Milk, beer and the political hijacking of competition policy in Australia
Posted by Julie Clarke on 3 April 2011
First the milk wars. Now the beer wars. Never before have we been so concerned about cheap drinks. Normally the complaint is quite the reverse.
Over the last few years we have been pestered repeatedly with little reactive and industry-specific inquiries (normally by the Senate) which propose fundamental changes to competition policy for the purpose of satisfying a perceived industry-specific issue. We have also seen unprecedented political interference in the application of competition policy (not policy on its merits – but its effectiveness in certain isolated cases). We saw it with the ill-conceived Senate Inquiry into the ACCC’s Metcash decision (something the Senate quickly backed away from when it realised the matter was going to be litigated), the ill-considered proposals presented for the introduction of industry-specific price signalling laws (which, unfortunately, are likely to pass), the multiple inquiries into the milk industry and most recently the media furor over Foster’s decision to withhold supply of beer for fear that it would be sold cheaply. The discussion has been highly politicised and is far removed from the independent inquiry process we would hope preceded any significant change to competition policy.
Let’s focus on the Senate’s obsession with milk. In 2010 we had an inquiry into milk – the Senate Economics Reference Committee – Milking it for all it’s worth – competition and pricing in the Australian dairy industry. The Senate Committee made a number of bizarre recommendations which are now being re-“investigated” by the current Senate inquiry desperate to protect the dairy farmers. And it masquerades as an inquiry into the competition laws. Some of the terms of reference point directly to competition policy reform – the first is TOR (c) whether such a price reduction is anti-competitive; TOR (d) the recommendations of the previous milk inquiry and (e) whether there is need for legislative reform. The rest relate more specifically to aspects of the dairy industry. Yet most attention seems to have focused on the alleged ‘anti-competitive’ nature of Coles’ discounting, with various accusations being made – typically from Senators Xenophon and Heffernan – about the ACCC’s ‘weakness’ in this area. Indeed, the ACCC was attacked relentlessly (and unfairly) when it appeared before the Senate – and repeatedly it had to remind the Senators that much of what they were getting upset about had little or nothing to do with competition policy and at the very least didn’t raise any concerns about contraventions of the Act. Independent experts were also not spared – unless of course they shared the same obvious pre-conceived views about the inquiry as the most vocal Senators (Senator Heffernan felt free – has he has on many occasions – to slander certain witnesses with the benefit of parliamentary ‘privilege’). View some extracts from the Senate Committee Hansard here.
The biggest buzz term has been “predatory pricing”, a practice which has a unique meaning in Australia because of the embarrassing Birdsville Amendment introduced a few years which makes sustained below cost pricing by anyone with substantial market ‘share’ illegal if it can be established that they had one of three prohibited purposes (harming competitors etc). It’s not matched by any credible regime around the world – they are more concerned with the economics of predatory pricing and it’s likely impact on competition than prohibiting low cost pricing which is generally what we hope competitive markets can deliver. Predatory pricing becomes a concern if the company involve succeeds in eliminating all competition with the result that it can subsequently charge much higher prices for those goods to recoup sustained losses. But it’s unlikely to occur here. Even if it could be demonstrated Coles was ‘below cost’ pricing – whatever that means (the Act doesn’t care to define it for us), Woollies will match them. So will some others. And not everyone is switching to homebrand or avoiding convenience stores (which are, after all, used for their convenience, rather than their competitive pricing). Aldi’s not likely to go out of business because of the price of milk.
Ultimately if there is demonstrable evidence that the dairy industry would be harmed as a result (and by this I mean a net loss of farming and output, not the impact on any individual farmer) then it will be for the government to determine if they should interfere rather than let the market sort it out. It’s unlikely less milk will be produced – given demand will remain high it’s not in the interests of the retailers to reduce supply which will increase their purchase costs, at least in the medium to long term, as well as upset their customers. But some farmers may be hurt and the milk processors will lose out if demand for branded milk declines. This is a normal consequence of a free market – even one in which two retailers hold a significant chunk of the market share – and any interference should be targeted and industry specific and should not masquerade as competition policy. It should be labeled what it is, protection and/or subsidy for the dairy industry. Then we can have an honest debate about whether or not that is desirable and, perhaps, why the dairy industry is more deserving of protection than many others that have had to survive tough competitive conditions.