Sims: Tackling market power in the COVID-19 era

ACCC Chair, Rod Sims, addressed the National Press Club discussing market power issues in the COVID-19 era:

“Speaking at the National Press Club in Canberra on ‘Market power in the COVID-19 era’, ACCC Chair Rod Sims said it was crucial for Australia to tackle the issue of market power as it sought to recover economically from the pandemic and deal with the implications of an ever-growing digital economy. Mr Sims said a strong recovery will depend on a competitive economy so we want the innovation, efficiency and restructuring our economy needs, without the damaging consequences from market power being leveraged to the detriment of competition and consumers.“

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Tackling market power in the COVID-19 era

Speakers:

Mr Rod Sims, Chair

Conference:

National Press Club

21 October 2020

Speaking at the National Press Club in Canberra on ‘Market power in the COVID-19 era’, ACCC Chair Rod Sims said it was crucial for Australia to tackle the issue of market power as it sought to recover economically from the pandemic and deal with the implications of an ever-growing digital economy. Mr Sims said a strong recovery will depend on a competitive economy so we want the innovation, efficiency and restructuring our economy needs, without the damaging consequences from market power being leveraged to the detriment of competition and consumers.

Transcript:

Check against delivery

Thank you Sabra and the National Press Club for this opportunity to speak to you all today.

Tragically COVID-19 is destroying lives and livelihoods. It is also affecting our wider economy in a number of important ways.

First, it has sent our economy into deep recession and has or will cause many businesses to fail. As we recover, it is vital that we do not, as a consequence, see an increase in market power. A continuing and strong recovery will depend on a competitive economy.

Second, COVID-19 has completely disrupted our economy and how we will work in future. The ACCC has learnt, for example, that some significant element of working from home increases both our already strong productivity and staff satisfaction.

I am aware many other office-based workplaces are seeing the same results.

More widely, I see a permanent shift to more online business and less bricks and mortar establishments. How we buy things, and utilise many services, has, I believed, changed permanently.

Increasing online activity results in more data collection. This can bring risks. It can, for example, cause an increase in market power, particularly when a few major players are so well-positioned in the collection of user data.

Third, COVID-19 is such a shock that it forces us to consider how we want our world to be, and our economy to operate. Many people are providing ideas; today I will add some of mine.

To understand why concepts such as competition and market power matter so much it is worth taking a few steps back.

In my world three economists are central to understanding how our market economy functions.

Adam Smith gave us the most important quote in economics.

It is not from the benevolence of the butcher, the brewer or the baker that we expect our dinner, but from their regard to their own self-interest.

An 'invisible hand' guides our economy, and that is competition. Businesses must perform well to succeed; if they do not, a competitor will take their customers.

Joseph Schumpeter taught us about 'creative destruction'. Technology will change business models, and we should not impede this process; rather, we should encourage it. This is extremely relevant in today’s world.

To me this is translated as 'do not protect individual competitors; instead protect the process of competition'.

Finally there is Michael Porter. While making or providing goods and services valued by consumers is almost always necessary for business success, the surest way to earn prolonged high profits is through gaining market power. Business strategy, therefore, should be much about reducing competition through acquisitions, seeking to lock in customers, raising entry barriers and keeping your suppliers fragmented.

Why earn the profits possible from a competitive industry when much higher profits are available from leveraging market power?

Smith’s ideal of perfect competition does not sit well, then, with what occurs in our practical world.

The fundamental point is that with perfect competition the interests of businesses and consumers align; the further we move beyond this ideal, indeed the more we have market power, the more these interests diverge. Business can gain at the expense of consumers, rather than by serving them.

The profit motive of companies can therefore work against the interest of consumers and our society.

On joining the ACCC nine years ago, after nearly 20 years in the private sector, mostly advising top 50 companies on corporate strategy, I was surprised to be constantly hearing that 'companies succeed by focusing only on the needs of their customers.'

This is a naïve and inadequate understanding of business strategy and incentives.

Do not get me wrong. I am a complete believer in a market economy, and the benefits of the profit motive. It brings efficiency and innovation we would otherwise not have, and it provides us with competent business leaders.

It is the belief that businesses will only and always act in the interests of their customers that I object to, because it is simply not correct.

Our society, our policy makers and yes, our journalists, need to understand this better.

On many occasions journalists have said to me they think a company is misbehaving when the company is simply using its market power. Such as when electricity companies increased electricity prices when Hazelwood closed, or when the monopoly port of Newcastle increased its prices by around 50% because there is no regulation preventing this.

In these circumstances companies are not misbehaving. Their behaviour is not some form of aberration. They are simply acting commercially and predictably to maximise profits as their shareholders demand of them.

The issue for all of us is how do we prevent companies gaining too much market power in the first place and, when they have it, how do we deal with the most damaging consequences of the use of that market power.

My thesis today is that we must, in all decisions affecting our market economy, take into account market power and the consequences that flow from it. This is particularly crucial at this time, as we confront the economic challenges of the COVID-19 pandemic, and the implications of an ever-growing digital economy.

I will explain this by going through the three core roles of the ACCC.

First, we enforce competition laws. But I believe you cannot rely on competition laws alone to stop or deal with all the adverse consequences from a growth in market power.

Second, along with state agencies, we enforce consumer law. This should have an even larger role that it has today, especially as it applies to small businesses.

Third, we regulate infrastructure and, in particular situations, we regulate where there is considerable market power. We need a bit more well-targeted regulation of this kind.

I should add that, in essence, the many inquiries given to the ACCC by the government in recent years have been driven by problems stemming from market power.

1. Competition law can play an important role in protecting competition, but it is not always successful.

Our competition laws are, in essence, designed to do three things.

First, they stop business gaining market power by acting with their competitors, such as through a cartel or other forms of anti-competitive agreement.

Second, they prevent a business that already has market power from inappropriately protecting or enhancing their market power, which is the focus of section 46.

Third, they can prevent acquisitions that give or increase businesses market power or, to be precise, in the words of section 50 of the Act, that are likely to have the effect of substantially lessening competition.

The first of these was the focus of another Adam Smith quote.

People of the same trade seldom meet together, even for merriment and diversion, but the conversation ends in a conspiracy against the public, or in some contrivance to raise prices.

Our cartel laws, whilst clunky and technical and challenging to enforce, are nonetheless effective. So much so that people of the same trade these days seldom meet with each other without their competition lawyers present.

The second focus of competition laws now sees us with the new section 46 test of behaviour which has the purpose or effect of substantially lessening competition, introduced in late 2017, which replaced an ineffective and largely unusable law.

The change followed the Harper Review, which removed the obstacles created by the focus on 'take advantage', and now deals with the effect of the behaviour as well as the purpose behind it.

Big business fiercely opposed a workable section 46 against the interests of largely voiceless consumers. It required effective lobbying by small businesses to get the changes through.

We brought our first case under this new law late last year against Tasmanian Ports Corporation, and we have some fascinating investigations underway.

It is in the third area, preventing anti-competitive acquisitions under section 50, where we continue to confront difficulties in contested merger cases.

We are not alone. Ensuring anti-competitive mergers are prevented is a challenge facing many competition agencies, and I discuss these issues with my overseas counterparts regularly.

We do have real successes under our informal merger review process. Of the 148 mergers that have gone to public review in the last 5 years, 27 did not proceed, because of either ACCC opposition or the merger parties withdrew after we identified preliminary competition concerns, and 17 went ahead after providing an acceptable remedy.

However, in the instances where we have ended up in litigation the reality is that we haven’t won outright in a contested merger case since the current substantial lessening of competition test was introduced in 1992.

The heart of the problem is that, in merger cases, the ACCC is required to prove on the balance of probabilities what is likely to happen in the future if the merger does not proceed. That is, in essence, the merger regime seeks to compare what will happen with and without the merger and determine if the difference can represent a substantial lessening of competition.

In electricity, for example, we failed to stop AGL acquiring Macquarie Generation in 2014 when the Australian Competition Tribunal permitted it to proceed. At that time, the Tribunal noted that 'for the medium and long term, the available generating capacity will be significantly in excess of demand.'

When the Hazelwood plant closed, catching most people by surprise, this all changed.

Subsequent analysis suggests the significant lift in electricity prices that followed was due to key players using their market power.

There is no doubt that Facebook and Google achieved their dominant market positions in search and social media essentially by excellent and beneficial innovation.

But how much stronger and more entrenched is Facebook with its very many and continuing acquisitions, including Instagram and WhatsApp; and Google with its numerous acquisitions including YouTube and the digital advertising intermediary DoubleClick?

We need as a society to ask how much market concentration do we want to tolerate?

In the private sector I helped assess mergers for their commercial merits: almost always we counted gains from reducing competition, and so gaining higher prices.

Imagine my surprise on coming to the ACCC to be told by the merging businesses that all the mergers we needed to assess were totally devoid of any benefits from a reduction in competition.

Indeed, the ACCC is often labelled as being 'theoretical' and 'speculative' when we suggest that increasing consolidation in an industry will see increased market power and so higher prices.

I think the importance of these issues will only grow in a COVID-19 world with perhaps many failing firms, and a more digital world.

Currently our merger laws cannot prevent all inappropriate increases in market power.

However where you draw the line on which mergers proceed and which should not is complex.

We will put forward ideas for changes to our merger laws in 2021. This will trigger an important debate.

In the meantime, however, there is more we can do with consumer law and regulation to deal with the most damaging consequences of market power.

2. Market power and consumer (and small business) law

Not so long ago I pointed out to a senior parliamentarian that price gouging was not against consumer law. He was shocked.

The ACCC is often called 'idle' or 'stupid' for not stopping actual or perceived price gouging.

I am still not sure which of these labels I prefer.

The point I seem unable to communicate is that it is not against the law.

Consumer law in essence is not aimed at curbing the use of market power; instead it seeks to ensure consumers are not misled or subject to some other unfortunate practice.

I often use a simple example. If I buy an apple for $1 and on-sell it for $10 it can be said that I have price gouged the buyer. But I have not breached consumer law.

Alternatively, if I misleadingly tell the buyer that the apple has special properties that justify the $10 price, then I have breached consumer law.

Consumer law relies on competition law to ensure there are enough apple sellers so that, absent being misled, buyers will be able to obtain sensibly priced apples.

The fact that there is sometimes price gouging often reflects a lack of effective competition.

Do not get me wrong: Australia’s consumer laws are powerful. To give some examples in four sectors of great interest to consumers:

• Ford admitted it had engaged in unconscionable conduct when it told consumers, among other things, that their car’s problems were due to their driving style when the company knew there was an inherent problem with the transmission system.

• Telstra and Optus admitted they engaged in false or misleading conduct when, despite large numbers of complaints from their own customers, they used systems that led to people paying for third party services inadvertently.

• AGL and Origin were found to have misled their customers about the level of discounts provided on their electricity consumption.

These are just a few examples. Note that these examples make a mockery of companies saying they always put their customers first.

The ACCC is one of the most effective consumer law enforcers in the world.

The term 'consumer law', however, is a misnomer as the law also applies to dealings between businesses, or business-to-business. We were, for example, successful in our action against Coles for the dreadful treatment of its small business suppliers some years back; and we were also successful in dealing with Murray Goulburn for misleading farmers about the farmgate milk price it expected to pay them.

My key point here, however, is this.

Our consumer and small business laws deal with some damaging uses of market power, but not directly or comprehensively.

First, we now have laws dealing with unfair contract terms, both business-to-consumer and business-to-business.

The main problem now is with the latter. We have taken many cases against large businesses which have included unfair clauses in standard form contracts; clauses that will allow the large business to change the pricing unilaterally under the contract, or remove any recourse even if the larger business is at fault.

The law only provides that the ACCC can take these companies to court to have the relevant terms declared unfair and void. In other words, having unfair terms in a contract in the first place is not illegal and does not attract any penalty.

The significant problem here is that, while many companies have changed their contractual terms voluntarily, others only do so on the court steps, if at all. The ACCC has to do all the work to put each matter before the court, and gains minimal wider deterrence benefit from these actions.

Why change your unfair contract terms if you can get the benefit of them until the ACCC calls and does all the work to be able to take court action.

In my view when you hear small business complaints about big business it will often be a complaint about unfair contract terms. Making unfair contract terms illegal and subject to penalties would be an enormous boost to small business.

The Commonwealth and State governments are towards the end of a lengthy process that, as one option, could see unfair contract terms made illegal. I hope that this is the governments’ preferred option and these law pass the Parliament in 2021.

Second, my other area of concern lies with our laws relating to unconscionable conduct. We have used these laws often, but on some but certainly not all occasions our successes have been when the offending company has admitted liability rather than have all their conduct exposed through a contested court hearing.

When cases are contested, however, we do not always succeed. In our case against Medibank, the Full Federal Court considered its conduct to be harsh and unfair but not unconscionable.

The Courts recently appear to be setting a high bar for what is considered to be unconscionable. In one case, now on appeal, the judge indicated that 'unconscionability' must involve conduct against a person or a small business who is at a special disadvantage. This view, which is the subject of our appeal, restricts the law to a narrow common law principle dating back three centuries, despite the law having moved on with parliament legislating prohibitions that step away from such past doctrines.

In response to all this the President of the Victorian Court of Appeal has recently called for the introduction of an unfair practices prohibition.

I completely agree we need such a law.

I would argue that the following behaviour would be unlikely to be found to be unconscionable conduct, but is unfair and should be prohibited.

• A digital platform not removing a known scam that is causing individuals to lose large sums, and, in some cases, seeing prominent individuals’ reputations damaged

• Companies using data about individuals to target them with sales approaches when they are at their most vulnerable.

• Small businesses getting threatened by larger businesses with commercial consequences unless they agree to change contract terms or otherwise accept considerably less than they are entitled to.

• Larger businesses demanding their small business suppliers provide them with their cost of and sources of key inputs, and then establishing a competing, near identical, 'home' brand.

I could go on.

The issue comes down to what sort of economy we want; one benefitting consumers and allowing small business to thrive, or one that allows the strong to grow stronger by whatever means.

I mentioned earlier that small business lobbying brought us welcome and overdue changes to section 46.

Back then small business thought it was getting more than any change to section 46 could deliver. Section 46 deals with when market power is used to damage the competitive process.

What many small businesses wanted was a law to stop some of the behaviour just mentioned.

They are right to want this.

They should re-engage in the debate and get behind an unfair practices provision. That law would be added to the Australian Consumer Law.

I would go further. I would recognise that the Act the ACCC enforces says:

The object of this Act is to enhance the welfare of Australians through the promotion of competition and fair trading and provision for consumer protection.

The Australian Consumer Law should be renamed to emphasise that it doesn’t just protect consumers. I would rename it the Australian Consumer and Fair Trading Law.

Consumer Affairs Ministers are currently debating the need for, and shape of, an unfair practices provision.

Adding the small business voice can get such a change over the line.

We should not, and cannot, deal with all uses of market power. Often it is coupled with other profit-enhancing behaviour that yields useful innovation.

But in my view there is no place for unfair contract terms. And there is no place for unfairness that sees significant detriment from highly questionable business practices.

3. Regulating monopolies, and the logic of market studies

I remember in 1990, yes some time ago, a pivotal meeting held in Bob Hawke’s office when he was Prime Minister. There was Paul Keating, Kim Beazley, and each Minister had an adviser present. I was there as Bob’s senior economic adviser.

The meeting was to decide the future of competition in telecommunications, particularly in relation to the then government-owned Telecom.

The reformers, of which I was one, had already lost one battle. The trade unions had vetoed the Labor Government splitting Telecom into its network and retail limbs.

This was a major battle lost. A separate telecoms network company would have been the ideal vehicle for building the NBN, rather than creating a new company to do this which had to start from scratch.

At the meeting in Bob Hawke’s office we lost another battle, but we won a very important war.

The then domestically-focused Telecom would be allowed to acquire OTC, Australia’s then overseas telecommunication company, rather than compete with it. But in return, as a quid pro quo, it would have to provide fair priced access to its copper wire monopoly to the new entrant competitor Optus.

We then took this idea of mandating access to monopoly infrastructure and injected the idea into Fred Hilmer’s National Competition Policy review. The Part IIIA access regime was born.

This was a path-breaking reform. Mandating access to monopoly infrastructure facilitated complete restructuring in telecommunications, electricity, gas and rail transport.

Here we had new regulation actually facilitating competition and opening up markets.

Massive and measurable efficiency gains were the result.

The reform was an innovative way of dealing with situations where monopoly power prevented competition.

But it did not adequately deal with situations where monopolies simply use their market power to raise prices.

We have a mishmash of approaches for dealing with this issue.

With the NBN and the Australian Rail Track Corporation (ARTC), the regimes have flaws. Each entity provides an undertaking to the ACCC, and we have particular criteria concerning our acceptance of it. We cannot determine what an appropriate price and service regime should be.

This is fine while both are in government ownership, but significant change to their regulatory regimes will be needed when either is privatised.

More concerning, however, is that there is currently no or little regulation of monopoly privately-owned ports. When these were government-owned political pressure on Ministers kept prices reasonable. But the ports were sold, usually with no control over their pricing in order to maximise the proceeds of sale. The resulting unfettered market power of some ports is costing our nation dearly.

The same situation applies to our airports.

In my view, we need a new 'Part IIIB' monopoly regulation regime that would see owners of significant infrastructure with market power subject to some form of price regulation.

Properly priced infrastructure is vital for our economy.

And we need to stop the privatisation of assets with no regulation on the way they will set future prices. This sees high initial sales proceeds go to the government vendors which is subsequently 'paid for' by the users of that infrastructure through excessive prices for many decades afterwards.

Market studies

Most ACCC inquiries directed by the Government in recent years have had concerns about market power at their base. For example, our inquiries into gas, electricity, banking, digital platforms and agriculture.

You cannot and should not deal with all consequences of market power. That will lead to too much regulation and unintended outcomes. But you should deal with the most damaging consequences.

In my view, recent government energy initiatives, based on ACCC advice, to bring in an electricity default market offer and a Heads of Agreement with LNG Gas producers, plus our general monitoring, have worked to reduce energy prices. The evidence is clear and we are pleased with that.

Likewise the Dairy Code of Conduct and changes in the beef, horticulture and wine grapes sectors.

And then we have the many recommendations flowing from our digital platforms inquiry.

The most prominent, of course, is the media bargaining code.

The media bargaining code is a great example of a tailored solution to a particular market power issue.

The digital platforms, Google and Facebook, clearly have market power. It is simply extraordinary how the digital platforms continue to reject that they have market power when everyone else sees it as obvious.

Further, their 'take it or leave it' attitude to dealing with news media businesses is damaging journalism, which in my strong view is essential to our society.

And let’s be clear, this is not a case of Schumpeterian 'creative destruction'. The situation we are in is not akin to the car replacing the horse and buggy. The digital platforms do not produce news; rather they are vehicles for the dissemination of views and information which would be all the poorer, including for digital platforms, with a lack of content from professional journalists.

We have all noticed recent offers of money by both Google and Facebook to media businesses. This is due to the pressure the digital platforms are under.

We should get to a sensible outcome on these issues in the not too distant future.

A coming battleground is data. In some markets access to data is a key ingredient to offer services and compete, and in some cases a serious source of market power.

We want to gain the huge benefits data can bring without the large potential pitfalls.

The consumer data right is another example of targeted regulation boosting competition.

It allows consumers to have their data, that has been collected by one company, transferred to another.

To my mind it rivals tariff reform and the floating of the dollar. The value of this reform is still generally underestimated.

As you know, it initially applies in banking, then energy, and then progressively the wider economy.

The ACCC is putting this in place carefully. Consumer trust is pivotal. Once the foundations are safely laid, and trust is earned, it can be expanded quickly.

There are many other data issues.

Problems in the adtech supply chain, market power in apps, cyber security issues, the prevalence of scams, the manipulation of consumers and social division, to name a few.

The main digital platforms have accumulated huge wealth from innovation, and later steps to cement their market power.

While we have all benefitted greatly from their innovation, we must now ensure the innovation of others is not stifled.

We may well need more regulation of digital platforms. The ACCC will be considering this as we progress our work in this area.

Conclusion

We benefit greatly from a market economy.

Companies, with their objective of maximum profit, can deliver significant benefits to society.

But we must keep asking whether our market economy is too much favouring the producers at the expense of consumers. Alternatively put, we must do all we can to align the interests of business and society through sound laws.

It would be a major step forward for our economy, for consumers and for small business if we could address the gaps in our competition and consumer laws that I have discussed today: Make Unfair Contract Terms illegal, introduce an Unfairness Provision, regulate the prices and services of monopoly infrastructure and introduce well-targeted regulation to deal with the more damaging market power issues.

Our need for a strong post-COVID recovery invites this, particularly given the concern that significant disruption often allows the strong to get stronger, to the detriment of our economy and society.

Thank you for your time and the opportunity to speak today.