Government declares war on cheap prices

Simon Cowan

18 March 2016 | Ideas@TheCentre

Simon Cowan-Government declares war on cheap pricesThe Harper Competition review describes the debate around the need for an effects test as “one of the enduring controversies of competition policy in Australia.” The report helpfully provides a table that actually better summarises the position: despite 11 previous competition reviews over 40 years, only one found in favour of adding an ‘effects test’ to the misuse of market power prohibition.

The report proposes reshaping the regulation to prohibit “a corporation with a substantial degree of market power from engaging in conduct if the conduct has the purpose, effect or likely effect of substantially lessening competition.”

Despite both the Abbott government and the Turnbull government initially rejecting this recommendation, it will now become law. That this was pushed by the Nationals, no friends of free markets, should warn you there are problems with this proposal. Of the many, two are important.

First, the very idea that government can create, corral and control competition is a farce. The more government tries to regulate market behaviour, the more it distorts the market with intervention and legal uncertainty, the less true competition there is — especially since so much competition policy is based on the fallacy that companies can enter a market, force the competition out of business and then jack up the price forever. In a free and open economy this is basically impossible. There are always other competitors.

Second, the effect of this change is to protect smaller, inefficient businesses from larger, more efficient ones (there is no need to protect efficient small businesses from anyone). While there are a number of industries where this may be relevant, the most obvious targets are the major supermarket chains, hence the interests of the Nationals.

The purpose is to force the supermarkets to pay more at the farm gate, and prevent them trying to rationalise their supply chains by dealing only with larger farmers and companies. This can mean only one thing: food prices are going to rise. What a win for competition.

Whatever people like to say about supporting small business, the truth is consumers almost always go for the cheapest or best option. They would never vote with their dollars in favour of these changes. If only the Australian Competition and Consumer Commission took the second ‘C’ as seriously as the first.

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