The real crisis isn’t the GFC, it’s lack of competition
While everyone knows about the current financial crisis, few people know of Australia’s other crisis.
That other crisis involves the growing over-concentration of key markets in the economy and how our competition laws are impotent to deal with the growing crisis.
That crisis is already having a major negative impact on consumers and the economy through such things as higher food prices and higher bank fees.
Sadly, if this is not properly handled the negative impact will continue long after the current financial crisis is a distant memory.
So, what lies at the heart of this other crisis? To understand that, it’s important to go back to basics.
First, as a market economy Australia requires that there is vigorous competition between competitors.
Unfortunately, the level of actual competition is linked to the number and strength of competitors in the market.
Therein lies the problem. Through mergers and other anti-competitive practices designed to “take out” competitors we are left with fewer and fewer players that are more and more likely to act as a cosy club pushing up prices to consumers.
Why compete too aggressively when you can just shadow your few remaining competitors on price? A cosy club represents the easy life so why rock the boat?
We see it in banks, the grocery sector, and the petrol industry. It’s even worse where you end up with just a monopolist.
Have a think about the price gouging behaviour of a monopolist when you next park at an airport carpark.
With monopoly power comes pricing power. That is, the ability to drive up prices and force consumers to pay more than they would have in a truly competitive market.
How did we find ourselves in this other crisis?
Quite simply, because over an extended period of time our competition laws have been weaken by court decisions that have narrowly interpreted key parts of those laws.
These court decisions have punched big holes in our competition laws.
Consequently, Australia now has some of the weakest competition laws in the world.
Rather than fix our broken competition laws, successive Governments have even added to the problem by not staying ahead of the corporate crooks.
Laws to put cartel participants in jail are still not in force.
This allows the corporate crooks to steal from consumers without the fear of going to jail like your local neighbourhood crim.
Laws supposedly designed to stop anti-competitive mergers allow the regulator – the Australian Competition and Consumer Commission – to approve upwards of 97% of mergers.
With those odds of success in getting a merger through no wonder we are left with 3, 2 or even 1 player in key markets.
Once we are left with so few players just watch prices rise.
With only 2 major supermarket chains no wonder Australia’s food inflation is increasingly higher than our trading partners.
So while we have a financial crisis causing many prices to collapse, food and grocery prices are going up.
This contradiction is easily understood when you realise that having just two major supermarket chains controlling upwards of 80% of the grocery sector means that they have the power to put prices up where they are only “competing” with one another.
Of course, the supermarket chains may drop their prices where they face competition from independents, but that is only done so in the hope of driving out those independents so that prices can go back up.
Clearly, any dropping of prices is localised and only benefits consumers so long as there are independents left in that local market.
This practice is known as geographic price discrimination and involves selling low in a local market having independents to drive them out and cross subsidising those lower prices with much higher prices in other markets where there are no independents.
Why don’t the major supermarket chains charge the same low price in all markets?
For the simple reason that in the absence of independents the major supermarket chains can keep prices up.
What is needed is a law to correct this market failure which allows consumers to be ripped off in markets lacking independents.
This is where the proposed “Blacktown Amendment” comes into play.
The Blacktown Amendment to be sponsored by Senators Barnaby Joyce and Nick Xenophon will ensure that the major supermarket chains will sell the same product at the same low price in all their stores in the same geographic area.
That way, consumers will be guaranteed the lowest possible prices in all local markets in the same geographic area. Under the Blacktown Amendment consumers will no longer be discriminated against on the basis of postcode.
Getting stronger competition laws is only part of the way to ending the crisis.
While having world’s best competition laws is a critical first step, it is essential that the ACCC is a tough enforcer.
Protestations that the ACCC will look at cases “very closely” mean little where little or no action flows from such “watching.”
Strong enforcement of effective competition laws would go a long way to tackling Australia’s other crisis where consumers are left exposed to higher prices because of weak competition laws and an ACCC that prefers to “watch”.
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