Shopping for a solution

Robert Carling

14 January 2011

The raging controversy over online overseas shopping highlights the benefits of the internet in promoting competition and empowering consumers. But if there is an anti-competitive villain on the other side of this story, it is less clear who or what it is.

The GST exemption for overseas purchases up to $1,000 is in the spotlight. The domestic retailers' campaign against the exemption has generated much heat, but whether it is good public policy is a side-issue. Consumers are being enticed by savings on like-for-like items much greater than the 10% GST. Whether the exemption stays or goes, the incentive for internet shopping abroad will remain. Australians who travel abroad and foreigners who come here can’t help but notice that Australia has become a relatively expensive country. Why is this so?

The Productivity Commission's inquiry will explain these issues, and we should withhold judgment until it reports. But there is a range of possible suspects.

The public's hostility to the retailers seems to be based on perceptions of excessive retail margins, but it is altogether too glib to blame fat retail mark-ups for high prices in Australia. If high mark-ups were the problem, Australian retailers would be fabulously profitable, or at least more profitable than their international peers, which in general they are not. Retailing is competitive, and competition keeps retail margins in check. The reasons for high domestic prices lie elsewhere.

One is the high domestic cost structure, underpinned by a very high minimum wage and high land costs (and therefore rents) in the major cities. Planning laws and their exploitation by established retailers may also be making it more difficult for new competitors to establish themselves, as illustrated by the recent experience of US retailer Price Costco in opening its first store in Sydney.

Another possible suspect is geographical price discrimination. Multinationals with a degree of pricing power based on brand name appeal and other competitive advantages are known to sell into different markets at different prices for reasons unrelated to freight costs and differences in production costs. Australia seems to be one of the markets disadvantaged by this practice.

A further consideration is that importers are slow to adjust their Australian dollar prices to fluctuations in exchange rates. They (and probably consumers) prefer their prices to be much more stable than exchange rates. Current $A prices are most likely reflective of a much weaker $A than currently prevails. If the $A sustains its current strength for a long time, then $A prices of imported goods should eventually catch up, either falling or just not increasing as other prices inflate. But if the $A tumbles back down, then online prices converted at the market exchange rate will not look as attractive as they do now, and some of the appeal of internet shopping will disappear.

Whatever the reasons for Australia’s relatively high prices on tradeable consumer goods, the best antidote is competition, and there is no doubt that online shopping overseas is a wonderful tool of competition and consumer empowerment. It makes it harder for foreign suppliers to practise price discrimination or for domestic retailers to apply excessive mark-ups. Anything that takes us closer in practice to the textbook notion of consumer sovereignty is to be welcomed. We should not, however, forget that the scope of online overseas shopping is limited. If it is something big and heavy you want, or you have to see it, feel it, drive it, or try it on, then the advantages of the online alternative are lost.

Robert Carling is a Senior Fellow at The Centre for Independent Studies.

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