Equity effects of microeconomic reforms: competition policy in Australia.(Essays in Honour of Clement Allan Tisdell, part 2)

I Introduction and outline

I.I Introduction

Microeconomic reform in Australia included the creation of the Australian Competition and Consumer Commission (ACCC) in 1995. This was established to implement the recommendations of the report by the independent committee of inquiry (Hilmer et al., 1993), customarily referred to as the Hilmer Report. Effectively the ACCC is an expanded version of the Trade Practices Commission, which it replaces.

There are some minor differences between the recommendations in the Hilmer Report and the various powers given to the ACCC. However, the major so-called "principles" of that report provided the basis for the legislation, and it is those "principles" and some of the likely effects of their implementation, which are examined in this paper. The principles include various inconsistencies in the application of economic theory and are concerned primarily with a very basic version of economic efficiency. Problems associated with the income distribution, or equity, and the potential conflict between efficiency and equity, receive very little attention.

The Government also commissioned, some six months after setting up the Hilmer Committee, an independent review of Part X of the Trade Practices Act. Part X deals with the regulation of international liner cargo shipping which services Australia's trade. The report was published in December 1993 and is entitled Liner Shipping: Cargoes and Conferences (Brazil et al., 1993). Although references to this report are rare, it is known as the Brazil Report.

The two reports reached very different conclusions on some basic principles. The Government implemented the major recommendations of both reports without acknowledgement of the differences in the theory and the logic on which the recommendations of the two reports were based. The Hilmer Report argued that, except in labour markets, it must be presumed that more competition is practically always better than less, regardless of the characteristics of any market. In contrast, the Brazil Report argued that such characteristics must be taken into consideration to determine the need for and kind of government intervention in certain cases.

Some of the differences can be explained by reference to a market situation characterized by very different market power by sellers compared with that of the buyers, or vice versa. Increasing the extent of competition in that part of the market which is already weaker than the other does not ensure that greater economic efficiency is achieved. Perhaps more important, it also will tend to change the distribution of income in favour of those with greater market power.

The effects of competition policy on the distribution of income have received almost no attention. It is, however, bad economics to ignore them. Income distribution is, or should be, the concern of government, and not the result of decisions by a so-called independent statutory body established for a quite different purpose.

I.II Outline

Section II will examine briefly the principal differences between the Hilmer and Brazil Reports. Section III will draw attention to established economic theory relevant to the discussion, including the necessary reference to the effects on income distribution. Section IV examines the use of industry-specific regulatory bodies as an alternative approach to competition policy. The final section is a brief summary and conclusion.

II Principal differences between the Hilmer and Brazil reports

II.I Recognition of constraints

The Brazil Report recognized the effects of the inability to remove some of the constraints within which real-world markets operate. The specific market to which the panel was directed by its terms of reference, international liner cargo shipping, did not make it practical to recommend that such constraints should be removed, since they are not within the reach of Australian law. The Brazil Report pointed out:

Current approaches to the general implementation of competition policy are inconsistent with an alternative approach most appropriate for shippers and carriers in international liner shipping. This alternative consists of a recognition that shippers are …