Thursday, 10 September 2015

A defining moment?

Last night we had the latest seminar from the Law and Economics Association of New Zealand (LEANZ) - AUT's Dr Lydia Cheung on "Quantitative techniques for competition analysis: An Overview, and Application to the Z Energy / Chevron Merger", which traversed market definition, modern demand estimation, and merger simulation. It was billed as "for non-economists as well as economists" - a tough challenge if you're going to take the laity through things like critical loss analysis and systems of demand equations - but she pulled it off.

It's also left me thinking about a few things, and in particular about market definition.

The trend these days for competition agencies, when considering mergers and acquisitions, is to rather downplay the importance of exact or precise definitions of markets, a trend which has been gathering some global oomph since the 2010 edition of the US merger guidelines. As an example, in the latest merger clearance for which the Commerce Commission has published its full decision (Staples/Office Depot), the Commission said (at para 49) that "it is not necessary for us to reach specific conclusions on relevant markets".

I'm somewhat uncomfortable with this, from a number of perspectives, including a legal one. While I'm not learned in the law, I have had to wrestle from time to time with the fine print of the Commerce Act, and I do wonder about the bit (s66) that allows the Commission to grant acquisition clearances. Under s66(3), the Commission must either be satisfied or not satisfied that "the acquisition will not have, or would not be likely to have, the effect of substantially lessening competition in a market" (my italics), and how can it do that, to an Act-satisfying standard, without specifying one?

Coming back to hopefully safer economics ground, I'm not sure the current move towards more fuzzy market definition is the right way to go, particularly as we may be getting closer (as Lydia explained) to being able to do a better job of taking a more robust empirical approach to measuring things like demand curves, and own- and cross-elasticities of demand. If, using things like scanner data, improved econometric methods, sophisticated consumer choice testing, and clever analysis of 'natural experiments' - what happened, say, after a fortuitous interruption to one source of supply - we can get a more scientific handle on the extent to which products are or are not substitutes for each other (and so are or are not likely to be in the same market), why wouldn't we use that information to derive empirically grounded market definition? More precise, rather than less?

It's also not clear to me - and here you can peel off if you like, as I'm venturing into some deeper undergrowth, and I may be gone for some time -  it's not clear how a competition authority can sign up for applying a SSNIP test (as many agencies say they do, including the Commission in its Merger and Acquisition Guidelines, paras 3.15 to 3.21) and subscribe to a fuzzyish, not completely defined definition of a market. Sure, in many jurisdictions the SSNIP test is more paid lip service than formally implemented, but if you were to take it out over the fences, as agencies say they're committed to do, then you need the demand curve that the hypothetical monopolist faces. And how can you have a reliable demand curve for an ill-defined product?

In any event, that's one of the benefits of these LEANZ events: they get you thinking, and often across formal disciplinary lines. Get to them if you can, and maybe LEANZ ought to follow up on the feedback I got last time I wrote about them, that they ought to take the show on the road to Christchurch as well, and not just to Auckland and Wellington.

Thanks to Lydia for presenting, to AUT's Richard Meade for chairing the evening, and to AUT more generally for hosting and catering.

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