Without the help of Australia's apparent consumer champion, Coles and Woolworths would never have been allowed to agree to put an end to large fuel discounts, writes Stephen Dawson.

People of the same trade seldom meet together, even for merriment and diversion, but the conversation ends in a conspiracy against the public, or in some contrivance to raise prices. ... But though the law cannot hinder people of the same trade from sometimes assembling together, it ought to do nothing to facilitate such assemblies; much less to render them necessary. - Adam Smith in The Wealth of Nations (1776)

This year I carefully timed my major Christmas grocery shop so that I'd be eligible to score a massive fuel discount voucher. It was a beauty: 35 cents per litre. I let the petrol tank run down to maximise the benefit, and thus gained a discount of $14.08 when I filled it up.

I won't have to worry about such things from 1 January 2014 since the maximum discount I will be permitted to enjoy on a similar petrol purchase is $1.61.

That's because the Australian Competition and Consumer Commission has facilitated an agreement to end competition between businesses, thereby ensuring that costs will rise for consumers such as me.

Good one, eh? A government body which purports to protect the consumer from anti-competitive business practices has done something that the businesses, in their wildest fantasies of market-rigging, couldn't.

Coles and Woolworths aren't allowed to talk to each other about how they do their business for the reasons identified by Adam Smith more than 230 years ago. If they could, then there is indeed a strong possibility that their talks would end "in a conspiracy against the public, or in some contrivance to raise prices".

But they aren't allowed to do so under the very laws that the ACCC administers.

Woollies and Coles compete vigorously in many ways, some obvious and some less so. There is price competition, of course. There is product-line competition (do they carry all the products that purchasers could possibly want?). There is service competition (who has the most pleasant staff) and shopping environment competition (wide aisles, clean stores).

And there is constant experimentation in competition. Only in Woolworths can you buy the 300 gram Nescafe Blend 43 instant coffee. Coles has the 'standard' 250 gram jar, which generally sells at a higher per-gram cost. There are several other price/size variances between the major retailers. A cynic might say that this is to make it harder for the consumer to compare value between retailers, but that argument has been weakened by the introduction of price labels which routinely show cost per standard unit.

Loyalty programs are another facet of this relentless competition. With Woollies you can get Frequent Flyer points, and with Coles you get Fly Buys. Coles uses the data it gathers on purchases attached to my Fly Buys card to make suggestions via email for future purchases. It's borderline creepy seeing how closely they keep track of what I buy.

Fuel discount vouchers are another way of competing - competing remarkably aggressively, it seems clear, when discounts can get up above 20 per cent on fuel purchases. Neither fuel nor groceries are high margin activities. Many years ago when I worked in Woolworths, we staff were impressed with cost-savings attitudes. To make a telephone call - when local calls cost 10 cents - would require $10 additional sales to recoup.

The kind of competition required by law in Australia and other developed countries ensures a significant degree of ignorance in the various parties of what their competitors are up to - at least until it is revealed by their actions. Competitive innovation, consequently, is not always particularly efficient. Does Coles profit by offering in some circumstances a 35 cents per litre fuel voucher? Perhaps, in the current environment - an environment which includes its major competitor also offering vouchers.

But it's almost certain that both businesses would benefit if neither of them offered vouchers, or if there was some firm limit on the discounts that removed most of the uncertainty in the business.

Too bad that it's illegal for them to come to such an agreement with each other.

But it's not illegal for them each, individually, to agree with a certain third party to limit their voucher programs. That third party is the ACCC.

In its purported pursuit of consumer welfare, the ACCC had already been investigating the fuel discount regime, concerned about the frequent 8 cent per litre discounts. Two matters worried it: that they "could have longer-term effects on the structure of the retail fuel markets and also short term effects of increasing general pump prices in those markets".

Hmmm. Well, the second part kind of makes sense. Those discounts have to be offset somewhere. Was the price of petrol purchased without vouchers higher at Coles/Shell and Woolworths/Caltex than it otherwise would have been? Hard to say. It didn't appear to be more expensive than that of other retailers, so it's likely that it was being in part subsidised by their non-fuel retail activities. Which makes sense, since the purpose of it all was to get people doing their shopping in those stores. That would lead to two things: slightly higher grocery prices and slightly reduced profits for the chains.

The ACCC agreement prohibits that cross-subsidisation. All voucher discounts must be funded by petrol station sales alone (including their attached convenience stores). To the extent that the voucher plans continue, this is likely to increase non-voucher fuel prices at the retailers offering them. Which would be a competition disadvantage compared to other petrol retailers, so it will be unsurprising to seem them end completely.

And 'structure of the retail fuel markets'? Translation: the other petrol retailers have been squealing. They don't like the competition and didn't have access to cross-subsidisation from other activities.

So, in the name of protecting consumers from possible future reductions in competition, the Australian Competition and Consumer Commission has facilitated an agreement - one that would have been illegal had it been made directly between Coles and Woolworths - that reduces, perhaps eliminates, actual existing competition.

The principle beneficiaries? The other petrol retailers who will no longer lose customers to the lure of significant fuel discounters, and Coles and Woolworths who have been relieved of this expensive bit of competition.

Adam Smith lacked imagination. He was worried that the 'law' might 'facilitate' meetings between competitors, or even make them 'necessary'. But that's not the case at all. With the ACCC we can have the appearance of the law fostering competition, while the consumer champion actually manages the process of reducing it for the benefit of business.

Stephen Dawson is a freelance writer from Canberra. View his full profile here.