Most Australians became acutely aware of market power in 2011 due to, of all things, the price of milk.
Prior to 2011, milk prices rose 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 the major retailers announced they would sell 2 litres for $2.
The effect was immediate:
If the graph does not display click here
For the next nine years, inflation rose 15% while milk prices remained unchanged.
Then in March 2019, notionally to “support farmers”, the major chains announced the end of $2 milk.
The effect again was immediate, and milk prices since then have risen 14% compared with inflation rising 11%.
In this instance the market power worked in consumers’ favour – we paid less for milk.
It didn’t help the farmers, but in 2018 the Australian competition and consumer commission (ACCC) noted that even higher prices would not really help farmers because of the massive power imbalance they have with milk processors.
The ACCC said that due to the power imbalance, higher milk prices would not “mean the processors will pay farmers any more than they have to secure milk”.
This highlights that a lack of competition does not just affect prices, but also the ability of small providers – whether they be farmers or food manufacturers – to compete.
The ACCC said this is the result of “market failure in the Australian dairy industry”.
But really it’s less a “failure” than a “feature”. Large firms consolidate market power with the joy of Scott Morrison grabbing ministerial jobs.
For decades, questions of how to improve productivity growth has inevitably seen business groups answer that we need to reform the industrial relations system and be more flexible.
But in a speech tonight at the Australian National University, the assistant minister for competition, Andrew Leigh, focuses squarely on businesses themselves and how the concentration of market power has hurt Australian consumers and workers, and slowed productivity growth.
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:
If the graph does not display click here
Going from four major banks out of 250, to four out of 150 might seem no big deal, but consider the power of those four:
If the graph does not display click here
The big four hold 74% of all owner-occupier home loans and 79% of investment home loans:
If the graph does not display click here
Even more stunning, they hold 92% of all credit card loans in Australia.
That power is one reason why despite home loan rates mostly following the cash rate down, credit card interest rates did not change:
If the graph does not display click here
You may be able to negotiate a lower mortgage rate, but credit card rate? Nope.
This lack of competition has broader impacts on the economy, something which Leigh addresses in his speech.
Drawing on his own research and work done by Treasury, he says the power held by the top four firms across all industries has risen over the past 20 years:
If the graph does not display click here
He argues this might be fine if “there was a lot of churn among the leaders, with new firms growing and displacing the incumbents” but unfortunately these large firms are more secure than ever.
Twenty years ago about 65% of the top four firms in each industry were still there two years later; now it is above 75%:
If the graph does not display click here
Leigh says this increased market power and security leads to higher prices. Because these firms have secure market power, they can “mark up” prices above what would be possible were there perfect competition.
He estimates “average firm mark-ups increased by around 6% between 2003-04 and 2016-17”.
Leigh pushes back on old free market theories that suggest “if a firm tried to overcharge, competitors would take its market share.”
The facts, he says, show this does not happen.
It does explain somewhat why the Australian Bureau of Statistics was able to assert in June that “Australian businesses benefited from rising prices” while “wage growth trailed inflation, despite a strong labour market”.
A big problem with all of this is not just higher prices and low wages, but, as Leigh says, a “decline in economic dynamism” which in turn reduces productivity growth that drives better living standards.
Strong competition means new firms enter the industry and bring new technology and ways of doing business, and force poor performing firms out. But Leigh says that aside from a bump during the pandemic (which looks a bit of an abnormality) fewer new firms are now entering Australian industries and fewer are leaving:
If the graph does not display click here
Leigh argues this creates a “more sluggish economy” where major firms can mark up their prices, feel little pressure to innovate and even less need to raise wages.
While business groups inevitably talk about needing changes to industrial relations to improve productivity, Leigh makes it clear that businesses themselves and how they operate have much to answer for.