“A real problem for innovation and for the economy”: Andrew Leigh on Australia’s lack of competition

“We've seen a rise in market concentration. We've seen an increase in the gap between cost and prices … We've seen a decline too in the startup rate … All of this suggests the Australian economy may have become less dynamic.” – Andrew Leigh announces the Competition Review, 23 August 2023.

There are very few positives that come from an environment of monopolies and oligopolies, says The Hon Dr Andrew Leigh MP, Assistant Minister for Competition, Charities and Treasury.

A lack of competition is economically damaging for a variety of reasons. Leigh says his intention is to assist in bringing competition back into the Australian market.

“We want to see better prices for consumers and better prices for suppliers,” Leigh says.

“We’ve known for a long time that monopolies squeeze the people they’re selling to. Increasingly, economists are realising also that monopolies squeeze the people they're buying from.”

We see this particularly in the supermarket sector, he says, where farmers find themselves selling to just a couple of processors or supermarkets.

A lack of competition in the labour market also results in the stagnation of wages as there are fewer employers competing for staff.

Importantly for small businesses, this can also lead to a lack of available talent. That’s not just because the big businesses need as many people as they can get. It’s also because they often put non-compete clauses in employment contracts, meaning individuals often can’t work for smaller businesses even if they want to.

“Non-compete clauses make it harder to leave your job, and that is directly relevant to any business that is looking to hire employees,” Leigh says.

“The smaller you are, the more likely you are to need to hire employees from a larger business. That puts you at a competitive disadvantage if all of the good workers are locked in through non-compete clauses.”

Can the ACCC break up big businesses?

In his February Press Club address, Former ACCC chief Professor Allan Fels pointed out that divestiture is “just a standard thing in US competition and antitrust law, and in many other countries”.

“It should be part of our armoury,” Fels said.

Prime Minister Anthony Albanese rejected subsequent Nationals calls for divestiture, particularly of the supermarket giants.

“We're not the old Soviet Union,” he told ABC Radio. "What we have the power to do is to encourage competition and encouraging new entrants."

Leigh argues that, even in territories where regulators have the power to break up companies with monopolies, those powers are rarely used.

Leigh prefers other approaches to ensure the ACCC has the power to do its job effectively, rather than being considered relatively toothless. Over the past several years, corporates considered the minimal fines for anti-competitive behaviour as “a mere cost of doing business”, he says.

“We have also raised the penalties for anti-competitive conduct and banned unfair contract terms.”

Since our conversation with Leigh, the Greens party’s Senator Nick McKim, in an uncommon alliance with the Nationals, introduced the Competition and Consumer Amendment (Divestiture Powers) Bill 2024.

If passed, the Bill is intended to provide the ACCC with real teeth – the power to break up companies that are proven to have abused their dominance. It would not be enough to simply hold a monopoly – a company would need to have misused it in specific ways for the regulator to act.

Whether through penalties or divestiture, competition must be restored for the good of the suppliers, consumers and would-be new market entrants – as well as for the sake of economy-boosting innovation.

“We have been increasingly noticing firms doing less innovation when businesses know they can just buy innovative rivals, instead,” Leigh says.

“That’s a real problem for innovation and for the economy.”

Can the ensure a dynamic, competitive economy

There are too few choices in many markets, including obvious ones such as supermarkets and banking, and less obvious ones such as baby food and beer.

Right now, as McKim’s divestiture Bill is still before the Senate, the Federal Government is working with the states and territories on revitalising national competition policy, as well as scrutinising mergers that could be against the national interest in terms of reducing competition.

This includes ensuring zoning and planning rules take competition into account. Such rules should not allow monopolistic businesses to lock up suitable land sites, making it difficult for others to compete.

But the policy focus isn’t only on matters affecting the big players.

“A lot of what we’re doing in the small business space is aimed at encouraging those strategies for the startups and smaller businesses to be able to compete with the larger firms,” Leigh says.

“Just today, we announced some new innovations and resources for cybersecurity for small businesses that are not being offered to the larger firms.

“We’re doing that because we recognise that cybersecurity has a fixed cost,” he says.

“When you’re very large, you can spread that across your organisation. When you’re smaller, often you might not be able to afford to invest in cybersecurity.”

Cybersecurity is one of a range of risks that can introduce disproportionate costs to small businesses, he says. Such costs can discourage innovation among small businesses and therefore remove from the national economy the productivity-boosting value that small businesses can bring.

Where do we look for an example of a sector that boasts a healthy level of competition? Leigh says we need look no further than Australian farming, which is diverse and competitive, with great levels of competition, and therefore innovation, between small or medium businesses.

The problem for that sector, as mentioned, comes as a result of there being little competition in the local market they’re selling into. Hence, many look overseas for better opportunities.

“We really are an economy where the exceptional sectors are the ones with high degrees of competition,” Leigh says.

“Too many sectors are dominated by just a couple of large firms. That means that it’s harder to get a foothold as a start-up than it might be in a more competitive market.”