It’s one of the most significant economic and social innovations of the past three centuries. Yet we hardly notice it, even though we spend all our waking hours involved in it and we’re dependent on it to deliver everything from the necessities of life to Taylor Swift concerts.

Entrepreneurs go to market

It’s the concept of ‘the market’, the idea that sellers and buyers voluntarily interact in a notional bazaar in ways that work for both sides. The French economist Léon Walras said we could think of an economy as a place where a zillion little auctions are happening simultaneously: prices going up here, prices going down there, until people strike the bargains they like, a bell rings and we all go home (the one we bought in, em, the housing market). British philosopher Adam Smith famously called the process “the invisible hand”, an unseen mechanism quietly coordinating people’s work and consumer activities.

For a somewhat metaphysical economic concept, it’s swept all before it: John Maynard Keynes was surely right when he said that “The ideas of economists and political philosophers, both when they are right and when they are wrong, are more powerful than is commonly understood. Indeed, the world is ruled by little else.” Today, a market mechanism is often the first go-to tool when governments face a problem, whether it’s how to allocate the radio spectrum for mobile phones (run an auction) or get on top of climate change (set-up an emissions trading scheme).

Across a wide range of circumstances, markets work well: without any central directing authority, market prices signal what things people value most and what resources will be needed to make them. In idealised theoretical conditions, economists say that not only will markets work well, they work best – producing an outcome that no other combination of production and consumption could beat in terms of delivering satisfaction to everyone involved.

It’s all academic

Those perfect conditions don’t apply outside the academic laboratory, but in the real world ‘workably competitive’ markets, as the competition lawyers call them, nonetheless tend to deliver the goods, literally and metaphorically. They need some institutional support: markets can’t work their magic without a rule of law, property rights and good information, including robust accounting standards. But when they’re up and running, they’re an extraordinarily effective mechanism. Firms face enough competitive pressure to keep prices sensible, to offer choice and to innovate: if only for fear of what their competitors might launch, businesses are forced to keep thinking about the next Big Thing that might work in the marketplace.

People sometimes say we live in a capitalist economy: it would be far more accurate to say that we live in a market economy.

One of the real world imperfections that can spoil this positive story, however, is market power: when the competitive playing field is not level and one or the other side to a transaction has the clout to screw the scrum. Monopolists and oligopolists get to charge more, offer less (for example, lower gigabyte allowances on your internet data plan) and take their own good time about innovating.

Where is the power?

The bad news is that, in many jurisdictions, the suspicion is that market power is on the increase. Some of it is down to tech: social platforms, for example, tend to ‘tip’ towards one big incumbent because that’s where all the action is. And some people feel it’s down to lax competition policy enforcement, mistakenly allowing mergers, for example, to result in over-concentrated industries where a smaller number of bigger incumbents can call the shots.

The good news is that here in Australia and New Zealand, at least we’re alive to the risk. Both countries have recently revised the law (section 46 of Australia’s Competition and Consumer Act, already in force, and section 36 of New Zealand’s Commerce Act, from April 2023) to better corral anti-competitive use of market power.

The main idea behind the change (one I supported and agitated for in New Zealand) is that the law, as was, did not properly recognise that what might be fine for a small company to do may well damage competition if done by a 600 pound gorilla. The new law asks, what has been the actual effect of what the big company has done?

“What might be fine for a small company to do may well damage competition if done by a 600 pound gorilla.”

Stick to the rules!

Both countries have also strengthened the hand of small businesses by outlawing unfair terms in boilerplate commercial contracts: there’s less room for powerful incumbents to stick you with a ‘take it or leave it, all the risks are yours’ deal. Both countries now have ‘unconscionable conduct’ legislation (from August 2022 New Zealand essentially replicated Australia’s regime), which outlaws the ratbag exploitation of the most vulnerable. And both countries have criminalised perhaps the most egregious interference of all with competitive markets: cartels and their price-fixing rorts (Australia from 2009, New Zealand from April 2023).

It’s early days, especially for New Zealand, which has just got its ducks in a row. And it’s possible we haven’t done enough. One law professor I talked to a while back, for example, said that criminalising cartels is all very well, but what if the end result is to drive the cartels, like WWII submarines, to run deeper and run quieter? And we may not have got the merger regime where it should be: the chair of the Australian Competition and Consumer Commission (ACCC) said in September 2022 that “the current regime is not fit for purpose and presents real challenges”, while in New Zealand, where companies don’t have to officially register mergers, the Commerce Commission (ComCom) has been busy unscrambling anti-competitive omelettes. But overall I’d give us a decent rating for being alert to the market power issues that can undermine the benefits of competitive markets.

Maybe we should think of the ACCC and ComCom less as adversarial ‘them versus us’ regulators, and more as the mechanics that service the market machinery and keep it running smoothly. All the more so as it’s not just ‘Joe’ and ‘Joan Public’ who wear the cost of markets falling over or being interfered with. All too often – as recent examples, the Japanese shipping cartel into Australia and the freight forwarding cartel out of New Zealand – it’s small and medium sized businesses that pay the price. We all have an interest in curbing market power and stopping conspiracies that rip us off.