Monday, 26 August 2019

By the numbers

There's a really neat bit of dataviz gone up on the Productivity Commission website, which has a go at showing different measures of the intensity of competition in the various sectors of the New Zealand economy. The Commission has had an interest in competition as it surmises - I'd say correctly - that the intensity of competition (or lack of it) may have something to do with our national productivity (or lack of it).

The story starts with the Commission getting Motu's Dave Maré and independent researcher Richard Fabling to look at the links between the intensity of competition and productivity outcomes, an exercise they published as 'Competition and productivity: do commonly used metrics suggest a relationship?'. As part of that exercise they first had to get the underlying dataset scrubbed up, an exercise they describe in brief here; their full paper is here.

The competition and productivity data that Maré and Fabling collated form the basis of the dataviz. It's the work of data wizzes Aaron Schiff and Harkanwal Singh, who have taken the data on competition and created the Competition Explorer.  There's an accompanying paper, 'Competition in New Zealand: highlights from the latest data', which you'll be relieved to hear "is aimed at non-specialist (and non-economist) readers", and which explains that it "provides a consistent set of competition measures for 39 industries for each year between 2001 and 2016".

Have a play with the Explorer. By default you start at the 'About' tab, which shows you the measures: yer standard Hirschman Herfindahl Index of concentration; price to cost margins (in two flavours, broadly similar); profit elasticity, which measures the responsiveness of profits to changes in variable costs and which should be higher in more competitive industries (again in two flavours, but the 'fixed effects' version is the one with legs); and subjective measures of self-reported levels of competition in their neck of the woods as told by businesses to Stats' Business Operations survey. Once you've got your head around the measures head for either 'Home' or 'Measures' and you're underway.

In principle this measurement of the strength of competition is a good idea. I liked it before, when the Productivity Commission was doing its services inquiry ('Yes, you can measure competition'), and again when the Electricity Commission had a go at trying to figure out whether electricity retailing was more or less competitive than other parts of the retail sector ('Measuring the degree of competition'). We all need to know whether markets are workably competitive, and I'm a big believer in using data imaginatively wherever possible.

But there's no getting away from the conundrum that it's hard to do. Maré and Fabling did the sensible thing: when you have a whole bunch of indicators, each of which is likely related in some way to the intensity of competition, you can feed the lot of them into the principal components sausage machine and see if the various data series reflect some underlying common driver. As it happens, the exercise turned up two* common underlying threads, one linked to market structure and one linked to profitability, which was promising.

But subsequent attempts to see how these competition indices affected productivity did not find a lot. One explanation, as the Productivity Commission said in its 'Cut to the Chase: Competition and productivity' write-up of the research is that
this does not necessarily mean that competition and productivity are unrelated but could reflect the fact that changes in competition over the period studied have not been particularly pronounced, meaning any effect of competition changes on firm productivity has been masked by other sources of time variation in productivity.
Another, though, as the Commission and the various researchers acknowledge, is that measures of competition within industries will not necessarily reveal what you are really interested in, which is competition within markets. It's possible that an industry might be homogeneous enough to be a market, but it's generally not going to be the case. Sometimes an industry - like Professional, Scientific and Technical Services - is going to be so diverse that data based on it are going to be a jumble of the many markets within it (eg for lawyers and accountants, who may be lumped together in the same industrial sector but are very rarely in the same market for competition purposes).

So: interesting stuff, but still a work in progress. We may not yet have been able to unearth many of the likely real links between competition and productivity, but it will be worth banging on with the search. And the Productivity Commission's competition proposals (from pp5-6 of the 'Cut to the Chase' publication, and based on their earlier services sector report) are good standalone ideas in any event:
● addressing search and switching costs, including better support for comparison websites, dealing with unfair contract terms, promoting switching facilities and portability;
● addressing occupational regulations, including the role of professional bodies in supporting competitive entry to the market and the merits of certification regimes as opposed to those based on registration; and
● continuing to refine competition law, including Section 36 relating to the misuse of market power and its interpretation.

*Strictly speaking three, but the third did not explain much.

Wednesday, 21 August 2019

How'd it go?

You'll have seen the key takeaways from the Commerce Commission's petrol market study:
many fuel companies appear to be achieving a level of profitability in New Zealand that is persistently higher than what we estimate a reasonable return would be in a workably competitive market ... The core problem, in our view, is that an active wholesale market does not exist in New Zealand. This is weakening price competition in the retail market (Executive Summary, X10-11)
and you can follow up on the details in the full report.

Most people, rightly, will be concerned with the substance of the report, but us competition geeks also have an interest in the market study process itself, especially as this was the first use of the Commission's new market study powers. So, how'd they go?

Overall, I'm impressed. They've self-evidently done a ton of work on this in effectively just six months. Occasionally I've been critical of how some of the Commission's work would stack up, from a productivity point of view, against a top rank commercial economic consultancy. Not this time. I was especially impressed by the work done in Attachments B though E on estimating profitability. And amongst all the other stuff they tackled it was good to see regression analysis applied, too: in a world of ever bigger torrents of data, the opportunity to deploy econometrics to useful effect is growing all the time. If this productivity partly reflected the tight deadlines, on Parkinson's Law lines, then let's keep whipping the Commission along. But I'm also pretty sure it reflects the team (Commissioners and staff) raising their game.

And the heap of data the Commission had available makes another point: you're not going to get meaningful answers to any potential competition questions unless the folks involved have a clear mandate to fossick where they need to, have the powers to collect the data and other information they need, and have the resources to process what they find (contrary to some asinine political reaction about spending a million dollars of the taxpayers' money). MBIE's petrol inquiry in 2017, despite the fine people they recruited to do it, had ticked none of those boxes adequately: the Commission's did. The case for market studies, as set up under Part 3A of the Commerce Act, is now closed.

Another thing I noted was the willingness to put out work-in-progress analysis with a "this is where we've got to, whatcha reckon?" tag. That's progress too: you don't want to put out shoddy stuff, but you don't want to be unnecessarily perfectionist, either. On this showing, the 80:20 rule is getting more of a look-in at 44 The Terrace. It's not without its own challenges, and no doubt the Commission's lawyers are several steps ahead of me in dealing with how you allow adequate consultation if some of these provisional findings get changed between the draft report and the final one, but the "it's looking as if this is how it's going down, are we right or wrong?" approach has a lot going for it, including the clear signal of open-mindedness.

That's another thing: this study looked a balanced exercise. It's easy (trust me) to see 'problems' everywhere when you're a regulator: to the man with a hammer, everything looks like a nail. But I thought the report, correctly, said the right things about the efficiency of the petrol companies' infrastructure, their retail innovations on the forecourt, and the inadvisability of jumping to inadequate-competition conclusions just because companies are profitable.

The other thing I'd wanted to see was a firmly remedy-oriented approach (assuming there were problems identified). No complaints there, either: head straight to Chapter 8 if that's your thing. I may be reading too much into 8.6 - "A number of the options are directed at industry participants who may be best placed to implement them. Others are of a regulatory nature that the Government
may consider instead of, or alongside, those market options" - but if the sense, or hint, is that the industry can get to a better place through enlightened self-interest improvements rather than anything more heavily-handed regulatory, jolly good.

On the substance of the report? So far I've only given its 424 pages the once over lightly, but it looks a generally plausible set of findings, even if not what people on the street were likely expecting as the big issue (some kind of tacit leader-follower price coordination). One thing that is nagging me, though, is the extent to which our local business cycle may be partly responsible for the reported petrol company profitability. Here, for example, is a chart (from page 326) showing a measure of profitability (return on average capital employed) for both the New Zealand petrol companies and a group of overseas comparators.

It looks, doesn't it, like profitability everywhere took a knock through the GFC, but recovered afterwards - fairly early on here at home, only in the last few years overseas. You see the same cyclical pattern in local importer margins, too, if you look at Figure 2.4 on page 28. I'm not saying that a relatively good post-GFC cyclical expansion here in New Zealand explains everything away, but at the moment I'm left wondering whether at least some of the profits reflect generally benign economic conditions as much as anything, and, if so, how that should be incorporated into the analysis.

Friday, 9 August 2019

The unsung heroes

Earlier this month, in a criminal case, the Federal Court of Australia pinged Kawasaki Kisen Kaisha Ltd (K-Line) A$34.5 million, the highest ever criminal cartel fine in Australia, though just adrift of the highest civil penalty, Visy's A$36 million in 2007.

K-Line was the second Japanese shipping company to have its collar felt for the longstanding rort of rigging the cost of shipping Japanese cars to Australia, following the earlier criminal conviction and A$25 million fine for NYK Line (see 'The Shipping News'). The K-Line judgment is here (handy hint - you can safely skip paras 86 through 169).

The only reasonable response to the fine is, jolly good. This fell squarely within the 'hard core' kind of cartel conduct that criminalisation was intended to punish and deter, complete with the usual cloak and dagger contrivances. NYK had had a version of Maxwell Smart's 'cone of silence', and K-Line had "reports ... often marked with words to the effect of “Confidential. Dispose of after Reading”. You can imagine some hapless manager in Tokyo trying to eat the files as the lads from Japan's Fair Trade Commission arrived.

The only smidgen of mitigation that, as an economist, you might feel for them is that, as the judge noted
41 ... the market for ocean transport service for roll-on, roll-off cargo was characterised by high capital costs with ‘lumpy’ investment, meaning that capacity could not be smoothly adjusted in response to demand.
42    The market was also characterised by long investment lead times. That was because the length of time required to commission and build a specialised car, or car and truck vessel was approximately two to three years per vessel. Such vessels were also not generally available for short term lease or charter, though in some instances space on vessels was made available between particular carriers pursuant to space chartering arrangements
But workably competitive markets are inventive enough to come up with licit solutions to these kind of problems. One is long-term 'take or pay' contracts, as you see every other day in (for example) the commercial property market, where developers line up leasing precommitments before they turn the first sod.

Lawyers should probably have a look at the bits of the judgment that discuss the extent of K-Line's cooperation with the ACCC, as described in the agreed statement of facts. The judge at [193] pointed to the "rather general and anodyne nature of some of the facts recited in it" and at [341] said it was "a statement of facts which appears to have been the product of detailed discussion and agreement between the respective legal teams. The result is a lengthy and detailed document which has no doubt been carefully crafted as a result of the negotiations, but which is nonetheless rather unhelpful in a number of important respects. The Court is left in the rather unenviable position of having to decipher and draw inferences and conclusions from that rather bland and sanitised document". You can be too clever by 'arf, in other words.

Other than that, there isn't too much to take away from the sheeting home of a particularly large, global and brazen cartel.

Except for two unsung heroes at K-Line.

One pops up at [79], where we read that "The Car Carrier Business Group General Manager was particularly distrusted by some NYK and Mitsui employees because he would sometimes compete aggressively for market share and on occasion attempt to depart from agreements reached with the other carriers" (he subsequently got sat on).

The other appears in [81], where "a Manager in one of the regional teams in the Car Carrier Business Group proposed to the Managing Executive Officer of the Car Carrier Business Group that K-Line should consider ceasing its communications with other carriers because such communications were risky for K-Line and its employees and K-Line should focus on having a strong sales force" (he - almost certainly a he - was ignored).

Well done, guys. And hopefully for their companies' sakes there aren't honest New Zealand executives in the same ignored and sidelined boat. Cartel criminalisation goes live in New Zealand from April 2021.