The recent election campaign focused a lot on low wages and inequality. It did not, however, focus on an underlying driver of these issues. If Australia had fewer markets run by dominant oligopolies and more benefiting from strong competition, we would have less inequality and higher wages and productivity.
Market economies rely on the forces of supply and demand, which make up Adam Smith’s “invisible hand”. But this requires enough players on the supply side; without this, Australians will be poorly served by our market economy.
Companies do not want markets where there is perfect competition
We have, in my view, inadequate competition in Australia. Think beer, groceries, mobile service providers, aviation, rail freight, banking, energy retailing, internet search, mobile app stores, and more.
Companies do not want markets where there is perfect competition.
This is not controversial. Every business person would agree. None wants to work in a competitive market where they seek to outperform their competitors. They want an edge from some form of market power.
To be clear, such behavior can be beneficial as businesses seek to lock in consumers. Too much market power in our economy, however, can cause a range of harm to many Australians and our society. It is, therefore, a key role of the government to push against the instincts of corporate Australia and foster competition.
The most obvious harm is higher prices, particularly when supply is limited relative to demand. When supply is plentiful, the focus moves to reduce wages and other supplier costs.
The share of profits in our national income has been rising steadily since the 1970s; the percentage of national income going to Australia’s workers has been steadily declining.
The implications for inequality are clear. Most Australians earn most of their income from wages, not dividends, on their shares.
There are also concerns regarding the lack of innovation in Australia and low productivity. These problems will not be properly addressed until we recognize that high industry concentration and the resulting lack of competitive pressure reduce the incentives to invest and create new products. And it is harder for new entrants, which often drive innovation, to gain a foothold.
At the ACCC, I said that Australia’s merger laws need considerable strengthening. The ACCC put forward proposals for reform for consideration post-election, which is now.
Unfortunately, there are considerable difficulties in finding evidence to convince our courts that firms will gain market power by merging or, when these mergers occur, the resulting market power will be used in harmful ways. This is because the union has not yet occurred, and the courts often regard commercial logic as simply theory.
We have also seen court cases where attempts to protect the sale proceeds from privatization by restricting competition to a then monopoly were not deemed a breach of the competition laws. This occurred in a recent decision concerning the Port of Newcastle.
Under the sale terms, if the Port of Newcastle moves more than a certain level of containers, it must compensate its dominant competitor, Port Botany. Despite finding that this arrangement was put in place to protect the proceeds from the sale of Port Botany, the court found that these arrangements did not substantially lower competition.
With the election out of the way, our merger laws and the effective working of our competition laws need to be debated.
There is also another role for the government here. We need laws that promote competition rather than protecting existing large firms.
Be it landing slots at airports, access to scarce telecommunications spectrum, laws that allow shipping companies carrying freight to Australia to engage in collusive behavior, or regulation of the financial sector that favors the incumbents, to give just some examples, we need governments to prioritize competition over the needs of the industry incumbents.
Add to this how governments privatize assets in ways that do not support competition or as unregulated monopolies; hence, they receive high sale proceeds, knowing that the users of the privatized assets will have to pay higher prices. This is an unfair form of taxation by stealth which harms most Australians and contributes to inequality.
Australia needs to move to a pro-competitive mindset if it waddressss our issues with low wages and productivity and what should be a fundamental goal of economic policy, reducing inequality.
Rod Sims is a professor of public policy and antitrust at the Crawford School at the ANU and former chair of the Australian Competition and Consumer Commission.
