Greedy businesses deserve part of blame for cost of living crisis

Feb 15, 2024
Coins with a growth graphs. Business

The nation’s economists and economist-run authorities such as the Reserve Bank have not covered themselves in glory in the present inflationary episode. They’ve shown a lack of intellectual rigour, an unwillingness to re-examine their long-held views, and a lack of compassion for the many ordinary families who, in the Reserve’s zeal to fix inflation the blunt way, have been squeezed till their pips squeak.

There’s nothing new about surges of inflation. Often in the past they’ve been caused by excessive wage growth, where economists have been free with their condemnation of greedy workers. But this one came at a time when wage growth was weak and barely keeping up with prices.

What economists in other countries wondered was whether, this time, excessive growth in profits might be part of the story. Separate research by the Organisation for Economic Cooperation and Development, the International Monetary Fund, the Bank for International Settlements, the European Commission, the European Central Bank, the US Federal Reserve and the Bank of England suggested there was some truth to the idea.

But if the Reserve or our Treasury shared that curiosity, there’s been little sign of it. Rather, when the Australia Institute replicated the European Central Bank’s methodology with Australian data and found profit growth did help explain our inflation rate, the Reserve sought to refute it with a dodgy graph, while Treasury dismissed it as ‘‘misleading’’ and ‘‘flawed’’.

One leading economist who has been on the ball, however, is Professor Allan Fels, a former chair of the Australian Competition and Consumer Commission, whose experience of competition and pricing issues goes back to the year before I became a journalist.

In his report this week on price gouging and unfair pricing practices, commissioned by the Australian Council of Trade Unions, he concluded that ‘‘business pricing has added significantly to inflation in recent times’’.

Fels says his report is ‘‘fully independent’’ of the ACTU, which did not try to influence him. Considering his authority in this area, I have no trouble believing it.

‘‘ ‘Profit push’ or ‘sellers’ inflation’ has occurred against a background of high corporate concentration and is reflected in the surge of corporate profits and the rise in the profit share of gross domestic product,’’ he finds.

‘‘Claims that the rise in profit share in Australia is explained by mining do not hold up. The profit share excluding mining has risen and [in any case,] energy and other prices associated with mining have been a very significant contributor to Australian inflation,’’ he says.

Fels says there has been much discussion about inflation and its causes – including monetary policy and fiscal policy, international factors, wages, supply chain disruption and war, but ‘‘hardly any discussion that looks at actual prices charged to consumers, the processes by which they are set, the profit margins and their possible contribution to inflation’’.

His underlying message is that there are too many industries in Australia which are dominated by just a few huge companies – too many ‘‘oligopolies’’ – which limits competition and gives those companies the ability to influence the prices they can charge.

‘‘Not only are many consumers overcharged continuously, but ‘profit push’ pricing has added significantly to inflation in recent times,’’ he says, nominating specifically supermarkets, the banks, airlines and providers of electricity.

Fels says, ‘‘some of Australia’s largest businesses, often [those selling such necessities that customers aren’t much deterred by price rises], are maintaining or increasing margins in response to the global inflationary episode’’.

He identifies eight ‘‘exploitative business pricing practices’’ – tricks – that enable the extraction of extra dollars from consumers in a way that wouldn’t be possible in markets that were competitive, properly informed, and that enabled overcharged customers to switch easily from one business to another.

First, ‘‘loyalty taxes’’ set initial prices low and then sharply increase them in later years when customers can’t easily detect, question, or renegotiate them, and where the ‘‘transaction costs’’ of changing to another firm are high. This trick can be found in banking, insurance, electricity and gas.

Second, ‘‘loyalty schemes’’ are often low-cost means of retaining and exploiting consumers by providing them with low-value rewards of dubious benefit.

Third, ‘‘drip pricing’’ occurs when firms advertise only part of a product’s price and reveal other costs as the customer continues through the buying process. This trick is spreading in relation to airlines, accommodation, entertainment, pre-paid phone charges, credit cards and other things.

Fourth, ‘‘excuse-flation’’ occurs when general inflation provides camouflage for businesses to raise prices without justification. This has been more prevalent recently. As the inflation rate starts falling, excessive inflation expectations and further cost increases can be built in to prices.

Fifth, ‘‘confusion pricing’’ involves confusing customers with myriad complex price structures and plans, making it difficult to compare prices and so dulling price competition.

This is occurring increasingly in mobile phone plans and financial or maintenance service contracts.

Sixth, asymmetric or ‘‘rockets and feathers’’ pricing is a big deal now the rate of inflation is falling. When a firm’s costs rise, prices go up like a rocket; when its costs fall, prices drift down slowly like a feather. Fels says this trick can be very profitable for businesses. The banks have long been guilty of this stunt, yet I can’t remember a Reserve Bank governor ever calling it out.

Seventh, ‘‘algorithmic pricing’’ is where firms use algorithms to change prices automatically in response to what competitors are doing.

Fels wonders whether this reduces price competition and is analogous to the way now-illegal cartel pricing worked.

Finally, ‘‘price discrimination’’ involves charging different customers different prices for the same product, according to what the firm deduces a particular customer is ‘‘willing to pay’’. The less competition firms face, the easier it is to play this game.

That so few economists and econocrats have been willing to think about these issues doesn’t speak well of their profession’s integrity. If they won’t speak out about businesses’ failings, why should we trust what they do tell us?


Republished from The Sydney Morning Herald, February 9, 2023


For more on this topic, P&I recommends:

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