I’m no speed demon when it comes to running. I might be chipping away at my personal bests, but I’m reminded – during many of my runs – that there’s always someone faster, stronger and fitter. Sometimes, they’re kind enough to cruise along beside me to the soundtrack of me gasping as I try to keep up. Other times, we struggle together with neither of us wanting to let the other get ahead.
For some, it’s just about competing with themselves or doing it for fun. But often, without someone to challenge us, improvement comes more slowly – or we might not realise just how far we can push ourselves when someone else is hot on our heels.
It’s the same for businesses. They don’t run marathons, but competition helps us get the best out of them and race towards finding better ways of doing things.
We often see the push for stronger competition as a fight between customers – who want the best prices or quality (and therefore want to see firms to fight it out among themselves) – and businesses trying to maximise their profits. But it’s not as black and white as that.
As Luke Woodward, a commissioner at the Australian Competition and Consumer Commission, spelt out in a speech last month, customers have a lot to gain from stronger competition because when a bunch of companies are fighting hard against each other, they tend to drive down the prices they’re charging or ramp up the quality of the good or service they’re providing to win over customers.
When competition is weak – for example because there’s only a small number of big firms that know they’re better off co-ordinating their prices (it’s much harder to get hundreds or thousands of businesses to agree to keep their prices the same) – customers get a worse deal.
But here’s the thing: a lot of businesses actually lose when competition is weak.
But wait, don’t businesses want less competition? Don’t they want to be able to charge as much as they possibly can without a neighbouring business trying to steal their customers?
Well, you might say that if you’re a big business with a big customer base you don’t want to lose, or if you’re a big business making sneaky deals with another big business to both keep prices high, or if you like squeezing out any new businesses by lowering your prices intentionally for a period of time until your competitor goes out of business. Most of those things are, of course, already unlawful.
But as Woodward points out, if you’re a relatively smaller business, or one trying to make it into an industry dominated by a handful of big businesses, weaker competition is not a good thing. Nor is weaker competition a good thing for our economy more broadly.
In fact, it’s almost certainly one of the reasons our productivity growth – our ability to make or do more with a set amount of resources – has been lagging. That has made it harder for us to pump out more supply to meet demand, and therefore made it harder to stop prices from climbing.
When businesses aren’t being incentivised to – or are unable to – compete and innovate, it leads to slower improvements and higher prices: we fail to push the economy to its potential.
Marathon world record breaker Sabastian Sawe may have been able to break the two-hour limit on his own, but there’s no doubt having the second-place runner, Yomif Kejelcha, right on his heels until the final stretch gave him an extra boost: someone he had to beat.
Businesses, likewise, need strong competition. And as Woodward said, stopping business actions that stifle competition was never meant to be an “anti-business” way of doing things.
In fact, when Australia put in place the Trade Practices Act in 1974 – introducing laws aimed at preventing businesses from, for example, just marrying each other and becoming giants – the commissioner of the relatively newly formed independent watchdog, Ron Bannerman, said the changes were fundamentally pro-business.
The only ones these new laws would come down hard on, he said, were “particular companies who engage in anticompetitive business practices”.
And it’s never just a matter of “cutting the cake fairly”: making sure smaller businesses are given a fair go and customers get a good deal. It’s also, as Bannerman wrote back in the 1970s, about increasing the size of the cake there is to cut. “Continuing improvement in industry efficiency is necessary to maintain or raise the standard of living,” he wrote.
Before all this came into play, businesses were colluding and restricting competition in many corners of the country.
That, of course, hasn’t just disappeared after competition laws tightened up, and we began monitoring for anticompetitive conduct.
Restrictive trade practices – such as businesses agreeing to divide a market up into territories to avoid directly competing with each other – are no longer an acceptable business norm.
“But that does not mean that they no longer exist and don’t have the real capacity to act as a dead weight on the economy,” Woodward said in his speech, especially at a time when we’re facing cost of living pressures and a fall in real living standards.
The Organisation for Economic Co-operation and Development (OECD), in a recent publication, concluded that competition had waned across the Australian economy over the past two decades, with industries becoming more dominated by big businesses and profit margins widening.
If we can foster stronger competition, there’s a lot that we can gain. Woodward points to research, for example, showing that strong competition enforcement is positively correlated with more businesses and more jobs being created, boosting economic activity more broadly.
We’ve come a long way from the days when all that was asked from businesses was a process of registration.
Since then, we’ve seen court and tribunal cases make clear the importance of competition. The question became less about whether companies were damaging each other, and more about whether their actions were restricting the “competitive process”: the broader rivalry essential for markets to work.
It’s a bit like if a fast marathon runner stopped everyone else from entering a race. He or she might win, but it stops the competition from going ahead as it should: spectators would probably end up with a less exciting event to watch and up-and-coming runners keen to challenge this fast runner wouldn’t be able to. He or she would probably also end up less motivated themselves.
A business – or handful of businesses – that hinders competition can not only hurt newer businesses, and customers who pay more for (potentially worse quality) things, but also removes the incentives to become better itself, and harms the entire economy.
Supermarket giants such as Coles and Woolworths, for example, have been taken to court by the competition watchdog, with Coles being found to have misled customers with “illusory” discounts: something that weakens competition by making it harder for customers to find the best prices.
As Woodward said, though, the work is never finished, especially with the rapid development of technology and trend towards bigger companies: “Markets change. Business models evolve. Power can concentrate in new ways, and restrictions can arise in places we did not previously anticipate.” It’s something we need to keep an eye on.
The good thing about running is that despite the leaps and bounds being made in technology such as super shoes, the barriers to entry are pretty low: all you need is yourself – and that means wherever you are, there’s strong competition. I’ll never be an elite runner – not even close – but if I had no one to keep me on my toes, I suspect I’d be more of a couch potato.
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Millie Muroi is the economics writer at The Sydney Morning Herald and The Age. She was formerly an economics correspondent based in Canberra’s Press Gallery and the banking writer based in Sydney.Connect via X or email.
