Right and wrong in ComCom proposals

Roger Partridge
The National Business Review
7 July, 2017

We all know two wrongs don’t make a right. But nor does getting something only half right. At least not when it is also half wrong.

And that is precisely how we should view Commerce Minister Jacqui Dean’s announcement last week about proposed changes to the Commerce Act.

She was right to rule out broadening s36 of the Commerce Act. But her proposal to grant the Commerce Commission powers to conduct proactive “market studies” is badly mistaken.

Let’s start with s36. It prohibits a firm with market power from taking advantage of that power for an anti-competitive purpose. The prohibition focuses on a firm’s own, unilateral actions. It does not require collusion with another party. And it is a firm’s purpose that matters, not the effect of what it has done.

Much to the commission’s frustration, the courts have made it hard to establish a breach of s36. In response, both the Ministry of Business, Innovation and Employment and the commission have argued New Zealand should follow recent law changes in Australia and turn s36 on its head. Rather than focusing narrowly on a firm’s purpose, they seek a broader inquiry into the effects of its actions.

Their hope is to have s36 mirror the act’s other important prohibition, s27. This forbids firms from entering arrangements with other parties that have the “effect” of substantially lessening competition.

Effects-based prohibition

But introducing an effects-based prohibition on a firm’s unilateral conduct would expose New Zealand firms to both excessive cost and risk. New Zealand’s small size means many markets have only two or three participants. And they are often small – at least compared with their international counterparts.

Requiring them to consult lawyers and economists when they enter arrangements with customers, competitors or suppliers to check whether their conduct has had an anti-competitive effect is one thing.

But requiring them to do so when acting on their own, performing the acts that businesses do every day – changing their pricing, increasing their capacity or opening new premises – is another thing altogether.

Assessing the competitive effects of a firm’s conduct is a complex, costly and time-consuming process. Just look at how long the commission has spent trying to assess the competitive effects of recent high-profile mergers.

If we want a low-cost, highly competitive market place, requiring scores of New Zealand firms to undertake this type of exercise before they change their pricing schedules is not the way to do it. 

It took courage for the minister to stare down her officials. But her decision was unquestionably correct.

Proactive studies

More’s the pity, then, that she got her other decision wrong. In acceding to the commission’s request for power to undertake “market studies,” the minister has opened the door to costly, invasive and unnecessary investigations that will neither aide consumers nor increase competition.

Allowing the commission to conduct proactive studies in identified markets “to help it pinpoint emerging competition issues” does not sound so bad.

Unfortunately, it is. Because detecting collusive conduct is difficult, the act gives the commission far-reaching investigative powers. It can execute search warrants, clone computers and summons witnesses. Indeed, its powers are even wider than those of the police.

This is well and good when the commission is investigating alleged breaches of the act. Accused wrongdoers can expect the state to exercise its powers of compulsion to investigate them.

But it is an entirely different matter to compel businesses to hand over their records, and to answer questions under oath, just so the commission can “help pinpoint competition issues." It is like administering chemotherapy to apparently healthy patients on the off-chance one of them may have cancer.

Competition concerns

It is also unnecessary. The commission’s typical competition concerns centre on the number of participants in a market. Whether it is supermarkets or building suppliers, the commission wants more of them.

Yet it hardly requires powers of compulsion to work out what is holding back new entrants parachuting in from overseas to join the fray in local markets.

Our economy is small and it is geographically isolated. Add to that the regulatory barriers for overseas investors and it is no wonder many markets are dominated by just a couple of incumbents.

The likes of Aldi and Lidl don’t need powers of compulsion to work out whether entry into the New Zealand groceries market is feasible. Nor do the research analysts whose job it is to assess whether a listed public company incumbent is at risk of losing market share to a new entrant from abroad.

And nor should the commission. All it needs is commercial acumen. Unfortunately, new regulations won’t solve that.

Having turned her regulator down once on s36, it is tempting to forgive the minister for indulging the commission on its second request. We shouldn’t. The decision is wrong. Being only half right is not good enough.

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