A former head of Australia's competition regulator says its latest crackdown on supermarket giants is unlikely to provide a lasting curb against price gouging.

Professor Allan Fels, who chaired the Australian Competition and Consumer Commission (ACCC) from 1989 to 2003, said the "power of the business lobby" had stymied a more effective move to deter unfair pricing, in the form of new government powers to break up dominant market players.

The ACCC's legal action against Woolworths and Coles over alleged false discounts has refocused public attention on the role of the supermarket duopoly in Australia's cost of living crisis.

The watchdog is suing the companies in the Federal Court for allegedly misleading customers by advertising bargains on more than 500 products that had become more expensive overall between 2021 and 2023.

Coles has said it would defend the proceedings, insisting it had tried to balance rising costs with value for customers, while Woolworths has said it would review the claims and engage with the ACCC.

Prime Minister Anthony Albanese said on Monday if the allegations were "found to be true, it's completely unacceptable" and if supermarkets were "charging more for products than you should, it of course has an inflationary impact by definition".

But Mr Albanese dismissed calls from the Coalition and the Greens for new government divestiture powers to target the supermarket giants.

"It is rather extraordinary that you have a coalition, a Liberal Party in 2024, along with the Greens Political Party, that have the same policies of breaking up capitalism," he said.

"I'm not sure who, if Coles sells their shop, who's going to move into the local supermarket chain. Chances are they'd be divesting towards each other. That's not the solution."

Mr Albanese said the government would instead give the ACCC "pumped up powers" through a mandatory code of conduct for supermarkets that would see retailers "face multi-million-dollar penalties for serious breaches".

'We need a divestiture power'

Professor Fels said there were practical problems splitting up Coles and Woolworths "but the existence of that power would have a tremendous deterrent effect".

He said the powers to break up anti-competitive business structures were "standard in the US" but had been long resisted in Australia through "the power of the business lobby".

"It's easy to paint a frightening picture and ignore the fact that it's just used occasionally in the US and would only be occasionally used here," he said.

"We need a divestiture power in general, in that law, the whole competition law."

Australia's supermarket sector is one of the most concentrated in the world, with Woolworths and Coles accounting for more than 65 per cent market share with almost 2,000 stores combined.

Professor Fels said their dominance represented a market failure that meant "broadly, consumers have got nowhere to go".

"Will [unfair pricing practices] resume? Quite likely in a few years."

Had Woolworths and Coles simply hiked costs, they would face no action because ACCC has no power to regulate prices.

Professor Fels said the big supermarkets had appeared to increase their profit margins under the cover of pandemic-driven price rises, but a separate inquiry by the ACCC would "get to the bottom of it".

Professor Fels said the role of the supermarket giants was "not the key driver" of inflation in Australia "but it makes a contribution".

The ACCC legal action followed a lengthy investigation sparked by complaints from supermarket customers.

The same alleged practices were identified in submissions to a price-gouging inquiry led by Professor Fels for the Australian Council of Trade Unions, with the report issued in February.

Professor Fels said it was "staggering that ordinary consumers identified these pricing practices and either Coles and Woolies executives at a high level didn't know what was happening, or they did".

"But the fact that ordinary consumers without special knowledge knew it was going on raises serious questions about how extensive the knowledge of this topic was at senior levels in the retailers."

The federal government adopted Professor Fels' recommendations for the ACCC inquiry into supermarkets and the mandatory code for retailers.

Professor Fels said no single reform was "going to work miracles" and "the best single thing would be if we get a new player in".

Fines a 'cost of business'

The ACCC is seeking significant penalties for the alleged misconduct by Coles and Woolworths, which the consumer watchdog claimed took place in a period when inflation peaked at 7.8 per cent, prompting the Reserve Bank to hike interest rates 13 times over 19 months.

Consumer laws provide for fines of either up to $50 million, 30 per cent of adjusted turnover during the period of the breaches, or three times the "reasonably attributable" benefit from the breaches.

But that would represent a fraction of earnings before interest and tax last year for Woolworths ($1.69 billion) and Coles ($1.04 billion)

Greg Jericho, chief economist at the Australia Institute, said it begged the question about "how big a fine [would] make that anything more than a cost of business".

Mr Jericho said the case highlighted the need for stronger powers for the ACCC, including the threat of divestiture and a new prices commission.

He said the Albanese government found itself in the "weird position [of] taking the view of the business lobby rather than one where it seems there actually would be bipartisan support" for divestiture powers.

The 'nuclear option'

"I'm not sure why the government is so hostile to enacting them," he said.

"Its main argument is that they don't get used much — well, that's fine. They shouldn't have to be used much. They are kind of the nuclear option. But if I was the government, I'd like to have the nuclear button there at my disposal.

"I think also the politics of this might be moving fast because I think this case brought by the ACCC has just been so red hot that I think the government's going to need to do more than just say, well, we've already got the grocery code of conduct in place.

"I think people are going to want more."

Mr Jericho said supply shocks from the COVID pandemic and Russia's invasion of Ukraine "provided good cover for companies to raise their prices even when they didn't need to".

He said a prices commission would ideally have "statutory powers to be able to go in and look at the justifications for prices of things" without needing to show illegal conduct like the ACCC.

"And if we see Woolies and Coles and others say, 'No, we do compete and our margins are very tight and we're just responding to costs', well, great. Show us. Prove it," he said.

"I think the fact that they know they've got someone looking over their shoulder at their pricing decisions, I would suggest would be a bit of a deterrent… because this could be made public [by] a body that doesn't need to wait until it's gathered up proof of collusion or proof of non-competitive behaviour before they're able to make even an announcement [like the ACCC]."