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:
https://pricegouginginquiry.actu.org.au/wp-content/uploads/2024/02InquiryIntoPriceGouging_Report_web.pdf
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.
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