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Allan Fels's ACTU initiated price gouging report calls for government to act against exploitative practices of big business

Banks, supermarkets, aviation and energy companies are exploiting their market power in ways that drive up inflation and hurt Australian households, according to the former chair of the Australian Competition and Consumer Commission (ACCC).

The report by Allan Fels found that rising prices were not just caused by true inflation but often by greed, corporate gouging and "profit pushing" by companies with too much market power.

The blistering report also stated that excessive pricing is not unlawful in Australia and called for the government to act, especially as many Australians struggle with cost of living pressures.

"There is currently a gap in government policy," Professor Fels wrote.

"It does not pay sufficient attention to high prices. It needs to.

His 80-page report, commissioned by the Australian Council of Trade Unions (ACTU), found that many Australian consumers were being overcharged, and "profit push" pricing had added significantly to inflation in recent times.

The report examined various sectors including electricity, aviation, banks, food and groceries, childcare, medical specialists, electric vehicles, pharmaceuticals, and shipping services in far northern Australia.

The inquiry found that a rise in corporate profitability in the wake of COVID corresponded with the acceleration of inflation.

"The power of corporations to unduly lift prices had been a central factor in the recent cost-of-living crisis affecting so many Australian households," Professor Fels found.

"Companies have been able to leverage the disruptions and uncertainty that followed the COVID pandemic into unprecedented profitability.

"The ability of companies to charge unfair prices, amidst the unprecedented economic and social dislocation ensuing from the COVID pandemic, has significantly undermined the well-being of the Australians we heard from."

Professor Fels also stated in his report: "Adding insult to injury, numerous of the individual allegations of price-gouging received by our inquiry dealt with unfair behaviour by large commercial banks, which have used their market dominance to extract even more profit from customers through higher interest costs and other charges.

Professor Fels chaired the ACCC from 1995 until 2003 and his inquiry for the ACTU received hundreds of submissions from members of the public – mostly with concerns about prices in the supermarket, energy and banking sectors.

"It is a fully independent report, they [the ACTU] have not tried to influence me," Professor Fels told 7.30.

"It is my view, and I have been doing price regulation since 1973, continuously."

The report recommended policy changes that could remove obstacles to competition, improve information to consumers, make it easier for consumers to switch suppliers and expose or shame exploitative business practices.

He also suggested pricing behaviour across several industries should be fully investigated by the ACCC.

Food and grocery sector duopoly

Almost half of the public submissions to the ACTU's price gouging inquiry related to supermarket prices and practices.

"Neither Coles nor Woolworths experienced declines in profit nor revenue over the pandemic as their main businesses were, rightfully, deemed essential services," Professor Fels wrote.

"This position allowed business continuity and retained their position in the market.

Professor Fels discussed the use of "special" tags being used on "normal" grocery prices.

"Misleading price displays are illegal but despite this, there is no prescribed minimum period where a business must advertise," he wrote.

"The extent of the obligation is that the item and a reasonable proportion of the items must have been sold at that price before businesses are able to claim it is a discount.

Professor Fels welcomed the steps the government had taken, which have included a review of the Food and Grocery Code, and directing the ACCC to investigate prices.

The big supermarkets have both repudiated price gouging allegations in recent weeks.

In its submission to the Senate Inquiry on supermarket prices, Coles said it too had been impacted by the increased cost of doing business due to inflation.

It said despite increased costs, Coles still provided value to customers through "thousands of weekly specials".

Last month, a Woolworths spokesman told 7.30 that as inflation started to ease, the supermarket would be focused on "delivering savings to our customers".

"The last ACCC review of supermarket competition was in 2008 — it found the market was workably competitive and competition has only intensified since then," the spokesman said.

Qantas singled out for price gouging

Professor Fels accused Qantas of price gouging and made a direct link to the cost of living pressures being felt by Australians.

His report stated that Qantas fare increases over the three months to December 2022 were large enough to produce a sizeable increase in the "holiday travel and accommodation" contribution to inflation.

"Qantas' ability to reduce supply while increasing prices and suffering no material loss of market share, may have affected CPI in December 2022, and therefore may have impacted the Reserve Bank's inflation expectations and rate increases."

His report recounted some of the controversies that have surrounded the airline in recent years, including customer dissatisfaction and the blocking of Qatar Airways into the Australian market.

Professor Fels said the aviation sector was lacking competition and several policies and practices appeared to be making it difficult for a third player to enter the market.

"For example, restrictive slot allocation practices at major airports. These and other conditions need to be reviewed," he wrote.

He said there should be a third-party review of aviation competition.

Electricity sector 'of great concern'

The report found there was "substantial price gouging taking place" in the national energy sector and it "needs urgent reform".

"At every level – generation, transmission and distribution and retail – prices are too high," Professor Fels told 7.30.

"We need to investigate further and also to review whether the price bidding system remains fit for the purpose.

"The present system involves generators bidding on the basis of the prices they will charge. We should consider adopting the United States and Western Australian approach where the regulator determines how much production capacity is needed and allocates that task to the most competitive bidder."

Professor Fels said the electricity sector was concentrated at all levels and needed deeper investigation by regulators.

"There are also major problems for consumers in determining what are the best prices in the retail market and much more activity is required to get competition and good prices in retail," the Fels report stated.

Banking sector lacks competition

According to Professor Fels, Australia's banking system is one of the most concentrated among advanced economies, making it easier for banks to achieve gains at the expense of their customers.

"Australia's Big 4 banks not only have experienced larger profit margins over the period that the Reserve Bank has been raising rates since May 2022, but they have been able to raise their margins by enough to enable their profits to have been higher through the entire period of the pandemic than they experienced on average in the 15 years before the pandemic," Professor Fels wrote.

Among other recommendations to improve the sector, Professor Fels's report suggested there should be full bank account "portability" for consumers and small businesses.

"So if you want to go to another bank, all of your information is handed over to the new bank.

"It would take some work, but if the government wanted it to, it would happen. There would be huge resistance from the banks because it would increase competition."

Among other things, his report also recommended that the ACCC should be provided with a standing Ministerial Direction to monitor prices and competitiveness in the retail banking sector.

Exploitative pricing practices

The report analysed a selection of pricing practices that enabled businesses to squeeze extra dollars from consumers in ways Professor Fels argued would not be possible in more competitive markets.

These practices included loyalty taxes, loyalty programs, complex "confusion pricing", "excuse-flation", algorithmic pricing, asymmetric "rockets and feathers" approaches to pricing and price discrimination.

Loyalty taxes occur when a company sets a low initial price and then sharply increases the price in subsequent years when consumers cannot easily detect, question, or renegotiate them, and where the "transaction costs" of changing to other competitors are high.

Professor Fels said the banking, insurance, and energy sectors used loyalty schemes, which were often a low-cost means of retaining and exploiting consumers by providing them with low-value rewards of dubious benefit.

Asymmetric pricing, also described as the "rockets and feathers" phenomenon, is the practice of sharply increasing prices but only dropping them slowly.

Professor Fels said this practice was of great concern in the current environment, as inflation started to come down.

"Business has done its bit to push prices up; now it has to do its bit to pull prices down," he told 7.30.

"But I am worried they will lower prices slowly – 'rockets and feathers'.

Excuse-flation occurs when general inflation provides "camouflage for businesses to raise prices without justification".

He said this sometimes allowed businesses to signal subtly to competitors how much they intended to raise prices by, for example via an industry association.

Recommendations to government

The Fels report recommended the pricing behaviour across several industries should be probed by the ACCC, armed with appropriate powers of investigation.

He suggested the government could establish a Commission on Competition and Prices to review government and other restrictions on competition and the high prices that were caused.

He also recommended there should be more naming and shaming of businesses that overcharge.

"You can only urge the government to do these things, but there would be strong public support," Professor Fels told 7.30.

The report makes 35 key recommendations, which relate to prices, mergers and divestiture, competition policy, and issues in specific industries examined in the report.

Professor Fels handed his report to the ACTU on Tuesday and will also hand a copy of his report to the government on the same day.

ACTU secretary Sally McManus said its findings confirmed "what working people suspected".

"Some big businesses have added to inflation and have too much power over customers, workers, and supply chains. This needs to be reined in," she said.

"The gaming of the system in the wholesale energy market is particularly concerning.