Tuesday, March 12, 2013

Indifference to regulatory price rises a problem

To protect consumers the government should probe the ACCC's approach to competition before it starts regulating.

In Monday's Australian Financial Review Rod Sims argued:  ''The way I always approach issues is in two stages.  Stage one is, do I think there's economic harm?  Either to the competitive process or to consumers if we're talking about consumer issues.  Has there been any detriment?  And then step two is do we think we can succeed in court?''

It's an odd way to approach competition.  Both steps assume a centralised regulator knows when a market is perfectly competitive, and what drives the consumption behaviour of 22-odd million consumers.

In a free and open economy, excessive market concentration is undesirable, but not all market concentration is the same.

On one hand regulated public or private concentration is dangerous because established interests are protected from competitive pressure, allowing industry to be fat and lazy while extracting unjust profits from consumers.

On the other hand, open markets allow players to achieve a strong position only by responding to consumer demand, and as soon as they stop, or a new market emerges, they lose their competitive position.

As economist Joseph Schumpeter argued, ''The fundamental impulse that sets and keeps the capitalist engine in motion comes from the new consumers, goods, the new methods of production or transportation, the new markets, the new forms of industrial organisation that capitalist enterprise creates''.

The first example is the national broadband network monopoly whose interests are so heavily backed by government it barely needs to secure customers.

The second example is Australia's retail supermarket sector, where multiple players succeed through aggressive competition.  They can achieve increased efficiency and competitiveness from size, but that doesn't inhibit other market players from competing on grounds other than price.

There's no argument that, combined, Coles and Woolies have significant market share.  Their 55 to 60 per cent combined market share is mostly in pre-packaged groceries and quickly drops on fresh fruit and vegetables, meats and breads and cakes, where they compete against other supermarkets and local and franchise retailers.

Supermarkets don't compete just on price, but it is clearly the one that matters most to consumers.

In response, ALDI now has 300 stores and competes heavily on price, leveraging private labeling, its supply chains and purchasing power by having 7000 stores globally.  Costco has also stepped into the market.

Meanwhile, consumers seeking quality visit stores like IGA Marketplace and Woolies' Thomas Dux, as well as a highly competitive convenience market.

In short, the market is meeting different market segments, and if people don't like what they are being offered they can switch.

The data suggests we do.  Industry analysis shows Australians are some of the least loyal supermarket customers in the world.  That's why the chains are using heavy discounting, rewards and discounts to keep customers loyal.

The important component of ensuring a competitive supermarket sector is making sure there are not barriers to entry for new market entrants.  The stunning growth of ALDI in a little over a decade would suggest not.

The same cannot be said with broadband.

Of course the NBN also competes against other suppliers of internet services using existing infrastructure.

But by being regulated as a monopoly means it has no competition in the same service class, ensuring it can achieve the benefits of volume as well as extracting retail premiums.

How the ACCC can see supermarkets as a problem and not the NBN is staggering if Sims wants to avoid ''economic harm ... to the competitive process or consumers''.

Both political parties should take note.

Sims's relative indifference to potential price rises resulting from regulatory action is emblematic of an attitudinal divide across the country, with serious political consequences.

Inner suburbs of major capital cities are dominated by well-paid professionals who earn significant and enlargeable incomes, and can afford to pay a premium for boutique quality and convenience.

Many also don't have kids, or they have left home.

Much of the rest of the community struggles on fixed incomes to meet the competing demands of their home and car mortgage, the expenses of having kids, including school fees, and the high cost of feeding a family.

Cheap milk is a godsend for a family that can go through one or two litres a day, and which aggressively packages its consumption behaviour to take advantage of loyalty discounts and rewards.

Similarly, if a monopoly NBN makes it unviable for competition it could also increase internet prices for the same families.

Sims may not experience this reality while he uses his taxpayer-funded internet or wanders the aisles of the David Jones food hall, but it will be electoral poison for current and future governments.

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