Improving Australia's productivity and consumer welfare

Speakers: 
Mr Rod Sims, Chair
Conference: 
RBB Economics Conference
21 November 2019

ACCC Chair Rod Sims addresses the RBB Economics Forum on consumer welfare and the emerging challenges for policymakers and regulators to improve economic efficiency across a range of areas including mergers, unfair conduct, monopolies, agriculture and the data economy.

Transcript: 

Check against delivery.

Introduction

My thanks to RBB Economics for the invitation to speak to you. This conference is now a mainstay in the competition law and economics calendar. It provides a great opportunity to explore some of the economic issues that shape the way we at the ACCC approach our role. I intend to take full advantage of this opportunity today. 

Australia’s economic record over the past 25 years is enviable. We have not been in recession since 1990–91.

There are, however, some concerning trends. For instance, productivity growth in Australia has slowed considerably.

Productivity growth has slowed in most advanced economies, with the slowdown commencing before the GFC.[1] A number of hypotheses have been advanced to explain the productivity slowdown, many of which focus on weaker investment, including in research and development, and lower rates of innovation and knowledge dissemination.

The profit motive plays a key role here. The profit motive provides firms with the incentives to invest and innovate.

Markets must operate to encourage the development of new technologies and to facilitate the diffusion of knowledge. Competition, of course, is central to this. The incentive to innovate is likely to be no greater than when there is a threat that rivals will get there first and reap the rewards.

While higher profits from attaining transitory market power can be necessary to encourage innovation and risk taking, persistent market power can have the opposite effect. Firms with market power have incentives to engage in conduct to protect that power by restricting or deterring competitive behaviour by their rivals or potential rivals; that is, to protect the economic rents they have legitimately gained by illegitimate behaviour.

This is recognised by the International Monetary Fund (IMF). Commenting on the finding that market power has, in recent times, been rising in many advanced economies, the IMF notes:

this market dominance could lead to unfair advantages that weaken market entry and competition and, more significantly, dampen investment and innovation. It is therefore important to cut barriers to market entry and reform and strengthen competition law to better align with the new economy.[2]

The IMF further notes:

In general, competition authorities should have ample resources to investigate mergers in detail and assess whether they will benefit consumers. Anti-competitive behavior may be deterred more effectively if competition authorities also have the ability to undertake market examinations and—when evidence of anticompetitive behavior is found—enforce strong remedies, including directing firms to divest assets if deemed necessary.[3]


I, of course, totally agree that competition authorities should have 'ample resources' to detect and remedy anti-competitive behaviour. Directing firms to divest assets as a remedy for anti-competitive behaviour is, as I have noted before, a big step.  

Sluggish performance of our market economy is posing challenges for the economics profession. The profession has a significant contribution to make in finding ways to reverse the slowdown in productivity growth.

With this in mind, I wish to pose a range of questions, some that will be familiar, and some not. These points extend well beyond competition law, as they need to.

  1. Are we under-enforcing merger law to the detriment of our economy?
  2. Would more effective consumer laws, and so enforcement, improve economic efficiency?
  3. How do some economists see it as efficient not to regulate infrastructure monopolies? Why do some think that the best way forward is commercial negotiation when companies have to negotiate with a monopoly?
  4. What are the economic consequences of the lack of price transparency afforded to our farmers and their lack of bargaining power?
  5. What are the economic consequences of so much personal data in the hands of a small number of commercial entities?

1. Are we under enforcing merger law to the detriment of our economy?

The objective of merger law is to prevent anti-competitive acquisitions before they occur; that is, before the harm occurs. It is about protecting competition and the competitive process, and in that way protecting consumers.

The ACCC recognises that mergers play an important role in the efficient operation of a market economy. They provide an effective way of reallocating resources and replacing ineffective management. Mergers can also generate efficiencies associated with greater scale and scope and enable the merged firm to make better offers to consumers.    

It is important, however, not to lose sight of the objective of merger law and the economic costs of allowing anti-competitive mergers. 

Market power provides a firm with the freedom to increase prices above costs resulting in unexploited gains from trade. In addition to raising prices and restricting output, anti-competitive mergers can reduce the pressure on firms to be vigilant over costs, slow innovation, deter socially beneficial investment and encourage wasteful rent-seeking activities. All of which ultimately impede economic growth.

As you all know, the ACCC is concerned that merger law in Australia is not meeting its objective, particularly given the way the law has been interpreted by the courts.

The ACCC has two main concerns. 

First, we think there needs to be greater recognition that mergers that significantly increase concentration in already highly concentrated markets, or that provide a competitor with monopoly control over an essential input, create significant competition risks. There also needs to be greater recognition that anti-competitive mergers can cause significant economic damage.

For example, the most immediate consequence of a horizontal merger is to eliminate rivalry between the merger parties. It lessens competition. Of course this is by no means the end of the inquiry. In order to assess whether the merger is likely to substantially lessen competition requires the consideration of a range of matters including the closeness of competition between the merging parties, their market shares, the competitive constraints imposed by other firms in the market, the likelihood of new entry, and so on. But the start of the inquiry should be to understand what competition is lost from the merger.

Second, the ACCC is concerned that insufficient weight is placed on the commercial incentives that are likely to be affected by the merger.  

The ACCC is often told its arguments in merger cases are too theoretical. That we rely too heavily on how the commercial incentives of the merging parties will change as result of the merger. And in turn how that will likely affect their market behaviour, such as increasing prices.

It seems that courts place greater weight on the testimony of the executives of the merging firms who often state that their behaviour will not change, or they will compete more aggressively after the merger. This is not to say that these executives mislead the court. Rather, at the time they give evidence to the court, the merger has not occurred. They are not operating in a post-merger world. Their total focus is to get the deal through.

I strongly disagree that the ACCC’s arguments in merger cases are too theoretical or not ‘commercially realistic’. Rather, they are based on sound and extremely practical commercial logic and experience and are supported by evidence often contained in contemporaneous internal company documents before the deal was announced, or in data showing the closeness of competition between the parties. Real world commercial experience clearly sees that market structure can affect market behaviour and market outcomes.

Experienced business people know this. As did the Australian Competition Tribunal in QCMA where is stated:

Competition is a process rather than a situation. Nevertheless, whether firms compete is very much a matter of the structure of the markets in which they operate.[4]

In raising concerns about the current approach to merger law, the ACCC has noted options that could be considered and which are informed by overseas approaches. These range from changing the onus, or introducing structural presumptions about certain mergers, through to considerations of a more formal regime. Others have pointed to the possible use of expert tribunals. We think this discussion has some way to go and are pleased that it will get a run at this conference.

2. Would more effective consumer laws, and so enforcement, improve economic efficiency?

Traditionally economists focus on competition law more than consumer law. This is understandable as competition law can be more intellectual fun. But if we are seeking to enhance economic welfare I believe that consumer law should get much more attention than it does.

Consumer law enforcement improves the functioning of markets in a number of ways.

One is by prohibiting businesses from engaging in misleading and deceptive conduct.

Markets only work when participants are well informed. If consumers are misled or deceived they will likely make inappropriate decisions and be worseoff as a result. This is particularly the case in consumer-facing markets where buyers often do not have ready access to the information necessary to detect misleading conduct.

Misleading and deceptive conduct can also reduce trust in the operation of markets and discourage participation. As a result, many mutually beneficial trades can go unexploited.

Moreover, enforcing laws prohibiting misleading or deceptive conduct reduces the risk of a 'race to the bottom' where firms succeed by misleading consumers rather than by making them a better offer.

Another way in which consumer law improves the functioning of markets is by prohibiting unconscionable conduct.

Competition is, by its very nature, ruthless and results in winners and losers. Firms jockey for position and seek to outperform one another by making more compelling offers to consumers.

'Survival of the fittest' means go hard and compete on your merits. It should not, however, mean do whatever you like to those in a weaker position. This is a crucial point.  

Companies in a superior economic position can use that position to extract economic rents from consumers or their trading partners.

Coles’ past treatment of its suppliers is a case in point. In 2011, Coles misused its bargaining power to demand payments from suppliers it was not entitled to, by threatening to harm them if they did not comply.

Many of Coles’ suppliers are small or medium-sized businesses who continually look for ways to improve their processes and lower their production costs. Coles appropriated some of the value of these investments. Not only was Coles’ behaviour inconsistent with acceptable business and social standards which apply to commercial dealings but, if it went undetected and unpunished, it would have undermined the incentive for its suppliers to invest.

The Federal Court found, by consent, that Coles engaged in unconscionable conduct and ordered it to pay the penalty of $10 million which was jointly submitted by the ACCC and Coles.

While this was a success, courts in Australia have tended to stick closely to traditional equitable concepts and apply a high bar when assessing whether conduct is unconscionable under the statute.

In ACCC v Medibank (2018), the ACCC was unsuccessful in demonstrating that Medibank engaged in unconscionable conduct. Medibank failed to notify its members that it had terminated agreements with a number of pathology and radiology providers that supplied services to hospital patients, resulting in its members having to pay significant and unexpected out-of-pocket costs. Notably, Justice Beach observed:

Certainly, Medibank acted harshly. And I am also prepared to conclude that it acted unfairly. But this is not enough to establish statutory unconscionability.[5]

Unfair practices can distort behaviour and trust in markets. One of our concerns with Medibank’s conduct was that it added to the uncertainty about the value of health insurance and risked undermining consumer confidence in the offers of health insurers.

In the Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry, Commissioner Hayne identified six norms of conduct for entities providing financial services.[6] The third norm was to 'act fairly'.

This begs the question: Why not prohibit 'unfair practices' that cause, or are likely to cause, significant commercial harm to consumers or small businesses?

I recognise that such a provision would need to be drafted so it minimises uncertainty for business and does not capture conduct that harms rival businesses by out competing them. But this can be done; we can use the lessons learned in other jurisdictions that prohibit unfair practices including the United States, the European Commission, the United Kingdom, Canada, Japan and South Korea.

I also recognise that a prohibition on 'unfair practices' will, like the prohibition of unconscionable conduct, involve the application of value judgements. But moving to an unfairness standard might encourage the courts to judge what behaviour is unacceptable by reference to modern standards articulated in the statutory prohibition, not by long established equitable standards. And, in doing so, bring the law into the current day, without the historical baggage of unconscionable conduct.

There is a strong argument that we need to protect our market economy from its own excesses. Having a law that deals with firms that cause substantial detriment to consumers or small businesses by unfair conduct that, for example, is not reasonably necessary to protect their own interests, seems a change whose time has come.        

3. How do some economists see it as efficient not to regulate infrastructure monopolies? Why do some think that the best way forward is commercial negotiation when companies have to negotiate with a monopoly?

Privately owned non-vertically integrated monopoly infrastructure of national significance is often unregulated in Australia. And the threat of regulation is weak to non existent.

The Part IIIA access regime does not seem to apply to non-vertically integrated bottleneck infrastructure. In recommending to the designated minister that the declaration of the shipping channel service at the Port of Newcastle be revoked, the National Competition Council stated:

...PNO is not vertically integrated in any meaningful way into any relevant markets related to coal export activity. This means it is unlikely to have an incentive to deny access to firms operating in related markets (as they are not competitors to PNO); or to provide access on terms and conditions that inhibit the ability of different users of the Service to compete against each other on their merits in these markets.[7]

Some say there is no need to regulate infrastructure monopolies, that the market power held by owners of monopoly infrastructure has no or limited adverse economic effects.

For example, the Productivity Commission recently concluded that Sydney, Melbourne, Brisbane and Perth airports have significant market power in the provision of domestic aeronautical services.[8] However, the Commission formed the view that they have not systematically exercised that market power in negotiating charges for aeronautical services or in setting car parking rates.[9]

It is surprising that these airports have the ability to 'give less and charge more', but choose not to do so.

The National Competition Council seems to be of the view that the Port of Newcastle has limited incentive to monopoly price as it has a 98 year lease, and monopoly pricing will deter some future investments in coal mining activity serviced by the port.[10]

What seems to be missing is that monopoly pricing involves a trade off. Higher prices will reduce the volume the monopolist sells. In the case of the Port of Newcastle, this means monopoly pricing will deter some investments in coal mining activity. But higher prices will also increase the Port’s profit margin on the volume it does sell.

The lack of alternatives available to coal miners makes this trade off profitable for the Port.

And the prospect of monopoly pricing for access to the Port of Newcastle hangs over all the investment decisions the coal companies consider making.

Concerns about the likely adverse economic effects of no regulation, or poorly designed or implemented regulation of monopoly infrastructure, is heightened by a recent decision by the Australian Competition Tribunal. The matter concerned a review of an arbitration decision by the ACCC in relation to port charges at the Port of Newcastle.

A key issue of dispute in that matter was the treatment of the capital contributions made by users to the cost of deepening the port. The Tribunal concluded that no deduction should be made to the regulatory asset base for these user contributions.[11] This meant that users will pay twice for deepening the port. First by the capital contributions, and secondly through user charges.

The regulatory framework has clearly failed to protect the sunk investments made by port users. One can understand why port users would be extremely reluctant to contribute to the capital costs of port expansions and improvements in the future.

The broader signals this outcome sends to users of monopoly bottleneck infrastructure are concerning. In many cases it is efficient for users to contribute to the capital costs of improving or expanding monopoly bottleneck infrastructure. Such contributions are an efficient way of allocating and sharing the risk associated with these investments. Some investments may not occur, or may not occur as soon, without a capital contribution from users.

These examples bring into focus the question of whether we have got the appropriate regulatory settings for non-vertically integrated monopoly bottleneck infrastructure in Australia.

Or more to the point, what economic damage does one need to demonstrate before regulation is justified?

The arguments here link back to some of the arguments about merger law and its implementation. Say there were two ports available to users in Newcastle and they sought to merge. Should the ACCC oppose this because of the economic consequences of the market power the merger would create?

I would say 'yes'. Others, it would seem, may not be so concerned.  

4. What are the economic consequences of the lack of price transparency afforded to our farmers and their lack of bargaining power?

The ACCC’s recent involvement in agriculture issues has seen us appreciate the difficult position farmers are often in. 

Farmers in most commodity sectors often have little bargaining power, limited access to proper dispute resolution, and limited protection against unfair contract terms or unfair practices. In many sectors, farmers also have limited price transparency.

Our recent market inquiries into the beef, dairy and wine grape sectors, and our work implementing the horticulture code, have revealed that unnecessary economic costs are being imposed on farmers.

Consider dairy farming. In most dairy regions, farmers have at most two or three processors they can sell their milk to. The livelihood of dairy farmers is inextricably linked to the farmgate price they receive from their processor. With few exceptions, no individual dairy farmer will have much effect on the profits of a dairy processor. This gives dairy processors substantial bargaining power with dairy farmers. And can expose them to unfair and commercially damaging practices by dairy processors.

For example, in 2016, Murray Goulburn made misleading claims about the final farmgate milk price it expected to pay dairy farmers for the 2015-16 milk season. Murray Goulburn’s misrepresentations meant farmers were not informed that there were material risk factors to achieving the forecast final milk price announced by Murray Goulburn.

These misrepresentations imposed significant costs on dairy farmers. They were denied the opportunity to plan for the impact of the reduced milk price on their businesses, including implementing measures to reduce their exposure to a sharp decrease in the milk price.

A recurring theme in our work in the agricultural sector is how arrangements with processors can expose farmers to unnecessary risks or, very often, risks that could be better managed or controlled by others in the supply chain. 

Farm businesses face inherent risks from the vagaries of climate and international commodity prices. As a result, the volatility of farm business returns is higher than in any other sector of the economy, and almost double the average level of volatility of all businesses in all sectors.

Managing investment risk is very important to the profitability and growth of farm businesses.  Constraints on access to land and water dictate that growth is heavily dependent on productivity improvements, most of which require capital investment. Businesses in the sector are more likely to undertake such investment when markets are transparent and competitive, risk is appropriately shared along the supply chain, and disputes can be resolved promptly and fairly.

However, arrangements with processors mean farmers are often allocated risks or costs even though they are the party least able to manage or minimise them. Long payment terms that allocates credit costs to farmers is just one example from many.

Farmers are also often forced to bear risks they cannot control.

A lack of price transparency that processors afford farmers can make production and planning decisions difficult and more risky.

Our market studies have revealed that some of the arrangements farmers have with processors can be difficult to change, even if the changes are likely to enhance economic efficiency. Our studies highlighted the limited ability of the farm sector to achieve necessary policy change in the face of well-resourced advocacy from major processors, retailers and agribusinesses.

In response to these endemic issues, the ACCC has recommended a mandatory code for the dairy industry, and indicated that, in the absence of major reform by the industry, a mandatory code may also be needed in the wine grape industry.

Some have argued that mandatory industry codes are a small step away from re-regulating agricultural markets. This is nonsense. They are a light touch, yet effective, response especially in the face of entrenched and systemic market practices that limit transparency and competition, and which can limit investment and the efficient operation of markets.

5. What are the economic consequences of so much personal data in the hands of a small number of commercial entities?

The economics of digital platforms are fascinating. 

They provide users with access to online services such as internet search and social networking sites. The benefits users gain from these services are substantial.

Users pay for these services in a number of ways. Users provide digital platforms with their attention and their personal data. Digital platforms sell the attention of users to advertisers and use their personal data to better target advertisements.

Targeted advertising reduces waste. Users waste less time looking at advertisements for products they have no interest in. Advertisers waste less resources advertising to users who have no interest in their product.

Digital platforms can and do use personal data in other ways. Digital platforms often combine the data obtained via their platform with data from other sources and may share the data with third parties.

The amount and quality of personal data that commercial entities have access to, combined with the growing capability to process, analyse and use this data, enable businesses to employ strategies that in the past were not possible. 

For example, it is becoming increasingly possible to assess the willingness to pay of individual consumers based on a broad range of characteristics including health, wealth, where they live and recent purchases. It is also becoming increasingly possible to target individual consumers at particular times when they are more likely to purchase or are in a vulnerable position.

The economic consequences of all this are unclear.

But let’s pose some questions.

Consumers often don’t know what personal data is collected by digital platforms, or what their data is used for. They may not have access to adequate information, or the information may be difficult to navigate and understand, or they may be misled. Consumers may also have few choices about what data is collected, given that when they use a platform in any way they must agree to wide data collection. How much is this lack of information and choice distorting the operation of markets for data collection and use? What are the economic consequences of this?

What are the economic implications of an increase in the ability of businesses to price discriminate? Are these simply transfers where the gains to the winners offset the losses to the losers? Will it encourage consumers to hide or disguise their personal characteristics to avoid paying higher prices? Will price discrimination encourage some consumers to avoid online shopping?

Is there a need for safeguards to protect some consumers from being targeted or discriminated against by digital platforms or businesses using those platforms?

Growth in the volume and availability of personal data is making it easier for scammers to target susceptible consumers. Who should bear the responsibility for detecting and removing scams from digital platforms?  Who can do this most effectively, and at least cost?

A large number of businesses rely on a small number of digital platforms to advertise and to attract new customers. Many businesses, small and large, see interacting with large digital platform as unavoidable. Some businesses are significantly and instantly adversely affected by algorithm changes by large digital platforms. How concerned should we be?

There are wider questions.

Is the concentration of large volumes of personal data in the hands of a few companies a problem? What are the implications for competition, innovation and investment from this?

What access rights, if any, should businesses have to data collected through the interaction of their customers with digital platforms? Media companies, for example, say that they cannot get sufficient access to the data of the readers who view extracts of their news stories on digital platforms. They claim this limits their ability to better align their stories to their readers and to monetise their content.

Are consumers who are increasingly concerned about abuse of their data likely to seek to provide less of it or distort it, for example by obfuscating their identity or personal details? The ACCC’s recently commenced action against Health Engine for misleading and deceptive conduct relating to the sharing of consumer information with insurance brokers and the publishing of patient reviews and ratings. This may be a further wake-up call in an increasingly 'anything goes' data environment.

Finally, and most fundamental, what rights should consumers have to their personal data? The Government’s Consumer Data Right (CDR) provides consumers with the right to share their transaction and usage data with service providers and comparison providers in order to make it easier to shop around and compare offers. The CDR will initially apply to the banking and energy sectors, and then extend to many others. The ACCC is doing all it can to make the CDR a practical reality that clearly benefits consumers, but also innovation.

Australia is just beginning its data journey of discovery. It is vital that we get it right.  

Conclusion

There are many fascinating issues facing the ACCC today.

These issues do not just go to economic efficiency, but also to other economic issues including understanding how the benefits from technological progress are shared. An understanding of these issues is necessary to inform some important policy debates.

The economics profession has a crucial role to play in assessing and opining on these issues.

No other discipline is better placed to help society address the questions I have raised in this address.

Thank you for your time today.

 

[1] Productivity Commission, PC Productivity Bulletin, May 2019, page 44

[2] International Monetary Fund, World Economic Outlook, Growth Slowdown, Precarious Recovery, April 2019, page xiv

[3] International Monetary Fund, World Economic Outlook, Growth Slowdown, Precarious Recovery, April 2019, page 69

[4] Trade Practices Tribunal. Re Queensland Co−operative Milling Association Ltd., Defiance Holdings Ltd. (Proposed Mergers with Barnes Milling Ltd.) (1976)

[5] ACCC v Medibank Private Limited [2018] FCAFC 235 at [353].

[6] Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry, Final Report, 2019, page 8

[7] National Competition Council, Revocation of the declaration of the shipping channel service at the Port of Newcastle, Recommendation, 22 July 2019, pages 1–2

[8] Productivity Commission 2019, Economic Regulation of Airports, Report no. 92, page 11

[9] Productivity Commission 2019, Economic Regulation of Airports, Report no. 92, page 1

[10] National Competition Council, Revocation of the declaration of the shipping channel service at the Port of Newcastle, Recommendation, 22 July 2019, page 2

[11] Application by Port of Newcastle Operations Pty Ltd [2019] Australian Competition Tribunal at [364].