Price signalling

The free market system does not really work the way it should be. We are mistaken to believe that the law of supply and demand will always work to the advantage of the consumer. Apparently the free market system is increasingly not living up to its promises. Look; the cost of internet connection in Australia is about the highest in the developed world, although there are many companies "competing" for the same market. The cost of beef in Australia is twice what it is in the US, although Woolworth is supposed to be competing against Coles. The cost of all utility supplies (water, gas, electricity) has gone through the roof since these utilities were privatized to many companies. Banks continues to generate record profits year after year, successfully expanding their profit margins come rain or shine, or financial maelstrom.

Perhaps having more than one supplier does not necessary create competition, thanks to collusion at work. Price signalling seems to be such a big issue in Australia that the Australian Competition and Consumer Commission is (only) now proposing reforms that will initially target the banks. Here is how price signalling works. As an example, TRUEnergy boss Richard McIndoe in a newspaper interview published last week noted that industry consolidation would not offset "the kind of price increases that we expect to see across the board". This will be picked up as the signal for other utility providers to follow suit with price increases themselves. Likewise, banks send discrete signals to one another when setting new interest rates.

The move at reforms by the ACCC is going to be lame at best. The issue has to be addressed by creating true competition. For example, the government should use its unique position to create a government-run bank, and then provide the cost of service that will truly give the private banks a run for their money (pun intended). That was how the Commonwealth Bank succeeded in reining in the other banks when it was set up. Unfortunately it eventually got privatized and the rest, as they say, is history.