Friday, 7 July 2017

NZ Initiative on Competition Law

Previously on this blog, views were expressed about the NZ government's recent announcements regarding competition law. Two decisions have been made:

  • to give proactive "market studies" investigation powers to the Commerce Commission, and 
  • to punt debate over s36 as far into the future as possible. 
Today, Roger Partridge published the NZ Initiative's view in the NBR. It is the exact opposite of my position: Roger supports the punting of s36 issues and opposes the new "market studies" power. I know, like and respect Roger, so I'm explaining below why I disagree with these views.

While I agee with Roger that "New Zealand's small size means that many markets have only two or three participants", these market structures have only occurred because the Commerce Commission has waved through many mergers on the basis that they will reduce costs. We've operated a permissive merger-screening regime for many years now. Our highly concentrated markets are a consequence of this approach.

This is not necessarily a bad thing. Rock solid economics has exposed the concept of a sustainable industry structure, crudely summarised as the number of firms that can be supported by the size of the market, assuming each is operating at cost-minimising scale. We have smaller markets (demand) than more densely populated countries, so fewer firms can achieve the scale/size needed to minimise costs.

But if we only cared about minimising production cost, why would we ever have regulated natural monopolies such as power line companies? Why didn't we just let them enjoy the quiet life, the best of all monopoly profits? After all, this is the cost-minimising sustainable industry structure for power lines: a monopoly. What was our rationale, as a society, for imposing upon these firms the compulsory burden of complying with costly demands for information, and then, after about three years of careful deliberation actually properly regulating them?

I have no real insight into the provenance of the balls grown by the government that pulled this trigger. It definitely was the Clark/Cullen crew though, aided by Paula Rebstock as Commerce Commission chair, that finally put a stop to further extensions of the shameful revaluation rort that is embedded in consumer power bills, now and forever.

So this is our history on monopoly regulation: only in the last decade have we even started to regulate natural monopolies, and even then we respected the property rights of the earlier bandits by baking-in all the billions of dollars of super-profits banked by Eric Watson and his mates.

Against this background, lets now shift the focus a bit further up the scale, to the natural oligopolies that are so prevalent in NZ. In some cases (mobile phones) these market structures have emerged from entry. In others (grocery retailing, general insurance) the Commission has allowed oligopolies to form, at the eager behest of Roger's firm and its rivals up there on Shortland St.

The policy questions are about how to constrain this market power, having allowed it to be formed. Or indeed whether to constrain it at all. So we're talking about firms that have substantial market power (SMP) either individually (s36) or jointly (market studies).

Section 36
As noted previously, before it became defunct, s36 was the only legal constraint on the use of substatial market power (SMP). The only reason we're talking about s36 is that it is defunct. So the question is whether to ignore this "problem" or to fix it somehow.

The debate seems to be boiling down to "purpose vs effect". The current defunct test is based on "purpose": a firm with substantial market power (SMP) is not allowed to use that SMP for the purpose of restricting competition. However, rather than inquiring directly into whether this was a purpose of the conduct, our courts have been persuaded to focus on a contentious and unrealistic "counterfactual" test, the weaknesses of which approach have been known for 4 years at least.

This is why ComCom has basically given up trying to prosecute under s36. No one fancies the prospect of arguing that firm X did this thing for the purpose of lessening competition.

The situation has seemed unsustainable to me for several years. If the police are on strike because the law doesn't work: sack the police or change the law.

Roger's view is that we shouldn't change the law, because it would cost the big guys, the ones with SMP. Read his statement carefully and tell me if you see any discussion of the "long-term benefit of consumers" which underpin the purpose of the Commerce Act. It's not there.

I'm not certain that an effects test is best for NZ, but I am certain that Roger is dodging the core question, as is the government.

Market Studies
New Zealand has a productivity problem and insufficient domestic competition is a major driver of our weak productivity outcomes.

We've allowed firms to merge to concentration levels that are internationally unusual, partly because the merging firms expect enough cost savings, and partly because its easier to predict cost savings than to quantify the value of foregone competition.

This is where we are. In many industries, trade is dominated by just a few firms at best. Consumer interests appear to be compromised as revealed by the petrol margin study for example. Roger says that these oligopolists, who occupy a privileged position in our society, should not be compelled to "hand over their records, and to answer questions under oath", but

  • he has no supporting argument as to why this would be unreasonable, much less any thought of the potential benefits consumers might get from a bit more focus on such a privileged sector; and
  • refusals to supply information, as hampered the petrol margin study, is kinda dodgy in itself isn't it? 

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