A report by the Grattan Institute into competition in the Australian economy has found that Australian markets are not especially concentrated compared with other nations. It also found that a greater market share held by a smaller number of firms does not necessarily lead to greater levels of profits. The report however does confirm that our supermarket sector is overly concentrated and policies can be implemented to ensure greater competition including a move already under way by the government to make it easier for consumers to switch between providers and control their own data.
One of the more common consumer complaints is that there is not enough competition in major industries. The banking, supermarket and petrol retail sectors especially come under fire. A lack of competition and domination by a few firms can lead to implicit collusion – such as is often suggested occurs with petrol prices seeming to go up in unison on Thursday.
The issue is not just a dry economic one. The shadow assistant treasurer, Andrew Leigh, has written extensively on the issue, arguing that a lack of competition is damaging the economy.
The report by the Grattan Institute’s Jim Minifie, Competition in Australian, examined this issue and found somewhat surprisingly that while a lack of competition did hurt our economy, the damage was not as great as might be expected.
Minifie argues that “large firms are not unusually dominant in Australia given the size of its economy” and they “do not have an unusually large share of Australian output and employment”.
Take for example the banking sector. The market share of the top three banks is actually quite low compared with the rest of the OECD. While the market share of the top five is above average, it is “not much more concentrated than it is in other high-income economies of about the same size”:
But at least here the signs of increased market concentration are evident. As a result of mergers that were allowed to occur in the aftermath of the GFC, the market share held by the top four banks is significantly higher than it was at the start of the century:
The issue is whether or not this impacts on reduced competition and thus hurts the economy as consumers end up having to pay more for services and goods that they otherwise would have.
The problem Minifie found is that you can’t just assume market concentration leads to higher profits.
What is important is not just how many firms dominate an industry but also why they dominate. If – as in the case of banks – the reason for the concentration is mostly due to regulation, then the industry does not see a greater proportion of “super-normal profits” (which are those that are greater than the expected shareholder return) than in other industries with low barriers to entry (such as builders, accommodation services or restaurants).
But industries, which are either natural monopolies, where only a few firms can actually carry out the service (such as electricity generation or airports), or scale economies, where the cost of doing business is such that bigger has an inherent advantage (such as supermarkets, domestic airlines or petrol retailing), are much more likely to see above expected profits:
Thus among the most concentrated industries, those which have the greatest share of the profits coming from “super-normal profits” are those with either scale economies – ISPs, internet publishing, supermarkets, or are natural monopolies such as wired telecommunications.
The Grattan Institute report on the other hand found banks report a lower share of super-normal profits than highly competitive industries such as motor vehicle retailers and childcare services.
The report also found the largest businesses in Australia have not over the years taken a greater share of the overall revenue – with the biggest 20 firms since the early 1990s usually accounting for around 54% of total revenue received by all firms listed on the Australia stock exchange:
This, however, does not mean there are no issues.
Our supermarket sector is one of the most concentrated among high-income countries. Our two biggest firms in the sector (Woolworths and Coles) account for 69% of the market compared with 52% in Canada, 44% in Germany, 43% in the UK and 32% across the United States:
However over the past decade the two big supermarkets have actually lost market share as Aldi and Costco have begun competing. Minifie suggests once Amazon Fresh and the German company Kaufland enter the market, the share held by Woolworths and Coles will continue to fall, which will lead to “greater diversity and lower prices”. The report also recommends relaxing zoning restrictions that can limit the entry of competitors:
By contrast thetelecommunications sector – both ISPs and mobile communication – while being very concentrated is not unusually so. The report notes that “high-income countries tend to have only three or four mobile networks, and their three-firm market shares typically exceed 80% – in Australia currently Telstra, Optus and Vodafone account for around 90%:
But this is one area where the report notes policy progress can be made, and which the government is already making moves to introduce changes.
The report argues that strong regulation aimed towards lower prices appears necessary for natural monopolies such as electricity distribution and transmission, ports and wired telecoms, given the level of their super-normal profits. But it also argues that consumers should have the power to “take their data with them to another provider” to encourage competition in telecommunications, banking and other industries.
Last week the assistant minister for cities and digital transformation, Angus Taylor, announced that next year the government would seek to legislate a “consumer data right” which would enable customers “open access to their banking, energy, phone and internet transactions”.
This would make it much easier to compare the cost of different services and crucially reduce the burden of switching banks or utility providers.
The Grattan Institute report highlights that while market concentration can lead to excess profit-taking by firms, this mostly occurs in industries where the barriers to entry – either due to cost or the nature of the business – are high. In such cases the government needs to ensure firms are not taking advantage of consumers, but the report also makes clear that while firms have too much market power in a few industries, overall Australia’s economy is little different from most nations.