Australia’s Competition Problem: Too Much Power in Too Few Hands?

Part 2 of the Competition and Inflation Series

In the first article of this series, we explored the debate around greedflation and found the evidence was more complicated than a simple story of corporate greed causing inflation.

Some firms expanded margins during the inflation surge. Others did not.

That raises a more important question:  Why were some companies able to raise prices more easily than others?

The answer leads us to a topic that economists, regulators and policymakers are increasingly focused on: competition.

Across much of the Australian economy, a relatively small number of firms dominate key industries. Supermarkets, banking, telecommunications, insurance, energy and aviation all exhibit varying degrees of market concentration.

The concern is whether or not markets remain competitive enough to ensure lower prices, better service, innovation and productivity growth.

Why Competition Matters

Competition is one of the most important forces in a market economy.

When firms compete aggressively for customers, consumers benefit through:

• Lower prices.
• Better products.
• Improved service.
• Greater innovation.

Competition also encourages businesses to become more efficient.

A firm that wastes resources, overcharges customers or fails to innovate risks losing market share to competitors.

When competition weakens, those incentives can weaken as well.

The result may be:

• Higher prices.
• Reduced innovation.
• Lower productivity.
• Slower economic growth.

These concerns have attracted increasing attention from economists in Australia and overseas. Research from the Reserve Bank of Australia suggests declining competitive pressure can contribute to higher mark-ups, capital misallocation and lower productivity.

What Is Market Concentration?

Market concentration refers to the extent to which a small number of firms control a large share of a market.

Some Australian examples are familiar:

Supermarkets

The Australian Competition and Consumer Commission found that Coles Group Limited and Woolworths Group Limited continue to dominate Australian grocery retailing and that their strong market positions are likely to persist without significant structural change.

Banking

Australia’s banking sector is dominated by the “Big Four”:

• Commonwealth Bank of Australia
• Westpac Banking Corporation
• National Australia Bank Limited
• ANZ Group Holdings Limited

Together they control the majority of household deposits and mortgage lending.

Insurance

Insurance is similarly concentrated, with major market shares held by:

• Insurance Australia Group Limited
• Suncorp Group Limited
• QBE Insurance Group Limited

These firms play a significant role in household and business insurance markets.

Concentration by itself is not proof of a problem.

The crucial question is whether competition remains sufficiently strong despite that concentration.

Have Australian Mark-Ups Increased?

Economists often look beyond prices and examine mark-ups, the difference between a firm’s costs and the prices it charges.

Research by Jonathan Hambur found evidence that mark-ups have increased in parts of the Australian economy over time, consistent with declining competitive pressure. This matters because mark-ups affect consumer prices. Higher mark-ups can influence:

• Business investment.
• Productivity growth.
• Wage growth.
• Economic dynamism.

Recent research from the Reserve Bank of Australia estimates that Australia’s productivity and GDP could have been materially higher had competitive pressures remained closer to levels observed in the mid-2000s. The implications extend well beyond inflation. They affect long-term living standards.

The Productivity Connection

One reason economists care so much about competition is its relationship to productivity. Over the long run, productivity growth is the primary driver of rising living standards. A country becomes wealthier when it can produce more output using the same amount of labour and capital.

Yet Australia’s productivity performance has been disappointing in recent years. The latest analysis from the Productivity Commission shows labour productivity growth has been weak, with output growth failing to keep pace with increases in hours worked.

This creates a potential connection between competition and living standards. If weak competition allows inefficient firms to remain dominant, resources may not flow toward the most productive businesses. That can reduce innovation, investment and economic growth.

Competition policy therefore affects far more than prices at the checkout. It affects Australia’s future prosperity.

What Did the Inflation Surge Reveal?

The inflation episode from 2021 to 2023 placed competition issues under a spotlight. Consumers observed:

• Rising prices.
• Record profits in some industries.
• Increasing cost-of-living pressures.

This naturally led to greater scrutiny of large corporations. The greedflation debate emerged from that environment. But competition provides a deeper explanation. Businesses are always interested in maximising profits. What changes over time is their ability to do so.

A company with strong market power may find it easier to increase prices during periods of economic disruption. Research on seller’s inflation and pricing power suggests that inflationary environments can reduce consumers’ sensitivity to price increases, potentially strengthening firms’ pricing power.

Viewed this way, inflation may have acted as a stress test for Australian competition. The results suggest some sectors possessed more pricing power than others.

What Regulators Are Doing

Concerns about competition are not limited to academics. The Australian Government commissioned a major Treasury Competition Review to examine whether current competition policy remains fit for purpose in a modern economy. At the same time:

• The Australian Competition and Consumer Commission has increased scrutiny of concentrated industries.
• Merger laws have undergone reform.
• Policymakers have become more focused on barriers to entry and consumer switching costs.

The goal is to ensure markets remain contestable and competitive. Well-functioning competition benefits consumers, workers and business alike.

Why This Matters More Than Greed

One weakness of the greedflation debate is that it focuses on motivation. Competition economics focuses on incentives and market structure. Economics generally assumes firms seek profits. That is not unusual behaviour.

The more useful question is: What prevents firms from raising prices beyond what the market will bear?

The answer is competition.

When competition is strong, businesses must continuously justify their prices and performance. When competition weakens, firms may gain greater freedom to increase prices, reduce service quality or slow innovation. That is why economists often worry more about market structure than corporate intentions.

Conclusion

Australia’s competition debate is ultimately about power. Not political power, but economic power. Who has it, how much they have, and whether consumers have realistic alternatives.

The evidence suggests competition matters for far more than inflation. It influences productivity, investment, innovation and living standards. Research from the Reserve Bank of Australia, the Productivity Commission, the Australian Competition and Consumer Commission and the Treasury’s Competition Review all point to competition as an increasingly important economic issue.

The greedflation debate asked whether companies became greedier.

A better question might be whether Australia’s markets became less competitive.

In the next article, we’ll move from theory to evidence. Using financial statement data from 12 major Australian companies across supermarkets, banks, insurers and energy producers, we’ll examine which sectors actually expanded profits during the inflation era, and which did not.