Friday, 9 August 2019

The unsung heroes

Earlier this month, in a criminal case, the Federal Court of Australia pinged Kawasaki Kisen Kaisha Ltd (K-Line) A$34.5 million, the highest ever criminal cartel fine in Australia, though just adrift of the highest civil penalty, Visy's A$36 million in 2007.

K-Line was the second Japanese shipping company to have its collar felt for the longstanding rort of rigging the cost of shipping Japanese cars to Australia, following the earlier criminal conviction and A$25 million fine for NYK Line (see 'The Shipping News'). The K-Line judgment is here (handy hint - you can safely skip paras 86 through 169).

The only reasonable response to the fine is, jolly good. This fell squarely within the 'hard core' kind of cartel conduct that criminalisation was intended to punish and deter, complete with the usual cloak and dagger contrivances. NYK had had a version of Maxwell Smart's 'cone of silence', and K-Line had "reports ... often marked with words to the effect of “Confidential. Dispose of after Reading”. You can imagine some hapless manager in Tokyo trying to eat the files as the lads from Japan's Fair Trade Commission arrived.

The only smidgen of mitigation that, as an economist, you might feel for them is that, as the judge noted
41 ... the market for ocean transport service for roll-on, roll-off cargo was characterised by high capital costs with ‘lumpy’ investment, meaning that capacity could not be smoothly adjusted in response to demand.
42    The market was also characterised by long investment lead times. That was because the length of time required to commission and build a specialised car, or car and truck vessel was approximately two to three years per vessel. Such vessels were also not generally available for short term lease or charter, though in some instances space on vessels was made available between particular carriers pursuant to space chartering arrangements
But workably competitive markets are inventive enough to come up with licit solutions to these kind of problems. One is long-term 'take or pay' contracts, as you see every other day in (for example) the commercial property market, where developers line up leasing precommitments before they turn the first sod.

Lawyers should probably have a look at the bits of the judgment that discuss the extent of K-Line's cooperation with the ACCC, as described in the agreed statement of facts. The judge at [193] pointed to the "rather general and anodyne nature of some of the facts recited in it" and at [341] said it was "a statement of facts which appears to have been the product of detailed discussion and agreement between the respective legal teams. The result is a lengthy and detailed document which has no doubt been carefully crafted as a result of the negotiations, but which is nonetheless rather unhelpful in a number of important respects. The Court is left in the rather unenviable position of having to decipher and draw inferences and conclusions from that rather bland and sanitised document". You can be too clever by 'arf, in other words.

Other than that, there isn't too much to take away from the sheeting home of a particularly large, global and brazen cartel.

Except for two unsung heroes at K-Line.

One pops up at [79], where we read that "The Car Carrier Business Group General Manager was particularly distrusted by some NYK and Mitsui employees because he would sometimes compete aggressively for market share and on occasion attempt to depart from agreements reached with the other carriers" (he subsequently got sat on).

The other appears in [81], where "a Manager in one of the regional teams in the Car Carrier Business Group proposed to the Managing Executive Officer of the Car Carrier Business Group that K-Line should consider ceasing its communications with other carriers because such communications were risky for K-Line and its employees and K-Line should focus on having a strong sales force" (he - almost certainly a he - was ignored).

Well done, guys. And hopefully for their companies' sakes there aren't honest New Zealand executives in the same ignored and sidelined boat. Cartel criminalisation goes live in New Zealand from April 2021.

Sunday, 28 July 2019

I've been to a conference

The Commerce Commission's biennial 'Competition Matters' conference has wrapped up. Here are some of my takeaways: where the road forked for parallel sessions, I went the economics / competition / regulation route rather than the law / fair trading / consumer protection path, so if you prefer that end of the world you'll probably need to watch the recordings of those sessions (they're not up on the Commission site yet, but can't be far away).

If there was an overarching theme, it was Big Data and all that new digital economy stuff. Repetitive though it sometimes can be to be reminded, again, of the ever-increasing pace of change, the reality is that we are indeed in the early stages of one of those transformative technologies that alter how entire societies behave and work. It's right up there with the printed book and the car. My main takeaway was that, if you subscribe to the traditional 'is there a problem / what's causing it / can we fix it / ought we' policy model, competition analysts everywhere are largely at sea. They haven't satisfactorily got over the first fence, let alone the rest of the course, or as the Singapore Commission's Han Li Toh put it more formally, we're all still looking for "adequate evaluative tools".

For what it's worth, I could easily be convinced that the net benefits of the new technologies massively outweigh any costs, and some of of the scaremongering reminds me of the comparable 'make a man walk with a flag in front of it' response to the arrival of the car. By all means ping any of the big players if you can indeed find them guilty of the same sort of rort a steelmaker might get up to (though we're not even sure enough on issues like market definition to be able to do that), but otherwise from a competition policy point of view I'd be very loath to jump to premature controls of any kind, let alone the heavy duty structural separation ideas that are being floated on the American presidential campaign circuit. Maybe I'll change my mind when I eventually get round to reading the UK's Furman report ('Unlocking Digital Competition') and/or the ACCC's doorstopper 'Digital Platforms Inquiry', summary here, which appeared as the conference was underway, but for now count me among the anti-competitive agnostics.

I was very encouraged by what's been called 'NewReg' regulation, the idea that panels of consumer representatives can be given authority to strike product quality agreements with regulated businesses. At the moment for, say, our electricity lines businesses, we default to things like frequency or duration of power outages, on the assumption that regularity of supply is the key quality characteristic in consumers' eyes. But it mightn't be. They might care more (and did, in the case of AusNet, the Melbourne area lines business where this got a trial) for how quickly a company cleans up after things like power surges, or whether they can easily get hold of someone at the company when they need to talk to them about something.

When the consumer panel wandered - like "curious chooks" as its chair put it - across the whole of the lines business, they found heaps of things that could easily be made to work better for consumers. It reminded me, in a good way, of the management fad a few years back for 'process reengineering'. Remarkably, they found improvements that would both benefit consumers and save AusNet money, which is a remarkable illustration of the general proposition that monopolists can be very dozy indeed when not challenged (I don't mean that to be especially critical of AusNet, who after all embraced this NewReg trial and ran with it). I'd say there is clear room for this to be at least a complement to our current 'building blocks' regulation, and in an ideal world a replacement for it. And I also wonder about the community trusts who run some of our lines businesses, and are hence exempt from price control on the assumption that the community ownership structure will constrain monopoly power. How effective have they actually been in that curious chook role? Or have they been [insert your favourite harmless animal metaphor here]?

Market studies - the first one isn't far away now, with the draft petrol study maybe two to three weeks away. For the sake of the new regime, this first one needs to go well, and not just on the technical market analysis stuff but also on how it is sold to its various audiences. One of the things that the very experienced Roger Witcomb, former chair of the UK Competition Commission, emphasised was that market studies need government support, and while you don't want independent authorities like our Commission pandering to the current public service please-the-pollies zeitgeist, this first one needs to hit all the appropriate persuasiveness buttons.

Roger also stressed being remedy focused from early on, accepting that you don't necessarily know, day one, how a study is going to unfold. In our regime, the Commission doesn't have any market study enforcement powers, and maybe that's broadly right and best left to the pols. Commissioner John Small mused, though, about whether it would be useful for our Commission to have a power to initiate binding codes of conduct, along ACCC lines: that might well be a useful extension (either in the market studies context or more generally). And speaking of remedies, it's useful that (ahem) some of us helped get s51E into the law ("The Minister must respond to the final competition report within a reasonable time after the report is made publicly available") to stop the minister sitting on the Commission's recommendations.

The big keynote speeches were very solid. Dr David Halpern on behavioural insights convinced me (and others, going by coffee urn chats) that competition analysis needs to look hard at how consumers actually behave in the real world rather than relying solely on the old utility maxing within constraints we default to. Dr Howard Shelanski on competition intervention in markets likely confirmed us in our existing views on price controls (ick) and line of business regulation (meh) but opened our minds to potential greater use of access regulation. And Ed Willett left us with some warm fuzzies that we've rolled out fast fibre-based broadband better than the Aussies have, and also raised the possibility that maybe some of the old rationales for telco regulation may not apply any more. If I'm sitting at home with a choice of copper, fibre, and three mobile networks selling fixed wireless (in turn based on competitive backhaul markets), where's my regulatory problem?

Assorted other snippets: it is indeed probably worth kicking the tyres harder when looking at vertical mergers, though, on the other tack, if you're looking for the paper that Martin Cave cited, pointing to the unexpectedly widespread efficiency benefits of vertical mergers, it's 'Vertical Integration and Firm Boundaries: The Evidence'. And despite Dr Darryl Biggar's emphatic 'No' to my question about whether electricity lines businesses should be let play in the solar and battery markets, I think I'll remain open to it for now, if only for pragmatic get the damn thing done reasons.

Finally, the panel on 'Why does competition really matter?' looked at how the work of regulators sits with the broader national wellbeing agenda as set out, for example, in Treasury's Living Standards Framework. I didn't warm to one bit of it: there was, I thought, a bit of unnecessary economist self-flagellation. It's not (in my humble) true that economists in general have been mesmerised by GDP and monetary costs and benefits, and oblivious to soft outcomes they couldn't measure, nor that competition authorities have also been blind to them. Look at (for example) the Commission's decision on NZME / Fairfax, where by far the biggest moving part was the likely loss of media plurality in the civic marketplace (as I discussed here).

But the rest of the panel's ideas were spot on. If you look at two of New Zealand's biggest challenges - productivity (low and sticky), and poor outcomes for too many at the bottom end of the heap - making competitive markets work properly helps on both fronts. Stronger competitive pressures could do a useful Schumpeterian job of clearing out our disproportionately long tail of low productivity firms (as the Productivity Commission's Murray Sherwin noted). And on the equity front, it's inevitably the most vulnerable who fare worst when the anti-competitive fix goes in.

Wednesday, 17 July 2019

Save some dollars at CLPINZ. Oh, and watch a video

Roll up, folks, you've only got till Friday to get the early bird rate to attend this year's Competition Law and Policy Institute workshop. Full details here.

You're big enough to read the workshop programme for yourself, but I'd just like to point out that there's one very impressive name indeed on the agenda - David Evans, co-author (with the equally eminent Richard Schmalensee) of Matchmakers: The New Economics of Multisided Platforms (Harvard Business  Review press, 2016). Sooner or later, as a competition/regulation economist or lawyer, you're going to have to get your head around two-sided and multi-sided markets. This is where you should start: highly recommended.

Want to hear what the man actually sounds like? Here you go: this is a video I used on a training mission to a developing economy competition authority. It's Evans on using the hypothetical monopoly test for market definition. Not bad, eh?

Wednesday, 26 June 2019

Spot the good guys

Trade wars are top of mind for those interested in the macroeconomic outlook. As our own Reserve Bank said in today's monetary policy review, " A drawn out period of [trade] tension could continue to suppress global business confidence and reduce growth". And it's not just the US vs China stuff, bad as that is, but it's all over the place, as the World Trade Organisation pointed out a few days ago under the heading 'WTO report shows trade restrictions among G20 continuing at historic high levels'.

Out of casual interest I had a fossick through the WTO's trade database, which among other things counts the prevalence of trade barriers. Here's an interesting result.

We're not angels all the time, but at least on this criterion New Zealand scrubs up well by not adding much to the current protectionist rackets. And full marks to MBIE and the National-led government who in 2017 drew the teeth of the worst of these anti-dumping rorts, by amending the law so that consumers got a look in before anti-dumping duties get imposed. 

Here's the press release at the time, and if you're a trade policy tragic the new public interest test can be found in s10F(2) of the amended Trade (Anti-dumping and Countervailing Duties) Act 1988. It reads: "Imposing the [anti-dumping] duty is in the public interest unless the cost to downstream industries and consumers of imposing the duty is likely to materially outweigh the benefit to the domestic industry of imposing the duty".

Personally I'd have put the onus the other way around - "Imposing the duty is not in the public interest if the costs to downstream industries and consumers are likely to materially outweigh the benefits to domestic industry" - but hey, in these more trade-hostile days, I wouldn't quibble too much about wording. When you get a pro-consumer public interest test in trade law, take it and run.

It's happened again

It's easily done. A company decides to get out of a line of business, and sells the operation to someone else. A business decides to flag away retailing and stick to wholesaling, and sets up an exclusive retail arrangement with a distributor. A company buys another company in the same line of trade. All perfectly normal and (barring an acquisition of a competitor that would create substantial market power for the new combo) perfectly fine from a competition policy perspective.

But then the parties "jump the gun", as the jargon puts it. They start tidying their affairs - mutually agreeing things - before the divestment / distribution agreement / merger has actually gone into effect. That's where they risk falling foul of s27 of the Commerce Act (arrangements lessening competition) or, worse, s30 (price fixing). And things can really go pear shaped if the proposed divestment / agreement / merger falls over, as it can easily do. Now you can find yourself swinging in the wind when the Commerce Commission comes calling and wants to know why you're colluding with what is still an independent competitor.

The latest to find this out the hard way ($825K fine and $100K costs contribution) is Milfos, which among other things sells milk quality sensors and dairy herd management software (Commerce Commission press release here, High Court judgement here on the Commission's site). A proposed exclusive distribution agreement eventually turned to custard but the two companies involved went on coordinating the price of the milk sensors in the interim anyway.

It's not yet a full-blown Thing, but this has become one of those areas where a bit of probably not explicitly malign carelessness can now walk you into a heap of trouble. Nobody wants to be jumping at every imaginable legal risk, but it's now clearly advisable to add something else to the checklist when you're thinking of divestment or acquisition. If you'd like some more background info on what to look out for, have a read of what happened in a recent Australian case ('Too harsh?') which was cited in this latest Milfos episode, or on the wider general topic of gun jumping you might like 'Jumping the gun'.

The other thing that's started to pop up more in mergers is failure to get clearance from the Commission for potentially problematic ones. We went years without seeing the Commission sally forth and challenge a merger, and then there was a sudden blizzard of them in 2018 ('They're like buses'). Fortunately, most of them (listed here) have gone away with no further action, and to date only one has been pinged, and deservedly so ('Naïve? Casual? What?'). Two are still live.

I say "fortunately" because I like our system of voluntary notification of mergers. Most other developed countries have some sort of compulsory merger notification regime: we don't, and I like it that way. I wouldn't want it to fall over, which it assuredly would if it's discovered that merger parties are routinely trying to do an end run around it.  As a small economy,  we're already got at least our fair share of micromanagement superstructure: we don't need another dead hand process on top.

Wednesday, 19 June 2019

Are we ready?

The Budget came and went while I was overseas, and I've been catching up with the news and the coverage.

It's not surprising that a lot of the media and analyst attention was focused on the 'wellbeing' perspective: it's getting attention overseas, too, as in this thoughtful piece in the Financial Times ($?). It's equally unsurprising, though, that virtually nobody (as usual) has asked the simple Keynesian question, is the Budget expansionary or contractionary? Do its direct effects on government spending and taxation boost or brake the economy?

Here, buried (as usual) on page 15 of the 'Additional info', is Treasury's best guess at the answer. The 'fiscal impulse' is the effect of policy changes on aggregate demand, allowing for anything cyclical that might also be affecting tax revenues and government spending. A positive impulse is expansionary, and you can see that fiscal policy has been giving a decent 1%-of-GDP-ish boost to the economy in the June year just finishing. It's not doing a lot either way in the next couple of years, and then if policies stay as they are, it starts to modestly brake the economy over 2021-2 and 2022-3.

The last time we saw these calculations was at last December's 'Half Year Economic and Fiscal Update', or HYEFU, when they looked like this (I wrote about them here).

From a fiscal policy cycle-management point of view, the new profile makes a good deal more sense than the old one. In the old one, there was a stonking 2%-of-GDP fiscal boost in the 2018-19 year, when the economy didn't need it, nor was there any obvious reason why the brakes should have gone on immediately afterwards. The new pattern is rather more sensible: there's less of a pro-cyclical boost in this June year, and the brakes aren't getting applied in the coming June year.

It would be nice to think that this was a deliberate adjustment of fiscal policy to make it more attuned with the cycle, but it looks more happenstance than design. While there is a bit of extra spending in 2019-20 that helps draws the sting of the previously planned braking, otherwise it seems to be down to timing differences: spending didn't happen to the original timetable. Or as the official explanation puts it
The 2018/19 impulse is now estimated to be 1.1% of GDP compared with 2.2% forecast at the Half Year Update. This reflects changes in the expected timing of operating and capital spending. Some operating spending previously expected to take place in 2018/19 is now expected in 2019/20. Changes in the timing of spending and higher allowances announced at Budget 2019 see a broadly neutral impulse in 2019/20 compared with a -0.9% of GDP impulse forecast at the Half Year Update.
That's all understandable: we're all human, things always don't go like clockwork, and the incoming Coalition government didn't exactly have a fully worked-out policy programme when it first took the reins, so some slippage isn't a huge surprise.

But if you get biggish changes in the stance of fiscal policy happening by administrative accident rather than for proactive cycle-management reasons,  it does make you wonder how effective fiscal policy can be in dealing with cyclical ups and downs. You might well want to slow things down, for example, only to find the economy gets an unwanted boost from spending programmes kicking in late, or conversely find that planned fiscal boosts get undermined by slower than expected spending.

With monetary policy creeping ever closer to its practical limits, especially after the latest interest rate cuts in Australia and New Zealand, fiscal policy is necessarily going to have to do more of the heavy lifting to manage the business cycle in the next downturn, which may not be too far away if the Trump administration continues in brinkmanship mode.

As it stands, however, fiscal policy is vulnerable to large ebbs and flows that can dwarf any attempt at fiscal cycle control. We need to be able to do something more effective when - not if - the next downturn turns up. Ideally, 'shovel ready' infrastructure spending programmes that could be rolled out quickly would do the trick, but while they're not impossible to organise they're not a doddle either. An alternative would be quicker-to-work defibrillator fixes like "put $500 in every beneficiary's bank account", which we've shown we can organise (recall the recent winter heating top-ups to national super, for example).

I'd like to think there's someone in Treasury primed and ready to pull the Emergency Fiscal Boost lever. Am I wrong?

Friday, 14 June 2019

Competition papers coming up at the NZAE conference

The New Zealand Association of Economists annual conference is coming up (July 3-5) in Wellington, and if you're interested in competition issues there are some interesting papers due to be presented. You can find the current draft state of the full conference programme here and you can register to attend here.

Earlier this week I posted about Bill Rosenberg's presentation on "Low Wages: Is Competition a Factor", and Bill has pointed me to a paper scheduled for session 3.1 from the RBNZ's Christopher Bell on "Monopsonistic power in the New Zealand labour market".

Session 5.2 has the theme "Digital Markets and Competition Outcomes", and features three papers from ComCom economists: "Innovation in regulated and competitive industries" by Hristina Dantcheva;  "Airports regulation - evidence of the information disclosure regime working?" by James Marshall (I'll take a wild guess and say, the answer is yes); and "Assessment of competition in digital markets – challenges for economic analysis in the era of platforms, data and AI", by Michal Mottl.

Session 5.4, "Energy", has two papers I'll be especially interested in: "Identifying and estimating excess profits in the New Zealand electricity industry" from Victoria's Geoff Bertram, and "Petrol prices [still] rise and fall at the same speed as international oil prices" from Prince Siddarth at the NZIER.

There's also session 6.6, "Regulation and Industry", where the paper I'll be going to is "Retrospective Study on Stuff (Fairfax)’s Exits in the Newspaper Industry", a joint effort from AUT's Lydia Cheung and Geoffrey Brooke.

See you there.

Wednesday, 12 June 2019

Yet another reason why workable competition matters

A small but select audience turned out last night for the latest Auckland LEANZ seminar, featuring Bill Rosenberg, the Congress of Trade Unions' policy director and economist, on the topic of "Low Wages: Is Competition a Factor?". This was a reprise of a May presentation in Wellington which Bill gave in association with Peter Cranney, an employment lawyer at Oakley Moran: the May slides can be found here.

Maybe the topic is more of interest to a Beehive-focussed audience, but it's a pity more people didn't attend in Auckland, because Bill made an interesting case. Beforehand, I'd been afraid that he was going to have a go at attacking free (or at least workably competitive) markets, and I'd been sharpening my claws. Quite the opposite, as it happened: Bill's case might as easily have been titled, "Low Wages: Is Lack of Competition a Factor?". His argument was that businesses have accrued too much monopsonistic market power in the labour market, and for a variety of reasons, including as a side effect of increased market power in goods markets as 'super star' companies have emerged and (perhaps) merger policing hasn't been all that it might have.

Skewed labour markets are becoming A Thing in antitrust circles, and I suspect we're going to hear a lot more about them. Here for example is the peroration from a recent article (cited by Bill) in the Harvard Law Review:
Labor market power is ubiquitous and costly to society. It is bad for economic growth and equality, and fuels political conflict. Yet labor market power is generally ignored by antitrust authorities and never considered as a justification for subjecting mergers to scrutiny. This contrasts with the regulatory concern for product market power. We argue that this asymmetry is not justified by either legal doctrine or economic theory and suggest that the economic analysis of product markets regularly deployed in the scrutiny of mergers can easily be applied to the labor market (p600)
How you might address imbalances of market power in the labour market is the tricky bit. Maybe the generic competition law of the land has a part to play (on egregious use of no-poaching or non-compete agreements, for example), although as the Harvard Law Review article says, even in the litigious US it hasn't got very far. 

Bill's got a menu of other proposals (his slides 38-40). Two of them got the tick from me - raising productivity, and better support for people affected by disruptive job losses - and while I'm more ambivalent about the third route (a greater role for collective bargaining) it's possible that the Fair Pay Agreements Bill supports might deliver net benefits.

The real trick would be to pull off what Denmark's managed - retaining a high degree of employer hiring flexibility, while also providing a lot of support (eg through retraining) to displaced employees. We're not currently crash hot on the support side, as this OECD graph shows (original document here), whereas Denmark is tops.

These 'active' labour market policies also have something of a moral imperative to them. If you subscribe to the idea that freer global trade brings net national benefits (as it does), and you recognise that the overall benefits create winners and losers (as they do), then there's a good case for looking after those who have fallen in the overall victory. And there's also cold-eyed politics involved: if you don't help out,  the losers will turn on trade itself. Trump's election and the US ranking on the graph are no coincidence.

Well done Bill; thanks to Sasha Daniels from Spark who emceed the evening; and special thanks to James Craig and the team at Simpson Grierson who hosted the evening.