Supermarkets are the public face of inflation. Every time we go shopping, we are reminded that just about everything costs more than it did before Covid. And shrinkflation, once subtle and insidious, has become blatant. A standard chocolate bar is now what used to be called “fun size”. A natural response, particularly for politicians seeking to divert attention from themselves, is to blame greed and monopoly power.
Explanations based on greed are rather naive. Corporate executives are paid by shareholders to be greedy – that is, to maximise profit subject to a somewhat hazy concept of “social licence” regarding the treatment of customers, employees and other stakeholders. And there is no reason to think that Coles and Woolworths were any less greedy before the arrival of the pandemic than after.
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The role of monopoly power is a bit more complex. Coles and Woolworths dominate the market, but if anything their dominance has eroded in recent years as Aldi’s market share has grown. However, their capacity to benefit from market power was increased by strong growth in demand after the end of lockdowns. Under conditions of strong demand, firms with market power can pad their profit margins and amplify inflation, as appears to have occurred in this instance.
The big problem with the supermarket sector is not monopoly but the monopsony (the technical term for a market dominated by one, or a few, buyers) power of supermarkets who can push down the prices and terms they offer to their suppliers. The mandatory code of conduct proposed after a review by Dr Craig Emerson might help to address these problems.
What about divestiture? Perhaps mistaking the late Joseph Stalin for a trustbuster, Anthony Albanese has described this as a “Soviet” option. In fact, forced divestiture is a standard feature of competition policy internationally, available in such distinctly non-Soviet countries as the US and UK.
Nevertheless, divestiture is unlikely to be the right remedy for the problems of the supermarket sector. Most people have only one or two supermarkets in easy reach, and splitting Coles and Woolworths into two or more competing businesses wouldn’t change that. The problems of dealing with suppliers are better dealt with through conduct measures rather than a breakup. The only obvious targets for divestiture are the liquor businesses and the loyalty programs (Flybuys and Everyday Rewards).
But there are other parts of the Australian economy where divestiture powers could be a useful tool for competition policy. Perhaps the most notable example is that of airlines. The Sydney-Melbourne-Brisbane “golden triangle” comprises three of the busiest city-pair routes in the world, and ought to be fiercely competitive. But a single corporation, Qantas, holds more than 60% of the market under its own name and through its wholly owned subsidiary Jetstar.
There are many factors contributing to Qantas’s dominance. These include control of crucial slots and cabotage rules restricting international competition. And Qantas has received favourable treatment reflecting residual goodwill from its historical role as the national flag carrier (much eroded by the Joyce era, but still present).
But the ownership of Jetstar as a “flanker” or “fighter” brand is at least as important. Wikipedia notes that flankers are “lower-priced offerings launched by a company to take on, and ideally take out, specific competitors”, and the first example listed is that of Qantas. Forcing divestment would yield an immediate increase in competition in the airline market.
Another candidate for divestiture is Transurban, the owner of most of Australia’s privatised toll roads. Here the main issue is not competition per se, since toll roads in different locations don’t compete with each other, but the political power associated with having a single company control so much of our transport infrastructure.
It is now becoming clear that the deals that have greatly enriched Transurban shareholders have been a disaster for motorists and for coherent urban planning. The solution, as others have argued, could be to take these roads back into public ownership and redo road pricing from scratch. A breakup of Transurban into separate state-level businesses would be a first step.
Big business in Australia faces less competition than almost anywhere in the world and likes it that way. The era of privatisation and “light-handed” regulation has only made matters worse. Turning the situation around will require a full set of policy tools, including conduct measures, divestiture and, in some cases, a return to public ownership.
John Quiggin 
Obviously the main issue is lack of competition although Aldi, Costco, IGA and other groups are having an impact. The idea that monopoly/monopsony power “amplifies” inflation (but, yes, does not cause it) is a footnote theory – not the main story. Moreover, that cost-push pressures from labour are not the cause of the current inflation does not add credence to the “amplifies” theory. Inflation is now being caused by excess demand caused by long periods of massive monetary expansion – as evidenced by the negligible current unemployment rate and the surge in demand following the arrival of 650,000 immigrants with consequent rising rentals and still surging house prices.
Harry Clarke
Australian politicians still think that Australia’s markets are too small for more than two to four dominant businesses. This is a throwback to the 1980s, but it is not true today. Australia, particularly on the eastern seaboard, has concentrated markets. Sydney and Melbourne are the biggest markets, but there is also the conurbation from Brisbane to the Gold Coast. Then the Sydney market is now linked to markets stretching from Newcastle to Wollongong and out to Parramatta. The idea that these areas can only support a few competing businesses is clearly out of date.
Politicians are like generals in war time. They fight today’s battles with yesterday’s tactics and strategies. Politicians have locked in self regulation and cannot imagine any other solution. But it dies not work The management of businesses have their first duty of care to their owners. They also have a duty of care to their employees. But only after that do they consider the interests of supplies and customers.
Consumers have one great market power that they can wield. It is the power to refuse to but at higher prices. Consumer boycotts are also effective. My point is that waiting around for sluggish politicians to do anything worthwhile is a fool’s errand. Consumers need to whip supermarkets, and other price gougers, back into line. They have the power of their spending patterns. Today’s politicians will only provide lukewarm assistance. It will be slow coming and almost certainly mishandled. Government regulators are the most inefficient workers in Australia.
Consumers should not wait for weak kneed politicians to reluctantly do something to help them with price gouging. They should take up their consumer sovereignty and exert their market power.