Monday, 3 July 2017

Competition update: no, we still don't care

If you occasionally tire of reading those media stories about just how stretched NZ household budgets are, and end up wondering why is it like this, then the recent OECD report is a good to place to look for clues.

The OECD's three main points are perfectly crafted into a work of shit sandwich art. Someone needs their chain pulled a bit, but we want to be nice enough to retain their goodwill, so they get two nice compliments with the actual message in between. In a better world, this might cause his sponsors to say: "We all love your enthusiasm Donald. This misogyny has to stop, so we can continue to support your meteoric rise".

Anyway, here's the OECD's shit sandwich for NZ.
  • New Zealand continues to enjoy a strong, broad-based economic expansion
  • Productivity remains well below that of leading OECD countries
  • Employment has been shifting towards high-skilled occupations
Two compliments with a nasty little fact in the middle, right?. So we need to examine that nasty little fact. Here's the summary discussion of it.
Labour productivity is well below leading OECD countries, restraining living standards and well-being. Productivity is held back by a lack of international connections, agglomeration economies and scale; weak competitive pressures; low rates of capital investment; and meagre research and development activity. Opportunities to address these factors include reducing barriers to foreign direct investment, lowering the corporate tax rate, expanding infrastructure funding options to increase housing supply (preferably through densification), reviewing the insolvency regime and the current provisions for misuse of market power, and increasing support for business innovation. (emphasis added)
So we have five productivity problems. Delve deeper and you'll find that there is not much we can do about the first two: we're not going to suddenly shift from being a small open economy in a remote corner of the planet.

So now the shit in this delicious sandwich is down to just three things we might be able to deal with:  "weak competitive pressures; low rates of capital investment; and meagre research and development activity".

Now here's a funny coincidence: firms that lack competitive pressure have less market pressure to undertake "capital investment" including in the form of "research and development activity". Injecting more competition into our economy could therefore help tackle all of the solvable problems identified by the OECD. In case it's not obvious, I am agreeing with all of this diagnosis. Now let's look at the prescription, which has two components.
Allowing the Commerce Commission to undertake market studies is currently under consideration and could help markets work better, especially when obstacles and distortions to competition are not caused by competition law violations. In addition, the legislative prohibition against misuse of market power should be reviewed to consider whether the current requirement to prove the intent or purpose of behaviour is working and examine whether a test focused instead on the effects of business conduct, as in most other OECD countries, would be more beneficial.
The first of these is a no brainer. The power to inquire through market studies should have been vested in the Commerce Commission from the start. Instead, at the instigation of Telecom, the Commission was spanked by the High Court in 1994 (pdf, see f.n.3), for daring to inquire into telecommunications competition.

The second idea concerns s36 of the Commerce Act which is our only constraint on the unilateral exercise of substantial market power. (SMP). Setting aside regulated industries, if a monopolist or a small number of oligopolists have SMP s36 is the only legal constraint on that power being used to choke off (or otherwise tame) their potential rivals.

Five years ago, it was clear that the Commerce Commission chair considered s36 broken and that the Commission would no longer be wasting its litigation budget in prosecuting such cases (example).

Think about the incentives this creates. Suppose you're an executive in a firm with SMP, or perhaps an entrepreneur with a great idea for stiffing entrants. Why wouldn't you just run riot? The police are on strike because the law is broken.

And now, five years after we gave free rein to the big guys, the government is touting market investigation powers as a bold new initiative while throwing s36 reform down a big dark hole:

The Government has also been considering changes to Section 36 of the Commerce Act, around misuse of market power.
“While the consultation process has demonstrated that Section 36 does not work perfectly for some types of conduct, it is not yet clear whether an alternative test would benefit competition or consumers.
“Officials will continue to look into this and will report back in mid-2018 before decisions are made regarding section 36,” Ms Dean says.

So there is a clear and enduring message here. Yeah, nah, go for it mate. Fill your boots.

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