Markets, Monopolies and Moguls: The Relationship between Inequality and Competition

• Published date: 01 December 2016
• Date: 01 December 2016
• Author: Andrew Leigh,Adam Triggs
• DOI: http://doi.org/10.1111/1467-8462.12185

Markets, Monopolies and Moguls: The Relationship between

Inequality and Competition

Andrew Leigh and Adam Triggs*

Abstract

Analysing private market research data, we

estimate the degree of market concentration

across 481 industries in the Australian econ-

omy. On average, the largest four f‌irms control

36 per cent of the market. Some industries are

considerablymore concentrated. In department

stores, newspapers, banking, health insurance,

supermarkets, domestic airlines, Internet ser-

vice providers, baby food and beer, the biggest

four f‌irms control more than 80 per cent of

the market. We suggest ways in which high

market concentration may increase inequality

and discuss some policy ideas to address the

problem.

1. Introduction

In 1992, packaging businessman Ed Zac started

cardboard box manufacturer, Zacpac, with a

leased factory in Caringbah and then a

permanent factory in Ingleburn in Sydney.

He had just one cutting machine and one

folding–glueing machine (Zacpac 2016). A

family-run operation, Zacpac hoped—like

many small businesses—to grow large enough

to employ more staff and expand its operations.

The cardboard box manufacturing industry

is signif‌icant because such a large share of

consumer products come packed in cardboard.

Indeed, some have even suggested that if you

want to see how the output of the overall

economy is doing, you should look at the

output of cardboard box manufacturers (Obel

2009). If people are not buying boxes, the

theory goes, they are not buying products.

At the time when Zacpac began, the

Australian cardboard box market was worth

around $2 billion. Not surprisingly, the f‌irm’s

management wanted a share of the action. They

did not expect to become billionaires, but they

f‌igured if they worked hard and played by the

rules, they would be able to expand their

operations.

Unfortunately for Zacpac, others had differ-

ent ideas. Between them, two companies—

Visy and Amcor—controlled over 90 per cent

of the cardboard box market and they were not

merely large—they were actively colluding.

Over a 5 year period from 2000 to 2005, senior

representatives of the two f‌irms began a series

of clandestine meetings (see Beaton-Wells and

Brydges 2008).

In scenes reminiscent of spy thrillers, they

met in hotels and motels, including the Rock-

man’s Regency Hotel in central Melbourne and

* Leigh: Shadow Assistant Treasurer, Shadow Minister for

Competition and Federal Member for Fenner, Australian

Capital Territory 2600 Australia; Triggs: Crawford School

of Public Policy, Australian National University, Austra-

lian Capital Territory 0200 Australia. Corresponding

author: Leigh, email <Andrew.Leigh.MP@aph.gov.au>.

This is an edited and extended version of the John

Freebairn Lecture in Public Policy, delivered by the f‌irst-

named author in Melbourne on 19 May 2016. The f‌irst-

named author is grateful to Bill Griff‌iths for the invitation

to deliver the lecture. Our thanks to several people—

including John Asker, Chris Bowen, Jim Chalmers, John

Daley, Craig Emerson and Nick Green—for valuable

feedback on earlier drafts. Responsibility for any error lies

with us alone.

The Australian Economic Review, vol. 49, no. 4, pp. 389–412

°

C2016 The University of Melbourne, Melbourne Institute of Applied Economic and Social Research

Published by John Wiley & Sons Australia, Ltd

the Tudor Motel in Box Hill, Melbourne. They

made phone calls from public phones and

prepaid mobiles and met up in parks, including

Westerfolds Park in Templestowe and Myrtle

Park in North Balwyn, Melbourne (see Beaton-

Wells and Brydges 2008).

The collusion went to the highest level in

the f‌irm and included a 2001 meeting at the

All Nations Hotel in Richmond, Melbourne,

between the f‌irms’two chief executives:

Amcor’sRussell Jones and Visy’sRichard Pratt.

Eventually, as sadly happens in so many

clandestine affairs, things broke down. Since

the start of their collusion, Visy’s market share

had grown from 47 per cent to 55 per cent

of the market, but Amcor’s had shrunk from

45 per cent to 36 per cent. At the end of 2004

(Beaton-Wellsand Brydges 2008), Amcor went

to the Australian Competition and Consumer

Commission (ACCC) and announced it was

willing to confess its role in the collusion in

exchange for immunity from prosecution.

The ACCC took action, ultimately leading to

a court judgement which imposed a $36 million

f‌ine on Visy for price-f‌ixing, the largest f‌ine

in Australian historyat that time, and $2million

worth of f‌ines for the individuals involved

(ACCC 2016). The ACCC also sought a

criminal conviction against Richard Pratt for

providing false evidence. This charge was

ultimately abandoned on account of his poor

health (Pratt died in 2009). A few years later, a

class action brought by Maurice Blackburn on

behalf of more than 1,000 businesses affected

by the price-f‌ixing led to Amcor and Visy

paying out $95 million (Maurice Blackburn

Lawyers 2011).

In 2009, Australia criminalised cartel con-

duct with a jail term of up to 10 years. This put

Australia in line with the United States, United

Kingdom, Germany, Ireland and Canada.

1

Those involved in the cardboard box cartel

were fortunate that their cartel did not operate

a few years later or they might have found

themselves behind bars for serious cartel

conduct.

The combined market share of Amcor and

Visy is still large—at 84 per cent—but

signif‌icantly down from the 91 per cent that it

was at the peak of their duopoly (Beaton-Wells

and Brydges 2008; IBISWorld 2016). And

what about Zacpac? Their Sydney factory has

now expanded to f‌ive cutting machin es and

four folding–glueing machines—far more

computerised than when it began (Za cpac

2016). Zacpac recently op ened a second

factory in Stapylton, on th e Gold Coast.

In the past few years, their bus iness has

grown at an annual rate of over 30 pe r cent

(Hoy 2014).

Like a large tree that overshadows the

saplings around it, f‌irms that abuse their market

power prevent newer competitors from grow-

ing. They hurt entrepreneurs and often reduce

the scope for innovation. Consumers suffer

through higher prices, lower quality and less

choice.

But, some of the benef‌its of market power

invariably go to the people who run the f‌irms.

At the time of his secret meeting at the All

Nations Hotel, Richard Pratt was the third-

richest person in Australia (Beaton-Wells and

Brydges 2008).

But, are not moguls who made their money

through wielding market power the exception?

What about the story of ingenious entrepre-

neurs creating value for the community? Such

examples do exist—think of Boost Juice

founder, Janine Allis, Red Balloon founder,

Naomi Simson, or Atlassian founders, Mike

Cannon-Brookes and Scott Farquhar.

Alas, when it comes to the wealthiest

Australians, breakthrough innovators are not

the norm.Analysing how the richest Australians

made their money, Frijters and Foster (2015)

estimated that just f‌ive out of 200 had become

rich primarily by inventing a new product or

service. Far more commonly, the most aff‌luent

operated in industries with limited competition

or with signif‌icant reliance on government

decisions.

One analysis from the 1990s looked at the

industries in which the rich-listers made their

fortunes. It concluded that about one-quarter

grew wealthy in an industry that was uncom-

petitive at the time (Siegfriedand Round 1994).

Since then, the problem may have become

worse. As Stensholt (2012, p. 50) noted, ‘There

is a dearth of new, young and entrepreneurial

people on the latest BRW rich list.’

390 The Australian Economic Review December 2016

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C2016 The University of Melbourne, Melbourne Institute of Applied Economic and Social Research