It's not every day ...

 ... you get to listen to a Nobel prize winning economist, so big shout out to the University of Auckland for its Dean's Distinguished Virtual Public Lecture last night by Nobel Laureate Jean Tirole, Professor at the Toulouse School of Economics, and further hat tip to the university's extending the availability of the lecture to the Law and Economics Association of New Zealand (LEANZ, you are a member, aren't you?).

Tirole was talking about "Digital Dystopia", or as the invite put it, "How transparent should our life be to others? Modern societies are struggling with this issue as connected objects, social networks, ratings, artificial intelligence, facial recognition, cheap computer power and various other innovations make it increasingly easy to collect, store and analyse personal data. While this holds the promise of a more civilised society ... citizens and human rights activists fret over the prospect of mass surveillance by powerful players engaging in the collection of bulk data in shrouded secrecy. A dystopian scenario will be used to emphasise the excesses that may result from an unfettered usage of data integration in a digital era".

Truth be told, it wasn't the easiest presentation to follow: not because of Tirole, whose style is affable and conversational, but more because Zoom webinars are not the best medium for presenting equation-rich material, or at least not for those of us below Tirolean levels of mathematical deftness. Most of the invited panel of commentators appeared to have read it beforehand, and that was the sensible thing to do - here's a link.

Even if the details of the maths beat me, I got the message, and it's plausible. Tirole said that, at first, people had assumed that the likes of the internet and other modern social tech would be a good thing - empowering the previously voiceless and all that - and momentarily reminding me of the optimism around the Summer of Love before it petered out into drug overdoses in squalid squats. But he reckons that this upbeat assumption, like the flower children's, is worth revisiting, and that there are real risks of technologies like facial recognition becoming oppressive - and effective - methods of totalitarian control. The poster child in his presentation was China's proposed 'social credit' rating system, which looks to bundle all of a person's activity into a composite measure of whether they are a good citizen in their everyday life and whether they are going with the Communist Party flow, with potentially unpleasant personal consequences if they aren't (for example though restrictions on their access to credit, employment, education or travel).

In the discussion afterwards, there were quite a few questions (including mine) about whether the social credit rating would be as effective as feared. My thinking had been that people would see through the government's rating as a political device - I was reminded of the crack in the Soviet Union that "we pretend to work and they pretend to pay us" - and would actually judge you by (for example) your buyer or seller scores on whatever is the Chinese equivalent of eBay. 

Tirole, as we should have expected, had thought of that, and his answer was that an authority minded to go down the social credit rating route would deal to the private scoring systems to stop them being used in exactly that way. On p4 of the paper he says, "The state must eliminate competition from independent, privately-provided social ratings. Because economic agents are interested in the social reliability of their partners, but not in whether these partners’ tastes fit with the government’s views, private platforms would expunge any information about political views from their ratings. This competition would lead to de facto unbundling, with no-one paying attention to the government’s social score". 

He also said that people couldn't just ignore the ratings when they carried real penalties, and he pointed to an insidious feature of the rating system, 'guilt by association'. You might well want to allow the poorly rated dissident to buy a business class air ticket, but your own rating will suffer if you do. It reminded me that we've been here before: how many people kept buying from Jewish shops in 1934, when the SS were taking notes? Tirole also raised some interesting historical parallels, quoting Aldous Huxley's letter to George Orwell in 1949, where Huxley felt that oppressive governments would find it easier to go for lower cost routes than running gulags. Orwell was right in the shorter-term, but Huxley might be closer today: "the recent developments fit well with his overall vision" (p6).

What should be done? "A key challenge for our digital society will be to come up with principle-based policy frameworks that discipline governments and private platforms in their integration and disclosure of data about individuals" (pp35-6). But as he also says with very considerable understatement, "The exact contours of such disciplined principles are still to be identified", particularly (I'd add) because we also want to keep sight of the very large benefits the new platforms have brought.  Tirole argued for the desirability of keeping divisive issues out of the databases and aiming to "monitor platforms' foray into political coverage unless platform regulation is performed by one or several entirely independent agencies".

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.

Have we got the same problems?

Earlier this week the LEANZ programme of Auckland seminars got a more than usually eminent speaker: Professor Sir Martin Cave, who among many other achievements is now chair-elect of the UK's energy regulator the Office of Gas and Electricity Markets (Ofgem).

Picture from http://www.martincave.org.uk/

He was on his way to Wellington to assist MBIE's Electricity Price Review, given his background as one of the members of the UK's extensive two-year review of the British electricity markets (for regulation uberwonks, all the source material you'll ever want can be sourced here, and for the rest of us the summary report is here). If I've got it right I think the invitation to New Zealand came from Vector, but in any event Vector certainly hosted the Auckland event, emceed as usual by Richard Meade. Well done, folks, LEANZ activities in Auckland and Wellington depend on business support.

The gist of what Martin said was that the review found the wholesale market was working tolerably well: there was room for some improvements but it generally got the green tick. The distribution (lines) businesses were already closely regulated. But the retail market - that was quite a different story. There appeared to be a large lump of captive customers, or if not captive, at least not interested in escape. As the summary says (p22), "72% said they had never switched tariff with an existing supplier, did not know it was possible, or did not know if they had done so". It will be no surprise that the incumbent retailers had them on expensive tariffs. The summary says (pp45-6) that

we estimated the detriment from excessive prices to the domestic customers of the Six Large Energy Firms to be about £1.4 billion [NZ$2.7 billion] a year on average over 2012 to 2015, the entire period for which we had data, with an upwards trend, reaching almost £2 billion [NZ$3.9 billion] in 2015. We consider this our headline estimate of the annual detriment arising from high domestic retail market prices.

In our discussion in Auckland, we had some difficulty getting our heads around this. In particular, why aren't the excessive returns from these passive victims competed away? To which the answer was, you can wave attractive offers in front of them till you're blue in the face, but They. Won't. Move.

Which leads to the next obvious question, why not? Many theories. Part of it appears to be down to the characteristics of the customers who have "disengaged". The review ran a big survey which found (p33) that "those who have low incomes, have low qualifications, are living in rented accommodation or who are above 65 are less likely to be engaged in the domestic retail energy markets against a variety of indicators of engagement". The already disadvantaged, as usual, fare worst.

There are also process explanations (p35): "there is some evidence indicating that the process of searching for an alternative supplier and successfully switching has been problematic for some customers. Significantly, the perception of the complexity and burden of the process appears to be worse than the reality, which may further dissuade domestic customers from shopping around and/or switching".

And if you accept all this - and for balance maybe you should read this piece which UK consultancy Oxera did for one of the Big Six, and which disputed the excess profits and argued that there might be perfectly rational  reasons for customers not to bother switching - the final questions we knocked about for a while were, what do you do about it? And have we in New Zealand got the same issues?

In the UK, they are pressing a number of buttons at once, trying to work on both the lumpen demand (eg by setting up an accessible database of non-switchers that will be easier to market to) and the excess profits from too-high prices. Legislation was passed in the UK last month to impose price caps, which will kick in this coming northern hemisphere winter.

That will help people with their bills, but price caps are a clunky bit of economic regulation that is generally not nearly as good as getting to the root of impediments to effective pro-consumer competition (though that's easy to say 11,000 miles away from the problems). You'd wonder - and we kicked this about a bit with Martin - whether you wouldn't be better off with transfer payments directly to the disadvantaged who have big power bills. A better-targeted version of our recent winter energy package would deal to the immediate affordability problems while leaving room for more market-oriented solutions to competition impediments.

Have we got the same issues? While we're not clones of our neighbours, it's interesting that the Aussies have something similar to the UK. The final report from the ACCC's Retail Electricity Pricing Inquiry, released last month, found (from the media release) that "It is clear that most households are paying far too much for electricity. In addition, some of the most vulnerable in our community are forced to struggle through freezing winters and scorching summers, with many others also having difficulty paying their bills".

The Aussies have also gone for price controls: the ACCC recommends "Abolishing the current retail ‘standing’ offers (which are not the same between retailers), and replacing them with a new ‘default’ offer consistent across all retailers, set at a price determined by the Australian Energy Regulator".

And while we haven't seen anything definitive yet from our own inquiry, its latest process update to stakeholders says that "we have already identified common positions on some key areas. A notable example is that some consumers are genuinely unable to afford such basics as heating their homes, and that something must be done to help them".

That's suggestive that we're broadly in the same area, too, though I'll wait to see the evidence, and I also think there's a good chance that we may have made a better go of publicising and facilitating switching than either the UK or Australia with initiatives like the Electricity Authority's WhatsMyNumber. If we have a problem, though, I hope we don't default to price caps as the easy to reach for answer. Make the market work better is the first best option: go elsewhere only if you have to.

How will market studies work?

Last night we had the latest LEANZ event in Auckland - a panel discussion on the 'Commerce Commission's new market studies power: how should it (not) be used?'.

The panel was chaired by our genial host for the evening, Andy Glenie of Andrew Creagh Lai, and comprised Peter Wilson, principal economist for the NZIER and one of the authors of MBIE's 2017 petrol pricing study; Glenn Shewan, special counsel and a specialist in competition and regulation at Bell Gully; Chris Bowden, senior legal counsel at Air New Zealand and who advises primarily on competition and regulatory matters; and yours truly. The event was organised by AUT's Richard Meade, who had also been an author of the MBIE petrol report. It followed an earlier Wellington session on the same topic.

There was quite a meeting of minds on some of the issues. Without putting words into people's mouths, I'd say that we were relaxed about the proposal to let the Commerce Commission do market studies on its own initiative rather than only at a Minister's direction. For one thing, it is more likely to be a measured response to potential competition issues rather than a politician's scratch at an electorally handy scab. For another, as one audience member suggested, an independent Commission might be more ready to take on politically well-connected industries. Only afterwards (as you do) did I think of the ACCC's 2017 inquiry into new car retailing: the Aussie pols continue to protect the new car dealers, but the ACCC found dubious anti-consumer arrangements, especially around repairs.

We also all felt the kick-off needs more refereeing. Whoever starts a study - the Minister or the Commission - ought to be required to say, in some detail, what they think the problem is that is worth expending the taxpayers' resources on. At the moment there's only an "in the public interest" test, which one panellist correctly called "vacuous". I especially liked the idea put up by a couple of my panel colleagues that there should be public consultation on the terms of reference, which, as well as being a democratic way of going about things, would help to identify exactly what the issues might be and help prevent scope creep.

It also became clear that there might need to be some further thinking done about the uses of market data gathered for a market study. From the audience, for example, John Land asked whether the data would be available for, say, later s27 or s36 cases, or for later mergers in the market studied? I'm generally of the view that, except in rare cases, data gathered for one purpose shouldn't be used willy-nilly for another, but even if you stuck to that "Chinese walls" approach, it's still hard for Commissioners or staff to "unknow" what they know.

Tomorrow I'm off to the Transport and Infrastructure Select Committee to talk to my submission on the Commerce Amendment Bill, which among other things provides for the new market studies power. If you're wondering (as I was) why Transport and Infrastructure has ended up as the venue, rather than Economic Development, Science and Innovation (which normally handles competition issues and is, for example, the Select Committee looking at cartel criminalisation), the answer seems to be that the Bill also provides for potential changes in how airports might be regulated, which puts it more within Transport and Infrastructure's purview.

I'll put up my own submission after I've talked to the Committee: the process seems to be that submissions are being published after submitters have fronted up. So far there aren't many on the Select Committee website from the usual competition suspects: the only one thus far is Russell McVeagh's. I don't agree with their proposal to limit initiation only to the Minister, but I certainly found myself in agreement with their ideas - along the panel's lines - for a tighter process around the initiation of a study and around its terms of reference.

Well done to the organisers and especially to the hosts, Andrew Creagh Lai: without business support LEANZ seminars won't happen, so thanks again. Though members' subs help too: head here.

Skyfone revisited

Last week's Law and Economics Association of New Zealand (LEANZ) seminar in Auckland, 'Lessons from the Sky/Vodafone Merger (from an Economist and a Lawyer)', paired Victoria's Dr Bronwyn Howell (the economist) with Russell McVeagh partner Sarah Keene (the lawyer), and a highly productive evening it proved to be. Both presentations are now up on the LEANZ site (Bronwyn's, Sarah's).

Bronwyn led off: she was convinced that the Commerce Commission was wrong to decline the merger (all the details of the Commission process are here).

The Commission's view was that the merged entity would leverage Sky's market power in content into the market for broadband supply, foreclosing rivals' ability to compete. I could see the logic, though as in many of these cases you do wonder whether the up-front consumer benefits (eg from deep bundle discounting) are worth more than the costs of any later potential squeeze on competition. I'm not wholly convinced, for example, that the ACCC was right to stop the Aussie supermarkets giving their shoppers big discounts on petrol.

Bronwyn argued first of all that the Commission's foreclosure concerns did not take into account that Sky and Vodafone had already been bundling since 2009 on a contractual basis, yet foreclosure hadn't happened. I'm not sure this was a killer argument, as I'd wonder whether the contractually available bundles were earth-shatteringly attractive, either to consumers or to internet service providers (ISPs). For example, for some of the time since 2009 these contracts came with restrictive 'key commitments'  for the ISPs - restrictive enough, in the Commission's view, to have likely breached s27 of the Commerce Act.

But Bronwyn followed up with other arguments. She argued that the markets had been wrongly defined as markets for single products (content and broadband) when the right market was a market for bundles. And if you looked at bundles, she said, then there are different ways of approaching the competition implications of bundling, depending on the types of bundling. In models that best describe what has been on offer in New Zealand, foreclosure looked either unlikely or impossible.

Better still, she actually modelled, using a simulation, how some of these bundle markets would play out, and demonstrated that far from being an uncompetitive leveraging to foreclosure, total welfare could well be greater with bundling than without. I really liked this: we get too little simulation and too little econometric analysis in merger (and other regulatory) decisions, even though the availability of data and the quality of the modelling tools are getting better all the time.

Sarah's legal perspective was less on the merger itself (where Russell McVeagh had represented Spark in arguing against a clearance) and more about what it implied for merger policy more generally.

She had three big points. One was that the legal test for a "likely" post-merger substantial lessening of competition (SLC) - a legacy of the Woolworths/Warehouse cases - is too low. As she said, "In practice it means, “is there sufficient evidence to support a prima facie case of a risk that a substantial lessening of competition might arise”?" And it certainly came as a surprise to the non-lawyers in the room that "likely" does not mean "more likely than not".  She preferred something more like the Aussie Metcash test, which talks about a "commercially relevant or meaningful" SLC  rather than a theoretical but remote possibility.

The second was that binary clearances/declines are blunt instruments and that we would be better off with a system that allowed for approvals subject to behavioural undertakings (which the Commission currently can't accept, under s69A of the Act). Everywhere else we'd normally compare ourselves with can either accept undertakings, or has regulation in place to prevent content lock-ups like Sky TV's portfolio of premium sports rights. Going by the questions afterwards - and my wife's similar reaction when I told her about the seminar - content lock-ups also bothered quite a few of the attendees.

And her third point was about the time it took to get to finality - "Time kills deals" - and how current processes around (for example) confidentiality and disclosure could be reviewed to get the timetable more aligned with marketplace requirements.

Sarah's presentation reminded me that there's now a fair bit of Commerce Act stuff accumulating in the new government's competition in-tray. The relevant bits of the Labour Party election manifesto proposed reviewing the Commerce Commission "to determine greatest areas of need and potential for enhancing its capabilities"; a code of conduct for the supermarkets (like what the Aussies have); reviewing s36 (abuse of market power), which again the Aussies have already dealt to; and criminalising cartels. Sarah would add revisiting s47 (the likelihood of an SLC) and s69A (behavioural undertakings). And as well as supporting s36 and cartel criminalisation I've suggested freeing up the Commission to do market studies, and removing the shipping lines' over-friendly cartel treatment. I spent a fair bit of the last government's period in office bemoaning the slow progress of reform: I hope this new one gets a faster move on.

In any event another very interesting seminar. Well done to both speakers, to the organisers - Andreas Hauser for an earlier outing over the fences in Wellington, and Richard Meade for the Auckland one - and to Russell McVeagh for hosting and sluicing. These events wouldn't happen but for generous corporate hosting.

And they wouldn't get very far without your membership subs, either. So pop along to the LEANZ membership page and hand over your $75, or $50 for students, and get set for 2018.

Still stuck

So here's the state of play.

The Commerce Commission can't do "market studies", proactive inquiries into the state of competition in particular sectors or industries. That's because of a historical - and in my view strange and misguided - court decision, but the Commission is lumbered with it in any event.

The Commission's overlord, MBIE, can do market studies. It's been asked to do one on petrol prices. So the policy Ministry will be doing the operational work, and the operational agency will be sucking its thumb.

And on top of this strange demarcation process, while MBIE has talented people, they're starting near ground zero, while competition analysis is the Commerce Commission's day job, and it's good at it.

It's a botch and a bungle, in sum. Which is why allowing the Commerce Commission to do market studies has been one of the agenda items on MBIE's mini-review of the Commerce Act.

But that appears to have gone to ground. As I've noted before, it's one of a number of competition reforms that have run out of oomph in the past few years.

Meanwhile the Aussies just press ahead: I read in today's Australian Financial Review that their government is "ordering the competition watchdog to conduct a review into retail electricity prices" (article here though it may be paywalled). No judicial nitpicking for them over asking their competition authority to do something that should obviously be within its remit.

It's possible that the change of bums on seats as Minister of Commerce may be holding things up. The previous Minister, Paul Goldsmith, had gone round the traps and taken soundings about the mini-review of the Commerce Act, and may well have been on the verge of pressing some buttons. It's possible that the new Minister, Jacqui Dean, is still forming her own views.

But once everyone's got their heads around the issues, could we, finally, see some progress on some long overdue improvements to our competition regime?

How will the Aussies' new competition law play out?

And so to my final write-up of last week's RBB Economics conference in Sydney, the session on "How Australia's competition law deals with excessive pricing". It covered two topics, how competition law is going to evolve in the wake of the Aussies' changing their version of our s36 (the abuse of market power), and how the new "concerted practices" prohibition might operate.

Liza Carver, a partner at Herbert Smith Freehills, spoke on "Reform of section 46: what does it mean for unilateral pricing decisions?" and looked at potential implications in three areas. Predatory pricing: the new law is no clearer than the old on how you go about applying a "below average variable cost" standard, and might (no stronger) have opened up the possibility that recoupment isn't a necessary element anymore, because the basis for recoupment might have been grounded in the now junked "take advantage" wording of the old version of the law. Margin squeezes: the new law isn't any clearer on this tricky area, either, with Liza saying that the courts hadn't been able to deal with them very comfortably (she instanced our own beloved Telecom v Clear), which is why there have been more industry specific regulators and more access price regulation. Excessive pricing: she worried that "it will be open for the ACCC and potential plaintiffs to allege that "excessive" pricing by a firm with a substantial degree of market power has or is likely to have the effect of substantially lessening competition in a downstream market".

If Liza's right on that last point, that's probably a bit more radical an outcome than proponents of change to Australia's s46 would have meant: merely being a monopoly, and charging the monopolist's price, weren't (in my mind anyway) ever what the Harper changes were aimed at. I had a quick squizz at how the ACCC is minded to operate under the new misuse of market power legislation (assuming it gets through the Aussie political process, something I haven't been able to get a feel for), but the draft guidelines didn't look as if the ACCC threatens to gallop off in new radical directions. They don't mention excessive pricing per se at all, other than in the context of a margin squeeze.

Wayne Leach, a partner at King and Wood Mallesons, spoke on "Will the new concerted practices law in Australia help to bring down prices?". Since we don't have anything along these lines here at home, by way of background this is the proposed legislation:

 Section 45

1. A corporation must not:  …

3. engage with one or more persons in a concerted practice that has the purpose, or has or is likely to have the effect, of substantially lessening competition.

And here's the definition of concerted practices from the ACCC's draft guidelines on how they'll apply the law:

A concerted practice is a form of coordination between competing businesses by which, without them having entered a contract, arrangement or understanding, practical cooperation between them is substituted for the risks of competition

The lawyers amongst us will recognise that "contract, arrangement or understanding" bit: it's also the language in our s27. So the intent (as Wayne said) is to catch things that don't quite make the "understanding" threshold in the existing law, but are still coordinated in some way and have an competition-lessening effect. The ACCC gave a number of hypothetical examples: one was

A number of petrol retailers notify each other of their future pricing intentions. While they have not committed to do so, they begin to regularly follow the price change foreshadowed by others. Retailers find such information assists them and start making business decisions in expectation of calls from their competitor. No attempt is made to reject the calls. Such disclosures results in the pricing uncertainties present in a competitive market effectively being substituted for cooperation

It's all new territory. Wayne felt that the Aussie law, with the requirement that the challenged concerted practice must be shown (with proper evidence, for example on prices) to have had an actual effect on competition in the market, should help avoid the overreach of the European courts, where anti-competitive effect has effectively been presumed rather than proved. And he reckoned that, as part of establishing whether the practice did actually have an impact, the US approach of "plus factors" might come into play. "Plus factors" include things like "outcomes that can be explained rationally only as a result of concerted action". We'll see how it plays out: if you're interested, I expect Wayne's written-up analysis will turn up in due course on his firm's In Competition blog.

And positively the last, final word (at least for a while) on misuse of market power: last night LEANZ had a well-attended debate in Auckland pitting the suave and empathetic duo of Russell McVeagh's Sarah Keane and NERA's James Mellsop (supporting the case we should leave s36 alone) against the polished and measured team of Matthews Law's Andy Matthews and me (supporting the case we should do a Harper). There wasn't a vote at the end, and modesty prevents me from speculating on what it would have indicated had there been.

That was the last LEANZ event for this year: don't forget to pay your sub to support next year's programme. Special thanks to Richard Meade, who herded all the cats into position, and to Mayne Wetherell who very kindly hosted the event at their modern new office in the Viaduct and who helped circumvent Google Maps' unhelpful misdirection to a nearby building site.

Rumours of my conversion have been greatly exaggerated

I got some funny comments at last night's LEANZ section 36 debate, along the lines that I'd suddenly gone weird and soft about competition law enforcement.

Eh?

Moi?

Haven't I been banging on about more effective legislation to patrol abuse of market power? About how competition authorities may be getting too lenient on mergers? On throwing the book at criminal hard core cartels?

Puhleez!

I tracked down where people had got the idea from. This:

So you can see why people would look at this and think at first glance that the headline represented my view.

It doesn't. Never has. Never will.

The headline is actually the headline from a recent post, 'Is no competition policy the best competition policy?', on Paul Walker's Anti-Dismal blog. The headline is his. I'm only in the first paragraph because Paul started his piece with a reference to a post I did about getting the best out of competition agency economists, and went on from there with his own views about the desirability or otherwise (mainly otherwise) of competition law.

As for Paul's arguments? Nah (mostly). The odd point has some validity - yes, overzealous competition enforcement could interfere with the very competition it's meant to promote, which  is (for example) one of the reasons people point to the potential "chilling effects" of the likes of section 36 of our Commerce Act on big companies' willingness to be tough competitors.

But for the most part it's off beam. You don't want mergers leading to very large firms wielding monopoly power (giving less, charging more). You don't want cartels forming, persisting, or going unpunished when rumbled: they're a rort and a distortion, and in the worst cases akin to fraud. You don't want the competitive auction process sidelined by bid rigging. You don't want companies carving up markets into exclusive sales territories. You don't want big companies foreclosing the opportunity for new entrants to compete. And to make all that happen, you need effective competition law and enforcement. No hanging judges, no slaps with a wet bus ticket, but good middle of the road rules, effectively monitored.

Right. That clear enough for everyone? Jolly good.

Carry on.

And now for something completely different...

...namely Ann Pettifor presenting at last night's Law and Economics Association of New Zealand (LEANZ) meeting in Auckland, on the topic, 'Money and the neglected genius: John Law 1671-1729'.

And different it certainly was: the title didn't give much away, but what she aimed to do was to argue that what everyone conventionally learns about money and credit in the economics textbooks is wrong, and that there is a different and better way of understanding what is going on.

The traditional view, she said, has several components. One is that money is secondary: the things that matter are the 'real' things like production and consumption, and money is a lubricant but of no other great importance. Another is the traditional way we think about banks as financial intermediaries that take in people's savings (as deposits) and lend them out (as bank loans) to people who'd like to make use of them. And another is the view that there is a market which matches the supply of money or credit with the demand for it, with the price of money (the interest rate) set in the usual way to match the supply up with the demand.

Instead, she said, money and credit are far more important than conventionally realised: she mentioned, for example, the obstacles to economic activity in developing economies from the lack of a properly functioning monetary system. She said that banks do not need, in fact, to wait till deposits roll in: MegaBank, for example, can unilaterally make two computer entries on its book, one crediting a squillion dollars to MegaCorp's bank account, the other recording a squillion dollar loan to MegaCorp, and immediately the money supply and the stock of credit will go up by a squillion dollars. And she argued (I think) that the interest rate is set autonomously by various human agencies (particularly central banks and commercial banks) and is not the end result of supply and demand matching up.

From a policy point of view she argued that we used to manage banking regulation and monetary policy better, pointing to a period from 1945 through 1971 when there were no financial crises: things have gone worse, she felt, since deregulation. She also argued that the banks, left to their own devices, overwhelmingly lent to relatively easy-to-assess activities like property (creating bubbles in the process) rather than to more productive activities that would have been better for economic growth. And since, on her view, credit is more or less infinitely creatable by central and commercial banks, and in the case of central banks is backed by governments' effectively bottomless ability to tax, we should have little truck with 'austerity' policies. She noted, for example, that we can create money up the wazoo when we want to fund wars or bail out banks, but don't seem to be able to apply the same logic to getting economies rolling or saving the planet's climate, a view that the UK Labour Party has also come to with its proposal for "People's Quantitative Easing".

It's not every day you get someone having a go at knocking over everything you've ever learnt, so full marks to AUT's Policy Observatory, who have brought Ann down to New Zealand and have arranged a wide range of meetings for her: it's good to get challenging, and even iconoclastic, points of view. And special thanks too to Sarah Keene and the team at Russell McVeagh who generously hosted last night's event, and to Richard Meade who does all the legwork to make these Auckland LEANZ events a goer.

Did I get my own mind adjusted? Hmmm. I can see some of her points, but I'm still left with quite a few questions. I'm still not overly inclined to the view that we can print-money our way out of anything: the other week I went into a stamp and coin dealer in Wellington and bought a ten trillion Zimbabwe dollar note for $14, so clearly there are finite limits to what you can do. Ditto running up vast quantities of government debt which (Ann seemed to me to argue) must always be serviceable due to the government's ability to tax. There certainly used to be a view that countries could never go bankrupt (at least when issuing debt in their own currency), but maybe that's also a conventional wisdom that needs challenging. And while John Law may well have been a neglected genius, his experiment of creating one of the earlier paper-money banks and letting rip with it didn't end happily for anyone.

Food for thought all round, and maybe time for a bit of reading, too. Chatting to Ann before the kick-off, she told me that the definitive biography of John Law was written by my lecturer in undergraduate monetary economics at Trinity College Dublin. Law had an extraordinary dramatic life and was a pioneer of early economic theory (Ann principally mentioned his Money and Trade Consider'd with a Proposal for Supplying the Nation with Money of 1705), so I reckon it's time to track down a  copy of Antoin Murphy's John Law: Economic Theorist and Policy-Maker (Oxford University Press, 1997).

A smorgasbord of competition topics

Last weekend's annual workshop of the Competition Law and Policy Institute of NZ had a series of good sessions. They were all interesting: I got a lot out of  Professor Brent Fisse's very balanced analysis of the recent Harper competition review in Australia (even if we agreed to differ on changing the test of 'abuse of market power' in our s36 and their s46 of our respective competition laws), and from the session on whether broadcasting is ripe for regulation, where Buddle Findlay's Tony Dellow and Covec's John Small concluded (correctly) that it wasn't.

Here's an assortment of other stuff that I found interesting.

Princeton's Bobby Willig spoke on 'Merger Analysis', mostly about the application of the 'GUPPI', or 'Gross Upward Pricing Pressure Index' (yes, cue for fish puns...). Willig is one of these top-rate US economics professors who manage to combine elite academic credentials with top teaching skills and a wide commercial consultancy practice (he's been involved, in NZ alone, in Air New Zealand/Qantas, air cargo, and Fonterra's milk pricing), with synergies all round. I was left convinced that the upward pricing principle approach "is a valuable source of more granular and extensive insights into merger impacts than are available from an accurate qualitative articulation alone".

Or to put it another way, look at the data. If, after a merger, a business would own both product A and the newly acquired but previously competing product B, and would be tempted to jack up the price of A knowing that some of the sales lost will come back to it as increased sales of B (that's how the "upward pricing pressure" on A works), a competition authority concerned about potential post-merger price increases ought to look at exactly how much of a substitute B is for A, rather than taking a qualitative guess. It ought to get to grips with whatever data or natural experiments are available to calculate how much leakage of sales will occur between A and B.

The good thing is that not only will there be better-informed merger decisions, but in today's 'big data' world the opportunities to estimate diversion ratios between A and B, or, same diff, cross-price elasticities, are getting better all the time - a conclusion I'd also come to last month at the LEANZ presentation AUT's Lydia Cheung gave on quantitative techniques for competition analysis (write-up here).

There was a terrific session on "Vertical restraints", where a first class paper by Russell McVeagh's Troy Pilkington was followed up by an equally impressive comment paper from the Commerce Commission's David Shaharudin. Vertical restraints, and the courts' and economists' take on their legitimacy, are one of those things that, as Troy and David pointed out, have been all over the place, from explicitly legal to explicitly illegal and all points in between (retail price maintenance has been similar). Currently, things appear to have setted down where they should probably have always been - permissible, subject to a net benefits test.

And then there was the fascinating presentation by ACCC Commissioner Sarah Court on "Unconscionable conduct and supermarkets", where the ACCC had pinged Coles for a series of unilateral strong-arm abuses of its suppliers. We don't have "unconscionable conduct" in our competition law - there's the odd similar sort of provision here and there, such as the ability to re-open "oppressive" credit contracts under Part 5 of the Credit Contract and Consumer Finance Act, but not any overarching provision - and at first blush, based on Sarah's account of the Australian goings on, you'd be tempted to think we ought to have the same tools to knock any New Zealand business thuggery on the head as they have for theirs.

But as Bell Gully's Jenny Stevens argued in her commentary reply, if you're going to legislate or regulate, the first thing you've got to do is define the problem you're trying to deal with, and  it's not a given that we do, in fact, have the same sorts of standover issues that the ACCC have had to confront. I'd have to agree: I wouldn't say all of our businesspeople are lining up for canonisation, but on the other hand we also generally tend to be a high trust society where many transactions are handled equitably on a handshake basis, or close to it. If that gets abused, let's act, but in the meantime it's not a bad way to run our particular whelk stall.

A defining moment?

Last night we had the latest seminar from the Law and Economics Association of New Zealand (LEANZ) - AUT's Dr Lydia Cheung on "Quantitative techniques for competition analysis: An Overview, and Application to the Z Energy / Chevron Merger", which traversed market definition, modern demand estimation, and merger simulation. It was billed as "for non-economists as well as economists" - a tough challenge if you're going to take the laity through things like critical loss analysis and systems of demand equations - but she pulled it off.

It's also left me thinking about a few things, and in particular about market definition.

The trend these days for competition agencies, when considering mergers and acquisitions, is to rather downplay the importance of exact or precise definitions of markets, a trend which has been gathering some global oomph since the 2010 edition of the US merger guidelines. As an example, in the latest merger clearance for which the Commerce Commission has published its full decision (Staples/Office Depot), the Commission said (at para 49) that "it is not necessary for us to reach specific conclusions on relevant markets".

I'm somewhat uncomfortable with this, from a number of perspectives, including a legal one. While I'm not learned in the law, I have had to wrestle from time to time with the fine print of the Commerce Act, and I do wonder about the bit (s66) that allows the Commission to grant acquisition clearances. Under s66(3), the Commission must either be satisfied or not satisfied that "the acquisition will not have, or would not be likely to have, the effect of substantially lessening competition in a market" (my italics), and how can it do that, to an Act-satisfying standard, without specifying one?

Coming back to hopefully safer economics ground, I'm not sure the current move towards more fuzzy market definition is the right way to go, particularly as we may be getting closer (as Lydia explained) to being able to do a better job of taking a more robust empirical approach to measuring things like demand curves, and own- and cross-elasticities of demand. If, using things like scanner data, improved econometric methods, sophisticated consumer choice testing, and clever analysis of 'natural experiments' - what happened, say, after a fortuitous interruption to one source of supply - we can get a more scientific handle on the extent to which products are or are not substitutes for each other (and so are or are not likely to be in the same market), why wouldn't we use that information to derive empirically grounded market definition? More precise, rather than less?

It's also not clear to me - and here you can peel off if you like, as I'm venturing into some deeper undergrowth, and I may be gone for some time -  it's not clear how a competition authority can sign up for applying a SSNIP test (as many agencies say they do, including the Commission in its Merger and Acquisition Guidelines, paras 3.15 to 3.21) and subscribe to a fuzzyish, not completely defined definition of a market. Sure, in many jurisdictions the SSNIP test is more paid lip service than formally implemented, but if you were to take it out over the fences, as agencies say they're committed to do, then you need the demand curve that the hypothetical monopolist faces. And how can you have a reliable demand curve for an ill-defined product?

In any event, that's one of the benefits of these LEANZ events: they get you thinking, and often across formal disciplinary lines. Get to them if you can, and maybe LEANZ ought to follow up on the feedback I got last time I wrote about them, that they ought to take the show on the road to Christchurch as well, and not just to Auckland and Wellington.

Thanks to Lydia for presenting, to AUT's Richard Meade for chairing the evening, and to AUT more generally for hosting and catering.

Another good seminar from LEANZ

Last night we had the latest Auckland seminar from the Law And Economics Association of New Zealand (LEANZ): Richard Meade's "Should Customer-owned Monopolies face Different Regulation than Investor-owned Firms?", based on his PhD work at the University of Toulouse. Richard, before his studies at Toulouse, had been at Victoria's Institute for the Study of Competition and Regulation (ISCR), and is now at AUT.

It was an interesting evening. I learned, for example, that New Zealand is by no means unusual in having a large number of consumer-owned electricity lines businesses, and indeed that the customer-owned or cooperative model is common internationally in other utility sectors as well, such as water and telecoms. The general motivations seem to be a consumer defence mechanism against the market power of a monopoly, and undertaking infrastructure investments in areas that would not be commercially viable for an investor-owned utility. Ideology likely plays some part in some places, but the widespread adoption of the consumer owned model is generally more down to commercial practicalities.

In New Zealand, 12 of the lines businesses have been exempted from the price-and-quality regulation they would otherwise have had, because the main incentive that customer owned lines businesses operate under (low prices for the customers) does a perfectly adequate job of keeping the monopolies to heel. Exemption from regulation is also reasonably common overseas, though not a given. Richard's theoretical work (and he kindly spared us the maths you'd expect from a Toulouse economics PhD) found, however, that in some cases a regulator can't rely completely on the consumer ownership to achieve regulatory objectives by itself, especially if an objective is to nudge the business towards an optimal price/quality combination: consumer ownership will generally deal to price. but may not hit the price/quality combo that consumers might want.

That's probably right: one thought I had was that governance of cooperatives tends to be a political process with elected boards (the bit of Part 4 of the Commerce Act that allows for exemption of consumer-owned lines businesses includes a requirement for elections by the consumers), and that can give rise to political pressures to keep prices down today even if it jeopardises needed future investment tomorrow. The longer term quality of the service may not get a good enough look in.

Richard's presentation on the challenges that regulators face in trying to hit cost efficiency and quality targets simultaneously was also interesting. The latest round of the Commerce Commission's default price/quality paths for the lines businesses includes an automatic mechanism whereby companies' allowed revenue gets a bonus or a deduction depending on whether they beat or miss certain quality targets. I gathered from Richard's presentation that this puts us up somewhere near the regulatory policy frontier when it comes to using CPI - X incentive regulation to steer towards desired quality outcomes as well, but also that the theory and practice of quality regulation is still very much in its infancy.

Another excellent evening: if you're not a member of LEANZ, you should think of joining up, as it depends, as a charity, on members' fees to keep these valuable seminars going, or supporting it in other ways, for example by giving a presentation yourself (and yes, yes I have, which I summarised here). LEANZ also depends on the generosity of a variety of businesses so thanks to Gary Hughes from Wilson Harle who did the introductions (Ed Willis from Webb Henderson would have but couldn't make it) and to Ross Patterson of Minter Ellison who provided the premises and the refreshments afterwards.

How to get regulated

Last night I was the speaker at the latest Law and Economics Association seminar in Auckland with a presentation entitled, somewhat tongue in cheek, "How to get yourself regulated", or, implicitly, the Seven Things you should not do if you a major incumbent in an industry and want to avoid the whole nine yards of heavyhanded sectoral regulation. They are:

1. Over-encourage the government to take an active role in the strategic direction of your sector (everyday government-to-business interactions are OK)
2. Have a headstrong chair or chief executive with a "my way or the highway" approach to the industry
3. Take a short-sighted view of the company's financial interests (where I quoted a speech I once heard Milton Friedman give, "The suicidal impulse of the business community"), ignore the potential for longer-term regulatory backlash, and in particular go over the grey line between high profitability and profiteering
4. Take an overly legalistic, die-in-a ditch, see-you-in-the-Supreme-Court approach to disputes and issues, and buttress it with inflexible legal and economic advisers
5. Destroy your credibility by taking inconsistent positions before different regulators in different jurisdictions
6. Annoy influential politicians, in particular at Select Committees, and if you're still not regulated after all of that, then...
7. Do something especially outrageous to tip the scale, where I gave the example of a recent and particularly gross case of mobile roaming charges, and the European Union's regulatory response to similar overcharging in the EU

Unfortunately we have had too many companies and industries that have fallen into at least one - usually several, and sometimes all - of these heffalump traps, with the result that we now have several regimes of very complex, very expensive, very intrusive regulation. It still amazes me that a country that has generally opted to take the lighter-handed regulatory route, and if pressed would prefer to go with some of the more modern forms of less clunky incentive regulation ("CPI minus X" and the like), has nonetheless ended up with old-style price controls of the "WACC on a regulated asset base" variety and other complex regulatory schemes like the telco "final pricing principle" cost models. For that, the regulated companies must themselves take a fair share of the responsibility: if they hadn't steadily worked their way through the Seven Easy Pieces above, they wouldn't be in the regulatory dogbox today.

Thanks to everyone who came along and contributed to a lively Q&A session, and thanks, too, to Gary Hughes of Wilson Harle who did the intro and wrapup, and especially to James Craig and the rest of the team at Simpson Grierson, who generously hosted the evening.

Another good LEANZ event

We've been having a good run with recent LEANZ events in Auckland, and last night's was no exception: Ed Willis from law firm Webb Henderson gave us a fine presentation on 'Promoting quality regulation' which was well attended and stimulated a lot of active discussion.

Ed, who describes himself as possibly the only person in New Zealand who is "passionate" about regulation (and he might be right, but that's OK), went through some of the tests for what good regulation would look like, instancing both Treasury's checklist - which you can look up for yourself in this Treasury paper - and a somewhat similar and equally useful paper I hadn't come across before, from the UK's Department for Business Innovation and Skills, 'Principles for Economic Regulation'.
Ed instanced two regulatory schemes as practical examples - the Overseas Investment Act, and the recent telco policy review - and his main points (on my reading) were two.

One, people can get confused between criticising the quality of regulation and disagreeing with the social policy intent of it. There'd be a lot of people (well, me anyway) who'd regard much of the policy intent behind the Overseas Investment Act as xenophobic, protectionist, and inefficient, for example, though that doesn't necessarily mean that the poor devils trying to implement the damn thing aren't making a halfway decent job of what's been dumped on them.

Two, sometimes regulation is trying to serve multiple and possibly mutually inconsistent purposes at once, which describes the telco policy review in a nutshell. You're unlikely to be able to satisfy everyone - if you want cost-based (and therefore probably lower) pricing for the copper network, you're going to upset the folk who don't want cheaper copper-based internet services getting in the way of the national benefits to be had from moving to a fibre network.

Ed was also pretty hot about the importance of transparency and accountability in regulatory frameworks, and who could argue.

In the context of accountability, could I give a nod to the folks at the Commerce Commission who have been doing the odd post-decision review of merger decisions, to see if things actually panned out the way they had thought at decision time? I know, there are folks who argue that the methodology for doing this kind of exercise is not up to scratch, and especially not if you're going to try and do a cost-benefit analysis and put $ numbers on the value of decisions, but I think that even a qualitative scan, with hindsight, of whether you got the main trends and factors right, is absolutely a step in the right direction.

Finally, thanks to NERA for generously hosting last night's event.

The new Merger and Acquisition Guidelines

Last night we had the latest Law and Economics Association of New Zealand (LEANZ) event in Auckland, where a decent sized crowd came along to hear an explanation of the Commerce Commission's updated Mergers and Acquisitions and Authorisations Guidelines, presented by two of the Commission's senior staff, David Blacktop, Principal Counsel Competition, and Lilla Csorgo, Chief Economist Competition.

In the event the evening focussed very much on the M&A Guidelines. The previous ones came out in 2003, so it was timely for the Commission to have another look. Both the law and the economics have evolved since then, and the Commission has accumulated another decade's worth of practical experience with mergers: it was also an opportunity to take soundings from professional M&A advisers (there had been an earlier consultation round on a draft version of the guidelines).
You can read the Commission's summary here, and here's the link to the full text. If you're already reasonably familiar with the M&A landscape, then the bit of the Guidelines you'll want to focus on is the Chair's Introduction (pp5-6) where the substantive changes and the rationale for them are laid out.

Most of the changes came up one way or another in the presentation or in Q&A and discussion afterwards.

The former "safe harbours" terminology is gone, replaced by "concentration ratios", partly to avoid giving people a false degree of certainty that their merger is "okay" (market shares below the thresholds could still be problematic, market shares above them aren't necessarily the end of the world), and partly to deter gamesplaying, where it is tempting for merger parties to find market share numbers that squeak under the thresholds.

"Counterfactual" is gone, too, as a matter of terminology. Apparently the change was not without internal staff controversy: personally I'm glad to see the back of it. "Without the merger" is now the preferred description - good thing too, simpler and clearer. And the Guidelines now explain the "with the merger" and "without the merger" comparison in the light of The Warehouse cases.

"Barriers to entry" have had a makeover as well, but more substantively. "This change reflects the courts’ own move away from the language of ‘barriers’ to entry and expansion to the term ‘conditions’ – a more expansive concept", says the Chair's Intro, referencing the Air New Zealand/Qantas and NZ Bus cases. So now it's "conditions of entry" when it comes to applying the LET test for entry or expansion post-merger.

I'd add that it's not just the courts moving along, it's economics. I used to lean towards a Stigler approach to barriers to entry, but I had my mind changed for me by Dennis Carlton's paper, "Why Barriers to Entry are Barriers to Understanding".

Same applies to another change, on market definition. "New Zealand courts have reiterated that market definition is a tool to aid in competition analysis, rather than an end in itself. We have adopted this approach in these guidelines. In particular we have moved away from defining markets as a first step in the analysis and recognise that relevant markets need not always be defined precisely", again from the Chair's Intro. I appreciate that for the Commission, what the New Zealand courts say, goes, and in a way it doesn't matter a hoot where overseas regulators or economists have got to with market definition in merger cases, but the reality is that the New Zealand courts are only part of a global evolution in thinking on the matter.

It's been somewhat controversial, all the same. I know, for myself, that when I was involved in these merger decisions, issues only properly started to come into focus when some sort of provisional market definition had been adopted, so my instinct would have been not to stray too far towards a lesser role for market definition early in the piece. I certainly agree it didn't have to be too precise early on, but it gave you a framework to start with. In any event, wherever you might stand on that issue, the reality is that you're still going through the same exercise of identifying the competitive constraints on the merging parties.

There was an interesting question from the audience on whether the Commission will be using the Upward Pricing Pressure test. You may have seen this idea already - AUT's Lydia Cheung gave a paper on it at this year's NZAE conference - but if you haven't come across the idea before, here's a terrific video from MIT's Richard Schmalensee which explains it. The short answer was, no: the test may be a useful screening device to explore whether there are issues with a merger, but in a relatively small, interconnected economy like ours there are probably more direct ways of figuring out how close a substitute one product or company may be for another.

Another very productive evening from LEANZ - well done to David and Lilla, who are excellent speakers, and special thanks to Russell McVeagh, who hosted the event and put on drinks and nibbles afterwards.