Opinion piece: Look overseas to see virtues of more competition

Australian Treasury

Earlier this month, the competition watchdog released its inquiry into digital services.

The report highlighted the massive market dominance of digital platforms, such as Google, which has a 94 per cent share of the search market. It recommended major reforms, such as a requirement that user interfaces are designed in the best interests of consumers, and a broadbased ban on unfair trading practices.

Since at least the days of Adam Smith, economists have spruiked the virtues of competition. Industries with plenty of competitors tend to deliver lower prices and more choice than sectors dominated by a single monopoly.

Yet over recent decades, the Australian economy has exhibited some worrying trends. The business start-up rate and job switching have declined, while market concentration and mark-ups have risen.

In considering what to do, there’s plenty we can learn from other countries.

In 1890, the United States passed the Sherman Act on the back of a wave of popular concern – particularly in the American Midwest, where anti‑monopoly sentiment had always been strong – about the rise of trusts.

One of the biggest was JD Rockefeller’s Standard Oil Trust. In effect, this was an oil refining, distribution and marketing cartel controlled by his dominant Standard Oil company.

Other industries soon followed, with large companies forming monopolistic trusts in sectors such as steel, tobacco, beef, sugar, flour, cotton and agricultural harvesters.

The Sherman Act was used by Republican President Theodore Roosevelt to tackle monopolies. In the years from 1901 to 1914, the US government brought 136 lawsuits against monopolies. Because it targeted trusts, North Americans still refer to competition law as antitrust.

The result was a more dynamic, and vibrant economy.

Another example of successful competition reform occurred in Germany, where authorities in the post-war era broke up IG Farben, the world’s largest chemical company.

A major reason for the break-up was IG Farben’s involvement in the Holocaust – one writer called it Hell’s Cartel. But recent analysis by economist Felix Pöge shows that the break-up increased competition and boosted innovation.

IG Farben’s successor companies such as BASF and Bayer – and their competitors – became more innovative. Australia has no broadbased divestment power, and we are not proposing to introduce one, yet the IG Farben example shows vividly how competition cannot just lower prices, but also boost innovation.

Another successful example of reform was Canada’s 1986 competition law. Prior to that year, price fixing, bid-rigging and predatory pricing was rife.

After the law was passed, authorities were able to tackle these practices, including through a major case against NutraSweet for excluding competitors. Businesses that engaged in price-fixing or abused their dominance were more likely to find themselves in court.

And, while a range of factors may have been at play, it is notable that industry concentration in Canada fell significantly in the decade following the 1986 reforms.

These three examples all have something to teach Australians.

The US trust-busting example shows change takes time, it takes passion to engage the public and argue the case to get a fairer deal for consumers and suppliers.

The German case study shows that more competitors equals more innovation – proof that regulators around the world are right to closely scrutinise mergers.

The Canadian example shows how vital it is to persist with reform efforts in the face of self-interested opposition.

Competition is one way to build resilience – a diverse and dynamic economy is also a resilient economy.

It means we are better equipped to deal with unexpected shocks and absorb, adapt, and solve the challenges of an uncertain world.

The government is committed to reforms that produce a more dynamic, competitive economy.

Recently, our government passed through parliament a law that increases the maximum penalty for anti-competitive conduct – bringing Australian penalties in line with those in comparable jurisdictions.

We have also banned unfair contract terms, protecting consumers and small businesses from contract terms that allow the more powerful party to unfairly cancel the contract or unfairly change prices.

We are currently consulting on the Australian Competition & Consumer Commission’s new Digital Platform Services Inquiry.

Our focus is on ensuring that Australia’s competition law is fit for purpose, so the economy is fit for the challenges of the future.

As history tells us, competition reforms can change lives for the better, delivering growth with fairness.

Inspired by the boldness of past competition reformers, we are working to build a more dynamic, more productive, economy.

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