Let hard core cartels off the hook? Nah

The reactions to the news that cartel behaviour will not, after all, be criminalised, have been all over the place.

I covered the initial reactions from the law firms most involved in competition law here as well as my own reaction, where I was disappointed that "hard core" cartels were not going to be criminalised (I only chose the law firms, by the way, because they were first to react, not because I was climbing into them); John Small has written 'Criminalising cartels' which doubted the rationale for the non-criminalisation decision; Bernard Hickey has criticised the decision (this version has more comments but this version has prettier graphs); Paul Walker has written 'Do we need competition policy?' and 'Competition policy, again (updated)', broadly questioning the case for criminalisation and taking a critical approach to interventionist competition policy in general; and Jim Rose has written a thoughtful piece, 'Does competition law in high-tech markets help consumers?' which is less about the criminalisation issues but more (like Paul) thinking about the scope of competition law particularly in modern more tech-based economies. No offence to anyone I've missed.

Over at the New Zealand Dr Oliver Hartwich also came out with a piece, "Three cheers for competition (and for Paul Goldsmith)", which welcomed the non-criminalisation news. But I have real difficulties with some of his arguments.

Here's one of them:

The problem lies in the nature of competition law. It is an area of law which is prone to arbitrariness. Practically everything is a matter of interpretation...In short, the nature of competition law is such that you would never want to make it the basis of criminal sanctions. Criminal law requires a great degree of predictability. If you commit a crime, you should know what penalty to expect if caught. With competition law, you often do not even know you have done something wrong until a judge tells you so

Now, I've some sympathy for this argument in some contexts, and have said so in the context of 'abuse of market power': where s36 of our Commerce Act might or might not apply, and megabuck fines might or might not be in play, it's a fair point.

But as I said then, "there will be instances where there are guys in black hats who know they are wearing them", and "hard core" cartels are the classic example. The people engaged in them know there are no 'efficiency' or 'collaborative activity' benefits. They know full well that the sole purpose is to rip off unsuspecting buyers of their products. And if you think those old style, smoke-filled-room cartels belong back in the days of Teddy Roosevelt's trust-busting US of A, and things like that don't happen anymore, then you haven't been following the international case law*.

A second argument Dr Hartwich makes is in the same general area of fuzziness of the law:

Then there is the difficulty in finding proper definitions. To quote the late economist Murray Rothbard, “there is nothing anticompetitive per se about a cartel, for there is conceptually no difference between a cartel, a merger, and the formation of a corporation: all consist of the voluntary pooling of assets in one firm to serve the consumers efficiently.” Indeed. Yet somehow the formation of a corporation is fine whereas a merger or a cartel might be illegal.

Rothbard's argument is surreal. They're self-evidently not the same, and self-evidently do not have the same effects. The formation of a corporation very likely involves the creation of no market power; a merger of two businesses might or might not create market power; a cartel almost certainly does.

And to say that they all different routes to the same objective, "to serve the consumers efficiently", is false in the case of most cartels, and absolutely, blatantly, spit-in-your-eye false in the case of the "hard core" cartels I'm most concerned about. They are by definition inefficient from an allocative efficiency point of view - consumers don't get to buy the quantity they would have liked to, at the price they'd be happy with, in the way they would have in a workably competitive market - and very likely inefficient from a dynamic efficiency point of view. For example, I can't see cartelists putting much effort into innovation that might undermine the product they've got a stranglehold on.

But pulling back from some of the detailed arguments, let's take an overview.

A lot of the comment has been along the lines that free-market people who are generally in favour of letting businesses get on with their business without too much interference - and I don't have a problem with that as a general approach - ought to be glad that a potential piece of heavy-handed business legislation has been rolled back.

Let me give you three reasons why I think that, as a general approach, is wrong in this instance.

The first is that cartels interfere with the proper operation of markets. You can't be a believer in letting markets rip and in standing idly by when cartels swing into action. Market prices are supposed to be signalling consumers' demands and producers' opportunities. They're not, when the prices are getting stuffed up by cartels. That's why proponents of markets (like me, and competition authorities everywhere) get so hot under the collar about them.

The second point is - for folks who genuinely worry that criminalising cartels, or even prosecuting them under our present civil law arrangements, risks penalising possibly welfare-enhancing collaboration and 'chilling' things consumers would have gained from - is that (a) we already have a route for companies to justify 'good' cartel arrangements (John Small's post was very good on this) (b) the proposed Commerce Act changes are introducing another one, and (c) the criminalisation proposal (as was) had an 'out' for making an honest mistake.

Let me explain. You form a cartel (I'm using 'cartel' to cover all the cartel-like behaviours, not just price-fixing). If that's all you do, you're toast. You're bang to rights under s30 of the Commerce Act. It's deemed, out of hand, to be a malign substantial lessening of competition.

But you can, under the Act as it stands, apply under s58 to have your arrangements 'authorised'. This means going through a process where you show that what you're doing may have some competition downside, but it's outweighed by the benefits. You'll see a good example here: the Commission authorised the Infant Nutrition Council's Code of Practice "which restricts advertising and marketing of infant formula for children under six months of age", "restrictions on advertising and marketing may lessen competition", but "the public benefits arising from higher breastfeeding rates outweigh any lessening of competition from the arrangement".

The proposed changes to the Commerce Act introduce another, 'clearance', channel. 'Clearance' is where you get the Commerce Commission to agree that there's no competitive detriment in the first place, so you don't even have to go through the balancing of detriment and benefit exercise. This clearance route, incidentally, is the standard way many proposed mergers get the nod.

But wait, there's more. As the Commerce Committee said (on p9 of the proposed changes), "criminal sanctions should be reserved for conduct that is truly culpable. A person should have intended to engage in the conduct in question, or at the very least have been reckless as to its consequences, to attract such sanctions". Quite so, which is why (see p6) people could have used an "Honest belief" defence, namely "they honestly believed that the cartel provision of the contract was reasonably necessary for the purpose of the collaborative activity...The term “reasonably necessary” requires the exercise of judgment in which a person could make an honest mistake".

This looks to me like quite an extensive suite of opportunities for people to argue their case for a pro-competitive cartel and, in extremis, escape having their collar felt if they've accidentally and honestly strayed over the line. And it still leaves the worst of the worst liable to have the book thrown at them, which is as it should be.

The third point for pro-business people to ponder is that, very often, it is other businesses that bear the brunt of hard-core cartelists' ripoffs. While there is no 'typical' cartel, a very common example is a cartel for some industrial input. You may see comments floating around at the moment about cardboard packaging, which is a reference to one of our closer to home cartels, the Amcor/Visy rort which stitched up the market for cardboard cartons, a mainstay component for many manufacturing and distribution businesses. As the ACCC pointed out, "The Federal Court ordered Visy and Amcor to pay $95 million in damages to a customer class action involving more than 4500 businesses".

Incidentally, I highly recommend the ACCC's 'Cartels case studies & legal cases' resource (which is where the quote came from). If nothing else, it's going to shake any unthinking assumption you may be holding about the harmlessness of cartels.

And with that I'm almost done. I'll just add that I'm somewhat taken aback. I was expecting more reactions along the lines, "Some cartels are beyond the pale. They are disgusting, exploitative conspiracies. I condemn them. I strongly advise everyone not to go there. But there's a whole bunch of activities that are more difficult to categorise..."

I'm still waiting.

*You might want to read Robert Marshall & Leslie Marx's book, 'The Economics of Collusion: Cartels and Bidding Rings'. It's excellent: as my long suffering colleagues in the economics trade will vouch, I've been wishing it on everyone. It's also readable by non-economists, as the authors have deliberately structured it for the intelligent lay person. The details of the lengths cartelists have been prepared to go to defend their conspiracies are an eye-opener.

"Hard core" cartelists are criminals

Earlier this week the government said that it is flagging away criminalising cartels. The rationale was "the significant risk that cartel criminalisation would have a chilling effect on pro-competitive behaviour between companies": in other words, businesses could be put off from engaging in worthwhile cooperation for fear of straying into heavily penalised criminal territory.

Most of the reaction to the news was either positive or matter of fact.

Buddle Findlay said they had always opposed criminalisation, for the very reason the government has now recognised. They also felt that there had been a side benefit from the whole exercise: "While the need for prison jumpsuits for cartel conduct no longer exists, the threat of criminalisation has been a significant factor in renewed compliance training and focus for New Zealand businesses.  In our view, the threat of criminalisation by itself has been critical to deterring anticompetitive behaviour".

Simpson Grierson reported the news without taking any positions, though they picked up on something else that also might have gone off the government's radar - the proposal to bring the shipping lines under the Commerce Act. There is, of course, no good reason for shipping line cartels to be exempt from the competition law of the land, any more than there was any good reason for IATA, pre 1980, to run a global airline cartel.

Minter Ellison Rudd Watts said the change in tack would be "welcome news for businesses which have expressed strong concern about the potential chilling effect that criminalisation could have on legitimate pro-competitive activity". They also, correctly, said that "Criminalisation is a controversial issue, not least because of the difficulty in evaluating its deterrent effect", pointing out that for various reasons actual criminal prosecutions in Australia and the UK have been thin on the ground (I'd also spotted the Aussie development).

And Chapman Tripp's consultant Grant David said in the NBR that dropping criminalisation was a good idea, but there was a better reason for it, which was "the question should be whether it is appropriate to subject executives to serious risk of imprisonment for conduct that is uncertain in nature and can be deterred in other ways" (here's a link but it may be paywalled if you haven't signed up).

My own take is somewhat different. I've been left with distinctly mixed emotions.

There's the bleeding-heart liberal part of me that welcomed it. The western world - particularly the US, but more generally - is getting overfond of redneck policy, long on retribution and short on rehabilitation and prevention.  In that light, one less criminal sanction on the books isn't a bad idea.

And there's the economist part (and the barrack-room lawyer part) of me that can see the government's point about potential chilling effects on cooperation, particularly as other proposed changes to the Commerce Act were simultaneously making collaborative activity easier to organise. Easing up on cooperation on the one hand, and (arguably) making it more uncertain on the other, didn't make for a completely coherent policy package.

But.

But on the other hand I have a deep, visceral dislike of "hard core" cartels, as they're often called in the competition enforcement business. These are the premeditated, concealed, hijackings of the competitive process: the ones with the coded messages, the throwaway mobile phones, the maps with the cartel members' territories, the furtive meetings in hotel rooms on the fringes of trade meetings in Osaka or Düsseldorf or Buenos Aires. These go beyond the concerns economists or lawyers might have about the affront to competitive markets: they are concerns every citizen ought to have about the proper operation of their society. "Hard core" cartels are in the same general territory as fraud and embezzlement, and ought to attract the same penalties.

Self-evidently, these sorts of rorts would never have been confused in the conspirators' minds with licit collaboration.

So I regret that the proposal, along with grey area "is it cooperation or is it collusion" activity, will also let the "hard core" cartels escape criminalisation. It can't have been beyond the wit of statutory draftmanship to have carved out a description of "hard core" cartel behaviour, and criminalised it, just as there are gradations of other bad behaviour (murder/manslaughter, reckless/dangerous/careless driving).

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.

The dance of the seven veils (economist version)

..and what I mean is, I'm going to show you a series of graphs, but I'm going to take my time baring all.

Here's the first bit.

This shows our actual official cash rate (the OCR, the bold black line) over the last couple of years, compared with the Reserve Bank's projections of where it thought the cash rate would need to go (the various coloured lines, which are forecasts the Bank made at different times). You'll see that recently the OCR has gone down, though the Bank had thought it would need to go up. In our 'gotcha' culture, there have been plenty of people to say the Bank made a 'mistake', but as I've said before, that's probably not the best interpretation. People make the best decisions they can under considerable uncertainty, and every now and then they get blindsided.

Right. here's the next bit.

This is the entire history of the Bank's interest rate projections, since we started on the inflation targetting caper, compared with what actually happened.

I could look at this graph for hours. No, really, I could. It's fascinating.

If you were a blame-seeking muckraker, you could go to town on this. "For over twenty years the Bank has been saying that the OCR will need to go here, or there, and the OCR has gone somewhere else. Heads must roll!" But since we are reasonable people who understand nuance, reality, complexity and uncertainty, let's try some different responses.

My first thought was that it said something about forecasting. Very often, in the financial markets, the default forecast is that something that is going up, will go up a little more, and then drop back (or, if it's going down, will drop a little more, and then rise). You see it all the time in, for example, forecasts of exchange rates. The default tends to be some kind of "reversion to the mean" - people tend to think the current trend could run on a bit more, but will eventually drop back to something more "normal". So my initial reaction was that this looked like a not very sophisticated forecasting scheme.

But in talking to some folks at the Reserve Bank's modelling workshop today, I came to the view that there's something else happening. These aren't really "forecasts" in the normal sense of "what will happen to something": rather, they're actually the RBNZ's view of what OCR will be needed to keep inflation inside the RBNZ's target range. Seen in that light, what the graph arguably shows is that the RBNZ has tended to think that monetary policy is more powerful than it actually is.

For example, over that period from 2004 to 2007, the Bank thought that modest increases in the OCR would have enough oomph to keep things under control: in fact, the OCR had to rise a lot more than that to do the job. Similarly, in the weaker post-GFC period, the Bank thought a brief period of stimulus would be enough to fire things up. In the event, it took a much longer time, and much lower rates than the Bank had expected to wield, to try and work inflation up again. And it hasn't succeeded yet: it thinks it's on track, and that today's low interest rates will be enough to get inflation back to near 2%. But on this showing it's just as likely that monetary policy still isn't as high-powered as you might imagine, and that even lower rates for even longer might be required.

You might think, why has our central bank held this overoptimistic view of the influence of monetary policy? I don't have a good answer to that, but - and here comes the next bit of the striptease - we're in good company. Here are the equivalent forecasts made by the Norwegian and Swedish central banks, in both cases dating from when they also embarked on the great inflation targetting adventure.

Interestingly, they have both tended to err in the same systematic way - they have persistently thought that interest rates would need to be higher than actually proved necessary. Part of it is happenstance: the post-GFC global economy has been a strange place, where central banks might have reasonably expected inflation to have picked up as the global economy has recovered, but it hasn't, for reasons that aren't clear yet. And part of it, in my view, is that when a central bank first sets out to be an inflation targetter, it's absolutely got to establish its credibility early in the piece. And above all, that means not letting inflation go above target. So there's an inevitable tendency to want to set rates at a conservatively high level that takes an inflation-above-target outcome out of play. You can see something much the same playing out in the early days of our own experience.

All of this, by the way, came from an excellent paper albeit with the rather opaque title, "Monetary policy forecast and global indicators", presented by Hilde Bjørnland (BI Business School and Norges Bank) at today's workshop. It's not up on the RBNZ's website yet, but it'll be well worth your while to have a read when it is. I'd also recommend "International inflation dynamics and the New Keynesian Phillips Curve: The role of the global output gap", by the Bank of Thailand's Pym Manopimoke, where she shows that global influences are playing a larger role in individual countries' inflation outcomes, and the rather inscrutably named "Foreign shocks" by Norges Bank's Drago Bergholt, where (if DSGE is your thing) he improves your workhorse DSGE model to allow for a greater influence for international linkages.

Poorer management, lower productivity. Makes sense

On Tuesday we had the Productivity Commission's excellent symposium on innovation  and productivity, where one of the main talking points was the growing importance of investment in 'intangibles' like research and knowhow. We're not especially good at it, as the three right hand bars in the graph below show (taken from this recent Productivity Commission working paper, 'Measuring the innovative activity of New Zealand firms' - symposium attendees will recognise it from the brochure).

By coincidence the Peterson Institute for International Economics in Washington had a conference last month on 'Making Sense of the Productivity Slowdown' which covered some of the same landscape. One of the presentations in particular was quite suggestive about one of the intangible knowhows we could do with a bit more of - and that's managerial skill.

The LSE's John Van Reenen was talking about 'Productivity Issues: Past, Present & Future'. He's been working with a sophisticated index of management expertise: you can find out more about it at the World Management Survey website, but in essence it grades companies, on a 1 to 5 scale, on how well they do 18 different management things. Van Reenen (and others) have then gone on and looked at the links between management expertise, as measured, and various financial and economic outcomes. They are generally sizeable: here, for example, is the global link between a firm's Total Factor Productivity (TFP) and the quality of its management.

TFP, by the way, for folks not versed in the black arts, is the bit of a firm's performance left over after you've accounted for the contributions of its workforce, its employees' skills, and its capital spending. At one level it means "anything we can't get a handle on", but it's also often used as a shorthand for important intangibles like management quality, social skills and "the way we do things round here", and smart processes.

In this latest outing, he's had a go at explaining differences in countries' TFP: if you make a plausible assumption about management's importance in overall TFP, and you have measures of TFP and management expertise, you can estimate how much of countries' TFP differences is down to differences in management. Often, in these kinds of surveys, New Zealand tends to be among those absent, but for once we're in the numbers, and here are the results. Differences in TFP are measured as a percentage of the US level. I've circled NZ in red.

Now, I think we can all agree that this is somewhere down the more heroic end of estimation, and also that there are the usual issues of correlation and causation. But we can also agree that rough and ready estimates, that are approximately in the right sort of area, are also useful things to have. 

And I think there is something to this one. The overall pattern looks realistic: poorer countries at lower levels of development - the ones on the left with, say, less than 20% of America's TFP - tend to have bigger issues to confront than the relative quality of their management, and sure enough the contribution of management to the development gap tends to be low. But at higher levels of development, where you've got higher levels of resources available, how you manage them becomes more important. 

On these estimates, 43.5% of the productivity gap between us and the States is down to our relatively weak management capabilities (and it's interesting that Australia, with a somewhat similar business environment to ours, comes out with a similar number, at 45%).  These numbers also sit comfortably with other evidence that our management capabilities aren't that flash: for example, the Productivity Commission's services inquiry found some data that suggested that low ICT uptake appeared to be linked with a "couldn't be arsed" approach by business owners (as I posted at the time).

Even if the proportion is uncertain - let's just say it might be somewhere between a quarter and a half - it makes for a significant line of attack if we're thinking about better management's potential contribution to narrowing the productivity gap with overseas. There were some neat ideas at this week's productivity symposium - but they're not going to get the traction they should if our business managers are slower to run with them, or worse at execution, than their overseas competitors.

A visit to a Special Housing Area

A while back, I saw that a Special Housing Area (SHA) had been set up quite close to us, in Browns Bay. So I went and had a nosey, as you do.

It wasn't what I'd expected, from a number of perspectives. I'd had at the back of my mind that SHAs would be reasonably substantial sites - it's rather implicit in the term 'area', you'd think - so I was somewhat surprised that the SHA consisted of a single, small to medium sized commercial building at 4 Bute Road (pictured below).

To be fair to Auckland Council, this must be an unusually small SHA. Their guidelines for approving SHAs say (at point 5) that "The council has a preference for SHAs with a yield of at least 50 dwellings", and this one just scrapes in. The Council's SHA web page says that "The site at 4 Bute Road, Browns Bay will be developed for retail at ground level with four levels of apartments above, comprising 54 residential units plus accompanying car parking".

And if you're wondering how you get 54 apartments onto the former site of a not very large New World supermarket, the answer is that they'll be - I don't know the best real-estatese to use here, but "snug" might do. As the webpage says, "The residential units are a mix of one-bedroom (77m2) inclusive of balconies and two-bedrooms (88m2) inclusive of balconies".

I've got no problem with any of this. If people want to buy fairly small apartments, why not? And as the Council web page says, apparently people do: "The proposed scheme has been developed in close liaison with local real estate agents who have identified significant demand, particularly from older residents seeking to downsize and remain in the suburb". While I still think "area" is pushing the ordinary meaning of words a bit, let's park that.

But it also got me thinking about the meaning of "Special". From a land use point of view, there's nothing in the least bit "special" about 4 Bute Road. The area around it has already got lots of multi-storey mixed retail/residential apartment blocks. Here are two of them, also on Bute Road.

I'd have thought the planning approval discussion at the Council would have gone something along the following lines.

Trev: "Hey, Kev - you know Bute Road?"
Kev:  "Yep".
Trev: "Is that the one with all them apartment blocks?"
Kev:  "Yep".
Trev (picks up rubber stamp): [Thunk]

So I don't know whether this site was ever going to be a goer under the SHA regime, where developers get faster-track approval in exchange (in particular) for including a component of "affordable" housing (section 6 of the guidelines has the definitions of "affordable"). Personally, if the social objective was solely a faster build, I think I'd have preferred a simple, "accelerated consent" process without side conditions, but I can also see the planners' wanting to get a social quid pro quo. But I'm not sure any of this applies to 4 Bute Road: the developer, I'd imagine, would have figured on getting planning approval fairly readily, given the past approval of several projects just like it, and without giving up any potentially expensive concessions.

Not that its being an SHA, or not being an SHA, seems to have made any material difference either way. The site's been vacant for some considerable time, and (I drove past a few moments ago) is still vacant, with no signs of imminent activity. Don't know why: if I had to guess, I'd say it's because the Auckland construction market is at or beyond full capacity, and projects are just going to have to take their turn in the development queue. But in any event, I don't think I'd be proposing 4 Bute Road as a poster child for the SHA initiative.

Good progress by the Aussies

Sometimes you have to admire the Aussies.

First they had the gumption to realise that competitive markets are part of the answer to an economy working better, and to do something about it. As their Federal Treasurer Scott Morrison said this week, "Competition policy is one of the surest ways to lift long-term productivity growth and generate economic benefits that can be shared by everyone". And they set up a competition policy review - the 'Harper' review- that delivered good results in short order with modest resources. Now, this week, the Aussie government has said it's going to run with the majority of the Harper recommendations - 44 out of the 56 - and has 'an open mind on' or has 'noted' the rest of them. Nothing's been rejected out of hand, or at least that's the official line, though I suspect the odd one here or there will be quietly left to expire. There's an item-by-item list of responses here.

It's not the most important of the Harper recommendations, but I was particularly interested in how they would react to the one on allowing 'market studies', proactive inquiries into the state of competition in markets. As I posted this week, I think this is an open and shut case: they're an obviously useful - maybe even necessary - part of the competition toolkit. The Aussies have come to the same conclusion. It's not entirely clear (to me at least) whether the Aussies will be running market studies solely through the ACCC (which the response to Recommendation 45 suggests) or whether they will also be done by a new body, the Harper-recommended Australian Council for Competition Policy, which will shepherd the general competition reform agenda. Either way, market studies are a goer. We don't (I reckon) have the scale to set up an entirely new body ourselves, but the sooner we get to the commonsense position of the Commerce Commission doing market studies in New Zealand, the better off we'll be.

Many of these agreed recommendations have the potential to make important improvements to Australian productivity. The big ones include getting more choice and competition into social services; making sure that regulation doesn't unnecessarily restrain competition (taxis/Uber look like getting dealt to, as well as mandatory product standards); ensuring that local authorities' zoning and planning doesn't have anticompetitive outcomes; and improving and simplifying competition law ("a prohibition on concerted practices, refining exclusionary conduct provisions, simplifying cartel laws, streamlining merger clearances, introducing a class authorisation process and establishing more flexible collective bargaining provisions"). And there's a long tail of smaller good ideas which will cumulatively add to the positive impact.

Not all of them are signed, sealed and delivered. A lot of the recommendations will still have to be worked through with the Australian states. And some of the more difficult ones have been kicked for touch - pharmacy reform, second-hand car imports, and, especially, reform of s46 of the Aussie competition law, the equivalent of our s36 of the Commerce Act, which deals with the abuse of market power. It hasn't gone dead - "the Government will consult further on options to reform the provision and release a discussion paper on this topic" - but there's clearly a major political bunfight on the way between Big and Small Business, complicated by political flak (the Aussie Labor Party isn't behind the Harper s46 approach). Here's a good article from the Sydney Morning Herald that gives a feel for who's backing what.

Even so, it's obvious that over the next wee while Australia will be building up quite a head of competition reform momentum. And it puts our limited exercise - the recent 'Targeted review of the Commerce Act' - in the tuppenny ha'penny place by comparison. We've already got a bit of an issue in trying to close the productivity gap with Australia: we're going to have to do a lot more in the competition arena if the Aussies aren't going to pull even further ahead.

The case for market studies - again

Imagine this: the police view their role as solely responding to complaints.

There won't be any patrols to keep areas safe: the police cars will only arrive if someone rings up and says there's something bad going down locally. There won't be booze bus checkpoints: drivers will be breathalysed only if they've already crashed into someone. There won't be undercover operations: the meth factory won't be found unless it gets dobbed in. You get the picture.

Or consider fisheries protection. Will  there be a ranger out on the beat checking that nobody is netting everything out of your favourite trout river? Nope. Anyone checking the health of species stocks? Sorry. Giant trawler scooping up everything in Golden Bay? "What a shame. If only someone had rung in and told us"....

But that, folks, is pretty much where we are when it comes to policing the state of competition in New Zealand. As MBIE's recent 'Targeted review of the Commerce Act' reminded us (p55)

there is no single, broad power to investigate any market from a competition perspective and make recommendations on how improvements can be made, as is found in comparable jurisdictions

The review was looking at the case for 'market studies' - a loose term, but one which essentially means that competition authorities can go out and proactively look at markets and see if they are working competitively. This is how the review summarised matters as it saw them (pp6-7):

Three interconnected approaches to market studies, as seen in the international experience, are identified: 

• diagnosing market problems;

• removing regulatory barriers to competition; and

• building an evidence base as a precursor to enforcement.

The Ministry considers that the question of whether New Zealand needs a formal market studies power is dependent on whether there is a definable gap in its competition framework that aligns with one or more of these approaches.

The last sentence is one only a policy analyst could love, but in plainer English, and I'm reading a bit between the lines here, where the review got to was that it could see some value from market studies in diagnosing market problems, seemed a bit ambivalent about using them to remove regulatory barriers (possibly because it's got its own programme of work in the same area?), and ruled out the third use ("this kind of extension to the Commerce Commission’s powers is unlikely to be helpful").

As it happens, I don't mind ruling out the third, precursor-to-enforcement, use either. But from every other perspective I'm strongly in favour of the Commerce Commission getting market studies powers, primarily on police-patrol  and fishery-protection first principles but also from a variety of other perspectives. In my opinion the review did not do the pro-studies case full justice. As one example, it didn't canvass the idea that market studies could be used as an accountability device, to see if the Commerce Commission had actually made a difference to the state of competition in a market.

So here's my go at redressing the balance. Earlier this year I presented a paper at the NZ Association of Economists conference, 'Is the competition toolkit missing its torch? The case for market studies'. It's a full-blooded, pro-studies piece: the original version is here but I've updated it a bit since, and you can find the new, improved version here. If life's too short, here's the conclusion:

Market studies have become a standard tool for competition authorities in many overseas jurisdictions, but have not been made available to New Zealand's. Current arrangements have become increasingly incongruous in the light of overseas adoption, the recommendations of two official inquiries (in New Zealand and Australia), academic assessment, and practical experience with Commerce Commission and other investigations which, while not strictly 'market studies', served the same function and shared the 'look and feel' of formal studies. It is time to allow, and require, the Commission to conduct studies in order  to realise the range of pro-competitive benefits typically associated with them, as well as to prevent mistaken policy responses to non-existent or misdiagnosed competition 'problems', and to provide an additional accountability measure of the Commission's outcomes.

When network effects go bad

"Final Mail Newsletter", says the December 2015 issue from a chap I buy stuff from. "Due to the increased costs of postage and decreased service from NZ Post this will be the final newsletter that you will receive via post. From 2016 the Monthly Newsletter will be sent out by email".

Nothing new there, you might think: that's how it is these days. And yet it says some important things about monopolies and network industries.

One is that we tend to assume that monopolies, and especially those 'natural' monopolies, are a fixture that we're lumbered with. There's only ever going to be one national grid for electricity transmission, only one network of letterboxes and post offices. And with that mindset comes at least some disposition towards regulation - if nothing's going to relieve us any time soon from our vulnerability at the feet of these monopolists, at least we can (say) give them a dose of price regulation and put some limits on their profiteering.

But as NZ Post shows, monopolies aren't always - I'm tempted to say, aren't often - the impregnable fortresses they look like. New tastes, new technologies, new substitutes undermine them, particularly as there is the very strong market incentive (relief from the monopoly's high prices) to find alternatives. Regulators shouldn't be naive or blasé about monopolies, and shouldn't automatically assume, Micawber-like, that some innovation will come along and get rid of the problems the monopoly is currently creating. But they shouldn't automatically assume that monopolies are forever, either, and particularly in the more technologically dynamic parts of the economy.

Another thing NZ Post's problems show is the underbelly of network effects. When they're working for you, everything gets exponentially better. When they turn against you - take your pick of 'vicious circle', 'vortex', 'vanishing up the orifice of your own infrastructure'.

In NZ Post's case, e-mail has led to "the ongoing decline in the core letters business", as it said when announcing its latest annual results: "Letter volumes declined by 10% last year and are expected to keep falling by at least that amount annually. Falling letter volumes is a reality worldwide". For any network operator, like Post, the cost of the expensive infrastructure built for peak historical volume gets spread across less and less, and either prices go up (and customers desert even faster), or you try to wind back the infrastructure, which, even if feasible, won't be costless, and may degrade service quality (even more customers head for the exits).

NZ Post's fighting back best it can, but sometimes the unwinding of network effects is spectacularly terminal. MySpace (as originally called) is my favourite example: according to its Wikipedia entry, it was valued at US$1.5 billion at its peak and in mid-2006 was the most visited website in the US. In 2011 it changed hands reportedly for US$35 million, and this year came in at #1296 in US website traffic. So when I see the EU competition authorities having a go at Google's "market power", my inclination is to say, "Is that right?"

In an unwind, it doesn't help a monopoly - and I'm not pointing fingers at NZ Post here, it's a general comment - if it's pigged it in the days of its pomp. If it's pillaged the pool of consumer surplus when the going was good - price discriminated,  bundled, manipulated service quality and product design, the whole toolkit - it's got little or no customer loyalty to brake or halt its decline. It's not just the regulators who are liable to think, mistakenly, that monopolies are forever: so do the monopolies themselves.

Black hats - or grey?

Yesterday I posted about how I liked where MBIE's review of the Commerce Act had got to with its conclusion that section 36 of the Act - the bit that aims to curb firms with market power from nobbling the competitive process - wasn't working as intended.

But there was one comment in the review that jarred with me at the time, and after thinking about it for a while, I've figured out why.

It came in the bit on p29 where MBIE was talking about how the way s36 works in the courts stacks up against the criterion of 'simplicity'. They were right to say, not well, in particular from the point of view of a plaintiff (typically the Commerce Commission, but firms can also have a go at private prosecutions). When the courts decamp into the alternative universe of the 'counterfactual' - what would firms have done in a hypothetical world where they didn't have market power - the possibilities for rabbits to run in every direction are endless. MBIE was right to call the process "defendant friendly".

But along the way MBIE said this (I've added the bit in brackets to make MBIE's point clearer):

The problem here is not so much one of predictability for powerful firms – businesses will generally know if they are acting in a way that they would not in a competitive market. The problem seems instead to be the cost and delay involved in [the plaintiff] making a case under the counterfactual test

Frankly, the first sentence is just plain wrong (the second is mostly right).

Businesses very often won't know if they are acting in a way that they would not in a competitive market. That's precisely why we, and the Aussies, and competition authorities globally, have been having these rethinks about defining abuse of market power and policing it: it's a grey area, where reasonable people can come to different conclusions. What is vigorous but fair competition by a big company can be very hard to tell from tactics that exploit the company's bigness to skew the competitive playing field. In fact, that's exactly what the (in)famous Pink Batts case (which MBIE cites) demonstrated: courts took different views, with the House of Lords, who had the last bite of the cherry, taking the vigorous but fair line.

The biggest current example is Google's bunfight with the EU competition police. Is it really abundantly clear that Google's giving higher rankings in search results to companies that advertise with it is "anti-competitive"?  If you, um, google it, you'll readily find experts on both sides.

I wasn't born yesterday: of course, there will be instances where there are guys in black hats who know they are wearing them. There have been clear cases where competition authorities have spotted and pinged egregious behaviour that would have been found anti-competitive on pretty much any reasonable definition of abuse of market power.

But it's not the right way to typify where many companies are likely to find themselves - in the real, greyer world.

Good outcome - but now what?

Earlier this week MBIE came out with its 'Targeted Commerce Act review', which contained its long-awaited revisit of s36 of the Commerce Act - the bit that deals with anti-competitive use of a position of market power. It also included a review of non-litigation remedies available to the Commerce Commission (such as settlements, and cease and desist orders), which I hadn't known it was looking at, and the case for market studies, which I did. I'll come back to the remedies and market studies in another post.

The big news - and it's good news - is that MBIE has got to the same place that many others have got to with s36: it's broken and effectively unworkable. That's essentially what the Commerce Commission has been saying, in more diplomatic language, in (for example) its latest Statement of Intent (p16):

There is still uncertainty about the application of section 36 of the Commerce Act, which deals with monopolistic conduct. The way New Zealand’s courts have interpreted section 36 has created difficulties in applying the law. Given the complexity and cost of these types of cases, we choose very carefully which potential monopolisation cases to investigate. We would like to see a review undertaken of section 36 and will contribute to any potential reform in this important area

MBIE has got there as well, for two main reasons. One is that it felt that the current law, and its interpretation by the courts, risked letting companies get away with anti-competitive behaviour because it is too easy to claim that it's what any company, with market power or not, would have done. It gave this example (p28):

Exclusive dealing, for instance, frequently occurs in competitive markets as businesses seek to control the distribution of their products. However, the same conduct when carried out by a business with substantial market power can result in significant competition detriments, at worst eliminating all competitors from the market.

MBIE also cited (p28) a statement by the chair of the Aussie ACCC stating that it had been unable to ping a range of anti-competitive behaviour under the equivalent provision of the Aussies' legislation.

The other main leg of the argument is that the legal hoops a plaintiff has to jump through to make out a s36 case fail the criterion of having simple, comprehensible competition legislation. This is the key bit (p29), and I couldn't agree more:

The evidential burden for the plaintiff of proving a hypothetical counterfactual is simply too heavy in many cases. In particular, a mandatory requirement to construct a hypothetical competitive market of at least two participants requires difficult assumptions to be made. These difficulties are compounded by the courts’ observation that the analysis need not depend on realistic or practical assumptions, so that unrealistic scenarios are permitted. Such an evidential burden for the plaintiff has increased the complexity of the section 36 process. The prohibition has ultimately become defendant-friendly.

MBIE also looked at s36 and the courts' interpretation of how to apply it against the criterion of consistency - internal consistency with other parts of the Commerce Act, and consistency with what other countries do - and found that our current approach fluffs it on both counts. For example, "section 36 is significantly different from equivalent provisions in the US, the European Union and Canada" (p30).

MBIE couldn't decide how another criterion might be applied - whether some allowance ought to be made for our being a small, remote economy. Should we ease up on policing behaviour, on some kind of 'national champion' grounds, or be especially vigilant when we've got more than our fair share of large fish in small ponds? Can't say I've got the same difficulty deciding - 'No national champions, please'.

The review was a problem-definition issues paper, so it didn't march smartly on to proposed policy solutions, but it indicated a whole range of possibilities, including, I'm pleased to say, the route the 'Harper review' of Australian competition policy took.

But getting anywhere with them  is going to be tortuous. For me, the next steps look glacially slow. People have till next February to get their views in to MBIE on this review, at which point there may or may not be an Options Paper, which in the grand fullness of time will have its own submissions and countersubmissions, and may or may not lead to proposed legislation (possibly with another round of submissions), and which will finally struggle to get a slot on the already overcrowded Parliamentary calendar (have you seen what it looks like? It's horrendous). And all this on a topic that (as some media comment has already said) may not be popular with Big Business.

It's too late now: the lumbering siege machine has started to trundle into the far distance, and it can't be called back. And it's good that it's probably going to arrive at a better place. And yes, there's a case for thorough policy preparation and legislative design.

But if we'd had more sense, and urgency, we could have moved straight to the Harper review endpoint. Free ride on the Aussies' expertise? Check. Good outcome? Check. Faster result? Check. Consistency with our trans-Tasman mates? Check. As I've argued before, 'Australia's got the competition gospel. Have we?'

Interesting details from the OECD

Last night the OECD came out with the latest update to its Economic Outlook - you can read the whole thing here (the chapter on New Zealand starts on p189) and access the statistics behind it here.

There were no huge dramas in the commentary: keep fiscal policy on a conservative course, loosen monetary policy some more (the OECD expects the official cash rate to drop to 2.25%), watch out for the Auckland housing market, do something about easing Auckland housing supply.

But the detailed numbers were nonetheless interesting. Here's a selection.

On the GDP front, 2016 could be tricky: forecast 1.9% growth doesn't leave much room for error if, say, China or El Niño spring an unpleasant surprise. And you do wonder about where longer-term growth is going to come from if (as the OECD thinks) the housebuilding boom loses its oomph. Investment in non-housing capital goods growing at only 2.0-3.0% a year isn't doing much to increase our productive capabilities.

And that's where we get to the more interesting numbers. The OECD's got an estimate of how fast our economy can grow (the 'potential output' line). Sure, these potential output 'speed limit' calculations can be flakey, but that said, on its face the news is not good. Our current potential growth rate of 2.5% is not flash, and is likely to fall a bit over the next couple of years. One or more of labour force growth, capital investment, or productivity has got to start picking up if we're not going to be lumbered with growth rates a lot lower than we'd like.

You can also see how the OECD gets to its case for easing monetary policy. Forecast inflation is below the RBNZ's target mid-point, the economy is operating below full capacity (that's the 'output gap' line), and the forecast unemployment rate is above the 'NAIRU' level where (in theory) a tight labour market would start to generate wage pressures. NAIRU estimates are just as iffy as potential output, and on nothing more than hunch I'd say the NAIRU could be lower than the OECD thinks, but either way there's clear room for monetary policy ease.

I've put up the financial markets forecasts for reference. Recent history, home and away, of forecasting interest rates and exchange rates has not been, um, a complete success, but in any event short term rates are headed down as the RBNZ cuts, and the dollar eases a little, but longer term rates are heading north: the driver is the US bond market, where the OECD expects the long term bond yield to rise from 2.1% this year to 3.2% in 2017.

What's behind those jobs numbers?

Yesterday's labour market figures, and particularly the employment outcome and the participation rate, came as an unwelcome surprise to everyone. The consensus expectation amongst economic forecasters had been that employment would rise by 0.4%, whereas it actually fell by 0.4%, and the participation rate (the proportion of the population in the labour force), which had been expected to hold up at its historically high 69.3%, dropped back to 68.6%. Given that a falling participation rate is usually taken as a sign of a weaker labour market, since people tend to leave the labour force when they become less confident that jobs are available,  the employment and participation numbers taken together showed an unexpectedly soft jobs market in the September quarter.

On the other hand, though, there were some oddities in the numbers. Employment certainly went down, but the number of filled jobs, and the total number of hours worked, both rose during the quarter, and those increases would tend to suggest that the labour market was a bit better than previously.

The different outcomes got me wondering about how these three measures - employment, filled jobs, hours worked - have behaved over time. Here's the answer, since the start of 2000.

Generally they move together, as you'd expect. There is the odd occasion, as in this latest September quarter, when employment falls but the number of jobs and the hours worked rise (March 2000, September 2006, September 2012). There is even the odd occasion where the opposite happens - employment rises but jobs and hours fall (June 2005, March 2008, June 2009, June 2015). But as a rule they tell the same story, and quarters like this June (employment up, the others down) and this September (employment down, the others up) are the exceptions.

What's happened, I reckon, is that there was clearly some general slowing of the economy earlier this year, with an impact on the labour market, but  we're also seeing the impact of quite a lot of noise in the data. Over the long run (back to early 1989, when the jobs and hours series start), all three measures have almost exactly the same average growth rate: employment, jobs and hours have each grown, on average over the long haul, by 0.4% a quarter. But there's a lot of volatility in the three numbers: if you look at the standard deviation of each one, for employment it is 0.6%, for jobs 0.8%, and for hours worked it's 1.0%. As a rough rule of thumb, even if the underlying 0.4% hasn't changed at all, two thirds of the time you're going to see employment numbers between -0.2% and +1.0%, jobs numbers between -0.4% and +1.2%, and hours numbers between -0.6% and +1.4%.

The overall lesson is that you're probably best advised not to get fixated on any one of the three measures: employment is somewhat less volatile than the others, and to that extent it's more of a reliable pointer than the other two, but they're best considered (a) in the round and (b) on timeframes longer than a single, possibly unrepresentative, quarter.

If, for example, you look at 2014 as a whole, the average quarterly increase in employment was +0.89%, the average increase in filled jobs was +0.61% and the average increase in hours was +0.74%. In the first three quarters of this year, the same averages were +0.12% (employment), +0.56% (jobs) and +0.77% (hours). So you'd conclude, overall, that there has been some modest slowdown: employment on its own would point towards a reasonable slowdown, but the other two point to little or none. That's not at all surprising, given the effect that falling dairy prices were having at the time. A modest slowdown, but still ongoing growth in employment, is also exactly what you see in the employment component of the ANZ's business survey, so it all fits together nicely.

How's life? Pretty good

A day when we got news that employment fell, and the unemployment rate rose, may not be the best time to argue that New Zealand is in pretty good shape when compared with the rest of the world.

But that's the case nonetheless, as the latest How's Life 2015: Measuring Well-being report from the OECD shows. The report is part of a growing - and welcome - global focus by various agencies (including our own Treasury with its 'Higher Living Standards' framework) on a wider range of societal outcomes than just GDP.

Here's how New Zealand stacks up against the rest of the OECD on a broad range of economic, social and environmental criteria. The scores are standard deviations above or below the OECD average, and anything bigger than +1 or lower than -1 is pretty unusual. Hat tip, by the way, to Timothy Taylor's excellent Conversable Economist blog, which is where I came across the news that the OECD had done this latest exercise.

Sometimes when organisations do these comparisons, the results don't always resemble the country you know, but this looks about right to me. By international standards, we're on the right side of the ledger for most things - and very much so on the size of our houses, our perceived state of health, the cleanliness of the air and our ability to get people into employment. You can see - if you use the "life satisfaction" measure at the bottom as an overall summary - that we are travelling well by international standards.

Where do we lag? There's nothing outrageously bad, but the one drawback that sticks out, housing affordability, will surprise no-one (here defined as "Percentage of household gross adjusted disposable income spent on housing and hosue maintenance", but we'd have shown up badly no matter which precise measure you used). We also work too much and don't take enough time off, and have a slight issue with educational attainment (and, I'd say, if you peeled back the overall educational showing, a particularly knotty issue with the bottom tail of the educational attainment distribution). And everyone would prefer if we were above the OECD average for household income rather than slightly below. But overall this is a good score-card.

I'm a little surprised we don't have data on all the criteria (if you're interested in the definitions, they're on p26 of the print edition or p28 of the e-book, and these country graphs start on p47/p49). 'Financial wealth' is defined as 'net household financial wealth', and something very much like that is available on the Reserve Bank's website (here). I'd have thought we had the data on earnings and basic sanitation, too. The 'adult skills' measure is the only one where I can see a good reason for missing data: we aren't apparently part of the OECD's Programme for the International Assessment of Adult Competencies (PIACC). Don't know why - the rest of the OECD seems to have signed up (33 of them) - but there you are. But even if you filled in the blanks, it wouldn't (at a guesstimate) have changed the overall picture.

There's much more in this report than just country league tables, and I'd recommend it to anyone with an interest in social welfare broadly defined,  but I suspect people will still want to do the usual comparisons, so here's how Australia looks.

Very similar, but richer, in sum. And if you ever wanted a simple graphic showing the need for structural reforms in some economies, here's Spain.

Scene-setter for tomorrow's RBNZ decision

Tomorrow we get the latest Official Cash Rate (OCR) review from the Reserve Bank, so by way of a scene-setter here's my latest calculation of the overall tightness or looseness of monetary policy, as measured by the Monetary Conditions Index (the MCI), which combines the impact of interest rates (90 day bills) and the exchange rate (the TWI) into one summary index number. If the MCI is all news to you, there's an older post about it here.

This time round I've just shown the last 10 years and a bit, including my estimate for October (based on bills at 2.9% and the TWI at 72.9).

The latest consensus from polls of economists is that the Bank will leave the OCR alone at 2.75% tomorrow - a change from an earlier view that another 0.25% cut was almost a certainty. The main reason appears to be that the economic forecasters are placing quite a bit of weight on the keep-the-powder-dry bit in the Governor's recent speech where he referred to "the need to have sufficient capacity to cut interest rates if the global economy slows significantly".

It's possible too that the recent improvements in business and consumer confidence, and robust results from the BusinessNZ/BNZ surveys of manufacturing and services, mean that the RBNZ doesn't need to be in such a hurry to provide some extra stimulus to the economy, which seems to be coming out of its dairy-price-slump attack of the glums.

Me? I can see some value in hanging about till the next Monetary Policy Statement on December 10 and getting a better bead on the economy, and what's six weeks in the great scheme of things anyway, but for what it's worth I'd cut tomorrow.

For a start, there's been that recent sharp rise in the TWI: the Kiwi dollar is up by nigh on 7% in overall value from its low point on September 23. And as the MCI graph shows, that move in the exchange rate has been enough to take the overall bite of monetary policy onto the tighter side of neutral. You can't keep fiddling with interest rates every time the dollar ducks and dives - which is why the MCI was abandoned as a policy tool - but equally you can't be completely indifferent to overall monetary policy being tightish when it actually needs to be loosish. The big picture here is that we (like many other countries) have been undershooting our inflation target: monetary policy needs to move into a modestly stimulus/inflationary space. Standing pat won't get us there. If it's steady tomorrow and a cut in December, no great harm done. But there needs to be a cut sometime soon, and especially if the Kiwi dollar keeps strengthening.

Are the rates out of control?

Last week's write-up of the latest CPI by Stats NZ included this graph. It showed how the prices of various components of central and local government charges have been behaving since 2006.

The colours aren't that easy to tell apart, but the top line is local authority rates, which appear to be on an inexorable rise, through good times and bad. The line that drops sharply at the end is 'other private transport services', where you see the big impact of recently lower ACC levies on the cost of licensing your car.

That remorseless rise in the rates bill got me thinking, so I've done a little bit of research, and here is how the rates, average weekly total earnings, and overall inflation have behaved over the same period, all rebased to 1000 in mid 2006, and all seasonally adjusted. Over the whole period, prices in general rose by 20%, weekly earnings rose by 35%, and the rates - well, the rates rose by 60%.

Maybe we shouldn't be worried. The rates, after all, are subject to some sort of political discipline, and presumably the voting citizenry either don't mind what's happened, or even asked for it, if they felt (for example) that councils finally needed to get on with building adequate local infrastructure.

But I can't help feeling that there's an argument that the electoral discipline doesn't look very binding. At a national level, it's true that politicians can generally no longer get away with bribing the electorate with its own money - there's a great deal more transparency about the costs of lolly scrambles - but is the same scrutiny as effective at local authority level? And even assuming that all is politically hunky dory, did councils really deliver a 33% real (above inflation) increase in services to us all over that period? Doesn't feel like it. And I don't see any efficiency dividend from Auckland amalgamation in the rates graph*.

I don't have the answers, but I do have a question: are rates rises out of control?

*Addendum Oct 28 - Subsequent (separate) comments have pointed out that Auckland has had one of the lowest increases in rates since 2006, and that total rates collected in Auckland have fallen since 2009, so there may be an efficiency dividend after all.

A smorgasbord of competition topics

Last weekend's annual workshop of the Competition Law and Policy Institute of NZ had a series of good sessions. They were all interesting: I got a lot out of  Professor Brent Fisse's very balanced analysis of the recent Harper competition review in Australia (even if we agreed to differ on changing the test of 'abuse of market power' in our s36 and their s46 of our respective competition laws), and from the session on whether broadcasting is ripe for regulation, where Buddle Findlay's Tony Dellow and Covec's John Small concluded (correctly) that it wasn't.

Here's an assortment of other stuff that I found interesting.

Princeton's Bobby Willig spoke on 'Merger Analysis', mostly about the application of the 'GUPPI', or 'Gross Upward Pricing Pressure Index' (yes, cue for fish puns...). Willig is one of these top-rate US economics professors who manage to combine elite academic credentials with top teaching skills and a wide commercial consultancy practice (he's been involved, in NZ alone, in Air New Zealand/Qantas, air cargo, and Fonterra's milk pricing), with synergies all round. I was left convinced that the upward pricing principle approach "is a valuable source of more granular and extensive insights into merger impacts than are available from an accurate qualitative articulation alone".

Or to put it another way, look at the data. If, after a merger, a business would own both product A and the newly acquired but previously competing product B, and would be tempted to jack up the price of A knowing that some of the sales lost will come back to it as increased sales of B (that's how the "upward pricing pressure" on A works), a competition authority concerned about potential post-merger price increases ought to look at exactly how much of a substitute B is for A, rather than taking a qualitative guess. It ought to get to grips with whatever data or natural experiments are available to calculate how much leakage of sales will occur between A and B.

The good thing is that not only will there be better-informed merger decisions, but in today's 'big data' world the opportunities to estimate diversion ratios between A and B, or, same diff, cross-price elasticities, are getting better all the time - a conclusion I'd also come to last month at the LEANZ presentation AUT's Lydia Cheung gave on quantitative techniques for competition analysis (write-up here).

There was a terrific session on "Vertical restraints", where a first class paper by Russell McVeagh's Troy Pilkington was followed up by an equally impressive comment paper from the Commerce Commission's David Shaharudin. Vertical restraints, and the courts' and economists' take on their legitimacy, are one of those things that, as Troy and David pointed out, have been all over the place, from explicitly legal to explicitly illegal and all points in between (retail price maintenance has been similar). Currently, things appear to have setted down where they should probably have always been - permissible, subject to a net benefits test.

And then there was the fascinating presentation by ACCC Commissioner Sarah Court on "Unconscionable conduct and supermarkets", where the ACCC had pinged Coles for a series of unilateral strong-arm abuses of its suppliers. We don't have "unconscionable conduct" in our competition law - there's the odd similar sort of provision here and there, such as the ability to re-open "oppressive" credit contracts under Part 5 of the Credit Contract and Consumer Finance Act, but not any overarching provision - and at first blush, based on Sarah's account of the Australian goings on, you'd be tempted to think we ought to have the same tools to knock any New Zealand business thuggery on the head as they have for theirs.

But as Bell Gully's Jenny Stevens argued in her commentary reply, if you're going to legislate or regulate, the first thing you've got to do is define the problem you're trying to deal with, and  it's not a given that we do, in fact, have the same sorts of standover issues that the ACCC have had to confront. I'd have to agree: I wouldn't say all of our businesspeople are lining up for canonisation, but on the other hand we also generally tend to be a high trust society where many transactions are handled equitably on a handshake basis, or close to it. If that gets abused, let's act, but in the meantime it's not a bad way to run our particular whelk stall.

Cartels? What cartels?

I spent last weekend at the latest Competition Law and Policy Institute of NZ's annual workshop, and I'll write up some of the (interesting) proceedings when I've got a moment. But as a hold the fort exercise, I'll just ask this, based on some thoughts I had at the workshop.

Where are the cartels? Or more specifically, where are the Aussie cartels?

The reason I raise it, is that Australia criminalised cartels in 2009. And since then, I'm told, there hasn't been a single criminal prosecution of a Aussie cartel. None. Nada. Zip.

Why could that be?

Proponents of criminalisation will no doubt feel they know the answer: the prospect of sharing a cell in Long Bay with Mad Reggie.

But it might be happenstance. Cartels don't get rumbled to order. They're like buses - none for ages, next minute you've got your pick of them.

Or - or - criminalisation might have driven cartels into deep, deep cover.

This is definitely one of those unknown unknowns, but it's at least possible that criminalisation, plus recent terabuck penalties in the US and Europe and the associated humongous civil liability, have altered the calculations for price fixers who might otherwise have ratted out their co-conspirators. Now, you have to be very, very, very confident indeed that the regulators' leniency policy will see you right.

Especially on the criminal side, where you don't want to run into some grandstanding crown prosecutor who isn't too sold on all this leniency stuff.

'Cos Reggie, he ain't much into leniency either.

What drives the A$?

Exchange rate forecasting, as we all know, is usually a decidedly iffy proposition: the authors of this new Discussion Paper from the Reserve Bank of Australia point to "the well-documented difficulties in empirically explaining movements in exchange rates" and "the imprecise nature of exchange rate modelling, which is well established in the literature".

I'll just pause for a sec (before I get anyone into trouble) to point out that in any Discussion Paper, "Views expressed in this paper are those of the authors and not necessarily those of the Reserve Bank. Use of any results from this paper should clearly attribute the work to the authors and not to the Reserve Bank of Australia".

Right. Carrying on, and despite the well-known difficulties, they've done a pretty good job of modelling the behaviour of the (real) trade-weighted index (TWI) of the Aussie dollar. Here's how their model fits the data: if I'd managed that, I think I'd be retiring to the pub for a beer after a good day's work.

It's an error-correction model, where the TWI tries to move towards an equilibrium level determined in this model mostly by Australia's terms of trade, with a smaller supporting role for a real interest rate differential ("the real policy rate differential between Australia and G3 economies"). And it explains about half of the quarterly changes in the TWI over 1986-2014.

The authors were a bit exercised by those periods where the actual A$ TWI was well away from the modelled band - below, during the GFC, and above, more recently - and they've had a go at seeing whether various ways of modelling the impact of the recent Australian resource investment boom and of unconventional monetary policy overseas would explain those deviations. There were some suggestive hints, but no knock-out discoveries: "Taken as a whole, while the results from these augmented models support the notion that there have been some additional influences on the real exchange rate in recent years, they do not fully account for the behaviour of the exchange rate during the period". The existing model did more or less as well (and more simply) than potential alternatives.

Incidentally, if you're a student, or hence or otherwise would like to get up to speed with where the economics of exchange rates has got to in recent years, there's a very useful bibliography at the end of the paper.

You're probably wondering, is there a Kiwi dollar equivalent? And yes there is, give or take (the Aussie graph shows the modelled A$ TWI versus actual, the Kiwi graph shows an explanation of why the actual rate is away from its long-term average). Here's what it looks like, and I wrote it up in more detail here.

Takeaways? Two main ones. The story that the A$ and NZ$ are 'commodity backed' currencies is oversimplified, but not wrong. And exchange rate forecasting may be problematic, but I'd say not so problematic that you can't get something useful out of it.

Protected, or exploited?

If you're interested in markets, competition or regulation, you're bound to have a few eye-opening and brain-opening moments along the way: for me, one of the key ones was The Commerce Commission v The Ophthalmological Society of New Zealand Incorporated And Ors, a 2004 High Court judgement known in some circles as 'Eyes 1'.

The case, which the Commerce Commission won,  was about some Southland ophthalmologists and their professional body. They had acted together to intimidate some (highly qualified) Australian surgeons from dealing to the backlogged waiting list of cataract operations in Southland, and at a cost much lower than the fees the incumbent Southland doctors wanted to charge. And one of the deplorable tactics they used was declining to provide 'oversight' to the Australian medics. Supposedly, these eminent Australian doctors required 'oversight' to operate safely in New Zealand, and since their New Zealand colleagues refused to provide any, their plans got scuppered.

It was a brutal example of how regulations brought in for one, worthwhile, and even necessary purpose (patient safety) can be piggybacked into an anti-competitive rort. As the judge in the case said, “I do not accept that the defendants had any proper foundation to believe that the proposals would put patients in jeopardy”. On occasions, the alleged worthwhile basis for a regulation or practice can be very flimsy indeed, and little other than a convenient cloak for protection of a professional market.

It seems to me that this is going to be an increasingly fraught issue across a wide range of services, including education and health, for a whole range of reasons. Services in general are becoming an ever larger share of modern economies, some services such as health are becoming more important to us as we live longer, and there is a general trend to greater credentialism and professional/occupational licencing, which gives ever greater leeway to gatekeepers to abuse quality standards to protect their own patch.

It's even cropped up as a (somewhat peripheral) issue in the current US presidential primaries. Last month the Committee for a Responsible Fiscal Budget, an independent non-partisan think tank in Washington, looked at the policy plans Hillary Clinton and Bernie Sanders have come up with to tackle US prescription drug costs. Both of them have identified a "safety" provision they'd like to deal to. In the Clinton plan, she "would allow Americans to safely and securely import drugs for personal use from foreign nations whose safety standards are as strong as those in the United States". In the Sanders plan, he would "Allow individuals, pharmacists, and wholesalers to import prescription drugs from licensed Canadian pharmacies".

There is, of course, no good pro-consumer reason why American (or other countries') consumers shouldn't get their prescriptions filled in Canada or the UK. As Hillary Clinton puts it, "it’s unfair that drug companies charge far lower prices abroad for the same treatment, while imposing higher prices on Americans", and - while I wouldn't normally give you tuppence for Bernie Sanders' views on anything - you've got to admire him when he says that in 1999 he "became the first Member of Congress to take a busload of Americans across the border into Canada to purchase prescription drugs. Americans should not have to pay higher prices for the exact same drugs than our Canadian neighbors simply because Congress is bought and paid for by the powerful pharmaceutical industry".

The same tension between competitive provision and real or fantasised patient safety crops up all over the place. I recently read in the Harvard Business Review, for example, 'Why Health Care Mergers Can Be Good for Patients'. The author says, and I'm sure he's right, that "Patients who undergo complicated operations fare worse when their hospitals or surgeons rarely perform them", and his response is that hospitals should bulk up so that there are high volumes of lower-risk operations being performed all the time. The flipside, though, is that there are all sorts of clear competitive downsides to wholesale health mergers: as the American Medical Association recently said, 'Health-Care Mergers: Good for Health-Care Companies, Not So Good for Patients and Doctors' (though in this case it wasn't a completely pro-consumer stance, as the AMA was also concerned about the enhanced countervailing power of merged insurers against doctors).

Maybe it's time for competition authorities to be given the job of riding shotgun on some of these 'patient safety' and 'professional qualification' arrangements?