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Correction: A previous version of this speech read: '...the revenue of Australia’s largest 100 listed companies increased from 15% of GDP in 1993 to 47% of GDP in 2015.'

This has been updated to '...the revenue of Australia’s largest 100 listed companies increased from 27% of GDP in 1993 to 47% of GDP in 2015.'

We have corrected Chart 1, Chart 3 and related text.


I wish to thank RBB Economics for again inviting me to speak today.

I always look forward to this conference. It gives me an opportunity to reflect on some of the economic philosophy underpinning competition policy and where public debate on economic policy is heading.

I was recently struck by some commentary in The Economist magazine.[1] As you may know the editors of The Economist are generally strong advocates of free and open markets and economic liberalism.  

The commentary focused on the rise of large corporations in the US economy. It is consistent with analysis showing that the gross revenue of the Fortune 100 companies as a percentage of US GDP increased from 33% in 1994 to 46% in 2013.[2]

The Economist noted that large corporations grow into ‘superstars’ like Google and Facebook because they are really good at what they do and they churn out products that improve the lives of consumers. Doing so is highly admirable and should not be impeded or discouraged.

The Economist went on to say, however, that the emergence of superstar companies creates two problems. One is the ability of some of these global companies to manage their business affairs to minimise tax. The other is the ability of some of these companies to use their position to squash competition.

The Economist questioned whether antitrust agencies are sufficiently alert to the long-term consequences of large firms acquiring promising start-ups. Allowing such acquisitions risks entrenching the control superstar firms have over entire markets.

The emergence of superstar companies that attain their market position through offering innovative products that consumers value should be applauded. Retaining that market position by engaging in conduct that handicaps their rivals should be discouraged through the strong enforcement of competition laws.

Professor Carl Shapiro discussed similar issues at the Competition Law and Economics Workshop the ACCC recently co-hosted with the Law School of the University of South Australia. While it may appear I am following Carl’s theme, this speech was well advanced prior to that workshop.

This is an interesting debate. However, the views of The Economist are not new.   

In my view Adam Smith, who laid the foundations of free market economic theory, would have been a supporter of the strong enforcement of competition laws. 

Eric Roll, in his pre-eminent work ‘A History of Economic Thought’, interprets Adam Smith to be arguing in the Wealth of Nations that the:

“preservation of free competition, if necessary by state action, was the principal duty of economic policy”[3]

Adam Smith was, of course, particularly concerned about the ability of monopolies to harm consumers, and that government action protected monopolies. This later point is relevant to some of our competition advocacy concerning privatisation.

Today I want to discuss three things given this background.

  • First, is Australia’s economy getting more concentrated, and does this matter?
  • Second, to discuss the often put view that we need not be concerned with industries becoming heavily concentrated, and with monopolies and their behaviour.
  • Third, some questions I think we all need to ponder.

Is Australia’s economy getting more concentrated, and does this matter?

The rise of large corporations in the Australian economy has also been substantial. Indeed it seems we have slightly outpaced the US.

Analysis prepared by Port Jackson Partners Limited shows the revenue of Australia’s largest 100 listed companies increased from 27% of GDP in 1993 to 47% of GDP in 2015. This compares to the US figures of 33% to 46%.[4]  

While there are difficulties in comparing company revenues with GDP,[5] it is not difficult to form the view that the share of GDP generated by Australia’s largest companies has increased substantially over the last two decades or so, albeit most of the increase occurred before 2000.

This, of course, begs the question of whether we should be concerned about increasing market concentration in Australia.

In Australia many markets are concentrated or are likely to become concentrated as firms pursue efficiencies from scale. In some markets there may not be ‘room’ for more than a few ‘efficiently-sized’ firms given the size of demand.

Over a long period of time petrol retailing in Australia has become more consolidated. In 1970 there were around 20,000 retail petrol sites operating in Australia. Now there are around 6000 or so. During this period of consolidation many smaller retailers have closed or were sold to large retailers. Volumes sold per site have increased causing both higher profits and, importantly, lower prices.   

There is no doubt that the largest petrol retailers are currently making good profits. At the same time many retailers with only a few outlets struggle.

From a competition perspective, what we need to understand is whether smaller rivals or new entrants can readily contest the position of larger more established firms. The market power of large established firms in concentrated markets will depend on a range of factors including the difficulties smaller rivals may face in expanding their business, barriers to entry of new firms, competition from imports and the countervailing power of buyers.

One way to assess the degree to which concentrated markets are contestable is to observe how often the identity of large firms change. There are a couple of ways in which the identity of large firms can change. One is by acquisition, such as Wesfarmers buying the Coles supermarkets. The other is by entry or expansion, such as Aldi entering grocery retailing in Australia. The regularity with which the identity of large firms change as a result of entry or expansion provides an indicator of the degree to which concentrated markets are contestable.

Of the ASX Top 100 in 1990, only 29 companies survive in Top 100 as at October 2015

Again, drawing on work by Port Jackson Partners Ltd, of the ASX top 100 companies in 1990, only 29 companies remained in the top 100 as at October 2015. Sixty one had been acquired or merged, five had disappeared due to corporate collapses and five had slipped from the top 100.

However, the identity of the six largest listed companies has not changed substantially in recent times. For example, in 2005 the top six listed companies by market capitalisation, in order, were BHP, Telstra, and four banks: Commonwealth, NAB, ANZ and Westpac. Today the top six companies in order are four banks: Commonwealth, Westpac, ANZ and NAB, followed by BHP Billiton and Telstra.

But the top 6 companies have not grown as strongly as the rest of the top 100, as another chart from Port Jackson Partners Ltd shows. Since 1993, the top 6’s revenue as a proportion of GDP has increased from 13% to 16%. For the rest of the top 100 this percentage has nearly doubled from 14% to 32%.

I think concerns over increasing concentration can be taken too far. Many markets in Australia remain with low levels of concentration.

Over the last 20 or more years, although market concentration has increased in the US and Australia, world poverty has reduced and we have seen living standards increase considerably in developed countries.

Further, while in many countries inequality has increased (and this is an important concern, given its effect on the social fabric and wider policy debate), virtually all groups have seen their living standards improve.

The often put view that we need not be concerned with industries becoming heavily concentrated, and with monopolies and their behaviour

A perennial debate among economists concerns whether competition agencies should employ a consumer welfare standard or a total welfare standard when assessing mergers or deciding whether to pursue anti-competitive conduct.

The question often asked by economists is this:

“If a merger is likely to result in higher prices by interfering with the competitive process, should this be considered a breach of competition laws even if there is no overall loss in economic welfare?”

It is an interesting debate.

Ultimately the value of economic production is determined by its effect on consumer well-being.  As Adam Smith said:

 “Consumption is the sole end and purpose of all production; and the interest of the producer ought to be attended to, only so far as it may be necessary for promoting that of the consumer.”[6]

While this is the case, advances in welfare economics provide a framework for considering the effect of conduct on total economic surplus, including producer surplus.  

The ACCC and the Courts must, however, assess whether the conduct in question is likely to breach the CCA.  In most Part IV matters, this involves assessing whether the conduct has the effect, or is likely to have the effect, of substantially lessening competition.

This is often then determined, at least in the merger context, by whether prices will increase to consumers or users above the levels that would prevail absent the merger.

This does not mean efficiencies are not taken into account in assessing the competitive effects of mergers. The potential for improved efficiency can sometimes be the main motivation for firms to merge.

The ACCC will take into account merger-related efficiencies in the assessment of the competitive effects of mergers in appropriate circumstances.      

In our assessment of the merger of Vodafone and Hutchison’s mobile operations, we stated:

“…..the increased scale from the proposed merger would be likely to provide the merged entity with a platform from which to undertake network investment that will enable more effective competition against Telstra and Optus in mobile telephony and MBB in the future.”[7]

To be relevant to the ACCC’s informal merger clearance assessment, the efficiencies must result directly from the merger and must increase competitive tension that will not be dissipated over time. Our merger clearance assessments do not involve a trade-off between a lessening of competition and efficiencies that are retained in full by the merged firm, nor do they involve a balancing of competitive detriment against public benefits, including efficiencies.

However, broader efficiencies can, of course, be taken into account in the merger authorisation process. The test here is whether the merger is likely to result in such a public benefit that it should be allowed.

Increasing concentration

The ACCC gets a significant number of applications for informal merger clearance where the parties argue increasing concentration in their markets will not cause consumer harm. Qualitative arguments as to why this is the case are common. Good quantitative analysis supporting these claims is rare.

It seems to me that, absent a clear and convincing economic and evidence based explanation of how a merger will avoid harming consumers the standard economic wisdom should prevail. This wisdom is that mergers resulting in high levels of concentration in markets with substantial barriers to entry will usually reduce competition and cause harm to consumers and our economy.

Claims that increasing market concentration to significant levels is likely to enhance welfare should be treated with scepticism. Yes it can be the case sometimes.  But in my view it must be demonstrated by the parties and the economists making the claim.

While merger parties typically argue that in their case increasing market concentration is not problematic, the wider business community often takes the opposite view. The main criticism of the ACCC from the wider business community is that we allow too many mergers. This is particularly the case from businesses that purchase products from the merging firms. They see the consequences of any increase in market power from the merger first hand.

It is also not uncommon for merger parties to argue that their merger is necessary so the market moves to its optimal structure, arguing:

“There is only room for one or two firms in this market, so we need to merge. Otherwise we will be sub-scale.” 

These arguments are difficult to assess. Mergers to restrict competition with the aim of designing an ‘ideal’ market structure are fraught with risks. Typically in a market economy, competition causes markets to evolve toward the optimal structure.  Competition is always the best method of ensuring the firms that survive as a market evolves are the most efficient firms.


The same issues arise in relation to monopolies.  Microeconomic theory predicts a monopoly will charge higher prices to consumers than a firm facing effective competition. As a result consumers will buy less of the product causing a loss of total welfare.

As is the case with most predictions from economic analysis, there are circumstances where this will not be the case. For example, if a monopoly can price discriminate so the amount of the product sold is unaffected there will be no welfare loss. There is only a transfer from consumers or users of a facility to the monopolist.

However, circumstances where monopoly pricing has no effect, or only a small effect on economic efficiency, are rare.

I was surprised the Australian Competition Tribunal did not appear to recognise this in its decision in the Port of Newcastle access matter. The Tribunal noted that the Port of Newcastle, as the monopoly provider of port services in the Hunter Valley region, had an incentive to increase the price it charges for those services in order to maximise its profits.

The Tribunal noted however:

“……it does not necessarily follow from an ability to increase prices that there will be a reduction in coal production that impacts competition in the coal export market because PNO has the commercial motivation to ensure that the Service supports the ongoing coal export market and its expansion.”[8]

The Tribunal appears to have accepted that the Port of Newcastle can raise prices to the coal miners without affecting coal volumes.

There are two issues with the Tribunal’s view.

First, conventional economic wisdom is that a profit-maximising monopolist will increase prices beyond the level that affects sales. A price rise will increase Port of Newcastle’s profits even though that decreases port throughput.  

Second, it seems highly unlikely that the Port of Newcastle would be able to increase prices without affecting some production and investment decisions, even if that were its objective. Coal miners in the Hunter Valley have different coal reserves with different extraction costs. Their ability to pay for port services is likely to vary greatly. 

There is also a broader issue at stake here. The threat of appropriation of rents by a monopoly service provider in such a situation does not merely result in a pure transfer. Rather, the threat of such appropriation can limit future investment and innovation by the upstream firms.

What miner would invest in reducing its extraction costs if it knew that the lower extraction costs could simply be met by higher port charges? More generally, what miner would invest in its mines knowing that the benefits of that investment could be appropriated by a monopoly somewhere else in the supply chain?

The ACCC has recently been granted leave to intervene in the appeal from the Tribunal’s decision to the Full Court of the Federal Court.  The ACCC will make submissions in relation to these competition issues. 

Some questions I think we all need to ponder

Let me pose a number of questions that may be worthy of debate given the concerns expressed to me from time to time about the number of mergers cleared by the ACCC, and the increasing concentration in our economy.

First, why is it that a lot of economic argument and opinion down plays conventional economic theory and wisdom, as described in the previous section?

I have mentioned the conventional wisdom that monopolies will charge more and produce or give less.

Further, on 28 September 2012 David Thodey, then CEO of Telstra, said;

“Now all the data we’ve looked at around the world says three …(operators in a market)…are very rational from a pricing perspective. Once we get to four or five is when you start to get behaviour that can be aberrant in terms of shareholder value.”

I use this quote not to embarrass David or Telstra. Indeed, David was saying what all CEOs and business strategists know; market concentration matters. It is business and economic conventional wisdom.

So why do economists often appear to write so as to defy conventional economic wisdom?

One explanation, perhaps, is that academic economists get their research published by coming up with surprising results and analysing extremes. The results from this research are increasingly being used to justify increases in market concentration. While this research is valuable and provides insights, it should not replace conventional wisdom in the implementation of competition policy.

Second, and related, do we need to consider something similar to the approach adopted by US courts where once markets are defined and the merger is likely to result in a significant increase in concentration, there exists a “rebuttable presumption” that the merger should not proceed absent evidence to the contrary?

Under a rebuttable presumption, the merger parties must show why conventional wisdom does not apply to the merger and produce evidence to support their propositions. After all, a company has more facts and knowledge of its company and its industry, and it is difficult to prove what will likely happen in the future.

There will be times when a merger to high concentration is acceptable, due perhaps to low entry barriers, but logic says it will not be the norm. Why shouldn’t those arguing the unconventional have the burden of producing evidence to support their position?

I am not necessarily advocating for this, simply raising a question we should all ponder.

Third, how should the ACCC analyse the types of acquisitions that concern The Economist; where large incumbent firms acquire promising start-ups? We recognise that such acquisitions can bring innovative ideas to the market sooner. However, in some circumstances, such acquisitions, or a pattern of such acquisitions, can have the adverse effect of entrenching the market power of large incumbents. It is a challenging task to predict and assess the impact such acquisitions may have on competition in dynamic markets. It is even more challenging to establish that there is likely to be a substantial lessening of competition on the basis of the removal of one potential competitor.

Fourth, is there too much focus on overlap in specific narrow market sectors? Should we focus more on the wider actual and potential competitive constraints and the extent or strength of those constraints? For example, examining a retail merger local market by local market may only provide part of the picture when the key competition harm may be the loss of the chain-on-chain competition.

Fifth, and closely related, how many different forms of remedy should a competition regulator assess before saying “enough”? During our review of the proposed Haliburton/Baker Hughes merger, remedies were floated by the parties in many different sub markets. If this merger proposal had proceeded, the ACCC would have had to assess each of them separately when in reality the overall transaction raised significant competition concerns that were unlikely to have been capable of being remedied.  And in other circumstances, we receive multiple versions of a proposed undertaking over the course of a review, each requiring detailed analysis and consultation. 

All of us here today understand the importance of strong actual or potential competition to the effective working of our market economy. This is why we all have an interest in these questions.

Thank you for your time today.

[1] The rise of the corporate colossus threatens both competition and the legitimacy of business, The Economist, September 17 2016, page 9.

[2] Flowers, A. Big Business Is Getting Bigger, 18 May 2015,

[3] Eric Roll, A History of Economic Thought, page 132. 

[4] Top 100 measured by market capitalisation. Share of GDP measured by revenue of those companies.  Port Jackson Partners analysis, 2016, unpublished.

[5] Not least being that company revenues include those achieved overseas. Note, however, that the international revenue of the top 100 firms as a share of their total revenue has slightly fallen over the last 10 years.

[6] Adam Smith, An Inquiry into the Nature and Causes of the Wealth of Nations, Book II, Chapter II, p.329, para. 106.

[7] ACCC Vodafone Group plc and Hutchison 3G Australia Pty Limited - proposed merger of Australian mobile operations, Public Competition Assessment, 24 June 2009 

[8] Australian Competition Tribunal,  Application by Glencore Coal Pty Ltd [2016]  ACompT 6, para 155