A new report from the Grattan Institute has called for the deregulation of pharmacy in the name of enhancing competition

Competition in Australia: Too Little of a Good Thing? looks at several market sectors including supermarkets, banks and pharmacy.

It concludes that the belief that powerful firms control Australia’s economy is a myth – and that the market shares of large firms in concentrated sectors are not a lot higher than in other countries.

However in some sectors, where only a few firms dominate markets, they earn higher profits: for example, up to half the total profits in the supermarket sector are “super-normal,” that is, they exceed to cost of compensating shareholders. The supermarket sector is dominated by Coles and Woolworths.

In the banking sector (dominated by the Big Four banks), super-normal profits account for 17% of total profits.

The report urges governments to “do more to ensure customers get a good deal, especially in highly concentrated sectors where big firms have market power and potential competitors face high barriers to entry,” says Grattan Institute Productivity Growth Program Director Jim Minifie.

He says that in banking, governments should make it easier for people to switch banks; while in the supermarket sector, where the big incumbents have expanded into liquor and petrol retailing, governments should consider relaxing zoning restrictions that limit the entry of new competitors.

As for pharmacy, “constraints on competition in retail pharmacy should finally be removed, as many reviews have suggested,” he says.

The report identifies pharmacy as a sector with “barriers to entry” due to heavy regulation, alongside casinos, banks, health insurance, general insurance and life insurance companies

In many cases these sectors are “highly concentrated,” it says, though it does not specifically describe pharmacy this way.

Pharmacies earn above normal profits, the report says.

A spokesperson for the Pharmacy Guild pointed out the recent words of executive director David Quilty, who told the Senate Inquiry into red tape that “community pharmacies are not normal businesses”.

“They are, effectively, market stewards for the federal government, tasked with working on behalf of taxpayers to ensure that all Australians have timely access to PBS medicines,” he said.

“As such, they are subject to a level of regulation that does not apply to normal businesses.”

The Guild has also pointed out that average net profit of a community pharmacy is $100,000 per annum.

“As the Federal Treasury reported to the King Review, community pharmacies are not making excessive economic returns,” Mr Quilty said recently.

“Price disclosure … is reducing medicines expenditure by $3 billion annually and by some $24 billion between 2010 and 2020.

“As small businesses, community pharmacies have helped deliver this extraordinary dividend to taxpayers through efficiencies and by diversifying into areas of unmet patient need.”

Read the full report here.