The 'Gouging' report from Alan Fels for the ACTU comments
This report concludes that business pricing has added significantly to inflation in recent times.
‘Profit push’ or ‘sellers inflation’ has occurred against a background of high corporate concentration and is reflected in the surge of corporate profits and the rise in the profit share of Gross Domestic Product. There is much support for the view that prices have added much to inflation. This is to be found in research from OECD, IMF, BIS, European Commission, European Central Bank, US Federal Reserve Bank, Bank of England and many think tanks globally and locally and many detailed research studies. Claims that the rise in profit share in Australia as explained by mining do not hold up. The profits share excluding mining has risen and energy and other prices associated with mining have been a very significant contributor to Australian inflation. ...
The report analyses a selection of exploitative business pricing practices that enable the extraction of extra dollars from consumers in a way that would not be possible in markets that are competitive, properly informed and that enable overcharged consumers to readily switch from one supplier to another. The fact that there is a quite widespread lack of competition in Australian markets means that pricing practices that might be accepted in very competitive markets are unduly exploitative of consumers in that setting.
Fels identifies a range of 'not unlawful' practices
Loyalty taxes set initial prices low and then sharply increase them in subsequent years when consumers cannot easily detect, question, or renegotiate them and where the ‘transaction costs’ of changing to other competitors are high. Examples come from banking, insurance, energy, and other areas.
Loyalty schemes are often low cost means of retaining and exploiting consumers by providing them with low value rewards of dubious benefit. These schemes are also often badly run.
Drip pricing where firms only advertise part of a product’s price and reveal other prices later as the customer goes through the buying process is spreading including in airlines, accommodation, entertainment, pre-paid phone charges, credit cards and others.
Excuse-flation where general inflation provides camouflage for businesses to raise prices without justification is also more prevalent in the current environment. As inflation starts to fall excessive inflationary expectations and future cost increases can be built into prices.
Confusion pricing involves confusing consumers with a myriad of complex price structures and plans making price comparisons difficult and dulling price competition. It occurs more and more in areas such as telecommunications, financial or maintenance services and other fields.
Asymmetric or ‘rockets and feathers’ pricing is of much concern in the current environment especially as inflation is starting to come down. When costs rise prices go up quickly ‘like a rocket’ but when costs fall prices fall slowly ‘like a feather falling to the ground’. This practice of delaying price falls when costs have fallen can be very profitable for businesses. A recent example concerned meat prices when prices paid to farmers for lamb fell but retail prices did not, at least until there was publicity including from this inquiry about the delay.
Algorithmic pricing is the practice of using algorithms to set prices automatically (but taking account of competitor responses) raises issues about whether this reduces price competition and is analogous to cartel pricing. Price discrimination which in its simplest form involves charging different consumers different prices for the same product enables businesses to set prices according to how much each consumer is willing and able to pay. It takes many forms. It is enabled by a lack of competition. If there were competition charging high prices to customers who wish to or have to pay higher prices would not be possible because competitors would bring those prices down to normal levels.
This report identifies a number of examples ranging from banks (better rates from customers likely to leave them), electricity (better prices for business customers than for consumers even allowing for lower costs of supply) and medical specialists which offer vastly different prices for near identical services. Of particular concern is the rise of much greater use of price discrimination enabled by the rise of digital platforms, new technology, detailed customer data and sophisticated profit maximising pricing methodologies. These practices all result from an economy which is insufficiently competitive and gives room for businesses to engage in exploitative pricing practices. There is a case for a much more active public policy for investigating and analysing practices that operate at unwarranted cost to customers.
In order to address these the report recommends policy outcomes which would:
• remove obstacles to competition by the application of competition law or a removal of government restrictions on competition
• require the provision of better information to consumers
• lessen or remove obstacles to consumers switching to other suppliers
• exposing or sometimes shaming exploitative business practices of the kind shown in this report 6
All these business exploitative practices rest on a platform of weak competition in many parts of the economy and would be generally reduced by a strengthening of competition law and policy. Accordingly, recommendations to this effect are made in the report. The prices practices described are not unlawful, but they reflect an imbalance between consumers and the power of business. Price control is not seen as a solution in most or all cases. However, there is a case for governments exercising much closer scrutiny over these practices and for such scrutiny to be a regular part of the policy agenda.
Fels' recommendations are summarised as
1.1: The Australian Government should use its power to require the ACCC to conduct more price and market investigations.
1.2: The Australian Government should have power to require the ACCC to undertake market studies as well as price studies.
1.3: The ACCC should have power of its own to initiate price and market studies.
1.4: The GST pricing legislation of 2000-2003 provisions regarding the naming of businesses and industries that overcharge should be reinstated.
1.5: Section 46 of the Australian Competition and Consumer Act should be amended to make it an offence to charge excessive prices in terms similar to the European Union provisions.
1.6: The Government could establish a Commission on Competition and Prices to review Government and other restrictions on competition and high prices caused by a lack of competition.
MERGERS AND DIVESTITURE
2.1: The Australian government should establish a pre-merger notification system along similar lines to most OECD countries.
2.2: That in merger matters the onus should be on applicants to satisfy the ACCC and on appeal the Australian Competition Tribunal that the merger is not anticompetitive and is in the public interest.
2.3: The merger test should be augmented to continue to prohibit mergers which substantially lessen competition but there should be an additional provision prohibiting mergers that give rise to substantial market power (a more structural and immediate test) and/or which entrench, create, or add to market power.
2.4: A divestiture power should be introduced into the competition law.
COMPETITION
3.1: The Australian Consumer and Competition Act needs to be shortened.
3.2: If the secondary boycott law is retained in the Competition Law there should be a provision that secondary boycotts are only unlawful if they substantially lessen competition.
3.3: Australia should ban non-compete clauses in employment contracts affecting both employees during and post-employment.
3.4: The current National Competition Review should examine policies and laws that prevent Governments from needlessly restricting competition.
3.5: The ACCC receives further funding for strong enforcement of the cartel law. It should also apply the criminal sanctions available for unlawful price fixing and other cartel agreements.
3.5: Treasury should conduct a public consultation to determine the need for improvement in the drafting of the criminal elements of the cartel law in view of recent difficulties in the bank cartel case.
AVIATION
4.1: Airport prices should be regulated in the same way as other utility prices.
4.2: The Australian Government should use the opportunity of its current aviation review to remove international and domestic restrictions on competition. Any remaining restrictions should be reviewed by the Treasury led Competition Policy Review.
EARLY CHILDHOOD EDUCATION AND CARE
4.3: The ACCC should be empowered to investigate pricing decisions made by for-profit providers to ensure gaming is not occurring.
4.4: Prices in relation to disability care and support and aged care should be kept under continuous review by the ACCC.
BANKING AND FINANCIAL SERVICES
4.5: The ACCC should be provided with a standing Ministerial Direction to monitor prices and competitiveness in the retail banking sector.
4.6: The ACCC should be issued with a Ministerial Direction to undertake a further inquiry into pricing practices in foreign exchange markets to develop mechanisms for a fairer transmission of cost information to consumers as well as to provide specific assistance to prevent exploitation of those with low English language proficiency.
ENERGY
4.7: There should be a review of the design and operation of the wholesale market as to whether it requires refinements or a fundamental change in the form of a ‘capacity market’ as in North America and in Western Australia. This review should be chaired by an independent expert with input and resources from the AER, AEMO, and ASIC. The level of electricity generation concentration should be kept under review, and there should be close scrutiny of the impact on competition, positive or negative, that could occur in the transition to a re-designed energy market.
4.8: ASIC should be provided with a Ministerial Direction to investigate the energy derivatives market to ensure that participants in both the National Electricity Market and the markets for derivatives are not misusing their position in either to gain an unfair advantage or influence the price of energy to meet derivatives conditions.
4.9: Network prices should continue to require close regulatory scrutiny with the long-term interests of consumers put first.
4.10: There should be a regulatory review of the high degree of price discrimination in the retail electricity and gas markets.
4.11: State Governments and regulators should continue to introduce initiatives to improve retail outcomes brought about by current market imperfections.
FOOD AND GROCERIES
4.12: It is recommended that there should be a comprehensive ACCC inquiry into competition and prices in the retail food and grocery industry.
4.13: The Food and Grocery Code Review should be fully mandatory.
4.14: The Food and Grocery Code Review should investigate creating a price register for farmers to assist them in understanding market prices across primary industries.
SHIPPING COSTS IMPACTING FNQ AND NT
4.15: The ACCC should once again have an ability to challenge and overturn unreasonable prices charged by Sea Swift to ensure the service is not exploiting its market position.
ELECTRIC VEHICLES
4.16: Regulations in the Road Vehicle Safety Act 2018 which block parallel imports of electric vehicles be immediately lifted.
4.17: Regulations under the Road Vehicle Safety Act 2018 which block parallel imports of cars into Australia should also be repealed in coming months.
OUT OF POCKET CHARGES BY MEDICAL SPECIALISTS
4.18: The National Competition policy review should conduct or commission a contemporary study of specialist fees backed by an analysis of restrictions on competition and of the role of information imbalances between patients and specialists.
4.19: The ACCC or the Productivity Commission or another appropriate body should, separately, review specialist fees and the policy steps that could be taken to make them more transparent or to reduce them.
PHARMACEUTICALS
4.20: A mandatory reporting scheme should be implemented in relation to originator and generic agreements to improve the detectability of pay for delay agreements similar to the reporting arrangements in the United States.
