Showing posts with label mergers. Show all posts
Showing posts with label mergers. Show all posts

Sunday, February 4, 2024

The next thing on Albanese's to-do list: fix competition

In a capitalist economy, every capitalist professes to believe in stiff competition. In truth, it’s their biggest hate. Why? Because it limits their ability to put up prices and makes them work harder for their money.

Just this week, big business has been saying that, if only we could get proper tax reform – by which they mean lower taxes on companies and the highly paid – we’d get more productivity and more innovation.

In truth, what’s far more likely to improve innovation and productivity is stiffer competition, particularly in those many industries dominated by just a few giant corporations.

The federal government doesn’t have a minister for competition, but it does have an assistant minister: Dr Andrew Leigh, a former economics professor.

Last year, the Albanese government announced a rolling two-year review of competition and set up a taskforce within Treasury. It’s supported by an expert advisory panel with some big names: Dr Kerry Schott as chair, David Gonski, the former boss of the Australian Competition and Consumer Commission, Rod Sims, and the new boss of the Productivity Commission, Danielle Wood.

This week Leigh gave us an update on what the taskforce had been doing and discovering. But he started with a locker room pep talk on why competition is the key to making capitalism – or “the market system” as economists prefer to call it – benefit the customers more than the capitalists.

“Competition provides a check on unbridled profit-seeking by business. In a competitive market, innovators can bring new products and services to market, without fear of being shut down by entrenched monopolists,” he says.

Competition limits unearned privilege and seeks to treat everyone fairly. Competition guides labour and capital to their most valuable uses and combinations, driving the productivity improvement that underpins sustainable wages growth.

“For workers, genuine competition between businesses provides greater opportunities to switch jobs, allowing workers to make the most of their skills and secure better pay and conditions.”

“For consumers, competition provides more choices, allowing people to shop around and find better value products and services. Indeed, the most obvious benefit of competition is in delivering cheaper prices. There is no better tool than competition policy for keeping real prices down.”

And, Leigh adds, competition is also crucial if Australia is to make the most of the big shifts involved in digitisation, growth in the care economy and the transition to net zero carbon emissions.

But Leigh warns of “worrying signs the intensity of competition has weakened over recent decades, with evidence of increased market concentration and [profit margins] in several industries.”

“Other countries find themselves at similar crossroads and many are – like us – reviewing their competition policy settings,” he says.

Our taskforce is taking a fresh approach to competition policy: digging out and analysing large sets of data to understand what the problems are and help craft solutions to them.

The digital revolution is producing masses of “microdata” on what businesses are doing, while making it easier for statisticians to measure the growth in the economy earlier and more accurately.

It gives academic economists great ability to analyse what’s happening in particular industries, and gives the econocrats a better understanding of what and how to regulate the things business gets up to.

For the first time, the taskforce has developed a database that tracks company mergers throughout the whole economy. Believe it or not, it does this by looking at the flows of workers moving to different employers.

This will allow it to track the effects of mergers on the performance of businesses, on employment and on industry concentration – that is, fewer firms controlling more of a particular market.

The new database has already revealed three worrying things. First, because notifying the competition regulator the ACCC of an intended merger is voluntary, it hears of about 330 mergers a year, whereas there are between 1000 and 1500 mergers occurring annually.

Second, for the most part, it’s huge firms swallowing smaller firms, rather than medium and small firms joining. Get this: the largest 1 per cent of firms account for about half the acquisitions.

Larger companies made more acquisitions over the course of the 2010s. And mergers were most common in manufacturing, retail, professional services, and health and social services.

Third, the firms that are the targets of takeovers are more than twice as likely to own a patent and almost twice as likely to own a trademark.

Remember that patents give inventors a long-term legal monopoly over the use of some invention. So this finding raises the fear that at least some takeovers are motivated by a desire to gobble up an effective competitor, or may even be “killer acquisitions” aimed at killing inventions that threaten the profits of some big player.

Leigh says we can expect to hear more from the government this year on mergers and how they should be regulated. The taskforce issued a consultation paper in November asking for opinions on whether the present arrangements remain fit for purpose.

The ACCC has already proposed a significant increase in its power to block mergers considered likely to substantially lessen competition.

And, last December, the federal government secured agreement from the state treasurers to revitalise national competition policy and commit to developing an agenda for pro-competitive reforms.

Meanwhile, Leigh points to findings by British academics Geoff and Gay Meeks that reveal only one in five research papers find that the typical merger boosts the profits or the sharemarket value of the merged business.

They point out that mergers often boost the remuneration of the company’s managers, while leading to layoffs among workers.

Leigh acknowledges that mergers aren’t necessarily a bad thing, but the small number of proposed mergers that do raise competition concerns warrant close scrutiny.

He says that “for the sake of shareholders, workers and citizens, it is important to ensure that Australia’s regulatory system is not facilitating value-destroying mergers”.

Many of the nation’s chief executives may not agree with that, but most of the rest of us would.