Most Australians realized market power in 2011, largely due to the price of milk.
Prior to 2011, milk prices increased largely in line with inflation. From 1998 to the end of 2010, inflation rose 43% and the price of milk rose 44%.
Then in 2011, major retailers announced that they would sell 2 liters for $2.
The effect was immediate:
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Over the next nine years, inflation rose 15% while milk prices remained unchanged.
Then, in March 2019, ostensibly to “support farmers,” the major chains announced an end to $2 milk.
The effect again was immediate, and milk prices have since risen 14% compared to inflation which was up 11%.
In this case, market power worked in favor of consumers: we pay less for milk.
It didn’t help farmers, but in 2018 the Australian Competition and Consumer Commission (ACCC) noted that even higher prices would not really help farmers because of the huge power imbalance they have with milk processors.
The ACCC said that due to the imbalance of power, higher milk prices will not “mean that processors will pay farmers more than they have to pay to secure milk.”
This highlights that the lack of competition not only affects prices, but also the ability of small suppliers, be they farmers or food manufacturers, to compete.
The ACCC said this is the result of “market failure in the Australian dairy industry”.
But it’s actually less a “flaw” than a “feature”. Big business consolidates its market power with the joy of Scott Morrison getting ministerial posts.
For decades, questions about how to improve productivity growth have inevitably prompted business groups to respond that we need to reform the industrial relations system and be more flexible.
But in a speech tonight at the Australian National University, Deputy Competition Minister Andrew Leigh focuses squarely on the companies themselves and how the concentration of market power has hurt Australian consumers and workers and slowed growth. of productivity.
Another well-known example of market power is banks.
Since 2004, Australia’s financial sector has shrunk from nearly 250 deposit-taking institutions to just under 150:
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Going from four major 250 banks to four 150 banks may not sound like much, but consider the power of those four:
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The Big Four hold 74% of all homeowner-occupant mortgage loans and 79% of investment mortgage loans:
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Even more amazing, they hold 92% of all credit card loans in Australia.
That power is one of the reasons why, even though home loan rates remain mostly lower than the cash rate, credit card interest rates haven’t changed:
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You may be able to negotiate a lower mortgage rate, but the credit card rate? Nope.
This lack of competition has broader impacts on the economy, something Leigh addresses in her speech.
Drawing on his own research and work done by the Treasury, he says the power of the top four companies across all industries has increased over the last 20 years:
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He argues that this might be fine if “there was a lot of turmoil among the leaders, with startups growing and displacing established ones,” but unfortunately these big companies are safer than ever.
Twenty years ago, about 65% of the top four companies in each industry were still there two years later; now it is above 75%:
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Leigh says that this increased market power and security leads to higher prices. Because these companies have secure market power, they can “push up” prices above what would be possible under perfect competition.
It estimates that “average business markups increased by about 6% between 2003-04 and 2016-17.”
Leigh rejects old free market theories that suggest that “if a company tried to overcharge, competitors would take their market share.”
The facts, he says, show that this does not happen.
It explains a bit why the Australian Bureau of Statistics was able to claim in June that “Australian businesses benefited from higher prices” while “wage growth lagged behind inflation, despite a strong labor market” .
A big problem with all of this is not just higher prices and lower wages, but, as Leigh puts it, a “slowing economic dynamism” which in turn reduces the productivity growth that drives higher living standards.
Strong competition means new companies enter the industry and bring new technologies and ways of doing business, and drive out underperforming companies. But Leigh says that aside from a blip during the pandemic (which seems a bit abnormal), fewer new companies are now entering Australian industries and fewer are leaving:
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Leigh argues that this creates a “slower economy” in which major companies can raise their prices, feel little pressure to innovate, and even less need to raise wages.
While business groups inevitably talk about the need for changes in labor relations to improve productivity, Leigh makes it clear that companies themselves and how they operate have much to answer for.
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