raising financial penalties for anti-competitive conduct and doubling the Australian Competition and Consumer Commission’s litigation budget to ensure it has the firepower to go after firms that flout the law.

Bringing down prices at the pump means that transport businesses can employ more workers. For households, it helps stretch their family budgets further. It’s also a progressive measure. As a share of income, the poorest fifth of Australians spend three times a much on petrol as the richest fifth. For these people, a lack of competition isn’t some abstract concept. It can mean going without so they can still afford to drive the kids to school. If you want to create jobs, help the disadvantaged and reduce inequality, boosting competition is a great way to do it.  

Andrew Leigh is the Shadow Assistant Treasurer and the Shadow Minister for Competition and Productivity. This opinion piece was first published in the Herald Sun on Monday, 6 February 2017.