IAN McAULEY. Reframing public ideas Part 5: Competition

Competition is a means of encouraging innovation and productivity, and bringing those benefits to the community. When it becomes an end in itself, however, it can impose costs on us all.

In 1968 I went through the rites of passage of the time – I graduated in engineering, started in a proper job, and rented a small apartment. Younger readers would find it hard to realise how easy we had it.

But there was one difficulty: I had to buy a refrigerator, a vacuum cleaner, kitchen appliances, and something on which to play my Bob Dylan LPs, and all this stuff was expensive. So expensive that in those days toasters and irons were often given as wedding presents.

There were no Good Guys, Bunnings, JB Hi Fis or Bing Lees. The big department stores were the main outlets, and their prices were all exactly the same.

The only option was the grey market. My colleagues introduced me to Károl (“I’m Hungarian but call me Karl”), whose business premises was the bar at the Overway Hotel in Adelaide’s Hindley Street. There the deals were done, usually about 20 per cent off retail price with an exchange in cash. Later in the evening one would pick up the goods, all in factory wrapping, from his house in the western suburbs.

Károl wasn’t a smuggler: in fact almost everything he supplied was made in Australia, with the help of a protective tariff. Nor was he a tax evader: he had bought everything wholesale and consumption tax in those days was paid by the wholesalers.

His offence was far worse, for he was working around what were known as “retail price maintenance” agreements. Under such agreements, manufacturers and importers could refuse to supply to retailers unless they agreed to abide by a pre-determined price. No discounts, no special deals.

Retail price maintenance suited suppliers and department stores, but not young graduates setting up house, and it didn’t suit Karl. He never revealed how he managed it – he’d simply say that having lived with Hungary’s communist bureaucracy he found getting around Australia’s retail price maintenance relatively easy.

Retail price maintenance wasn’t the only cosy arrangement between corporate mates. As I mentioned there were tariffs and other forms of protection against imports, and just to make sure people didn’t have too much time to compare products and prices, there were restricted retail trading hours, effectively giving most workers only two and a half  hours a week for shopping between 0900 and 1130 on Saturdays. That’s not to mention geographical franchises in industries such as brewing. While my colleagues and I  were enjoying the security of corporate or government employment, Gordon Barton, who later went on to form IPEC, bought an old truck and raised his early capital through smuggling Victorian beer into South Australia. (It was no better than West End.)

Paradoxically, it was the Menzies Liberal-Country Party Government that maintained these anti-competitive rackets, and it was the Whitlam Labor Government that finally brought in effective trade practices legislation and reduced tariffs. In the 1980s it was the Hawke-Keating Government that brought in more substantial tariff reductions and widespread moves to introduce competition in most previously protected sectors of the economy under the name “National Competition Policy”. Never believe the rhetoric that the Coalition are more committed to free markets than Labor – it just isn’t true.

When it comes to our everyday shopping for cars, kitchen appliances, clothes, travel and beer, the benefits of competition are obvious. Tariff protection, for example, did protect some “blue collar”, jobs, but in sustaining extremely high prices for basic necessities such as cars and clothes, the costs of protection fell most heavily on those least able to afford them.

But is all competition beneficial? Have we taken competition too far? Have we forgotten that competition has costs as well as benefits?

At universities many students do preliminary economic units, where they study idealised competitive markets – markets in which every party behaves rationally, in which all sellers and buyers are well-informed, in which there are no ”transaction costs” (i.e. shopping around is costless), and so on.

In such an idealised world, competition is always beneficial to buyers. It’s a good starting point to study economics, but its ignores real-world realities. As an analogy, in junior high school students are introduced to physics through an idealised model of a mechanical world where Newton’s equations are unrestrained by the hard reality of friction – a good introduction, but a long way from practical engineering. So it is with economics: what friction is to engineering, transaction costs are to economics. While a few students go on to study applied economics, for many students basic economics is a simply service unit on the way to qualifications in law, commerce, public administration or business. They never learn about the limitations of the competitive model.

In the real competition is costly. Advertising expenditure alone costs about $15 billion a year, or more than $1000 per Australian household. Then consider all the duplication in markets – all those shop assistants and real-estate agents who spend so much effort on sales that never take place, all the stock and floor space in competing shops, all work that firms put into tendering for projects, and all the time people spend searching for deals in markets. (How much time did you spend last year searching through electricity, telecom and ISP websites?)

This is not to suggest we should prefer central planning to competition. As Károl would have asserted, central planning in Communist Hungary was hardly an outstanding success. But in each situation policymakers should bring the costs of competition into account, and if those costs are less than the benefits, then they should consider other means to bring low prices and meaningful choice to consumers.

But in many cases competition has gone mad. One example is in electricity. Up to late last century state governments operated electricity supply as vertically-integrated government-owned utilities. But in the name of “competition” these enterprises were broken up into four components – generation, transmission, distribution and retail, in an arrangement known as the “National Electricity Market” (NEM).

The NEM spawned a whole new set of incentives and  behaviours. People who had once cooperated with one another became rivals, turning their attention to competitive stratagems to the benefit of their corporations, rather than to customer service. In turn these behaviours spawned a whole new financial industry, the “retailers”, whose task is to smooth out the market-induced price fluctuations, to read people’s meters and to send out bills. A quarter of your electricity bill – $300 to $350 per customer – goes to pay these “retailers”. That’s about the same as goes to the firms that actually generate electricity.

We hear a great deal of argument about the costs of generating electricity (coal vs renewables and so on), but little about what we pay the “retailers”. These costs are borne in the name of “competition”, and competition is sacred.  According to the Competition and Consumer Commission (ACCC), customers are served by at least 19 “retailers”, all with their own bureaucracies and expenditure on promotion. The ACCC realises that all this competition has not reduced “retailers’” costs or profits. Its proposed solution – more competition!

I have chosen electricity as an example because it’s a topical and clear example of competition gone mad, but throughout the economy the costs of competition are pervasive, and they rarely allow for neat quantification. They include the costs of overwork in competitive workplaces, fear and insecurity among all workers in firms whose fortunes rest on the next tender, miserable pay in the highly competitive “gig” economy, and lost opportunities for the development of meaningful and trusting commercial relationships. These are the proximate costs: the society-wide costs are even less easily calculated.

There’s an emerging backlash against competition gone mad, but it would be unfortunate if this resulted in a reversion to Károl’s Hungary or Australia of the 1960s, with all manner of crony deals to protect privileged interests. Rather, policymakers should remember that competition is not a meaningful or useful economic objective. It’s a means to an end – the outcomes being the benefits of lower prices, innovation and meaningful choice. Competition imposes costs, and if those costs exceed the benefits, policymakers should find other means to serve those outcomes.

 

This is the fifth in a series of eight articles on re-framing public ideas, being published over January 2018. Others so far have been:

  1. Leadership, posted on 3 January.
  2. The role of government, posted on 5 January.
  3. Economy and society, posted on 9 January.
  4. Economy and environment, posted on 11 January.

 

 

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