When and how to intervene in markets

Speakers: 
Mr Rod Sims, Chairman
Conference: 
Australian Conference of Economists
12 July 2018

ACCC Chairman Rod Sims delivers a speech to the Australian Conference of Economists, discussing a number of inquires the ACCC is involved with, including the digital platforms inquiry, the retail electricity prices inquiry and the consumer data right.

Transcript: 

Check against delivery

Introduction

Good afternoon, and thank you for inviting me to speak at this year’s ACE conference.

As you all know, the ACCC is Australia’s competition and consumer law regulator, and we regulate aspects of communications and transport as well. Like most regulators, we often attract criticism for doing too little in the eyes of the average person in the community.

For example, we are criticised by some in the community due to a perception that we have failed to act in the face of increasing petrol prices, or in respect of various forms of actual or perceived price gouging of the Australian consumer, as well not doing enough on behalf of particular small businesses who are seen to be suffering at the hands of larger businesses.

Much of this stems from a misunderstanding of what the ACCC is meant to do. Enhancing competition does not mean protecting all market participants from failure, nor does consumer protection extend to shielding consumers from price increases set by the markets.

It is not illegal for a company to put their prices up, or even to price gouge, as this term is commonly understood. This last point in particular seems to be a sticking point for many people.

Instead, we work to establish an even playing field, where all participants have a fair chance of achieving either success or failure, and we work to ensure consumers are not misled.

Of course, we think a lot about our role in the market, and when and where we should act. The age old question of when to intervene in markets has long held a fascination for economists. Do you intervene to prevent market failure, or to correct it once it has already begun? If you do intervene, do you do so with a light-touch, or a heavy-touch?

The comedian George Carlin once cut to the heart of the issue when he remarked:

Nothing rectifies out-of-control market failures like a healthy dose of government intervention and mountains of bureaucracy.

And there is considerable truth to that. In an ideal world, regulators like the ACCC would exist as a deterrent to anti-competitive, anti-consumer behaviour, and intervention would rarely be required.

We do not, however, live in such a world.

When we choose to intervene, via enforcement cases, market studies or via general compliance activity, we do so to ensure that markets function correctly. This is important for business, consumer and investor confidence.

We want everyone operating on an even playing field, with the opportunity for success or failure dependant on their merits, not artificial manipulation of the markets or any misleading of consumers.

With this in mind, it is an interesting time for the ACCC. We have a number of inquiries going on, such as the digital platforms inquiry, our retail electricity prices inquiry has just been completed, and we are working hard to develop policies and processes around a new function that we have acquired in the past year: our responsibility for the consumer data right.

These all raise fascinating issues of when to intervene in markets, and they all raise important economic and social issues for Australians and our place in the world. Today I will provide a brief overview of each of these.

The digital platforms inquiry, or DPI

As the economic regulator of the communications sector we monitor and report on competition and market developments, and enforce compliance with a range of telecommunications-specific legislation. Adding this role to that of our other roles, we have a stake in how things like digital platforms develop, what kind of market power they exercise, and what their effect is on consumers. While technological change and innovation provide many benefits and opportunities to companies and consumers, they can also raise potential competition and consumer issues.

The advent of digital technology, and particularly social media platforms, has been enormously transformative, and over a comparably short period of time. We are still coming to terms with just how transformative it has been, and what social forces have been unleashed as a result, and governments around the world have only recently begun to examine the effect of digital platforms on their respective societies.

On 4 December 2017, the Australian Government directed the ACCC to conduct an inquiry into digital platforms to examine the effect they have on competition in media and advertising services markets.  

One of the key questions that we must ask ourselves is, ‘Should there be intervention to protect a disrupted media market?’

We will not intervene to simply hold back change, and disrupt the natural evolution of an industry that is itself being disrupted, but we will ask four questions.

  • Do digital platforms have market power and how is that being exercised?
  • Are digital platforms sufficiently transparent in the collection and use of consumer data? Are they complying with the Australian Consumer Law?
  • Do digital platforms have an unfair competitive advantage due to the unequal treatment of regulation?
  • Have digital platforms substantially changed media and advertising markets in Australia to the detriment of news, journalism and therefore Australia?  This assessment amounts more to an economic cost-benefit analysis in the widest sense.

The first question requires us to examine whether platforms have substantial ‘market power’ and, if so, how is that market power being used?

A market power assessment is clearly within the ACCC’s comfort zone but these markets are not straightforward. For example, in which markets do the platforms operate, and who are their competitors?

At its core, however, antitrust policy and enforcement concerns itself with whether competition is being harmed, so it must have a large role in our inquiry. Can competition remain given the way the major platforms currently operate? Can new players emerge who may not, for example, rely as much on harvesting massive amounts of peoples’ data?

The second question addresses the ‘the impact on consumers’.

This is a really significant part of our assessment. We do not believe that consumers are generally well-informed about how digital platforms collect and use their data. The feedback to our consumer questionnaire shows that consumers do not understand how much data is being collected or how their news feed is being curated.

We need to understand fully the data being collected. Many consumers understand that data is being collected when they are using a platform, such as their Google search history, or Facebook profile, but do they understand what is collected when they are off the platform?

The issue is not just about the wording of a privacy policy. We will be also examining whether users appreciate the value of the data they are providing to these platforms, both when they are using these platforms, and also when they are not.  In other words, are users ‘selling’ their data too cheaply in exchange for convenience?

The European Union’s General Data Protection Regulation came into effect on 25 May 2018. This wide-ranging data protection law has a number of additional protections over current Australian law including a right to erasure and a right to portability.

We will be closely looking at the many impacts of its implementation in Europe.

Now the third question: do digital platforms have an unfair competitive advantage?

It is important for us to examine the extent to which the major digital platforms are competing with publishers and broadcasters and whether they have a competitive advantage.

The digital platforms are clear competitors to media companies in the case of attracting advertising spend but the relationship on the content side is more complicated and there are a number of important questions.

Are the platforms subject to defamation law or journalism’s codes of conduct?  Should they be, and how practical is this?

How does, or should, copyright law apply to the digital platforms?

Now the fourth question: what is the impact of the digital platforms on news and journalism in Australia?

Much has been written about Google and Facebook’s share of digital advertising revenue and, as our submissions tell us, traditional media have been significantly impacted by the reduction in advertising revenue.

The reported reduction in journalist numbers would suggest there is less journalism being undertaken, but we appreciate that this is not straight forward. New financial models are being trialled by the so-called ‘digital natives’ such as the Guardian Australia, Crikey and Buzzfeed and we are interested in examining the viability of these models. 

In many ways, the internet and digital platforms have increased the diversity of news and journalism available to Australians.

What is really interesting about this Inquiry is that we don’t yet know what our recommendations are likely to be. Is intervention required, and if so, in what form?

Consumer Data Right

The government announced the introduction of the consumer data right in November last year. This followed a number of government reviews and inquiries which all recommended expanding consumers’ access to their data.

In budget week the Treasurer announced the government’s response to the Open Banking Review. In doing so he confirmed that banking would be the first sector to which the consumer data right would apply, where it will be known as ‘Open Banking’and that the ACCC would have a new role in overseeing its implementation.

The consumer data right will enable customers to safely share their transaction, usage and product data with trusted service providers, if they choose to do so.

We see this as a fundamental competition and consumer reform.

But what is the justification of such a broad ranging regulatory intervention and why isn’t the market delivering these benefits absent intervention? As this audience well knows, markets usually work more efficiently when consumers are well informed about the price and quality of offers available to them, the costs consumers incur when switching between providers are small, and barriers to entry for new providers are low.

In mortgage markets this is not the case.  As we observed in our Residential Mortgages Prices Inquiry, it is often difficult and costly for borrowers to compare the offers of mortgage providers. Discounts off standard variable interest rates are opaque. Borrowers often have to lodge an application and provide substantial personal information in order to confirm the interest rate a mortgage provider is willing to offer.

This all amounts to high search costs for the market to work effectively. Consumer data rights are therefore intended to reduce the cost to borrowers of discovering and comparing offers.

The ACCC recognises that a shift is occurring in data use. The way data is used within society is changing rapidly, and the ways in which businesses are collecting and using data derived from consumers are radically different to the practices of even five years ago.

Business is obtaining a benefit from this data but often consumers are not. Indeed, innovations that arguably could benefit consumers such as targeted news or advertising are controlled almost exclusively by business interests rather than consumer decisions or choice. In this context, attempts to redress the balance and give more control to consumers, and to spur competition, are to be welcomed.

The new right will improve consumers’ ability to compare and switch between goods and services on offer. It will encourage competition between service providers, leading not only to better prices for customers but also more innovation of products and services.

To me, this is one of those cases where government intervention is totally justified and will be welcomed by consumers, as companies cannot be relied upon to make this data available themselves without the legislative push from government. The consumer data right helps to reduce search costs, and lower the barriers to switching between service providers that consumers currently face.

It is envisaged that the consumer data right will be expanded, initially to energy and communications, and consumers will be able to benefit from access to their data across the entire economy.

Electricity

Finally, I will touch on electricity.

Energy prices remain a significant source of anxiety for Australian residential users, and commercial and industrial users. The big jumps in both electricity and gas prices have hit them hard, particularly those businesses for whom energy costs are a significant input cost.

There are two key economic problems.

First, low income people suffer most when they pay higher electricity prices than they should. Whereas electricity costs represent around 2 to 3 per cent of the disposable income of people in this room, for low income people they can represent double this level.

Second, Australia risks losing significant investment and industry that, but for unnecessarily high electricity costs, would be a source of comparative advantage and enhance national welfare. That is, Australia would be better off with these industries than with others that are less well suited to our economy.

These problems arise because Australians are paying considerably more for electricity than they should be, largely due to poor past decisions by governments and the electricity industry.

Consider these decisions and consequences.

Over 10 years ago governments loosened the regulation of the monopoly poles and wires companies, and then in some states significantly increased reliability standards in an excessive response to particular outage incidents. Significantly higher network spend and high rates of return drove higher electricity prices.

As one example, in New South Wales alone, network spend more than doubled in one five year period to the next. This drove up the Regulated Asset Base, and return on, and of, capital expenditure is the key driver of network costs to consumers.

Next, Australia, in essence, decided to meet our climate commitments via the Renewable Energy Target, which subsidises investment in generation capacity that is not always capable of providing energy when it is needed. At the same time, the states decided to provide premium solar feed-in-tariffs at levels many times the cost of energy. The costs of these schemes are spread across electricity users and greatly benefit those with solar panels over those without them.

A further development was some states, with the excellent exception of Victoria, often privatising generation and retail assets without an eye to competition, and mainly to maximise sale proceeds.

Finally, retailers have sought to compete on the basis of size of discount, often off inflated standing offer prices that they set themselves at different levels. They have made consumers’ decisions about purchase of electricity difficult and confusing.

To address all these problems and more, intervention is certainly needed.

From our recently released Retail Electricity Pricing Inquiry report, or REPI you will appreciate the level of change we think is needed.

Conclusion

The digital platforms inquiry, consumer access to data and energy are three headline issues affecting Australian businesses, consumers, and the economy more broadly.  Each provokes questions about when to intervene, and when not to intervene, and each demands a different response.

You may think there is a lot of government intervention in the economy at the moment, or at least a lot being discussed.  I think these three issues demonstrate why this is the case.

Thank you for your time today.