MORE COMPETITION, LESS CHICAGO
Australian Financial Review, 17 December 2018
If you want to know whether firms are worried about competition, don’t just listen to what they say. Listen to what they don’t say. Trawling through thousands of annual reports of American firms, a recent study found that the use of the word ‘competition’ in those reports has declined by three quarters since the start of the century.
Another approach is to look at their books. In the 1980s, large listed firms charged prices that were 10-20 percent above their costs. Today, that’s risen to 60 percent. The problem is just as bad in Australia as in other advanced countries. A study by the Australian Competition and Consumer Commission earlier this year concluded that the residential mortgage market looked more like ‘synchronised swimming’ than competition, with customers forced to keep switching lenders if they wanted to get the best deal.
Australia’s competition problem has deep roots. Under the Fraser Government, the test for companies to merge was weakened, in the misguided belief that we needed to let firms grow large in Australia if they were to compete overseas. The merger test was finally tightened up again under the Keating Government. But as former ACCC chair Allan Fels has pointed out, the lax test had by then allowed mergers between Coles and Myer, News Ltd and Herald & Weekly Times and Ansett Airlines and East West Airlines.
Underpinning this thinking was the idea – developed at the University of Chicago in the 1970s – that big firms are good because they can produce more cheaply, and will be kept in check by the free market if they try to throw their weight around. Chicago School thinking influenced Australia’s courts and conservative legislators in areas such as vertical restraints, predatory pricing and barriers to entry.
The result has been significant market concentration. From beer to baby food, insurance to internet providers, many Australian industries are dominated by a few big firms. For consumers, this can be a dangerous. As current ACCC chair Rod Sims recently noted, ‘Many well-known and respected major Australian companies have admitted, or been found, to have breached our competition and consumer laws. These same companies regularly proclaim to put their customers first’.
There have also been problems created by the poor regulation of privatised monopolies. Where a monopoly asset is placed in private hands, our economics textbooks predict that prices will rise well above the marginal cost of production that should govern pricing in a competitive market. In the absence of appropriate regulation or oversight, we should not be surprised if this is exactly how new monopoly owners behave. Whether it is a port or an airport, it is important that governments ensure that the gains to taxpayers from selling an asset aren’t offset by the losses to consumers from higher prices.
An economy with just a few big firms may be bad news for startups. This is a particular challenge in the technology space. The Economist recently reported that around the FAANGs – Facebook, Amazon, Apple, Netflix and Google – there is now a ‘kill zone’, in which companies are either acquired or quashed. In Australia, we are also seeing a steady decline in the rate at which new businesses are being created: falling from an average of 16 per cent before 2010 to 13 per cent since then. Meanwhile, the number of mergers and acquisitions has increased almost five-fold in the past quarter century.
Overly concentrated markets aren’t just bad news for consumers. Increasingly, economists are coming to the view that monopoly power is part of the explanation for wage stagnation and underwhelming business investment. The topic was a focus for this year’s gathering of world central bank governors in Jackson Hole, Wyoming, where attendees discussed research that when industries become more concentrated, they tend to be less productive and pay lower wages.
We can see some of the changes that have been made to Australia’s competition and consumer laws over recent years – civil fines for unconscionable conduct, the criminalisation of cartels, higher penalties for breaches of consumer protection provisions – as a reaction to the growth of market power among Australia’s behemoths.
But more needs to be done. Ensuring that we do not adopt an overly permissive approach to mergers. Taking a more circumspect approach to claims of efficiency when considering anti-competitive conduct. Giving the regulator the investigatory powers it needs. Making sure that penalties are not treated as just a cost of doing business. Considering the impact of anti-competitive conduct on innovation. Recognising that unchecked market power can harm workers as well as consumers.
Curtailing monopolies may not be good for those firms that have stopped mentioning ‘competition’ in their annual reports, but it’s a vital economic reform. If we’re to keep prices down and wages up, we need to encourage more competition in Australia.
Andrew Leigh is the Shadow Minister for Competition. This is an edited extract from his Lionel Murphy Lecture, delivered at the Australian National University.
Authorised by Noah Carroll, ALP, Canberra.