Coordinating in the dark

While laid up at home with a very belated case of Covid - we're okay, thanks for asking - I thought I'd use the downtime to read the IMF's latest report on New Zealand. I'm tempted to add the traditional "so you don't have to". While you don't expect an airport novel, even economists' eyes will glaze over when they find pieties like "The OCR [official cash rate] path should be calibrated to developments in the economy, including external shocks and fiscal and other policy responses". Well, duh.

Cheap shots aside, you can't argue with the big macro conclusion - we've overheated, and fiscal and monetary policy need to brake the economy: "With exemplary management of the pandemic, New Zealand recovered faster than most other advanced economies. This supported activity and, together with generous fiscal and monetary support, resulted in strong investment and consumption. But this came at the cost of overheating against capacity constraints exacerbated by restrictions on labor movement due to border closures, and disruptions in global supply chains". 

You could argue that the RBNZ has done its bit, but that Treasury hasn't. As the graph below shows, we have a largeish positive (i.e. stimulatory) fiscal impulse in the current 2023-24 fiscal year, when if everything was nicely coordinated fiscal policy would also be tightening. Given the Auckland floods and Gabrielle I'm happy enough to cut some (but only some) slack in the circumstances and trust (hope?) that the fiscal largesse will unwind in coming years. It's also true, as Oscar Parkyn, New Zealand's alternate director at the IMF, points out in an accompanying statement, that "While the fiscal impulse is estimated to be positive in the current fiscal year, the authorities [i.e. the New Zealand government] note that near-term fiscal impulse forecasts are highly uncertain", and maybe there won't have been an unhelpful 1.8% of GDP boost to an already overstretched economy when the final beans are counted. All that said, some of the discretionary measures in the 2023 Budget, or other programmes that could have been put on the back burner, really ought to have been deferred till a more cyclically opportune time

The Executive Board assessment in the report - "Directors underscored the importance of careful calibration of the fiscal and monetary policy mix to rebalance the economy and help address long-term structural needs" - is surely right. And I'm not convinced we have a good institutional mechanism to make that happen and to expose the consequences of fiscal and monetary policy not pulling together. If Joe and Joan Public had been told that you can have your Budget goodies, but your mortgage is now going to 6% rather than 5%, how impressed would they have been?

Elsewhere in the report, the Executive Board said that "Compiling a monthly inflation index would enhance the effectiveness of monetary policy", and it crops up in various places: in the staff report (para 19), "During the consultation, the RBNZ flagged the need to improve data and real-time information to aid monetary policy decisions and highlighted the lack of monthly consumer price data as an important gap. The lack of a monthly CPI series makes New Zealand an outlier among advanced economies and is holding back a timelier formulation and assessment of monetary policy. A review of the financial resources of the RBNZ is ongoing" and (para 20, in the government's response), "Stats NZ is examining the possibility of publishing more price data on a monthly basis to enable more timely monitoring of inflation developments but noted that a monthly CPI series would require additional resources".

Sadly, we have form here. When Covid hit, we discovered we didn't have timely enough data on how the economy was tracking, and we started on a mad scramble in the middle of a crisis to develop some ('Getting real', 'Getting even more real'). Two years later along comes the worse outbreak of inflation in 30 years, and do we have the statistics to help us best cope with the latest challenge? No we don't. In our current and deeply strange ordering of statistical priorities, the Stats database can tell us what we spend monthly on imports of 'Preparations of vegetables, fruit, nuts or other parts of plants' from Bulgaria*, but it can't tell us our own country's monthly inflation rate.

Just over a year ago the Aussie Bureau of Statistics got with the plot and started its 'Monthly CPI indicator'. We saw its value yesterday when the latest number (4.9% for July) came in below the expected 5.2% - useful new info all round, with reactions across numerous markets. Here? We're still twiddling our thumbs.

*$46,015 in May

CLPINZ 2023

 After a rapid scramble to reorganise the schedule following the last minute loss of the planned keynote speaker, the 34th annual workshop of the Competition Law and Policy Institute of New Zealand (CLPINZ) successfully got underway in Wellington over the weekend.

Top of the bill - promoted at short notice from the previously planned 'fireside chat' session, and very much appreciated for their willingness to step up and help out - were Commerce Commission chair John Small, on 'The future of antitrust', and Andy Matthews of Matthews Law as commentator. CLPINZ chair Anna Ryan of Lane Neave chaired the session.

John Small and his chosen topics; Andy Matthews commenting

John noted a swing in the intellectual competition policy pendulum, with a strong trend of more regulation for competition which had started twenty years ago with the Telco Act and has more recently extended to petrol, groceries and retail payment systems: on petrol, he noted that there were some retail "issues", a conclusion you'd tend to agree with after reading the latest quarterly petrol market monitoring report. He signalled that there is likely to be more ComCom activity against restrictive practices, an area which he accepted had been underdone to date, with the likes of retail price maintenance, anti-competitive covenants, cartels - the leniency programme is still "ticking away" - and in the fulness of time the revised s36 provisions against abuse of market power likely to see more playtime. He said that the NZ merger guidelines were due for review in any event, and noted that they're also a hot issue in other jurisdictions (notably in the US and Australia). And he put some emphasis on how ComCom plans to engage with its various stakeholders: "efficiency-based playing nice", as he put it, preferably relying on soft power (such as guidelines) and on "direct, respectful engagement", and avoiding litigation if possible, but going there if ultimately necessary.

Andy agreed that there had been a pronounced trend towards regulation for competition since around 2001 when there had been a "Big Bang" away from the previous reliance on light-handed, or no, regulation, and there could be a big payoff from the latest regulatory initiative, on consumer data rights, which could make competition in banking, for example, more effective. He also agreed with John's view that consumer law can be effectively used to complement competition policy, with for example significantly higher Fair Trading Act penalties over time providing a stronger incentive to be more consumer-friendly. And although the zeitgeist has moved to more hands-on interventionist competition policy, Andy reminded us that (a) the new and globally high-profile FTC/DoJ guidelines are just that, guidelines, and don't change the underlying law, and (b) regulation is all very well, but the first best option is always likely to be more effective competition, as we notably saw when a third mobile telco rolled out its gear.

Session 2 was "The most environmentally friendly carbon neutral CLPINZ session ever! Or is it?". In other words, the currently controversial area of "greenwashing", making misleading claims about the greenness of a business's products, activities, positioning or performance. The speaker was Charlotte Turner, senior associate, climate risk governance with MinterEllison in Melbourne, commentator was Kirsten Mannix, acting general manager - fair trading at ComCom, chair Bradley Aburn from Russell McVeagh. Charlotte referenced a web-scraping survey of the increased prevalence of green-focused claims, Kirsten referenced another which found an alarmingly high (~40%) proportion of potentially misleading claims. It's self-evidently an area with the potential to bite careless people: that said, as Charlotte said, the fundamentals haven't changed, and there are still well-established tests for 'deceptive' and 'misleading' even if the field they're being applied in is relatively new. And as Kirsten reminded us, one of the established principles is that 'intention' is not the point: being misleading will always put you on the wrong side of the law. You may well have read ComCom's own 'Environmental Claims Guidelines: a guide for traders', but might also like to follow up on some references Charlotte provided that originated with ASIC, the Aussie financial markets regulator: 'How to avoid greenwashing when offering or promoting sustainability-related products', and 'REP 763 ASIC’s recent greenwashing interventions'.

Session 3, 'Section 36: What can we learn from the Australian experience?', gave us incisive insights into how our s36, now amended to be in line with Australia's equivalent s46, will go in trying to deal to abuse of market power, given that our previous formulation of the law had proved ineffective. Chaired by Jennifer Hambleton,  it featured two very good speakers - Simon Muys from Gilbert + Tobin in Melbourne and Ed Willis from the University of Otago - and even though the 10 cases commenced under the new law in Australia have yet to go the full legal distance, and in some cases are still cantering towards the first fence, we got good ideas on what we might reasonably expect here. While some (including me) had hoped we might have got to a simpler place, compared to the counterfactual complexities of our old s36, both speakers agreed that litigating the new s36 will not be any simpler, just different (though, thankfully, more intellectually coherent). Establishing anti-competitive purpose, and establishing anti-competitive effect, will remain tricky, which is a bit of a disappointment to those of us who had hoped the Australian 'effects based test' would cut through more easily to the chase, and market definition looks to be at least as  crucial as previously. 

Simon Muys (L) and Ed Willis (R) reflect on the jurisprudence around abuse of market power

Session 4 was 'The Next Gen' session, a new CLPINZ idea aimed at showcasing some of the talent coming through the younger ranks of the competition and regulation community, and was chaired by NERA's Will Taylor. Left to right below, we got Sophie Vinicombe, solicitor at Russell McVeagh, talking about Ticketmaster antitrust claims in the US (what looks in retrospect to have been a very poor merger clearance); Sophie Harker, senior solicitor at Chapman Tripp on collaborating with competitors in emergencies like Covid; Luke Archer, principal investigator, Commerce Commission, on competition and sustainability; and Jono Henderson, consultant, NERA, on self-preferencing in digital markets (eg when a Google search throws up Google-associated products ahead of others'). All good topics, all well handled, and (going by people's reactions and the discussion at the CLPINZ AGM) I'd guess a 'Next Gen' session is going to be an ongoing feature of future workshops.

Session 5, 'AI and Collusion: Unveiling the Challenges of Tomorrow', featured a bright idea by chair Ben Hamlin: have AI (in the form of ChatGPT) write both the blurb for the session and the biography of the speaker, James Every-Palmer, which ended up crediting James with everything short of the Nobel Prize in Economics (not to downplay his real achievements: let's hat-tip his involvement in the Lawyers for Climate Action NZ win in the High Court, forcing the government to roll back its poor plan to paper the country with cheap emission trading scheme credits). James was surely right to argue that there is a long list of potentially anti-competitive concerns, not only over facilitated collusive conduct, such as tacit algorithmic price-formation, but also over unilateral conduct (including predatory conduct, and anti-competitive tying and bundling) and further issues across a variety of non-price dimensions including quality and privacy. Me, I'm a tech optimist, and inclined to believe the benefits of modern platforms in aggregate far outweigh their downsides, but you have to expect that some of the powerful incumbents will from time to time push their luck too far.

And finally Session 6, 'Aotearoa New Zealand's Turning Point - Competition and Consumer Policy Implications', chaired by moi, featured Mayuresh Prasad from Deloitte Access Economics in Wellington. Mayuresh gets a big thank-you for stepping in at literally days' notice to fill the gap in the programme after John Small and Andy Matthews moved to the keynote slot. He showed us, first, some modelling of the costs and benefits of what we need to do to keep temperatures rising by no more than 1.5 degrees. In the graph below there's a period where we incur costs to put in place policies like carbon taxes and spend on new renewable energy (and hence our GDP on the green 'do something' track falls below our GDP on the orange 'do nothing' track). After a period - the 'turning point' of his title - we pull ahead of where we would have been otherwise, and Mayuresh put numbers on the initial costs and ultimate payoffs. The costs, for mine, looked a bit on the low side, but otherwise his modelling fits with other attempts along these lines which also show that we can indeed have our cake (a greener sustainable world) and eat it (have a higher standard of living). And secondly Mayuresh explored some of the competition and regulation policy implications, notably around facilitating the necessary collaboration for good stuff to happen, and in particular giving certainty early in the piece as to what is or is not permissible, as we don't have a lot of time to waste.

Don't forget the benefits

Scrutiny of mergers is on the increase, notably in the US, where new draft merger guidelines have been widely interpreted as a sign of a more activist competition regulator proposing to take a tougher line, but also elsewhere. In the UK, for example, one economist recently wrote a piece in the Financial Times pointing out that the CMA's merger decline rate has been rising in recent years ('The UK’s competition watchdog risks undermining business dynamism', possibly $). 

In this latest swing of the pendulum, it's getting harder to argue for the 'good' merger, where the merged entity produces efficiencies (typically cost savings) or other benefits, such as innovative synergies from a combo that's more than the sum of its parts, or creates a more effective competitor to an entrenched incumbent. And more critics are finding more reasons to ping supposedly 'bad' mergers which reduce competition and increase corporate market power.

By happenstance, along have come two pieces of work, reminding us not to forget the 'good merger' story.

First, two hat tips for unearthing the first piece. One goes to the always interesting 'Blog Watch' column which the University of Canterbury's Paul Walker (aka GrumpyMcGrumpyface on Twitter) writes for the New Zealand Association of Economists' Asymmetric Information newsletter (if you're the proverbial intelligent lay person who'd like some very well-written takes on local and international economic issues, sign up for Asymmetric Information here, it's free). And the other goes to the equally approachable Conversable Economist blog, run by Timothy Taylor. He's also the editor of the Journal of Economic Perspectives, which "aims to bridge the gap between the general interest business and financial press and standard academic journals of economics" and is a terrific explainer in plain (or plainish) English of current economic debates (it's also free to read online, start here). Taylor's 'Recommendations for Further Reading' in each issue are always worth a look.

In his latest (July) 'Blog Watch', Walker picked up on one of Taylor's blog posts in April, 'After that Big Merger, What Happened?'. Taylor had come across some research done by folks at the International Center for Law and Economics, 'Doomsday Mergers: A Retrospective Study of False Alarms'. They looked back at six high profile, highly contested US mergers: their bottom line was that "Our retrospective analysis shows that many of the alarmist predictions of the past were completely untethered from prevailing market realities, as well as far removed from the outcomes that emerged after the mergers". With only one, partial, exception, the mergers had actually been 'good' mergers, with pro-competitive pro-consumer effects, or as Taylor summarised it, the retrospective case studies "do show pretty clearly that dire predictions about ill effects of mergers need to be taken with a few spoonfuls of salt" (he also wondered whether the merger sponsors' claimed benefits were as oversold as the merger critics' claimed costs were, which is fair enough).

The only partial exception was a big merger in the beer industry, where post-merger prices for some of the mass-market beers did increase (average prices remained steady). But that had the happy outcome that it created a profitable opening for the craft brewers, who have taken increased market share. And if you'd had the choice between a now more expensive but decidedly pedestrian beer and a tastily hopped artisan American Pale Ale, you'd have switched, too.

The other piece of research, which I came across on the ProMarket blog, is some work done for the World Bank. The ProMarket write-up is 'Firm Consolidations Hurt Workers, But Likely Not Because of Market Power', and the original all the bells and whistles World Bank working paper is 'Firm Consolidation and Labor Market Outcomes', very short summary here and full pdf here.

The researchers were primarily concerned about the adverse employment consequences of mergers, and they were well placed to investigate them. They were able to use a big administrative database in the Netherlands which contained matched employer-employee data, so they were able to compare what happened to employees in acquired companies after some 1,000 takeovers in the Netherland over 2011-15, compared to what happened at very similar companies that weren't taken over.

It's true that takeovers led to job losses: "There is substantial job loss among the workers of target firms: in the four years after a takeover, workers at a target firm are 8.5% less likely to be retained at the consolidated firm compared to workers in the control firm. This lower retention rate translates into income loss ... These effects are long-lasting and are present even in the fourth year after the takeover" (pp1-2 of the World Bank paper). 

Now, the researchers are, properly, concerned about this long-term adverse impact on those hit by involuntary job loss: my two best answers (which I've championed here before) are, at a macroeconomic level, maintaining as hot a labour market as you can run without triggering inflation, and, at a microeconomic level, 'active' labour market policies that make it easy to retrain, upskill, or go self-employed. Stomping on anti-competitive constraints in the labour market, like non-compete clauses, wouldn't go amiss, either.

But that said, the employment restructurings they are bemoaning are what in the competition policy game we would call efficiencies: they're cost savings, and as the researchers discovered, cost savings of a very specific kind. They found that if lab technician Kath in the acquired company is paid more than lab tech Rita in the acquiring company, Kath tends to get laid off. They also found that if there are lots of accountants in the acquired company, but the acquiring company already has lots of accountants, too, then the acquired accountants tend to get laid off. 

It makes complete sense, and it's likely to be a ubiquitous feature of mergers everywhere, not just in the Netherlands: if you were running the acquirer, you'd very likely act on similar lines. It's hard on Kath, and hard on the accountants, but the merged entity ends up more productive. And that's without thinking of any other efficiencies that may be on the table. Sure, for competition policy purposes, it's the net outcome that matters, and in any given case efficiencies may well be outweighed by detriments, but it would be silly to start from a viewpoint that efficiencies are nebulous or unlikely. A better starting presumption is that there are very likely to be at least some.

The Dutch example also got me thinking about what the New Zealand data might show. The Netherlands may well have a good administrative database, but so does New Zealand: indeed I'd hazard a guess that ours is top tier by international standards. Formally, it's the 'Integrated Data Infrastructure', or IDI: Stats calls it "a large research database. It holds de-identified microdata about people and households. The data is about life events, like education, income, benefits, migration, justice, and health. It comes from government agencies, Stats NZ surveys, and non-government organisations (NGOs). The data is linked together, or integrated, to form the IDI. The IDI complements the Longitudinal Business Database (LBD), which holds linked microdata about businesses. The two databases are linked through tax data".

At one point, access to the IDI was overtightly corralled, and not enough was being done to exploit its potential value. Now, it's being increasingly mined to good purpose: this year's NZ Association of Economists' conference featured a variety of IDI-based projects. AUT's Gael Pacheco and her team, for example, were able to follow (anonymised) Kiwi students who had done badly on the international PISA tests of numeracy and literacy to see what their subsequent employment, health, and justice system outcomes had been (as you'd expect, not good).

So why hasn't someone had a look at the effects of takeovers? It's all very well for supporters of mergers to claim benefits, and critics to claim costs, and the Commerce Commission to appeal to first principles of economics, but wouldn't we get more informed decisions if the question was, how does this proposed merger line up with what we empirically know about New Zealand mergers in general?

The RBB Economics conference is back

After the Covid-induced hiatus since its 2019 conference, RBB Economics got back on track last week with its traditional face to face conference in Sydney. It was good to be able to schmooze again, and you never know who you'll meet: this time round I bumped into Lilla Csorgo, who's back in our part of the world as the about-to-be ACCC chief economist.

The first panel session was 'Reflections from the agency, judiciary, and private practice'. It featured the CEO of the ACCC, Scott Gregson (somewhat oddly, the ACCC doesn't list bios of its senior staff on its website but here's the 2020 media release about his appointment as COO, upgraded to CEO in February '22) on 'Pursuit of a strategic enforcement model – the ACCC’s journey'; King & Wood Mallesons partner Peta Stevenson on 'Those who do not learn from the past are doomed to repeat it – is the ACCC doomed?'; and the Hon Justice John E Middleton AM KC on 'A more demanding judiciary emerging?', all moderated by RBB Economics partner George Siolis.

Scott took us through a history of the evolution of the ACCC from an essentially reactive complaints-driven collection of regional offices to an integrated national outfit with a more purposive agenda. Looking ahead, and he said these would be modest rather than massive moves, he expects that while a penalty-based regime will still be central, there's likely to be more focus on remediation and redress (good); that the ACCC will be driven more by market data and intelligence (as is everybody else these days); and that it will aim for better measurement of performance (always a tough job for anyone in the services game).

(Left) George Siolis kicks things off; (right) the panel for the first session, Scott Gregson, Peta Stevenson, Hon Justice John Middleton

Peta walked back a bit from what she called her "click bait" title - no, the ACCC is not doomed - and focused on the performance-measurement element. Some purported measures based on levels of ACCC outputs or activities may well be problematic: higher numbers of cartel prosecutions, for example, could easily be a result of more cartels operating rather than less, and could well mislead people into thinking that the actual desired outcome (cartel deterrence) had been achieved. Better measures might be found by rerunning the likes of the University of Melbourne 2011 survey of public awareness of cartels. And John explored some of the remediation and redress issues: the "demanding" bit of his address referred to judges demanding clearer and more convincing reasons why they should go along with agreed penalties, especially around whether they are appropriate to the degree of harm involved.

The second session, 'Reflections on policy (1)', was a pre-taped address by Dr Andrew Leigh, Assistant Minister for Competition, Charities and Treasury (and incidentally a Harvard PhD and ex economics professor at ANU), on 'No Competition, No Progress'. He pointed to evidence of rising market concentration, higher company markups, declining job switching, and declining start-ups as a percentage of total firms (when you look at firms with employees, and not just ex-employees going out as one-man-band consultants, not that, ahem, there's anything wrong with that). He made a good case that effective competition policy can combat these productivity-sapping developments, and that the post- Hilmer-report competition reforms had been one of the reasons supporting an Australian productivity boom in the 1990s. All good stuff: whether the rest of the Albanese government shares Andrew's vision of being "pro-growth progressives" remains to be seen, but it's a good thing to aim for.

Then came 'Reflections on policy (2)' on the broad theme of 'The shifting mandate of competition policy in Australia and globally'. We heard from Tom Leuner, Executive General Manager, Mergers, Exemptions and Digital at the ACCC (sorry, no web link or bio obviously available), White & Case partner Belinda Harvey, and Minter Ellison partner Katrina Groshinski, moderated by RBB principal Chris Hart.

Tom (disclaimer - his views, not necessarily ACCC's) referenced the debate about whether merger enforcement globally had become too lax (he pointed to this joint report from the CMA, the Bundeskartellamt and the ACCC). Looking forward he expected that merger policing would need to involve more focus on: non-price effects (such as on quality or privacy); effects on potential competition (the whole 'killer acquisition' thing); upstream markets facing downstream monopsonists; vertical mergers and potential foreclosure problems (very few challenged in the US recently, but more a live issue in Australia); and the process of dynamic competition, even if the analysis is necessarily qualitative. People tend to make a song and dance about how hard it is to judge whether some currently fringe start-up has the potential to be the Next Big Thing. My feeling (which I put to Tom) is that there are private equity and venture capital types who are 24/7 all over these start-ups and could well (given their skin in the game) have a pretty good sighting view of a start-up's eventual evolution. Don said that they do pick up on the valuations being paid for start-ups as an indicator of how big their idea is, which is fair enough, but I still wonder if there is some further information lurking unused.

Belinda endorsed what Tom said, in particular picking up on the importance of protecting dynamic and potential competition, but she also wondered whether in a newfound tougher global merger approach, there weren't risks of 'big' being regarded as 'bad' irrespective of the efficiencies a merger might bring or of a big company's success in meeting customer needs. She also wondered how protecting nascent competitors from incumbent acquirers would play out: it could reduce the incentives for start-ups to form in the first place if their most likely cash-out, to one of the big guys, gets taken off the table.

Katrina accepted that there is a global move of scepticism about big companies and where we've ended up - she instanced Bernie Sanders' book It's OK to be Angry about Capitalism - and that there's a view that ever bigger companies are a standing reproach to merger underenforcement. But she too wondered about going too adventurously down that road: big can be beautiful (the indirect reference was to E F Schumacher's Small is Beautiful) if efficient. On a separate topic, she said that competition policy needs to be at the centre of Australian decarbonisation: it might yet get sidelined (e.g. to allow room for government acquisitions of energy assets), but the risk would be that you end up with an economically inefficient greening transition.

And finally we came to 'Reflections on NSW Ports', a recent Full Federal Court decision. Speakers were Sarah Lynch, Special Counsel at Gilbert+Tobin, RBB principal Chris Whelan, and Michael Borsky KC, Ninian Stephen Chambers, List A Barristers. Sarah took us through the factual matrix of the case and Chris took us through some of the economic issues.

The genesis of the case was interesting. I think it would be fair to say that the then chair of the ACCC, Rod Sims, had got so exasperated at Australian states maximising the value of their privatisations, by means of arrangements (in his view) providing anti-competitive protection for the assets being sold, that he'd had a gutsful (an earlier example had got on my wick, too). The ACCC duly took on provisions that it said protected the container depot monopoly of Ports of New South Wales: their privatisation had included a clause whereby Port of Newcastle, if it entered the container port game, would have to compensate the incumbent New South Wales ports (Port Botany and Port Kembla) for business lost to the upstart Newcastle challenger. The arrangement, the ACCC argued, acted as an anti-competitive barrier to Newcastle giving the container business a go.

Unfortunately once the ACCC had clambered out of the trenches, it ran into the barbed wire of Crown immunity (the state of New South Wales could do what it liked, as its privatisation decisions were outside the purview of the Competition and Consumer Act, and the immunity also extended derivatively to Ports of NSW).  While still tangled in the wire it was mortar bombed by failing to establish anti-competitive purpose (the court preferring the simple story of a financial purpose, namely an arrangement that the buyers would get the value of the monopoly they were paying good money for). And it got raked by the judges' machine gun fire on effect: they reckoned that the provisions made no difference, as it was very unlikely that Port of Newcastle would in fact get into the container trade. Chris had wondered, given the 50 year term of the lease the purchasers were buying, how confident you could be that Port of Newcastle would stay out of the game for such a long period: on the other hand, the state of New South Wales (likely for solid economic efficiency reasons) had made it clear that it was only interested in allowing sequential container port development, with Port Kembla second in the queue when Port Botany eventually reached capacity.

The ACCC's reaction is here. The good news is that despite the lengthy and expensive defeat, the ACCC's intervention probably helped to get to a better place: the compensation arrangement was eventually rescinded. The bad news, for mine, and accepting that the courts cleared Ports of New South Wales in this case, is that Crown immunity could leave too much scope for future anti-competitive rorts. Michael Borsky usefully reminded us that the Harper report recommended that competition law ought to be extended to cover more of the activities of various levels of Australian government: at p282 it said that "Through its commercial transactions entered into with market participants, the Crown (whether in right of the Commonwealth or the States and Territories, including local government) has the potential to harm competition. The Panel considers that the NCP [National Competition Policy] reforms should be carried a step further and that the Crown should be subject to the competition laws insofar as it undertakes activity in trade or commerce". That looks a sensible view.

Stick it to them

Our Commerce Commission has just hosted the International Competition Network's annual cartel workshop, on the nowadays typical hybrid online-plus-in-person basis, and it has been a fascinating meeting.

If you're not a competition policy tragic, sticking it to cartels may not ring your bell. You wouldn't be alone. People don't always appreciate the harm they do, and indeed it's not so long ago that cartels were seen as potentially a good idea. In FDR's depression-ravaged America, for example, cartels were actively encouraged: they were thought to be useful as a way of holding up prices when deflation was a macroeconomic problem. Some folks still think that cartels can help businesses through tough times by parceling out the available jobs so that everyone has some sort of income stream to help keep them going.

But these days, competition agencies, rightly, see cartels as an unmitigated evil. Cartels raise prices, ripping everyone off for illicit private commercial gain. They reduce output: think OPEC, which rorts the oil price by agreeing to curb production. And at least one of the four activities that fall under the general heading of 'cartel' - price fixing, market allocation, bid rigging, collective output control - is nothing short of outright commercial fraud. Crooked collusive bidding on tenders is a crime - and a particularly nasty one when it stitches up the likes of medical supplies or essential infrastructure - and the conspirators ought to face the prospect of being banged up with the other fraudsters, as they will when our cartel criminalisation regime goes live next April.

So there are good reasons why competition agencies everywhere want to discover and punish any existing cartels, and hence or otherwise deter new ones from forming.

Trouble is, one of their best weapons may be losing its oomph.

'Leniency', as it's known in the trade, was a Cunning Plan. It destabilised cartels by encouraging cartel members to rat on their mates. The first - and, importantly, only the first - cartelist to dob in the others got 'immunity': the Commerce Commissions of this world wouldn't take any proceedings against them, but would prosecute the rest of the gang. There is other stuff - the initial dobber-in had to continue cooperating with the investigation, for example - but that's the guts. 

The importance of 'only the first' is right out of game theory. If a bit of mistrust starts to bubble up in a cartel - and let's face it, it tends to, as cartelists are always worried that someone will renege and sneak a commercial advantage by undercutting the high price they are supposed to quote - then the 'first in' element sets up a payoff matrix where the first in gets a positive payoff at the others' expense. And there have indeed been real world instances of cartelists racing to be first in the regulators' door. Overall, it's been good at unearthing cartels that mightn't have been found otherwise.

But there is a growing suspicion that cartelists may be opting to stay away from looking for leniency. It doesn't seem to apply to New Zealand - apparently the Commerce Commission has at least 17 leniency applications in, and at the conference we heard that Portugal's authority has eight, which the local folks think is a lot for an economy Portugal's size - but at least in some jurisdictions, notably the EU, the number of leniency applications has dropped off. 

Why? Probably three things most of all. 

One is that the EU has made it easier for private parties to swing in behind the competition regulator and sue for damages: the prospect of megabuck claims across multiple jurisdictions to recover the cartels' overcharging has made cartelists reconsider the leniency matrix of payoffs. Personally I'm all for facilitating people getting back their ill-lost costs, and multiple expensive court cases are exactly what the conspirators deserve (and should have thought of before they started), but realistically you've also got to wonder about the cost to competition enforcement of leniency becoming ineffective. 

The second thing is that it's good to get immunity from a competition authority's civil proceedings and the risk of a big fine, but it's not always as clean a process as it might be for applicants to get immunity from criminal proceedings, where employees risk going to jail (as they have in Australia since 2009, and as they will here from next year). People really worry about that - you would, too - and if the deal doesn't come as a guaranteed combo, people won't buy it.

The third thing is that it's plausible that at least some competition authorities rested on their oars and let leniency do all the cartel detection work. Understandable: leniency was the gift that kept on giving. But, again, it upset the payoff matrix. Now, cartelists started to reckon that if they didn't dob a cartel in, there was sod-all chance that the competition authorities would find it by themselves. The calculus shifted to staying shtum. 

How to turn the tables back in the competition authorities' favour?

You don't have to be a professional game theorist to get to the answer, which is to re-stack the payoff calculus.

One leg is to make the payoff from leniency and immunity more attractive. There's some swallowing of dead rats involved, but there you go. The main moving parts are ironclad civil plus criminal immunity, and probably some form of protection against private claims.

The other leg is to increase competition authorities' independent capability to find cartels. The Commerce Commission's Grant Chamberlain (below) chaired the plenary session on 'Widening the enforcement toolkit - how do we detect cartels going forward without relying on leniency?', and the big takeaway for me was that outreach programmes have a lot of cartel-detecting potential. Go out and about in the community on competition advocacy tours, and you'll find (as one panelist said) that if you talk to people, they tell you things. Funny, that.

Another very promising line of attack is Big Data. Everyone says Big Data will mean this, that or the other for society as a whole: not everyone has connected the dots and realised that in the right hands it could be a powerful anti-cartel tool. I was impressed by Spain's efforts. There is a nationwide Spanish e-platform used for public procurement tenders: their authority cloned it, and devised software to interrogate it for patterns suggestive of bid-rigging. Way to go. 

And one last tool is encouraging whistleblowers, which has had some good results. Me, I'd stack the strategic deck a bit more, and as well as protecting whistleblowers from retaliation, I'd give them a share of the takings from any eventual fines. 

Not that some need much extra motivation. One of the speakers told us of a French example, which involved bid-rigging contracts for upgrading school buildings. The cartelists had an IT guy set up the software to keep track of who got what. Later, almost incredibly, they made him redundant.

His wife dobbed them in.

CLPINZ 2022

Last weekend the 33rd annual Competition Law and Policy Institute of New Zealand (CLPINZ) workshop was held at Simpson Grierson's Auckland offices - many thanks to James Craig and the Simpson Grierson team for use of the impressive facilities. It was once again a hybrid event - effectively standing room only for the 80 or so attending in person, with others attending online - and it increasingly looks like the most effective and flexible way of putting on events like this. One of my mates reports that the digital version worked really well, so hat tip to Shannon Woodward and the team from Conference Innovators for organising everything and to their technical folk for making the linkups work.

CLPINZ attendees hit the coffee, Saturday morning

First up was the keynote speaker, Professor Fiona Scott Morton from the Yale University School of Management: she was a fine presenter, and you could see why she's won teaching awards. Her general theme as per the workshop programme was 'Misuse of market power enforcement', and her presentation (online, from Edinburgh) was titled 'Competition Policy Whiplash'. Her argument was that over the past three or four decades economists, influenced by the 'Chicago School' style of thinking, had retreated more and more from activist anti-trust enforcement and towards deregulation and letting markets rip, whereas the economy, particularly the 'new' economy of tech and platforms, was posing more and more potentially anti-competitive problems. Old school economic thinking, and legal evidentiary standards in the US around an unrealistically high burden of proof, were being danced around by corporate strategies such as 'buy or bury' (acquisition or elimination of nascent competitors, what some call 'killer acquisitions'). Economics, and law, she reckoned, need a rev up to be able to better analyse what's going on (economics) and to be more able to do something about it in a courtroom (law).

Changing the law to better nobble anti-competitive stuff is precisely why we've recently reformulated s36 of our Commerce Act. Ben Hamlin, the commentator on Fiona's paper, had a look at how we're set up to deal with the issues Fiona raised. On the plus side, our s36 looks a more flexible instrument than its US equivalent, partly because "likely effect" leaves room to catch anti-competitive effects that would fall short of the "more likely than not" test in an American court. And our High Court can (and typically does for these s36 cases) have a Lay Member, so there's a better chance that modern economics will get a look in (Ben told us something I didn't know, which was that both the Court of Appeal and the Supreme Court can appoint an economic adviser, which looks like a good option to have). On the down side, when we have tried to ping potentially anti-competitive stuff, it didn't work very well (albeit under the old s36 and before  modern case management), and the Commission is going to have to lift both its investigation and prosecution game if it's going to be effective. And while the 'new' economy gets a lot of focus both overseas and at home (we've got some big tech companies of our own), Ben noted that the decarbonisation challenge posed by climate change is going to pose stiff competition challenges elsewhere, too (eg if a renewables-based electricity generator's market power got a tailwind).

Onwards to 'Setting the bar for collaborative activity workouts', presented by Sarah Keene and commented on by Emma Ihaia of Link Economics. The 'workout' theme referred to the gym involved in the Commerce Commission's decline of the first authorisation of a 'cartel' provision in a collaborative activity (press release here, decision here). Bit of a mouthful, but what's going on is that the Commission can authorise what would otherwise be a no-no - in this case, a gym franchisor setting maximum and minimum membership fees for its individual franchised gyms - if the provision is "reasonably necessary" for the collaboration to work. Several people pointed out that a lot of the evidence in this decision was redacted, and from the outside we're not privy to what the Commission saw, and even without knowing the details, the fact that the gym managed for some years without the provision it wanted authorised rather undercut the argument that it was "reasonably necessary" for the operation to be a commercial goer. That said, it looks distinctly odd that franchises have been caught by the law at all (people, including Sarah in a past life, had argued they shouldn't have been) - and I feel the same way, to my mind they are interconnected parties - and it's equally odd that even the Commission didn't see any anti-competitive harm ("In our Statement of Issues we expressed the preliminary view that competition is unlikely to be substantially lessened by the Proposed Agreement"). But that was moot: falling at the "reasonably necessary" hurdle meant it couldn't be cleared, even if it did no competitive harm. 

Session 3 chaired by Hayden Green of Axiom Economics was 'Insights into the Commission', originally meant to be a tour d'horizon by outgoing ComCom chair Anna Rawlings but sadly disrupted by a bereavement in her family. In her stead ComCom's Antonia Horrocks (GM Competition) and Andrew Riseley (GM Legal Service), stepped up at short notice and did very well indeed across a wide variety of topics (y'all know who they are but if not profiles are here). Among the things I picked up on: the growth of the Commission (79 folks when the Commerce Act hit the statute books in 1986, 408 now), reflecting its expanded roles; it's setting up an outcomes-based framework to figure out its actual impact (or not), and is planning some look-back analysis of previous merger decisions (gets a tick in both those boxes from me); the value for money as a lighter-touch regulatory option of the $300K a year spent on the airports' information disclosure regime; how 'must do' things like the recent tsunami of mergers have sucked resources out of more discretionary stuff; and, something I'd been baffled about ('What if they threw a party ...', 'Sterny McSternface'), what was going on with authorising collaborative activity to help with the response to Covid. As it happens, quietly in the background ComCom was in fact allowing helpful initiatives through, but barring a rather oblique reference (on p18 of the latest Annual Report), you'd be hard pressed to know. The Commission could usefully give itself a more public pat on the back.

Session 4, chaired by Alicia Murray of DLA Piper, was on unfair terms in business to business (B2B)  contracts, which kicked in here in New Zealand this August for B2B contracts where the trading relationship between the parties is less than $250K a year. Australia's had a regime going for small business contracts ('small' defined differently, but never mind) since 2016, so Professor Jeannie Paterson of the University of Melbourne walked us through what's been happening there, with local  commentary by Jennifer Hambleton from MinterEllisonRuddWatts. The upshot from Australia is that while there is little case law (there have typically been settlements when the regulator has challenged terms), the likelihood that what is adjudged unfair in a B2B contract and what is unfair in a business to consumer contract may be different, and may reduce the likelihood that a term is unfair: Jeannie said for example that "Running a business is all about bargaining for a viable balance of risk and cost in the deal. Many businesspeople are savvy at this trade-off. They may not be able to influence the terms of a standard form contract, but they may negotiate price, which should reflect the risks assumed". That said, it wouldn't be safe to conclude that anything goes, and you can stick any old terms to anyone on a take it or leave it basis: "the takeaway lesson ... may be caution in the scope of the boilerplate provisions". Jennifer ran us through the technicalities of the NZ legislation, including pointing us to one of the limbs of the legal test for an "unfair" contract term, namely "The term is not reasonably necessary to protect the legitimate interests of the party advantaged", and noting that there is "significant uncertainty" about what that means. Given that (as we learned in a preceding session) "reasonably necessary" was also the big issue in collaborative activity authorisations, you'd wonder (as a non-lawyer, in any event) whether there couldn't have been a user-friendlier formulation in the law. In any event, the new legislation is one of those useful bits of consumer law where, by addressing imbalances of bargaining power, it helps grease the wheels of workably competitive markets.

Our dinner speaker was Neale Jones from government relations and communications firm Capital, who gave a very entertaining and insightful guide to effective political lobbying. I'd guess most of his audience have had a go somewhere along the way at influencing things in the competition and regulation space (I've weighed in on s36, market studies, ComCom's Covid-era powers, and ComCom's info sharing with other agencies) and we picked up some practical ways to do it better.

Saturday morning, and we started off with 'Market studies, looking back and looking forward'. It was to have been chaired by Will Taylor of NERA, but at the last moment he came down with the dreaded lurgy, and the ubiquitous Ben Hamlin stepped in to preside over Eric Crampton from The New Zealand Initiative and Lucy Cooper from Chapman Tripp. Two big points from Eric: if you're concerned that competition isn't working in a market, the best first question to ask is, what are the barriers to entry? Why aren't new entrants able to come into a market and eat the incumbents' supernormally tasty lunch? And secondly, when you do that, you're liable to discover that there are "impenetrable thickets" of overlapping blockages which are the real issue: he mentioned the cumulative effects, for example, of regulation (including occupational licensing), statutory protections, zoning and consenting in the planning process, and the Overseas Investment Act. Both Eric and Lucy wondered about the selection process: so far the topics chosen (while good ones) have all been government priorities, and there could well be traction from ComCom being given its head to look at where it thinks there may be issues. Lucy raised something I hadn't thought of: she said that ComCom's strength is in analysis and findings, and perhaps there's scope for the policy recommendation piece to be shared with, or done by, others, given that policy development is an art form of its own. I can see the point, and Lucy (who's been through the supermarkets and petrol bunfights) knows more about process than I do, but FWIW, what you might gain in policy development you might lose in urgency (think s36, and others), unless the policy developers' feet were held to the fire in the same way that ComCom is forced to move right along with its market studies.

Ben Hamlin warms up the audience for Eric and Lucy

And finally we got to an oddity of New Zealand's competition regime, ComCom's legislated inability to accept behavioural undertakings in merger proceedings. In the session, chaired by Glenn Shewan from Bell Gully, we heard from Linda Evans from Herbert Smith Freehills in Sydney (Australia allows behavioural undertakings, and Linda's been involved in some big ones), with commentary from Michael Tilley, Geelong Cats fanatic and mergers manager at ComCom. Another very good session, and I hope I don't do it an injustice by cutting straight to the chase, namely that an absolute prohibition doesn't make much sense and that occasionally - occasionally - behavioural undertakings will be a good way to go. Linda: "The experience, particularly in the US, but also from Australia and Europe, indicates that behavioural undertakings may be appropriate in certain circumstances. In particular, well designed behavioural undertakings can effectively resolve any competition concerns, while also maintaining the efficiency benefits of a transaction". Michael: "There is a case for change; Acceptable standalone conduct remedies are likely to be rare; Claimed efficiencies should be treated with caution; Consumer benefits should outweigh the costs; Commission would want ability to say “no”".  When we get the next update of the Commerce Act, this should be on the agenda.

If you'd like more detail on anything, the papers and slides are already up in the members' area of the CLPINZ website, and recordings of the sessions will also be available in the near future.

A long post, but then this was a pretty chunky and meaty workshop. I'd guess the length was, um, reasonably necessary?

A statistical surprise

The New Zealand Association of Economists runs a poster competition at each annual conference - a good idea, encouraging concision and clear messaging, not always a forte of economists - and this year it was deservedly won by Alexandra Turcu of AUT's Work Research Institute, with her entry, "Underutilisation in the New Zealand labour force: Unused human capital, or an underpaid workforce?". The winner's decided by popular vote of the attendees, and I voted for it, too.

Before reading it, and (I'd guess) like everyone else, I'd always assumed that the "underemployed" were available to work more hours than they currently are, and were a reserve slush fund of unused labour availability. But Alexandra discovered something striking about the apparently "underemployed". 

She looked at the characteristics of two kinds of underemployed people - the full-time underemployed (full-time; available to work more; want to work more) and the part-time underemployed (part-time; ditto; ditto). Remarkably, she found that "Although the underemployed groups want to work more hours, and state that they are available to do so if more hours were available, our results reveal that they already work a similar amount to their fully utilised counterparts. The fully-utilised work only one hour more than the underemployed do per week": full-time employees, for example, who said they were "underemployed" were actually working 40 hours a week, virtually the same as the 41 hours of fully employed full timers, and it was the same story with part-timers where the "underemployed" ones were putting in 15 hours a week compared to the 16 put in by fully utilised part-timers.

So it is not at all obvious that these people actually form any substantial pool of increased labour supply - an important thing to know if, for example, you're the Reserve Bank wondering about potential output and full employment - and it's likely that what they're telling Stats has less to do with their availability to put in more hours and rather more to do with their relatively low incomes. As Alexandra put it, "This begs the question: Are underemployed workers truly underemployed, or are they just underpaid? When asked why they were underemployed, the majority of respondents said it was because there was not enough work available. However, it is important to note that the HLFS [household labour force survey] survey did not include "not enough income" as a potential answer".

So one practical lesson to take away is that there is less slack in the labour supply than you might have thought, if you had been relying on those apparently "underemployed" being available to step up to the plate and do more work. And if you were concerned about their low incomes, there's a positive to take away: fully 57% of those "underemployed" part timers transitioned into fully utilised full timers in the following quarter. They don't sit on the sidelines for long.

Here's the full poster.

When there's a will ...

You don't often see competition reform feature in the Budget, but we did last week.

"We are ... committed to boosting competition in the New Zealand’s grocery sector to ensure people pay fair prices for food and other basics", Grant Robertson said in the Budget speech. "Today, we are introducing legislation that will remove barriers to new retailers entering the market. Specifically, this will prohibit the restrictive covenants on land that major grocery retailers use to limit site availability for competitors. Such covenants will be prohibited immediately once the Bill comes into effect, and I anticipate that competitors can begin to consider new sites shortly thereafter".

The Commerce (Grocery Sector Covenants) Amendment Bill is here. It defines Foodstuffs North Island Limited, Foodstuffs South Island Limited, and Woolworths New Zealand Limited as 'designated grocery retailers', and creates a new s28A of the Commerce Act whereby "Certain grocery-related covenants are treated as prohibited and unenforceable" by deeming them as "having the purpose, or as having or being likely to have the effect, of substantially lessening competition in the relevant market", and so pinging them under the existing s27 and s28 of the Act. s27 we all know and love - contracts, arrangements and understandings substantially lessening competition - and s28 is its equivalent for anti-competitive covenants.

In its grocery market study (summary here, whole shebang here), the Commerce Commission had identified "more than 90 restrictive covenants entered into by the major grocery retailers, the majority of which are still active" (6.77) and "over 100 exclusivity covenants in leases entered into by the major grocery retailers, the majority of which are still active" (6.80). Clearly, this isn't a small issue, and it may be rather bigger than the Commission thought. On its helpfully proactive 'Market study reporting dashboard', Foodstuffs North Island says that it alone has removed restrictive covenants from 78 out of 135 affected properties (the outstanding ones are on land it doesn't own any more, and they are approaching the current owners to bop those off, too).

So it's good news that the government has moved quickly to implement the Commission's recommendations 2A, 'Prohibit restrictive covenants that relate to the development of retail grocery stores' (discussed at 9.68 - 9.72) and 2B, 'Prohibit exclusive covenants in leases that relate to the operation of retail grocery stores' (9.73 - 9.79). Their impact may be overstated - my guess is that planning laws restricting the supply of land available for supermarkets may be more important, as may planners' inclination to protect competitors rather than to protect the competitive process (hence the Commission's 'Recommendation 1F: Retail grocery store development should not be able to be declined on the basis of adverse retail distribution effects on existing commercial centres') - and the supermarkets look to have been dismantling them anyway, but it's progress. 

It's helpful that the political pressure to 'do something' about rising prices in the shops - a key focus of the Budget - helped bring about a quick competition policy response, and you'll excuse me if I snarkily add, 'for once', given the tortuous processes in getting s36 reformed, cartels criminalised, and indeed setting up the market study regime itself. When there's a will, there's a way, as they say. Moving this quickly, incidentally, means that you've only got a very brief window for submissions: Friday, in fact. The submission link is here.

But I hope that the "it's the supermarkets wot done it" line about inflation doesn't get taken much further. In April the Commerce Minister, Dr David Clark, commented on the 7.6% rise in New Zealand food prices over the year to March, and said that "The March increase is above general inflation figures and highlights the role the grocery sector is playing in driving up prices. Rising food prices is a global issue. Omicron, ongoing disruptions to global supply chains and Russia’s invasion of Ukraine is putting pressure on prices in every country, but that is exacerbated here by the lack of competition at the checkout".

Hmmm. In the US, annual food price inflation was 8.8% in March; in Canada it was 9.7%; in the UK it was 6.7% in April. Overwhelmingly, inflation is not a matter of grocery industry structure, but a result of those other global factors that the Minister mentioned: he might have thrown in monetary policy, here and overseas, being left too stimulatory for too long after the initial Covid hit. Blaming the supermarkets, if only in part, for current food price inflation may play well to the galleries, but it's not a strong argument. If, as he said at the time, he had "not ruled out going further than the options that the Commission tabled in its final report", fair enough: quite a few folks (but not me) reckon the Commission didn't go far enough. But I wouldn't take that step on the back of a not very convincing line of attack on inflation.