In 1992, packaging businessman Ed Zac started cardboard box manufacturer Zacpac, in Sydney. A family-run operation, Zacpac hoped – like many small businesses – to grow large enough to employ more staff and expand.
Unfortunately, others had different ideas. Visy and Amcor controlled over 90% of the cardboard box market. They were actively colluding.
In scenes reminiscent of spy thrillers, clandestine meetings between senior firm representatives occurred in hotels and motels. They made phone calls from public phones and prepaid mobiles, and met up in parks. It went right to the top, including a 2001 meeting between the firms’ two chief executives: Amcor’s Russell Jones and Visy’s Richard Pratt (then the third richest person in Australia).
After Amcor confessed, the ACCC took action, ultimately leading to a court judgment which imposed a $36 million fine on Visy for price-fixing, the largest fine in Australian history at that time, and $2 million worth of fines for the individuals involved.
Like a large tree that overshadows the saplings around it, firms that abuse their market power prevent newer competitors from growing. They hurt entrepreneurs and often reduce the scope for innovation. Consumers suffer through higher prices, lower quality and less choice.
Compiling IBIS World market share data for over 400 industries in Australia, I found significant market concentration.
In department stores, newspapers, banking, health insurance, supermarkets, domestic airlines, internet service providers, baby food and beer and soft drinks, my analysis suggests that the biggest four firms control more than four-fifths of the market. In most of the industries that I studied, the market share of the top four firms exceeds one-third, a common definition of an overly concentrated market.
What might explain the observed degree of market concentration?
First, there have been more mergers, with total mergers rising from 394 in 1992 to 1,460 in 2015. In general, mergers tend to increase market concentration.
Second, our nation is creating fewer companies. From 2011 to 2015, the rate of new business formation in Australia declined by 2 percent. Over time, fewer new businesses means more market concentration.
As a higher proportion of the economy becomes weightless, the challenge of concentrated markets becomes harder still. Google dominates search. Apple dominates smartphones. Uber and AirBNB have a significant share of their respective markets.
Competitors struggle to make inroads due to a combination of intellectual property, network effects, and merger activity.
Too little competition can lead to too much inequality. Since the late-1970s, Australia has seen greater inequality in wages, household income, top income shares and top wealth shares.
Inequality in Australia today is as high as it has been in three-quarters of a century.
Modern-day market power tends to benefit shareholders and top executives at the expense of consumers. Because both capital owners and senior executives are wealthier than the average consumer, market power tends to increase inequality.
As Labor’s Shadow Minister for Competition, I am pleased a Shorten Government would begin to address the problems that I have outlined.
Labor has a strong history of consumer-focused policy reform. Labor introduced the Prices Justification Act in 1973, the Trade Practices Act in 1974, National Competition Policy in 1995, and the Australian Consumer Law in 2011.
In the current parliamentary term, we have supported many – though not all – of the proposals of the Harper Review.
However, we do not believe that the government has focused enough on inequality.
A future Labor government will ensure that competition policy does more to ameliorate the growing economic gap in our society. This work complements what we are doing to tackle inequality in other policy areas. In social policy, Jenny Macklin has released a seminal report, titled Growing Together – Labor’s Agenda for Tackling Inequality.
First, we will amend Section 76 of the Competition and Consumer Act to allow the Court to apply higher penalties for conduct that targets or disproportionately impacts disadvantaged Australians, or apply lower penalties when firms have provided adequate compensation to those affected.
Second, we will include a requirement in the Competition and Consumer Act that the ACCC prioritise investigations of conduct that targets or disproportionately impacts disadvantaged Australians.
Third, we will task government to investigate the impacts of increased market concentration on income inequality in Australia and produce policy recommendations on how the negative effects of market concentration can be mitigated.
Fourth, we will encourage states and territories to include competition principles in planning and zoning legislation, as recommended by the Harper Review, with a specific focus on shortfalls of appropriately zoned land for key services in disadvantaged communities.
After a generation of rising inequality, and with the evidence pointing towards increased market concentration, it is vital to look at ways of ensuring that competition works for the neediest. These policies will help tilt the playing field towards the most disadvantaged.
* Andrew Leigh is the Shadow Assistant Treasurer and Shadow Minister for Competition. This is an edited extract of his Freebairn Lecture, delivered at Melbourne University on May 19.