One of my favourite economic bug-a-boos is forced competition in any market. In Australia we are seemingly in-love with this false competition. We regulate financial services, telecommunications, airlines and electricity quite heavily. We also like to "enforce" competition in banking, transport and retail. Other than provide bureaucratic jobs in the regulatory bodies, does this do anything much for Australia overall?
Without actually doing a doctorate (or reading a whole one) on the topic myself, I suggest that elements of competition policy are inefficient and burdensome. The National Competition Policy (NCP) reforms of the 1990s were wide ranging and largely beneficial to the Australian economy. Those reforms were behind the corporatisation of many government businesses and the introduction of competition in energy and telecommunications among others. It also created the ACCC - the so-called competition umpire. I'm not going to pick on the NCP reforms but more on some of the outcomes and the actions of ACCC.
Let's take the tabloid's favourite market: groceries. Woolworths and Wesfarmers dominate this area. It is, contrary to popular belief, a competitive set of markets. Coles and Woolworths have had to deal with competitors like Franklins and IGA and foreign antagonists such as Aldi and Costco. Apparently when the two “big bullies” use their size to compete with smaller, local businesses, people don't want to enjoy the lower prices, they whinge about predatory pricing hurting the little guy. Fact is: sometimes a market is only big enough for one and a half participants. Think about the Australian airline industry through the 1990s. There was always Qantas, but Ansett, Compass, Compass mark 2, then along came Virgin as the market grew and airlines reduced their cost base. So when the market is reduced to a monopoly with monopoly profits, economic theory tends to hold up and another competitor will enter the market. That’s why we got Compass airlines twice.
Another failure of competition policy is Telstra. When Optus was given access as the initial competitor to Telstra, it boggles my mind that Optus agreed to enter the market when the natural monopoly part of the telecommunications industry – the copper wire – was owned and operated by the retail competitor. The NCP recommends that regulation and ownership of non-contestable sections of an industry be regulated (or just run by government I think). So Optus has always been behind the eight-ball. The dream of Optus’ coaxial network competing with Telstra’s was stymied by local councils who didn’t like overhead cables. Roughly 20 years later, I think most of Australia would agree that structural separation should have occurred before Optus and before privatisation with the network business probably being retained by the government. Since this didn’t occur, Telstra shareholders have been screwed six ways from Sunday by successive governments and mostly the ACCC. Telstra would have finished building the National Broadband Network had the ACCC not disallowed the pricing scheme Telstra wanted to use to allow its competitors access to the upgraded network. So dual policy failure – Telstra shouldn’t have owned the network and with its Universal Service Obligation should have been allowed to get a commercial rate of return on its network investment. Instead, we are now in the $40billion process of re-nationalising the country’s telecommunications backbone.
Bank bashing has almost become Australia’s pastime. We forget however, that there is a massive, yet intangible barrier to entry for new players in the banking Industry: customer confidence. Through the decade leading up to the Global Financial Crisis, we saw a massive increase in participants in banking services: GE money, ING, RAMS, Wizard, Citibank to name a few. They mainly offered mortgages and credit cards. The four pillars of Westpac, ANZ, NAB and CBA kept their profits up by finding new fees to charge customers. Customers are reluctant to change financial institution for two main reasons: 1. in the electronic age, notifying all other institutions connected to a primary transaction account is difficult and time-consuming and 2. People won’t give their money to an institution they don’t trust or can’t access easily. New players in banking take a long time to build up public trust. With the four pillars policy rigidly in place, it takes new entrants and smaller players a long time to achieve the scale and consumer confidence to begin to impact on the degree and type of competition. Without the four pillars there would be mergers amongst the big four banks and this would create niches and points of difference that foreign or regional banks could exploit. My answer to your “too big to fail” argument is to either keep banks as banks or force all financial institutions to offer all financial services in some way. Personally I think keeping banks as banks and not insurance companies or fund managers or stock brokers is the best way.
Lastly, in competitions like the lottery, war, sport or pass the parcel, there is a winner. Why can’t a market have a winner? Why regulate and bureaucratise on the off chance someone wins before market conditions change? Remember the Microsoft anti-trust lawsuit involving bundling windows and Internet explorer? It went on for so long that by the time there was an outcome it didn’t matter anymore. So Microsoft won the initial browser competition only to be gazumped by open source and google. Markets change, annoying government interventions change, consumers change and technology changes. The lesson here as in the four examples at the top of the paragraph is that victory is fleeting and staying on top for any length of time is impossible, so why force competition?
