Abuse of market power
In many instances the market allocates resources efficiently. However, the market only operates efficiently if sufficient competition exists. (In fact, true competition heavily relies on there being a large number of buyers and sellers in the market). Without adequate competition, businesses are more able to exercise market power to the detriment of consumers, which ultimately leads to an inefficient allocation of resources. See monopoly or monopsony power.
The government seeks to ensure that there is healthy competition in most markets. Competition forces businesses to continually seek better and cheaper ways to produce output and satisfy consumers. This is because any failure to be efficient is likely to result in lower profits and possible failure or bankruptcy.
The government promotes competition (and/or discourages anti-competitive behaviour) in a number of ways, with its primary weapon being the restrictive trade practice legislation (The Competition and Consumer Act 2010 - formerly the Trade Practices Act 1974) that is policed by the Australian Competition and Consumer Commission (ACCC). For example, the ACCC will only allow mergers of two large businesses in an industry if it believes that it will not result in a substantial lessening of competition ('the merger test').
Similarly, the ACCC will initiate legal action against firms found to be engaged in cartel behaviour - which occurs when two or more businesses join forces (or collude) to profit from activities such as price fixing, output restrictions or allocating customers. To read about more recent cases, visit www.accc.gov.au.
To emphasise the importance of competition to the health of the economy and efficiency in the allocation of resources more generally, the government introduced a new criminal offence in 2009 for making company directors liable to criminal action in the event that they knowingly engaged in cartel activity.
Since 2010, the government became increasingly concerned about the lack of competition in the banking industry following the greater market share enjoyed by the big four banks in the mortgage market and the higher prices (e.g. interest rates) charged. As a consequence, it introduced a number of measures designed to increase competition, including the ban on mortgage exit fees on new loans. By late 2011, following significant consultation and submissions from bodies such as the ACCC, the government drafted proposals that seek to reduce or eliminate collusion in the form of price signaling in the banking industry. [Price signaling occurs when businesses publicly signal their pricing intentions to rivals with the intention of securing a coordinated pricing decision.] The proposal amended existing competition laws (Competition and Consumer Amendment Regulations (2012)) and took effect in 2012.
Governments can also promote competition by:
The government also believes that the introduction of a government monopoly can at times improve efficiency in resource allocation in a few industries (e.g. Australia Post). As discussed earlier (see natural monopoly) belief is that some markets (e.g. standard letter postal services) are only large enough for one player (more producers would have lead to duplication of infrastructure and increased costs) so the government has legislated to have these markets dominated by one government producer. [Interestingly, technological developments (in particular, email) have greatly reduced the demand for standard postal services and there are signs to suggest that major reforms will occur in this market and within Australia Post.]