A lack of competition is hurting consumers and the economy

Competition in business, whether from the perspective of the individual consumer or the economic health of a nation, is an essential ingredient in the recipe for success.

Australian Competition and Consumer Commission Chair Gina Cass-Gottlieb addressed the National Press Club in April 2023. The Competition and Consumer Act 2010, she said, has a stated objective “to enhance the welfare of Australians through the protection of competition and fair trading and provision for consumer protection”.

So, what’s wrong with a lack of competition? When one or two organisations are so successful and command such loyalty that competitors simply don’t get a look-in – as is arguably the case in Australia in hardware retail, office supplies retail, air travel, sports equipment retail, pet supply retail, funeral services and more – how does that cause problems for consumers and for Australia’s economy?

“The joy of competition is that in order to compete, businesses have to either reduce prices to offer a better deal than their competitor, or improve their product or services in some way, to do better than their competitor,” Rob Nicholls, an associate professor of Regulation and Governance at the UNSW Business School and a visiting professional fellow at UTS Sydney Law explains.

“From an economic perspective, you expect healthy competition to drive costs down to the marginal cost of production, including a normal rate of return. That is, the businesses will make a normal profit but not a supernormal profit, because their prices or services are constrained by other players in the market.”

In a recent Public Accountant report on productivity, Matt Grudnoff, Senior Economist at The Australia Institute, connected a lack of competition with slowing productivity growth.

“I think the reason we’ve seen a slowdown in productivity in Australia is because we’re seeing a lack of competition in the Australian economy,” Grudnoff said, arguing that Australia has come to be dominated by oligopolies.

“If you’re a big oligopoly, all you’re really interested in doing is managing, and making sure to keep your shareholders happy as your profit slowly grows,” Grudnoff said.

Are two players enough?

Throughout Australia we see numerous examples of duopolies: Coles and Woolworths. Bunnings and Mitre 10. Qantas and Virgin. Is that enough competition to keep the market honest?

Nicholls says no. At least, not without very strict and well-enforced rules to manage the risk in duopolies, or clear support frameworks for disruptors.

“People talk in a disparaging way about the cosy duopoly, where there are only two major providers,” Nicholls says.

“The reason they tend to get cosy is that they tend not to need to innovate to improve services. There might be some level of competition on price, but consumers are denied the benefits of innovation.

“And so, where there are sectors dominated by two players in Australia, the competition authorities will try to ensure that nothing bad is going on, and that nothing is stopping the entry of somebody else.”

In the supermarket sector, for example, there were once just the two big supermarket chains, Coles and Woolworths, with IGA trailing a very distant third. But entry was always possible for other players, and now Aldi is in the market as IGA is also growing its offering.

Aldi is providing good competition, particularly on price and quality, Nicholls says.

“You start to see a competitive dynamic coming out of that,” he says.

“You do get baked-on loyalty, particularly in the airline sector, but you can only go so far on assuming that loyalty will follow you. And I think Richard Goyder, the chair of Qantas, in the recent AGM discovered there’s only so much patience people have before they’re starting to question why they only have a duopoly, and what has gone wrong.”

Should dominant businesses be broken up?

In the USA, UK and EU, antitrust powers exist that allow regulators to break up monopolies to introduce greater competition into a market.

“Australia doesn’t have that power to break up a monopoly or duopoly. Instead, Australian law says if you have operated successfully enough to get to be a monopoly, you’re even allowed to charge monopoly rents, because you must be doing something right. So competition is allowed to flourish to its ultimate end, here,” Nicholls says.

There are restrictions, however. Nicholls points out that Australia’s regulations against abusing market power are used more often than they might be in countries that can break up monopolies.

“And if two businesses are coordinating with each other, that is cartel behaviour and that is not allowed.”

Australian competition regulators also typically deny permission for mergers or acquisitions that would lead to substantial monopolistic opportunity.

“Australia allows you to become a monopoly if you’ve done it organically,” he says. “You can’t buy your way to a monopoly, you have to grow your way there.”

Do we need monopoly-busting powers?

Breaking up monopolies isn’t necessarily the best way forward, despite slowing productivity growth, lower workforce participation and a smaller tax base as the population ages.

Nicholls suggests a better focus from an industry policy perspective would instead be on the strong promotion of disruption.

“A disruptive entrant can make a huge change very quickly. Big disruptions are potentially available in all sectors,” he says.

“Where they don’t work terribly well is in the financial services sector, where you’ve got that balance between wanting disruptive players, but not wanting to do anything that’s going to disrupt the financial services sector. We want unquestionably strong banks. So there are a few sectors where disruption is only at the margins.”

So, rather than monopoly-busting power, Nicholls prefers powerful support for disruptors, tougher abuse of market power, and greater circumspection around mergers and acquisitions.

Monopolists give less but charge more

Cass-Gottlieb agrees that if economic growth and greater productivity are high on our agenda, as they must be over the next few decades as Australia’s population ages, such powers are vital.

“The ACCC needs to have the tools necessary to be able to properly scrutinise and, if necessary, prevent those mergers that are likely to substantially lessen competition,” she told the National Press Club.

Without such tools, markets are vulnerable to the potentially adverse effects of further consolidation, particularly those that already have large organisations with market power, in markets where there is a high barrier to entry.

"As we know, concentrated markets are generally not good for consumers – or indeed for economic growth and productivity. Companies operating in concentrated markets tend to charge higher price markups over costs for their goods and services, and often have less incentive to innovate in ways that benefit consumers,” Cass-Gottlieb said.

She paraphrased a quote from the late Professor Maureen Brunt, who made a significant contribution to the establishment of competition law and economics in Australia and New Zealand: “These players can give less, and charge more, but retain their grip on the market.”

Cass-Gottlieb told the AFR in early November that suing Qantas over its alleged advertisement of cancelled flights has caught the attention of other major corporates, and that the ACCC has to keep taking such actions.

Her ACCC is shaking their grip on the market.