How monopolies hurt the economy

When my three boys were younger, there was one sure way to start a family fight: play Monopoly. The board game would start calmly enough, with some teasing over who got to be the battleship, the boot and the thimble. But within the hour, lucky dice rolls would create a clear divide between the moguls and the marginalised. Sure, Monopoly might be the only place where rich and poor have an equal chance of going to jail. But like life, the game entrenches privilege. When you’re rich, you buy houses and hotels, which bring in rent from the other players. As the monopolist brother started taunting their soon-to-be-bankrupt siblings, yelling was sure to follow.

Monopolists aren’t evil – they’re just acting in line with their incentives. Writing in 1776, Adam Smith observed: “The interest of the dealers, however, in any particular branch of trade or manufactures, is always in some respects different from, and even opposite to, that of the public. To widen the market and to narrow the competition, is always the interest of the dealers.”

This tension between what is in the interests of monopolists and what is in the interests of the public is one of the reasons why economists aren’t always in sync with business leaders. If titans of business represent companies with market power, then they are likely to prefer arrangements that let them dominate markets. They might also be sceptical about changes that advantage start-ups.

Rod Sims, former chair of the Australian Competition and Consumer Commission (ACCC), has observed that what is often taught in business schools is how companies can create a position of market dominance. For example, Michael Porter’s famous “five forces model” suggests businesses can achieve commercial success by diminishing competition, establishing high barriers to entry, keeping suppliers fragmented and weak, cultivating strong consumer loyalty and reducing the chances of other companies being able to offer your customers products perceived as substitutable for your own. As Sims points out, Porter’s five forces model serves the owners of companies, not the buying public.

Consumers don’t have to look far to see the dangers of monopoly power. Whether it’s mobile phone carriers, supermarkets, health insurers or banks, there’s often only a few choices. If you live in a regional area, you’ll typically have even fewer options. And while the promise of the internet was it would make it easier for new competitors to emerge, the online environment has created some of the biggest monopolists of all. Amazon dominates online shopping. Google dominates search. Uber dominates ride-sharing. Airbnb dominates short-stay home rentals.

Australia’s markets are more concentrated than in many other nations. Economists Dan Andrews and Elyse Dwyer, of OECDeconomy and Macquarie University respectively, compared the market share of the top four companies in Australia and the United States. They found 17 industries where it was possible to make a direct comparison. In all but one, Australia’s markets were more concentrated than those in the US.

One response to this research is, “Well, what do you expect in a country with fewer than 30 million people?” Inherent in that explanation is that size matters, and when a country grows larger, its markets will become more competitive. Yet the trend has been in the opposite direction. According to Andrews and Dwyer, the average Australian industry became more concentrated over the period from 2006 to 2020. Despite the population and economy increasing, our biggest companies grew their market share.

This is not the only troubling trend over that era. Reserve Bank researcher Jonathan Hambur finds that mark-ups – the gap between cost and price – have risen. Meanwhile, the start-up rate of new employing businesses has slowed. And employees are less likely to be switching companies – which means slower wage growth and less economic dynamism.

Together, these trends may explain why the period from 2013 to 2022 was a lost decade for productivity growth. Even before the pandemic hit, the Australian economy was showing signs of stagnating. More concentration, bigger mark-ups, fewer start-ups and less job switching had made the economy less dynamic. As a result, real wages barely grew.

The story of Australia’s lost decade stands in stark contrast with the story of the Hilmer decade. In 1992, then prime minister Paul Keating tasked Fred Hilmer, Geoff Taperell and Mark Rayner with advising him on what could be done to create a seamless national economy. With Bob Hawke, Keating had already opened up the economy to international competition: bringing down tariff walls to make goods cheaper and force local businesses to compete against the best in the world. But many areas of the domestic economy faced minimal competitive pressure. Sectors such as transport, electricity, water and telecommunications were still relatively untouched by competitive forces.

The Hilmer reforms brought a much-needed dose of competition to the Australian economy. Retail energy markets were deregulated, allowing consumers to shop around for the best prices. National food standards were introduced. Retail trading hours were deregulated in most jurisdictions. A wide range of agricultural marketing boards that set prices were abolished. The dairy industry was deregulated and milk prices fell. Analysing the impact of the competition reforms in 2005, the Productivity Commission estimated they led to a permanent increase of 2.5 per cent in Australia’s GDP. Today, that lift equates to about $5000 a household.

As Paul Keating put it in his book After Words, “We brought a new word to the Labor lexicon – competition. Competition is our word, not their word. Not the Tories’ word … [W]e were tired of paying twice as much as we should be paying for cars, for telephones, for clothing, for electricity. By cutting tariffs and by lifting domestic competition, we created a low price structure, thereby allowing people’s wages to go further.”

Today, the nation faces fresh competition challenges. One of these is the fact Australia’s current merger scrutiny system is outdated. About 1400 mergers occur annually, but the competition watchdog only reviews about 300. Most mergers escape scrutiny, unlike in other advanced countries with compulsory merger notification. There are no fewer than three merger pathways, which contributes to needless confusion and delays and can create an opportunity for strategic behaviour to avoid detection.

To address this, reforms are now under way to make Australia’s merger approval system faster, stronger, simpler, more targeted and more transparent. There will be a single administrative pathway with the ACCC as the primary decision-maker. The goal is to improve merger efficiency and strengthen the economy.

A modern merger system isn’t just good for consumers, it can also benefit shareholders. According to The Merger Mystery by Geoff and J. Gay Meeks, many mergers end up reducing profits and sharemarket value. Mergers that destroy value are an economic failure.

Another major competition challenge arises from non-compete clauses, which hamper workers from moving to a better job. For example, a non-compete clause might say that if an employee quits, they cannot take a job at a competitor within 10 kilometres for six months. About a fifth of the workforce find themselves bound by non-compete clauses, including early-childhood workers, hairdressers and yoga instructors.

Switching jobs isn’t just a great way to get a pay rise; it’s also essential for new business creation. In today’s full-employment economy, a start-up entrepreneur will typically be looking to hire workers from existing companies. If all of your potential workforce is locked up by non-compete clauses, however, it’s hard to get a new company off the ground.

In the US, the Federal Trade Commission recently announced a nationwide ban on non-compete clauses. The commission’s analysis predicts the ban will boost average annual earnings by US$524 and lead to the creation of more than 8000 additional businesses and more than 17,000 new patents every year. In Australia, submissions to the issues paper on non-competes closed at the end of May. This government is now deciding how best to reform Australia’s laws to give workers and new businesses more freedom.

Competition is critical in reducing cost-of-living pressures, so in key industries the government is prioritising specific reforms. Australia’s supermarket sector is heavily concentrated, leading to complaints from suppliers and shoppers alike. In response, former competition policy minister Craig Emerson has been tasked with reviewing the Food and Grocery Code of Conduct, considering whether the current voluntary code should be made mandatory. The ACCC is reviewing the supermarket sector, with a particular focus on consumers. And consumer group Choice has been funded by the Australian government to produce quarterly reports that inform grocery shoppers of where to get the best deal.

Finally, there’s the revitalisation of National Competition Policy, which was in abeyance under the former Coalition government. By collaborating with states and territories on issues such as the data economy and the net zero transition, Australia can achieve the kinds of lasting gains that boosted dynamism and raised family incomes in the 1990s.

A competitive economy is good for farmers and shoppers, workers and entrepreneurs. A dynamic economy rewards hard work and encourages innovation. It ensures everyone has a fair shot, not just the lucky insiders. A more competitive economy is good for Australia.