New thinking

Brining turkeys, looking after Christmas guests, and wrapping up the last bits of the year's consultancy work have eaten up my time, but I'm finally getting round to writing up the excellent Asia-Pacific Industrial Organisation Conference held at the University of Auckland earlier this month.

This was only the second time it's been held - as explained here it's a new initiative to add a regional industrial organisation event to the big American and European ones - and it's already attracting some big-name speakers and a good attendance. Over the next three years it will be held in Melbourne, Tokyo and Singapore. Nice to see our local academics presenting too: from AUT, Richard Meade (finance) and Lydia Cheung (mergers and divestments), and from the University of Auckland Simona Fabrizi (asymmetric information, and again on innovation), Erwann Sbaï (auctions), Tava Olsen (incentives) and Steffen Lippert (learning and entry).

It was heavily academic-focused, with a smattering of regulators and economic consultants, so you had to be prepared for a fair amount of pure economics theory, but then if you're at this sort of conference you'll probably comfortable feeding your inner quant. As always with the fancy models, some are down the cleverness-demonstration end, and some are analyses of well-off-the-beaten-path esoterica. But it's worth sitting through the sessions, because it's conferences like this that can present the path-breaking innovations - in ten years' time, they'll be the standard way we think about issues like two-sided markets, platforms, auction and market design, vertical integration, or oligopoly (which were all session topics at the conference).

My own bent leans towards empirical applications of the new ideas, so I especially enjoyed the first keynote presentation. Harvard's Ariel Pakes presented on 'Just Starting Out: Learning and Equilibrium in a New Market' (there's a recent version here). The new market was the UK wholesale electricity market for 'frequency response': Ariel's modelling showed how the players learned how to play the new game, and showed that they got pretty good at it reasonably quickly, with an end-result, once they'd got their heads around it, that was close to an efficient competitive outcome.

This is the sort of market where you might have expected strategic behaviour, and early on there were  indeed high bids which looked like invitations to follow. In the event tacit or other collusion didn't happen: I asked Ariel why, and the simple answer was, too many competing participants for it to hold (29 in all, with the top 10 holding 84% of capacity and an HHI of 1100). The paper says that "One area where [this kind of] learning model may be particularly helpful is in simulating counterfactual outcomes, a type of analysis increasingly used by regulatory authorities", and that's true: I'd also like to see it applied to things like our wholesale electricity market.

The other keynote was Columbia's Yeon-Koo Che on 'Optimal Sequential Decision with Limited Attention', which at first glance sounded like it didn't compete with the alternative option of a late breakfast. But it was excellent (there's a version here), and witty: his general theme was how people make decisions when they have a finite budget to spend on verifying their assumptions, and one of his examples included how people should select the media they read in a world of highly partisan "fake news".

I took two things away. One is that when you aren't especially sure about the likelihood of something, you should look for corroborative evidence, but when you're pretty confident about its likelihood (or unlikelihood), you should look for contradictory evidence. Whether that's a Great Universal Law that applies in all circumstances, I don't know, but it makes intuitive sense. And the other was that sometimes longer deliberation leads to worse decisions, something that ought to be bludgeoned into the brains of some of our policy-making and law-making institutions.

I lucked into a particularly good choice from the parallel session menu, on 'Topics in empirical IO'. Lawrence White (NYU Stern Business School) challenged the conventional wisdom that the US economy has become more concentrated (in an HHI sense). Ken Krechmer (University of Colorado Boulder) showed how control of standards (eg on how mobile phones communicate) matters for international trade and for potential use of market power. And Stephen Martin (Purdue) went into utility theory and how compensating losers with gains from winners mightn't be as easy as it looks in the textbooks: one implication was that price discrimination might turn out more welfare-reducing than usually thought.

My own contribution was to moderate the panel session, 'Big data: friend or foe of competition and consumers?', with panellists Reiko Aoki, Commissioner at Japan's Fair Trade Commission, Reuben Irvine, acting chief economist on the competition side of the Commerce Commission, and Greg Houston, principal at Australian consultancy HoustonKemp (and who kindly sponsored both the session and the overall conference).

We'd agreed to take a bit of a risk. After Greg had presented some results showing how big data can be used to  better refine geographical markets and to show the impact of new app-based services like Uber on older economy sectors like taxis, we left a good half of the time available for discussion, hoping that enough people would come along and be prepared to have a conversation. And fortunately they did.

Greg starting his presentation

The panel ready to take questions

UCLA's John Asker in the discussion, with Harvard's Ariel Pakes and Duke's Leslie Marx (co-author of the excellent The Economics of Collusion) in front

Broadly we came down on the side of more friend than foe: we (and the attendees) could see a lot of potential for society from better and greater use of the flood of modern data, ranging from better services for consumers and epidemiological and other payoffs from combining diverse datasets through to, for regulators, more accurate market definitions and clearer observation of market behaviour. But - and this was a recurrent theme - it wasn't obvious that regulators could tap into the best econometric experts at will: it's hard, especially in the US, to prise them off the beaten academic path. And the difficulties of cleaning, interpreting and manipulating databases in the terabytes are easily underestimated.

We weren't completely Pollyannas - we could see the potential risks in collusion between pricing algorithms, for example; we recognised that databases can create market power; and we had a range of conviction about whether traditional enforcement analysis and legislation are up with the New Economy play - but broadly we were technology and data optimists.

For those interested in the topic, we compiled a short reading list: a good place to start is the Competition Bureau of Canada's discussion paper (which Reuben had tracked down). And here's a copy of Greg's slides.

Well done to the local conference organising committee - Simona Fabrizi, Tim Hazledine, Steffen Lippert and Erwann Sbaï.

The full monty

Now that we've got the full decision in NZME/Fairfax, what can we take from it? Apart from some admiration for the combined writing style of Justice Dobson and Professor Richardson: I liked the crack at [98], about the likes of Facebook, that "Fifteen recyclers of the product of two producers of news are still only making two views available", the worked examples, and the historical footnote disquisitions.

Let's start with the clearance arguments - whether the merger would or wouldn't lead to a substantial reduction in competition, an 'SLC'. This was always going to be an uphill ask for the appellants, and so it proved. The court agreed with most of the SLCs the Commission had found.

It's not a great idea to give good advice away for free, but here's some anyway for NZME/Fairfax: don't even think about appealing the clearance judgement. When a judgement says at [74] that in the online news market "the merged entity would employ over 300 more editorial staff than the three next biggest mainstream media organisations combined" and at [135] that "The Sunday newspaper reader market is a duopoly so that each firm is the greatest constraint on the other", you haven't a snowball's.

On to the authorisation arguments - whether there were net benefits to the public that compensated for the adverse effects of the SLCs.

The first point traversed was how the net benefit test should work. One argument was that the balancing exercise to determine a net benefit should count benefits in the markets where there were SLCs, detriments in the markets where there were SLCs, and any benefits anywhere else, but not costs anywhere else.

This is manifest nonsense from any economic, commonsensical or public policy point of view: why should some of the detriments be ignored? The trouble was, though, that the Commission, in its 2013 Mergers and Acquisitions Guidelines, went with the lawyerly view that this daft detriment test (DDT) was indeed what the Commerce Act and its jurisprudence required. In its NZME/Fairfax decision, however, the Commission decided to count the detriments elsewhere (particularly the national cost of loss of media plurality). The appellants, wholly understandably, called foul.

I'd thought that the DDT had been definitively and rightly knocked on the head in the various Godfrey Hirst cases (see 'The net benefit test' and 'Common sense - at last'). But whatever lingering zombie existence it still may have had has been well and truly terminated now. Sample quotes from the decision: at [195]

It is inconsistent with Parliament’s approach to infer, without any clear indication of such an intention, that Parliament intended to discriminate between the scope of benefits to which the Commission could have regard, and then a narrower subset of detriments

and at [213]

Proposed mergers will have widely varying levels of impact on New Zealand consumers generally and where those impacts are as broad and as significant as arose here, then it would be inconsistent with the statutory scheme to require the Commission to ignore them. Parliament cannot have intended such an outcome

and at [221]

The broader approach in the Court of Appeal’s reasoning in Godfrey Hirst 2 suggests the detriments that may be taken into account need not be confined to those arising in the relevant market. Non-quantifiable factors may be decisive, and no logical reason for limiting the type of detriments is suggested

and at  [223]

There should not be an artificially limited assessment of detriments if such limitation would prevent the preferable advancement of the long-term interests of consumers. That cannot have been parliament’s intention

and at [232]

it would be illogical to exclude consideration of identifiable detriments that affect an overall assessment of the benefits to the public merely because those detriments do not arise in the market in which the merged entity would operate.

The DDT is now buried at a crossroads with a silver stake through its heart, and good riddance. Our competition regime is the better for its demise.

The next bunfight - once it was established that the Commission could indeed count detriments elsewhere, even touchy-feely ones ("Non-quantifiable factors may be decisive") - was whether the Commission had been right to put a large adverse value on the potential loss of media plurality. In short, yes it was.

The court didn't much take to attempts to put a number on the plurality loss: at [299] "Material unquantifiable detriments are simply unquantifiable". And at [301] it sympathised with merger parties that "it can be frustrating for participants in an authorisation application to be confronted with an outcome that is determined by findings of unquantifiable benefits or detriments".

But at the end of the day someone's got to make the call. It mustn't be a guess: at [301] "a decision on such matters must strive not to rely on a purely intuitive judgment and is to avoid undisciplined subjectivity". Rather, still at [301], "An outcome determined by application of unquantifiable factors (detriments and/or benefits) is a matter of qualitative judgement, informed as in this case by expert opinion".

And in this instance, at [305]

We are satisfied that maintaining media plurality and the quality of the media produced are fundamental values of benefit to the public and of real and national significance.

There were also arguments about the Commission's processes. In the end, none of the objections - the Commission only talked to anti-merger people after its conference, it commissioned a hatchet-job rather than an independent expert report - stuck. But if the Commission's got any sense it will take on board, from this judgement, ideas for improvements in how it goes about its business in those two areas.

For economists, there are other interesting points in this judgement. If you haven't mugged up enough on two-sided markets, you'd better, and especially that article cited at [63] and quoted with approval at [64] ("We agree with that analysis of the two-sided markets in which the appellants operate"). And there are some aspects of the economics of this case that I wouldn't mind challenging at some point.

Market definition, for one: at [161] the court said that "The appellants made the superficially attractive submission that it was illogical to find the prospect of an SLC in a market of undefined scope", but I'd dispute that "superficially". How to treat "wealth transfers" to non-New Zealanders in the net benefits test - see [291] to [297] - where in my view the law is at best chaotic and probably wrong. Even the basics of how to decide if products are substitutes or complements, for example when as in this case you observe people consistently visiting different online sites ("multi-homing").

But that's enough free analysis for one day.

Quick reaction to NZME/Fairfax

Back in June I wrote a piece - 'Howzat!?' - on the likely outcome of the two appeals against Commerce Commission decisions that were live at the time, Skyfone, and NZME/Fairfax.

And I finished up saying

We can't see everything - there's a wholly blacked-out bit in paragraph 19(c), for example, in the 'Natural justice and fairness' section of the NZME / Fairfax appeal - but on what we can see, what are the umpires likely to do with these appeals?

I'll be surprised if I see the Commission trudging back to the pavilion.

I won't be dashing off to the TAB to exploit my newly discovered tipping skills, because, to be fair, it wasn't a hard call. You had unacceptably high post-merger levels of concentration in some markets, and little realistic prospect of divestments as a remedy: the market for Old Media assets isn't exactly thriving at the moment. And the appellants were asking the court to ignore or downweight a stonking great albeit qualitative detriment, loss of media plurality. The Commission didn't win on everything, but it was in my view at short odds-on with the bookies on the overall yay/nay outcome.

We, the general public, haven't got the full decision yet - as I write there's only a media release from the court and an extract from the decision summary - but there are two things I'll be especially interested in when we do get it.

One is the discussion around qualitative things like the value of media plurality in a democracy, and whether, and to what extent, and how, they should be included in the benefits and detriments balancing. My answers would be yes they should, as completely as possible (I quite liked this Aussie court's approach), and ideally with whatever numbers you can put on it.

There may be companies thinking that mergers have just got a lot harder if they've got to allow for all this airy-fairy social impact stuff on the detriment side. I wouldn't see it that way: it also opens up the opportunity for companies to argue qualitative payoffs on the benefit side. In 'new economy' sectors, for example, I could see companies successfully arguing, who knows what sort of blue-sky benefits might emerge from bringing two sets of research talent together.

The other thing that caught my eye in the court's press release was that the court "dismissed the prospect of one of the appellants introducing a pay wall for their online publication, post a merger". That sounds like a finding of fact. But even if the merger had actually enabled a pay wall, and NZME/Fairfax consequently decided to introduce one, I can't see that as much of a detriment. It seems to me that's a completely normal development in online media: consumers mightn't like it, but I don't have an issue with media charging readers for valuable content. I can even see a logic that without the paywall, there might not be valuable content in the first place.

Speaking of content quality, the press release also said that "The Court found the Commission was also entitled to place significant weight on the prospect of reduced quality of the products produced by the merged entity".

Live by clickbait, die by clickbait.

Ideas? Sure. Answers? Not so much

Today's well-attended Government Economics Network (GEN) conference in Wellington on the theme, "Responding to Global Challenges", covered the back end - the challenges - pretty well. But as for "responding" - if I were in the policy sausage grinder, as many of the attendees were, I'm not sure I came away with enough new policy ideas, or even a clearer policy research agenda.

My highlights? The IMF's Jonathan Ostry made a good case that growth and (re)distribution as policy targets aren't as incompatible as once thought - indeed, redistribution may facilitate higher levels of GDP growth. Structural reforms, for example, often have winners and losers, and properly compensating losers may cement support for the GDP-enhancing reforms: win-win all round. That's a big policy lesson right there, and not one we knew enough about in the '80s and '90s when we were crashing through with our reform programme. So I would take one big bit of practical policy guidance away: check the inequality and equity outcomes of what you plan to do. If there's enough of a GDP payoff, and there likely will from initiatives like trade liberalisation, then there'll be enough cash in the kitty to see the losers treated right.

I also liked Australian National University Professor Warwick McKibbin's presentation on recent global trends and future prospects: he's very good at explaining the dynamic interplay of macroeconomic variables. But it's not all just seat of the pants judgement calls: he's got a multi-sector multi-country model which enables him to make a stab at calculating the global and national impacts of different policies or shocks. He modelled, for example, the Trump policy package of immigration controls, big tax cuts, infrastructure and defence spending increases, and higher tariffs, against a background of tighter Fed monetary policy (good for US GDP in the short term, pretty horrible longer term), and he also had a go at modelling what would happen if a global trade war broke out (bad news for everyone, but especially bad news for China and Germany).

What I took away from his presentation was that we ought to run any bright ideas we have - joining or not joining the Trans Pacific Partnership, introducing different forms of carbon emission policies - through a practical model like his, before we press any buttons. My impression from chatting to people in the policy game is that we don't*. And it's not helped by economists here and overseas putting the bulk of their modelling efforts into fragile DSGE-style models which fall apart if the wind shifts, rather than into more robust, empirical, simpler and useful models that will give you sensible answers to real world questions.

Kaila Colbin, 'New Zealand and Australia Ambassador for Singularity University' - no, made no sense to me, either - turned out to be a highly impressive speaker who made a convincing case that the pace of technological change is high and increasing far faster than practically anyone realises. And she also dealt to some of the more alarmist 'the robots will take all our jobs' perspectives. Wouldn't you prefer, she said, an artificial-intelligence medical device to read your X-rays with complete accuracy, and leave your doctor to talk through treatment options? It also left me - again - with the strong impression that our (and other countries') productivity and GDP data can't be properly capturing the full extent of these extraordinary advances in our capabilities.

But as with many of the issues raised, attendees might now have a better idea of some of the global trends that are going on around us, or might happen down the pike, but we weren't given many suggestions about what to do in response.

And the issues that were raised didn't cover all of the waterfront. Nobody knows for sure why New Zealand's got the low productivity issues it already has, and what we need to fix to meet both our current and future challenges. But a partial list of plausible factors would include insufficient physical and other infrastructure; weak entrepreneurial and managerial incentives and capabilities; low international connectivity; the deadweight burden of poor regulation (think housing land in Auckland, or local regulatory reactions to Uber and Airbnb); policy sluggishness in the bureaucracy and the legislature; low intensity of performance-forcing competition; social and cultural attitudes to success, innovation, unorthodoxy, experimentation and failure; and you've probably got some further candidates of your own.

They didn't get much of a look-in, nor (as the New Zealand Initiative's Oliver Hartwich pointed out in a panel session towards the end) did the challenges of urbanisation, which he rightly said was one of the most important global megatrends. It's also one of the challenges we're failing to meet: neither Auckland nor Wellington work properly.

So a good grade to GEN for bringing expert overseas and domestic speakers together, and a decent grade for consciousness-raising. And maybe the paucity of policy responses this year could be the motivation for next year's agenda.

*Update December 9 - this should probably be "we don't all the time" or "we don't enough", as John Ballingall at the NZIER has helpfully been in touch to say that the TPP was actually run through a model.

This year's RBB Economics conference

Last week's RBB Economics conference in Sydney lived up to its six excellent predecessors (write-ups of last year's: keynote addresses, using economists, mergers, competition law).

Rod Sims, the chair of the ACCC, led off on the theme of  'Towards the new era in competition law'. Mostly the 'new' bits centred around changes to legislation. The Aussies'  Competition and Consumer Act (the CCA) has a new s45 on anti-competitive 'concerted practices', and an improved version of s46 dealing with abuse of market power, which incorporates the 'effects' test for use of market power as recommended by the Aussies' Harper review of competition policy.

We, on the other hand, are still lumbered with the 'taking advantage of market power' test that the Aussies have moved on from. As our Commerce Commission said in its just-released Briefing to its Incoming Minister

The Commission supports changes to Section 36 [our abuse of market power provision] as our enforcement programme continues to be constrained by practical difficulties in applying the legal tests set down by the courts. We note that the equivalent misuse of market power provision in the Australian Competition and Consumer Act 2010 (Section 46) has been amended (and came into effect in October this year), ostensibly to overcome similar issues and limitations encountered by the ACCC with ‘market power’ cases.

Don't know what cavilling nitpicker put 'ostensibly' in there: there's no ostensibly about it. Rod Sims said that "the old Section 46 saw us powerless to deal with a range of behaviour by powerful firms in many parts of the value chain who were stopping their competitors competing on their merits". The Aussies did have issues. They did have limitations. They've had a go at fixing them. We haven't (yet).

If the Aussies are ahead of us in some areas, it was nice to see that at least sometimes we have made the running. Currently our Commission does both merger clearances (no lessening of competition involved) and merger authorisations (there's a lessening, but it's worth it on a net public benefit basis), and has done for yonks. In Australia however there was an 'informal' clearance regime run by the ACCC (though in practice it became rather formalised and not unlike our clearance process), but authorisations went to the Australian Competition Tribunal. Now both clearances and authorisations go to the ACCC in the first instance, which makes total sense. So it was nice to see our own Mary-Anne Borrowdale, general counsel in the competition branch of the Commerce Commission, explaining to the Aussies how the processes work in practice and how to make them work smoothly for everyone.

Sims also made the good point that enforcing a competition regime is even more important these days when people are more than usually concerned about inequality and inequity. As he said, "Often populism opposes the essence of our market economy because it seems to many that the common person loses out and a small elite get wealthy at their expense. As I have repeatedly said, however, the role of the CCA is to ensure that our market economy does, and is seen to, work as it should, to the benefit of people generally".

I was struck by a couple of other things he said. One was that the ACCC has five criminal cartel cases with the Commonwealth Director of Public Prosecutions on top of others they've already pinged ("shipping, polycarbonate roofing, electrical cable, air freight, electrical componentry in cars, foreign exchange in the banking sector, airline tickets, and laundry detergent"), plus "there are others in our now‑healthy pipeline from our investment in establishing our serious cartels unit". Like all cartel policemen, he's got an interest in talking up his book, if only to make cartel leniency programmes look more attractive to potential dobbers-in: those five with the CDPP for all I know could all be the other Japanese shipping lines after NYK rolled over on its erstwhile co-conspirators. But even after allowing for some puffery it does leave me wondering: if the ACCC is finding stuff, are we? And if not, why not?

Sims also said that the ACCC had won a prize for competition advocacy. I'd never heard of the International Competition Network (ICN) / World Bank competition advocacy contest: now that I have, and acknowledging that we in New Zealand can't go through life forever making invidious comparisons with our Aussie mates, I wouldn't mind at all if the Commerce Commission was on the ICN / World Bank podium some day.

Luke Woodward, partner and head of the competition and regulation practice at Gilbert + Tobin, followed Sims on the same 'new era' topic (summary here, full remarks here). It put the evolution of Australia's competition regime in historical perspective. He said that "in Australia we developed an excessive level of legal formalism, where statutory construction has at times predominated over competition analysis. This approach has been rigid and not well able to flexibly adapt to developments in thinking over time...Section 46 suffered this fate: it started poorly with judicial glosses; was put on a good workable footing... and then...an artificial and disconnected legalistic approach to causal connections was introduced. The ACCC got shy and backed off. The hunting dog retreated to the porch".

But now Australia is in a potentially better position - potentially, because it might get to a place where the substance and the economics prevail over the legalism, or it might not. As Luke said, "The ACCC’s s 45 and s 46 guidelines don’t as of yet provide any guidance around the competitive theories of harm that the ACCC considers applying. In form, they are documents that look more like they were written by lawyers or administrators with an eye to warning businesses and keeping options open; rather than written by economists articulating a coherent economic theory of harm".

Other presenters - notably Peter Armitage from Ashurst (on s45) and Kirsten Webb from Clayton Utz (on s46) - made similar points about early days, detail still needing to be filled in, and how things might yet develop through the cases. Where the Aussies take s46 in particular will be hugely important to us if (as I think likely) we'll eventually join them in changing our law to match theirs. Whether we'll opt for a 'concerted practices' provision is more debatable. I can see a logic to one, but as Armitage argued, it's not fully clear what its reach is. If it's meant to catch anti-competitive things that aren't quite caught by the traditional 'contract, arrangement or understanding', fair enough. But (as he instanced) what about the example of smaller coal or iron producers swinging in behind the prices negotiated by the big guys with the big Chinese and Japanese buyers? There's a risk of overreach.

Luke Woodward also had some questions about the ACCC's extensive series of market studies: one came out on the morning of the conference (on the dairy industry), and another one has got underway since (a highly interesting one, on digital platforms). Luke worried that they might be going too far: for example, "If regulators themselves are prone to regulatory failure,then having found market failures, we run the risk of not correcting market failures, but simply adding regulatory failure to market failure" (read his full comments on pp 9-11 of his speech). All I can say is, it's a nice problem to have: up to now our Commerce Commission has been left twiddling its thumbs. The new government, goaded by the petrol  market, looks like it'll finally - finally - let the Commission proactively look at competition issues, but at the usual glacial pace of legislative and policy change in this area it'll be late next year before they have the powers, and 2019 and beyond before we see anything from them.

We also had sessions on competition issues in key industries, the pick for me being RBB's George Siolis with his commentary on the ACCC's retail electricity inquiry. At the risk of making those invidious comparisons again, I was left with the clear view that we've managed a much better job of regulating electricity lines businesses than the Aussies have, partly because Aussie lines companies were able to see off the regulator's decisions through the courts (a bolt hole that's since been sealed off).

All up, an engrossing conference, and well done RBB Economics. We're fortunate - in Australia and New Zealand - to have a variety of high level fora where these kinds of issues can get serious treatment. On our side of the ditch, though - those damn comparisons again - we're not very good at translating them into worthwhile reforms within any sensible timeframe.