The rise of large corporations in the Australian economy has been substantial. Indeed it seems we have outpaced the US.
Analysis prepared by Port Jackson Partners Limited shows the revenue of Australia’s largest 100 listed companies increased from 15% of GDP in 1993 to 47% of GDP in 2015. This compares to the US figures of 33% to 46%.
In Australia many markets are concentrated or are likely to become concentrated as firms pursue efficiencies from scale. In some markets there may not be room for more than a few efficiently sized firms given the size of demand.
From a competition perspective, what we need to understand is whether smaller rivals or new entrants can readily contest the position of larger, more established firms.
We should, therefore, have an eye to how often the identity of large firms change. Again, drawing on work by Port Jackson Partners Ltd, of the ASX top 100 companies in 1990, only 29 companies remained in the top 100 as at October 2015.Sims notes
drawing on work by Port Jackson Partners Ltd, of the ASX top 100 companies in 1990, only 29 companies remained in the top 100 as at October 2015. Sixty one had been acquired or merged, five had disappeared due to corporate collapses and five had slipped from the top 100.
However, the identity of the six largest listed companies has not changed substantially in recent times. For example, in 2005 the top six listed companies by market capitalisation, in order, were BHP, Telstra, and four banks: Commonwealth, NAB, ANZ and Westpac. Today the top six companies in order are four banks: Commonwealth, Westpac, ANZ and NAB, followed by BHP Billiton and Telstra.
But the top 6 companies have not grown as strongly as the rest of the top 100, as another chart from Port Jackson Partners Ltd shows. Since 1993, the top 6’s revenue as a proportion of GDP has doubled from 7% to 16%. For the rest of the top 100 this percentage has nearly quadrupled from 8% to 31%.Sims questioned belief that we need not be concerned with heavy concentration and monopolistic behaviour.
It seems to me that, absent a clear and convincing economic and evidence based explanation of how a merger will avoid harming consumers, the standard economic wisdom should prevail.
This wisdom is that mergers resulting in high levels of concentration in markets with substantial barriers to entry will usually reduce competition and cause harm to consumers and our economy. Circumstances where monopoly pricing has no effect, or only a small effect on economic efficiency, are rare.Sims identified questions about market concentration and merger analysis, including:
- Why is it that economic argument and opinion increasingly down plays conventional economic theory and wisdom on high levels of consolidation and monopolies?
- Do we need to consider something similar to the approach adopted by US courts where once markets are defined and the merger is likely to result in a significant increase in concentration, there exists a “rebuttable presumption” that the merger should not proceed absent evidence to the contrary? There will be times when a merger to high concentration is acceptable, due perhaps to low entry barriers, but logic says it will not be the norm.
- Why shouldn’t those arguing the unconventional have the burden of producing evidence to support their position?
- Are regulators able to analyse and act where large incumbent firms continue to acquire promising start-ups? Is there too much focus on overlap in specific narrow market sectors?
- Should we focus more on the wider actual and potential competitive constraints and the extent or strength of those constraints?
- How many different forms of remedy should a competition regulator need to assess before saying “enough”?