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A handful of companies wield too much influence, warns IMF

Nicki Bourlioufas  |  20 Jun 2019Text size  Decrease  Increase  |  
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A small collection of large companies, such as Google and Facebook, wield too much influence on economies and wages, says the International Monetary Fund in a new report.

The IMF did not mention names in its latest World Economic Outlook, but the rise of the tech industry and its omnipresent nature has drawn attention to the significant market power of the tech giants.

The study examined nearly 1 million companies from 27 advanced and emerging market economies since the early 2000s, and found average company price mark-ups, or the ratio of a company’s product price to its production cost, has increased, especially in the developed nations.

Average mark-ups increased by 8 per cent since 2000, compared to less than 2 per cent in emerging economies covered by the analysis.

This increase in market power has taken place in most industries, but it has been driven by a small fraction of companies, the IMF said.

The report indicates further increases in the market power of these already-powerful firms could weaken investment, deter innovation, reduce labour income shares, and make it more difficult for monetary policy to stabilise output.

However, in Australia, there are very few companies that hold significant market power, other than the big four banks, according to Peter Warnes, head of equity research at Morningstar.

“Unlike in the US, Australia doesn’t have companies with meaningful intangible assets like the tech giants or large pharmaceutical companies that have pricing power,” says Warnes.

Banking is the only sector in which companies can claim market power, says Warnes.

“The big banks have demonstrated time and again their pricing power. They basically own about 85 per cent of the mortgage market in this country.

"We've seen them increase interest rates out of cycle, and they haven't passed on the full amount of official rate cuts. That's why we've got a wide moat on three of the big four banks (excluding NAB) and their wide moat is due to their cost advantage," says Warnes.

He notes that Australian banks' return on invested capital far outweighs the cost of capital, and expects this will remain the case for the next 20 years.

“The supermarkets may have had pricing power 20 years ago, but with the entry of ALDI, that has gone.

"ALDI has come in and wiped it all away. Maybe when Coles and Woolies had a duopoly, they had pricing power, but now it’s gone,” says Warnes.

Nor do healthcare companies CSL, ResMed and Cochlear have significant pricing power.

"While they play in the global market and with significant market share, device companies like Cochlear and ResMed are always at risk of recalls and glitches,” says Warnes.

Shane Oliver, chief economist at AMP Capital, says Australian companies generally are struggling to raise prices and pass on cost increases in the face of ongoing intense competition, particularly from online sources and spare capacity.

He points out that Australian inflation as measured by the CPI was flat in the March quarter and up just 1.3 per cent over the last year.

Oliver points to several factors that have driven the ongoing softness in inflation, including the sub-par recovery in global demand since the GFC.

This has left high levels of spare capacity in Australian product markets, underutilisation of labour, and intense competition exacerbated by technological innovation – such as online retail, Uber, Airbnb and others – and softer commodity prices.

These factors have combined to magnify a lack of pricing power and bargaining power among established companies and workers, respectively, says Oliver.

Global trend the opposite
According to the IMF, however, a small group of companies have rising power, especially those with significant intangible assets such as technology companies.

This is illustrated by the chart below, which shows that companies with the highest mark-ups – those in the top 10 per cent – raised theirs by over 30 per cent since 2000, while mark-ups have been largely flat among the remaining 90 per cent of companies.

Highly uneven playing field

chart

Source: IMF

While the economic effects haven’t been dramatic so far, that could change, the IMF report warns.

“Although the overall macroeconomic implications have been modest so far, further increases in the market power of these already-powerful firms could weaken investment, deter innovation, reduce labour income shares, and make it more difficult for monetary policy to stabilise output.

“Even as rising corporate market power seems, so far, more reflective of 'winner-takes-most' by more productive and innovative firms than of weaker pro-competition policies, its challenging macroeconomic implications call for reforms that keep future market competition strong,” the IMF says.

 

 

is a Morningstar contributor.

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