45: Misleading & Deceptive Conduct. Masterclass with the original watchdog.

Speaker: [00:00:00] Welcome to Burgernomics. Demystifying economics with Ross MacDowell.

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Ross MacDowell: Welcome to the Burgernomics Podcast, where we demystify economic events and concepts that affect [00:00:20] your everyday life. I'm your host, Ross MacDowell. Have you ever felt that you were taken advantage of in a commercial transaction? Maybe it [00:00:30] was the way you were treated by a bank, or maybe it was just any other company and you just felt ripped off. Some of the emotions you [00:00:40] may have felt after that encounter were bitterness toward the seller, a sense of unjustness that that seller was still allowed to continue in business.

Your [00:00:50] worst emotion was that of powerlessness. Who was going to stick up for you against the perpetrator of that injustice? Who may also have had a [00:01:00] huge legal department packed with lawyers. Then came along Professor Allan Fels nicknamed the Consumer Watchdog. In 1995, Professor Fels [00:01:10] became the inaugural chairman of the Australian Competition and Consumer Commission, the ACCC for short.

In his zealousness to protect [00:01:20] Australians from bad corporate behavior, Professor Fels became one of Australia's most well-known public figures. I had the honor of being taught economics by Professor Fels at [00:01:30] Monash University. His tenacity and energy in the field of economics continues unabated to this day. Professor Fels, welcome to the [00:01:40] Burgernomics Podcast to help demystify how competition either does or sometimes does not protect Australian consumers.

Professor Allan Fels: Okay, [00:01:50] thank you. Pleasure to be on the program.

Ross: Can you please first just give us a brief tour of Australian competition history [00:02:00] or consumer protection history from the early 1900s up until you became chairman of the ACCC? From caveat emptor, and [00:02:10] one of the things that still remains in my mind to this day from my years at university was the Door-to-Door Sales Act.

Professor Allan Fels: Yes. I'll talk [00:02:20] about two things somewhat separately, although they're connected. Competition Law and Consumer Protection Law. They are connected because if consumers are [00:02:30] misinformed about products, then competition won't work well. They can't choose between the best products if they're not well-informed. [00:02:40] There is a connection and there's another connection. Consumer Protection Law is generally good, but I can give you some examples maybe later on in this [00:02:50] conversation of where it actually harms competition.

We'll come back to that. I just wanted to say they're connected but I'm going to separate them. Now on the competition [00:03:00] side in the United States, it all got

started with the Sherman Act in about 1895. That was a general [00:03:10] attack. In those days, it was on big business power being harmful to small businesses and maybe consumers. [00:03:20] We copied that in 1915 with the Australian Industry's Preservation Act but that was declared effectively unconstitutional by the [00:03:30] High Court in 1921 I think, Huddart Parker.

Only in the 1960s did they reverse their attitude. [00:03:40] In 1965, the Liberal Country Party Coalition introduced a fairly weak restrictive practices law. Then in 1974, [00:03:50] Labor led by Lionel Murphy established the modern law. It was then called the Trade Practices Act, now Australian Competition [00:04:00] and Consumer Act. Now, it was a strong law. It had an outright prohibition on cartels, anticompetitive mergers [00:04:10] abuse of dominance. We can talk about what that means in a minute. Sometimes they can be authorized if despite the harm to competition is some benefit.

Then [00:04:20] the Australian Competition and Consumer Commission basically applies that law regarding cartels, mergers and monopolies [00:04:30] taking advantage of their power monopolization.

Ross: Let's just go through those technical teams. You've got oligopolies, monopolies, duopolies, cartels, collusion which are [00:04:40] considered restrictive trade practices. An oligopoly is a collection of companies getting together in a free marketplace [00:04:50] but having a bit of a chat behind closed doors.

Professor Allan Fels: Well, you start with monopoly of firms got real market [00:05:00] power. It can charge the prices that it largely wants to. It doesn't face any competition. Oligopolies are where there's a small number of firms, [00:05:10] which whether they talk to another or not, they dominate a market. You treat them as a collectivity. If there's just two firms in a market that's a duopoly [00:05:20] so they're tight oligopolies where they really have enormous market power. They have to collaborate.

Ross: In Australia, what would've been some examples that you've [00:05:30] seen of that?

Professor Allan Fels: Well, just taking popular ones. Take retail, you've got Coles and Woolies would be oligopoly. They've got a fair [00:05:40] bit of power. Now, we can have a discussion of the extent to which ALDI, IGA and all those people, Costco, other things somewhat limit [00:05:50] their market power. Airlines, it's somewhat similar, pretty concentrated, not a single monopoly but fairly concentrated. [00:06:00] There's quite a range of others in Australia with either a monopoly or a small number of competitors.

Now, under the law, there's no [00:06:10] law about them watching one another. You might say cooperating, but the restriction is that if they [00:06:20] talk to one another, then they're breaking the Cartel Law. What we've got is, we've got an economic problem, concentrated market plow, and then we are not [00:06:30] very happy with some of the things they do, so to speak together. All the law does is it tackles them when they actually talk to one [00:06:40] another and agree.

Ross: Okay. Those are restrictive trade practices and, we legislate against them because we want to protect a consumer. Over the last [00:06:50] 80, 90 years, how have we protected the consumer? Because we started off with this legal maxim, didn't we? Caveat emptor, which was basically saying [00:07:00] to the consumer, "You're on your own. If you buy a lemon of a car, that's your problem."

Professor Allan Fels: Yes. Well, the best protection for the consumer [00:07:10] is genuine competition but that depends on the market being informed. We just have to have a look at Consumer Protection Law. Now, [00:07:20] up till 1974, we did have bits and pieces of Consumer Protection Law. You mentioned to me door-to-door selling [00:07:30] restrictions, weights and measures, a number of things like that. The big bang in consumer protection was the Consumer Protection Law [00:07:40] that was part of the Old Trade Price Act, now part of the Australian Competition and Consumer Law, and that has several features.

They get a lot of publicity. The [00:07:50] biggest one is the prohibition on any business engaging in misleading or deceptive conduct. That can be outright [00:08:00] failing to tell the truth. Sometimes it's just not saying certain things. An act of omission can be just as deceptive as an outright lie. [00:08:10] When the law was brought in '74, there was outrage from business, such a general law prohibiting anyone in trade and [00:08:20] commerce from engaging in misleading or deceptive conduct that could cover anything.

In fact, the application of the law has been quite sensible and [00:08:30] very useful. It's led to much better marketing practices that every day there are examples nevertheless, of deceptive and misleading [00:08:40] conduct.

Ross: Okay. Australia has a market capitalist economy. Which broadly means that the laws of supply and demand create [00:08:50] a market that freely operates, creates competition. If we've got the laws of supply and demand working efficiently, [00:09:00] why do we need restrictive trade practices legislation? Because surely those companies, if there's competition, won't be able to compete [00:09:10] properly.

Professor Allan Fels: Let's go back to what the founder of nodern economics, Adam Smith said. He was the one that got the idea across that if [00:09:20] individuals, including businesses, traders, labor, everyone just pursues their own self-interest, that gives them a huge incentive. You'll get the best [00:09:30] results. What is not that well recognized is that he immediately went on to say, "This doesn't work if there's monopoly." The [00:09:40] market does not work well if there's monopoly. If there's no competition, then a business will charge high prices.

Ross: How can there be a monopoly though, in a free [00:09:50] market?

Professor Allan Fels: Just look at the world. There are a lot of monopolies. There'll be a monopoly if competitors can't enter the market [00:10:00] and if there are no product substitutes. On the product substitute the demand side maybe you think of [00:10:10] Coca-Cola fine business, it's not quite a monopoly because you could switch to Pepsi or other drinks and so on. [00:10:20] In looking at competition

issues, we always look at product substitute. Say there's a merger of, I don't know, coffee businesses. [00:10:30] They'll somehow go to monopoly. Then would you be worried or would you say, well, if they put up the price, people will switch to tea or other beverage?

If you think they would, you don't worry, [00:10:40] if you think they wouldn't, it's a monopoly. There's the product substitute question always to ask. When you go down to your petrol station [00:10:50] and they've got a high price, there is a substitute the next station. Broadly speaking, in the high world of competition posse, [00:11:00] we'd say that's competition.

We're not going to hit that little business for overcharging because the consumer's got some choice, now that you can immediately [00:11:10] say, "Well, it's nuisance, you have to search around and so on." Also their limits on what a government can do. It doesn't want to regulate every petrol station in the country. [00:11:20] On the whole, we restrict the Competition Law to situations where on one side there are no product substitutes. [00:11:30] On the other side where it's not easy to enter an industry.

For example, say it's petrol stations not [00:11:40] that hard to set up a petrol stations, there are some problems but it's not that hard to set them up or for existing players, including oil companies and independent operators [00:11:50] to set up petrol stations. Supposing near where I or you live or anyone, there is a petrol station making huge profit, then [00:12:00] it's quite possible a competitor will come in and share it, but it may not be so easy.

Take, if you like supermarkets, [00:12:10] there's been some entry from ALDI, from Costco, from et cetera. There's a judgment call to make, but the question to ask anyway is [00:12:20] if they start doing bad things with consumers, especially over charging, will there be new competitors coming in or not? If there aren't, they have quite a lot of [00:12:30] market power.

Ross: Let's take the example of supermarkets, which you bring up. They've had, depending upon who you want to listen to, between 63% [00:12:40] to 80%, if you want to listen to Bob Catter of market share of a huge grocery market in Australia. They've [00:12:50] been accused of misusing that power. Not so much with the consumer, but more with the supplier in terms of some commercial practices. [00:13:00] I've heard of many where they've, for example, tried to retain at some stages upwards of 50% of the value of an [00:13:10] invoice of goods they've bought with from the supplier.

Now that would mean that they're making more money by buying products than [00:13:20] by selling products, and therefore the consumer just simply exists as a clearing house for them to make money from suppliers. If you have a whole [00:13:30] string of huge multinational corporations, Unilever, Proctor & Gamble, Gillette, et cetera that see their Australian operations as a rounding error in the [00:13:40] corporate bank account, and so are willing to pay, what would seem to be extortionate listing fees and percentages of their invoice as [00:13:50] discounts. Surely that's not supply and demand working.

Professor Allan Fels: I think there is a real problem there on the supply side of the big [00:14:00] retailers, their buying power is considerable. I do think without wanting to defend them, we have to be a bit careful with retailers [00:14:10] because it's just natural that there'll be a huge number of complaints, self-interested complaints, self- interested publicity [00:14:20] about they're being screwed by the retailers. You have to look at cases on their merits.

Now another thing that is a fact [00:14:30] of life a bit more so in the United States competition antitrust law than here is, they tend to say, look, we're here to look after consumers. [00:14:40] We're not really here to look after suppliers, and there's some consumer advantage if the retailer screws the supplier as long as they are [00:14:50] themselves competitive enough to, or pass it on.

Ross: Pass it on.

Prof: Let's focus on that bit of the market. Now I don't entirely agree with that, but it is [00:15:00] an issue. Now with the ACCC, it's always wrestled with this question partly because there's so many complaints. In recent times [00:15:10] it has taken serious effective action against Coles and I believe Woolies. I'm not so sure about Woolies, but there was a case about Coles [00:15:20] engaged in so-called unconscionable conduct where they really did screw their suppliers, and they got fined and penalties and [00:15:30] damages and bad publicity and so on.

Yes, there is some exploitation of suppliers. [00:15:40] I wouldn't discount as much as you have in your comment the power of the bigger suppliers, you mentioned Unilever and all these, [00:15:50] they're not doing that badly.

Ross: No, but I think that certainly post World War II Australia, you had this concept of [00:16:00] what I would call marketing imperialism, where corporations around the world wanted to be number one, they wanted to be the market leader in every market. They had enormous resources [00:16:10] and they looked at Australia and they said, it's a tiny place, but we still need to be number one to make the corporate edict work. Run into Australia everybody [00:16:20] and make sure that you are number one.

At that stage we had duopoly, I'd call them a duopoly of a Woolworth and Coles willing to [00:16:30] take for them enormous amounts of money to the multinationals and their rounding error, and to gain their number one. They developed a [00:16:40] corporate structure, a profitability structure, certainly a balance sheet and a profit loss statement based on what Australian companies couldn't provide.

All the [00:16:50] meanwhile, you've got a multinational American Dutch English CEO sitting in the chair wanting just to be number one at any cost, so that [00:17:00] he could be rushed back to head office and he'd get his next promotion. Meanwhile, we've got a whole bunch of grocery executives rubbing their hands together saying more, more, more, and they're getting it.

Prof: [00:17:10] Well, look, in the interest of having a good discussion, I'm going to make a couple of points. The other way without necessarily being rightly sold on

them, but it is complicated. [00:17:20] First of all, after World War II and for quite a long time after that, the manufacturers, the people you are talking about, whether they're multinational or Australian, [00:17:30] they had the power and retailers were rather weak. Now that's been gradually changing to the point now where it is the retailers have [00:17:40] the bargaining power, and the big multinationals who make healthy profits in Australia.

Ross: Sure.

Prof: They get checked by the retailers. Now if you're talking [00:17:50] to Coles and Woolies, they'd say they're actually doing a favor to the consumer, because in the old days, the big multi's make huge profits, nothing to [00:18:00] stop them. Now they find the big retailers stop it, and then there's a question of who gets that gain. Let's say it's shared between the [00:18:10] big retailers and the consumers. That's one aspect of the history of things that should be borne in mind.

Ross: Okay. [00:18:20] Looking at the concept of monopolies, and those restrictive trade practices, would you say that as a country, we started off huge geography, [00:18:30] tiny population. We were never going to be profitable in so many markets for private enterprise to come in and provide services that we would need to develop as a [00:18:40] country. The government was forced to provide licenses, monopolies to certain industries or companies to have those services [00:18:50] provided.

They might be government departments such as the Postmaster General's Department in 1901, or various things that, [00:19:00] the granting of monopoly power has been a very necessary thing for Australia's economic development.

Professor Allan Fels: Look, I find it hard to judge [00:19:10] whether the government's got it right or wrong, setting up them monopolies in the first place. If I look up my textbook, why not just [00:19:20] open it up to the market from the beginning, and have some healthy competition? On the other hand, in Australia, there seemed to be small market, a bit of a shortage [00:19:30] of capital. The government jumped in and set up public enterprises, and then in recent decades it started privatizing them. [00:19:40]

Let me give you my perhaps jaundice view of history of telecommunications, because I started on this in the '70s, [00:19:50] and by then it was clear that the old telco monopoly, it used to be a government department, then became Telecom Australian now Telstra, now it was given a monopoly same [00:20:00] as in the US, AT&T had it. That got in the way of progress. It was lazy, inefficient, high prices and not innovative. [00:20:10]

Now in the US, in about the early '80s, the Department of Justice Antitrust Division, the equivalent of the ACCC, [00:20:20] broke up AT&T into competing businesses. It had a tremendous effect, especially on innovation and it expanded the [00:20:30] industry a lot because you got new product, better prices, strong incentives to supply the whole market. Now Australia, in my [00:20:40] opinion, didn't handle things all that well.

What we did have in about 1985-ish, we started thinking about it [00:20:50] and we had in those days two businesses that were separate. One was Telecom Australia, Telstra, and the other was the old OTC, the Overseas Telephone [00:21:00] Corporation. If you wanted to call overseas, you went to OTC, local Telstra. Now, what would've been ideal would've [00:21:10] been if when they deregulated, those two were left to fight it out because they each had a stranglehold on something. Telstra had the [00:21:20] copper wires into your home, and OTC you had to go to them to call internationally.

If you'd removed the restrictions in that way, [00:21:30] neither of them would've become terribly dominant, but OTC would've certainly challenged Telstra on domestic phone calls. Telstra would've [00:21:40] challenged OTC on international, and the result would've been you had two serious, almost evenly matched competitors. That's not what happened. [00:21:50] The government foolishly in 1990 merged them. Paul Keating fought it. A lot of people fought it, but [00:22:00] the government caved into union pressure, pressure from Telstra. It didn't want a competitor.

They merged and you got this enormously powerful [00:22:10] Telstra. Then the government said, "All right, someone else can come in," the Optus, but Optus started a long way behind. It was a weak competitor [00:22:20] and it didn't have some stranglehold on something that would've made Telstra have to come to it to get some favors. Instead, all [00:22:30] depended on Telstra. Now we've moved on since then.

Ross: Hang on. At that stage, wasn't Telstra technically not a monopoly, but it had so much market power [00:22:40] and it and it was a private shareholder-based--

Professor Allan Fels: No, this happened before privatization. In 1990, the government said, "Oh, [00:22:50] well, we've got to do some deregulation." Then Telstra heard about it, the unions heard about it, some others. There's this real ding dong in the labor government. Keating [00:23:00] lost. Instead, a monopoly did emerge-- a highly dominant firm emerged, and Optus was allowed in, but it was in a very weak position [00:23:10] from the start.

Now I'm talking 30 years ago, but that has continued to plague the whole history of telecommunications competition [00:23:20] in this century.

Ross: Then Telstra was privatized. Professor Allan Fels: Correct.

Ross: Of which I still struggle to understand how something that we, the taxpayer, paid to establish in [00:23:30] 1901 could be resold back to us twice. I think that was a magnificent way of making money each time shares went down, not up. It became [00:23:40] privatized. Why then wasn't it pursued for restrictive trade practices?

Professor Allan Fels: There is some coverage under the competition and regulatory [00:23:50] laws. In fact, there's a special part of the Australian Competition and

Consumer Law, which seeks to regulate Telstra, but it's [00:24:00] less effective than many people would want. Anyway, in the meantime, something else happened. That was the advent of what we now call the NBN. In [00:24:10] about 2005, 2008, we had to have a modern telecommunications network, not just the old copper wire into [00:24:20] your home.

The question came up, how do we do it? Telstra stepped forward and said, "Let us do it." Now some people were worried that would [00:24:30] further increase its market power. Then there was a question about, would they accept regulation? I don't [00:24:40] think they were very keen to accept regulation. Negotiations broke down between Telstra and the government, and the government realized it was [00:24:50] not going to get its new network.

Out of the blue under Kevin Rudd, it stepped in and said to Telstra, "You are out of this. We are taking [00:25:00] over your copper wire and we are going to set up NBN to run the network. You are just a retailer from here and a wholesaler." [00:25:10] They did have to pay, I think $11 billion compensation to Telstra for this. They set up NBN as a new monopoly supplying [00:25:20] Telstra, Optus, and the rest of them.

Ross: Is this repeating the same mistake?

Professor Allan Fels: It's somewhat similar. Now, always these things are complicated, [00:25:30] but the argument for it was that Telstra had a total near monopoly subject to Optus and others. Not only [00:25:40] did it have the copper wire into your home, but it had the retail, the telephones, a whole lot of things all brought together making them very powerful. [00:25:50] It's arguable, some of that's a monopoly, and then they've added on a lot of things.

The NBN, some would say, "Well, that's a pure monopoly. It's got to be just one person digging up the street, [00:26:00] laying the network and so on. Let them be a monopoly, but not do other things." That sort of a merge, NBN is a monopoly supplying [00:26:10] now to Telstra, Optus, and the rest of them. The world is changing and that monopoly of NBN is being challenged well by mobile [00:26:20] phones and by other things.

Ross: It's a bit of a cracked record that we've got a government in a free market economy that seems [00:26:30] to be setting things up in ways to create problem situations that keep on reoccurring. Do you agree with that?

Professor Allan Fels: Yes. I do think that with all the [00:26:40] emphasis on Competition Law, it does the best possible job it can about big business, but equally harmful to competition is actions by government. [00:26:50] That's what competition policy is about. That's what the national competition policy, the Hilmer review, all that kind of thing was about [00:27:00] Great to have the ACCC doing its job, but it can't deal with governments restricting competition. Let's have a policy that makes it difficult [00:27:10] for governments to impede competition, and that has had some effect, but there's always pressure on governments.

Ross: Talking about governments, then [00:27:20] what's the situation, where in a market such as Australia, you have domestic producers, and into the marketplace comes imported product. That imported [00:27:30] product is subsidized by that overseas government dumping subsidies. All those terms come to mind. How can we allow [00:27:40] overseas governments to do this and expect our own domestic producers to compete with perhaps our using some restrictive trade [00:27:50] packages or all that, having a little bit of collusion?

Professor Allan Fels: The more basic question is laws to restrict imports. [00:28:00] In response to that line of thinking, for a long time we had really high tariffs, import quotas, other things to keep foreign products out or [00:28:10] make them really expensive. Now, I believe on balance that was quite harmful. Not all agree with that, but that's the consensus [00:28:20] of governments, the political parties. We've basically got rid of that protection. There's one important bit left, which relates to your question. [00:28:30]

There are anti-dumping laws and they are heavily applied. Australia, in fact, goes around the world bragging that we've deregulated international [00:28:40] trade. In fact, we've got one of the most restrictive dumping laws. In my opinion, the dumping laws go far stronger, wider, deeper than they should. [00:28:50] There's plenty of protection there.

Ross: I want to get back to the idea of governments providing protection for whatever their [00:29:00] reasons in certain industries or certain companies. To mind, I think about the four pillar banking policy, which I can understand decades ago [00:29:10] served a purpose because those banks enjoyed certain facilities from the Reserve Bank, so that they wouldn't be ransomed and they wouldn't go broke, lend them the last [00:29:20] resort, which now don't apply to the same degree.

Let's take casino licenses where you've got one casino operator. In all of these examples, we seem to [00:29:30] have allowed-- that protection has created corporate culture that has started to degenerate, become self-righteous, deny, and [00:29:40] in many cases it leads to a royal commission. How do we avoid providing protection that leads to a royal commission?

Professor Allan Fels: [00:29:50] Again, I think I'll go back to dear old Adam Smith. He said, "Take it as given that people will be greedy, pursue their own economic interests, and so on." [00:30:00] You're not going to change that aspect of human nature. The best we can do, is force upon them competition. Competition broadly protects [00:30:10] the consumer from abuse, and also a bit of consumer protection protect against false information. That's the basic thing, it's not going to stamp out [00:30:20] greed.

Ross: How do you do that? If with banking they did that to a degree was it Paul Keating that deregulated the banking segment? That certainly did bring competition to [00:30:30] a degree, but it still allowed these four banks that you could call an oligopoly in some ways, because they have [00:30:40] 90+% of the Australian- owned mortgage market. 60% of their assets or more is tied up in first home mortgages. They're [00:30:50] acting and have acted in an inappropriate manner

because they're an oligopoly. How do you police that? Competition didn't work. It didn't straighten [00:31:00] them out. Dead people will still get being charged financial fees.

Professor Allan Fels: There's been weak regulation of them and that's what Hayne said. [00:31:10] The regulation of concern you is mainly an ASIC from an Australian Securities and Investment Commission. I know all about it because [00:31:20] the Wallis inquiry in 1998 into banking, more or less said, the job's not being done by ASIC. The only dinkum regulator is the ACCC, [00:31:30] we'd like it to take over a lot of this, and the banks stopped that.

The banks are a really powerful lobby, and they have managed [00:31:40] to stop many things being done. Even with Hayne, a lot of the Hayne recommendations which were not that strong have been undone. You may remember that Hayne had this [00:31:50] statement, why not litigate? What he meant by that was, if you are the regulator, someone is breaking the law, you should start with the assumption you'll take some action [00:32:00] about it, why not litigate? In fact that was not the approach, the old ASIC talk, it was more well let's quietly fix this up or ignore it.

Ross: Why? [00:32:10] Why were they soft?

Professor Allan Fels: Oh there's a whole long history. The culture has been not very strong about law enforcement. There have been some other things they're meant to do. [00:32:20] They're meant to be half friendly, half unfriendly to business. There's much to be said for putting all their law enforcement in a separate box from [00:32:30] the other things they do. The whole history, unlike the ACCC had a much harder law to apply, and they were not so-called [00:32:40] civil sanctions which were fairly easy to apply. They grew out of a culture, there were state regulators, they formed a national one that [00:32:50] took a lot of settling down, but for whatever reason, ASIC has not really delivered.

Ross: Is there a hope that in the future they will deliver?

Professor Allan Fels: [00:33:00] There is the possibility it'll improve, yes, let's see.

Ross: When you talk about bank lobbying, lots of companies lobby, why is bank lobbying more effective, [00:33:10] than other industry sectors lobbying to allow them to continue to act as an oligopoly?

Professor Allan Fels: They're much closer to the top parts of government such as treasury [00:33:20] and so on. Also they've got great scare stories. If the banking system goes under we all go under. Governments are very [00:33:30] cautious about doing things that affect bank stability. Bank stability is often used as a justification for not being a very competitive market. [00:33:40] Even today as you talk to me, I was just looking over an article by someone serious in the Australian Financial Review, just saying well I'm a bit cautious about [00:33:50] introducing too much competition into banking, because in America there's more competition and they had more bank failures.

Just at the time we are talking the Silicon [00:34:00] Bank went under, and the claim is there's too much competition. I think it's a lot more complicated, but well we are not going to have a Silicon in [00:34:10] Australia because we've got four big banks and they're all rather conservative, and they're not likely to go under, in America they might.

Ross: Are our four [00:34:20] banks still technically underwritten by the Reserve Bank? They used to be technically as lender of the last resort et cetera et cetera. Someone would say it's [00:34:30] certain capital ratios whatever. Is that still technically the case today?

Professor Allan Fels: Well look, I'm not quite sure the correct technical answer, I can tell you [00:34:40] a few things. They're absolutely required by law to hold a certain level of reserves so they've got enough if there's a bank run on them. Even if there is a bank [00:34:50] run on them despite that, then we all know the government would come to the rescue, but it's not a stated government policy.

Ross: Was it used to be, wasn't it?

Professor Allan Fels: [00:35:00] No, it was never, it was unstated all the way along, but it was in fact the way it was. Then where I'm just a little bit unclear, is [00:35:10] that it is definitely the case. I don't know if it's legally the case. Say a bank went under, then consumer deposits would be protected. I [00:35:20] think that is the law, but the bank itself would not be protected.

Ross: The corporate structure could go but the underlying assets were basically staying. What I'd love [00:35:30] to know is in your time as chairman of the ACCC, you must have come across some fantastic cases of companies doing [00:35:40] some pretty weird and wonderful things. I heard a little I don't know if it's urban myth or not, where you once pursued an air freight company, [00:35:50] and provide a certain proof that they had broken the law. Is that truth or urban myth?

Professor Allan Fels: Yes.

Ross: Could you tell us that story?

Professor Allan Fels: Actually I'll take a minute or two to tell the story [00:36:00] because it brings out what we've been talking about. In the '70s and '80s TNT and Mayne Nickless dominated so-called overnight [00:36:10] freight express, delivery of parcels packages other things interstate. They had a secret agreement, that they would divide and share the market. [00:36:20] TNT had this bunch of customers as they call their pets. Mayne had that bunch called their pets. They agreed not to compete with one another, which meant [00:36:30] they could get up prices, poor service.

If someone on that side came to the supplier on this side, certainly, Sir or Madam, will give you [00:36:40] a quote. They'd find out what their price was from competitor and give them much higher price. If they switched they then had to find a replacement, so they'd [00:36:50] get rid of one of their customers with poor service.

Their urgent packages from Sydney to Melbourne would end up in Darwin for a few weeks, things of that sort. [00:37:00] That was a cartel, and it was stopped and they were fined.

Now, the next thing was that some small businesses saw [00:37:10] all the profits being made and tried to enter and complete, but the big fish got private detectives, followed them around, saw which customers they're approaching. Suddenly [00:37:20] the big fish went to those customers and offered predatory prices. Say it was $50 get something from Sydney to Melbourne, they'd offer a price of $20 [00:37:30] to eliminate the small guy. That's monopolization, abuse of market power, a breach of section 46 of the Act.

Then they came [00:37:40] to the ACCC and said actually it'd be a good idea if we merged. We've noticed a lot of duplication in what will save a lot of costs, and we could create a big national champion, might [00:37:50] even go into world markets. We said, no, that's anti-competitive, that's what that merger is really about. Then finally some competition broke out, and [00:38:00] as you were saying they were advertising in those days our overnight airplane delivery freight express by air.

We [00:38:10] thought we'd test it, we got some packages at the ACCC, put in altimeters. We found out that businesses must have been using very [00:38:20] very low flying aircraft, never got more than 200 feet above sea level. That was misleading conduct and we prosecuted for that. That actually gives you a [00:38:30] quick picture of what competition law is about. Cartels, monopolization or abuse of being a monopolist, mergers and deceptive and misleading [00:38:40] conduct.

Ross: The altimeter never really went higher than the highest point on the Hume Highway

Professor Allan Fels: Correct.
Ross: [laughs] What fine did you levy on that company?

Professor Allan Fels: Well, in those days it [00:38:50] was quite big. Look, on the cartel, the biggest fine up to my time was $250,000 and we thought that was ridiculous. [00:39:00] We managed in that one to get $5 million and that set the sense, so now we've got fines up in the $50, $100 millions.

Ross: What sort of situations are they now [00:39:10] handed out to? Professor Allan Fels: Well, above all, blatant cartels and then now criminal

sentences for cartel behavior, you can go to jail for price [00:39:20] fixing. Ross: Has anyone done that? Has anyone been sentenced for that?

Professor Allan Fels: I think someone's just gone in. It's taken a while but I believe maybe the first jail sentence has occurred.

Ross: In the United States, [00:39:30] criminal prosecution is quite frequent for a lot of these situations, but in Australia we've not gone down that route. Why is that?

Professor Allan Fels: Look, it was quite a long [00:39:40] time before we got it. Personally I ran a big campaign to get it, and in 2003 the coalition government not terribly happily accepted that proposal, [00:39:50] and then they were slow to implement so only when labor came back five years later did they do it. Then it takes time, it's difficult, these court cases are difficult. [00:40:00] We have got the law and I think we'll see a few more jail sentences.

Ross: Before I ask you to take the Burgernomics test, what one thing [00:40:10] could you implement in Australia's economy to increase competition?

Professor Allan Fels: Well, I would do at least two, if not three things. [00:40:20] First of all, there should be a divestiture power, the ability to break up big business when it's acting anti-competitive. Secondly, the merger law could be strengthened and a bit more power given [00:40:30] to the ACCC rather than to the courts to decide and allied with that there'd be compulsory notification of mergers. I guess they're the two big things.[00:40:40]

Ross: When you were chairman, you could go in, make a decision, prosecute, or levy a fine rather than having to run through court?

Professor Allan Fels: No, we had to go to court.[00:40:50] The difference now is that in my time we really stepped up the intensity of enforcement. It hadn't been that strongly applied and [00:41:00] I went in really hard and we had an easy time winning cases in court. 20 years later, business and the big law firms got better organized and they're pretty [00:41:10] difficult to fight in court and the ACCC, although it's fairly well-resourced hasn't got the resources to fight huge businesses which spend millions [00:41:20] defending themselves. It's got a lot harder to enforce the law and there are some signs competition's weakening, so I would do some things to tilt the [00:41:30] balance more the ACCC way.

Ross: Okay. Now we get to the Burgernomics test. Professor Allan Fels: Yes.

Ross: This is where we apply your areas of expertise, [00:41:40] the area of competition to the common hamburger. We are taking something that everybody understands, most people eat because I believe that economics [00:41:50] applies to everything and there's a knock-on effect in terms of our Competition Law, our restrictive trade practices, where we've been, where we are going. [00:42:00] What effect has that had on our common hamburger?

Professor Allan Fels: Look, it's not had much. It's a naturally competitive market and there are many many suppliers of it and [00:42:10] there haven't even been mergers of great concern there. I suppose it's imaginable in an unregulated world. Some burger producers would get together try to form [00:42:20] monopoly but as I've said, there are entry possibilities. Someone would come in and compete with them. It's naturally quite a competitive market. [00:42:30] Just look out there, there are huge number of suppliers of hamburgers, both the firms with brands, but a lot of others supply them. [00:42:40] I don't see a big competition problem there at all.

Again, if they agreed on price, the Act would stop that but there's not many. Price agreement [00:42:50] is not viable in the market because say a bunch of people got together, put up prices, someone knew would come in and compete against them, but at [00:43:00] least the law stops any agreements on prices even though those agreements wouldn't work. The main thing that worries me about hamburgers [00:43:10] is that according to my textbooks, prices are meant to be the same everywhere around the world and they're nothing like that

Ross: Because?
Professor Allan Fels: Well, the [00:43:20] textbook assumes competitive markets

while inform no transport costs.
Ross: But that's not the case.
Professor Allan Fels: That's not the case.

Ross: Professor Allan Fels, thank you for spending the time with [00:43:30] an old student of yours from a long time ago who you did an excellent job on because he's still spouting the power of economics. [00:43:40]

Professor Allan Fels: Great. Ross: Thank you very much. Professor Allan Fels: Thank you. [music]

[00:43:51] [END OF AUDIO]