Here's a revolutionary idea

There's an ongoing barney on social and mainstream media about what the latest poor numbers for business confidence might or might not mean, and, in that unappealing Kiwi way, who's to blame. The truth is, we're all reduced to guessing what goes through the minds of the people who fill out the survey forms and bung them back to the ANZ and the NZIER.

My conjecture - an upmarket way of saying 'sort-of-informed guess' - is that it's actually a mix of several things. There's probably an element of party politics in it, though as I said the other day, it looked to me as if the business community had got past the toys-out-of-cots stage. There's probably an element (beyond partisan) where they've looked at government policies and think they're bad news (irrespective of who introduced them). There's certainly concern about pressures on profitability, where there's pretty obvious evidence of costs pressures that aren't easy to pass on to consumers.

But do I really know? Does anyone?

So here's my revolutionary idea. Why don't ANZ or the NZIER ask, what's bugging you?

And here's the template. It's from NAB's latest quarterly survey of Australian businesses.

That's not hard, is it? You could ask the same questions here, word for word, and you'd be left with as clear an answer as the Aussie survey shows.

Just before I let go of this business confidence thing, could I say to all those talking up and talking down the 'confidence' figures, confidence readings are kinda interesting in their own right, but you're both paying them far too much importance. The links between 'confidence' and actual business outcomes aren't always that strong.

But don't extrapolate from that and say, business surveys are airy fairy indicators of nothing in particular. It is - and you can't say this terribly often in economics - beyond reasonable question that some of the measures in these surveys, particularly the ones related to firms' own prospects, have very strong links to reality. You might think a simple 'getting better/getting worse' question isn't going to get you very far. But it often will, which is why even official statistical agencies run them. 

Here, just to belabour the point, are the latest results from the French statisticians.

And to belabour it into the ground, here is the link between Aussie GDP and the 'Performance of services index' compiled by the Australian Industry Group, which is again based on the balance of better/worse answers.

And, finally, here at home here's how a combo of some of the business and consumer measures in the ANZ business surveys track against our GDP (it's a graph in the latest one). It's a pretty good relationship. It helps too that it is timely, and a leading indicator of what's down the track (the graph shows a five month lead between changes in the indicator and subsequent changes in GDP).

So for all those knocking business surveys because it suits them tactically - give over. These are useful, cheap, timely and while not every bit of them is always telling you useful stuff, in parts and in combo they give reliable readings on where we are and where we're going. If the evolution of the economy, good or bad, is giving you political conniptions, don't shoot the messengers.

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.

Doom and gloom? Yes and no

As any number of recent headlines will tell you, there's a bunfight going on about a slump in business confidence and a rise in unemployment. There's the usual partisan point-scoring going on about the size of it, who caused it, and what comes next.

What's really happening?

Let's deal to the unemployment rate first, up from 4.4% in March to 4.5% in June. Should anyone be worried about that?

No, for at least three reasons. One, the statistic comes from a survey, which has sampling error. If I've read Infoshare right, and I've been known to get it wrong, the sampling error for the unemployment rate is 0.3%, which means there's a 95% chance the true unemployment rate is between 4.2% and 4.8%. A 0.1% rise may not even have happened. And second, even if it did, the economy is not an automaton, and you expect to find "noise", random fluctuations even in the middle of a longer-term trend. And third, and most important, the unemployment rate rose for a rather comforting reason: the participation rate went up.

The logic is that the participation rate goes up in good times. People aren't stupid, and can judge what's happening in the jobs market. Discouraged people lurk outside the labour force when they reckon there are few jobs to chase. They delurk when they think it's all on. Sure, there'll be the odd person who's forced by bad stuff - the mortgage getting out of hand, a redundancy in the family - to go hunting for a job, but overwhelmingly the evidence is that the participation rate going up is a signal of the labour market running in job seekers' favour.

Put that together with the all-time record employment rates for women and Maori and a strengthening in wage increases, and the marginal rise in the unemployment rate is neither here nor there. If you get a press release from a pollie banging on about it, mentally subtract a little from your previous estimate of their credibility. Negative numbers are allowed.

The business confidence slump is not so easily dismissed.

For a start, it's beyond any question of sampling error or random wiggles. It's large, and evident over several readings. There's a lot of focus on the ANZ Bank's latest and particularly glum survey, but it goes back further than that. The NZIER's June Quarterly Survey of Business Opinion showed more unhappy campers, too. It's true that you should focus on the 'activity' measures in these surveys rather than the 'confidence' ones, but the activity numbers are also in rapid retreat.

As the latest ANZ survey said, "Firms’ perceptions of their own prospects are a better gauge of economic outcomes, but the news wasn’t upbeat here either: it dropped 5 points to a net 4% expecting an improvement. This is the lowest reading since May 2009 and well below the long-term average of +27". There have also been growth slowdowns captured in the latest BNZ / BusinessNZ surveys of manufacturing and services.

Here's one graph that I think helps explain what's going on. On the trusted principle that in a market economy an analyst should follow the money, here's what businesses have been telling the ANZ survey what they think the outlook is for their profitability.

There's clearly (to my eye) a political component. The sharp drop in expected profitability after we got the new Coalition government might have been rational - "this lot aren't business friendly" - but likely also had some sort of political protest mixed in. But businesses appeared to have got over themselves by March or April of this year - only for expected profitability to drop to even lower levels than immediately after the election. So my guess it's no longer a "should have been National" two fingers, but a signal of something more real.

A good deal of it, I suspect, is pressures on wages and other costs (notably energy) which haven't been able to be passed on. As many others have commented, the rise in the minimum wage, from already high levels by international standards as a percentage of average earnings, and with more to come, is putting sectors like retailing under intense pressure. Retailing has large numbers of minimum wage workers, and bricks and mortar shops have little or no ability to pass the costs on when e-commerce is already stealing their lunch. I was walking around Newmarket today for the first time in a while, and while the area was generally busy, I was startled to see how many retail vacancies there are.

Nor are many businesses enthused about the cost - real or imagined - of having to go back thirty years and sign up again for collective agreements. And I suspect they, like everyone else, are wondering about the sort of generalised wage pressures that look like leaking from the public sector. Any public sector union worth its salt has sized up this government as an easy mark. And they're right: the chance of a Coalition Finance Minister actually getting to the finishing line forecast in this year's Budget is half of five eighths. As I said at the time, "The likelihood of the New Zealand political process actually leaving $7.3 billion unspent on the table is extremely low".

I'm not even there myself. With the infrastructure - where it exists at all - creaking all around us, I'd be using that money, too, especially as we've got not only cash in the government cheque account but also the opportunity to borrow at once-in-a-generation low interest rates and make a substantial and lasting difference.

Inaction on that front may be part of business malaise too, especially when contrasted with the readiness to spend on lower quality ideas (think boondoggle regional lollyscrambles). I was somewhat dismayed, reading MBIE's latest national construction pipeline report (summary here, full thing here) that "Infrastructure is forecast to remain relatively unchanged, increasing marginally to $7.3b in 2023" (p1 of the summary) and that (p4) " Infrastructure activity is lower than previously forecast". And although the summary also notes (p4) that " Pacifecon’s research data suggests that there is a high value of infrastructure construction scheduled to be initiated over the next six years", it always seems to be light rail tomorrow but traffic jams today.

The previous government, by the way, was just as bad as getting the facilities built that would enable all of us to get on with our lives more productively. The longer it goes on, the more likely we're going to hit capacity and productivity constraints that stop the economy growing at the rates we'd like. Whatever else may or may not be needed to be done (or undone) by the current government to move us forward from where we are now, a larger and earlier infrastructure spend has to be part of the answer.

Bottom line, some of the beat-up over the slowdown (actual or imminent) in the economy is exaggerated. But some of it is realistic, especially if you put some weight, as you've got to in this late stage of the post GFC global recovery, on the external environment hitting a bump. Recent surveys of global fund managers, for example, show that they are worried about the impact of trade wars on world economic activity, and with a buffoon pressing the protectionist policy buttons, they're right to be biting their nails. So the ANZ's take looks realistic: "with businesses in a funk, it’s fair to say that the road ahead is looking less assured, and risks of a stall have increased".

They're like buses...

...none for ages, then five show up together.

In this case it's Section 47 investigations by the Commerce Commission, s47 being the bit of the Commerce Act that says, "A person must not acquire assets of a business or shares if the acquisition would have, or would be likely to have, the effect of substantially lessening competition in a market". In other words, the Commission taking a look at mergers that maybe should have gone through the Commission's clearance or authorisation processes, because they risked lessening competition, but didn't.

You don't have to go to the Commission for permission to acquire another business, nor do you have to tell them afterwards. If you believe your acquisition doesn't affect competition, you can just go ahead and do it. But we also run a voluntary notification system: the payoff for people who use it is that they get a 'clearance', which is protection against any legal challenge alleging that the acquisition damaged competition.

If you chance it, and don't bother, and the Commission trundles out one of its s47 investigations and finds you have actually bought out a meaningful competitor, you're in shtook. You're up for a biggish fine and a divestment of your precious new purchase.

Some countries run compulsory notification regimes for acquisitions: we don't, and it's a good thing too. It can turn into a make-work imposition: large numbers of mergers or acquisitions are perfectly fine from a competitive point of view, and having them jump through pointless hoops is a waste of everyone's time and money. If you can get a voluntary scheme going that only brings the problematic ones in for an okay, then you're on the right track.

Companies and their legal advisers generally know the ropes, and play the game. As a result the Commission rarely needs to spring into action with a s47 investigation. In my longish time at the Commission, I can only remember one - funnily enough, a bus case, when one of the Wellington bus companies tried to buy another - which finished up in the Court of Appeal in 2008 (judgement here). On that occasion the Commission won and the transaction had to be unwound.

Yet in the past year or so there have been five of the things, listed on this useful page on the Commission's website.

Two of them have been wrapped up: Vero Insurance sold its shareholding in Tower to Bain Capital in March this year, and in the office products market Platinum Equity, which had bought OfficeMax to add to its existing Winc business, sold off Winc in July.

Two are ongoing. An Australian company, First Gas Limited, bought the Bay of Plenty gas distribution assets of GasNet in March last year. GasNet is owned by the Whanganui District Council, and the chair of the Council's holding company was quoted in this article in the Herald as saying that "the money was in the bank, though the sale was still subject to the Commerce Commission for final approval". That sounds like a merger clearance application had been made, but it doesn't look as if it had been, because the Commission opened a s47 investigation on the spot. The other ongoing s47 investigation is very recent and was opened last month to take a gander at Fulton Hogan's purchase of the construction materials business of the Stevenson Group.

And the final one is headed for the High Court, with the Commission alleging that "Wilson Parking substantially lessened competition for the supply of car parking in the Boulcott Street area in central Wellington when it acquired the rights to operate the Capital car park" (full press release here).

Out of nostalgia I dug out the 2008 bus case. I'd forgotten, but it was a surprisingly lively judgement, with Justice Hammond in fine form. The judgement is mainly remembered for its analysis of s83 of the Commerce Act, which deals with being an accessory to a breach of s47. But it had other bright moments. Reacting to the appellants' 15-page Notice of Appeal, Justice Hammond said at [67] that

To my mind, this initial approach – essentially that the High Court Judge had got just about everything wrong in relation to liability – has become a somewhat unfortunate feature of appeals in commercial causes to this Court in recent years ... It may also be a sign of considerable weakness in an appeal if counsel are unable to identify with some real precision precisely where it is that the court appealed from is said to have gone wrong.

and I also liked his crack at [91] that "the essential points are quite apparent, even in the usual smog of a competition law case".

We don't know how the First Gas, Fulton Hogan and Wilson Parking investigations will fare. There might be nothing anti-competitive to any of them. We've only seen the Commission's side of the Wilson Parking story, for example, nor do we yet know whether there are actually any problems with First Gas or Fulton Hogan. If everyone is home free, that would be fine. But if it isn't fine, I'd be a bit concerned that what has been an effective regime of enlightened self-regulation might be fraying at the edges.

The Commission hasn't the time or the resources to monitor every business acquisition in the country. I'm sure it keeps a bit of a weather eye out for the bigger transactions in the news, and it gets some market intelligence from interested bystanders. I've even done my little bit myself: I'm temperamentally not a dobber-in but I did tell the Commission about one acquisition that I'd read about in the press and that had looked to me a bit suss. It wasn't.

Essentially, in sum, an important plank of our competition regime comes down to self-policing. It's one of those bits of social capital that lubricate the free flow of business and avoid the heavy-handed alternatives. Fingers crossed that this mini-outbreak of s47 investigations is just happenstance, and not a sign of a change in the times.

Stagnation?

I've been reading Linda Yueh's The Great Economists: How Their Ideas Can Help Us Today.  It's a clever way of teaching the history of economic thought by imagining how the big names would have dealt with current issues. We get, for example, Ricardo looking at Trump's trade wars, and Keynes looking at post-GFC 'austerity'.

In the chapter on Schumpeter ("What would Joseph Schumpeter think about how contemporary companies and countries should innovate?"), I came across a remarkable quotation which bears on another of today's supposed problems, 'secular stagnation'.

This is popularly taken to mean, as its Wikipedia entry says, ""a condition of negligible or no economic growth in a market-based economy". Lawrence Summers, the former US Treasury Secretary, who is often credited with giving the idea its modern boost, says the Wikipedia version is "fatalistic" and not what he meant. He says he meant a more Keynesian notion: "the idea of secular stagnation is that the private economy — unless stimulated by extraordinary public actions especially monetary and fiscal policies and, or, unsustainable private sector borrowing — will be prone to sluggish growth caused by insufficient demand". But the downbeat version has taken root.

The idea in its fatalistic format, that we are moving into an extended period of slower growth or no growth, has always seemed to me to be completely off the wall. I don't believe that we are in some kind of diminishing-return world where the payoff from the next innovation is generally less than the payoff from the previous one. I don't believe that the latest rounds of invention - such the internet and the digital revolution more generally - are in any way less momentous than their industrial and chemical and electrical predecessors. And I strongly suspect that GDP as currently measured, despite statisticians' best efforts to capture changes in its quality, is hugely underestimated. We're producing far more, properly accounted for, than the doomsayers think.

I think it's far more likely that we in the earliest stages of a huge transformation of modern economies and societies where we are only beginning to see the impact of new innovations, let alone the further payoffs that will come from the interplay and recombination of our new technologies. "Ideas having sex", as Matt Ridley put it in his excellent book, The Rational Optimist.

The stagnation believers are, in my view, akin to someone thinking that the factory system had done its dash by 1800, or that modern business methods had peaked with Ford in the 1920s. In the middle of one of the most vibrantly inventive periods of all time, we are supposed to believe that growth is running into the sands?

It's extremely implausible. It's also at odds with some of the other doomsdays the pessimists worry about. You can't believe that the robots are going to take all our jobs and think that technological change has stopped having a big impact. And It's also an enormously bad guide to policy, if it takes you down the road of thinking that the big issue is fighting over a fixed pie, rather than growing the pie.

In any event, the quotation in The Great Economists that caught my eye was this. Schumpeter felt that the Classical economists - Smith, Ricardo, Mill - had missed what was going on round them. In his History of Economic Analysis he said:

Those writers lived at the threshold of the most spectacular economic developments ever witnessed. Vast possibilities matured into realities under their very eyes. Nevertheless, they saw nothing but cramped economies, struggling with ever-decreasing success for their daily bread.

The Classical economists were wrong then. The latest crop of stagnationists are wrong now.

My tuppenceworth

Today I fronted up to the Transport and Infrastructure Select Committee to speak to my submission on the proposed new 'market studies' powers. The Commerce Commission by the way was two slots ahead of me in the queue: you can read its submission here.

Quick gist: I'm all for market studies, and have been for ages as regular readers (both of you) will know. We're the outlier these days in not allowing our competition authority to have a proactive look at potential competition problems, and we should join the international best practice pack. I'm in favour of the Commerce Commission having the power to initiate them off its own bat, as well as Ministers asking the Commission to do them. So I'm on board with the broad provisions of the Commerce Amendment Bill.

I have suggested three small improvements, though. As I posted about Tuesday's LEANZ panel on market studies, I think there's a consensus that the threshold for firing the starting gun on a market study is too low. At a minimum the Minister or the Commission should be required to tell us in more detail why they're bothering. You could add a formal requirement to consult on the terms of reference (though I'm pretty sure the Commission would take at least informal soundings before going live). One MP asked me if the requirement to consult on the terms of reference mightn't tie up the whole process in judicial review till kingdom come, and maybe that's right, but it has to be possible to design something cheap and cheerful and appeal-proof that would kick the tyres properly before going live.

The second improvement was providing for the possibility of a conference on a draft market study. I'm a big fan of the conference process: properly managed it can lead to useful debate and enlightenment. At the moment the Bill provides for submissions on a draft study: maybe implicitly (it's been suggested to me) it already allows for a conference. But in any event I've suggested making it clear.

And the final improvement is that Ministers would be required to respond yay or nay to Commission recommendations in a market study, within a tightish timeframe: I've suggested 60 working days. I don't see the point of spending perhaps $1.5 million a pop on these things only for the study to moulder in a Ministerial cupboard.

I got some questions. One was related to the Commissioners being both decision-makers and the board of directors: the logic was that there aren't many checks and balances on what they can get up to, and maybe it might be better to leave the instigating power with Ministers, who might face greater accountability constraints. I didn't see that as much of a risk. The Commission's governance arrangements are a bog standard way of running competition authorities, and if you look across the ditch at the ACCC, which has the same set-up, you don't see any difference between the kinds of studies the ACCC starts rolling and those that Ministers do.

I got an interesting question about whether the Aussie market studies had made any difference at the end of the day. Mostly yes, was my answer, for example in improving the bargaining position of small suppliers dealing with the market power of big buyers (eg dairy farmers at the bottom of a supply chain totem pole with the supermarket duopoly at the top and the reasonably concentrated dairy processing factories in the middle). But not always: the ACCC, for example, hasn't been happy that its ideas for getting beef farmers a better deal at the stockyard sales haven't got much traction. And in some areas (eg the ACCC's ideas on buyers of new cars getting more choice of repairers) it's too early to tell.

Bottom line, a scheme exactly like that proposed in the Bill has been running with no problems and some achievements across the ditch, and it's time we did the same. End of.

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.

609 paragraphs later...

Stopping well-dug-in incumbents from using their market power to prevent or deter competition has always been one of the most challenging issues for competition policy. It's important - maybe even more important than before, with the emergence of the new generation of 600 pound gorillas (Amazon, Facebook, Google) - but intrinsically is also very hard to define and police.

For one thing, we want the 600 pound gorillas to be vigorous competitors and not just sit like Smaug  on their monopolistic hoard of profits. But it's not easy to distinguish 'vigorous' from 'anti-competitive'. A behemoth offers a big discount: is that a big win to celebrate for consumers, or a proscribed attempt to scare away potential entrants?

It doesn't help that our current law (section 36 of the Commerce Act), and the New Zealand jurisprudence around it, aren't in the best place. Anti-competitive abuse of market power is a hard thing to grapple with at the best of times, but you wouldn't bring our knife to that gunfight.

The Aussies are onto it. Last November their new approach came into effect, with section 46(1) of their Competition and Consumer Act now reading "A corporation that has a substantial degree of power in a market must not engage in conduct that has the purpose, or has or is likely to have the effect, of substantially lessening competition".

Previously their wording was the one we are still running with, "A corporation that has a substantial degree of power in a market shall not take advantage of that power in that or any other market for the purpose of: (a) eliminating or substantially damaging a competitor... (b) preventing the entry of a person ... or (c) deterring or preventing a person from engaging in competitive conduct...".

Junking "taking advantage" means that the complex legal exercise of linking the use of market power to the conduct (the 'counterfactual test') can also be thrown overboard. That's been the element that has stymied our Commerce Commission from getting any results and has led it to flag away trying to enforce s36. And introducing "effects" means that the big bunfight over "purpose" can be sidestepped. Barring the occasional smoking gun of damning internal e-mails, "purpose" is susceptible of many interpretations and it can be a lottery which view a court will take (and one that cuts both ways, judges wrongly seeing abuse where there wasn't, or, also wrongly, seeing no abuse where there was).

"Effects" is no walk in the park, either, but at least it offers the chance to do some empirical analysis of what happens in a market when a powerful incumbent does something, and takes us away from trying to peer into people's state of mind.

All of which is by way of introduction to what must be the last gasp of the old Aussie regime, the Pfizer case, which has just had its latest outing in the Aussie courts. You'll find all the details here at the very useful Australian Competition Law website. It dates back to 2012, when the Aussies were operating the old version of the legislation, the one we're still lumbered with.

What happened was that Pfizer held the patent on a widely prescribed and enormously lucrative drug, Lipitor, which helps control cholesterol. But the patent ran out in 2012 and, unsurprisingly, various manufacturers of a generic version were drooling at the prospect of getting into the game. Pfizer knew the boom days were over for Lipitor but reckoned it might at least minimise the hit to the bottom line if it could make a go of competing in the generic market with its own generic version.

Its bright idea was a trio of direct selling to Aussie pharmacies (bypassing the big drug wholesalers which chemists typically use); setting up a bank of dollar credits for pharmacists based on how much Lipitor they sold before the patent ran out; and then paying out the credits if pharmacists signed up to a deal where they agreed to sell large quantities of Pfizer's generic version rather than the opposition's.

Enter the ACCC in 2014. Unsurprisingly: patent-holders up against patent expiry have got up to some very questionable things overseas. In particular the ACCC didn't like that requirement to stock up big on Pfizer's generic version, as it looked as if it was intended to lock up most of the market and starve the other generic manufacturers of oxygen. I didn't like the look of it, either, and I'm not surprised the ACCC challenged it. Abuse of dominance is always a grey area, but I've always liked Robert Willig's characterisation of it as not leaving enough room on the dance floor for the other dancers. The bulk purchasing requirement looked like it failed the dancing room test. If I was on the ACCC I'd have probably pressed the Go button, too.

And it would have blown up in my face, just as it has in the ACCC's. The ACCC lost the first case, in the Aussie Federal Court, in 2015, and now it's lost the appeal to the Full Federal Court. The upshot is that Pfizer was found to have had market power, found to have taken advantage of it, but - wait for it - not with the proscribed purpose.

Both courts ended up accepting Pfizer's explanation, that "at all relevant times, Pfizer was seeking to position itself to remain a viable supplier of atorvastatin [the molecule in Lipitor] into the future rather than to hinder or deter others from competing in the atorvastatin market. At all relevant times, Pfizer well understood that any aspiration to hinder or deter the very substantial corporations which manufactured and supplied generic pharmaceuticals in Australia would have been pointless", as the Full Federal Court at [455] described the Federal Court's finding.

They couldn't have had the purpose, in short, because no-one in their right minds thought blockage or prevention or deterrence of new competition was remotely possible (if there had been an 'effects' test, Pfizer would have passed it, too). And indeed I found myself having some sympathy for Pfizer. The big pharmaceutical wholesalers were each vertically aligned with a generic manufacturer: Pfizer faced not only the loss of the Lipitor revenues but all the revenues in the new generic market, which would go to the wholesale-aligned manufacturers. So no wonder it was willing to scrap hard to get at least some share.

And, as the Federal Court said, in scrapping hard - which we want the Pfizers of this world to do - Pfizer did no more than what was par for the course in the very sharp-elbowed jostling that goes on when patents expire. As the Full Federal Court said at [559], Pfizer's cunning plan "was not atypical of the conduct which other pharmaceutical manufacturers had taken in the past and would take again in the launch phase of a new pharmaceutical. After all, the generics manufacturers were expected to, and did, in fact, vigorously compete with Pfizer by discounting their generic atorvastatin to 90% or 100% in order to gain traction in the post 18 May 2012 atorvastatin market".

And so the curtain very nearly falls on the "taking advantage...for the purpose" regime. The ACCC might yet appeal: whether the Full Federal Court has bomb-proofed the risk of being reversed with its 199-page, 609-paragraph, 29-months-in-the-making judgement remains to be seen.

Either way, the Aussies will soon ('soon' in the legal sense of 'not quite glacially') have seen the back of the artificiality of "taking advantage"; of the second-guessing of "purpose"; and of no role for actual effects. On this occasion, in Australia, it looks as if the old approach nonetheless found its way to the right answer, despite the rickety analytical mechanism. In New Zealand, unless the current government kicks on with its competition policy reforms, we're still stuck with what is effectively a lottery for both the Commission and the businesses caught up in section 36.