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Are Anthony Albanese and his ministers a bunch of nice guys lacking the grit to do much about their good intentions? Maybe. But this week\u2019s announcement of a review of competition policy raises hope that the nice guys intend to make real improvements.<\/p>\n
The review, which will provide continuous advice to the government over the next two years, has been set up because \u201cgreater competition [between Australia\u2019s businesses] is critical for lifting dynamism, productivity and wages growth [and] putting downward pressure on prices\u201d, Treasurer Jim Chalmers says.<\/p>\n
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Prime Minister Anthony Albanese and Treasurer Jim Chalmers.<\/span>Credit: <\/span>Alex Ellinghausen<\/cite><\/p>\n As I wrote on Monday, the great weakness in our efforts to reduce high inflation has been our assumption that its causes are purely macroeconomic \u2013 aggregate demand versus aggregate supply \u2013 with no role for microeconomics: whether businesses in particular industries have gained the power to push their prices higher than needed to cover their increased costs.<\/p>\n But it seems Chalmers understands that. \u201cAustralia\u2019s productivity growth has slowed over the past decade, and reduced competition has contributed to this \u2013 with evidence of increased market concentration [fewer businesses coming to dominate an industry], a rise in markups [profit margins] and a reduction in dynamism [ability to change and improve] across many parts of the economy,\u201d he says.<\/p>\n The former boss of the Australian Competition and Consumer Commission, Rod Sims, had some pertinent comments to make about all this at a private business function last week.<\/p>\n Australian economist and former ACCC chair Rod Sims. <\/span>Credit: <\/span>Dominic Lorrimer<\/cite><\/p>\n He observes that \u201ccompanies worked out long ago that the essence of corporate strategy is to gain market power and erect entry barriers. Profits from \u2018outrunning\u2019 many competitors from a common starting point are generally small; profits from gaining market power are usually large.<\/p>\n \u201cBusinesspeople know that when the number of competitors gets too large, price competition is often the result, and that this \u2018destroys shareholder value\u2019 or, alternatively put, helps consumers.\u201d<\/p>\n Sims says the goals of growing and sharing the economic pie are being damaged in Western economies, and in Australia, by inadequate competition leading to market power. But, aside from the specialists, the economics profession more broadly has been slow to realise this and factor it into policy responses.<\/p>\n Australia has an extremely concentrated economy, Sims says. We have one dominant rail freight company operating on the east coast, one dominant airline with two-thirds of the market, two beer companies, two ice-cream sellers and two ticketing companies, all with a 90 per cent share of their markets.<\/p>\n We have two supermarkets with a combined market share of about 70 per cent. We have three dominant energy retailers and three dominant telecommunications companies. We have four major banks, with a 75 per cent share of the home mortgage market.<\/p>\n So next time some business person, politician, Reserve Bank governor or other economists tells you higher productivity automatically increases everyone\u2019s wage, don\u2019t fall for it.<\/p>\n This is much greater concentration than in other developed countries. And, as you\u2019d expect, the profit margins of these companies generally exceed those of comparable companies overseas.<\/p>\n The centuries that businesses have spent pursuing economies of scale explain why we don\u2019t have \u2013 and shouldn\u2019t want – the huge number of small firms assumed by the economic theory burnt on the brains of most economists.<\/p>\n But, Sims argues, our relatively small population doesn\u2019t justify the much greater concentration of our industries. For one thing, studies of Australian industry sectors show that the returns to scale stop increasing well before market shares are anything like as high as they are in Australia.<\/p>\n For another, Australia\u2019s modest size doesn\u2019t explain why our industries are getting ever more concentrated, so that our key players are less likely to be challenged by competitors.<\/p>\n And it\u2019s not just our high concentration, it\u2019s also that we see large asset-managing institutions with big shareholdings in most of the firms dominating an industry. Thus, asset managers have an interest in keeping the whole industry\u2019s profits high by limiting price competition between the companies.<\/p>\n One study, of 70,000 firms in 134 countries, found that the average prices charged by our<\/em> listed companies were 40 per cent above the companies\u2019 marginal cost of production in 1980, and about the same in the late 1990s. But by the early 2000s, average prices were 40 per cent above marginal cost. By 2010, they\u2019d risen to 50 per cent above, and by 2016 it was nearly 60 per cent.<\/p>\n Analysis by federal Treasury has found that our companies\u2019 markups increased over the 13 years to 2017.<\/p>\n The evidence in Australia and overseas is that in concentrated industries we see less dynamism, lower investment and lower productivity, Sims says. Our productivity performance has been very poor at a time when our focus on pro-competition public policy appears to have been lost.<\/p>\n It\u2019s not hard to believe that the latter explains the former. \u201cWe run harder when competing versus when we run alone,\u201d Sims says.<\/p>\n Our Treasury\u2019s research also shows that firms in concentrated markets are further from the productivity frontier as there\u2019s less incentive to keep up.<\/p>\n And market concentration also has implications for wage levels. Where labour mobility \u2013 the ease with which people move between employers \u2013 is reduced, wage levels are lower.<\/p>\n But high industry concentration means fewer firms that workers can move to, bringing relevant skills, and fewer new firms entering the industry. Less competition for workers means lower wages.<\/p>\n \u201cNon-compete clauses\u201d make the problem worse. Recent Australian studies have shown that more than one in five employees are prevented from working for competitors under such contract terms, often even in fairly low-skilled jobs.<\/p>\n Another finding is that the benefits of improved productivity are less shared with workers in concentrated industries. The share of productivity gains going to workers has declined by 25 per cent in the last 15 years, Sims says.<\/p>\n So next time some business person, politician, Reserve Bank governor or other economists tells you higher productivity automatically increases everyone\u2019s wage, don\u2019t fall for it. Used to be true; isn\u2019t any more.<\/p>\n All this says that if the Albanese government is fair dinkum about getting inflation down and productivity and wages up, it will at least ban non-compete clauses and tighten up our merger laws.<\/p>\n<\/p>\n