Sunday, 13 December 2015

Criminalising cartels

Last week the NZ government decided not to criminalise hard core cartels, against the international trend.

The responsible minister struggled to explain himself on the radio but fortunately for the cartels plenty of written commentary supported him. It came mainly from the big law firms, as Donal Curtin observed in a great post, but Oliver Hartwich and Paul Walker applauded from the sidelines. 

The cheer squad are all arguing the same thing: that criminalisation would deter pro-competitive conduct because business people would be uncertain about the rules, so they wouldn't compete hard for fear of breaching the rules, so the whole idea is self-defeating. Lew Evans relied entirely on the same line when I debated cartel criminalisation with him at a LEANZ event a few years ago. It is an exceptionally weak argument as explained below.

First though, since appeals to (dead economist) authority appear to carry some weight for these folk, now is a good time to hear from our old mate Adam Smith, also known as Mr Invisible Hand:
"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."
That was 1776 and I challenge anyone who currently hangs around with business people to deny they've ever heard such talk. Smart guy that Adam Smith.

Back to the main point though: the alleged uncertainty about the rules and the resulting chilling effect on competition itself.

Uncertainty and risk are different. Managing risk is usually fairly easy because markets sell insurance against risk. Sellers of insurance use statistical models to estimate the probability of events and set prices for insurance products using those probabilities.

Uncertainty is more like Rumsfeld's unknown unknowns. Continuing the insurance example, suppose you paid for property insurance in Christchurch for years and years before the earthquakes. You had a contract with an insurer and naturally assumed that it would be respected, but you got a nasty surprise because the world changed unexpectedly. That's uncertainty: pretty hard to deal with in advance.

Now let's stand in the shoes of our would-be cartelists for a minute so we can feel their uncertainty and their fear: jail time. Here's a potential boardroom conversation.

Alice: lets do this thing.
Brooke: isn't that a cartel? we could go to jail.
Cheryl: jail?! we don't want that. let's pull the plug now
Donna: but, but, but,... it could be very profitable, do we really want to just blow that off?
Elsie: hey, why don't we just apply for authorisation
All: whaaat?

Elsie is right. There is already a safety valve in New Zealand's competition law covering exactly this situation. Part 5 of the Commerce Act 1986 is all about how firms can get certainty about whether they're breaching competition law. In particular, section 58 establishes a regime whereby firms considering conduct that might breach laws against collusion between firms (s27) can proactively seek an authorisation or clearance on well understood grounds.

In my view the uncertainty argument is seriously wounded by the existence of a well-trodden path by which would-be cartelists can resolve their uncertainty, in advance.

24 comments:

  1. This is an issue of property rights. If two firms wish to collude, that should be their right. The fact that the consumer must pay more for their product (until the temptation to cheat breaks the cartel) isn't sufficient justification for the state to invoke its monopoly on the use of force.

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  2. In your dreams this is an issue of property rights. IRL it's political horsetrading over changes to our competition law. That involves voters, who are consumers and from whom producers need a kind of social license, hence consumer protection laws.

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  3. What is this 'social license' you speak of? I own an airline. I want to fix prices with my competition. Competition laws limit how I can run my business; what I can do with my property.

    This limit helps (is a wealth transfer) from airline shareholders who are few in number to consumers who are plentiful.

    If the laws (or tax) are too harsh I'll go out of business.

    Competition law is just the equilibrium result of this dynamic.

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  4. Consumers are the ones that pay the money Damien. They reckon that they've got a right to fair prices. I'm not sure where that fits into your property rights framework.

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  5. They have no right. If I have a right there must be an obligation on someone else. You have a right not to be physically attacked and others have an obligation that prevents them from attacking.

    But if you claim a right to a fair price do I have an obligation to provide it? If you claim a right to free education who has the obligation to provide it (and can be punished in the same way someone who is guilty of assault is punished)?

    But back to the airline; the consumers want a fair price; but do they have a right to one and is it appropriate to put me in prison if my airline does not provide one?

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  6. Mmmkaaay, consumers have no rights. Thanks for clarifying how your world works.

    It's very directly transactional isn't it? You want to know who has the obligation to match every right and why it's their obligation in particular.

    Am I hearing you correctly?

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  7. Yes. If I have a right but no one is obligated to provide it then it's really a 'want'.

    If I build an airline a consumer should have no right to tell me what price to charge.

    And the state certainly should not be putting people into prison over what price they charge for selling their service.

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  8. We might get to the airline later but please tell me more about your property rights. Who exactly is "obligated to provide" your right to exclude people from your house?

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  9. This comment has been removed by a blog administrator.

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  10. No one. The question is 'do I have a right to quiet possession of my house?'

    The answer is yes. This places a negative obligation on every one else not to trespass.

    If this right is transgressed I have the right to use force to protect my property but no one has an obligation to come my aid.

    However; I can pay someone to protect me but no person can be punished for choosing to do something else than rushing to my aid.

    When thinking of police; you can argue that once enrolled a person has an obligation to protect me but no one can be compelled to become a police man

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  11. You said earlier that "If I have a right but no one is obligated to provide it then it's really a 'want'"

    Now you say no one is obligated to provide your "property right" to exclude people from your house.

    By your words, that means you actually have a property want, not a property right.

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  12. No. I have a right to quiet possession of my house. This right places an obligation on others. If others breach my rights they can be punished.

    An obligation can be positive; such as an obligation to provide for our children's rights to food, or negative; such as an obligation not to initiate force against another person.

    Standard libertarian ideology.

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  13. OK, so some of the above isn't exactly what it seems. That's OK.

    But let's be clear that this is an hypothetical world you're talking about. It's waaaay different to this actual current world is it not?

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  14. Depends. Let's think about gay rights. You and i believe a person has a right to engage freely their preference.

    But in some nations they lack the freedom to do so.

    Their rights are being breached. Rights in this context are fundamental and not allocated by the state.

    I believe a business person has a right to collude and the Commerce Act breaches this right (which isn't to compare, except in the broadest conceptual manner, oppression against gays and the inconvenience faced by constrained business types! )

    I simply wish to challenge the underlying assumption that the Commerce Act is justified on some Utilitarian sophistry that using force to stop business people colluding is a good thing because it will benefit consumers more than it will cost shareholders.

    Economics teaches us things like dead weight loss but and there is an inherent assumption that the purpose of economics is to eliminate this.

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  15. When the rational conclusion of your belief system leads you to seek the imprisonment of people for the price they sell cardboard packaging then maybe it's time to at least consider your starting assumptions

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  16. There is no law in NZ against setting high prices for airfares or cardboard or anything else outside of regulated sectors. The law is founded on the view that competition is the best way to deal with such things, so you will absolutely not be in danger of any official sanction due to the level of your prices.

    Consumers are expected to trust in the competitive process. Some find it difficult to do so, but that's the law and it makes good sense to me.

    Cartels deliberately subvert the competitive process. The price that pops out the end of a cartel is not the main objection to cartels: it is the dishonest and anti-competitive process by which that price was set.

    Cartels are a form of fraud and I have no problem with seeking imprisonment for fraudsters.

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    1. I agree that the law is founded on the basis of the merits of competition and I agree that it is a good system.

      I'm making the argument that some things are more important. This isn't itself controversial.

      Unions are a form of cartel (and I support their right to collude).

      By making cartels illegal the state is enforcing a wealth transfer from firms that could collude towards consumers. There is no guiding moral principles at stake here; unless you think the invisible hand is divine.

      A cartel is only a fraud because they are illegal and cartel members forced to pretend they are competing. If cartels were legal and transparent there would be no fraud.

      If a firms collude higher prices and lower output is the expected result. The Commerce Act seeks to prevent this; so the inevitable consequence of criminalising cartels is to imprison people for the price they sell their services.

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    2. I was tempted to wade in as well but those are exactly the same point as I would have made.
      I'd just add that the fraud element was esp obvious in the cardboard packaging example, where the cartelists were fraudulently representing collusive bids to be independent

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    3. I assume you were going to mirror John's comments?

      If I remember the packaging case was more about taking turns? They agreed who could win the bids in advance, but if such arrangements were legal would it have been fraud?

      If I fudge the truth in a negotiation that isn't fraud; "My Last Offer" isn't considered fraud. Stating; "This is a competitive process" is morally suspect; but not quite the same as saying " This is a Panda" when it really is a large black and white dog, which would be fraud and would lead to a very hungry puppy if all you gave it to eat was bamboo.

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  17. But cartels are already able to be legal and transparent. That was the point of my post. There is a well-established system in place that will legitimise cartels. The criteria for getting blessed are clear and the system is being used.

    So you should instead say "A cartel is only a fraud because the members decided in advance that their scheme has so little merit that it would not get authorised".

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  18. Ah. That is true, except the Commerce Commission is only going to approve such deals if it deems it is in the benefits of the consumer (such as Rugby's salary cap, where they went into estimating how much the public would enjoy more competitive rugby games against the lost salary for rugby players).

    It is my view that firms should be free to collude with the express purpose of making extra profit at the consumer's expense , an arrangement the Commerce Commission would not allow.

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  19. I sincerely hope your view never prevails, though your team has certainly won this (criminalisation) round albeit with an utterly bogus sales pitch.


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  20. Given Act polls less than average attendance of a rugby game in Picton there seems little chance that the libertarian world view is going to prevail.

    If you view politics as a dynamic process subject to an equilibrium; voters will vote for a government that will deliver to them as much goods as can be extracted from other voters as possible. Thus; we have a progressive tax system that extracts about 35% of GDP and delivers this to grateful voters.

    The vast majority of voters are net consumers of govt services; paying less in tax than they receive in govt benefits over their lifetime; but there is an upper limit; if the state goes much over about 40% there is some evidence that output begins to decline; placing an upper limit on how hard the productive sector can be mined for the benefits of the net consumers of various forms of govt welfare.

    The current level of welfare, and the Commerce Act is just a version of welfare in my view, is an equilibrium result from this dynamic process.

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  21. I have no strong view on consumer protection laws. Where they are simply a code to replace overlapping common-law torts I do not have a problem with them. If they go further, such as a requirement for lenders to give a holiday to borrowers who default or restrictions on the provision of credit etc; then I do not agree with that.

    The issue you raised on Twitter is a different one; a firm selling something and lying about its contents.

    This isn't an issue of property rights, as far as I can see. If I deceive you and this causes you an economic loss, you can sue me for the consequences.

    This is correct. I think if you suffer physical harm you should be able to sue for that as well, but in New Zealand you cannot.


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