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.
Showing posts with label LEANZ. Show all posts
Showing posts with label LEANZ. Show all posts
Wednesday, October 21, 2015
Wednesday, September 9, 2015
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.
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.
Wednesday, May 27, 2015
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.
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.
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