From higher prices to poorer service, here’s how a lack of competition damages Australia | Rod Sims

Australia has an extremely concentrated economy, with one or a small number of companies dominant in many parts of our economy, and this has consequences. Overall, the evidence suggests it means higher prices and poorer service for consumers, reduced productivity and so less prosperity for Australians, and more pronounced income inequality.

The recent issues with Qantas illustrate some of these issues. We currently see both sustained high ticket prices and issues with service levels ranging from the availability of flight credits to allegations of advertising tickets on already cancelled flights.

Not only does Qantas dominate aviation with two-thirds of the domestic market, but we have one dominant rail freight company operating on the east coast. We also have two beer and two ice-cream sellers and ticketing companies all with a 90% share of their respective markets, two grocery supermarket chains with around a 70% share, three dominant energy retailers and telecommunications companies, and four major banks with a 75% share of the home mortgage market.

One clear result of high market concentration is that mark-ups and so prices are structurally higher in Australia. Commonwealth Treasury analysis also finds that mark-ups have increased from 2004 to 2017. Further, firms do not try as hard to win our custom. We run harder when competing versus when we run alone. This goes to the heart of what a market economy should be all about.

Then there is the significant harm to our economic performance. The evidence in Australia and overseas is that with few competitors in the market we see less dynamism, and lower investment and productivity.

The Australian economy-wide data shows that high market concentration coincides with lower labour mobility, less firm entry and exit, lower technology adoption, and less challenge to the market leaders. The evidence also is that firms in concentrated markets are further from the productivity frontier as there is less incentive to “reach for the stars”.

US economists Paul Krugman and Larry Summers said that if market power was increasing, we would expect to see high corporate profits but low rates of investment, despite relatively low interest rates (a pre-Covid observation) and high share prices. “This,” Larry Summers pointed out at the time, “is exactly what we have seen in recent years!” The same pattern still holds in Australia.

One US study found that 80% of aggregate underinvestment since 2000 can be explained by less competitive markets and increased ownership of stock by institutional investors. A British study found that a 25% increase in market concentration leads to a 1% fall in productivity.

Market concentration also has implications for wage levels. Reduced labour mobility reduces wage levels. Studies show that a 1% increase in the rate at which workers move jobs sees a 0.5% increase in average wages. High industry concentration, however, sees fewer firms that workers can move to bringing relevant skills, and less new firm entry. Less competition for workers sees lower wages. Non-compete clauses, of course, don’t help. Recent research has shown that more than one in five Australian employees were prevented from working for competitors under non-compete clauses often in fairly low-skilled jobs.

Crucially, the benefits of productivity gains are less shared with workers in concentrated industries. The share of productivity gains going to workers has declined by 25% in the last 15 years. This finding has significant implications for the debate about wage levels and productivity.

Currently, and significantly, the wage share is at historic lows and the profit share is at historic highs in most sectors of the Australian economy. This has even more importance as it is occurring at a time of historic low cost of capital.

Further, corporate equity has become even more skewed relative to consumption recently which exacerbates the extent to which increased mark-ups raise inequality.

Australian data finds that monopoly power has a larger impact on lower income groups and increases inequality. Overseas studies support the link between inequality and market power. It has, for example, been found that market power increases the wealth of the richest decile by up to one-fifth.

Inequality is not, therefore, simply a function of taxation and government programs, important as they are. Focusing more on the competitive process, the structure of markets and the incentives those structures create for firms will play an important role in reducing inequality.

There are many forces against policies that promote competition. Business and business organisations, for example, and quite often business media. Competition progress is, therefore, like walking up the down escalator; if you are not constantly pressing forward you will go backwards.

Running an economy on the basis of each individual pursuing their own self-interest is high reward and high risk. The key to raising the former and lowering the latter is an approach that seeks to boost competition and so economic dynamism.