No competition = overpricing
The article below is based on research by Jan and Jan titled “Global market power”, which reviewed data on 70,000 firms in 134 countries from 1980 to show that the average global markup has gone up from close to 1.1 in 1980 to around 1.6 in 2016 (papers.ssrn.com):
A solution to the high price of living in the Land of Ozzigopoly. by Peter Hartcher in the Canberra Times, 3 November 2018
This week it’s anger at rising petrol prices. Last week it was anger at high electricity prices. In a couple more weeks the royal commission will no doubt arouse fresh anger at bank rip-offs. In the months to come it will be anger at rising road tolls, health insurance premiums, and electricity. Again.
What’s the common element? There are two. First, they’re all about the cost of living, the topic that Australians list as their biggest concern, ahead of health care, ahead of crime, ahead of the economy, according to pollsters Ipsos. Second, they all have a common cause. They’re all caused, in part, by a lack of competition. Looking forward to buying your groceries at Colesworth’s this weekend, are you?
Andrew Leigh, the federal Labor spokesman on competition says “Australia has a competition problem: there is not enough of it”. He signalled that a Labor government would do something about it. At the moment, the political system attacks oligopolistic abuses in episodic outbursts of frustration, one by one. But it’s not an episodic problem. It’s a systematic one.
Leigh, who was an ANU economics professor before he entered Parliament, tested 481 industries in Australia. He and another ANU economist, Adam Triggs, applied a standard measure that says an industry is highly concentrated if the four biggest players control more than a third of the market. By that test, most sectors across the Australian economy are dominated by just a few firms.
“Some sectors are particularly tightly controlled. In department stores, newspapers, banking, health insurance, supermarkets, domestic airlines, internet service providers, baby food and beer, the biggest four firms comprise more than 80 per cent of the market,” Leigh said in his speech. The digital economy is no better. In some cases, companies are using new digital technologies to rob customers and cheat the law.
Petrol firms are using big data analytics to collude on prices, using a single service station as their shared price signaller, Leigh says, drawing on a study of the Perth petrol market. “You no longer need to sit in smoke-filled rooms to fix prices – they are effectively colluding without breaking the law.”
And Leigh cites The Economist magazine on the biggest digitally based businesses in the Western world, the so-called FAANG firms of Facebook, Amazon, Apple, Netflix and Google: “There is now a ‘kill zone’,” for competitors of these behemoths, “in which companies are either acquired or quashed.”
But it’s the overall effect of market concentration that has had a shocking effect. Worldwide, corporate profit margins have risen inexorably over the last 40 years. But Australia is an extreme case of corporate profiteering, according to an international survey that Leigh quotes. In the 1980s, the average prices charged by publicly listed companies was not far above the cost of production, and stayed around that level till the late 1990s.
Then profit margins exploded. Mark-ups soared to an average 40 per cent by the early 2000s, climbing to 50 per cent above cost by 2010. This trend then accelerated in the last few years. By 2016, listed companies in Australia were charging prices 60 per cent above their costs of production, according to the study of 70,000 firms in 134 countries by Jan De Loecker from Princeton and Jan Eeckhout from University College London. They found the same trend worldwide, but with the global average today at 50 per cent compared to Australia’s 60 per cent profit margin.
This finding seemed so outlandish that Andrew Leigh contacted the authors to check their results. The inescapable conclusion is that this is national exploitation on a systematic and rising scale. Says Leigh: “It’s a massive transfer of wealth from consumers to producers.”
“If true, it’s of considerable concern,” says Allan Fels, the inaugural head of the ACCC and now a professor at the Melbourne Law School. “I’m inclined to believe it is true and it probably needs more research. It is a sign that we should be concerned about more vigorous enforcement” of competition law.
How would a Shorten Labor government measure success in tackling this profiteering? “Bringing mark-ups down to 10 to 20 per cent would be much more reasonable,” Leigh tells me. “It’s not as if companies weren’t making any profits in the 1990s”, when margins were nowhere near as fat as today’s.
This evidence of weakening competition could also help explain two of the most important phenomena of our time – slow growth of wages and rising inequality. Leigh points to studies showing that the weaker competition gets between companies, the smaller the share of benefits that flows to the workers. You probably don’t need a PhD in economics to figure out that a bigger concentration of corporate market muscle will aggravate inequality, but Leigh happens to have one and he puts it to good use in a survey of evidence.
The rising concentration of corporate power and profiteering is in line with Karl Marx’s observations of capitalist economies. Marx might have been lousy at prescribing an alternative to capitalism, but he was an astute analyst of its workings. A century and a half ago Marx wrote of capitalism’s natural tendency to monopoly. Which ends in the destruction of the market economy.
So to save capitalism from itself, governments in market economies need to wage an unending vigil against the ever-present tendency for greater market concentration. Leigh intends to reinvigorate the effort in Australia, improving the treatment of consumers in the process and holding inequality at bay. Concentrated markets like those in Ozzigopoly are “bad for the economy and bad for democracy”, says Leigh.
What would Labor do exactly? Labor would toughen the test for companies that want to merge or buy other firms, although Leigh hasn’t yet specified how exactly. Australia has too many mergers and too few start-ups, he argues. He also proposes to step up penalties for anti-competitive behaviour so that, instead of paying a flat fee which is like a parking fine to a big company, firms would have to pay a penalty based on 30 per cent of their sales multiplied by the number of years they were breaking the law, as in the European Union. It’d be capped at 10 per cent of total annual sales or $10 million per infringement.
And a Labor government would double the ACCC’s budget for litigation so that it could more aggressively sue businesses. It would also increase its investigative powers. For small businesses afraid of taking court action against big ones, Labor would change the law to protect them from any court ordering that they pay not only their own legal bills but also those of their opponent in the event that they lose a case.
Fels is broadly supportive of the Leigh inclinations, but he wants governments to go further. “It’s obvious that Australia needs a divestiture law” to force companies to be broken up, as in the US.
“It should be a sanction used when a company has acted illegally.” This is what the Morrison government proposes for the power sector. Instead of applying to a single industry, however, Fels wants this available across the economy. And instead of the government’s plan to put the break-up power into the hands of a minister, Fels says it should be put into the hands of the courts.
But Leigh says that Labor would not bring in a divestiture power, for electricity or any other industry. It’s going too far, he says. He says that Labor shouldn’t be daunted by the prospect of taking a hard line against big business to force more competitiveness into the economy: “It’s very much in the spirit of Whitlam and Keating as reforming Labor governments.”
He will certainly need boldness to wage war on corporate profit margins. Yet the refusal to allow the break-up of badly behaving monopolists or oligopolists suggests a certain wariness of corporate power. In light of Kevin Rudd’s thesis that no prime minister can survive the united opposition of the mining industry and the Murdoch press, perhaps it’s prudent.
See also Bloomberg for a European view of the same research: www.bloomberg.com