Big business grabs more market power as price-to-cost ratio soars 57pc

Big businesses in Australia and other rich countries are exerting more market power than ever before, a new study has found.

The landmark analysis of 70,000 businesses across 134 countries found market power for the largest firms had surged in the past 10 years in particular

Big businesses in Australia and other rich countries are exerting more market power than ever before, according to a new global study that finds mark-ups on goods and services have risen almost 50 per cent since the 1980s.

The landmark analysis of 70,000 businesses across 134 countries found market power for the largest firms had surged in the past 10 years in particular, suggesting competition was waning.

“In the absence of competitive pressure, firms grab market power which in turn allows them to sell goods at higher prices,” the study found. “Market power naturally leads to redistribution of resources from workers and consumers to the owners of firms.”

Surging electricity prices and the dominance of the big four banks in financial services has ­focused attention on mark-ups and the level of competition.

The study, by two economists at Princeton and University College, London, found the average mark-up above cost of production across all countries since 1980 had risen from 1.1 to 1.59 in 2016. In Australia, mark-ups rose 57 per cent to 1.57 since 1980.

 

“The economies in Oceania experience an increase in line with the global average, exemplified by Australia. New Zealand sees less of an increase,” they said. In New Zealand the mark-up was 35 per cent. Titled Global Market Power, the study found the steepest rises — and the highest mark-ups — occurred in Europe and North America. In Denmark and Switzerland, firms in 2016 were charging almost triple their overheads.

“Despite its central importance in evaluating the health of an economy, little is known about the evolution of market power in virtually all economies, let alone at the global level,” said the authors, economists Jan de Loecker and Jan Eeckhout.

They explained that most firms charged small mark-ups of about 10 per cent, but the number of businesses charging higher mark-ups had risen significantly since 1980. “Even in 2016, most firms have mark-ups that are relatively low; but in contrast, substantially more firms now have relatively high mark-ups,” they said.

A 2017 Grattan Institute analysis concluded big business was not exerting any more market power in Australia — where “only 15 per cent of the economy is dominated by large firms” — than in similar countries.

“Markets are not much more concentrated in Australia than they are in other economies of a similar size. Supermarkets in Australia are the exception to this rule,” the institute said. “The most profitable sectors include supermarkets, telecommunications (wire­less and fixed-line), internet publishing, electricity distribution and transmission, airports and gambling,” Grattan concluded.