Here we go again

On August 23 the Aussie Treasurer Dr Jim Chalmers in a joint release with the Assistant Minister for Competition Dr Andrew Leigh announced a new competition review. It's meant to be a rolling rather than a one-off process - "A Competition Taskforce has been established in Treasury to conduct the review, which will be progressed over two years and involve targeted public consultation. It will provide continuous advice rather than a formal report" - assisted by an expert advisory panel including luminaries like the CEO of the Grattan Institute Danielle Wood and ex ACCC chair Rod Sims. Some initial topics have already been identified, including the ACCC's wish list for merger reform (which you can find here) and the prevalence of non-compete clauses in employment contracts.

I'd liked the pro-competition song Andrew Leigh has been singing when I heard him take to the mike at this year's RBB Economics conference: "All good stuff", I'd said, but in a rare moment of prescience I'd added, "whether the rest of the Albanese government shares Andrew's vision of being "pro-growth progressives" remains to be seen".

It's still unclear.  In July Aussie Transport Minister Catherine King decided not to allow Qatar Airways to operate more international flights. The competition review announcement had talked of building on "the Albanese Government’s existing efforts to boost competition" and tackling "cost of living pressures": King's decision, favouring a powerful and highly profitable incumbent, and helping maintain expensive air fares, didn't sit comfortably with either of those aspirations. In slight mitigation, the flight approval system King inherited is a rusty regulatory relic: governments should have been backed out of decision regimes like these years ago.

It didn't help that the ACCC hit the newly protected darling Qantas with a false, misleading or deceptive conduct lawsuit alleging that Qantas had advertised some 8,000 flights for sale that it knew it had already cancelled (press release here, concise statement of claim here). The ACCC chair Gina Cass-Gottlieb is gunning for an all-time-record fine of the order of quarter of a billion big ones. It's only allegation at this stage, but the reputational damage has hit home: as Qantas said on September 4, "The ACCC’s allegations come at a time when Qantas’ reputation has already been hit hard on several fronts", and the Qantas CEO decided to leave two months early. The Aussie government wasn't to know what lay down the pike, but with hindsight I'd guess it is now wondering why it risked supporting an unpopular corporate against the interests of the flying public.

We shouldn't gloat too much on this side of the Tasman when Aussie policies don't line up in a neat row: pots and kettles, for starters, and in any event our interests are best served by having a prosperous well-functioning polity next door, so let's get back to the nuts and bolts of competition policy. 

When I saw the announcement, I wondered why the Aussies were having yet another review - they seem to be on a regular 10-year cycle with the Hilmer review in 1993, the Dawson review in 2003, the Harper review in 2013, and now this one. My first reaction was that they risked a makework reinvention of the wheel - Harper seems like it was only yesterday - but on thinking a bit more about it, maybe they're right. A good example - it cropped up several times at this year's CLPINZ conference - is what, if anything, needs to be addressed if collaborative ventures between otherwise competing businesses are needed to transition to decarbonisation, as they might well be. It's become a more urgent issue now than it was back in Harper's day, partly because in the interim, too little has been done, on both sides of the Tasman, to make enough progress towards our international global warming commitments.

The Aussie "let's have another rethink" approach contrasts with our more piecemeal approach to the Commerce Act. We haven't stood still: within the Act itself, off the top of my head I can think of the new prohibition against anti-competitive grocery covenants in s28A, the change to s36, the provisions in ss48 through 51E on market studies, and the introduction of the whole of the Part IV regulatory apparatus, and outside of the Act we've introduced rafts of ancillary competition-relevant legislation (most recently the Fuel Industry Act 2020, the Grocery Industry Competition Act 2023, and the Retail Payments Act 2022, on top of earlier dairy, electricity and telco legislation). Put that way, the case pretty much makes itself for a reasoned review in the round of where we've got to, how it all works together (or doesn't), and what remains to be done. 

And if we're minded to have a high altitude rethink, I for one wouldn't be averse to a free ride on the Aussies' coattails if they improve their regime to meet the latest challenges. Yes, we're not them, and they're not us, but a lot of the problems are common. We could have saved ourselves several years of expensive navel-gazing if, day one, we'd simply pirated their post-Harper revision of their competition law to deal better to abuse of market power. If they come up with any more bright ideas in the next couple of years let's steal those, too.

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.

A practice run

We've got the Budget coming up on Thursday, so as a limbering up exercise let's have a look at how to figure out whether the Budget will be braking or boosting the economy. 

You'd think that would be one of the top things the media would cover, but in practice they don't, or not well. Far more attention goes on "the" deficit or "the" surplus, on the debt profile and fiscal sustainability over the longer haul, and on specific initiatives. They're all fine, and worth the attention, but they don't tell you whether the Budget will be helping the economy when it needs help, or tapping the brakes when it's threatening to get boisterous - the 'stabilisation' role for fiscal policy, as they say.

So as a practice run at figuring out what cyclical impact Budgets have, here's a graph of what happened in the Aussie Budget that their Treasurer Josh Frydenberg presented last week (taken from their big Budget document, Budget Paper No. 1: Budget Strategy and Outlook).

Start with the solid black line. That's the historic and forecast path of "the" deficit or "the" surplus, the headline figure commentators tend to obsess on. Indeed in both Australia and New Zealand it's become almost a macho indicator of "I can run the Treasury better than that other lot", and any Treasurer that can't point to an actual or forecast surplus must be doing it wrong. Infantile, but that's the politics of it for you.

Now have a look at the 2018-19 year, which I've helpfully identified with that green arrow.

You'll see that the headline outcome was effectively a balanced Budget, with no material surplus or deficit. But what actually happened was that the headline outcome was flattered by a stronger than usual Aussie economy. You can make a decent stab at calculating how much extra tax revenue (or how much reduced government spending on benefits) was down to the good times, and that's shown in the blue bar. It was about 1% of GDP. Without that temporary windfall, the reported headline balance turned into an underlying cyclically-adjusted deficit of about 1% of GDP (the red bar).

No great dramas either way, other than (a) illustrating the point that a Treasurer's "success" in putting a balanced or surplus Budget in the window may have nothing to do with their responsible fiscal management and rather more to do with the state of the economy and (b) reminding us all to watch what's happening to the cyclically adjusted balance as a better guide to what's really going on with the stance of fiscal policy.

Onwards to 2020-21 (the orange arrow). There's a headline deficit of a bit less than 8% of GDP, flattered a bit by cyclical conditions (including the Aussie Treasury clipping the ticket on record high iron ore prices), so the underlying deficit is actually a bit bigger, at a little over 8% of GDP.

The Aussies have quite helpfully split out the underlying deficit into two bits - how much is down to temporary anti-Covid measures (the teal-coloured bar), and how much is genuinely 'structural' (the red bar) and will still be there when things like their JobKeeper wage subsidy scheme have dropped away.

Them's the concepts. What do they tell us about the cyclical role of Aussie fiscal policy?

First of all, that in the current 2020-21 there will have been a stonking great 7% or so of GDP as anti-Covid fiscal support, on top of some 2% of GDP in the 2019-20 year. This is fiscal policy doing its stabilisation stuff, and then some. I have no problem with that: it's possible that Finance Ministers pretty much everywhere ended up overdoing it a bit, but that's okay. Providing too much counter-cyclical support is a hell of a sight better mistake to make than providing too little. 

It also shows, by the way, that fiscal policy when it puts its mind to it, can be deployed very forcefully and very quickly. That wasn't the accepted wisdom pre-Covid, but is now. 

Next thing you'll notice is that Freydenberg was in no hurry to take the Covid support away: it tails off gradually. That's probably right, too: some sectors dependent on an open border will still be hurting for quite a while yet (the Aussies' assumption in this Budget was their border not opening till mid '22). Frydenberg explicitly chose to put a higher priority on near-term cyclical support over the pace of eventual deficit reduction, and one of the key things I'll be looking for in our Budget was what choice Grant Robertson has made.

You can measure how quickly support is being taken away: it's a thing called the 'fiscal impulse', and it is the change from one year to the next in the size of the structural balance. Think of it this way: suppose this year you get $100K in wage subsidies, but next year you only get $50K because the package gets tightened up. You're still being supported, but less so. The fiscal impulse picks up that degree of tightening. For some reason the Aussies don't bother calculating it (search their Budget Paper No.1 for 'impulse' and you get nada), but we do. It's the very first figure I'll be looking for on Thursday.

Even after all the Covid support is gone, Frydenberg has also decided to take his own good time to deal to the non-Covid structural deficit, which will still be running at 1.5% - 2.5% of GDP in the later years of this decade. That's more debatable, but to the extent that an ongoing deficit reflects using once-in-a-lifetime low borrowing costs to provide infrastructure, I can live with that too. Again it'll be interesting to see what choice we make.

What if they threw a party ...

... and nobody came?

Which, in the competition space, is where we've got to, with our attempt to make it easier for companies to collaborate to deal with problems like Covid disruption to supply chains. We set things up to make it easier and faster for the Commerce Commission to authorise collaboration - but nobody's used the new dispensation.

Here's the background. The COVID-19 Response (Further Management Measures) Legislation Act 2020 went live mid May of last year. Its heart was in the right place. During an 'epidemic period', a new s65AD of the Commerce Act allows the Commission to issue a provisional authorisation. ss65AD(2) and (3) are the key bits:

(2) The Commission may make a determination in writing granting a provisional authorisation ... if the Commission considers it is appropriate to do so—

(a) for the purpose of enabling due consideration to be given to the application; or

(b) for any other reason.

(3) The Commission is not required to comply with section 61(5) to (6A) before granting a provisional authorisation

(3) means that the Commission doesn't have to hang about and be "satisfied" - the test in normal times, under s61(6) - that the collaboration would provide "a benefit to the public which would outweigh the lessening in competition that would result". It can just say, get on with it for now and we'll do a fuller analysis later. Right on.

As fellow aficionados of New Zealand's mania for micromanagement will appreciate, you don't see the wide discretion of "for any other reason" written into the Kiwi statute books too often. In fact it's a straight crib from the Aussie equivalent (for wonks, s91(2)c of their Competition and Consumer Act). The ACCC has been able to do "interim" authorisations all along, Covid or no Covid, and you'd think that's a sensible plan.

Oddly, our own Commission used to have the power to issue provisional authorisations under the then s63 of the Commerce Act, but that got repealed by s22 of the Commerce Amendment Act 1990. Go figure.

Never mind, here we are today, back to the original status quo, even if it only applies in epidemic periods. Given that in normal times getting an authorisation strongly resembles wading through hip-high tar for months carrying a complete bound set of Econometrica, something cheap, cheerful and, above all, fast, was just what was needed to enable urgent collaboration in the public interest.

But nobody's used the new process. There have been no applications for authorisation under the new provisions.

Which is odd, because over in Oz, the ACCC has been issuing interim authorisations all over the place: public and private hospitals, medical wholesalers, grocery retailers, banks, regional airlines, and fuel importers and distributors. It's been commendably quick - overnight, on one occasion - in turning the applications around, and it's been putting pro-competitive safeguards such as time limits into them without nobbling the public welfare point of it all. 

What sort of stuff is being authorised? For the supermarkets, as an example, it was things like jointly addressing panic buying: "co-ordinating store hours, including allocating dedicated shopping hours for  elderly and disadvantaged members of the public during periods of high demand for Retail Products", "implementing uniform or similar purchase limits and related public messaging", and "measures to ensure continuity of supply to consumers in remote or regional areas, including securing special allocations of stock and joint requests to suppliers", as you can read in this draft determination.

Sure, Australia and New Zealand each have their own funny little ways, and there's no reason why we should do everything the same way. But I'm still bemused why helpful interim authorisations are flying off the ACCC shelves, while nobody's come into the Commerce Commission looking for one. Anyone got ideas?

It can work after all

At our usual blistering pace - the Fair Trading Amendment Bill was introduced in Parliament 11 months ago, and is still with its Select Committee (Economic Development, Science and Innovation) - we are getting closer to prohibiting 'unconscionable conduct'. 

'Unconscionable'? It's not a term defined in the Bill, though the proposed new Section 8 of the Fair Trading Act lists a set of factors intended to help courts recognise it when they see it. And it's not a term you see much used in everyday speech, either. But if you substituted 'disgustingly ratbag', you'd be pretty much there. 

It seems a bit odd that our existing legislation has a hole in it this big, but never mind, we're filling it in. While you can always argue about potential over-reach or under-reach, and the similar issues that crop up with the design of any legislation, the general thrust of the Bill ought to be welcome to everyone: to consumers, obviously, to economists, who recognise that markets if they're going to weave their magic need to work without oppression or deceit, and of course to the vast majority of businesses who operate decently.

The trouble has been, though, that the Aussies, who legislated for this back in 2010, came a cropper when one of their regulators tried to ping what they saw as an obvious candidate: in the Kobelt case, the Aussie High Court disagreed. That case had been brought by ASIC, the Aussie financial regulator, but the ACCC, who you'd imagine would normally be running the bulk of these unconscionability cases, was seriously rattled by the ASIC case falling over. I listened to ACCC Commissioner Sarah Court talk with some degree of passion about it at the RBB Economics conference last year and again at this year's CLPINZ conference. 

You can see why the Aussies were beginning to wonder if they needed something other than full 'unconscionability' - maybe some kind of 'unfair' provision - to catch stuff that looked pretty bad but didn't quite reach the statutory unconscionability threshold. And we might have to confront the same issue, given that our proposed legislation looks a lot like theirs.

But fear not. The good news, just this week, is that that the ACCC has scored a thumping great unconscionability win, and it looks as if the law might bite after all. This time, it was about the gross mis-selling by Telstra of mobile phone contracts to certain indigenous customers. The ACCC's statement is here, and there's a good piece in the Australian Financial Review (if you've got a sub) here.

Interestingly, despite admission of liability, apologies, and extensive remediation on Telstra's part, the agreed penalty which will be put to the courts by  the ACCC and Telstra for approval is a stonking A$50 million, which (I learn from the AFR article) would be the second largest consumer law fine in Australia, second only to the A$125 million imposed on Volkswagen for the "dieselgate" faking of emission tests (Volkswagen is apparently appealing, after a judge had upped the initial proposed penalty from A$75 million).

Hopefully our unconscionability provision, when it finally emerges blinking in the sunlight, won't be called on often. But it's good to know that it can be made to sheet home to the worst of the rogues and the bullies. To be honest, if I was asked which would I rather see criminalised first, cartel behaviour or odious pressure selling, I'd have to sit down and have a good think, and the answer mightn't be cartels.

Theirs and ours

Yesterday the Aussies had their latest Budget: I won't recap all the details as they're easily available all over the place, and if you want some expert economic commentary you could try National Australia Bank's or Westpac's, and you can also go to the horse's mouth and read the Aussies' Budget Strategy and Outlook Budget Paper No. 1 2020-21. I'll just note that I particularly liked the big boost to investment by way of instant expensing of capital spending, available to every firm except the very. very biggest ones; the job subsidies for businesses who hire currently unemployed younger people; the targeting of tax reliefs to the lower end of the income scale; and the focus on increased infrastructure spending.

As regular readers know, the thing I like to look at, but which usually gets under-reported or not reported at all, is whether fiscal policy is boosting or braking the economy. It can be self-evident: when you spend up on the scale of anti-covid stimulus that both our Grant Robertson and their Josh Freydenberg have, it's pretty obviously a boost. But not always: the headline fiscal numbers can be misleading, and in any event it's also useful to know the extent of the stimulus and not just the direction.

So here are the numbers for the 'fiscal impulse': it's an approximation based on in-the-background calculations of variable debatability, but for all that it's still the best measure we've got. I've shown Australia's (from last night's Budget) and New Zealand's (from September's Pre-Election Economic and Fiscal Update or HYEFU). For fiscal policy tragics, I've calculated Australia's as the year on year change in the underlying cash balance as a percentage of GDP, and for New Zealand I've used Treasury's numbers.

What's interesting is that both governments have reacted very similarly indeed. The Aussie stimulus giveth a bit more in the current 2020-21 year, and taketh away a bit more in the subsequent 2021-22 year, but there's not much other difference in the overall pattern since covid hit (pre-covid, the Aussies were playing a bit more of a macho 'I can get back to fiscal surplus faster than you can' political game than we were). Personally I take a bit of policy comfort from the similarity: if they were very different, you'd be inclined to think one (or both) may have lost the plot.

It's also got me thinking a bit more about that fiscal tightening you can see planned for 2021-22 in both countries. Normally a fiscal tightening of 5.4% of GDP (Australia) or 3.7% of GDP (us) would be a massive brake on an economy, and when I wrote up the HYEFU I doubted if the New Zealand economy in 2021-22 would be in anywhere strong enough shape to cope with it. You could say the same about Australia's even larger brake: on their Treasury's forecasts, unemployment will still be 6.5% in June 2022.

But I'm beginning to appreciate that the fiscal tightening might be a bit more apparent than real. Suppose a big slab of 2020-21 fiscal support consisted of temporary wage subsidies, entirely appropriate while companies were facing weak demand. Covid disperses, demand picks up, the subsidies are yanked (and turn up as part of that fiscal 'tightening in 2021-22), but businesses don't really mind. The temporary government cash has been replaced by ongoing customer cash, all good. It's not experienced as much of a 'tightening' at all.

Fair enough, but another way of putting it is that the current forecasts of a reasonably quick withdrawal of fiscal support depend on that recovery in the non-government economy. I'm inclined at the moment to stay on the cautious side. It would be great if both economies bounced back big and quick - the proverbial V-shaped recovery - but I wouldn't be surprised if we ended up with a W or other variant. I suspect both countries' fiscal policies will have to be a bit more supportive, for longer, than their Treasurers currently expect.

An excellent resource

Interested in staying up with Australia's criminalisation of cartels, and New Zealand's impending move to do the same? Then head over to the MLex site and download your free copy of  'Collusion Damage: Australia’s struggle to secure its first criminal cartel convictions — and make jail time a deterrent at last '.

It's an excellent resource. As the report says, "Since the first individual criminal cartel charges were laid early in 2018, MLex has been present at every material court hearing in Canberra, Melbourne and Sydney", and the expertise shows. The report is on top of all the cases currently live. My take, not theirs, but after reading this report, and also going by the coverage of the case in the Australian Financial Review, I do wonder from a variety of perspectives if the ACCC is going to succeed with its alleged cartel case against the underwriter banks left with unsold ANZ Bank shares. 

There's a chapter in the report about New Zealand's impending regime, where I agree with MLex that "It’s true that the Commerce Commission will still have the full suite of civil offenses at its disposal and will be under no obligation to unleash a criminal prosecution for trivial matters. Yet ensuring that well-meaning, small businesses -  those that aren’t large enough to have in-house counsel or even to employ a law firm to review their decisions - don’t get caught up with criminal offenses designed to ensnare larger, possibly global players, will remain a challenge for the agency".

In writing up the CLPINZ session on cartel criminalisation I'd also wondered about potential overkill, and had assumed we in New Zealand would end up with some arrangement similar to that between the ACCC and the Commonwealth Director of Public Prosecutions, which hopefully would set some seriousness threshold before unleashing the criminal process. But I learn from the MLex report that "Unlike the ACCC, the Commerce Commission will be able to take its investigations to court directly, without handing the file over to public prosecutors; however, it will be required to ascertain how its planned prosecution measures up with the Solicitor General’s Prosecution Guidelines, which demand “evidential sufficiency” and proof that the prosecution is in the public interest". As the Guidelines say, "The predominant consideration is the seriousness of the offence", and hopefully a conservative approach will be the way to go, rather than feeling the collar of commercial naïfs.

Speaking of resources, I came across the MLex report on its useful Twitter feed. If you're interested in competition tweets, head over to my own Twitter posts and help yourself to my Twitter 'Competition' list (currently 73 members). And if New Zealand economics is your thing, then the 'NZ economics' list (52 members) should be of interest. If there are local competition or economics folks I've missed, let me know and I'll add them.

CLPINZ 2020 goes online

Last week's Competition Law and Policy Institute (CLPINZ) workshop was - perforce - the first time CLPINZ has run the annual event online, and the good news is that the technology worked just fine (ably organised by Conference Innovators, special hat-tip Olivia Lynch). Covid is reshaping a lot of things (as I wrote in Acuity, the accountants' magazine) and sometimes for the better. Online workshops may not provide the same personal contacts and networking but they can deliver a lot of bang per buck once travel costs don't come into the equation for speakers or attendees.

Can't cover everything but here are some of my highlights.

The keynote was the topical 'Antitrust in times of crisis and emerging from the crisis', by Maureen K. Ohlhausen from Baker Botts in Washington DC, with commentary by Ayman Guirguis from K&L Gates in Sydney and session chair Anna Ryan of Lane Neave in Christchurch. One theme was the need for competition authorities everywhere to scramble hard to authorise (or at a minimum stand aside from preventing) collaborative activities between firms who would normally be competitors, when they are responding to covid logistical challenges (eg coordination of grocery deliveries, or availability of medical resources). The ACCC in particular has in my view been commendably quick to get provisional authorisations out the door. 

Another was how to treat 'failing firms': there are a lot of cases where firms are in trouble (or heading for foreseeable trouble) and while they can't qualify for the usually strict merger conditions around a 'failing firm', a properly forward-looking analysis of the competitive outlook might well lead you to allow a merger. 

A third theme was the renewed focus on market power in the tech space now that we're all even more dependent on the big tech names for our remote working and our online shopping. The conclusion as I saw it was that there is still no clear verdict on whether these markets are naturally tippy towards one predominant incumbent, or whether there are issues of market power that need to be corrected.

Consumer law isn't usually top of my interests, but I was very much taken with the session on 'Unconscionability and unfair contract terms', where the speaker was Sarah Court, Commissioner, ACCC, the commentator Anna Rawlings, Chair of the NZ Commerce Commission, and session chair James Craig of Simpson Grierson. As background, Australia's got unconscionability on the statute books, and we're minded to go the same way. I'd heard Sarah Court on this topic before (see here) and while the Kobelt case she cites as showing the Aussie law isn't working might be one of those odd cases that might not influence anything over the longer haul, there's a real chance that our courts might also struggle to nail genuinely ratbag behaviour. Why not read Kobelt and see what your call would have been? And if you think Kobelt got the wrong end of the stick, what would you suggest to fix it?

Another area where we look to be heading to align our legislation with the Aussies is changing our current s36 of the Commerce Act, the bit that deals with abuse of market power. The plan is we will move away from our current legal test (which focuses on the 'counterfactual test' of what would a firm without market power have done) to an 'effects test' which, as it says on the tin, tries to take an objective view of whether the conduct actually works anti-competitively (both jurisdictions would also retain anticompetitive purpose, which would catch those incriminating internal e-mails). 

I went into this session - 'Misuse of market power – what an 'effects test' would mean for New Zealand', speaker Dr Katharine Kemp from the University of New South Wales, commentator Brent Fisse of Brent Fisse Lawyers, session chair John Land from Bankside Chambers - with what I regret to reveal was a largely closed mind: I'm pro-change. But I came out with the odd niggle of doubt about potential over-reach. Faced with the choice of the status quo or the change, I'd still change, as the counterfactual test asks the wrong question plus we get the benefit of trans-Tasman alignment, but I suspect policy analysts on both sides of the Tasman will be watching the first few 'effects' cases very closely indeed.

And yet another area where we are harmonising with the Aussies (and with global practice generally) is criminalisation of cartels, where on the topic of  'Cartels – criminalisation – lessons from the Australian experience' we heard from Marcus Bezzi, Executive General Manager at the  ACCC, commentary from Marc Corlett QC from Britomart Chambers, chairing by Glenn Shewan from Bell Gully. I'm generally not in favour of yet more criminal offences when we already have far too many people in jail (by developed economy standards), but I'm prepared to make an exception for 'hard core' cartels which I see from a moral perspective as akin to fraud (quite apart from the often sizeable economic detriments).

One thing that's worried me, though, is that every 'ordinary' New Zealand cartel, if I can call it that, would attract criminal charges, which I would regard as overkill. I was partly relieved to hear Marcus talk about a memorandum of understanding between the ACCC and the Aussie Commonwealth Director of Public Prosecutions which aims to keep the criminal route for the worse cases, which is surely right. I presume something similar will go into place here at home before we go live in April next year. Marc Corlett's remarks said (to me at least) that individuals caught in the grinder between the criminal prosecutor and a perhaps not always supportive employer are going to be in a tough place: another reason in my view to make sure that we concentrate on the hard core conduct and the big fish.

The session on 'Acquisitions of nascent competitors', speaker Renata B. Hesse from Sullivan & Cromwell in Washington DC (who if I heard it right may indeed have coined the phrase 'killer acquisition'), commentator Iain Thain from DLA Piper in Auckland, session chair Will Taylor from NERA Economic Consulting in Auckland, got me thinking. This is a really tough area. It's important to stop killer acquisitions: as Iain emphasised, it's the competitive struggle that unearths all sorts of lucky discoveries (sometimes unexpected ones) even if in the end the market tips to one big winner. But it is very hard for competition authorities to deal with, when even those most up with the game in any given sector can't be sure what might have developed into a credible challenger to an incumbent, but for its pre-emptive acquisition. As Renata said, you're often trying to do an objective analysis of something that is inherently subjective. 

Some days I favour channelling my inner Schumpeter, not worrying too much about temporary tech monopolies and letting it all play out in the creative destruction gale. Sometimes there must be good outcomes when an incumbent offers a genuinely better product, once it has bolted on the smaller-firm functionality it's just bought, whereas you might be waiting years for the small firm to develop a full-feature offering. But then will incumbents' internal R&D slack off if they can rely on buying the next bright idea? And what if ... you get the drift. This is hard.

Life's too short to summarise everything but for the record we also had an economists' panel - 'Hipster economists? Values, welfare and evidence', and a corporate counsel oriented panel - 'Handy hints for practice – Joint ventures and commercial agreements', and if they ring your bell you can get in touch with the panellists (here's the full workshop programme with the details).

It helps, but we'll need more than this

No surprises in today's Monetary Policy Statement from the Reserve Bank. The official cash rate (OCR) was kept at 0.25% - as every one of us surveyed in the Finder forecaster survey had expected - and the size of the Bank's Large Scale Asset Purchase (LSAP) programme was increased to $100 billion. The point of the LSAP is to keep longer-term interest rates down by buying bonds: me, I'd be tempted to go the Aussie route where they've explicitly said what rate they're aiming for (0.25% for the Aussie three-year government bond). The RBNZ governor got asked at the press conference if the RBNZ was minded to some explicit bond yield targeting: it isn't ruled out, but it's not being ruled in, either. Can't see it hurting, as it would add to the information available on where the RBNZ is headed over time, its 'forward guidance' in the jargon.

Speaking of which, I'm not really sure anymore why the RB is keeping the OCR at 0.25%. Yes, it seems to want to have its forward guidance seen as rock solid, and it had said back in March that the OCR would be on hold "for at least the next 12 months". There may also have been some element of giving the banks a heads up about a timetable for getting their systems in order to handle a negative OCR. But in the wider scheme of things I'm inclined to think the extra support from a 0.25% cut now, especially if it helped weaken the NZ$, trumps the forward guidance credibility. And there is  not a lot of credibility downside risk anyway, given the recent turn of events and a new community outbreak. When the facts change, etc.

It's also worth pointing out that some of the Bank's other policy options would also get more bang per buck if the OCR were lower. As the Statement said, "Because the NZGB [New Zealand Government Bond] curve is already relatively flat around the current level of the OCR, a lower OCR would likely increase the effectiveness of LSAPs by lowering short-term interest rates and allowing LSAPs to flatten the yield curve at a lower level" (p19) and "A term lending programme may be increasingly useful for supporting the pass-through of monetary stimulus if the OCR were reduced" (p20).

But in any event further policy support, if only by way of a bigger LSAP at this stage, is absolutely the right thing to do, and would have been even without the latest Covid outbreak. And it's helpful that its previous easing is also quietly bearing fruit: as the Statement pointed out, "At least 50 percent of mortgages are due to be re-priced in the next 12 months" (p18), which will make quite a difference to a lot of households. 

At the same time you can't help feeling that monetary policy is well into diminishing returns territory. As cropped up in the press conference, marginal changes to interest rates aren't going to make much difference if, in deeply uncertain times, borrowers won't borrow and lenders won't lend. So the heavy lifting from here is going to have to be done by fiscal policy, and earlier plans to put the revolver back in the holster now look behind the curve.

Fiscal policy has been hugely important up to now: the Statement rightly pointed out that "The Wage Subsidy has temporarily supported more than 71 percent of New Zealand businesses and 1.7 million workers, helping employers to retain staff. As a result, the [Covid] impacts on employment to date have been small despite the unprecedented reduction in economic activity" (p25). The reality is that it's going to have to do a lot more again: "Fiscal stimulus is likely to be more significant and more front-loaded than we assumed in the May Statement" (p18). 

At this point, though, we don't have a great feel for what's likely to happen on the fiscal front, or as the Statement phrased it, "The exact timing, composition, and magnitude of government spending remains uncertain" (p10). August 20's Pre-Election Economic and Fiscal Update is going to be one of the most important policy statements of recent times. And I very much hope it doesn't fall into the election campaign's depressing "I can out-austere you" heffalump trap.

Finally a wonkish point that only an economist will warm to, but it's important all the same. One of the things you need to know when you're trying to figure out how monetary policy is working is what interest rates people actually pay or receive (duh, but bear with me). The Statement noted, however, that "Detailed data on business lending rates is limited. The Reserve Bank has begun collecting information on actual new lending rates faced by firms, which will enable better monitoring of monetary policy transmission to businesses in the future" (p18)

Better late than never, and well done the Bank for getting on with it, but it's yet another Covid-revealed instance of our statistical infrastructure letting us down. On the other side of the election, the next Prime Minister could usefully appoint herself Minister for Statistics, and find out why have we been so bad over long periods of time at collecting the fuller set of data that policymakers - and the rest of us - need. It's a gap that's all the more bizarre when the world is awash in data that can be turned into useful official info, as Stats, the RB and Treasury recently showed when they came up with the New Zealand Activity Indicator. 

In campaign season, the pols are prepared to make all sorts of commitments: how about committing to a fully First World set of statistics?

Patrolling a fine line

There is a growing disquiet - particularly in the US, but also elsewhere - that competition policy has got too soft on mergers, and has been permitting anti-competitive increases in market concentration. By coincidence the latest in ComCom's excellent series of telco market monitoring reports included some data on the international costs of mobile plans and broadband. It showed just how acute the problem has become in the US, which is well entrenched on the expensive right hand side of both graphs.

As Thomas Philippon said (pp5-6) in his recent book The Great Reversal: How America Gave Up on Free Markets, "In most advanced economies, consumers pay around [US]$35 for broadband internet connections. In the US, they pay almost double. How on earth did that happen? How did the US, where the internet was "invented" and where access was cheap in the 1990s, become such a laggard, overcharging households for a rather basic service?"

His answer, which feels right, is that incumbents' market power to charge more and/or give less has increased as some markets have become overconcentrated. "First, the entry rate of new businesses has declined. Businesses are now older and face fewer new competitors reach year. This has led to concentration from the bottom up", and he says that "lobbying and [new-entrant-unfriendly] regulations explain much of the decline in entry rates". "Second, agencies and judges have allowed more frequent mergers among large businesses. This has led to concentration from the top down. Together, they account for the rise in concentration that we have observed" (all from p96).

However true that may be, there is a risk that the backlash goes too far the other way and puts in jeopardy mergers that would make pro-competitive sense, despite the first-blush look of yet another increasingly concentrated market. While the latest big mergers won't make any of the "you've gone soft" critics happy, they look to have been the right call.

In the US, the example is the merger of the number three and number four mobile telcos, T-Mobile and Sprint. You might think, looking at the left hand panel in the graph above, that allowing further concentration in the already expensive US mobile market would be a difficult proposition to justify. And yet: the argument for it is that a bulked up three-plus-four will be a more effective competitor to the two big incumbents (AT&T and Verizon) than three and four separately would have been. There's a logic to that: it was raised, for example, in one of the first merger clearances I was involved in (Telstra/Clear in 2001) though in the end the merger was cleared along traditional ongoing competitive constraint from incumbents/new entrants lines. In the US, both the Federal Communication Commission and the Department of Justice were prepared to go along. Individual states weren't best pleased, but the last of the them standing, California, has also folded its hand after negotiating some state-specific goodies.

In Australia, it's similar. The ACCC had opposed the TPG-Vodafone merger: the ACCC reckoned that left to its own devices, TPG would have rolled out a fourth mobile network to compete with the big three (Telstra, Optus and Vodafone itself). The case in the end turned out to be less a contest of economic merger perspectives and more one of disputed facts. The court disagreed with the ACCC's view of the world: at [34] the judge said that "The Court has been left in no relevant uncertainty, after reviewing the evidence, as to the future of the retail mobile market which will not involve Mr Teoh [TPG's executive chairman and CEO] or TPG entering the Australian retail mobile market in the next five years" (full judgement here). Earlier this month the ACCC flagged away appealing.

Incidentally, as any of us who have to try and guess where competition litigation will go will agree, you have to tip your hat to Tony Boyd, the Chanticleer columnist at the Australian Financial Review, who in a (possibly paywalled) piece 'ACCC misreads mobile market' back in May 2019 absolutely nailed it: "ACCC chairman Rod Sims is headed for what is almost certainly an embarrassing defeat in court ... Rod Sims is kidding himself if he thinks the Australian Competition and Consumer Commission can win". He got it bang on: Justice Middleton could have saved himself most of his 899-paragraph judgement if he'd just copied and pasted Boyd's conclusion that "The problem with the assumption that TPG’s executive chairman David Teoh will spend billions of dollars building a new network is that it is completely without foundation".

So even against an appropriately heightened sense of scepticism about the merits of even further mergers, ones will still pop up there may be no loss of competition compared with the no-merger counterfactual (as in TPG-Vodafone) or there is the procompetitive emergence of a more effective post-merger competitor (T-Mobile-Sprint). Whether any of these arguments apply to the other behemoth out there - if it's survived the recent market havoc, the proposed merger of  the global number two and number three insurance brokers, Aon and Willis Towers Watson, to create a new number one - will remain to be seen. There look to be a good deal of potential back-office efficiencies, but whether they, and the claimed capability synergies, make up for the potential reduction in competition is debatable.

Finally, the latest ComCom telco report got me digging in the archive. Here are a couple of graphs from the very first telco monitoring report, published back in 2008.

Nor pretty at all back then, was it? The improvement since then, especially on the mobile side, has been enormous. And a lot of it goes to prove Philippon's points: for a good competitive outcome you can't beat new entry (particularly 2degrees) and entry-facilitating regulation (a whole swathe of things, from early 'ladder of investment' ideas like wholesale access through to mobile termination regulation and local loop unbundling).

RBB Economics draws a crowd

A record number of attendees braved the smoky air of Sydney yesterday to attend RBB Economics' ninth annual competition conference. If you're in the competition law trade and you haven't been, have a word with them: it's a good event. This year's was on the general theme, "What's next for competition law in Australia?"

We started off with the traditional opening keynote by Rod Sims, chair of the ACCC (his speech is here). As it happened two of his points - the potential role of consumer law in enhancing competition and productivity, and a potential need for strengthened merger laws - got developed in a lot more detail in later sessions. Like a lot of people in the competition game I've tended to relegate consumer law to poor cousin status, and (let's face it) largely on intellectual snobbery grounds: where's the challenge in reading an ad to see if it's misleading or deceptive, compared with the subtleties of economic theory? But Rod, and subsequent speakers, made a good fist of arguing that consumer law helps buttress the workings of workably competitive markets.

Jacqueline Downes, a partner at Allens, spoke in reply. The main points I took away were that the ACCC's concerns about merger laws not being effective in blocking anti-competitive mergers were not supported by the data: the few cases that go right through the courts and go against the ACCC are only a tiny unrepresentative fraction of mergers. The vast majority of potentially iffy ones get knocked back either by the firms' advisers, or in informal discussions with the ACCC. The system works. She also wondered about the number of market studies being undertaken (not that the ACCC has any choice about doing some of them) and their potential for politicised policy responses.

The next session was 'What would a new unfair trading prohibition look like?', led off by ACCC commissioner Sarah Court. She had recently changed her view and now thinks an 'unfair' trading prohibition would be a useful tool, in part because of recent difficulty in making the existing 'unconscionable conduct' offence stick: you'll find a good entry point to the Kobelt case that caused the grief here. In reply barrister Robert Yezerski also commented on the Aussie courts' struggle to get their heads around the statutory formulation of  'unconscionability' as opposed to the common law equitability jurisprudence they had learned at their elders' knees. In Robert's view, the key concept in the statutory formulation is, essentially, immorality - something that is so at odds with society's moral norms as to deserve condemnation.

Even if Kobelt fell over from a regulator's point of view (the financial regulator ASIC in that case, not the ACCC), it may have been one of those finely balanced facts-based cases that don't count for much in the longer-term. Which is just as well, as we in New Zealand will be looking to the Aussie jurisprudence when we adopt unconscionability, as we are now likely to do. As for bringing in 'unfair' in Australia, I could sympathise with Sarah's point that the wording would likely need to be linked to 'significant consumer harm', but I'm not sure (and I don't think the audience was either, going from the Q&A) that there is going to be any easy way of formulating a workably effective form of words.

After lunch we had 'Do we need to strengthen Australia's merger laws?'. Rod had felt that the courts were letting uncompetitive mergers through, partly because they were not properly taking into account how the post-merger commercial incentives changed  for the managers of the merged entity: he'd felt that the ACCC's submissions on changed incentives were being dismissed as speculative theorising. Jennifer Orr, principal economist in the ACCC's Economic Group, took a different line about arguably too-lax merger under-enforcement: she pointed to growing empirical evidence (in academic journals, mainly, and mostly US-focused) that industry concentration had been (wrongly) allowed to develop to the point that more powerful incumbents were anti-competitively enabled to raise price or give less. Had the prevailing 'Chicago School' approach to anti-trust missed something that older-fashioned analyses, which gave more weight to structural conditions like HHIs, had been more alert to?

In reply King & Wood Mallesons partner Lisa Huett and RBB Economics' own George Siolis pushed back. Lisa argued that "If it ain't broke, don't fix it", and provided the numbers to back Jacqueline Downes' earlier point about the vast majority of potentially problematic mergers getting flagged away. She wasn't enamoured either of the potential 'solutions' (like reversing the onus of proof, or introducing rebuttable presumptions of harm if say a proposed merger took an HHI over 2500). And she pointed out that in any event there had been a fair amount of other law reform (the 'effects' test for abuse of market power, 'concerted practices') to deal to any mischief a lax merger approval might have facilitated. George traversed the history of the evolution of anti-trust thinking which, for good reason, had arrived where it is today. He preferred that competition authorities should stay the course, use all the tools available to check for (say) potential post-merger coordination effects, and "get dirty", meaning immerse themselves fully in the facts of the case and the industry.

This session got the audience going. One chap bristled at the idea that merger parties should have to prove anything: the shoe should be on the other foot, and the ACCC should be positively required to prove harm, rather than hide behind a "not satisfied there wouldn't be" criterion. In general there was quite a bit of support for the idea that Type 2 errors (letting anti-competitive mergers through) aren't welcome, but equally (and for some in the audience, more importantly) Type 1 errors (blocking efficiency-improving mergers) weren't getting enough of a look-in.

Personally I was left in a bit of a quandary (maybe you are too), and said so in a question to the panel. On the one hand, I've been involved in mergers that went from 3 to 2: where, for example, the #2 and #3 players, merged, would make a more effective competitor to the #1 incumbent. I had no trouble sleeping at night afterwards, never mind what the post-merger HHI said. On the other hand you can't go around ignoring the evidence that Jennifer mentioned, either.

Even if you don't quite know what to think, though, one place you land is the need for post-merger reviews to see what is actually happening. In my notes I've written "ACCC not resourced, no powers" to do post-merger reviews: I can't remember whether one of the panellists said it, or someone mentioned it over coffee, or where it came from. But if so, it needs to be fixed, and the same applies to our own Commerce Commission (which in the past has had at least an indicative go at seeing how post-merger events played out). We need to know.

And so into the final session, 'How can the ACCC's competition concerns get more traction before Australian courts?'.

A Brit, a Scot and a Kiwi go into a bar ... aka Simon Bishop (RBB Economics), Dr Ruth Higgins SC, and Dr Mark Berry as they put the finishing touches to their thoughts on how to get traction in court on competition cases

One for the lawyers, but also some useful insights for those of us on the economics side of the house. Our own Mark Berry pointed to the value of the New Zealand 'hot tub' style of testing expert evidence and its ability to expose errors (on all sides of an argument). And he wondered if New Zealand and Australia were actually moving things along too quickly, by comparison with the times taken to rule on merger clearances or authorisation overseas: are we missing a chance to look deeper and harder at the issues involved? Ruth Higgins emphasised the primacy of the facts, quoting Thomas Huxley's "The great tragedy of science - the slaying of a beautiful hypothesis by an ugly fact", and argued that economic arguments are better when they integrate the apparently inconvenient facts. She also said that the big contribution from economists can come from establishing an overall framework within which the court can advance, rather than leaping to judgements themselves. And RBB's Simon Bishop said that the ACCC shouldn't necessarily be dismayed by the odd loss in court: it is not compelling evidence of wider underenforcement (they are always the marginal could-go-either-way cases), and echoed Ruth's points about economists showing restraint, focus, and a respect and care for the facts.

In panel discussion afterwards, there was also general agreement on what economists shouldn't do. There was short shrift given to the economists who can see no weaknesses in their arguments, and no sympathy for spinners of over-complex theories which they can't explain to decisionmakers in a persuasive way. But none of us are in those boxes, are we?

Solutions in search of a problem?

Yesterday evening in Wellington the Law and Economics Association of New Zealand (LEANZ, here's its spiffy new website), put on its latest seminar, 'Regulating Big Tech: Key Findings from the ACCC’s Groundbreaking Digital Platforms Inquiry', presented by Morag Bond, Joint General Manager of the ACCC's Digital Platforms Branch. There'd been an earlier one in Auckland at lunchtime.

Morag (below) did a fine job, in front of a good crowd. That was partly down to the intrinsic appeal of the topic, and partly down to coordination between LEANZ, the New Zealand Association of Economists, and the Competition Law and Policy Institute of New Zealand, each of whom gave the heads up to their memberships. Nice one. And hat tip to Russell McVeagh Wellington, who generously hosted.

Morag's slides aren't up yet, so in the meantime, if you're not already familiar with it, here's the ACCC's page on the inquiry, which includes the press release, an executive summary, and the whole 619-page inquiry itself. If videos are your thing, here's the 37 minute press conference on publication day.

Overall, my feeling remains where it was when this territory was traversed at this year's ComCom conference: quite a lot of smoke, no clear fires. There are, to be sure, some issues that need investigation. One that should indeed bother merger regulators, for example, is the big incumbent platforms buying up fledgling businesses that might have morphed into credible competitors. It is of course (as Morag noted) open to an ACCC or ComCom to make that case now under our existing legislation, but the inquiry said it might help if the law was made more explicit. It recommended that

Section 50(3) of the Competition and Consumer Act 2010 (CCA) be amended to incorporate the following additional merger factors:

(j) the likelihood that the acquisition would result in the removal from the market of a potential competitor;

(k) the nature and significance of assets, including data and technology, being acquired directly or through the body corporate

Maybe that might help to stiffen the odd judge's spine, but the reality is that a rewording doesn't ease the underlying difficulty, which remains highly vulnerable to both Type 1 error (stopping the purchase of a non-challenger) and Type 2 (allowing the purchase of a real threat). You can see how Type 1 errors might happen when every venture capitalist behind a start-up is puffing to new investors that it is The Next Big Thing. And you might well threaten the pipeline of innovation if inventors of useful complementary technology are wrongly prevented from cashing out to the guys with the big chequebooks.

In dynamic industries, as a general principle it's probably best to do as little as needed. It's fine to ping clearly anti-competitive practices ("thou shalt have no browser but My browser") if you come across them, and Morag said the ACCC has five investigations underway. But beyond that, you are dealing with a high-speed industry with strong network effects, where bigness is almost inevitable and the most likely playbook is a Schumpeterian succession of temporarily highly-profitable near-monopolies. It's true, as Morag said, that Facebook is being somewhat disingenuous when it argues that someone might topple Facebook as readily as Facebook toppled MySpace, but that's the longer-term way to bet. If you're my age, you once wrote in WordStar and worked with data in Lotus 1-2-3: where are they now?

Sit back and let it evolve is likely to be a good default competition policy strategy from another perspective. If there are real issues, for example genuine consumer concerns over privacy or data sharing - and in my view it's not yet proven that enough consumers care about the current bargain they've struck -  I wouldn't underestimate the ability of markets to deal to them. Worried about the outfits tracking your every online move? Instal Ghostery: as I write it's telling me there are no trackers following the ACCC site, four tracking ComCom's, and 13 tracking mine. Hah! Worried about the trustworthiness of a site? Instal Web of Trust. And even the incumbents are beginning to realise that it's in their own longer-term interest not to push their luck: have a look, for example, at 'How to Set Your Google Data to Self-Destruct'.

The ACCC inquiry was required in its terms of reference to consider "the impact of platform service providers on the level of choice and quality of news and journalistic content to consumers", and the upshot was that the Australian public allegedly risks losing some worthwhile public interest coverage of (for example) local politics. This is because, as shown below in a chart from the Executive Summary,  online advertising has eaten the old media's classified advertising revenue, which means they can no longer afford proper "local beat" journalists and are forced to recycle cheaper celebrity gossip, clickbait, and grief porn (my words, not Morag's or the inquiry's).

But I wonder if citizen journalism and the rise of "digital natives" - media that have only ever existed online - are a better market-oriented answer than the taxpayer subsidies the ACCC recommended for coverage of local courts and local politics. As Morag mentioned, the barriers to entry for new media have dropped enormously, enabling that "long tail" of small pockets of interest to be accommodated. Even in relatively niche areas, all of us now read expert, informed, committed media, from all ends of the spectra of opinion, that didn't exist a few years back. If local politics matters to people, and it does to some, it's highly likely someone will rise to the challenge unprompted.

Maybe I'm wrong, the North Shore Times will fall over, and the deliberations of the Hibiscus and Bays Local Board will be lost to posterity. I doubt it, but yet again, the better course is to see how it plays out before jumping to 'solutions'.

In a regulatory moo-d

The latest Auckland seminar from LEANZ - the Law and Economics Association of New Zealand - brought together a panel of experts on the theme, 'What's Right and What's Wrong with New Zealand Dairy Sector Institutions?'

An important issue at any time, but especially on the money right now with the current review of the regulatory Dairy Industry Restructuring Act (DIRA). So far (according to the Review website) it's reached the stage where it's analysing the submissions on the discussion document it put out last November, and the Review team is now working on policy recommendations for regulatory change. Unless I've missed it, there doesn't seem to be a master list on the site of all the submissions received, but google a bit and you'll find some of the main players' views. Fonterra's are here.

The LEANZ panel was a battle-hardened bunch of dairy experts: in alphabetical order Tony Baldwin, business consultant, A E Baldwin New Zealand; Phil Barry, Director, TDB Advisory (his LEANZ slides are here, well worth a look); Alex Duncan, Consulting Economist at Finology; and Alex Sundakov, Executive Director at Castalia.

It would be nice to say I came away with all the moving parts neatly analysed and clarified and put into a tidy box, but - in the nicest possible way - I didn't, and that's fine. As Mencken's Law says, "For every complex problem there is an answer that is clear, simple, and wrong".

That said, I can't say I was totally disabused of the notions in my head before I went into the seminar, either. 'National champion' strategies are to my mind poor plans (see here and here) and I think the Commerce Commission got the right end of the stick when it proposed in 1999 to disallow the merger that ultimately (via DIRA) became Fonterra (I dug out the details here).

They may not have settled down into a coherent whole, but some of the ideas I took away from the seminar were:

• I liked Tony Baldwin's exploration of deep-seated, long-standing cultural norms in the dairy industry (including worship at the altar of 'white gold', dislike of competition, a wariness of markets in general and outside capital in particular, a strong desire for government involvement/support) and which, he argued, are still in play today and will continue to shape wherever we go next. Tony tells me he's polishing up his slides with extra commentary, and I'll post a link (and maybe some discussion) once they're ready. Alex Sundakov wasn't greatly minded to traverse 'old history' and suggested we should focus more on what's in front of us today, and there is that, but Tony's story still seemed highly relevant to me. Tony also concluded that the current regulatory structure can't deliver the strategy it's committed to, which I'm leaning towards as well. On similar lines Alex Sundakov also argued that existing institutional mechanisms aren't able to accommodate necessary market adjustments

• Alex Duncan, who I last encountered when he took the Commerce Commission for its first walk through the intricacies of the milk price manual, made an intriguing point. The mantra in dairy has been 'value add': he questioned that. He felt that the ingredients business - your powders, your casein - could be the real money-spinner, because it has the production flexibility to turn out whatever pays best on the day, especially if a deeper futures market develops and enables it to lock in transient opportunities or sell-off existing positions if better ideas turn up

• The seminar was largely free of entrenched  'pro Fonterra' and 'anti Fonterra' attitudes but still accommodated some discussion of Fonterra's calculation of the farmgate milk price. In  principle Fonterra could raise the input costs of competing processors via a high price. In practice, that's hard to square with evidence of profitable new entry (see for example Phil Barry's Slide #7) or with the potential discipline from investors in the Fonterra Shareholders' Fund who have an interest in making sure the dividend is not disadvantaged by an overly high farmgate price. Though, as someone said at the seminar, what effective recourse do they have other than to sell out of the FSF? 

• Alex Sundakov was somewhat bemused by the Kiwi predilection for froofrooing over whether regulation is necessary and what form it should take, and said that the Aussies tended to go "Bang! You're Regulated!" (my summary). Fair point - policy analysis in New Zealand has typically been, let's charitably say, exhaustive (don't get me started on reform of s36 of the Commerce Act). But I'm not sure he's right in this case about the Aussies' pace. The ACCC proposed a mandatory code of conduct for the processors who buy the Aussie farmers' milk back in April 2018, itself the outcome of an 18 month inquiry started in 2016. The draft code surfaced in March this year: who knows when (or if) the regulation will go live. And in any event, ditherers or not, Aussie code or not, dairy farmers in New Zealand are much better protected from oligopsonistic market power than their counterparts across the ditch.

A fascinating evening. If you're not on the LEANZ mailing list, subscribe. If you're yet not a member, join up. And thanks too to Richard Meade who organises the Auckland events, and to Bell Gully for the generous hosting that makes these seminars viable.

Jumping the gun

A colleague in the competition business read my post about a recent Aussie 'gun jumping' case and let me know that one of the recent OECD 'Best Practice Roundtables on Competition Policy' had been all over the topic.

These roundtables focus on the hot competition issues of the day, and they're good stuff. 'Public interest considerations in merger control' (March '17), for example, was directly relevant to the issues at play in the NZME/Fairfax merger. Other recent ones on current frontier issues include 'Excessive pricing in pharmaceuticals' (November '18), plus two coming up this June, 'Vertical mergers in the technology, media and telecom sector' and 'Licensing of IP rights and competition law'. I found their market studies one very helpful when I was lobbying for legal change to allow market studies here (and they've since added a how-to-do them kit, 'Market study methodologies for competition authorities').

The gun jumping one, 'Gun jumping and suspensory effects of merger notifications', is also worth a read. The roundtable put two different things into the same 'gun jumping' box: not notifying mergers when you're required to or ought to, and premature coordination between merging competitors before the merger goes final. I'd personally have said only the second one is what most people would see as 'gun jumping' but it's semantics: it really doesn't matter whether you see them as two kinds of the same thing or two different things. The Commerce Act in any event puts them in different boxes (s47 for going ahead with an anti-competitive merger you should have had cleared or authorised, s27/s30 for premature collusion).

The roundtable was mostly geared to the vast majority of countries which operate compulsory merger notification schemes: as the OECD summary report says at para 21, "The UK, Australia and New Zealand are the only OECD jurisdictions with purely voluntary notification systems". But it also had some useful practical advice (at paras 65-77) for businesses under either regime, on how to avoid premature coordination. Sadly, there isn't any bright line certainty.

competition agencies fully recognise that these types of co-ordination are often necessary to achieve the legitimate objectives of a merger agreement ... Merging parties certainly have room to satisfy information and co-ordination needs which are justifiable in the context of a transaction. Such acts may need to be accompanied by appropriate safeguards in order to avoid gun jumping ... The remaining uncertainty on how to distinguish forms of information exchange, value preservation and post-merger planning that amount to gun jumping from those that are lawful seems inevitable ... While certain provisions in agreements and covenants and the safeguards applied may be considered ancillary, justifiable and sufficient in one case, this might not be true in another case [66, 76-77]

Interestingly both the ACCC and our own ComCom put in written submissions.

The ACCC talked about the Cryosite case but was also concerned about too-clever-by-'arf arrangements - my phrasing, not theirs -  that achieve all the benefits to the parties of an anti-competitive merger without looking like one. They cited one back in 1996, and they're currently alleging there was one in 2017: 'ACCC takes action against Pacific National and Aurizon'.

ComCom revisited NZ Bus and the Waikato pathology case and also mentioned a more recent instance in the horticultural sector where "the [acquirer's] receipt of the target’s customer lists and the target’s possible encouragement of its customers to switch to the acquirer raised concerns about pre-merger coordination" (para 45). In the end the Commission flagged away any enforcement action under s47 or s27/s30 but added that in general it sees "gun jumping as a potentially serious breach of competition law and is prepared to enforce against such breaches" (para 46).

Stepping back a bit from the minutiae, I think anti-competitive mergers and pre-merger-closing gun jumping are now one of the touchier hot buttons for competition authorities everywhere. There's a rising political head of steam building - here's just one example - behind the idea that too many mergers have been allowed through, with various damaging effects. In that environment, the enforcement level gets dialled up: horses and stable doors, maybe, but if you're on either side of a merger, it's time to be extra careful that the swinging door doesn't bang you on the bum.