Profits raise bar on competition

How much of a market is too much?

As the new federal government launches what I expect will be a new focus on improving the life of small business and the self-employed, it has taken aim at the supermarket giants.

For those opposed to big business, Coles and Woolworths supermarkets are the highest profile of a bunch of duopolies and oligopolies that small business loves to hate.

There is, of course, the perennial favourite, the banks, and the cyclical regulars, Telstra and Qantas. Another regular industry subject to complaint is daily newspapers.

The supermarkets are currently the focus because, despite lowering prices for consumers, they are blamed for overtly using their market dominance against suppliers in the Australian food production sector and its closely related farming industry.

But beneath those headlines, banks probably have a longer track record of being despised. That is because business and consumer customers regularly complain about them, despite the fact that there are four major banks, which ought to provide some form of competition in the market.

I was reminded of this at a Local Chambers of Commerce event I recently attended and was asked a question about banks “obscene” profits and their “gouging” of small business. 

Oddly, we don’t hear so much about Telstra or Qantas these days.

Qantas is clearly struggling with competition in international routes, and a company once seen as a monopoly is now an endangered species that has had to evolve rapidly to survive in a market it once owned. And Telstra’s dominance of landline infrastructure is less relevant in the age of the internet and mobile phones, where many spritely competitors have chiselled away at its market power.

I wonder how we would all feel if any one of the gouging banks had toppled during the GFC?  While I am thoroughly convinced it was wrong to allow second-tier banks St George and Bankwest to be gobbled up by major rivals, the uncertainty of that period allowed a reduction of competition that would have been blocked in more normal times.

KPMG reported this week that, at 213 basis points, major banks’ margins are the lowest on record, with the exception of the immediate aftermath of the GFC.

Clearly, when you look at the various scenarios above there is a high correlation between market power, public profits and consumer concern.

Clearly people feel aggrieved when they have little choice or negotiating power, especially when they perceive that is translated into bigger profits at their expense.

While I have always advocated share ownership in the companies in question as the obvious antidote, many businesses don’t have the capital to invest in bank or supermarket shares at a level that would net off against the cost of their facilities.

More recently I have wondered what the right level of market share might be where competition balances the equation between supplier and customer. Is it 15 per cent or 20 per cent? In listed companies, a 20 per cent holding can be considered a dominant position, depending on the size of other stakes.

Market dominance is not just the transference of profits from customer or suppliers – it kills innovation. The newspaper business is a classic example. Look at how Fairfax and WA Newspapers, in particular, missed the digital boat.

Could they have afforded to be so complacent if they didn’t have virtual monopoly positions in the classified advertising businesses they have now lost to digital rivals? Would their death have come even more quickly if Telstra hadn’t previously made life difficult for start-up internet service providers? Would Australia have been the birthplace of more global digital businesses as a result?

As a supporter of free markets, I wonder how we can maintain consumer and supplier choice without a regulatory burden that imposes its own costs in terms of profitability and innovation. Why should businesses be penalised for success?

Australian free-to-air television and banks are already regulated in ways that are intended to enhance competition, yet for consumer it is difficult to see the positive.

In reality, that has gone hand in hand with the kind of protection that once made the Australian car industry and our airline very profitable. Today, both sectors are ailing as unleashed competition undoes decades of inbuilt complacency.

Dare I suggest a tax (I can hear the keyboards pounding in response already) as a response? Perhaps we could borrow from the mining tax debate and put a super profits tax on any company’s earnings derived from holding more than 15 per cent share of any market in Australia.

Accounting nightmare? Yes. Tax definition challenge? Yes. Penalty for success? Yes. A cost on monopoly (duopoly/oligopoly) rents? Yes. We have already made our mind up that competition is important but we don’t seem to have the right mechanism to encourage it. Laws seem to get bypassed and regulators appear to be inconsistent.

A tax would encourage successful businesses to reallocate resources to new markets and create a costly burden for any player that wanted to protect a monopoly. It would penalise existing and future monopolists to the same degree.

Then again, maybe we could all stop whingeing and go shop somewhere else.