The market power of Australia’s largest companies has grown over the past two decades and price premiums have risen.
Core items:
- Large companies are increasingly dominating the Australian economy
- They use their market power to raise prices
- Competition policy must refocus on the consequences of market concentration
The increasing concentration of the economy has been accompanied by a decline in productivity growth.
These are the findings of recent research and fresh analysis from the Treasury, pointing to a lack of dynamism in Australia’s economy.
Andrew Leigh, Deputy Federal Secretary for Competition, Charity and Finance, says the trends are worrying.
He says there is evidence that decreasing competitive pressures is one of the main reasons Australian companies have been slower to innovate and improve their productivity performance over the past twenty years.
He also suspects that the influence of the Chicago School on Australia’s competition policy in recent decades, with its lax attitude towards dominance, has contributed to this situation.
He says competition policy in the United States these days is showing signs of going in the other direction, with key policymakers arguing that too much market concentration can hurt consumers and dampen momentum.
Australia’s economy has weakened
dr Leigh will make these observations tonight when he delivers the FH Gruen lecture at the Australian National University.
It will draw on a new financial analysis of microdata from the Australian Bureau of Statistics (ABS) to show Australia’s economy has weakened since the turn of the century.
“There have been a number of significant changes in the Australian economy in recent decades,” he says in a copy of his speech.
“The job turnover rate has fallen. The business creation rate has declined. The largest companies have increased their market share. Premiums have increased.
“All of this suggests that the Australian economy has become less competitive.”
He says the deterioration in these economic indicators has coincided with the slowdown in productivity growth.
“A back-cover calculation suggests that rising market power has reduced the rate at which labor flows to its most productive uses, which in turn has reduced annual labor productivity growth by 0.1 percentage point (about a fifth of the observed slowdown since 2012 ),” he says.
“There is also evidence that declining competitive pressures is a key reason Australian firms have been slower to adapt, innovate and improve productivity performance.”
He says more work is needed on this issue by the public sector and academia to better understand why market power has increased in Australia and whether any measures can – and should – be used to bolster competition and productivity growth in the country to boost for years to come.
Market concentration is increasing, but who owns the companies?
dr Leigh says if you look at the market concentration of the four largest companies in every industry of the economy, they have become increasingly powerful.
“In 2001/02 the market share of the four largest companies averaged 41 percent. In 2018/19, that number had risen to 43 percent,” he says.
“Across the economy, from baby food to beer, the top four companies hold a high and growing market share.”
He says the problem of market concentration could get worse given that competing companies often share the same large shareholders.
“The largest shareholders in Commonwealth Bank are Vanguard and Blackrock, which are also the largest shareholders in the other three big banks in Australia,” he says.
market power and inflation
dr Leigh’s speech comes at an interesting time.
In Australia, inflation is currently running at an annual rate of 6.1 percent, well above nominal wage growth.
Some economists say some companies are partly to blame for this inflation because they have used their market dominance to take advantage of the situation and rake in huge profits during chaotic times.
Gas giant Santos, for example, recently reported a 300 percent increase in its half-year profit, while households on Australia’s east coast face potential energy shortages.
dr Leigh says that even before the pandemic, increasing market concentration in Australia had caused markups to rise over the past few decades.
A “markup” refers to the difference between the price a company charges for its product or service (to guarantee a profit) and the cost of production.
“With perfect competition, premiums should be small – they should only reflect the need for business owners to achieve a return that offsets their risk,” says Dr. leigh
“In a monopolized economy, markups could be massive.”
He says recent work by Treasury officials showed average corporate markups in Australia rose by about 6 percent between 2003-04 and 2016-17.
Is the tide turning?
dr Leigh suggests that competition policy in Australia needs to pay more attention to the consequences of increasing market concentration.
He says politicians shouldn’t ignore what’s happening in the US these days.
“Over the past few decades, competition policy in Australia has been too heavily influenced by the Chicago School approach, which took a relatively relaxed stance on market dominance,” he says.
“Chicago School supporters like Robert Bork argued that if a company tried to overcharge, competitors would take their market share. Predatory pricing would not occur as companies would never be able to recoup their losses if new competitors entered the market. Big could be beautiful.”
“[But] a new approach has emerged in recent decades.
“The ‘New Brandeis Movement’ argues that excessive market concentration can hurt consumers and dampen momentum. Too much market concentration, it argues, can lead to a less innovative and sluggish economy,” he says.
He says he traveled to Washington DC last month to meet some of the key policymakers who embody the new movement.
“Australia should not ignore this marked shift in the way senior US officials view competition policy,” he says.
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