The market power of Australia's largest firms has grown in the last two decades, and price mark-ups have increased.
Andrew Leigh, the federal Assistant Minister for Competition, Charities, and Treasury, will make those observations this evening when he delivers the F.H. Gruen Lecture at the Australian National University.
He will draw on new Treasury analysis of microdata from the Australian Bureau of Statistics (ABS) to show that Australia's economy has become more sluggish since the turn of the century.
"Over recent decades, there have been a number of significant changes in the Australian economy," he says in a forward copy of his address.
"The job-switching rate has fallen. The business start-up rate has declined. The largest firms have increased their market share. Mark-ups have increased.
"All this suggests that the Australian economy has become less competitive."
Dr Leigh's speech will come at an interesting time.
In Australia at the moment, inflation is running at an annual pace of 6.1 per cent, which is well ahead of wage growth.
Some economists say many large businesses are partly to blame for that inflation because they have been using their market dominance to exploit the situation and collect huge profits during chaotic times.
The gas giant Santos, for example, recently reported a 300 per cent increase in its half-year profit while households on Australia's east coast face a potential energy shortfall.
Dr Leigh says even before the pandemic, growing market concentration in Australia had seen mark-ups increase in recent decades.
A "mark-up" refers to the difference between the price that a company charges for its product or service (to guarantee a profit) and the cost of production.
"Under perfect competition, mark-ups should be small – reflecting only the need for business owners to make a return that compensates for their risk," Dr Leigh says.
"Under a monopolised economy, mark-ups might be massive."
He says recent work from Treasury officials showed average firm mark-ups in Australia increased by around 6 per cent between 2003-04 and 2016-17.
Productivity problems
As the economy has become more concentrated, it has also coincided with a decline in productivity growth.
Those are the findings of recent research and fresh Treasury analysis that point to lack of dynamism in Australia's economy.
Dr Leigh says there's evidence declining competitive pressures are one of the main reasons why Australian firms have been slower to innovate and improve their productivity performance over the last twenty years.
"One back-of-the envelope calculation suggests that rising market power has reduced the rate at which labour flows to its most productive use, which has, in turn, lowered annual labour productivity growth by 0.1 percentage points (about one-fifth of the observed slowdown since 2012)," he says.
"There is also evidence that declining competitive pressures are one of the main reasons Australian firms have become slower to adapt, innovate and improve their productivity performance."
He says more work is needed on this topic, from the public sector and academics, to better understand why market power has increased in Australia and whether any policies can — and should — be used to boost competition and productivity growth in coming years.
Market concentration increases, but who owns the businesses?
Dr Leigh says when you look at the market concentration of the four largest firms in every industry in the economy, they have been growing more powerful.
"In 2001-02, the market share of the largest four firms averaged 41 per cent. By 2018-19, this figure had risen to 43 per cent," he says.
"Across the economy, from baby food to beer, the top four firms hold a high and growing share of the market."
He says the problem of market concentration may be even worse if you consider the fact that rival firms often have the same large shareholders in common.
"The largest shareholders of the Commonwealth Bank are Vanguard and Blackrock, which are also the largest shareholders of the other three major banks in Australia," he says.
Is the tide turning?
Dr Leigh also suggested the influence of the "Chicago School" on Australia's competition policy in recent decades, with its lax attitude towards market dominance, has contributed to this situation.
He says competition policy in the United States is showing signs of trending the other way these days, with key policymakers arguing that too much market concentration can harm consumers and dampen dynamism.
Dr Leigh suggests that competition policy in Australia needs to pay more attention to the consequences of growing market concentration.
He says policymakers shouldn't ignore what's happening in the US these days.
"In past decades, competition policy in Australia has been overly influenced by the Chicago School approach, which took a relatively relaxed attitude to market dominance," he says.
"Chicago School adherents such as Robert Bork argued that if a firm tried to overcharge, competitors would take its market share. Predatory pricing would not occur because firms could never recoup their losses, as new competitors entered the market. Big could be beautiful."
"[But] in recent decades, a new approach has emerged.
"The 'New Brandeis Movement' holds that excessive market concentration can harm consumers and dampen dynamism. Too much market concentration, it argues, can lead to a less innovative and more sluggish economy," he says.
He says he travelled to Washington DC last month to meet some of the key policymakers who epitomise the new movement.
"Australia should not ignore this marked shift in the way that senior US officials are regarding competition policy," he says.
