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A Giant Problem: The Influence of the Chicago School on Australian Competition Law, Economic Dynamism and Inequality

Published online by Cambridge University Press:  01 January 2025

Adam Triggs  and
Andrew Leigh
Adam Triggs*
Affiliation:
Crawford School of Public Policy, Australian National University
Andrew Leigh*
Affiliation:
Parliament of Australia
*
The author may be contacted at adam.triggs@anu.edu.au.
The author may be contacted at andrew.leigh.mp@aph.gov.au.
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Abstract

Australia has a competition problem: there is not enough of it. Our industries are concentrated. Our markets show signs of weak competition. The way Australia’s courts, parliamentarians and regulators think about competition is partly to blame. Although it has been less influential in Australia than in the United States, the Chicago School’s views on competition have shaped our laws, policies and enforcement practices. The Chicago School views market concentration as a virtue more than a vice. The School contended that barriers to entry are negligible, market power is temporary, most mergers are good, vertical restraints and predatory pricing are either benign or efficient. The growing body of research and experience, however, shows that the Chicago School’s faith in the ability of markets to self-correct and deliver competitive outcomes was misplaced. There is a strong progressive case for repositioning how we think about competition. Focusing more on the competitive process, the structure of markets and the incentives those structures create for firms will play an important role in reducing inequality.

Type
Articles
Information
Federal Law Review , Volume 47 , Issue 4 , December 2019 , pp. 696 - 714
Copyright
Copyright © 2019 The Author(s)

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Footnotes

This article is based on the Lionel Murphy Lecture, delivered by the second author at the Australian National University on 31 October 2018 under the title ‘Competition Policy and Inequality: Building on Lionel Murphy’s Legacy’. Our thanks to general editor Ron Levy, the eagle-eyed student editors, and two anonymous referees. We are also grateful to Caron Beaton-Wells, Craig Emerson, Allan Fels, Richard Holden, Ray Steinwall and others for feedback on earlier drafts. Naturally, these experts should not be assumed to agree with the entirety of the article.

References

Notes

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2. S G Corones, Competition Law in Australia (Lawbook, 4th ed, 2007) 20.

3. Lina M Khan, ‘Amazon’s Antitrust Paradox’ (2017) 126(3) Yale Law Journal 710, 718.

4. Ibid.

5. Corones (n 2) 26.

6. Ibid.

7. Khan (n 3) 726–7, citing Jonathan B Baker, ‘Predatory Pricing After Brooke Group: An Economic Perspective’ (1994) 62(3) Antitrust Law Journal 585, 586.

8. Khan (n 3) 734.

9. Richard A Posner, ‘The Chicago School of Antitrust Analysis’ (1979) 127(4) University of Pennsylvania Law Review 925, 928, 933.

10. ‘Herrera Anchustegui, Ignacio’. (2015). Competition Law through an Ordoliberal Lens. Oslo Law Review 2. 139.: European competition law has its own distinct intellectual origins, including the Ordoliberal School which emphasises the importance of checks on monopolies as a means of ensuring that powerful economic forces do not adversely affect the health of the democracy.

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13. Corones (n 2) 27–8.

14. ‘Schumpeter: Crony Capitalism’ (2017) 423(9036) The Economist 66.

15. Ibid.

16. ‘Business in America: Too much of a good thing’ (2016) 418(8982) The Economist 23-28.

17. Andrew Leigh and Adam Triggs, ‘Markets, Monopolies and Moguls: The Relationship Between Inequality and Competition’ (2016) 49(4) Australian Economic Review 389, 389.

18. Ibid 394.

19. Tim Wu, The Curse of Bigness: Antitrust in the New Gilded Age (Columbia Global Reports, 2018) 21.

20. World Economic Forum, The Global Competitiveness Report 2017–2018 (Insight Report, 2017) 51, 71, 129.

21. Leigh and Triggs (n 17) 393.

22. Jim Minifie, ‘Competition in Australia: Too Little of a Good Thing?’ (Grattan Institute Report No 2017-12, December 2017) 18.

23. Sasan Bakhtiari, ‘Entrepreneurship Dynamics in Australia: Lessons from Micro-Data’ (2019) 95(308) Economic Record 114, 122 (note that while the text states that the 9% statistic is for 2015, the author has clarified with us that the statistic is actually for 2014, which is consistent with his figure 5).

24. ‘Institute for Mergers, Acquisitions and Alliances’, M&A Statistics by Countries (online) <https://imaa-institute.org/mergers-and-acquisitions-statistics/>.

25. ‘Silent dogs: Competition’ (2017) 425(9067) The Economist 72.

26. Jan De Loecker and Jan Eeckhout, ‘Global Market Power’ (National Bureau of Economic Research (NBER) Working Paper No 24768, June 2018) 11.

27. Germán Gutiérrez and Thomas Philippon, ‘Investment-less Growth: An Empirical Investigation’ (NBER Working Paper No 22897, January 2017) 3.

28. Ibid 48.

29. Paul Krugman, ‘Robber Baron Recessions’, The New York Times (New York), 18 April 2016, A21.

30. Lawrence H Summers, ‘Larry Summers: Corporate Profits Are Near Record Highs. Here’s Why That’s a Problem’, The Washington Post Wonk blog (Washington, DC), 30 March 2016 <https://www.washingtonpost.com/news/wonk/wp/2016/03/30/larry-summers-corporate-profits-are-near-record-highs-heres-why-thats-a-problem/noredirect=on>.

31. Meghan Quinn, ‘Keeping Pace with Technological Change: The Role of Capabilities and Dynamism’ (Speech, OECD Forum on Productivity, 20 June 2019) <https://treasury.gov.au/speech/s2019-390085>.

32. United States Department of Justice, ‘Justice Department Requires Six High Tech Companies to Stop Entering into Anticompetitive Employee Solicitation Agreements’ (Press Release No 10-1076, 24 September 2010).

33. David Autor et al, ‘The Fall of the Labor Share and the Rise of Superstar Firms’ (NBER Working Paper No 23396, May 2017) 25.

34. Leigh and Triggs (n 17) 401.

35. Neil Irwin, ‘Tying Behemoths to Stagnant Pay and Low Growth’, The New York Times (New York), 26 August 2018, A1, A15.

36. Stephen J Nickell, ‘Competition and Corporate Performance’ (1996) 104(4) Journal of Political Economy 724, 741.

37. Bruce A Blonigen and Justin R Pierce, ‘Evidence for the Effects of Mergers on Market Power and Efficiency’ (NBER Working Paper No 22750, October 2016) 24.

38. Note that this approach is inherently biased in favour of finding a positive relationship between the change in profits and the change in the number of firms. To see this, suppose that an entirely new sub-industry emerges. This sub-industry would both increase profits and the number of firms within its industry.

39. Measured as inflation-adjusted growth and pre-tax business profit.

40. Sandeep Vaheesan, ‘Reconsidering Brooke Group: Predatory Pricing in Light of the Empirical Learning’ (2015) 12(1) Berkeley Business Law Journal 81, 82.

41. Khan (n 3) 710.

42. Ibid 713.

43. ‘Into the danger zone’ (2018) 427(9094) The Economist 61–63.

44. Australian Competition and Consumer Commission, Digital Platforms Inquiry (Preliminary Report, December 2018) 67. See also Kurt Wagner, ‘Vox’, Digital Advertising in the US is Finally Bigger than Print and Television (Web Page), 20 February 2019 <https://www.vox.com/2019/2/20/18232433/digital-advertising-facebook-google-growth-tv-print-emarketer-2019>.

45. Claire Ballentine, ‘Web Giants’ Dominance Prompts Ad Tech Companies to Scramble’, The New York Times (New York), 13 August 2018, B3.

46. Timothy J Muris and Jonathan E Nuechterlein, ‘Antitrust in the Internet Era: The Legacy of United States v. A&P’ (George Mason Law & Economics Research Paper No 18–15, 2018) 652. See also Herbert J Hovenkamp, Antitrust Policy and Inequality of Wealth (Faculty Scholarship, October 2017) [1184] and David Henderson, ‘EconLog’ on Should Antitrust Be Used Against Amazon? (Blog Post, 12 September 2017) <https://www.econlib.org/should-antitrust-be-used-against-amazon/>.

47. James Pethokoukis, ‘AEIdeas’ on Googlenomics: A Long-Read Q&A with Chief Economist Hal Varian (Blog Post, 20 December 2017) <http://www.aei.org/publication/googlenomics-a-long-read-qa-with-chief-economist-hal-varian/>.

48. Robert Akerlof, Richard Holden and Luis Rayo, ‘Network Externalities and Market Dominance’ (Working Paper, 10 April 2018) [35].

49. Adi Ayal, ‘The Market for Bigness: Economic Power and Competition Agencies’ Duty to Curtail It’ (2013) 1(2) Journal of Antitrust Enforcement, 221, 227. See also Jonathan Tepper and Denise Hearn, The Myth of Capitalism: Monopolies and the Death of Competition (Wiley, 2019) 188.

50. Stephanie Strom, ‘Giant Food Companies Pay Later, Squeezing Their Suppliers’, The New York Times (New York), 7 April 2015, B1. See also Julie-anne Sprague and Tess Ingram, ‘BHP Billiton widens tougher payment terms across Pilbara’ Australian Financial Review, 11 August 2016, Emma Koehn, ‘Woolworths to Follow Coles with 14-Day Payment Terms as Supermarkets Chase Good Relationships with Suppliers’, Smart Company (online), 13 April 2017 <https://www.smartcompany.com.au/finance/cashflow/woolworths-to-follow-coles-with-14-day-payment-terms-as-supermarkets-chase-good-relationships-with-suppliers/>.

51. Dun and Bradstreet, ‘Trade Payments Analysis: Payments at Pre-GFC levels’, Dun and Bradstreet (Report, 2014). See also Australian Small Business and Family Enterprise Ombudsman, Payment Times and Practices Inquiry (Final Report, April 2017) 5.

52. Warwick Long and Robert French, ‘Murray Goulburn, Corporate Regulator ASIC Reach Settlement over Continuous Disclosure Breach’, Australian Broadcasting Corporation (online), 16 November 2017 <http://www.abc.net.au/news/rural/2017-11-16/murray-goulburn-settles-with-asic-over-disclosure-breach/9156484>.

53. Leigh and Triggs (n 17) 402–9.

54. Rod Sims, ‘Companies Behaving Badly?’ (Giblin Lecture, University of Tasmania, 13 July 2018) <https://www.accc.gov.au/speech/companies-behaving-badly>.

55. This is a long-held concern for the Labor party: Murray Goot, ‘Labor, Government Business Enterprises and Competition Policy’ (2010) 98 Labour History 77, 77.

56. Australian Competition and Consumer Commission, Annual Report: 2008–09 (Report, 2008) 186.

57. Ibid; Annual Report: 2016–17 (Report, 2017) 144.

58. Ibid 9.

59. Ibid; ‘Pental to Pay $700,000 in Penalties for “Flushable” Wipes Claims’ (Media Release No 64/18, 12 April 2018).

60. Ibid; ‘Empowering Consumers Against Companies’ (Media Release No 142/18, 31 July 2018).

61. Ibid.

62. Ibid; ACCC, ‘Dulux to Pay $400,000 for Misleading Cooling Paint Claims’ (Media Release No 201/16, 3 November 2016).

63. Ibid; ACCC, ‘Tobys (Cereal Partners Australia) Pays $32,400 in Penalties for Alleged False or Misleading Representations About Uncle Tobys Oats’ (Media Release No 233/15, 26 November 2015).

64. Ibid; ACCC, ‘Woolworths Misled Consumers Over Product Safety Hazards—Ordered to Pay Over $3 million in Penalties’ (Media Release No 7/16, 5 February 2016).

65. Ibid; ACCC, ‘Coles to Pay $2.5m for Misleading “Baked Today” and “Freshly Baked In-Store” Bread Promotion’ (Media Release No 58/15, 10 April 2015).

66. The High Court continues to approach competition law issues using the structure-conduct-performance approach that had its origins in the Industrial Organisation School dating back to the Trade Practices Tribunal’s landmark decision in Re Queensland Co-operative Milling Association Ltd (1976) 25 FLR 169 (Woodward J, Member Shipton and Brunt). The Dawson Committee in the early 2000s similarly rejected the idea of including an economic efficiency test which, consistent with the Chicagoan approach, would allow more mergers to be approved: Corones (n 2) 39.

67. McMahon (n 12).

68. Corones (n 2).

69. Alex Bruce, Australian Competition Law (LexisNexis Butterworths, 2nd ed, 2013).

70. David K Round (ed), The Australian Trade Practices Act 1974: Proscriptions and Prescriptions for a More Competitive Economy (Kluwer Academic Publishers, 1994).

71. Commonwealth, Parliamentary Debates, Senate, 27 September 1973, 1014 (Lionel Murphy, Attorney-General).

72. Competition and Consumer Act 2010 (Cth) s 2.

73. I S Wylie, ‘Roots, Branches and Other Objects—One Step Beyond the Harper Review?’ (2014) 42(6) Australian Business Law Review 436 [2].

74. Continental TV Inc v GTE Sylvania Inc (1977) 433 US 36, 55–6 (‘Sylvania’).

75. Melway Publishing Pty Ltd v Robert Hicks Pty Ltd (2001) 205 CLR 1, 14 [20].

76. Phillip Areeda and Donald F Turner, ‘Predatory Pricing and Related Practices Under Section 2 of the Sherman Act’ (1975) 88(4) Harvard Law Review 697, 700.

77. Frank H Easterbrook, ‘Predatory strategies and counterstrategies’ (1981) 48(2) University of Chicago Law Review 263, 336–7. Note however that the Chicago School is not monolithic on this point. For example, Richard Posner argues that predatory pricing can exist but the test should be whether an incumbent was pricing below marginal cost with intent to harm a rival: Richard A Posner, Antitrust Law (University of Chicago Press, 2nd ed, 2009) 216.

78. Eastern Express Pty Ltd v General Newspapers Pty Ltd (1992) 35 FCR 43 (Lockhart, Beaumont and Gummow JJ).

79. Ibid [383].

80. Khan (n 3) 744.

81. Boral Besser Masonry Ltd v Australian Competition and Consumer Commission (2003) 215 CLR 374 (Gleeson CJ, Gaudron, McHugh, Gummow, Kirby, Hayne and Callinan JJ) (‘Boral’).

82. Boral (2003) 215 CLR 374, 399–400 [33].

83. Australian Competition and Consumer Commission v Boral Ltd (1999) 166 ALR 410 [104].

84. McMahon (n 12) 820.

85. Australian Competition and Consumer Commission v Boral Ltd (2001) 106 FCR 328, 167.

86. Ibid 405.

87. McMahon (n 12) 820.

88. Garth Campbell, ‘Quo Vadis? Towards an Effective Predatory Pricing Provision’ (2009) 17(2) Trade Practices Law Journal 82, 86.

89. See, for example, CSR Limited v Eddy (2005) 226 CLR 1, 40 [95] (McHugh J); Carson v John Fairfax & Sons Ltd & Slee (1993) 178 CLR 44 [18] of McHugh J’s dissenting judgment.

90. Boral (2003) 215 CLR 374, 461 [268]. See also Shirley Quo, ‘Interpretation and Application of the Purpose Test in s 46 of the Competition and Consumer Act 2010—Part 2’ (2012) 19(3) Competition and Consumer Law Journal 215, 221–2.

91. Boral (2003) 215 CLR 374, 462 [273].

92. Finkelstein J recognised this in Australian Competition and Consumer Commission v Boral Pty Ltd (2001) 106 FCR 328, 397 [256], cited in McMahon (n 12) 822.

93. France Télécom v Commission (European Court of Justice, C-20207 P, 25 September 2008) [68]–[78], discussed in Miguel Moura e Silva, ‘Predatory Pricing under Article 82 and the Recoupment Test: Do Not Go Gentle into that Good Night’ (2009) 30(2) European Competition Law Review 61, 61–2.

94. This provision was originally inserted as Trade Practices Act 1974 (Cth) s 46(1AAA) by Trade Practices Legislation Amendment Act 2008 (Cth) sch 2 item 1A but was later repealed and substituted by Competition and Consumer Amendment (Misuse of Market Power) Act 2017 (Cth) s 1.

95. Competition and Consumer Act 2010 (Cth) s 46.

96. Corones (n 2) 39.

97. On the use of long-term contracts as barriers to entry, see Philippe Aghion and Patrick Bolton, ‘Contracts as a Barrier to Entry’ (1987) 77(3) American Economic Review 388, 398–400.

98. Corones (n 2) 114–17.

99. Ibid.

100. Boral (2003) 215 CLR 374, 492 [361].

101. Ibid.

102. Maxine Rich, ‘Sons of Uncle Sam: Have They Grown Up in His Image? A Comparative Analysis of the Merger Laws and Policies of Australia and the European Union in the Context of US Antitrust Theory’ (1994) 17(1) University of New South Wales Law Journal 109, 154–5.

103. Corones (n 2) 114.

104. Allan Fels, ‘The Change from a Dominance to a Substantial Lessening of Competition Test in Australia’s Merger Law’ (Conference Paper, Fordham Corporate Law Institute Conference Roundtable on Substantive Standards for Mergers and the Role of Efficiencies, 31 October 2002) 6.

105. Rich (n 102) 109–55.

106. Australian Competition and Consumer Commission, Merger Guidelines (June 1999) 1.

107. Ibid; Merger Guidelines (November 2008 updated 2017) 1.

108. Ibid 49 [7.66].

109. Rod Sims, ‘Address to the Law Council of Australia Annual General Meeting’ (Speech, Law Council of Australia, 3 August 2018).

110. Australian Competition and Consumer Commission, Restoring Electricity Affordability and Australia’s Competitive Advantage (Final Report, June 2018) [viii].

111. Rich (n 102) 121–2.

112. Fels (n 104) 8.

113. Ibid 10.

114. Harper et al, Competition Policy Review (Final Report, March 2015) 9.

115. Ibid 61.

116. Authors’ calculations, based on data published in Australian Bureau of Statistics, Employee Earnings and Hours, Cat No 6306.0 (various years), ABS, Canberra. For other analyses of long-run inequality in Australia more generally, see Anthony Atkinson and Andrew Leigh, ‘The Distribution of Top Incomes in Australia’ (2007) 83(262) Economic Record 247; Andrew Leigh, Battlers and Billionaires: The Story of Inequality in Australia (Black Inc, Melbourne, 2013); Richard Burkhauser Markus Hahn and Roger Wilkins, ‘Measuring Top Incomes Using Tax Record Data: A Cautionary Tale From Australia’ (2015) 13(2) Journal of Economic Inequality 181; Roger Wilkins, ‘Measuring Income Inequality in Australia’ (2015) 48(1) Australian Economic Review 93; and Pamela Katic and Andrew Leigh, ‘Top Wealth Shares in Australia 1915–2012’ (2016) 62(2) Review of Income and Wealth 209.

117. Andrew Stewart, Jim Stanford and Tess Hardy (eds), The Wages Crisis in Australia: What It Is and What to Do About It (University of Adelaide Press, 2018) 22.

118. Labour compensation as a share of GDP has fallen from over 55% in the 1970s to a historic low of 46.5% in 2017, labour compensation as a share of factor income (which excludes net indirect taxes less subsidies received by government) fell from over 60% in the 1970s to 53% in 2017 and similar trends can be seen in other advanced nations: Jim Stanford, ‘The Declining Labour Share in Australia: Definition, Measurement, and International Comparisons’ (2018) 81 Journal of Australian Political Economy 11, 18–27.

119. Sean F Ennis, Pedro Gonzaga and Chris Pike, Inequality: A Hidden Cost of Market Power (Organization for Economic Cooperation and Development Competition Division Draft Discussion Paper, 2017) 3.

120. Joshua Gans et al, ‘Inequality and Market Concentration, When Shareholding Is More Skewed than Consumption’ (2019) 35(3) Oxford Review of Economic Policy 550.

121. The 1998 study used Australian Household Expenditure Survey data to generate demand elasticities for 14 commodity groups to obtain estimates of the relative welfare loss for households with different income levels. They found that the welfare loss associated with monopoly power is largest for poor households, which depend on government pensions and benefits for their principal source of income: John Creedy and Robert Dixon, ‘The Relative Burden of Monopoly on Households with Different Incomes’ (1998) 65(258) Economica 285, 285. The 1999 study extended this analysis with more detailed measures of welfare (through equivalent variations) and inequality (using a larger number of households in the Household Expenditure Survey) and confirmed their findings that reduced competition can have substantial effects on the distribution of welfare: John Creedy and Robert Dixon, ‘The Distributional Effects of Monopoly’ (1999) 38(3) Australian Economic Papers 223, 223.

122. William S Comanor and Robert H Smiley, ‘Monopoly and the Distribution of Wealth’ (1975) 89(2) Quarterly Journal of Economics 177, 178.

123. Begazo Gomez, ‘Tania Priscilla and Sara Nyman’, Competition and Poverty: How Competition Affects the Distribution of Welfare (Viewpoint, 2016) 7.

124. Paul Frijters and Gigi Foster, ‘Rising Inequality: A Benign Outgrowth of Markets or a Symptom of Cancerous Political Favours?’ (2015) 48(1) Australian Economic Review 67, 70–1.

125. John J Siegfried and David K Round, ‘How Did the Wealthiest Australians Get So Rich?’ (1994) 40(2) Review of Income and Wealth 191, 191.

126. John Stensholt, ‘Portrait of Rich Change: Ageing Fortunes’, Australian Financial Review (online) 26 May 2012 <https://www.afr.com/markets/commodities/portrait-of-rich-change-ageing-fortunes-20120526-j2pmk>.