Why oligopolies are not dominating Australian consumers

by Jim Minifie

Published by the Australian Financial Review, Tuesday 5 December

Around the world, many are concerned that competition is waning. They say large firms are dominating markets, pushing up prices and profits, squeezing suppliers, and slowing growth in wages and productivity. They point to the consolidation of old industries and the rise of new technology platforms.

Back at home, Australia is often said to be the land of the oligopoly. But is competition in Australia really weak and getting weaker?

A new Grattan Institute report, Competition in Australia: Too little of a good thing?, shows that the answer to both questions is no. But it shows there is more that governments can do more to sharpen competition in Australia.

Big firms don’t play an outsized role in Australia. Less than 20 per cent of the Australian economy is highly concentrated and insulated from trade competition. And few of the large oligopoly sectors such as banking, wireless telecoms, supermarkets, and insurance are much more concentrated here than than in other economies Australia’s size.

No more market power

The power of big firms hasn’t grown much either. Profit rates have hardly budged in 25 years. The big end of town is not bigger than it was in the 1990s, compared to either smaller listed firms or to gross domestic product. In the large concentrated sectors, the biggest companies haven’t gained much. In banking, the majors have actually lost a little market share in the years since they absorbed BankWest and St George. In supermarkets, the Coles-Woolies duopoly have lost a bit of market share too (though they’ve built strong positions in liquor and fuel retail).

Technological change is probably intensifying competition. Slightly fewer firms are starting up than a decade ago, but there’s little evidence that large firms are holding back innovation. The global tech platforms exercise market power in their domains, but they pose fresh competition to Australian incumbents, and have made it easier for some smaller firms to grow.

Overall, if Australia has an oligopoly problem, it’s probably not much different from anywhere else, and it isn’t getting worse.

Still comfortable

Nonetheless, the lot of the Australian oligopolist remains a comfortable one. Profitability averages about 20 per cent higher in sectors where one or a few firms dominate, or where regulation weakens competitive pressure. Firms earn high profits where scale economies dominate (including supermarkets, liquor retailing, mobile telecoms, and internet service provision), and in some highly-regulated sectors (including banking, health insurance, and gambling). Some of the biggest earners operate natural monopolies, such as electricity distribution and wired telecoms, as well as some airports and ports.

And market power hurts consumers in some sectors. We pay about 15 per cent too much to airports and utilities such as fixed-line phones and electricity. But elsewhere, market power pushes prices up by just a few per cent, on average. Even this might overstate the impact on consumers: larger firms are profitable and can be flabby, but their scale benefits are often larger still. If our oligopolists were replaced by more and smaller companies, consumers may well pay even higher prices.

So how can governments intensify competition in Australia’s highly concentrated sectors?

Getting more competition

First, they should not jump at shadows. Competition law is working reasonably well. Regulators have most of the tools they need to protect competition and constrain the misuse of market power by large firms. They have a few new tools thanks to the Harper amendments recently passed by the Senate, though penalties could still be increased.

Second, regulators can squeeze the natural monopolies more tightly, because competition cannot do the job. Price regulation still looks generous in electricity distribution. Regulators merely monitor prices at airports and many ports, and that is too weak in many cases. Governments must resist the temptation to protect the NBN from 5G mobile competition. And the test for any further privatisations should be purely whether they are in the public interest: setting up protected monopolies to juice the sales price badly fails that test.

Third, governments should find ways to lower entry barriers, including many that are imposed by regulation (as in pharmacies and banking) or by zoning (as in supermarkets). Red tape hits small firms harder, so streamlining regulation can improve competition.

Fourth, governments can do more to make it easier for consumers to compare and switch providers. And governments should not worship retail competition where it clearly fails many consumers, as in superannuation and retail electricity. Here, they may be able to introduce more effective wholesale forms of competition (such as tenders).

Finally, governments can do more to adapt competition policy to technology. They are already moving to help consumers take their data with them to new providers. They need to confront challenges such as collusion using automated pricing, and price discrimination based on consumer profiles.

Australia may not be the haven for oligopolies that many believe it to be, but governments can still do much more to tighten the screws on the natural monopolies, and to boost competitive pressure on the oligopolies. The result could be fewer oligopolies, or it might just be better competition within them. Either way, consumers win.