So, what’s the problem? “Running a market economy, where companies are motivated by profit, can only work as expected if there is sufficient competition, and we don’t have this now. We currently have too few companies competing to serve customers in the markets for many products; we need policies that promote competition, not thwart it,” Sims says.
The market-based economy is one where decisions regarding investment, production and distribution to consumers are guided by the price signals created by the forces of supply and demand, he explains.
But here’s the key provision on which the satisfactory functionings of such an arrangement is based: “An underlying assumption is that there are many suppliers competing to meet consumer demands.”
Right now, that assumption is not being met. Sims quotes Martin Wolf, of the Financial Times, saying “what has emerged over the last 40 years is not free-market capitalism, but a predatory form of monopoly capitalism. Capitalists will, alas, always prefer monopoly. Only the state can restore the competition we need.”
What? Wolf is some kind of socialist? Of course not. Sims puts it more clearly: “The market economy also needs the right regulation in place so that companies pursue profit within clear guardrails.” We need some changes to Australian consumer law to provide these guardrails, particularly an unfair practices provision.
Market concentration – meaning there are only a few dominant companies seeking to meet the needs of consumers in many product markets – is high in Australia. “Think banking, beer, groceries, mobile service providers, aviation, rail freight, energy retailing, internet search, mobile app stores and so much more,” Sims says.
‘What firms seek is market power where they can price, or pay their suppliers, as they want, without being constrained by other competing companies.’
Rod Sims, former ACCC chair
He quotes the Harvard economist Michael Porter, a corporate strategy expert, writing as long ago as 1979 that companies achieve commercial success by finding ways to reduce competition, by raising barriers to entry by new players, by lowering the bargaining power of suppliers including their workforce [No! he didn’t include screwing their own workers, did he?] and by locking in the consumers of their products and services.
“Companies don’t want markets . . . with many suppliers all with relatively equal bargaining power,” Sims says. “Instead, what firms seek is market power where they can price, or pay their suppliers, as they want, without being constrained by other competing companies.
“They seek above-normal profits based on using some form of market power.”
This is not controversial, he says. “Every businessperson would agree. None want to work in a competitive market where they simply seek to outperform their competitors. They want an edge from some form of market power.”
Too much market power in our economy can cause a range of harms to many Australians and to our society. “The most obvious harm is higher prices, which occur particularly when supply is limited relative to demand.
“When supply is plentiful, however, market power means pressure comes on workers and other suppliers.”
Sims points to the way the profits share of national income has been rising at the expense of the wages share. He also notes concerns about the lack of innovation in Australia, as well as our low productivity.
Guess what? When so many markets are dominated by a few big firms, the resulting lack of competitive pressure reduces the incentives to invest, create new products and do other things that increase productivity.
The message for the new government is clear: keep giving big business what it wants – weak merger and competition laws, plus prohibitions on union activity – and the economy will continue to perform poorly. Profits will keep growing while household income shrinks.
And it will prove what the Liberals have always said: Labor’s no good at running the economy.
Ross Gittins is the economics editor.
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