Friday, 18 October 2013

Competition matters

The Commerce Commission’s conference was very good. There was a much bigger crowd than at the CLPINZ workshop in August, and with correspondingly less scope for interaction & discussion - a congestion effect. But the Commission pulled in a strong group of international speakers which was enough compensation for me. Two sessions were particularly interesting.

Firstly, there seemed to be agreement that “something” needs to be done about s36 of the Commerce Act. That section prohibits the taking advantage of substantial market power to reduce competition. It is the primary constraint on powerful firms in NZ and has been totally ineffective for a few years, largely because the Commission believes it is ineffective. When the main prosecutor is disillusioned with the law, you either have to reillusion them, so to speak, or change the law.

Andrew Gavil deconstructed s36 beautifully, exposing the logical error that has emerged through our case law and explaining how it can easily result in false negatives (i.e. wrongly exonerating anti-competitive conduct). The case law has established a “counterfactual test” as being necessary to prove a claim that s36 has been breached. This test can be framed in different ways but it basically asks whether a firm that lacked market power would or could have acted in a similar way. If so, then the claim fails. If a firm without market power would or could do something, then market power is not needed to do it.

The false negatives come from situations where certain conduct (e.g. exclusive dealing) would be pro-competitive if done by a small firm but anti-competitive if done by a firm with market power. 

The logical error Gavil argued is that “taking advantage” implies that the firm gains something from the conduct, such as a weakening of competition. But that question is largely irrelevant to s36 analysis under the counterfactual test our case law has created. Instead, we end up focusing entirely on the motivations and incentives of a completely hypothetical firm: one that lacks market power but otherwise looks like the defendant firm.

Solutions are harder of course, but I think it is now inevitable that we need to rethink what is going on here, and the sooner we get started on that, the better.

The second session of interest to me was called “the future of telco markets”. Italian professor Carlo Gambini gave a nice overview of the economic issues. He included the well-known fact that technology is converging to the point that one misses a lot unless we think about telecommunications, broadcasting and internet services wholistically.

A single high capacity network can now supply voice call services, internet browsing, skype calls, television and video-on-demand. That means we are heading for a world in which competition will be in bundles of services. We are already seeing this kind of thing in NZ. Soon, firms that can’t compete with complete bundles like this will become marginalised.

The other theme from the “telco” session was that value and profits are moving upstream to content providers. Network providers, particularly in the mobile sector, will get squeezed between paying for a technological arms race driven by advancing technology (2G, 3G, 4G etc) and the content suppliers who capture the bulk of advertising revenue. That is already leading to some infrastructure sharing between mobile networks, a trend that is expected to continue. It may also lead to mergers and therefore less competition between networks. 

I wonder how that is going to shake out in NZ, where our mobile sector has only recently been shaken up by the arrival of 2degrees, which is struggling. Are we heading for a world where the sustainable structure of the mobile industry is one strong physical network that stays on the best-practice upgrade path, and competing retailers having open access to that network?

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