Friday, 20 November 2015

Black hats - or grey?

Yesterday I posted about how I liked where MBIE's review of the Commerce Act had got to with its conclusion that section 36 of the Act - the bit that aims to curb firms with market power from nobbling the competitive process - wasn't working as intended.

But there was one comment in the review that jarred with me at the time, and after thinking about it for a while, I've figured out why.

It came in the bit on p29 where MBIE was talking about how the way s36 works in the courts stacks up against the criterion of 'simplicity'. They were right to say, not well, in particular from the point of view of a plaintiff (typically the Commerce Commission, but firms can also have a go at private prosecutions). When the courts decamp into the alternative universe of the 'counterfactual' - what would firms have done in a hypothetical world where they didn't have market power - the possibilities for rabbits to run in every direction are endless. MBIE was right to call the process "defendant friendly".

But along the way MBIE said this (I've added the bit in brackets to make MBIE's point clearer):
The problem here is not so much one of predictability for powerful firms – businesses will generally know if they are acting in a way that they would not in a competitive market. The problem seems instead to be the cost and delay involved in [the plaintiff] making a case under the counterfactual test
Frankly, the first sentence is just plain wrong (the second is mostly right).

Businesses very often won't know if they are acting in a way that they would not in a competitive market. That's precisely why we, and the Aussies, and competition authorities globally, have been having these rethinks about defining abuse of market power and policing it: it's a grey area, where reasonable people can come to different conclusions. What is vigorous but fair competition by a big company can be very hard to tell from tactics that exploit the company's bigness to skew the competitive playing field. In fact, that's exactly what the (in)famous Pink Batts case (which MBIE cites) demonstrated: courts took different views, with the House of Lords, who had the last bite of the cherry, taking the vigorous but fair line.

The biggest current example is Google's bunfight with the EU competition police. Is it really abundantly clear that Google's giving higher rankings in search results to companies that advertise with it is "anti-competitive"?  If you, um, google it, you'll readily find experts on both sides.

I wasn't born yesterday: of course, there will be instances where there are guys in black hats who know they are wearing them. There have been clear cases where competition authorities have spotted and pinged egregious behaviour that would have been found anti-competitive on pretty much any reasonable definition of abuse of market power.

But it's not the right way to typify where many companies are likely to find themselves - in the real, greyer world.


  1. The "hypothetical world where they didn't have market power" is interesting. One of my problems with thinking about the counterfactual world is that competition bodies seem to think about this world as being perfect competition, but as Coase pointed out many years ago if we do have perfect competition we don't have any firms! Judging firms behaviour by the standards of a model with no firms seems a bit weird to me. So just what is the counterfactual world? I'm not sure there is an answer to this question so the whole process make little sense to me.

  2. As one economist once told me in defense of perfect competition, quoting a statistician, "all models are wrong, but some are useful".

    That said, I'd be surprised if there was a competition agency that aspired to perfect competition. Certainly in Australia and New Zealand regulators aspire to "workable or effective" competition (see s3 of the Commerce Act, and the explanation given in the Australian QCMA decision). Generally that is what the Court would expect in the counterfactual.

  3. Thanks Paul and Ben. I was about to reply with Ben's point, that the counterfactual would tend to be "workable" or "effective" competition, though I seem to remember that there have been instances where the assumed "workable" market is quite thin, eg where an entrant has been trying to get hold of an infrastructural network input and the counterfactual assumption is two owners of networks rather than one.

    Funnily enough, even though it takes us to a ropey place, I have some sympathy with the judges who've devised the counterfactual test, as you're kind of forced there by the "take advantage of market power" phraseology. So part of the eventual answer is to junk or change the wording - as the review says,we're outliers by international standards in sticking to this approach.

  4. I find it ironic that the process I was involved in inside a large company trying to avoid getting caught by this actually ended up holding up prices higher than they would have if we had let the sales teams off their leashes. Not to mention the compliance costs involved..
    Its also useful to remember that a firm is a collection of individuals who all have different motivations/incentives, what can from the outside look like conscious decision is often unintended.

  5. Thanks for those comments. That first example is a fine one - where's the obvious line between low prices (more sales, happier customers) and 'predatory pricing'? And your second point is bang on, too: by the time the engineers, the marketers and the lawyers have all chipped in, how likely is it that there's a simple, single, anti-competitive 'purpose' behind anything? So welcome to the Confraternity of the Grey Hats. MBIE needs to join, too

  6. I have had doubts about competition policy for a while. But at least I'm not the only one. William Landes summaries the point in the following quote on why Coase gave up on antitrust,

    “Ronald [Coase] said he had gotten tired of antitrust because when the prices went up the judges said it was monopoly, when the prices went down they said it was predatory pricing, and when they stayed the same they said it was tacit collusion.”

    –William Landes, “The Fire of Truth: A Remembrance of Law and Econ at Chicago”, JLE (1981) p. 193.

    Sometimes no matter what you do you can't win.

  7. Hadn't seen that before - clever!


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