Thursday, 1 September 2016

That competition law question...

Last week for a bit of fun (insofar as 'fun' has much meaning when it comes to competition law) I posted a competition law 'exam' question.

Most readers sensibly avoided giving any putative answers, no doubt assuming there was a trick somewhere.

Well, sort of. What I was trying to highlight was what I think is an anomaly in the Commerce Commission's, and the New Zealand courts', approach to applying the 'net benefits' test when considering authorising a merger: if there are  benefits of assorted kinds that outweigh the detriments from lessened competition, the merger can be authorised.

That's all straightforward and as it should be. But where I think something has gone wrong is this bit, which I've extracted from the Commission's Authorisation Guidelines (pdf), footnotes omitted:
37. In our assessment we regard a public benefit as any gain to the public of New Zealand that would result from the proposed transaction regardless of the market in which that benefit occurs or whom in New Zealand it benefits. We take into account any costs incurred in achieving benefits.
38. In contrast, in assessing detriments we only consider anti-competitive detriments that arise in the market(s) where we find a lessening of competition (whether substantial or otherwise).
39. To illustrate the difference in our approach to benefits and detriments, if a transaction gives rise to a lessening of competition in market A and benefits in market A and market B, then:
39.1 the public benefit is counted across both markets A and B; and
39.2 only those detriments arising in market A are counted.
The Commission refers to a couple of cases supporting this approach. One of them (Godfrey Hirst NZ Ltd v Commerce Commission (2011) 9 NZBLC 103,396) appears to be behind a paywall - how anyone has appropriated what should be a publicly available resource isn't clear to me - but the other, New Zealand Bus Ltd v Commerce Commission [2008] 3 NZLR 433 (CA), is freely gettable attable (here, if you're a competition tragic). The Guidelines refer to this observation, by Wilson J, in New Zealand Bus:
As the Commission correctly held in Goodman Fielder Ltd/Wattie Industries Ltd (1987) 1 NZBLC (Com) 104,108 at 104,147 and in Air New Zealand Ltd/Qantas Airways Ltd (23 October 2003 Decision 511) at para [897], all benefits must be taken into account whereas only detriments in a market where competition is lessened will be relevant.
So it seems to be settled. Benefits anywhere and everywhere from a merger will be counted towards the net benefit test, but detriments will only be counted in the market(s) affected by the lessening of competition.

Perhaps somebody learned in the law can put me right on this, but as it stands, this makes zero logical sense to me. And the exam question was rigged to show how this process could go wrong. There were net benefits from the hypothetical merger arising in the market where competition was lessened (a gain of NZ$2 trillion outweighing a detriment of NZ$1 trillion) so the merger would have been authorised, despite the fact that there were substantial detriments (NZ$3 trillion) in other markets* that did not get a look in. If they could have been counted (and why shouldn't they be, if they are real and caused by the merger?) the merger should have been declined: there was an overall net national detriment of NZ$2 trillion (the NZ$1 trillion net benefit in the markets directly affected, less the NZ$3 trillion detriment in other markets).

As far as I know, no real world merger authorisation has hinged on this. But someday it might. And it shouldn't. While Parliament is looking at some changes to the Commerce Act, it could usefully take the opportunity to clarify that mergers ought to be judged on their overall national impact, and not on a skewed subset of them.

*I tripped over my own feet a bit in phrasing the mock question. The detriments caused by the shutdown of the aluminium smelter would have been counted in the allocative efficiency impacts of the merger in the electricity market, so they wouldn't be part of the additional NZ$3 trillion detriment. I should have said the NZ$3 trillion arose wholly in the downstream markets for aluminium.


  1. I prefer Israel Kirzner's definition of a monopoly which is an essential input. That makes network industries are good candidates monopolies.

    I read the Tirole write-up for his Nobel prize yesterday. he is a smart cookie but his 1988 book is unbelievably terse

  2. Yes, I've also got a copy of The Theory of Industrial Organization, and heavy going it is, too

  3. Hmmm. You are right that the public version of Godfrey Hirst (2011) appears not to have been put online. That is plainly an oversight, but one that may be able to corrected. I suggest you watch this space:

    From memory that judgment refers to the concept of a "dis-benefit", which may well be relevant to the issue raise. Which just goes to show how important it is that judgments are made public.

    1. Thanks very much - I'll keep an eye out. I wanted to read the case for precisely the reason you mention - that it appears to have it both ways, endorsing the allegedly settled position that detriments in non-affected markets don't matter, but then suggesting "dis-benefits" might count after all.

    2. Its now up, but in a different place on the website:

      The issue is discussed at [62] - [75], but I think [73]-[75] is where the rubber hits the road on the issue you raise.

    3. Thanks - that's great. I'll work my way through it.
      At a first squizz I see the Commission in 1987 in Re Goodman Fielder, "asked itself ― [i]f the benefit from the whole of the proposal is taken into account then why not the detriment arising therefrom?". Plus ça change...

  4. Good to see the answer! Yes, seems like a strange inconsistency, and one worth addressing.

    However, I would be surprised if it significantly affected most merger decisions, as I think cases like your aluminium example are likely to be exceedingly rare. My key point in comments on the previous post was that additional disbenefits in markets that are upstream or downstream from the primarily affected market will only be large when there are *substantial* market distortions. Conversely, the closer that upstream/downstream markets are to perfect competition, the smaller the additional disbenefits will be.

    In working life, I do a fair bit of transport economics. It's a useful practical education in working through these sorts of issues, as there are many few distortions in and around transport markets. (Congestion, subsidies for parking and public transport, environmental externalities, crashes, agglomeration economies from labour market access, etc.) Yet the majority of the benefits / disbenefits of an individual transport project accrue primarily to users, rather than in other indirectly affected markets. (For a simple illustration for parking policy, see the NZAE paper Stu Donovan and I wrote last year.)

    Consequently, inclusion of benefits/disbenefits in secondary markets only tends to affect decisions about whether a project is worth funding when direct benefits to transport users are similar in magnitude to project costs. So for instance, if you have a project with direct user benefits equal to (say) 80% of project costs, the inclusion of secondary market benefits may change your decision, but if direct user benefits are (say) 200% of project costs, you can probably stop the investigation there.

  5. Thanks again! I'm sure you're right and the circumstances where this might apply are probably v rare: I don't remember coming across one in my 12 years at the Commerce Commission. But sooner or later just about every possible business combination and permutation comes in the window, and we might as well have the framework right to deal with it.
    The Commission now has the key legal case on which this odd treatment is based up on its website, and I'm having a think about it and will post again.
    And I agree with the parallels you draw with transport.
    I haven't had much to do with transport: every now and then I'll put my head over the parapet and tweet for SH1 to be upgraded ALL THE WAY ALONG rather than having decent bits funnelling into cart tracks, but people always tell me the cost/benefit doesn't stack up...