Common sense - at last

Yesterday I warned you that I was writing a piece for competition policy tragics, and this is it. In the event it's not terribly technical, so give it a go even if you're not a tragic - especially as it shows how we've got, finally, to a better place when it comes to assessing things like the NZME/Fairfax merger. Plus it's got some pirates in it.

First some context. The Commerce Commission when it gets the likes of NZME/Fairfax has to decide, if there's a loss of competition (as there was), whether to authorise the thing anyway, because there are, overall, net benefits to New Zealand: the good stuff (cost savings, international competitiveness, whatever) outweighs the bad (mainly the increased market power of the new entity).

Here's a completely general, utterly uncontroversial little diagram of all possible benefits and detriments.

The 'net of realisation costs' in the table is fairly simple, too. Let's say there is a cost savings benefit - scrunching two head offices into one, for example. You should count any costs involved (redundancy payments, for example) when putting a number on the cost savings benefit. All good. All clear.

Where it starts to go strange, however, is in the Commission's Authorisation Guidelines, where you find this.

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.³⁰

38. In contrast, in assessing detriments we only consider anti-competitive detriments that arise in the market(s)³¹ where we find a lessening of competition (whether substantial or otherwise).³²

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.

In terms of the diagram, when it comes to things like NZME/Fairfax, the Commission would count A, subtract B, add C, but ignore D.

This makes no sense from an economist's or indeed any commonsensical perspective, as I've argued before, and any lawyers who thought the case law on the Commerce Act required it need to go away and have a good lie down until they come to their senses. Why ignore D - if the merger caused some large detriment outside the markets the merger is taking place in, why on earth wouldn't you count it?

In what I think may have been the best single para I've ever written in this blog, I finished my previous post about this nonsense with this:

All this may seem technical and picky, and maybe nothing will ever turn on it. In practice, though, every imaginable set of business circumstances sooner or later comes in the Commission's window, and it's possible a merger or a restrictive trade practice will indeed involve a sizeable D, a detriment to the community that is being ignored. If the courts have said you can safely take a better, more logical route, why wouldn't you?

And what indeed happened?

Along comes NZME/Fairfax, where there is indeed a big D, a detriment outside the immediate markets involved: as the Commission said in paras 75-77 of its decision (irrelevant footnote omitted):

the proposed merger of NZME and Fairfax has the potential for negative consequences that may extend beyond the reader and advertising markets in which competition is affected.

In particular, a loss in plurality might impact on New Zealand society more generally...

A significant reduction in plurality would affect all New Zealanders, whether they directly consume news content or not. A loss in plurality may therefore have effects that extend beyond the reader markets in which competition is affected.

As you can imagine, the lawyers for NZME/Fairfax told the Commission, stick to your own Guidelines. They referenced the Guidelines, and, for good measure, the Commission saying the same thing in an OECD Working Party, and said (at para 27) that

the Commission's inclusion of plurality effects in its detriment analysis is contrary to the statutory scheme, its previous positions, case law and its own restatement of the correct legislative framework within the Draft Determination

The Commission, in short, found itself boxed into an untenable position: big detriments that it had said wouldn't be counted under its usual approach. As it pointed out (para 81 of the decision)

The implication of the Applicants’ approach is that we might have to authorise a merger that in our assessment was not in the public interest. That is, if we considered that there was a negative consequence that outweighed the positive aspects of a proposed merger, we might still have to authorise depending on where those negative impacts were felt

So how did the Commission extricate itself from the daftness of the Authorisation Guidelines and navigate its way back to Planet Earth?

First (here come the pirates) it used the Captain Barbossa approach in Pirates of the Caribbean where he reneges on an apparent deal with Elizabeth 'Turner' made under the pirates' code, by pointing out that "the code is more what you'd call "guidelines" than actual rules", or as the Commission put it (footnote 72, page 34), "the Guidelines are necessarily general and we must apply them flexibly according to the facts of each application. The Guidelines do not, and cannot, address every issue that might arise".

The Commission also found a little escape hatch in footnote 32 of the Guidelines. The footnote says that in the key case on benefits and detriments ('Godfrey Hirst 1' as it is called in the decision), "while the court endorsed this settled approach [i.e. of  ignoring D], it observed that ‘disbenefits’ or negative benefits that arise outside the affected markets may be relevant to the public benefit test". Of course, that rather raises the question why the Commission said it wouldn't usually count them, but never mind.

And it also made the (to me not very persuasive) argument that the law has moved on ('Godfrey Hirst 2') and the Guidelines have yet to be updated.

In any event we got to a good place. The Commission has now definitively said (para 134.1, my emphasis) that

we can consider all negative consequences arising from the proposed merger, in our consideration of whether the merger will result, or will be likely to result, in such a benefit to the public that it should be permitted

which in this case enabled them to get to the right conclusion, that (para 134.2)

irrespective of whether the plurality consequences of the proposed merger are ‘in market’ or ‘out of market’, we will consider any plurality losses as ‘disbenefits’ or ‘negative benefits’

So it's been a bit of a journey, but it's now very likely the next edition of the Authorisation Guidelines will reflect this eminently more sensible approach.