Allan Fels, the first head of the competition watchdog, told the parliamentary inquiry into supermarket prices that companies such as grocery stores that breach competition laws should be forced to divest.

He said similar powers exist in the US and could be used in Australia.

"It's only occasionally used (in the US) but with very powerful effect, and I think it would be sensible for Australia to," he told the inquiry on Monday.

"It's a structure of concentration that creates a capacity to do harm to consumers and to other businesses, and on occasions, the right answer is to break up the firm."

Australia has one of the most concentrated food retail sectors in the world, with Coles and Woolworths accounting for an estimated two-thirds of the market.

There have been growing calls to enact divestiture laws due to the size of the duopoly.

Professor Fels, who led the consumer watchdog from 1995 to 2003, said such powers should form part of competition legislation.

"If (companies) faced the possibility of divestiture, you get a lot more compliance with a key part of the competition law," he said.

The inquiry comes after a review of the relationship between supermarkets and their suppliers called for the food and grocery code to be made mandatory.

With AAP.