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Australia's Noah's Ark economy


Cartoon depiction of Noah's Ark with two each of various animalsIf the Coalition can genuinely make a difference to Australia's intensely oligopolistic industry structures — which is among the worst in the developed world — there will be a lot of votes in it. Large numbers of small business people, especially those unfortunate enough to supply the big supermarkets, know only too well how far they are from anything resembling a level playing field. That they do not make this better known is only because they would lose their livelihoods entirely if they spoke out.

Conversely, the Coalition tends to subscribe to the idea that government intervention is ipso facto bad, and any meaningful change will require some serious intervention. There is also, to say the least, powerful political influence exerted on both major political parties by the big corporations. The political parties, which are comparatively small entities, might be said not to have a chance when the big money comes looking for influence.

The most likely outcome is business as usual. But the noises being made by the Coalition are sounding surprisingly pertinent. The Minister for Small Business, Bruce Billson, described the relationship between the big, dominant players and smaller business as akin to 'serfdom'. Quite right. He says the Government wants to examine 'whether the current competition law is the toolkit that supports that to deliver economic prosperity and growth and durable benefits for consumers'.

The answer is easy. It does not. Not even close. Neither is the issue the amount of resources available to the Australian Competition and Consumer Commission (ACCC) as its head, Rod Sims predictably claimed, eager to put his hand out. It is the law that the ACCC administers, which only permits the regulator to act if there is a 'substantial lessening of competition'. The test is easy to get around by making incremental acquisitions.

Even when there are big acquisitions, the ACCC's use of this provision can be extremely weak, an example being Westpac's acquisition of St George in 2008, both of which were heavily concentrated on the New South Wales market. But it is not individual instances that matter as much as the overall shape of the market. Australia lacks anti-trust provisions, such as those that apply in the United States, whereby the total market share can be deemed as a problem and companies required to divest.

Consequently, we have exceptionally powerful oligopolies. A glance at the Fortune top 500 global companies, which compares revenues (not profits) tells the story. Wesfarmers and Woolworths, which are in the top 200, have larger sales than Google or Coca Cola. National Australia Bank, Commonwealth Bank and Westpac rank far higher than global investment banks like Standard Chartered and Morgan Stanley. Telstra ranks close to McDonald's, Hyundai and Halliburton.

That is on the global scale, giving some idea of how big we have allowed our oligopolies to become. On the domestic level Australia is very much the 'Noah's Ark' economy: two of everything.

Consider the spate of industry sectors in which only two companies dominate. Airlines, where Virgin and Qantas have replicated the old Ansett and Qantas duopoly. Paper and packaging, where Visy and Amcor dominate, resulting in corrupt practices that were recently exposed. Print media, where News Corporation and Fairfax enjoy dominance. BHP-Billiton and Rio Tinto are a global duopoly, although Fortescue Metals has, against the odds, managed to loosen its grip on the iron ore market.

It is often argued that it is 'something about the Australian economy' that leads to such concentration, and there are certainly issues of distance. But the argument does not convince. Australia is a $1.5 trillion economy; much smaller countries have far greater diversity. It is rather the case that Australian governments have allowed middle size firms to be taken out, creating an elite tier of dominant, often bullying, oligopolies and small firms with little bargaining power. There are some sizable private firms, but it is not sufficient to even out the imbalance.

The heart of the problem is the use of the word 'competition'. A story by this author revealing that the two supermarkets' substantially raised prices (based on a basket of what consumers actually bought rather than across the whole range) in cities where there was no third competitor eventually resulted in a government inquiry. The inquiry concluded that there was fierce 'competition' between the two supermarkets.

The evidence used to demonstrate how competitive they were was that both companies had tight profit margins. But profit margins can be tight for many reasons, including poor management. Indeed, it is possible that a monopoly can have poor profit margins. Does that mean it is subject to 'competition'?

Better tests of what is meant by 'competition' are needed. This could include having a diversity of players. It seems pretty obvious that duopolies and oligopolies are not particularly competitive, yet the ACCC routinely concludes that they are. This is because of the regulator's terms of reference. Constraints on market dominance such as American-style anti-trust law would also help create some genuine competition. But don't hold your breath — elites are not shifted easily.

David James headshotDavid James has been a business journalist for 25 years and is the author of Managing for the Twenty First Century and The Business Devil's Dictionary. He has a PhD in English Literature from Monash University.

Noah's Ark image from Shutterstock

Topic tags: David James, economics, coles, woolworth's



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Existing comments

“Competition” is a two-edged sword. In the present Capitalistic world of “worshippers of MONEY”, it is usually an expression of unbridled selfishness between competing forces. It sometimes can have accidental spin-offs of reducing prices for the end-users. But this is not it aim. Likewise “Cooperation” can mean mutually selfish Collusion . Or it can mean a healthy agreement of each to play an appropriate part in advancing the total Common Good. The human body is an example of great cooperation of the various functions of the cells, limbs and organs for the health of the whole. If some cells increase their demands on the nutrients of the body, we call it CANCER. If some firms or individuals seek excessive shares of market resources, they call it “business”. On the larger scale, “What is in the Nation’s Interests” is an expression of One Group’ s self interest, whereas what is in best interests of one and all Nations, is the healthy Cooperation of All.

Robert Liddy | 05 November 2013  

I believe that what the Japan’s monetary easing policy is doing to push the YEN downwards healthily is an appropriate action for the Australian government to consider. In a layman term, just print more money to make the currency move downwards peacefully. Since the YEN is much cheaper than before, the export and tourism businesses from Japan are active again. This is exactly what we want to see. Also, if the A$ depreciate, it will show an improvement of our government’s overseas investments which are usually calculated in foreign currencies. Before A$ starts to depreciate, it should be a good idea for investors in Australia to rapidly purchase some overseas assets e.g. a supermarket chain in Hong Kong or some businesses in China or other parts of Asia.

Dulong | 21 November 2013