Workshop takeaways

Last weekend was the latest annual workshop of the Competition Law and Policy Institute of New Zealand (CLPINZ). Wellington turned on its loveliest weather, all the speakers and discussants performed well, there were sausage rolls at the meal breaks, and during my absence in Wellington the Warriors broke their home game hoodoo and took the two points. An excellent week-end all round, and special thanks to Chapman Tripp for providing the excellent facilities.

Many of the usual suspects were at the workshop, but if you're in the game and had to miss it, head over to the CLPINZ website, sign up as a member, and you'll get access to the papers (they're not up yet, but will be). You'll also get access to previous years' presentations.

The papers speak for themselves: here are some personal thoughts I took away.

Cartels - the cause célèbre du jour is the Lodge case. This is the one where a whole bunch of real estate agencies pleaded guilty to price-fixing, but for the eponymous hold-out in Hamilton, who went to trial and to widespread surprise beat the rap in the High Court. At the time I wrote about the fines for those who had pleaded guilty and said that "in the context of small to medium provincial businesses, even to my unsympathetic eye they were looking down the severe end". Having listened to the cartels session, and to the session on coming to a negotiated settlement with the Commission, I'm more of that view now. I never thought I'd feel that way, but as David Blacktop's presentation said, there can often be some "precipitating event" that causes otherwise well-meaning, normally competitive businesses to lapse into a concerted (rather than independent) response to the event - in this case to Trade Me's attempted jack-up of real estate listing fees. No, they shouldn't collude on a response, and in principle it doesn't matter that they would have come to the same decisions independently, but all the same they got backed into a corner and were anything but the cartoon cartelists in the proverbial smoke-filled room. Time for more understanding, in my view, of the reality they found themselves in. The goss, by the way, is that the Commission stands a good chance of having Lodge overturned in the Court of Appeal, but stranger things have happened. And while we're on the topic...

The law - okay, I'm an economist, and anyone who gets their legal advice from an economist deserves what happens to them, but I've got some questions. Is there anyone on the look-out for where Australian and New Zealand competition law might be diverging? We don't want, for example, the situation John Land described, where the legal approaches to price fixing may be going down different roads. Is there any kind of trans-Tasman body that keeps a weather eye out and acts to harmonise on best practice? And speaking of harmonising on best practice, it seems from what Minister Faafoi said at the workshop dinner that reform of s36 - anti-competitive abuse of market power - will be back on the agenda next year. Good: the Aussies have fixed their equivalent, and we should get in behind. I've also got some disquiet (partly stemming from Lodge but also more generally) whether behaviour at the lower end of culpability will be prosecuted under the forthcoming criminalisation regime, rather than the 'hard core' cartels that should be its target.

Regulation - I found myself in strong agreement with Ross Patterson's response to Sasha Daniel's paper on 'The future shape of telecommunications regulation'. Ross argued that there is no lack of competition in access to fast broadband and hence no case for regulation, especially when you're regulating one technology (fibre) but not another (fixed wireless) and with a - I think he said 'clunky', but if he didn't I am - a clunky form of 'building block' price cap regulation.

The internet - our new digital economy is going to be a minefield from both competition and consumer law perspectives, and I suspect we'll be making both Type 1 and Type 2 errors for some time before we get it right, if we ever do. That was my overall impression from the keynote 'Collusion without the smoke-filled room: from public statements by wetware to algorithmic pricing by software' from Professor Joseph Harrington and 'Consumer Analytica: NZ consumer law application to international developments in privacy and use of data' from Sarah Keene. I suspect there's likely to be behaviour that is anticompetitive or unfair/misleading that will not be pinged, and behaviour that's legit that risks being rapped. Joe Harrington is surely right that we likely need jurisprudence and new guidelines to distinguish between the two, but we're still a long way from being able (for example) to "develop rules for how a platform can intervene in the setting of prices" or to "define the class of prohibited pricing algorithms".

Market studies - the papers presented at the session I chaired were absolutely on the money. If you're thinking about how the Commission should use the powers it's (more than likely) going to get, you've got to read the excellent presentations from Mike Tilley and Richard Meade. They've both had first-hand experience of doing these studies, and it showed. Market studies are a great idea, but there are more process issues to think through than you (or I) might have imagined. I'll just chuck in one final thought for MBIE's consideration: I suggest that any company that attempts to invoke our 'anti-dumping' provisions should automatically trigger a market study into its industry.

Quantification - James Mellsop and his NERA colleague Kevin Counsell gave a very good presentation on 'Mergers: exploring the economic tool box', and walked the attendees through unilateral effects in auction markets (using a pathology merger example), vertical arithmetic (a version of critical loss analysis) using the AT&T/Time Warner example, and then some Cournot modelling of a wool scouring merger (using made-up data, by the way, if anyone involved in any of those cases is wondering). Good stuff, and they got it across in a user-friendly way that - my keyboard nearly inserted 'even' - lawyers could understand. My feeling is that we are, finally, on the brink of a new more data-driven and more quantitative approach to competition analysis, after a long period when the tide had gone out a very long way indeed on playing with the numbers. As I've said a few times before (eg here or here) there's far more empirical data becoming available, and better (and often more robust) ways of interrogating it. The Commission's Reuben Irvine said that some of these quantitative techniques, like the auction and vertical arithmetic tools James and Kevin mentioned, are already in use, if somewhat behind the scenes, at the Commission, and about time, too. In my stint there, applicants and opponents very rarely reached for even the more basic econometric methods (regression, differences-in-differences), and you could go years without tripping over a correlation coefficient. We've become an immensely data-rich world: time to start using it, rather than making anecdotal guesses about (for instance) the degree to which products are or are not in the same market.

We've got one of them

We may only be a small economy on the edge of the world, but - at least in the fields of competition and regulation - we can end up wrestling with exactly the same leading edge issues that bother the big guys. And sure enough we've just had a prime example, involving all the hot topics overseas: technology, social media, big data, vertical integration. You name it, it's got it.

It's Trade Me's proposed acquisition of Motorcentral (strictly speaking, acquisition of Limelight Software, who operate Motorcentral). The Commerce Commission turned it down on March 9. While it took forever (well past the Commission's own performance target) to publish the written reasons, they finally appeared last Friday, and they've been worth waiting for.

The reasons run to 111 pages (maybe I should cut some slack on how long they took to see the light of day) but relax - I've saved you the bother of reading the whole thing, and boiled it down into this reasonably self-explanatory picture showing the 600-pound gorillas and the minnows in the two markets involved, plus a lurking 800 pound gorilla (insofar as 800 pound gorillas can lurk).

There were three issues involved.

One was horizontal aggregation in the online car ad trade, where the Commission found there'd be no competition issue, albeit for the brutal reason that Trade Me is so dominant that losing Need-a-Car made no difference.

The second was horizontal aggregation in the dealer software ('DMS') market, where the Commission found that there would be a substantial loss of competition, since, absent the acquisition, Trade Me would likely have improved its DealerBase DMS to compete more effectively. Trade Me appears to have disputed that, but all the interesting corporate strategy documents on that and other issues are (necessarily) redacted so we'll have to assume the Commission read that right.

The most interesting issue, though, was vertical integration in the context of  big data. Even before big data became a thing, vertical integration could always facilitate anti-competitive strategies like foreclosure or predation. But the permutations and combinations have become even more complicated when there is big data at one or (as here) both levels of a vertical tie-up.

Because lurking in the background is Facebook. It already has one side of a two-sided ad platform (eyeballs in New Zealand),  and in the States it is already getting the other side (the car listings) by partnering with DMSs. So it likely would do the same here: "While it is possible that there are other ways of entering the advertising market, the recent instances of entry that we have observed occurred through the new entrant listings platform entering into a relationship with DMSs holding large amounts of listings data" (para 462 of the decision).

But the Commission found that a Trade Me / Motorcentral combo could and likely would stymie Facebook's efforts to get at the only DMS that really matters by - on some sliding scale of foreclosure insidiousness - making it more difficult or expensive to get at the car listing data. Even as big a bruiser as Facebook could be seen off: "We have not found any evidence to suggest that a potential new entrant such as Facebook would, in circumstances where access to listings data in Motorcentral is restricted, incur the cost and risk of changing the entry model that it has employed overseas to enter the relatively small New Zealand advertising market" (para 465).

No doubt there are some who would be just as happy to see the already ginormous Facebooks and Googles seen off. And there are probably some who may be thinking that if a market like online car ads is going to 'tip' in any event into one big site where all the cars and buyers are clustered, it might as well be a Kiwi one.

But, as always, it's competition we care about, not competitors. There's been a trend overseas where well-entrenched incumbents have bought out what might have been the foundation for a competitor: ironically in our context, people have pointed to Facebook's purchases of WhatsApp and Instagram as possible examples. The important thing - as the Commission has done here - is to keep the options open for new entrants to have a crack at the tough nut.

Which, incidentally is why I still have a soft spot for the minority dissent in the Commission's clearance of Z to buy Chevron. Chevron and its Caltex stations might have been a complete waste of space as a vigorous competitor, but in different hands who knows what competitive discipline it might have brought to the petrol trade.

In any event, the lasting significance of this decision - and one that I think we'll see overseas authorities citing - is that it sets a good precedent for being protective of potentially subversive competitors to the status quo in markets with big data and technological innovation.

Not that's not always going to be easy to identify them: who can really look at a start-up and accurately tell that it's maybe the germ of the next Google? And there are going to be companies who will sincerely argue that there's nothing to see here folks, move on. All that's happened is that a start-up has built a better mousetrap than their own - Motorcentral's DMS really does have far more bells and whistles than Trade Me's DealerBase - and they're buying it to improve their users' experience. With the redactions, I can't tell, but I'd guess Trade Me made that case or something like it this time round.

So it's going to take a good deal of commercial savvy to make the right analytical and factual calls in dynamic markets like technology. How'd we go in this one? This acquisition was going to fall over anyway because of the horizontal aggregation in the DMS market, but if the whole thing had hinged solely on the vertical integration issues, I reckon the Commission got it right in protecting the only viable way for a new entrant to get into the game in a meaningful way.

Finally, if you're interested in the big data aspects, a while back the Commission's Reuben Irvine, Greg Houston of Houston Kemp, and I put together a short reading list you'll likely find useful (we were talking about it as a panel at the Asia Pacific Industrial Organisation conference). And if that's not enough for your inner nerd, the Trade Me decision also pointed me to this very useful OECD resource, 'Rethinking Antitrust Tools for Multi-Sided Platforms'.

New thinking

Brining turkeys, looking after Christmas guests, and wrapping up the last bits of the year's consultancy work have eaten up my time, but I'm finally getting round to writing up the excellent Asia-Pacific Industrial Organisation Conference held at the University of Auckland earlier this month.

This was only the second time it's been held - as explained here it's a new initiative to add a regional industrial organisation event to the big American and European ones - and it's already attracting some big-name speakers and a good attendance. Over the next three years it will be held in Melbourne, Tokyo and Singapore. Nice to see our local academics presenting too: from AUT, Richard Meade (finance) and Lydia Cheung (mergers and divestments), and from the University of Auckland Simona Fabrizi (asymmetric information, and again on innovation), Erwann Sbaï (auctions), Tava Olsen (incentives) and Steffen Lippert (learning and entry).

It was heavily academic-focused, with a smattering of regulators and economic consultants, so you had to be prepared for a fair amount of pure economics theory, but then if you're at this sort of conference you'll probably comfortable feeding your inner quant. As always with the fancy models, some are down the cleverness-demonstration end, and some are analyses of well-off-the-beaten-path esoterica. But it's worth sitting through the sessions, because it's conferences like this that can present the path-breaking innovations - in ten years' time, they'll be the standard way we think about issues like two-sided markets, platforms, auction and market design, vertical integration, or oligopoly (which were all session topics at the conference).

My own bent leans towards empirical applications of the new ideas, so I especially enjoyed the first keynote presentation. Harvard's Ariel Pakes presented on 'Just Starting Out: Learning and Equilibrium in a New Market' (there's a recent version here). The new market was the UK wholesale electricity market for 'frequency response': Ariel's modelling showed how the players learned how to play the new game, and showed that they got pretty good at it reasonably quickly, with an end-result, once they'd got their heads around it, that was close to an efficient competitive outcome.

This is the sort of market where you might have expected strategic behaviour, and early on there were  indeed high bids which looked like invitations to follow. In the event tacit or other collusion didn't happen: I asked Ariel why, and the simple answer was, too many competing participants for it to hold (29 in all, with the top 10 holding 84% of capacity and an HHI of 1100). The paper says that "One area where [this kind of] learning model may be particularly helpful is in simulating counterfactual outcomes, a type of analysis increasingly used by regulatory authorities", and that's true: I'd also like to see it applied to things like our wholesale electricity market.

The other keynote was Columbia's Yeon-Koo Che on 'Optimal Sequential Decision with Limited Attention', which at first glance sounded like it didn't compete with the alternative option of a late breakfast. But it was excellent (there's a version here), and witty: his general theme was how people make decisions when they have a finite budget to spend on verifying their assumptions, and one of his examples included how people should select the media they read in a world of highly partisan "fake news".

I took two things away. One is that when you aren't especially sure about the likelihood of something, you should look for corroborative evidence, but when you're pretty confident about its likelihood (or unlikelihood), you should look for contradictory evidence. Whether that's a Great Universal Law that applies in all circumstances, I don't know, but it makes intuitive sense. And the other was that sometimes longer deliberation leads to worse decisions, something that ought to be bludgeoned into the brains of some of our policy-making and law-making institutions.

I lucked into a particularly good choice from the parallel session menu, on 'Topics in empirical IO'. Lawrence White (NYU Stern Business School) challenged the conventional wisdom that the US economy has become more concentrated (in an HHI sense). Ken Krechmer (University of Colorado Boulder) showed how control of standards (eg on how mobile phones communicate) matters for international trade and for potential use of market power. And Stephen Martin (Purdue) went into utility theory and how compensating losers with gains from winners mightn't be as easy as it looks in the textbooks: one implication was that price discrimination might turn out more welfare-reducing than usually thought.

My own contribution was to moderate the panel session, 'Big data: friend or foe of competition and consumers?', with panellists Reiko Aoki, Commissioner at Japan's Fair Trade Commission, Reuben Irvine, acting chief economist on the competition side of the Commerce Commission, and Greg Houston, principal at Australian consultancy HoustonKemp (and who kindly sponsored both the session and the overall conference).

We'd agreed to take a bit of a risk. After Greg had presented some results showing how big data can be used to  better refine geographical markets and to show the impact of new app-based services like Uber on older economy sectors like taxis, we left a good half of the time available for discussion, hoping that enough people would come along and be prepared to have a conversation. And fortunately they did.

Greg starting his presentation

The panel ready to take questions

UCLA's John Asker in the discussion, with Harvard's Ariel Pakes and Duke's Leslie Marx (co-author of the excellent The Economics of Collusion) in front

Broadly we came down on the side of more friend than foe: we (and the attendees) could see a lot of potential for society from better and greater use of the flood of modern data, ranging from better services for consumers and epidemiological and other payoffs from combining diverse datasets through to, for regulators, more accurate market definitions and clearer observation of market behaviour. But - and this was a recurrent theme - it wasn't obvious that regulators could tap into the best econometric experts at will: it's hard, especially in the US, to prise them off the beaten academic path. And the difficulties of cleaning, interpreting and manipulating databases in the terabytes are easily underestimated.

We weren't completely Pollyannas - we could see the potential risks in collusion between pricing algorithms, for example; we recognised that databases can create market power; and we had a range of conviction about whether traditional enforcement analysis and legislation are up with the New Economy play - but broadly we were technology and data optimists.

For those interested in the topic, we compiled a short reading list: a good place to start is the Competition Bureau of Canada's discussion paper (which Reuben had tracked down). And here's a copy of Greg's slides.

Well done to the local conference organising committee - Simona Fabrizi, Tim Hazledine, Steffen Lippert and Erwann Sbaï.