Tuesday, 24 April 2018

Now you see it

You want to buy a widget. Bugsy's has the model you want, it's $6. Malone's also sells it, for $5. You may not know Malone's got it cheaper, so you end up paying a dollar too much at Bugsy's.

But suppose Bugsy's and Malone's are required by the Prevent-A-Widget-Ripoff Authority to post their prices online?  With a moment's search you can find Malone's cheaper price. You're a dollar ahead.

But Bugsy and Malone can also now see each other's prices (or at least more easily than they could before). It's possible that Bugsy will reckon he'll never sell another widget at $6 and cut to $5. But it's also possible that Malone will reckon he can safely raise his price to $6 and still share the market with Bugsy.

Which is a long-winded way of saying that compulsory price transparency might or might not be pro-competitive. Generally, you might philosophically lean to the proposition that transparency is a good thing, information asymmetries favouring sellers are unlikely to be good news for consumers, and less opaque markets should work better than murky ones, but there's no certainty you're right.

There's even suggestive evidence that the bad outcome can happen in real life. The petrol market report that MBIE commissioned last year (more detail here and here) noted (p87) that a scheme to make German petrol prices more transparent had backfired:
One study of the German scheme found that prices for petrol increased by between 1.2 and 3.3 euro cents per litre as a result of the scheme, while the price of diesel increased by about 2 cents per litre.
Oddly in this era of big data and far more online shopping, there's remarkably little empirical evidence either way. Step up two Israeli researchers, Itai Ater (Tel Aviv University) and Oren Rigbi (Ben Gurion University), with their paper, 'The Effects of Mandatory Disclosure of Supermarket Prices'.

It's a neat bit of analysis, which is able to use before and after data when Israel's Food Act had made it compulsory for the supermarkets to put their prices online from May 2015. Have a read: it's more or less accessible for the intelligent lay person, while still doing all the econometric heavy lifting (it's differences-in-differences, with fortuitously rich sets of control groups).

Bottom line: transparency turned out to be strongly pro-competitive. Sample results (all from pages 5-6):
after prices became transparent, the average number of distinct prices that a given item was sold for in brick-and-mortar supermarket stores decreased significantly
after the regulation took effect, prices of items in the treatment group [i.e. the supermarkets] decreased 4 to 5 percent more than did the prices of items in the various control groups
prices primarily decreased among chains that are considered more expensive, whereas the impact of the regulation on heavy-discount chains was largely insignificant
prices have declined less in supermarkets that faced fiercer local competition
This empirical analysis suggests that the prices of more expensive and less popular products fell more. We also find that the prices of branded products, that could be compared across retailers, decreased more than did the prices of “similar” private-label products
the reduction in prices is negatively associated with the extent to which customers used the price comparison websites [i.re. the more info consumers accessed, the more the supermarkets were forced to compete]
Interestingly, the very sharp fall in the number of different prices a supermarket charged for the same item across its range of stores - from around 16 different prices for the same widget to around 5 - was, the researchers think, down to the supermarkets' fears of being seen as unfairly ripping people off (p23):
in our setting fairness concerns probably best explain the the observed effect on price dispersion ... chains recognized the reputational costs associated with charging different “transparent” prices in different markets
These are remarkable results: a 4% to 5% reduction in supermarket prices is a seriously large payoff, as is the 'fairness' disciplinary constraint on supplier behaviour. I wondered whether 4% to 5% might have been neither here nor there in an Israeli context - maybe inflation is rattling along at 10%, and 4% to 5% gains are lost in the inflationary fog - but not so. Israel's got the same inflation target as we do - 1% to 3% - and has been hitting it. Inflation if anything is below target, with the Economist picking 0.9% as likely for this year. So a 4% to 5% saving is as much of a big deal in Israel as it would be here.

Generalisability elsewhere?  To New Zealand? Who knows. If you were to characterise our supermarkets as a duopoly, then the potential for more transparent competition to deal to potentially fat margins could be large. But on the other hand only two big players increases the potential for (legal) coordination, whereas the Israeli market is more diverse and less susceptible. And it could be that, if it works, enforced price transparency works in some kinds of markets more than others, and I wouldn't want to rush to a one-size-fits-all judgement.

All that said, the Israeli experience rather changes the burden of proof. Before reading it, I was agnostic about regulating for price transparency. Now, I'm more in the camp that feels it's more likely to help than not.

Wednesday, 4 April 2018

Three cheers for Part 3A

Just before Easter the Minister of Commerce Kris Faafoi announced that New Zealand is at long last going to get ‘market studies’: proactive investigations into the state of competition in sectors or markets to diagnose whether they are operating as well as they might. And, commendably, he’s getting a move on with it, saying that “I have asked officials to fast track this Bill to be operational by the end of 2018”.

It's excellent news. As MBIE's comprehensive Regulatory Impact Statement (RIS) notes (p3), we've been the odd man out: "A 2015 OECD survey of competition authorities found that out of the 62 competition authorities that responded, only New Zealand and Chile did not possess market studies powers". And with our Commerce Commission powerless, "Outside of a few sector-specific regulators, no agency has a specific mandate to undertake proactive activity to promote competition in low-competition areas of the economy, rather than just punish anticompetitive conduct" (RIS, p6, emphasis in original).

And now that we've belatedly got round to it - as the RIS reminds us, all this is in response to a Productivity Commission recommendation from back in 2014 - we've generally done a good job of designing our scheme, which will form a new Part 3A of the Commerce Act. In particular market studies, which we’re going to call ‘competition studies’, will be able to be started either by the Commission itself, or on the direction of the Minister, which is the right approach. As the RIS says (p13), leaving to it ministers alone “could mean that, from time to time, areas of the economy that may warrant a market study  would not receive one".

MBIE is also right to say (p11) that market studies aren’t always about pinging the baddies:
“even a market study that did not identify ways of improving market performance would have benefit in itself, by: 
a. reassuring relevant stakeholders and the wider public that a market is performing well; and
b. potentially avoiding costly and unnecessary government intervention in a market”.
There are a few things I would improve. The Commission or the Minister may instigate a study if, in the words of the Bill, either one “considers it to be in the public interest to do so”, but there is no requirement for them to spell out why they think it is. They are required to spell out the terms of reference and specify when the report will be finished: I think it would be good practice to also say exactly why they’re bothering in the first place.

And MBIE is of the view (p10) that “The Minister would not be required to formally respond to any Commerce Commission study, although in practice it is expected that the Minister would be likely to do so”. I don’t think it’s sensible to use the scarce expert resources of the Commission, and spend the taxpayer’s money, on a study that a Minister could in principle shelve, and you would get better accountability and transparency with a formal onus to respond.

I was also not too sure about MBIE’s final thoughts in its RIS. MBIE thinks (p20) that “it would have a key role in overseeing any market study”: that’s not how independent inquiries by specialist tribunals work. And MBIE “will continue to monitor levels of competition in the economy...is working on establishing a cross-government competition research agenda...[and] will continue to undertake quasi-market-studies itself where necessary, and as capacity permits”. Well, maybe, but MBIE’s own inquiry into the petrol market wasn’t a total success (see here and here), and they’d be better advised to let the Commission get on with the job, at least where competition issues are likely to be the main focus.

As a general and related point, we need to get better at clean lines of responsibility (Commission does this, MBIE does that), and as it happens this new Bill also has an excellent example of our tendency in the competition arena to second-guess and complicate. The Commerce Act has a ‘cease and desist’ mechanism, originally designed to be a quick response to temporarily freeze anti-competitive behaviour and sort out the big bunfight later. But it was hedged about with so many provisos and checks and balances that it was almost impossible to deploy in the prompt way intended, and is now being junked as useless. It was a good idea, strangled. Market studies are a good idea, too: give them to one agency, and leave them to it, and junk “quasi-market-studies” elsewhere.

But enough of the quibbles (though did I mention that this idea was floated in 2014 and it’ll have been over four years before a completely unremarkable feature of overseas competition policy sees the light of day in New Zealand?). This is a very good idea that is finally getting the legislative priority it deserves – well done to everyone who’s assisted along the way.

Next milestone – reform of section 36...

Friday, 23 March 2018

Inside the consensus

The consensus economic forecasts collated by the New Zealand Institute of Economic Research (latest one here) are a remarkably useful tool.

The overall picture from the latest one makes a fair deal of sense, with ongoing growth expected of about 3% a year. In per capita terms, allowing for population growth of say 2% a year, it's not outstanding, but at least the current cyclical expansion, which started back in early 2011, has still got legs.

We've got fiscal policy delivering a decent-sized (and pro-cyclical) boost to the economy, monetary policy is also supportive, the world economy is showing every sign of strengthening, as you can see from the latest forecasts from the big multilateral organisations (the OECD's is here) and from global business surveys such as the J P Morgan / Markit one, and at home we've got, I reckon, fairly strong wealth effects from the national rises in house values.

The consensus numbers themselves are obviously of interest in their own right - and over time are likely to prove better than any individual forecaster's - and it's good to know that on the latest consensus view we are in for further economic growth, a falling unemployment rate, modest inflation, and the fiscal books in good shape. But the most interesting things, for me, lie in the fine detail of the outlook rather than the consensus numbers themselves.

First thing I always check for is revisions to people's thinking: that's because it's surprises that tend to move markets, rather than the eventuation of the widely anticipated, which tends to be already baked in. This time round, there's not a lot of change to the expected GDP track compared to what the forecasters thought last December: no joy, then, for the equity markets which might have been looking for some signal of stronger than expected corporate profitability.

The second thing I look for is where there is most uncertainty or disagreement amongst the forecasters. This time round (as it has been before) the key moving part is housebuilding.

At one extreme we've got the view that we'll have trouble even maintaining the current volume of house construction - the most pessimistic view is that it'll ease off a little as Auckland new builds don't fully compensate for the rundown of the Canterbury reconstruction - and at the other we've got the view that we are off to the races, with substantial increases in coming years. Presumably that view is some combo of a judgement that the Auckland building trades are not at full capacity and that KiwiBuild kicks in big and early. Can't say I see strong evidence for being down the gung-ho end of that spectrum.

One oddity is the reasonably modest consensus outlook for non-residential investment. You'd wonder why - if we're reaching labour market capacity constraints, as we may be - businesses aren't splurging more on gear, especially as the Kiwi dollar is reasonably high (the bulk of our capital gear is imported) and (to the degree that investment is interest-rate sensitive) financing costs are at unusually low levels. We're also starting from a position where we're not hugely equipped with gear in the first place: one researcher has calculated that we could close 40% of our productivity gap with Australia if our workforce had the same level of capital equipment as theirs.

I also wonder about the implied rates of productivity growth in the consensus outlook. In the year just finishing, GDP growth is expected to have been 2.9%, and employment growth 3.0%, which means that labour productivity will have declined a smidgen. But in the March '19 year, on the consensus view GDP growth will be 3.1% and employment growth will be 2.0%, so labour productivity will rise by 1.1%, and there are 1.7% and 1.5% productivity gains expected in the following two years as well. I'd love to see it happen, but right now I can't see what the mechanism is that will get our productivity performance improving so much so soon.

And maybe I'm cynical, but in our political system I simply don't see how fiscal surpluses will be allowed to grow and grow, from $2.7 billion now to an expected $5.7 billion in three years' time. Three billion more of the folding stuff available - I'll be mightily surprised if it withstands the clamour for increased spending.

Thursday, 8 March 2018

Unintended consequences?

The bill that aims to rein in non-residents buying New Zealand houses - the Overseas Investment Amendment Bill - is currently before the Finance and Expenditure Committee.

It's had a lot of submissions - 239 of them, available here - and hopefully this point will already have been registered by the Committee, but if not I'd like to alert the members to the reality of housing development in our neck of the woods.

We live on Auckland's North Shore. It's an established area, which means that any extra housing comes from infill redevelopment. I can't speak for the whole of the North Shore, still less for Auckland more widely, but in our East Coast Bays the reality is that this redevelopment is largely being done by Asian developers with Asian crews. The typical projects aren't large - an existing house on a large section bowled and replaced with three new ones, two adjoining houses bought at the same time and their combined back gardens used for three new houses (both real examples) - but their aggregate contribution to expanding housing supply is significant.

There is provision in the Bill (sections 16C and 16D) for this sort of activity to continue, by way of approval from the Overseas Investment Office. But how many developers are going to go this route, which involves both uncertainty around an eventually positive vetting outcome and possibly some significant delay in the interim while the OIO mulls the decision?

My guess would be, not many. Maybe New Zealanders will end up better off in some affordability sense if foreign buying demand is taken out of the North Shore equation. But the evidence of my own lying eyes is that foreign supply is also being taken out of the market, and in our area at least it's not obvious that New Zealand will be the winner in any sense at all.

And what's true here may be true more widely. As the submission from the New Zealand Institute of Economic Research puts it
as well as preventing single-purchase investments by overseas persons, the Bill also makes it more difficult for foreign investors, including New Zealand-domiciled companies with more than 25% foreign ownership, to invest in large-scale residential projects. This is at a time when New Zealand has relatively few large-scale property development companies and New Zealand banks are increasingly tightening up on development funding.
This will reduce the supply of housing beneath what it might otherwise have been, pushing up prices for New Zealand resident and citizen buyers, including first home buyers. The Bill could therefore have precisely the opposite effect of what is intended. 

Monday, 5 March 2018


For a while there, it looked as if the dairy sector was going to be one of the quieter stretches of the regulatory front line: our regulatory regime was running smoothly along a pre-planned route.

The regulatory scheme of the Dairy Industry Restructuring Act - DIRA, pronounced "dye rah" if you've been lucky enough not to encounter it before - had, sensibly, included provision for a review of the Act if it looked as if it might no longer be needed. If at least 20% of the market for collecting milk from farmers was in non-Fonterra hands, North and South Islands considered separately, DIRA triggered a review of the state of competition. That review could then recommend whether regulation was still necessary, could re-address the 20% threshold, and could suggest routes to deregulation. In default of any new bright ideas, parts of DIRA would automatically lapse.

The 20% trigger was reached in the South Island in 2015 and the Commerce Commission duly published a competition review in March 2016 (the full thing is here and there's a handy summarised briefing here).

Overall, the Commission judged DIRA should be left much as is, but with limited recommendations for improvements, which were mostly around some modest deregulation of "DIRA milk". That's the milk Fonterra is required to supply, at a regulated price, to domestic processors of raw milk (cheese makers and the like), a requirement intended to counter what would otherwise be Fonterra's ability to ramp up the input price to processor buyers. The Commission also said that the 20% threshold for adequate non-Fonterra market share was too low, and suggested 30%, and recommended another look at the Act in any event by 2021-22, or when the 30% threshold was reached if it was triggered earlier (the Commission expected it wouldn't be).

All this looked sensible and it very largely was, though I'm not convinced about one proposal giving Fonterra the discretion not to accept new large dairy conversions as shareholder suppliers. The government of the day thought the package looked sensible too, and it consequently introduced the Dairy Industry Restructuring Amendment Bill in March 2017 to implement it. The Bill had gone nowhere, however, by the time the general election came round.

Which left room for the incoming Minister of Agriculture Damien O'Connor to say, on December 19, forget all that, nothing's getting deregulated, there'll be no change for dairy conversions, and no bits of DIRA are going to lapse for the time being. The Minister's statement is here (it includes a helpful Q&A) and the replacement Dairy Industry Restructuring Amendment Bill (No 2) is here.

The stated rationale was that "The Government wants to take a strategic view of the dairy industry", and limited changes now might get in the way of a big picture rethink later: "The intention is simply to prevent expiry at this time, and then take a holistic approach to all other dairy-related issues. There is little merit in taking a piecemeal approach to parts of the 2017 Bill, as opposed to a comprehensive review of all interrelated issues". There will be "a comprehensive review of the DIRA as a matter of priority" carried out this year.

So my question is, wazzup? It's fair enough to want to review how one of our major industries is performing, but it's still not clear exactly what's bothering the government about DIRA.

It could be that Fonterra's set it off.  For example it pursued a doomed attempt to discriminate, in breach of the 'open entry, open exit' regime, against former suppliers who'd rejoined Fonterra, and over 2015-17 lost all the way to the Supreme Court. And it decided to slow down payments to its trade suppliers  which got it bad press in 2016 and 2017 and suggested that, despite regulation, it still possessed the ability and the incentive to give less and take more. It looked as if they were reading from my DIY playbook,  'How to get regulated'. More recently Fonterra has woken up to playing a more strategic regulatory game, and has been running a charm offensive with its TV ads, but the harm may already be done.

Or it could be that the government is having a rethink about the big regulatory bargain struck at the start. Left unregulated, the merger that created Fonterra would have been bad for New Zealand: the Commerce Commission, in its draft decision in 1999, said there would be a net cost to the economy. The numbers are highly squishy but, the Commission said, there would have been a cost to the country ranging from around a smallish $75 million to around a sizeable $450 million. The overall Fonterra/DIRA deal was consequently an attempt to bank the benefits while containing the costs, turning the combo into a net plus for the economy. And irrespective of the net benefit calculus, it also got the support of those infected by the National Champion virus.

But did the benefits eventuate, were the costs contained, and did the National Champion sweep all before it? There's certainly room for a rethink on the benefits side. In 1999, for example, the Commission noted at para 624 that "The goal is to expand the present business, which currently has revenues of $8 billion per year, to one of $30 billion in ten years, an ambitious target which some have argued lacks specification of the means by which it is to be attained". Quite. In the event, 18 rather than 10 years on, Fonterra's revenues have reached $17.9 billion.

And still on the benefits side, why has the biggest financial payoff from marketing innovation come from outside the Fonterra stable? A2 Milk, currently worth $9.5 billion, is roughly equal to the value of Fonterra. If you take the view that one of the downsides of creating monopolies is a loss of dynamic efficiency, the value of A2 is a chunky bit of circumstantial evidence.

If they'd known then what they know now, it would be an interesting question what dairy farmers would have gone for back in 1999. Would the industry behemoth still look as good an option, compared (say) with creating two decent sized entities, each competing for the farmers' custom, and each with its own approach to product innovation, marketing, and overseas investment? But even if with hindsight some alternative might have been better, it's hard to see how that particular cake can now be unbaked.

All that said, there have been positives from the current regime. Fonterra has come up with some good ideas: Trading Among Farmers for one, and the listing of the Fonterra Shareholders' Fund for another. And DIRA has handled some issues a good deal better than the Aussies have been able to manage theirs. The ACCC's draft report last November on the Aussie dairy industry found that Aussie dairy farmers were at the bottom of a totem pole with the supermarket duopsony at the top and the processor oligopsony in the middle: "Unlike others in the supply chain, most dairy farmers have no bargaining power and limited scope to reposition their businesses to mitigate this ... Imbalances in bargaining power between processors and farmers result in practices that reduce competition for raw milk and transfer disproportionate levels of risk onto farmers" (pages 12-13). Kiwi farmers, with their right to join Fonterra and get a price policed by the Milk Price Manual, are in a better place.

It's also unfair to see everything that happens - good or bad - as down to what Fonterra did or didn't do. The reality is that Fonterra is a middleweight player in a big global market: what it can do is heavily circumscribed by global demand and supply factors. Rather than assuming that Fonterra is an unconstrained free agent, and playing the blame game New Zealand is so good at, the better questions are, has it played the hand it's been dealt as well as it might have? And has it worked the strategic angles so that the next deal of the cards falls more its way? I've no idea, and without good evidence people shouldn't be jumping to any premature conclusions.

In any event we'll know what precisely was on the government's mind when we see the terms of reference for the dairy review, which can't be far away. And the whole episode, by the way, is yet another example of why we need a 'market studies' power for the Commerce Commission. The last government, in what had become sadly typical of its too little too late approach to competition policy, had reached the point where it was prepared to give the Commission some circumscribed powers to look at how industries were travelling. This new government is more friendly to the idea, and rightly so: if there are competition issues in any industry, the specialist in the competition game should be able to take a proactive look and come up with some fixes.

Friday, 16 February 2018

Back to square one

First we were going to criminalise cartels - the main effect being that business executives could go to jail. That was back in October 2011 when a bill was introduced which allowed for a criminal cartel offence in addition to the existing civil offence (where companies and employees can be fined, but not jailed). And if you think October 2011 is ancient history, you're right, but then you haven't been following the recent pace of competition policy reform in New Zealand.

Criminalisation wasn't the only thing on the bill's menu. It also made various other changes, including splitting out 'cartel' into three distinct infringements (price-fixing, collective output restrictions, and divvying up markets). And it provided both exemptions from cartel accusations for various desirable business activities such as joint ventures, and a new mechanism where businesses could get a new kind of okay ('clearance') from the Commerce Commission for cartel provisions that were "reasonably necessary" for a collaboration, in addition to the existing 'authorisation' route.

The proposals made it through the Select Committee process, but in December 2015 the National government yanked the criminalisation bit (the rest of the bill made it through, a mere five years and ten months after it had been introduced). I wasn't happy about the yanking. As I said at the time
Let's get serious here. Piddling offences not worth the courts' time are prosecuted every day. But "hard core" cartels,  about as obnoxious and harmful as it gets when it comes to white collar crime, escape the dock. It's not right.
or a little later
For cases that fit the classic hard core model - anti-competitive intent that is manifestly not bona fide, secrecy, collusion, persistence, materiality - it's beyond absurd that the shop assistant who pockets $25 from the till will end up in the District Court, whereas the shadowy guys who meet on the fringes of industry fairs to steal $25 million from the public won't hear the knock of the cop at their door.
And now reason has prevailed, with the news that criminalisation is back on again. MBIE's write-up of the new Commerce (Criminalisation of Cartels) Amendment Bill can be read here, and the Cabinet paper proposing the return to square one is here.

I had some interesting exchanges on Twitter when I welcomed the tack back to the original course. As one guy sarcastically put it, "Great. I look forward to the bright line definition of cartel behaviour which unmistakably distinguishes it ex ante from pro-competitive cooperation and coordination in all circumstances, and absolutely no chilling effects through uncertainty. Brilliant".

That's fair comment, and indeed the potential chilling effect was the stated rationale for the yanking in the first place.

But personally I think there are enough safeguards to prevent chilling desirable collaboration or - more importantly - miscarriages of justice where people end up jailed for well-meant behaviour. There has to be a clear intention, or as the Cabinet paper put it in paragraph 23, "this mental element of the offence will target the offence to those persons who meant to engage in cartel conduct or who would be aware that this result would occur in the ordinary course of events". And people will be able to argue that they genuinely thought one of the collaboration/cooperation exemptions applied.

I did wonder about paragraph 33 of the Cabinet paper which said
The [Commerce] Commission has raised concerns about the breadth and complexity of the defences proposed. It will raise these concerns at Select Committee.
Concerns about the complexity - maybe. Concerns about the breadth: if the Commission thinks the defences aren't robust enough and need bolstering, excellent, but if it thinks they've gone too far, I can't agree. This is an area where criminalisation really needs to catch only the "hard core" cartels, and nothing else, and the protections need to be industrial strength to prevent a mistaken view of clause 206 in a joint venture agreement turning into a two year sojourn in Mount Eden.

I'm no lawyer (as my lawyer friends occasionally point out) but if anything I'd err even further on focussed targeting of the provisions. As extra protection, I'd be inclined to have a closer look at that "intention" element and tighten it up a bit more, especially that second leg of being "aware that this [cartel] result would occur", and at some stage the Select Committee is likely to get my best impression of the mens rea bits of Legally Blonde.

Saturday, 10 February 2018

Should we obsess about 2% inflation?

For a moment, watching the webcast, I thought there were going to be no questions at all at the Reserve Bank's press conference last Thursday, after its latest Monetary Policy Statement. The Bank had been universally expected to leave policy unchanged, as it did, so there was little "news" in the official statement, and the acting governor Grant Spencer will shortly hand over to the incoming Adrian Orr, so there was no massive interest in what an outgoing caretaker might have to say.

In the end the journalists (with a big assist from Bernard Hickey) filled in the awkward pause* and the conference limped into life. The most coverage was for Grant's remark that people on large mortgages at unusually low interest rates ought to be sure they can handle the payments if rates go up a few per cent. It was a sensible remark, but as the big takeaway, duh.

The questions around the Bank persistently undershooting the 2% midpoint of its target inflation range were more interesting. Some critics have argued for a long time that inflation has been too low, and unemployment correspondingly too high, compared to what would have happened if the RBNZ had run a more stimulatory policy. Michael Reddell for example said it again last week, and added that the Bank's view that inflation is actually heading back to 2% may be proven overoptimistic yet again.

The Bank's responses were first that people shouldn't get obsessed with the 2% number - the Policy Target Agreement says there should be "a focus on keeping future average inflation near the 2 per cent target midpoint" and the Bank seemed to parse this as "a focus" - and second that too many microadjustments of the steering wheel to keep close to 2% will make the passengers in the back seat carsick.

There are arguments both ways. My own take is that central banks virtually everywhere have been blindsided by unexpectedly low inflation: something, still not pinned down, has meant that inflation in the post-GFC world hasn't been behaving like it "should" relative to pre-GFC relationships. In that context, our own Bank hasn't done too badly: at least we've had recent core inflation in the 1% to 1.5% range, when others have fared worse. The European Central Bank still hasn't got core eurozone inflation clearly back over 1.0%, and the Bank of Japan despite extraordinary levels of monetary stimulus has struggled to get up it from zero (currently 0.2%).

The "something" that's changed means that the old 'Philips Curve', if it still exists at all, has shifted to the left. Any given rate of unemployment brings less inflation with it than before, or as critics of the RBNZ would put it, for any given inflation target, like 2%, you can safely drive unemployment down lower than you would have before. But (a) this is all in hindsight and (b) we still don't know exactly how hard you can push unemployment down without setting off an unwelcome bout of too-high inflation.

That's where the RBNZ's latest research will be highly interesting. As the Monetary Policy Statement said on page 5, and both Bernard Hickey and Michael Reddell have picked up on, the Bank's done some new research on where that trigger rate of too-low unemployment (the 'NAIRU' as it's called in the trade) might be. All we know at the moment is that the latest best point estimate is an unemployment rate of 4.7%, within a plausible wider band of 4.0% to 5.5%. Given that we're currently at 4.5%, the Bank would argue it's gone as far as it should.

We don't know the full details yet: the Bank will be coming out with an Analytical Note on the research in the near future. My first reaction (and others') is that 4.7% looks a bit on the high side. But it could well be in the lower 4's somewhere: we're not the States, but it's interesting that the American unemployment rate has needed to drop to 4.1% before there have been a clear pickup in wage growth.

Finally, it's often puzzled me that the media don't reproduce more of the graphs in the Policy Statements. Maybe it's part of the dumbing down of the big media outlets. But in any event here are two interesting ones.

Why are world equity prices currently retreating? Because equity valuations, particularly in the U.S., had been overinflated by a period of unusually low interest rates. But as this graph clearly shows, the interest rate tide has been on the turn for some time. Valuation correction was overdue.

Nearer to home, here's how little inflation is being generated domestically, outside of housing-related costs. The blue bars are everything from school fees to doctor's visits to hairdressing prices, and currently inflation for all those sorts of things comes to only a little over 1.0%. As noted earlier, it's still a bit of a mystery that an economy with 4.5% unemployment is generating so little inflation, but enjoy it while you can: the Bank thinks it won't last.

*I've been at a press conference that died on its feet. As a financial journalist in the early 1980s I went to hear the then Japanese finance minister talk at one of the big annual multilateral meetings (ADB or IMF, can't remember which). Noboru Takeshita gave a speech of such inane banality that none of us could think of a single thing to ask him about it.

Friday, 29 December 2017

New thinking

Brining turkeys, looking after Christmas guests, and wrapping up the last bits of the year's consultancy work have eaten up my time, but I'm finally getting round to writing up the excellent Asia-Pacific Industrial Organisation Conference held at the University of Auckland earlier this month.

This was only the second time it's been held - as explained here it's a new initiative to add a regional industrial organisation event to the big American and European ones - and it's already attracting some big-name speakers and a good attendance. Over the next three years it will be held in Melbourne, Tokyo and Singapore. Nice to see our local academics presenting too: from AUT, Richard Meade (finance) and Lydia Cheung (mergers and divestments), and from the University of Auckland Simona Fabrizi (asymmetric information, and again on innovation), Erwann Sbaï (auctions), Tava Olsen (incentives) and Steffen Lippert (learning and entry).

It was heavily academic-focused, with a smattering of regulators and economic consultants, so you had to be prepared for a fair amount of pure economics theory, but then if you're at this sort of conference you'll probably comfortable feeding your inner quant. As always with the fancy models, some are down the cleverness-demonstration end, and some are analyses of well-off-the-beaten-path esoterica. But it's worth sitting through the sessions, because it's conferences like this that can present the path-breaking innovations - in ten years' time, they'll be the standard way we think about issues like two-sided markets, platforms, auction and market design, vertical integration, or oligopoly (which were all session topics at the conference).

My own bent leans towards empirical applications of the new ideas, so I especially enjoyed the first keynote presentation. Harvard's Ariel Pakes presented on 'Just Starting Out: Learning and Equilibrium in a New Market' (there's a recent version here). The new market was the UK wholesale electricity market for 'frequency response': Ariel's modelling showed how the players learned how to play the new game, and showed that they got pretty good at it reasonably quickly, with an end-result, once they'd got their heads around it, that was close to an efficient competitive outcome.

This is the sort of market where you might have expected strategic behaviour, and early on there were  indeed high bids which looked like invitations to follow. In the event tacit or other collusion didn't happen: I asked Ariel why, and the simple answer was, too many competing participants for it to hold (29 in all, with the top 10 holding 84% of capacity and an HHI of 1100). The paper says that "One area where [this kind of] learning model may be particularly helpful is in simulating counterfactual outcomes, a type of analysis increasingly used by regulatory authorities", and that's true: I'd also like to see it applied to things like our wholesale electricity market.

The other keynote was Columbia's Yeon-Koo Che on 'Optimal Sequential Decision with Limited Attention', which at first glance sounded like it didn't compete with the alternative option of a late breakfast. But it was excellent (there's a version here), and witty: his general theme was how people make decisions when they have a finite budget to spend on verifying their assumptions, and one of his examples included how people should select the media they read in a world of highly partisan "fake news".

I took two things away. One is that when you aren't especially sure about the likelihood of something, you should look for corroborative evidence, but when you're pretty confident about its likelihood (or unlikelihood), you should look for contradictory evidence. Whether that's a Great Universal Law that applies in all circumstances, I don't know, but it makes intuitive sense. And the other was that sometimes longer deliberation leads to worse decisions, something that ought to be bludgeoned into the brains of some of our policy-making and law-making institutions.

I lucked into a particularly good choice from the parallel session menu, on 'Topics in empirical IO'. Lawrence White (NYU Stern Business School) challenged the conventional wisdom that the US economy has become more concentrated (in an HHI sense). Ken Krechmer (University of Colorado Boulder) showed how control of standards (eg on how mobile phones communicate) matters for international trade and for potential use of market power. And Stephen Martin (Purdue) went into utility theory and how compensating losers with gains from winners mightn't be as easy as it looks in the textbooks: one implication was that price discrimination might turn out more welfare-reducing than usually thought.

My own contribution was to moderate the panel session, 'Big data: friend or foe of competition and consumers?', with panellists Reiko Aoki, Commissioner at Japan's Fair Trade Commission, Reuben Irvine, acting chief economist on the competition side of the Commerce Commission, and Greg Houston, principal at Australian consultancy HoustonKemp (and who kindly sponsored both the session and the overall conference).

We'd agreed to take a bit of a risk. After Greg had presented some results showing how big data can be used to  better refine geographical markets and to show the impact of new app-based services like Uber on older economy sectors like taxis, we left a good half of the time available for discussion, hoping that enough people would come along and be prepared to have a conversation. And fortunately they did.

Greg starting his presentation
The panel ready to take questions

UCLA's John Asker in the discussion, with Harvard's Ariel Pakes and Duke's Leslie Marx (co-author of the excellent The Economics of Collusion) in front

Broadly we came down on the side of more friend than foe: we (and the attendees) could see a lot of potential for society from better and greater use of the flood of modern data, ranging from better services for consumers and epidemiological and other payoffs from combining diverse datasets through to, for regulators, more accurate market definitions and clearer observation of market behaviour. But - and this was a recurrent theme - it wasn't obvious that regulators could tap into the best econometric experts at will: it's hard, especially in the US, to prise them off the beaten academic path. And the difficulties of cleaning, interpreting and manipulating databases in the terabytes are easily underestimated.

We weren't completely Pollyannas - we could see the potential risks in collusion between pricing algorithms, for example; we recognised that databases can create market power; and we had a range of conviction about whether traditional enforcement analysis and legislation are up with the New Economy play - but broadly we were technology and data optimists.

For those interested in the topic, we compiled a short reading list: a good place to start is the Competition Bureau of Canada's discussion paper (which Reuben had tracked down). And here's a copy of Greg's slides.

Well done to the local conference organising committee - Simona Fabrizi, Tim Hazledine, Steffen Lippert and Erwann Sbaï.