#14 Market Power: Competition, Consumer Welfare, and Society with Allan Fels

Have you ever wondered how market competition affects societies? Join us as we explore this provocative idea with Professor Allan Fels, a towering figure in the sphere of competition law and regulation in Australia. As the inaugural chair of the Australian Competition and Consumer Commission, Allan has spent decades challenging powerful institutions to create a fairer market landscape. Together, we unravel his motivations and the broader impacts of competition—beyond mere price reduction, touching on innovation and dismantling political concerns tied to monopolies. Allan also provides a unique perspective on government-imposed restrictions and the unforeseen consequences these can have on market concentration.
 
 We traverse the evolution of corporate concentration in Australia since the 1970s, revealing how macroeconomic factors like monetary and fiscal policy have played pivotal roles in shaping inflation and competition. Alongside Allan, we scrutinise common narratives from corporate leaders attributing rising prices to wage and input costs, and instead highlight the often-overlooked role of reduced competition. The discussion leads us into potential solutions for countering corporate power, particularly the importance of welcoming new market entrants in sectors such as retail groceries, airlines, and banking. Through compelling examples, we illuminate how increased competition can bring about not just lower prices, but a richer tapestry of consumer choices.

More inspiration from Allan Fels:
Link to his book: TOUGH CUSTOMER, Chasing a better deal for battlers

Please visit our website, www.businessandsociety.net, for more inspiration.

Chapters

• 1:04 Tackling power
• 3:09 Basics of competition
• 3:55 Greatest failure of our time?
• 6:08 Does market concentration always lead to bad outcomes for consumers?
• 8:21 Are monopolies always a bad thing?
• 14:35 How long would it take for common people to see the benefits of divestiture laws are in place?
• 17:13 Has market concentration or corporate concentration been rising in Australia?
• 19:30 How competition regulators determine whether a firm is making excess profits?
• 21:31 Are the structural forces driving consumer prices in Australia?
• 23:19 What can we do to weaken concentrated corporate power?
• 26:05 Media/Journalists push for competition.
• 29:10 Managing differences of opinion and setbacks
• 30:42 Essential skills required for public sector leaders
• 32:15 Book recommendation

Transcript

Senthil

00:03

Welcome to the Business and Society podcast. I'm Senthil Nathan. Businesses and market structures impact our lives in many ways. I remember growing up in India when just one telecom company served the entire country. Getting a connection is fiendishly hard, services could be better, and people have to stand in queues for hours to pay their monthly bills. Then the markets opened up, leading to competition from multiple new entrants. Millions of consumers benefited from connectivity, better service and lower prices. Today, India is a country where mobile data costs are among the lowest in the world and people even from marginalized economic backgrounds, can afford a super-fast internet. So, I've seen before my own eyes how market competition can transform societies. 

01:04

My guest today is Allan Fels, the former chair of the Australian Competition and Consumer Commission called us ACCC. He currently holds academic appointments in law at Melbourne University and economics at Monash University. As a legendary regulator from Australia, Allan has spent most of his career tackling market imperfections. Today, Australia faces a significant cost-of-living crisis and Allan reported in a recent inquiry he led. Price gouging from major companies is now the biggest factor in the cost-of-living crisis. I sat with him to understand his perspectives on market competition, consumer welfare and society and as well as his distinguished public service career. Warm welcome, Allan. I'm honoured to have you as a guest on our podcast.

Allan

Pleasure. 

Senthil

Much of your career centred around challenging power. Fighting institution with enormous clout and resources calls for a lot of work and stamina. What drives you? Why did you choose this path and continue along it. 

Allan

02:05

Well, I've always had, from my earliest childhood, a sense of making a contribution to the public, and it turns out that I developed a knowledge of law and of economics and their intersection in the field of competition law. Now, it's inevitable in this field that there will be big conflicts with the firms that you regulate. But in many ways, I get some assurance, and I can sell my story publicly by pointing out that their complaints and objections are often a sign that I have uncovered something wrong. So, the more they complain, the more I let people know and judge for themselves whether the complaints are justified or whether it's just people fighting back against powerful steps that I'm trying to take. 

Senthil

03:09

Great. I'm going to ask you some basic questions on competition before we get into Australia, specifically because our audience are from 59 countries across the globe. Let's unpack competition, on which you have worked for decades. How does competition benefit societies other than lower prices and consumer choices, which we often hear about? Are there any other benefits, I wonder. 

Allan

03:32

Well, certainly, as you say, there's a strong economic benefit generally with prices, quality of service, innovation, etc. But also, it breaks up monopolies and concentrations of power which would otherwise be of deep political concern. 

Senthil

03:55

Almost everyone believes that we have been living in a neoliberal era since the 1980s, dominated by the idea of market competition. But I was surprised to read your book, and you wrote, and I quote historians of competition policy will look back and conclude that the greatest failure of our time was to take insufficient action against the large and widespread restrictions on competition imposed by governments in nearly all countries. End of quote. Could you talk a little more on this? 

Allan

04:26

Yes, so the conventional antitrust or competition law or trade practices law does a reasonably good job breaking up cartels, stopping anti-competitive mergers, abuse of power and so on by the private sector. But it does nothing about the multiple restrictions on competition brought about by government actions at all levels of government national, state, local and across all sectors - agriculture, mining, manufacturing, services, distribution and so on. And indeed, from a business point of view, one of the best profit-making activities is if you can get the government to impose restrictions on competition from others, for example by having a licensing scheme that keeps genuine competitors out, or by setting a minimum price that stops minimum competition, or by establishing an unchallengeable monopoly. So, it turns out there are many, many ways in which governments restrict competition. But competition law, first of all, there's an exemption from it for government action and secondly, governments in general have not been very interested in doing much about it. It's partly because it's their own actions. Regulating themselves is not particularly welcome. 

Senthil

06:08

We also know that such restrictions on competition can result in corporate concentration. But does market concentration always lead to bad outcomes for consumers? I was reading a recent study on the US economy which points to corporate concentration rising there for 100 years. But the past century has also seen technological development, higher output and improved consumer welfare. So, should we really be that worried about market concentration? I'm conscious of the adverse political impact it may have, but here I'm wondering from an economic perspective. 

Allan

06:44

Well, your point is a good one. High market share, high concentration does not necessarily mean the absence of competition. You have to analyse those sorts of markets in more detail, about whether it's easy to gain entry, particularly if the monopolist or whatever puts up prices, or for consumers, if they face a high price, can they switch to an alternative product or not. And there's some other indicators of whether there's competition or not. One important one in many countries is import competition. So, there are a number of industries I know about in different countries where there's one large local supplier which, on the face of it, looks like a monopoly but in fact it's strongly challenged by imports. It's got no real power to set its own prices. So, having said that, the studies that you mentioned about rising concentration are still a source of concern. And if you look at most of them, most of the areas where concentration's gone up, it is associated with higher market power. 

Senthil

08:21

If I may push that idea further, are monopolies always a bad thing? Entrepreneur and venture capitalist Peter Thiel, whose notches include PayPal and Facebook, argues that monopolies generate good for the world by being more innovative, efficient and better than competitors. According to him, monopolies are bad only when a business lingers in that position unchallenged for too long. What are your thoughts on this? 

Allan

08:48

So, firstly, there's nothing wrong in itself with being a monopoly. You may be a monopoly because you're a better competitor, you've invented a better product, you're more efficient, more cost-saving than anyone else. You may, on the other hand, have maybe acquired the monopoly through takeovers or through other actions which aren't a sign of efficiency. And the competition law is aimed mainly at preventing competitors merging to create monopolies or agreeing on prices or doing other things to exclude new entrants, such as predatory pricing. And it is also true, as you say, that monopolies bring with them certain benefits. And it's also true that longer term monopolies very often get displaced by new technology. We're seeing quite a bit of that at the moment, but not all of them. Take Google it's had a really strong position for a long, long time. In fact, until recently I was saying it looked locked in. There's just a chance with the AI developments that it could be challenged. It's really high market share in search. But again, generalising about the behaviour of monopolists, once they have a monopoly position, they tend to charge more than they otherwise would and provide poorer service. That seems to be the evidence. So, what do we do about it? We actually, in the world of competition law, we don't do anything about the main alleged harm excessive prices. Generally, we don't have price control. It's a bit more complicated If it's a pure monopoly. We get it in public utility areas like energy, telco, some areas of transport. There is a generally accepted case for price regulation in the case of pure monopoly, in the case where you've got a dominant firm that's got competitors or a duopoly on the whole, the policy, rightly or wrongly, is not to do anything about their prices. The cost to the public is high prices. The benefit is price regulation does not have a great track record and so it's not included. The other issue with monopolies is divestiture, whether monopolies should be broken up. 

11:44

In many countries, such as the US, there is a power to break up businesses, providing they are found by court to have broken the law seriously and providing a court of law considers that that's the best remedy in the circumstances. Now it's a power that is used infrequently but usually to good effect. In the US in the early days there was a breakup of oil, cigarettes, chemicals and more recently a very good breakup of the Bell Telephone monopoly, which has led to all that competition and far more jobs in the telecommunications industry. Right now, we're speaking just after the election of Donald Trump. The Biden administration has cases before the courts proposing some breakup, for example of Google, following the Google Apple case, and of Facebook. Let's see what Donald Trump does, but I'm not totally sure he will withdraw those cases because he's no big fan of some of the big digital platforms. 

13:14

But more generally, divestiture is quite an important power but should only be exercised rather rarely. The last big case aimed at a breakup was Microsoft in the US and the first judge said they'd broken the law, and they should be broken up. Now that case went on appeal on some other issues about process and so on. So, it was overturned or sent back because of process for a whole rehearing. But that court said well, divestiture is a possible remedy. But here's a long list of preconditions before a court should even think about a breakup. So, it's only in certain limited circumstances the divestiture power should be there. The availability of a divestiture power in the law, however, has quite strong incentive effects on business. They'll be much more careful about complying with the law compared to if it's just a fine. A fine is kind of a cost of doing business. 

Senthil

14:35

That's great. Talking of divestiture again, I was reading some scholars' work such as Eric Posner of the Chicago School. In the US you talked about breaking of big monopolies early in the century. The research found that the Sherman Act came into effect in the 1890s I think you're referring to that, but they say that it took about half a century for societies to see its full effect. In the world we live now, how long would it take for common people to see the benefits of divestiture laws are in place? 

Allan

15:07

So that's a good question. I'll just go back on that research. I mean tank oil. It was broken up about 1910 or 11, I think, and the Rockefeller monopoly. Standard Oil was broken up in, I think, four businesses around the world. So, they just didn't bother competing with one another until the Depression, when there was more pressure on them and then they started to have to compete. So, it is a good point. 

15:40

Sometimes divestiture takes a long time to work, but it has a very powerful effect. It did ultimately have a very powerful effect. So, your question is how quick would the public feel the effect of a divestiture? I think the answer is the same. Firstly, it takes quite a long time to run a divestiture case in court five or six years or more and then for the actual breakup it may take a bit more time. Let's add a couple of years for that, and then it's possible the firms won't compete for a while, but I'd still argue the long-term effect can be quite powerful. And I'd say the same about merger law that if you stop mergers the immediate effects may not be apparent, but if you look over time, you'll find the existence of 4-0-3 or 3-0-2, et cetera, firms, has a very big long-term effect. So, I think your questions bring out the important point that many of the effects of competition are they’re powerful, but their effects are felt over time but ultimately are rather powerful. 

Senthil

17:13

Great! Alan, let's turn to competition in Australia, which I'm sure is the forefront of society's mind. You have been a first-hand observer since at least the 1970s. Has market concentration or corporate concentration been rising in Australia since the United States and Europe? 

Allan

17:32

Look, I think on the whole it has. Since you go back to the 1970s things were very concentrated and then we opened up the economy to international competition and that had quite strong pro-competitive effects in the import-competing sector Also, sometimes technology arrives and has some pro-competitive effects. Having said that, there's quite a lot of recent evidence that suggests competition is not working all that strongly. Interestingly, the Minister for Competition happens to have a PhD in economics from Harvard, has done his own research on this and it tends to show reduced competition, increased concentration and a number of indicators. 

18:36

The number of new firms entering industry has not been that great. The number of firms leaving the top 10 has not been that great. It's the same old people at the top, not like in the US. The number of exits has also been not that high. So, there's a fair number of indicators of reduced competition and higher profit margins. So, it is difficult to assess the evidence. There are people who contest it. On the whole, my view is that the balance of evidence suggests somewhat increased concentration, profit margins and exploitation, but it's an ongoing subject of dispute. 

Senthil

19:30

When prices are too high and hurts consumers, we often point to market concentration and corporate greed or excess profits but on the other side, business leaders defend saying that they should not be punished for efficiency, that is, they say these are rewards for leveraging technologies and economies of scale. Do you agree that excess profits underlie Australia's cost of living crisis? Could you also explain how competition regulators determine whether a firm is making excess profits? 

Allan

20:00

Yeah. So, the primary driver of inflation in Australia and elsewhere is to be found in macroeconomic factors such as monetary and fiscal policy, exchange rate policy and so on. Having said that, I myself believe, and I believe there's evidence, that price rises have been a contributor of their own to a slightly higher rate of inflation than otherwise. One indicator of that, or possible indicator, is the rise in the profit share of GDP. It's gone up quite a lot, and there's evidence markups and net profits have gone up, even if you exclude export profits. So, on the whole, I think prices have made some contribution to the inflation story and as inflation comes down, there are signs that business is a little bit slow to bring its prices down. A popular expression is that when costs go up, business put up prices like rockets. When costs go down, they lower prices like feathers falling to the ground. I think there's some validity in that idea. 

Senthil

21:31

Yeah, I loved that example. I was listening to your speech in Canberra. I think in one of the press clips you talked about that rocket and feather effect. That's such a fantastic analogy. Another question which we often hear from business leaders they say that higher consumer prices are due to higher wages, cost of inputs and transportation costs. Do you agree that these are the structural forces driving consumer prices in Australia, or corporate concentration and weak regulation, only relatively minor factors. 

Allan

22:06

Look, I think it's a mixture of the two. Let me begin with wages. For decades, businesses blamed inflation on wages. Now real wages and nominal wages have been kept down very much in the last 15 or 20 years. As we speak today, there are some signs of a turnaround, but big picture, wages have been kept right down. They can't be blamed. Now there have been some other input prices that have gone up, but I don't see what prices are left out of the story. 10 years ago, if you were telling the story of wage inflation, you'd point to various indicators such as the wage share of GDP. So, if you switch the analysis to profits, you'll find a lot of those indicators that have been used to argue for wage inflation apply to price drivers, to the effects of concentration and so on. 

Senthil

23:19

We know that lack of competition or market concentration affects the broader spectrum of society, including consumers, workers and suppliers. In such a marketplace, is there anything consumers, workers or suppliers can do to weaken concentrated corporate power, or is the only option to be a price taker? 

Allan

23:40

Look, there are some things at the margin, but what is most important is if there is new entry or something that shakes up a business. So, I'll give you an Australian example, although it applies to many countries. We've got very concentrated retail groceries. Australia's got two big players and fringe players. Now there's not that strong competition. Not so long ago a major foreign player investigated entry and was about to enter and it would have brought prices down a lot, but for certain reasons I think it wanted to invest in some other part of the world it didn't come in.

24:31

If we got a third player, that would have made an enormous difference. With airlines, we've got a kind of duopoly in Australia, just two big airlines. If we had a third player, it would have been price to tell. We have had some short-lived attempts at entry by third players. When they do that, prices always come down, but unfortunately, they don't seem to survive terribly long. 

24:59

So, the best thing is to get more competitors and remove any artificial restrictions on entry that may be brought about by government rules, like in the case of airports. Maybe we could have better allocation of slots when airlines come in to an airport If you as a passenger get off at a good spot close to the exit or the luggage or the customs or whatever, you give a bit of a preference to that airline compared to one that ends up in a more remote part. Likewise with banks. If we have more banks in the system, we'd get keen at competition. We had some of that in the 80s and 90s. In many countries these small competitors start to eat away at bank profits, but a lot of them have gone away. 

Senthil

26:05

Interesting. Allan, I'll ask one last question before we move to the final section. We briefly touched upon this in our first question, where you talked about the strategies you used to tackle power. Reading your work and researching on your career, it seems you have systematically and very intelligently used the media to push for competition. You yourself said this in one of the interviews. In these five decades, what changes have you seen about the Australian media's coverage of competition? Are they less aggressive on corporate concentration now than in, say, the 1970s? Or has the influence of public relations and corporatization of media weakened journalists' power as battlers? 

Allan

26:48

Well, there's a lot of parts to that question. I'll begin by saying that the support for the application of competition law has grown strongly in the media and the key reason has been that the regulator has done two things. It's had a very high public profile out there talking but, as you know, just calling a media conference. They'll come once but they won't come back unless there's some action. So, it's got to be backed up by real action. So, the regulator has stepped up its action. A lot more cases, confrontations, conflicts. So that combination of vigorous enforcement, high profile, has changed public opinion, changed the media approach to it and gathered much more support for the regulator.

27:53

Now one point that's relevant and it almost goes back to your early questions about support for competition as against monopoly. I have to say that a lot of the support for a competition-regulated tracking, strong measures, is not quite because the public welcomes competition, low prices etc. They just like to see someone standing up to big, powerful businesses. That's where a lot of the support for the ACCC has come from. Regarding media coverage, it's still quite strong. Of course, I'm very concerned about the general decline of media. Readership's gone down. Viewing's gone down, people getting their news from social media, which gives you a less informed guide, and in rural areas, there's been a really serious collapse of the availability of media covering local matters, including local court matters, local councils and so on. 

Senthil

29:10

That's very insightful, Allan. Allan let's move to the segment how I Did it, where we ask all our guests three personal questions to draw lessons from their life and career. How do you handle differences of opinion and setbacks? It seems you had quite a few of them, it seems you had quite a few off them.

Allan

29:31

I like to try to do a lot of things. So, with the competition regulator, when I started, that just had four or five cases a year and if I lost one it was a disaster. We stepped up the number of cases to 40 or 50, and if we lost a few it was washed out by all the others. So, I often hope that setbacks will be buried by new, fresh activity. Regarding differences of opinion and how you handle conflict. Well, frankly, I always think about the bargaining strength of all sides in the regulatory area. The regulators got the law, the Act of Parliament, on their side, so they stick to it, and they don't deviate. As long as they're acting within the law, that is the strongest source of power, and it usually wins out. That would be my start on this complex question. 

Senthil

30:42

Yeah, well, in your experience, what are one or two essential skills required for business leaders? 

Allan

30:49

So, I wouldn't tell businesses business people what to do. But in regard to government, it's a fact. They don't fully understand it because government's very different. Business leaders are there to get results fast as a rule. In government it's a bit different. First of all, governments want results, yes, but they've also got to follow processes. So, if a government gets a good result, but through unlawful processes, like unlawful means of detecting criminal behaviour, you know, tape recording things they shouldn't have been allowed to tape record, et cetera, then it does badly. So, the process side is quite important in government and that explains a number of things that regulators do that frustrate business people who want a quick, smart answer, and the regulator says, no, I've got to go through a certain process before I do this. So, I just say to business people if they're dealing with governments, it's useful to try to get some understanding of what's driving the government people. Of course, the reverse applies also. Governments always need better to understand business. 

Senthil

32:15

That's fascinating. Finally, can you recommend a book or two to our listeners? 

Allan

32:21

Yes, so of course there are many, but maybe again because of my background, I would mention ways of looking at the public sector, and one of the great books is by Mark Moore at Harvard, Harvard Press, called Creating Public Value, and then another one in the same field is Public Leadership, by Paul ‘T Hart, Paul and then a little T with an apostrophe, and then Hart, H-A-R-T. Public leadership, just showing the complexity of public leadership. It's not as simple as you're taught in business schools. You know, form a vision, hire the people you want, communicate your message, get an early win. Public sector leadership's a lot more complicated. 

Senthil

33:25

Great. Thank you, Allan Pleasure. I only hope I had more time to talk to you like you have such wisdom and experience. 

Allan

Good, Terrific. 

Senthil

33:34

Thanks for joining today you. 

00:05 / 34:07