The price war between the nation's big two supermarket chains could hurt consumers in the long run if food suppliers don't have money to invest in their businesses.
With competition policy unchanged in more than 20 years, the federal government is pushing ahead with a "root and branch" review of how it applies to the food industry.
Small Business Minister Bruce Billson says, while intense competition between Coles and Woolworths has led to lower grocery prices, there are concerns this has happened at the expense of suppliers.
"Some of the alleged behaviour of supermarkets may not necessarily breach the competition laws as they are today," Mr Billson told a food industry conference in Canberra on Wednesday.
"But at the same time, it doesn't mean that the status quo is necessarily delivering the most efficient or optimal outcomes for the market, our economy and for our consumers."
Mr Billson described Section 46 of the policy governing the misuse of market power as a "hunting dog that won't leave the porch".
"It looks fantastic, it may growl, but it rarely bites," he told the Australian Food and Grocery Council (AFGC) gathering.
The review's terms of reference will be released by the end of this year, before ahead of the examination in 2014 by an independent panel of eminent business people, competition law experts and consumer groups representatives.
AFGC chief executive Gary Dawson favours an industry code, enforceable through the Australian Competition and Consumer Commission (ACCC), rather than government intervention.
Mr Dawson has already spent many hours with Coles and Woolworths negotiating the code.
"They have entered it in a great spirit. They understand the tensions created by the market conditions as much as anyone," he told the National Press Club in Canberra.
For now, consumers are enjoying "fantastic" low supermarket prices.
"But in the longer run, if we restrict choice, and it has already restricted choice, it restricts innovation, it has a chilling affect on (supplier) investment. That's a problem," Mr Dawson said.
It could also lead to higher grocery prices in the longer term.
Independent South Australian senator Nick Xenophon says it's "genuinely frightening" that Coles and Woolworths hold about 80 per cent of the dry grocery market.
In the UK, four separate chains hold a similar percentage of the market, and the largest chain in the US can only hold about 20 per cent due to laws that limit market share.
"We need similar laws here in Australia. Whatever the outcomes of the federal government's `root and branch' review ... our courts need to have the power to break up a company that abuses its market power," Senator Xenophon said.
ACCC chairman Rod Sims told the conference the watchdog's final assessment of an investigation into the treatment of suppliers by the major supermarkets been delayed from late this year until around March because of the "complexity and breadth" of the examination.
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