Tuesday, 24 November 2015

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.

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