Australians are “rightly outraged” at the nation’s two major supermarkets and it’s up to Coles and Woolworths to win back their trust, the federal government says.

The Australian Competition and Consumer Commission is taking the grocery behemoths to the Federal Court, after accusing them of breaking consumer law by duping customers with misleading discount pricing claims on hundreds of products.

Both retailers routinely bumped up the prices of products by 15 per cent for brief periods, the commission alleges.

Woolworths’ Prices Dropped and Coles’ Down Down deals then listed the goods at prices that were below the peak but higher than the initial price. 

Prime Minister Anthony Albanese lashed the supermarkets, saying it should never have happened.

“That’s not the Australian way, it’s not honest, it’s not fair dinkum,” he said in Perth on Tuesday.

“Australians are rightly outraged at this abuse of power, which has had an impact on the amount of money they put across the checkout for their weekly grocery bills.

“It’s not good enough – get your act together and behave as you would expect anyone to behave in this country.”

Some have questioned whether the grocery giants were in cahoots on these allegedly fake markdown schemes.

Former chair of the consumer watchdog Allan Fels said there would be political and public policy repercussions if the allegations were proven.

“Their claims that cost inflation justifies the behaviour will not stand up in court,” he said.

“It’s OK to pass on a cost, but not in a deceitful, dishonest fashion. 

“The courts and the public will see through that story.

“I used to think it would be 20 years before Australia got around to introducing divestiture. 

“However, the day is now coming closer for it.”

Commission chair Gina Cass-Gottlieb rejected claims of collusion but noted Coles and Woolworths monitored each other’s prices – and she suggested customers do the same.

“They price check each other and they price check other competitors to set their prices … but there is no suggestion that they colluded,” she told ABC radio on Tuesday.

In an effort to address competition in the supermarket sector, the commission is prioritising merger reform.

This would prevent larger players from gobbling up smaller businesses and proactively protect the sector, rather than divestiture laws which would retroactively break up supermarkets.

Federal Nationals Leader David Littleproud is maintaining the case for divestiture powers, saying it should be part of a tool kit to deal with the supermarkets.

But Mr Albanese has warned that breaking up the supermarkets could have unintended consequences for small towns that rely on a single grocery store or whose workforce depends on one of the major retailers. 

The government is expected to release a draft of its mandatory code of conduct for the sector later this year,

The commission launched its court case on Monday after completing an investigation sparked by social media posts by suspicious shoppers.

It’s expected to seek a significant penalty for the alleged breaches, if its legal action is successful in the Federal Court.

Coles is defending the action while Woolworths has defended its ‘Our Prices Dropped’ program as giving shoppers “great everyday value”.

Both supermarket giants were hit hard after the announcement on Monday, with their shares falling more than three per cent on the stock exchange and stripping a combined $2.29 billion of their market value.

Their stock fell again on Tuesday, by more than 2.5 per cent apiece.