Finally. A dark uncomfortable nexus that federal and state governments have tried to ignore, is exposed to the light of day.
INQUIRY INTO PRICE GOUGING AND UNFAIR
PRICING PRACTICES, Final report, February 2024
FOREWORD
I have welcomed the opportunity to chair this inquiry
for three reasons.
Firstly, there has been much discussion about
inflation and its causes including monetary and
fiscal policy, international factors, wages, supply
chain disruption and war. However, there is hardly
any discussion that looks at the actual prices
charged to consumers, the processes by which
they are set, the profit margins and their possible
contribution to inflation.
Secondly, there is also much discussion about
market power and its harms. But there is very little
discussion of any policies or actions that might be
taken to deal with the main harm: high prices.
Unreasonably high prices are not prohibited by
competition law. The ACCC, worthy though it is,
is restricted to looking at unlawful anti-competitive
agreements - for example, when competitors agree
on prices. If two firms, for example, coordinate
their prices without any illegal communication,
that behaviour is outside the scope of the Act. If
governments take actions which have the effect of
raising prices, that is also outside the scope of the
Australian Competition and Consumer Act.
In short, firms are free to charge as much as they
like. They can price gouge lawfully as long as there
is no unlawful collusion. This has given rise to a
policy gap – there is no set of government policies
about excessive prices. This report provides an
opportunity to examine whether this should be the
case at a time when Australians are so concerned
about the cost of living and the impact of prices on
their lives.
Thirdly, I am pleased to be engaged with the ACTU
in a prices inquiry because the concern of the Trade
Union movement is the impact of prices on the
costs of living of ordinary Australians. It has been
valuable to hear from ordinary people in this inquiry
rather than the ‘usual suspects’ that is businesses
and business organisations making economic
submissions about their prices.
Traditionally, the term price gouging has referred
to situations where sellers exploit a shortage of
essential goods and services to raise prices to
excessive levels. However, in the public mind
there is a wider meaning of the term: prices that
significantly exceed levels that would occur if there
was competition. Such prices substantially exceed
costs of supply and a reasonable level of profit.
What we have seen over recent years is a dramatic
increase in costs paid by consumers.
Some of the highest price increases occur in sectors which are characterised by having disproportionate market power, a level of power over their consumers, or a level of monopsony power over their supply chain and workforce.
At the same time as consumers experience significant increases in costs. Across food and grocery, energy, and financial services corporate profits are up.
Normally, inflation is a distributed experience, and the experience of those without market power being both squeezed on the supply and demand side is evidence of that. Some of Australia’s largest businesses, often supplying inelastic goods, are maintaining or even increasing margins in response to the global inflationary episode.
This is a situation that warrants further investigation.
In particular, it warrants investigation of the state of competition in Australia and of the associated regulatory settings and to learn from the experience of ordinary people as to the impact of these matters.
In short, if there is a high price, it usually pays to investigate its causes – typically a lack of competition or a market shortcoming – and possible remedies.
During this inquiry for example it was observed that electric vehicle prices in New Zealand are considerably lower than in Australia. In probing the reasons, it was found that the difference is due to a little known unwarranted import restriction i Australia that does not apply in New Zealand. This explains why prices on electric vehicles are much higher than they should be.
The inquiry is very timely.
The world is facing an inflationary episode. The goal of central banks and governments across the world is to drive down the rate of inflation to a more sustainable level. While there has been an enormous amount of public discourse on the contribution of wages and employment to inflation, too little discussion has been on the role price setters have on broader inflation outcomes.
The Governor of the Reserve Bank of Australia, Michelle Bullock, has noted that the inflation Australia is experiencing now is ‘homegrown.’ This declaration makes the examination of price-setting behaviour by domestic firms more important, as we cannot simply say that prices have increased elsewhere and are simply being passed on. The exercise of market power and limits on competition in specific markets have exacerbated what began as a global problem.
This inquiry has conducted 5 public hearings, received over 750 public submissions and more than 20 detailed contributions from academics, experts, think tanks, unions, businesses, and thei representatives.
These diverse perspectives are vital for a comprehensive understanding of the issues. Th public hearings in Melbourne, Sydney, Adelaide, Cairns, and Canberra have allowed us to directly engage with the community and hear a wide range of experiences and insights. These voluntary contributions have deeply enriched the inquiry.
As I stated when I agreed to conduct this inquiry, this is a serious examination of prices and competition in Australia.
This report summarises the key policy issues and draws on the submissions to develop a set of recommendations on price and competition policy which, if adopted, would substantially improve competition and decrease the price pressure faced by ordinary families.
Prof. Allan Fels AO
Chair
The full 80 page report can be read online and downloaded at:
Excerpt from Pages 5-6 of the report:
BUSINESS PRICING PRACTICES
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.
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 plan 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.
