The impact of government purchases on market performance in Australia

This paper discusses the role which federal, state and local governments can play as large buyers in influencing the behavior of sellers in markets. While the available data make it impossible to draw unambiguous conclusions, the evidence is consistent with the possibility that theAustralian Commonwealth (federal) Government has used its market position as a large buyer to encourage competitive behavior, especially in highly concentrated industries. The local preference buying policies of state and local governments, however, may have augmented the effects of market power. The results suggest strongly that omission of variables representing the buying side of markets will lead to misspecification of structure-performance models, and indicate that government purchases could at appropriate times be used in addition to antitrust action, in order to improve market performance.