Weaker competition widening the wealth gap, The Australian, 21 October 2016
Paying more for your pint? You’re not alone. Lately, beer prices have risen significantly faster than most other prices. Over the past decade, the cost of a beer has gone up 42 percent, meaning we’re paying as much for a middy today as a schooner ten years ago.
So naturally my ears pricked-up when I recently heard of a merger between the company that makes Carlton, Fat Yak and VB (SABMiller) and the company that makes Corona, Budweiser and Stella Artois (Anheuser-Busch InBev). If it goes ahead, the merger will create the world’s largest beer manufacturer.
There are many reasons why beer might have become more expensive, including taxes, the rise of craft brewing, and an increased appetite for premium beers. But one factor could be a lack of competition. Beer is one of the most concentrated markets in Australia. The four largest beer manufacturers control a whopping 90 per cent of the market. This has increased significantly over the last decade when the largest manufacturer (SABMiller) bought Fosters in 2011 and the second largest manufacturer (Lion) bought James Boag in 2007.
Wait, I hear you shout. Having fewer competitors doesn’t necessarily mean reduced competition. True, but it certainly doesn’t help, either. As any economics textbook will show, reduced competition means higher prices, less production, less innovation and ultimately less growth and fewer jobs. It might also be worsening inequality.
What we are seeing in the beer market is happening across the entire economy. Looking across 481 Australian industries, the Australian National University’s Adam Triggs and I found that on average, the top four firms account for 36 per cent of the market. That’s a worry, given that a standard rule of thumb for market concentration is when the big four have over 30 percent.
The relationship between market concentration and inequality was highlighted in a recent study by Jason Furman, a former classmate of mine who now heads President Obama’s Council of Economic Advisors. Furman warned that there are seven economic symptoms that inequality is being made worse by increased market concentration. Many of these symptoms are present in Australia.
The first is a slowdown in the creation of new businesses, consistent with new firms being scared off by dominant incumbents. This appears to be true in Australia. While accurate data on business formation only goes back a few years, we know that there were 6,000 fewer businesses created in 2015 than in 2012. A slower rate of new business formation means there are now 20,000 fewer businesses operating in the economy overall than in 2012.
The second sign is that more of a country’s national income goes to the owners of capital than to its workers, fuelling inequality. This also appears to be true in Australia. In the 1990s, the capital share stayed pretty constant. But in the 2000s, it rose from 49 per cent to 54 per cent, averaging around 53 per cent since then.
The third indication is that wage inequality worsens, particularly between large and small businesses. While firm-level data is lacking in Australia, wage inequality has certainly increased. Since 1975, earnings at the 90th percentile have increased 72 per cent while wages at the 10th have increased only 23 per cent.
A fourth symptom is that the labour market becomes less fluid, meaning fewer workers moving between jobs fearing the increased power of employers. The share of people who have remained with their existing employer between three to five years has increased by 6 per cent from 2010 to 2015. Usually, you might think that stable employment is a good thing - but if employees are too scared to chance their hand in a new job, then that’s a bad signal for the economy.
Fifth, businesses with market power have less need to invest in research and development, innovation or additional capacity. This means an economy with excessive concentration may see declining business investment. And indeed, business investment is down by almost one-third over the past few years.
The sixth and seventh symptoms are that the economy experiences a rising rate of return on capital and that this tends to be higher for larger businesses. As we have seen, the capital share is up. And although share prices have been fairly flat over the past decade, we have seen a sharp rise in both dividend payments (up 61 per cent in 10 years) and housing prices (up 73 per cent in 10 years).
So what does all this mean? The Australian economy is highly concentrated - more so than the US economy. Moreover, based on these seven symptoms, there is a risk that this increased concentration is worsening inequality.
If we take inequality seriously as a society, then the focus needs to be on policies that strengthen competition and reduce inequality, not corporate tax cuts for firms with significant market power.
How might we toughen competition laws? Labor went to the last election with policies to increase penalties for anti-competitive conduct, boost the litigation budget of the Australian Competition and Consumer Commission, prioritise the investigation of conduct that disproportionately impacts the disadvantaged and have government initiate a thorough inquiry into the consequences of market concentration more fully.
Making our economy more competitive is one of the best ways we can boost national productivity. Get this right, and beer drinkers everywhere will happily tell their mates ‘this round’s on me’.