Competition Policy | Reports

A major review of competition policy in Australia took place in 1992-1993 by an Independent Committee of Inquiry chaired by Professor Fred Hilmer.

In addition to specific recommendations, the Report included the following statements on competition policy [footnotes omitted]:

[Page xv] As the Prime Minister has observed, "the engine which drives efficiency is free and open competition". Competition is also a positive force that assists economic growth and job creation. It has triggered initiative and discovery in fields ranging from the invention of the telephone to the opening of new retail stores and small manufacturing operations. In fact, it is these developments in smaller firms, prompted by the belief of these firms in their ability to compete, that are the main source of both new jobs and value-added exports.

The benefits of fostering more competitive markets are being increasingly recognised by governments around Australia, and indeed around the world. ...

[page xvi] Competition Policy
Competition policy is not about the pursuit of competition per se. Rather, it seeks to facilitate effective competition to promote efficiency and economic growth while accommodating situations where competition does not achieve efficiency or conflicts with other social objectives. These accommodations are reflected in the content and breadth of application of pro-competitive policies, as well as the sanctioning of anti-competitive arrangements on public benefit grounds.

Australian competition policy is sometimes seen as solely comprising the provisions of Part IV of the Commonwealth Trade Practices Act 1974 (TPA) [now the Competition and Consumer Act 2010]. While laws of that kind are an important part of competition policy, the relevant field of policy interest is much wider. In its broadest sense, competition policy encompasses all policy dealing with the extent and nature of competition in the economy. It permeates a large body of legislation and government action that influences permissible competitive behaviour by firms, the capacity of firms to contest particular economic activities and differences in regulatory regimes faced by different firms competing in the one market.

[page xvii] The Committee has considered competition policy in terms of six specific elements, each of which is supported by laws, policy and/or government action ...

[The six policy elements listed were:

1. 'Limiting anti-competitive conduct of firms'

2. 'Reforming regulation which unjustifiably restricts competition'

3. 'Reforming the structure of public monopolies to facilitate competition'

4. Providing third-party access to certain facilities that are essential for competition'

5. 'Restraining monopoly pricing behaviour'

6. 'Fostering "competitive neutrality" between government & private businesses when they compete'

These elements re-appear in 'Box 2' of the 2014 Competition Policy Review]

The Need for a National Competition Policy

The imperative for developing a national competition policy rests on three main factors.

First, there is increasing acknowledgment that Australia is for all practical purposes a single integrated market. The economic significance of State and Territory boundaries is diminishing rapidly as advances in transport and communications permit even the smallest firms to trade around the nation. The increasing national orientation of commercial life has been recognised by a series of significant cooperative ventures by Australian Governments. ... [page xviii] ... Business and the community generally are impatient for much more rapid progress by governments in reforming our infrastructure and regulatory systems.

Second, while trade policy reforms have markedly increased the competitiveness of the internationally traded sector, many goods and services provided by public utilities, professions and some areas of agriculture are sheltered from international and indeed domestic competition. In this regard, recent micro-economic reforms have highlighted that an important part of Australian competition policy - the Trade Practices Act - remains limited in its application to these sectors, with coverage depending on ownership or corporate form rather than considerations of community welfare.

Third, the domestic pro-competitive reforms implemented to date have all been progressed on a sector-by-sector basis, without the benefit of a broader policy framework or process. Reforms undertaken in this way are typically more difficult to achieve, with the ground rules - including the respective roles of Commonwealth, State and Territory Governments - having to be negotiated on a case-by-case basis. A national competition policy presents opportunities to progress reform more broadly, to promote nationally consistent approaches and to avoid the costs of establishing diverse industry-specific and sub-national regulatory arrangements.

Considerations of these kinds led Commonwealth, State and Territory Governments to agree on the need to develop a national competition policy which would give effect to the principles set out below:

(a) No participant in the market should be able to engage In anticompetitive conduct against the public interest;

(b) As far as possible, universal and uniformly applied rules of market conduct should apply to all market participants regardless of the form of business ownership; [page xix]

(c) Conduct with anti-competitive potential said to be in the public interest should be assessed by an. appropriate transparent assessment process; with provision for "review, to demonstrate the nature and incidence of the public costs and benefits claimed;

(d) Any changes in the coverage or nature of competition policy should be consistent with, and support, the general thrust of reforms:

(i) to develop an open, integrated. domestic market for goods and services by removing unnecessary barriers to trade and competition;

(ii) in recognition of the increasingly national operation of markets, to reduce complexity and administrative duplication.

[page 1] For much of this century, competition policy was seen as limited to laws dealing with the anti-competitive conduct of firms. Particularly over the last decade, however, competition policy has been understood in a wider sense, embracing a range of laws and policy actions that influence the role of competition in the economy. Recent examples of pro-competitive reforms of these kinds range from the the introduction of competition into telecommunications to the deregulation of egg marketing.

Competition policy has been increasingly recognised as a key element of national economic policy. The national significance of competition policy was recognised by the establishment of this Inquiry in October 1992 by the Prime Minister in consultation with the Premiers and Chief Ministers of the States and Territories. Drawing upon written submissions from nearly 150 organisations and interests, and discussions with all Australian Governments and a broad range of individuals and representative groups, this report presents the Inquiry's proposals for a national competition policy for Australia.

...

[page 2] Competition may be defined as the "striving or potential striving of two or more persons or organisations against one another for the same or related objects".

...

[page 3] The relationship between competition and community welfare can be considered in terms of the impact of competition on economic efficiency and on other social goals.

(a) Economic Efficiency

Efficiency is a fundamental objective of competition policy because of the role it plays in enhancing community welfare. ...

[page 4] Economic efficiency plays a vital role in enhancing community welfare because it increases the productive base of the economy, providing higher returns to producers in aggregate, and higher real wages. Economic efficiency also helps ensure that consumers are offered, over time, new and better products and existing products at lower cost. Because it spurs innovation and invention, competition helps create new jobs and new industries. ...

Increased economic efficiency also means that firms are better able to adjust to changes, including unforeseen changes. This makes the economy more resilient and robust, and better able to adjust to changes in global economic conditions.

The promotion of effective competition and the protection of the competitive process are generally consistent with maximising [page 5] economic efficiency. However, there are some situations where unfettered competition is not consistent with economic efficiency. Examples of such "market failure" include situations where participants in a market have imperfect information about products, producers or suppliers, and the existence of so-called "natural monopolies" where a single firm can supply an entire market significantly more efficiently than two or more firms.

(b) Other Social Goals

The promotion of competition will often be consistent with a range of other social goals, including the empowerment of consumers. However, there may be situations where competition, although consistent with efficiency objectives and in the interests of the community as a whole, is regarded as inconsistent with some other social objective. For example, governments may wish to confer special benefits on a particular group for equity or other reasons.

In some cases competition in a particular activity may be restricted to allow a public monopoly to pursue these wider objectives. Thus, for example, public monopolies in areas such as electricity, water and ports have often been directed to provide goods or services to particular groups at prices below the full costs of production, with the resulting deficits often funded through higher charges applied to other users. Arrangements of this kind would be difficult to sustain in a more competitive market.

Similarly, particular firms may seek exemption from rules governing competitive conduct to allow them to increase their returns relative to those that would be available in a more competitive market. Thus, for example, some agricultural producers have been permitted to collude to restrict output or fix prices at least in part to raise farm incomes or regional employment at the expense of consumers or other producers.

In a third situation, some suggest that rules governing competitive conduct should aim to protect competitors, rather than. the competitive process, and should prevent larger firms from engaging in efficient competitive conduct where that would cause less efficient firms to become non-viable.

[page 6] In each of these cases, however, it is possible for governments to achieve objectives of these kinds in ways that are less injurious to competition and the welfare of the community as a whole.

2. Competition policy

In its broadest sense, competition policy encompasses all policy dealing with the extent and nature of competition in the economy. It permeates a large body of legislation and government actions that influence permissible competitive behaviour by firms, the capacity of firms to contest particular economic activities and differences in the regulatory regimes faced by firms competing in the one market.

Traditionally, rules prohibiting the anti-competitive behaviour of firms have been seen as the cornerstone of competition policy. ...

Competition policy is not about the pursuit of competition for its own sake. Rather, it seeks to facilitate effective competition in the interests of economic efficiency while accommodating situations where competition does not achieve economic efficiency or conflicts with other social objectives. These accommodations are reflected in the content and breadth of application of pro-competitive policies, as well as in the sanctioning of anti-competitive arrangements on public benefit grounds. [emphasis added]

A major review of competition policy in Australia began on 27 March 2014. The Competition Policy Review ('Harper Review') released the Final Report on 31 March 2015.

The Issues Paper released as part of the review stated, in part:

Competition is the process by which rival businesses strive to meet customer needs by developing and offering desirable goods and services on the most favourable terms. Competition spurs ongoing productivity growth.

For the most part, more competitive markets lead to greater efficiencies in the use of scarce resources. The benefits of competitive markets include lower resource costs and overall prices, better services and more choice for consumers and businesses, stronger discipline on businesses to keep costs down, faster innovation and deployment of new technology, and better information allowing more informed consumer choices. Competitive markets are dynamic and innovative, which can benefit Australians both now and into the future.

Competition policy seeks to protect, enhance and extend competition. ...

[source: The Australian Government Competition Policy Review]

It also contains a dedicated section on Competition Policy (from page 8; footnotes omitted)
[source: The Australian Government Competition Policy Review]

Why competition matters

1.1 Competition is the process by which rival businesses strive to maximise their profits by developing and offering desirable goods and services to consumers on the most favourable terms.

1.2 More competitive markets can lead to:

• lower resource costs and overall prices;

• better services and more choice for consumers and businesses;

• stronger discipline on businesses to keep costs down;

• faster innovation and deployment of new technology; and

• better information, allowing more informed choices by consumers. These are all ways in which the economy delivers more value added for every hour worked - in other words, higher productivity - and this is the source of sustainable rises in Australian living standards.

1.3 Competitive markets are characterised by various forms of price and non-price competition between businesses seeking to provide what consumers want. Price competition occurs when businesses selling the same or very similar goods seek to increase sales by offering low prices.

1.4 Non-price competition involves businesses seeking to gain an advantage over rivals by differentiating the goods, services and terms they offer to make them more attractive to buyers—a key mechanism for small and medium-sized businesses to compete with large businesses.

1.5 Poorly designed regulatory impediments to competition—for example, restrictions on who can be in the market or how they can trade - can deliver less competitive outcomes and narrow consumer choice. Governments may need to intervene in a market in some cases - for example, where there are natural monopolies, or to ensure the provision of social welfare services. In these cases, market and institutional design is very important in fostering competitive outcomes.

1.6 Vigorous competition can be tough and firms that misjudge the market or have a higher cost structure may lose market share and end up exiting the market. However, in doing so, they free up labour, land and capital for the expansion of other businesses better able to meet the needs of consumers. [page 9]

Box 1: Competition and Productivity

Competition reforms can boost productivity growth. Productivity refers to the quantity and quality of goods and services that can be produced from available resources. By market participants competing among themselves to provide the goods and services that consumers want at the lowest possible cost, resources are used more efficiently, adding to productivity.

Growth in productivity is the key driver of growth in our living standards.

Competition reforms under National Competition Policy (NCP) contributed to the pick-up in Australia’s productivity growth in the 1990s. Following a period of below-average growth during the 1980s, when labour productivity grew by an average of only 1.2 per cent per year, in the 1990s the rate of productivity growth accelerated to 2.1 per cent per year.

However, over the past 13 years, productivity growth has again slowed, with labour productivity only growing by an average of 1.4 per cent per year.

While incomes and living standards were supported by a large boost in the terms of trade in recent years, the terms of trade are expected to fall over the next decade. Exacerbating this, we have also entered a period when population ageing will reduce participation in the workforce. Because of these factors, we must expect lower growth in living standards if we cannot lift productivity growth. A new round of competition policy reform is a key way to achieve this goal.

 

Why we need a competition policy

1.7 Competition policy is a set of policies and laws that protects, enhances and extends competition.

1.8 Competition works best when there is a stable, certain and well understood legislative framework and effective design principles underpinning certain markets (for example, utilities markets).

1.9 In Australia, competition policy has been important in ensuring that our markets - many of which have been relatively concentrated, reflecting our small and spread out population - operate as efficiently as possible to the benefit of consumers and businesses.

1.10 Concentrated markets are not a concern if market participants are operating in a way that delivers durable and competitive outcomes; that is, trying to win business by offering consumers better products at more attractive prices than rivals.

1.11 However, in the absence of effective laws and institutions to protect the competitive process, market participants (including businesses, shareholders, employees, professions and governments) in concentrated markets may try to increase prices and profits by either unilateral or collusive action aimed at lessening the competition they face.

1.12 There are also regulations or policies that can have the effect of limiting competition, even though their purpose is to achieve another policy objective. For example, some types of work are restricted to individuals with certain qualifications on health and safety grounds, or to [page 10] ensure a minimum level of quality or reliability. These can act as barriers to entry, inhibiting competitors from entering the market. In these cases, regular assessments can ensure that the overall public benefit continues to be enhanced by these regulations or policies, and not diminished.

1.13 In some markets there may be very few businesses - perhaps only one - operating in an environment with little competitive pressure (for example, utility networks, ports and airports). Where these markets are sufficiently important and the lack of competition is likely to persist, governments may regulate in the public interest to constrain the exercise of market power, limiting adverse impacts on consumers.

1.14 Further, governments may also operate businesses and supply goods and services to consumers. However, the rationale for government involvement in a market may change over time, and consumers may benefit from lower barriers to entry or fostering greater competition in the supply of various elements of government services.

1.15 An effective competition policy aims to deal with all these issues.

Competition Principles

The Terms of Reference

Parts 1, 2 and 4 of the Terms of Reference provide broad direction to consider competition policy as a means of delivering competitive markets and enhancing the welfare of Australians.

1.16 An effective competition policy framework aims to address a wide range of behaviours by market participants in an ever-evolving economic environment. With this in mind, governments have often established competition policy frameworks built upon a set of overarching principles.

1.17 Box 2 below outlines the key elements underpinning the agreed National Competition Policy (NCP) framework that followed the Hilmer Review. [page 11]

Box 2: Elements of National Competition Policy

The fundamental elements of Australia’s competition policy can be summarised as:

1. Limiting the anti-competitive conduct of firms.

2. Legislation should not restrict competition unless it can be demonstrated that:

a. the benefits of the restriction to the community as a whole outweigh the costs, and
b. the objectives of the legislation can only be achieved by restricting competition.

3. Structural reform of government monopolies to facilitate competition.

4. Providing for third-party access to significant infrastructure facilities that are essential for competition.

5. Independent prices oversight of government business enterprises.

6. Fostering competitive neutrality to ensure that government businesses do not enjoy a competitive advantage simply as a result of their public sector ownership.

 

1.18 Since the commencement of NCP, many areas of Australia’s economy have been further opened up to competition, including:

• reforms to increase competition in industries with heavy government involvement such as the electricity, gas, water and road transport sectors;
• the review and removal of regulatory restrictions that were adversely affecting competition in areas as diverse as the professions and occupations, statutory marketing of agricultural products, fishing and forestry, retail trading, transport, communications, insurance and superannuation, child care, gambling, and planning and development services; and
• privatisation of government assets, especially in the areas of financial services, electricity, transport and communications.

1.19 NCP has contributed significantly to improving Australia’s welfare over the past two decades. However, over this time the economy has changed significantly, and it is timely to examine whether the earlier NCP elements continue to be ‘fit for purpose’ for the current and emerging economy.

In the Final Report the Panel stated (page 7)

Competition policy is aimed at improving the economic welfare of Australians. It is about meeting their needs and preferences by making markets work properly.

In the Panel’s view, competition policy should:

• make markets work in the long-term interests of consumers;
• foster diversity, choice and responsiveness in government services;
• encourage innovation, entrepreneurship and the entry of new players;
• promote efficient investment in and use of infrastructure and natural resources;
• establish competition laws and regulations that are clear, predictable and reliable; and
• secure necessary standards of access and equity.

Recommendation 1 of the Final Report stated:

Recommendation 1- Competition Principles

The Australian Government, state and territory and local governments should commit to the following principles:

• Competition policies, laws and institutions should promote the long term interests of consumers.
• Legislative frameworks and government policies and regulations binding the public or private sectors should not restrict competition.
• Governments should promote consumer choice when funding, procuring or providing goods and services and enable informed choices by consumers.
• The model for government provision or procurement of goods and services should separate the interests of policy (including funding), regulation and service provision, and should encourage a diversity of providers.
• Governments should separate remaining public monopolies from competitive service elements, and also separate contestable elements into smaller independent business activities.
• Government business activities that compete with private provision, whether for profit or not for profit, should comply with competitive neutrality principles to ensure they do not enjoy a net competitive advantage simply as a result of government ownership.
• A right to third party access to significant bottleneck infrastructure should be granted where it would promote a material increase in competition in dependent markets and would promote the public interest.
• Independent authorities should set, administer or oversee prices for natural monopoly infrastructure providers.

Applying these principles should be subject to a public interest test, such that legislation or government policy should not restrict competition unless:

• the benefits of the restriction to the community as a whole outweigh the costs; and
• the objectives of the legislation or government policy can only be achieved by restricting competition.

The Panel also set out four questions which it considered whether or not Australia's competition laws were fit for purpose (page 9):

• Does the law focus on enhancing consumer wellbeing over the long term?
• Does the law protect competition rather than individual competitors?
• Does the law strike the right balance between prohibiting anti-competitive conduct and not interfering with efficiency, innovation and entrepreneurship?
• Is the law as clear, simple and predictable as it can be?

The OECD has periodically studied the objectives of competition policy. IN 2992 it observed that:

This overview of the objectives of competition policy across different countries indicates that in most jurisdictions, the basic objectives are to maintain and encourage the process of competition in order to promote efficient use of resources while protecting the freedom of economic action of various market participants. Competition policy has been generally viewed to achieve or preserve a number of other objectives as well: pluralism, de-centralisation of economic decision-making, preventing abuses of economic power, promoting small business, fairness and equity and other socio-political values. It has been noted that these "supplementary" objectives tend to vary across jurisdictions and over time. The latter reflects the changing nature and adaptability of competition policy so as to address current concerns of society while remaining steadfast to the basic objectives.

[DAFFE/CLP(92)2/REV1, para 51]

 

More recently, in 2003, and OECD report noted:

The competition law and policy objectives in virtually all of the jurisdictions responding to the questionnaire include one or both of the core competition objectives, i.e., (i) promoting and protecting the competitive process, and (ii) attaining greater economic efficiency. Not surprisingly, the manner in which these objectives are expressed varies across jurisdictions. Sometimes, it is stated that competition should be promoted in order to achieve greater economic efficiency, economic welfare or the welfare of society and/or to provide consumers with competitive prices and product choices. In other jurisdictions, it is stated that the objective is to promote efficient resource allocation by means of workable or effective competition. Elsewhere, the emphasis is placed on protecting consumers, consumer interests, free enterprise, free competition, competition, a free market environment or "competition in markets for the long term benefit of consumers", by restraining or preventing anti-competitive practices or the abuse of economic power. An alternative approach adopted in certain jurisdictions is to phrase the objectives in terms of improving the competitiveness of enterprises in order to promote economic development or to lower the monopolisation level in the economy. Finally, in a few jurisdictions, the focus is upon preventing, restricting or terminating "monopolistic activity" or "obstacles to effective competition". A related, but subtly different, objective that appears to have emanated from Germany is protecting competition in the sense of an open and free decision-making process.

In addition to the core competition objectives, approximately two thirds of respondents (23), mostly whom were from transitioning or developing countries (16), stated that the competition law and policy objectives in their jurisdiction included one or more public interest objectives. ...

OECD Global Forum on Competition Law, 'The Objectives of Competition Law and Policy' (Note by the Secretariat, CCNM/GF/COMP(2003)3 (29 January 2003))