Eating ourselves alive: Why we need to change the way we do mergers

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Do you ever get the sense that some of our biggest companies seem to slowly gobble up more of their smaller rivals, thereby gaining more and more power to set prices?

If so, you’re not alone. The competition watchdog has long shared this fear. Indeed, the fact that so many industries are dominated by a few corporate giants – an issue called market concentration – is a growing concern around the world, including here. Now the government wants to do something about it.

Australian households could well be paying quite a cost for the high level of concentration in the marketplace, which can result in higher prices, weaker wages, less innovation and less productivity.Credit: Chris Hopkins

This week, Treasurer Jim Chalmers kicked off consultation in a process to assess if our regime for approving corporate deals is too permissive, and making competition feebler than it should be.

While no policy action has been decided yet, the federal government’s competition review is looking at whether to shake up the approvals that larger companies need to get when buying out a rival.

It’s a debate that’s likely to be fiercely contested, and reforms may well be opposed by some parts of the business world. But it’s about time the government had a hard look at the merger regime, which appears to be part of our competition problem.

Our economy is something of a land of oligopolies. One economist who’s repeatedly highlighted this is former Australian Competition and Consumer Commission chair Rod Sims, who is now part of an advisory panel for Treasury’s competition review.

Sims says we’ve got two major supermarkets with 70 per cent of the market; one dominant airline with two-thirds of the market; two beer companies with 90 per cent of the market; and two ticketing companies, also with 90 per cent of the market. And that’s not including the banks, insurance companies, or telcos.

“When you look at how concentrated our economy is, it’s way more concentrated than other countries overseas,” Sims says.

That has long been the case, but in more recent times, a couple of things have changed.

First, there’s some evidence the extent of this concentration has been growing. A Treasury paper says Australia’s average industry concentration, measured by the shares of sales held by the largest four firms, increased from 41 per cent in 2001-02 to 43 per cent in 2018-19.

Second, economists have noticed that the growing concentration has been correlated with some worrying trends – weaker productivity, and less “dynamism”. Weak competition probably isn’t the only issue behind poor productivity, but it’s plausible that it would be playing a role.

There’s evidence to suggest our economy has become more concentrated, Treasury says.Credit: Dionne Gain

As Assistant Minister for Competition, Dr Andrew Leigh, puts it: “What we’ve seen in the last couple of decades is a rise in market concentration, a rise in mark-ups, a decrease in the share of workers moving to another job, which is really important for boosting wages, and of course, the worst productivity growth decade in the post-war era.

“So all of that suggests the economy has become less competitive.”

Leigh, a former academic economist, says more recent economic research also suggests a “bloated monopolist” has less incentive to innovate.

When you add it all up, it suggests households could well be paying quite a cost for the high level of concentration: higher prices, weaker wages, less innovation, and less productivity.

So, what to do about it?

Corporate mergers over the years have played a key role in allowing many of our most powerful companies reach their dominant position. So if we think the market is too concentrated, the merger regime is a good place to start.

To be sure, corporate mergers are part and parcel of capitalism, and they can make businesses more efficient by attaining “scale” – where a business can spread its costs over a larger customer base. There’s also an argument that Australia’s relatively small population means we can’t support as many large companies as much more populous countries.

ACCC boss Gina Cass-Gottlieb. The regulator is convinced the current merger regime is not working. Credit: Alex Ellinghausen

However, neither of these points can justify our market getting more concentrated over time.

As Leigh says: “Size might explain the market structure in Australia at a particular time. The size of our population does not explain why as our population has grown, the number of firms should have shrunk.”

It is also hard to believe that we need to have two businesses controlling 70 per cent of a market between them in order for these firms to get the full efficiency benefits of having scale.

Clearly, there’s a balance to be struck between allowing companies to gain scale, but still encouraging fierce competition.

It’s about time the government had a hard look at the merger regime, which appears to be part of our competition problem.

The ACCC – currently chaired by Gina Cass-Gottlieb – is convinced the current merger regime is not striking that balance.

Its key criticism is that under the current system, if the ACCC opposes a merger, the onus is on the regulator to prove in court why a deal will harm competition, while the executives running both businesses typically swear that the deal would never harm competition. Says Sims: “The essential problem is, the way the whole thing has evolved, the ACCC has to prove what hasn’t happened yet.”

Under this system, the ACCC has had some high-profile losses in court when it’s tried to stop deals going ahead. Perhaps the most compelling example that supports the case for reform was its failure to prevent the merger between Vodafone and TPG in the highly-concentrated telco market.

Instead of the current system, the ACCC is pushing for a regime where companies would be required to get approval from the watchdog before they could proceed with a deal.

The government hasn’t yet said whether it supports this change or not. But the evidence of growing concentration suggests the economy would benefit from policies that stimulated more competition, and merger reform would be one way of doing this.

Ross Gittins is on leave.

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