Simply adding more regulations will not solve real problems

HENRY ERGAS
The Australian
Unlike Gillian Triggs, whose “How dare you question what I do?” epitomises regulatory arrogance at its worst, Rod Sims’s tenure as chairman of the Australian Competition & Consumer Commission has highlighted his competence and integrity.
But if even our best regulators clamour for ever more power and ever less accountability, that points to a political culture that, instead of protecting basic liberties, too readily accepts calls for them to be wound back.
Sims’s widely publicised speech last week is a case in point. The Australian economy, Sims argued, is becoming more concentrated, with large firms increasing their market power. To prevent the trend continuing, consideration should be given to changing the law so that mergers that increase concentration above a threshold level would be presumed to be unlawful.
The change Sims envisages is far from trivial. As things stand, mergers, even when they involve large firms, can go ahead unless there is a convincing case that they would substantially lessen competition. Were the law modified as Sims suggests, those mergers would only be allowed if the parties could demonstrate they posed no threat to the competitive process.
That would make the regulator’s life easier: instead of permitting what could not be shown to be harmful, the law would prohibit what could not be shown to be innocuous. But forcing private parties to prove their innocence sits uneasily with the principles underpinning a free society. And the damage such an approach might inflict on economic efficiency — which mergers can promote by ensuring corporate assets are sold to those best placed to use them, and who therefore value them most highly — means Sims’s arguments should only be accepted if backed by solid ­evidence.
Unfortunately, Sims does not even establish his claim that concentration levels are rising, much less show that large firms are ­increasingly able to extract monopoly rents. Rather, he merely looks at the total revenues of the 100 largest companies listed on the ASX expressed as a share of gross domestic product.
There is no reason whatsoever to think that ratio is a sensible indicator of concentration or market power. It might measure how large firms are, relative to the size of our economy, but combining Blackmores’s revenues with BHP’s, and Wesfarmers’ with Woodside’s, says nothing about what is happening in the markets they serve.
To make matters worse, Sims’s measure is distorted by double counting, adding, for example, the revenues Amcor gets from Woolworths to those Woolworths obtains when it passes its packaging costs on. It thereby overstates the top 100’s revenues, artificially boosting the ratio of those revenues to GDP. And since large firms now make 35 per cent of their sales to each other, with that share growing as contracting out becomes more widespread, the bias has increased over time.
Sims does not correct for those obvious deficiencies. But even without any corrections, the indicator he uses does not support his contentions. It is true that the ratio of ASX 100 revenues to GDP rose from 1999 to 2002; that coincided, however, with a series of listings (such as Telstra’s) that boosted the size of the ASX but did not alter concentration levels. After that, the ratio fell, contradicting Sims’s central claim.
Yet Sims could have tested his argument more directly. Since 2003-04, the market sector’s capital stock has doubled, with that increase largely occurring in the firms Sims examines. Were they becoming more powerful, those firms’ ASX valuation should have increased by even more than that, as share prices rose to reflect future monopoly rents. And falling real interest rates should have compounded the effect.
Comparing the change in ASX valuation with the growth in the capital stock would therefore have provided Sims with the measure he needs. Yet far from rising, as Sims’s claims imply, that measure has collapsed, while the profit rate in the market sector — instead of increasing as monopoly rents come flooding in — has fallen by about 15 per cent.
There is, in short, no sign of competition dwindling. As a result, all that is left of Sims’s argument is his assertion that in the US, mergers that lift concentration ratios above an essentially arbitrary level are presumed to be unlawful.
However, Sims’s assertion is a gross exaggeration; while important in the 1960s, that presumption has been almost entirely abandoned by the enforcement agencies, just as the ACCC itself, in its successive merger guidelines, has moved away from primarily emphasising market shares.
Nor were they wrong to do so: as Douglas Ginsburg, an eminent antitrust scholar and senior judge of the US Court of Appeals, recently concluded, “no serious defence” is possible of the proposition that market shares “above a particular level justify a legal presumption that a merger is anti-competitive” or that “presuming the illegality of transactions above any particular (market share) threshold is good for consumers”.
Of course, that doesn’t mean our economy is as competitive as it should be. But it is hardly merger policy that holds us back. It is a 19th-century industrial relations system that mandates uniformity and tolerates union-imposed cartels; state governments that instead of encouraging competition in public education and healthcare actively suppress it; and regulations that too often favour incumbents over challengers, while hindering business models based on disruptive technologies.
Tackling those issues is, no doubt, harder than fanning the hostility to big business that is the hallmark of our plague of populism. But Sims has shown more than once that he is willing to speak truth to power, denouncing, for example, the anti-competitive nature of Labor’s National Broadband Network. It is by focusing on the real problems, rather than by tilting at windmills, that he will continue to best serve consumers and the community.