Thursday, 14 August 2014

Collaboration? Collusion? Who knows?

On Tuesday I went along to Bell Gully's offices to listen to the Commerce Commission's presentation on its new, improved, Competitor Collaboration Guidelines, which are about how the Commission will implement some proposed changes to the Commerce Act.
The background to these guidelines is that the outgoing government has got a bill in the parliamentary works, the imaginatively named Commerce (Cartels and Other Matters) Amendment Bill. It's obviously now stalled until after the election, but even though it's still only a Bill and not yet the law of the land, you'd think it's highly likely make it onto the statute books even after any change of government, so I think the Commission has been absolutely right in being proactive about it now.
The Bill, as and when passed, will do three things.
It will change the old "price fixing" wording of the Commerce Act, and instead say that price fixing, restricting output, and allocating markets, will all be regarded as "cartel provisions".
It will put the fear of God into hard core cartels, because they will be criminalised, with cartel participants risking jail, though there will be a two year interval (from when the Bill becomes law) before the criminal gun can be fired.
But it will also allow businesses three exemptions where the "cartel provisions are always regarded as a bad thing" writ will not run. Two of them (cartel provisions in the context of joint buying and promotion agreements, and of vertical supply contracts) will be able to be authorised by the Commission, on the usual basis that there's a net benefit (over and above any damage to competition).
The third exemption is likely to be the most interesting one: the Commission will be able to give a clearance (a generally quicker and cheaper process) to cartel provisions that are related to collaborative activity. Basically, if it's genuine collaboration, there are good reasons for it, the dominant purpose isn't to reduce competition, and it doesn't cause the proverbial SLC (a substantial lessening of competition), it will get the nod.
Sounds good. But I felt the presentation feeling a bit of disquiet. I'm somewhat bothered by where we've ended up: I think businesses now have no more certainty than before (and arguably less) about what is or is not kosher when it comes to possibly cooperating with competitors. Before, you knew that a lot of activities were clearly not on: now, some might be.
None of it is down to the Commission, by the way: Mark Berry and David Blacktop did a fine job of explaining the guidelines, and the Commission has taken on board the feedback it got on an earlier version. It's also made a big effort (as it's been doing with its other publications) to write its guidelines in plain English.
But businesses are still somewhat at sea on what's licit or not.
Part of it is down to "the scheme of the Act" (as the lawyers say). When you've got draft legislation that says, we're getting tougher on A and now we'll throw you in the clink if you do it, but we're more relaxed about B, it's now alright and in the country's best economic interests, then there'd better be a clear distinction between the A (collusion) and the B (cooperation), or not much B is going to happen. Legislation can't always do that, and this legislation certainly doesn't.
And it's also partly because the distinction is inherently fuzzy. The best the Commission can say at this point is that the outcome of each clearance application for collaborative ventures is likely to turn on its facts, which is true, but not massively enlightening for companies when they are wondering whether to enter into something collaborative in the first place.
So you can understand why the biggest demand from businesses has been for more worked examples of the sort of collaborative thing that is likely to be okay. There are a couple in the guidelines - companies developing an oil field and jointly selling the oil, software companies developing a product and setting the price they will both sell it for - but not enough to people to get a really strong feel for the area. If there is anything missing or short changed in the guidelines, it's the economics that might lie behind collaborative activity - for example, the consumer and producer benefits of commonly developed standards in network industries (an example I got from the 'Cooperation and Compatibility' chapter of Shapiro and Varian's book, Information Rules). But there isn't a single economics citation in the chapter that deals with collaborative activity, though the law, the cases and even - Gawd help us - the Oxford English Dictionary get a look in.
At Tuesday's meeting one questioner asked about companies jointly tendering for projects - a good question, and one that crops up all the time in business. But it's still a very grey area. I can understand a perfectly valid risk mitigation reason for companies getting together: a company may not want to take on a very large contract if the risk of it going wrong might sink the company, and it might well prefer to go in with a partner so that if everything turns pear shaped later, the company will have shared the risk. But equally if there were four bidding companies before, and they collapse into just two consortia of two companies each, have we now got an SLC?
As for the likes of the meat industry, where there seem to be endemic pressures to go for Fonterra-style or other initiatives that fall somewhere along a cooperative/collaborative/collusive spectrum, are they any the wiser post this new Bill and the guidelines?

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