Monday, 21 August 2017

No cheap cars please, we're Aussies

What a bestiary Aussie politics is these days - and I don't mean the dogfights over second citizenships, though it would be nice if some of the oddballs who got in at the last election have at least one Irish grandparent, making them Irish citizens by descent and ineligible to keep their seats.

Away from the citizenship headlines, some of the pollies have been up to an unpleasantly protectionist bit of business which has seen the Aussie government rat on its previous commitment to consumers to allow some second hand car imports into Australia.

Infrastructure Minister Paul Fletcher's media release, 'New Road Vehicle Standards Act to Better Protect Consumers and Provide More Choice' (!) was dolled up in the dress of consumer welfare ("appropriate consumer awareness and protection arrangements") but none of the arguments he made looked convincing. The world Fletcher painted - of high administrative costs and no big net benefit to consumers - bears no relationship to the reality we've experienced in New Zealand. A reference to "price reductions estimated to be less than 2 per cent across the market" in particular looks a very lowball number, and I suspect the "across the market" reference, decoded, means "not a lot of change for some, but quite large reductions for others". As well as not conforming to the facts as we have actually lived through them, maintaining the ban flew in the face of advice from a variety of Australian bodies including the Harper review of competition policy.

Perhaps, despite their flimsiness, the Aussie government believes its justifications, but that may not all that is going through its mind. For the Aussie Financial Review, "It is understood that heavy lobbying by politically influential car sellers - as well as backbenchers such as John Williamson, Warren Entsch, Andrew Broad and Ian Macdonald - prompted the government to dump the option" (in  'Car buyers lose out as government backflips on parallel import rules', which may be paywalled, but if you haven't got a sub, get one).  Whatever the government's possible mix of intentions, an end effect was to do a big favour for a small, and, let's face it, rather unloved set of characters at the expense of doing a big favour for many millions of car buying households. And where, incidentally, were those tribunes of the people, Australia's Labor Party? They went along, too, as quoted in the AFR article.

A week earlier, by the way, the ACCC had come out with its draft market study into the selling of new cars. The media release said that "Complaints to the ACCC about new car manufacturers have risen to more than 10,000 over the past two years. Our draft report highlights the urgent need to address widespread issues in the industry". Not, in short, a sector that deserved ongoing favourable treatment, and I'd argue that the protectionist moat they're allowed to live behind is precisely the source of those "widespread issues" the ACCC found.

This latest proactive ACCC market study was another good example of the progress market studies can make to advance consumers' interests and promote more effective competition. So it's a shame that our own Commerce Commission isn't going to be able to do the same thing. As MBIE has said (at the foot of this webpage) the Commission isn't going to be able to start ones off its own bat: "The Commerce Commission’s market studies power will only be exercisable at the direction of the Minister of Commerce and Consumer Affairs", and then only after the Minister has satisfied an (as yet to be defined) "I smell a rat" test.

Still, it's something, and I suppose we should be somewhat grateful for the half a loaf we've got, or might eventually get. " Parliament", MBIE says, "will need to legislate for change to the Commerce Act for the market studies power to be introduced".

Oh goody. The most recent change to the Commerce Act - the Commerce (Cartels and Other Matters) Amendment Bill - took only five years, ten months and one day to go through the sausage factory.

Thursday, 17 August 2017

Timely cooperation

Collaborative working groups are a necessity in many industries: if you want your luggage transferred from one airline to another, or exam results at one university credited to another, or a gizmo to work in a USB port, you're going to rely on the backroom folks who have got together and worked out the protocols that make it all happen. Consumers unambiguously benefit.

Industry associations can sometimes go over the (not always obvious) line between consumer-friendly collaboration and producer-friendly collusion. The latest in the gun may be technology working groups in the German car industry, which are alleged to have colluded on collectively introducing cheaper but less effective technology to control diesel engines' exhaust. The airlines went too far when they colluded on air cargo surcharges. And it was interesting to note that the Commerce Commission's latest Competition Matters conference had a session on 'The anti-competitive potential of industry groups', possibly signalling that they've become an issue of greater interest locally, too.

But as a reminder of the large amount of welfare-enhancing cooperation that well-meaning working groups can achieve, here's a question for you: where did the time zones in the US come from?

A lot of people tend to assume it must have been the guv'mint. But as this plaque on the corner of La Salle Street and Jackson Street in Chicago reminds us, it was actually entirely the work of the private sector. The US railroads got together on the site of the plaque on October 11 1883, agreed on four time zones each an hour apart, and implemented the whole thing five weeks later on November 18. As soon as they did, it became immediately obvious that this was a hugely sensible idea, and everyone else, including the federal and state governments, fell in behind.



Can you imagine a modern western government managing to do anything as effective as quickly as the railroads did? As it was, it took the US government more than 34 years to formally ratify what the railroads arranged in five weeks.

Welfare economists are fond of 'Pareto optimality', but real life examples tend to be hard to find. I'd like to propose the US time zone setting: there can't have been anyone much inconvenienced by dropping the old system, and uncountable numbers of people had their lives simplified.

Saturday, 12 August 2017

Economics by walking around

You can read all the official data and reports you like, but I reckon nothing quite beats the insights you get from a spot of Economics By Walking Around - though an alternative interpretation is that I never quite switch out of my economics day job, even on holiday. Either way, and based on my first visit to the US in a long time, here in no particular order are what I found.

The US economy's doing fine - One of the things I always look out for in any country is the 'help wanted' signs in the windows: they're an excellent indicator. My trip wasn't a representative sample (San Francisco, Seattle, Portland, Chicago) but the short answer is, 'Now Hiring' signs were all over the place. The official labour market data for July came out when I was there: 209K new jobs, a rise in the participation rate, and a drop in the US unemployment rate to 4.3%, lower than ours.

You ain't seen nuthin' yet - all that hype about Uber and Airbnb and all those other online disintermediary threats to the established order? Believe it. They've become the new way of doing things. At the Navy Pier tourist trap in Chicago, for example, there are now designated pick-up points for Uber and Lyft (a competitor, and one we happily used). I wouldn't necessarily assume, as I think some investors do, that all of these markets are going to be network-effects-driven 'winner takes all': we found Lyft at least as good as Uber, and HomeAway better than Airbnb, and coexistence may be more likely than one-firm domination, or alternatively, they might default to one winner, but it may not be the current front-runner. And while investors could well be somewhat overexuberant, I can now see a bit more clearly why the sharemarket is prepared to pay 18.3 times expected earnings for the US IT sector. It's on a roll.

We are not alone - go to Seattle and Portland and you'll hear exactly the same sentiments about the housing market as you'll hear about Auckland's: first homebuyers can't get a look in, outsiders are buying up what's available, lower and middle income people can't buy homes near where they work (it's far worse again in San Francisco and the wider Bay area, and has been for some time). So we oughtn't think Auckland is a problem entirely unto itself: it's an outcome, like the US markets are, of generationally low interest rates, overall economic growth, regional concentration of growth sectors, demographics (including internal and external migration), and assorted supply constraints (notably planning and NIMBYs).

Public transport can work - there are days when I throw up my hands at the mismanaged mess that is Auckland transport, including the day we got back and tried to get through the chaos that is Auckland's North Shore, on a rainy day, towards the end of rush hour, with the schools back. Yet there are cities in the States who have made the thing work. Import someone from San Francisco or Portland, give them plenipotentiary powers and $5 billion a year, and tell them to get on with it. Preferably including light rail.

Are we falling behind? 1 - we like to think we're a bit ahead of the curve when it comes to social policies, but we're just tiptoeing towards issues like cannabis when it's already completely legal in some US states: we saw highway billboards in Seattle, for example, plugging the Ganja Goddess brand ("Taking Seattle cannabis to a new high"). Similarly with the taxi over-regulation revealed by Uber: the US has got on with it, we're still working it through. And it would be an interesting question which country is now the more regulated overall. Random examples: you can buy melatonin (a jet lag/insomnia thing) in your US supermarket, it's more tightly controlled here; cigar stores haven't been hounded out of existence in the US; you can buy your spirits in a San Francisco supermarket, you can't here; and dogs are welcome everywhere (including supermarkets and craft breweries), and nobody dies.

Are we falling behind? 2 - America's now our biggest export wine market. Excellent: looks like we're making great headway. Only we're a one-trick pony (Sauvignon Blanc, 86% of all exports by volume) that may be peaking - in a supermarket I saw one of our Savvie brands pitched as "low price, high quality", not where you want to be - whereas the quality of the US product is rising by leaps and bounds (try some outstanding Oregon Pinot Gris sometime). Ditto their beer and (at long bleeding last) their coffee.

We're still ahead - we're not perfect, but we have a more effective safety net than the States does. Very public homelessness and untreated mental illnesses are everywhere, particularly in San Francisco. And we should make a takeover bid for Washington state, because we sure would work it harder than its current farmers do.

The pollies have lost the plot - are the US politicians addressing issues like the homelessness? No. On the wall at breakfast in our Chicago hotel were three huge TV screens, one each for CNN, Fox, MSNBC. All of them were broadcasting as their big story - welfare? growth? homelessness? - no, a nasty intra-conservative row about whether President Trump's National Security Advisor was conservative enough. At the same time the pols were trying to restrict ordinary families' insurance access to the world's most exorbitantly priced medical care. Everything you've read about the intensely partisan and deadlocked US political system falls short of the disgraceful reality.

One step forward, one step back - we did the tourist things, especially art galleries. On the plus side, US galleries no longer care whether you photograph the exhibits (other than ones that would be damaged by camera flashes), even the ones in special exhibitions (we did Munch and Gauguin). On the minus side, when are they going to install ticket-vending machines and get rid of the entrance queues? San Francisco's Museum of Modern Art, that means you. The problem is, they're addicted to price discrimination (oldies/students, residents/nonresidents, members/nonmembers) but they've forgotten about the costs of running it. The ferry from West Seattle to downtown Seattle, for example, dispenses tickets on an ATM honesty basis (you can pick the 'senior' option if you want), and the sky doesn't fall.

A word of caution - I spend a lot of my time in front of a computer screen, so I've got a large 17.1" screen laptop. But taking it through US airport security currently makes you a marked man. As well as the whole body scanner that everyone goes through, twice I got picked out for the full pat-down search and the chemical swabbing. No dramas in the end, they let me through, and I understand what they're worried about. Just be aware, if you bring your own laptop, it'll be a bit of a performance.

Friday, 11 August 2017

Three excellent economics books

The prospect of some long distance air travel prompted me to reach for something big and chunky from one of the many books on my bookshelf I've always meant to get round to. Eric Roll's A History of Economic Thought and George Sabine's A History of Political Theory - both unfinished since my undergraduate days - were in the frame, but I eventually settled on Robert Skidelsky's one-volume biography John Maynard Keynes 1883-1946: Economist, Philosopher, Statesman.

Eight hundred and fifty three pages later, I'm glad I did. It's a great book: intelligent, comprehensive, balanced. You'll know before reading the book that Keynes was right on two big things - German reparations after the Great War, 'Keynesian' demand management to avoid slumps - and instrumental in creating two institutions (the IMF and the World Bank) desperately needed post World War Two. These are well covered, as are other good calls (eg on the UK's poor decision to go back on to the gold standard in 1925) but you'll also discover that Keynes could be wrong on a lot else. He was, for example, as prepared to resort to protectionism in the Depression as the justly maligned Smoot and Hawley, and supported cartels as a device to prevent deflation (as did Roosevelt's 'New Deal'). His speech in Dublin in 1933 to the assembled Irish worthies pandered to their nonsensical 'self-sufficiency' programme. In a way, though, that reflected another of his great abilities: his willingness to adapt his message to the audience made him a formidable player of the British and international civil servant game, prepared to compromise and adjust to get the core of what he wanted through an often ignorant and hostile policy process.

A big theme of the book is his outstanding intelligence (albeit too often deployed in a brutal take-no-prisoners style): Bertrand Russell said in his autobiography (and requoted in the book) that Keynes' intellect was "the sharpest and clearest I have ever known. When I argued with him I felt that I took my life in my hands, and I seldom emerged without feeling something of a fool". Others recognised it, too. At the formal dinner ending the Bretton Woods conference which created the Fund and the Bank, "as he [Keynes] moved slowly to the high table, stooping a little more than usual, white with tiredness, but not unpleased at what had been done, the whole meeting spontaneously stood up and waited, silent, until he had taken his place. Someone of more than ordinary stature had entered the room".

Another excellent book I've finished is the second edition of Economics for Competition Lawyers, by three of the people at Oxera, Gunnar Niels, Helen Jenkins, and James Kavanagh. For all I know, this is already the established font of all knowledge for lawyers required to come to terms with the black arts of competition economics, but if it isn't already, it ought to be: it's an absolutely first class textbook. It goes out of its way to make the economics accessible to non-specialists, and even economists will get a lot out of it. I wish I'd had it to hand sixteen years ago when I was first appointed to the Commerce Commission, and I'd say that every other Commissioner appointed since then would have felt the same way. Very few of us came to the Commission with a deep knowledge of the area - the economists tended to have serviceable general purpose economics rather than a specialty expertise, and the non-economists had little or nothing - and a comprehensive guide like this one is exactly what we all needed.

It covers everything you'll need to know, from the absolute basics of supply and demand through the core areas of market definition, market power, abuse of dominance, cartels, vertical restraints, and mergers to the design of remedies (often overlooked) and the quantification of damages, and finishes with a very useful chapter on 'The use of economic evidence in competition cases'. I found myself agreeing with virtually everything they said, with the exception of what I thought was an over-charitable view of 'pay for delay' agreements (where patent-holding pharmaceutical companies pay producers of much cheaper 'generic' drugs not to produce). There may well be cases, as they say, that are genuinely welfare-enhancing, but as I've argued before, it's generally not the way to bet.

But that's a minor quibble: this is a highly practical guide to a wide and complex field that takes you from ground zero to close to the cutting edge, and is thoroughly recommended. New Zealand, by the way, gets the odd look in: two cases are cited, Oh Bloody Eight Six Seven in the context of what the Baumol-Willig rule is all about, and Air Cargo (where the authors acted for the Commission) on the geographical dimension of market definition. If you missed it, by the way, the very last act in the Air Cargo market definition bunfight has just played out in the Australian courts.

There's a school of thought that says too much choice can bamboozle consumers, who'll resort to rules of thumb (possibly missing out on their best options) when confronted with menus that are too big to come to grips with. I'm not a great fan myself, but I saw the point when I got into Powell's City of Books in Portland, Oregon, the world's largest bookstore. Before my faculties melted down completely, however, I did manage to buy Niall Kishtainy's new book, A Little History of Economics. Kishtainy, a lecturer in economic history at the London School of Economics, has done a very clever thing: produced a 'what is economics all about anyway' book through the medium of a history of economic thought. It works a treat, and is also handsomely produced. If you wanted to get someone interested in economics, this should be high on your list.

Saturday, 22 July 2017

Highlights of second day's play

The second day of the Commerce Commission's Competition Matters conference led off with Richard Feasey's keynote address on the latest tectonic shift in the telco markets - where the underlying physical infrastructure will still be owned by what's left of the old traditional telcos but will be largely a 'dumb and blind' set of gear, operated and run by a new generation of internet service providers. He talked about the implications for regulation, especially around the incentives for the infrastructure owners to keep upgrading the gear, and how hence and otherwise governments were taking a closer interest in how to keep the networks in reliable shape.

Linked to that, he also felt that competition was playing a smaller role in the sector, partly because it hadn't delivered all the (maybe unrealistic) expectations placed on it earlier, and partly because competition has a fairly fragile hold on the public and policy mindset at the best of times. I'm not entirely sure he's being fair to the potential scope for competition - well, I would say that, wouldn't I - when even tough competition nuts like the 'last mile' of copper access to your house may be yielding to things like fixed wireless. In this area, however, you'd be mad to make any strong futurist predictions.

The consumer protection end of the competition policy spectrum isn't usually my bag, so the panel discussion 'Browser beware' on the risks of online buying and selling was unexpectedly interesting. John Dixon QC spoke about how the law is adapting precedents set in pre-digital days for modern circumstances, which was an unlikely springboard for the witty speech John actually gave (complete with domestic rhinoceros). Anne Callinan also spoke to the law, particularly around whether it can catch digital behaviours as occurring "in New Zealand", and left me (and others) wondering why the extra-territorial reaches of the Commerce, Fair Trading, and Consumer Guarantees Acts aren't lined up with each other. And Jon Duffy spoke about how platforms like his TradeMe try to keep trade legal and honest, partly by working with the myriad of product regulators (such as Medsafe) and partly on their own initiative (like making car dealers disclose when imported cars have been write-offs in their home country).

Then we got to choose from the menu. I went to Professor Michal Gal on 'Competition policy in small markets'. She went through the research showing how small and remote economies suffer competitive disadvantages of scale, and some of the responses they can adopt (particularly exporting, and especially high-value niche exports). From a regulatory point of view, she said, a small economy is going to be in a tight spot (and as commenter Professor Ralph Winter pointed out, will be also suffering from diseconomies of scale in the regulatory resources available): there'll always be pressure to allow mergers to get closer to scale levels of efficiency, but potentially at the expense of reduced domestic competition.

She was certainly no fan of a 'national champions' approach, and she suggested - an idea I'd never thought of, but seems sensible - that if nonetheless you're backed into the corner of allowing uncomfortable levels of industry concentration for efficiency reasons, maybe you ought to mitigate the domestic competition issues with behavioural undertakings (which as you likely know the Commission can't currently accept). And she also said that in that high-concentration case you'd be even more concerned to ensure that 'abuse of dominance' provisions are effective: s36 policy analysts within MBIE, please take note. She's also a big fan of 'market studies', and indeed her journal article survey was one of the resources I quoted in my little quest to assist the case for introducing them in New Zealand.

My next choice was the panel on challenges in telco markets. A short post can't do justice to a very full session so I'll just pass on a couple of thoughts. Professor Stephen King had some (typically?) provocative ideas: why, he wondered, are we all relaxed about the vast store of data the credit card companies hold about us, but when Google holds it, it's suddenly a federal case? And do we - us competition wonks - even know if the highly personalised pricing online companies can show us poses any competition problem at all? Sure, we absolutely hate it when we rumble someone making off with all our consumer surplus, but is it an overall welfare problem? And I was taken with the work of Dr James Every-Palmer QC -  here's a bit of background on his Law Foundation project - who's been beavering away on whether regulation is ready for today's world of rapid tech change, and he's found a nice way to approach it by generalising from the impact of the smartphone.

And then I opted for George Yarrow's 'Regulation in small markets'. My heart sank at the beginning when I found that it was going to be largely about Guernsey and a bit about the wider (but still tiny) Channel Islands group: what's the good of a sample of one from the set of micro-states? I needn't have worried: an excellent general principle came out of it. I'm not sure whether the wording came from George or from Andrew Riseley, general counsel on the regulation side of the Commission, who was the commenter on George's presentation, but what smaller country regulators should do is LNBTW - a Limited Number of Biggish Things Well. And Andrew suggested that in our own #8 fencing wire way, we'd been doing that. Two good examples: the 'initial pricing principle' in telco regulation, where we use the price of a service overseas as a quick (and in my view effective and practical) first stab at the local regulatory price, and 'default paths' for electricity lines businesses that avoid the whole intricate company-specific price control machinery.

We reassembled for the final plenary panel session, 'The anti-competitive potential of industry groups', where the Commission's Katie Rusbatch used a clever hypothetical example (New Zealand nuclear power companies getting together in response to news of a levy on their industry) to explore what is or is not okay to talk about or agree on. The short answer is, be very careful - even (as Professor Spenser Waller suggested, and not entirely in jest, either) to the extent of making an ostentatiously dramatic exit from iffy industry meetings. There are airlines all over the world ruing that they didn't do the same when the agenda got to the item on air cargo surcharges. And don't think it couldn't happen to you. The industry association economist who gets up and does the supply and demand forecasts for next year almost certainly doesn't mean to facilitate collusive output management, but it may not look like that in the High Court.

Another really good conference: it's been a very useful initiative by the Commission, and highly popular. Too popular to be held in Wellington, maybe - I gather the constraint on attendance (and the resulting waiting list, and the fairly crowded room at Te Papa) is the absence of any larger venue. I suppose the good news is that Wellington, unlike some cities, hasn't lumbered itself with yet another white elephant conference centre. But the bad news is that it can't quite handle this size of event, either.

Thursday, 20 July 2017

I've been to another conference...

...which sounds like that's all I do with my time, but it's just a strange coincidence that two of my three must-do conferences fell within a week of each other: last week's NZ Association of Economists' conference and this week's Competition Matters conference, the latest in the Commerce Commission's every-other-year get-togethers. The third, by the way, is the Competition Law and Policy Institute workshop in October - you will be going, won't you?

It's been a solid first day for what is a (literally) standing room only event. Mark Berry, the Commission chair, led off with some good news: the Commission will in the future be publishing those 'letters of issues' and 'letters of unresolved issues' that are part of the merger approval process. In the past they've sometimes been public, sometimes not, so that's a move towards more transparency. And it will be making the information on regulated industries more accessible for a wider audience, which is another good move. Information disclosure regimes are all very well, but currently it's a bit of an exercise to find the data and make effective use of it. It's there, and it's comprehensive, and the people who compile it are friendly and informed and helpful, but it's not yet really got the traction it might have.

The big keynote addresses were an interesting mix. Professor Spencer Weber Waller talked about 'The isolation of US antitrust': where once American legal and economic thinking about competition were state of the art and readily adopted elsewhere, now they're increasingly idiosyncratic and debatable (you could, sadly, say the same about a lot of other American policies too). And while I would normally pay good money not to go to another lecture on the 'internet of things', Professor Harry First gave a fascinating talk showing that the internet age does, in fact, pose new competition problems. Why (he started off) does the price of a packet of mini marshmallows go up and down so much, and why, recently, has it been so persistently high on Amazon - much higher than you'd pay in the corner dairy? This shouldn't be happening when the internet, in theory, gives consumers so much more ability to compare prices. And he went on from there into knottier issues, such as the potential for businesses to coordinate their online price-setting algorithms.

Professor George Yarrow -  a strong candidate in any Terry Pratchett Impersonator competition - talked about the outlook for incentive regulation. The short answer is, we don't know, and maybe the best approach is to experiment with what might work (it doesn't always). I'm a huge fan of incentive regulation: it's always seemed to me to be that our rate of return regulation is a step backwards from quicker, cleverer, simpler, cheaper approaches like CPI - X. After his speech I put that to George: his view was that things like CPI - X can take you a long way at the beginning of a regulatory regime, but to make further progress you're inescapably driven to delve deep into the details of a firm's costs, revenues and balance sheet. Maybe he's right, though I haven't completely given up on simple alternative ideas, particularly ones focussed on return on equity.

I wasn't entirely convinced by Professor Ralph Winter, either, who spoke on 'Competition policy in two-sided markets'. They're all the rage in competition economics - our recent, declined, NZME/Fairfax authorisation is a classic example - but Ralph's argument was (in my words) that courts have been bamboozled by this two-sided guff, when traditional one-sided analysis would have been perfectly adequate and would have found anti-competitive effects that a two-sided perspective would have okayed. He was summarising a longer, learned journal article, and maybe I should go and read that, but for now I'm sticking with the One Big Thing we've all learned about two-sided markets, which is that you shouldn't - can't - draw competition conclusions from looking at conditions on only one side.

It's a multi-track conference: I opted for the panel discussion on 'Merger hot topics'. The main takeaway for me was that competition authorities should keep a close and sceptical eye on mergers foreclosing potential sources of heightened competition, if (for example) the company being bought might (under alternative ownership) have been more combative in the market. It's a theme that surfaced, for example, in the 2015 Z / Chevron decision, where the dissenting Commissioner felt that the merger shut down the option value in Chevron being acquired by someone who might set out on a more competitive strategy.

We finished up with another good panel session, on 'Effective ways of engaging with a regulator'. This is something dear to my heart: some companies do it well, some fluff it badly. There were lots of good ideas: engage early, take efforts to explain your industry, be consistent in your engagement and your point of view, don't be selective or late with your data, be realistic about your expectations from the process and in particular try to understand the regulator's scope and objectives, don't let your advisors dominate your show. And (a point made by ACCC Commissioner Roger Featherston), if you end up on the pointy end of enforcement action, do a proper internal investigation, rather than be embarrassed by revelations later, and if you're bang to rights don't fight it all the way and then offer concessions late in the piece. It won't endear you to anyone.

All applehood and mother pie, you might think, and who needs an expensive conference to be told the obvious? But some companies still need to be told. I was comparing notes with some regulators at the drinks afterwards: we all had war stories of how Company X had sworn black was white in Australia, and then sworn white was black in New Zealand. Could have been naïveté: did they really think no-one would notice? Could have been incompetence: the Aussie end of the operation wasn't coordinating internally with the Kiwi one. Could have been sheer opportunistic cynicism. But the end result was the same: the company's regulatory credibility scored a spectacular own goal.

Saturday, 15 July 2017

I've been at a conference...

Last week's annual conference of the NZ Association of Economists went off well - particularly the big four keynote addresses: William Strange (University of Toronto) on the agglomeration benefits of cities, Lisa Cameron (University of Melbourne) on randomised control trials and natural experiments in development economics, Andrew Atkeson (UCLA) with a historical perspective on regulating big banks and preventing GFC-style episodes, and our own John Gibson (University of Waikato) with his "Quantity and quality redux", about how even professional economists forget that consumers adjust both quantity and quality in response to price changes.

That sounds at first blush like something only a professional microeconomist would care about, but it is surprisingly relevant across a variety of contexts. A local topical example is whether the likes of soda taxes (to curb obesity or rotten teeth) will work: no, is the answer, if, in response to a tax, people keep up their previous soda intake, and can afford to, because they also trade down to slightly less attractive and cheaper quality (eg 1.5 litre plastic bottles rather than smaller-volume cans).

It got me thinking about other possible applications, too. Competition authorities, for example, fret about potential price rises after mergers that reduce competition: 5% is often bandied about as a threshold price increase that you'd start to be concerned about. But what if consumers can easily defeat the 5% increase by small compensating changes in the quality of what they buy? Should we be more relaxed about mergers? Or should we be focussed on the welfare losses (potentially quite large if they really, really liked the quality they had before) of not quite getting what they used to have? Quality isn't always forgotten - it was a big theme in the proposed NZME / Fairfax merger that got turned down - but it can be.

All thought provoking stuff, and even if you had no prior interest in any of these topics, they were all fascinating to listen to. The keynote speeches aren't up on the NZAE's conference papers page yet, but keep an eye out for them when they do go up.

I was also pleased to see another 'Commerce Commission themed' session of three papers. This is a recent innovation, and a good one, and it's great to see the Commission getting behind the NZAE conference. It's good outreach, and a fine way of encouraging and facilitating the professional development of staff (all three presenters are at the Commission). Competition and regulation didn't always get much of a look in at NZAE conferences, and the limited coverage didn't line up with the number of economists engaged in the area or indeed with the importance of the topic. Your broadband, mobile phone and electricity bills, for starters, are all heavily influenced by the Commission, not to mention the policing of mergers like NZME / Fairfax or SkyTV / Vodafone.

It was a solid session, too. Catherine Corbett had a paper on "Flipping markets": no, not in the sense of "sod 'em", nor in the sense of "tipping" where network effects lead to one player becoming dominant, but the unusual situation where sometimes a buyer pays for its inputs but sometimes charges for its services. Her example was a meat waste product collector (a "renderer"). Sometimes a renderer will find the butcher's waste is worth paying for, sometimes the butcher is prepared to pay to have it taken away. How should you think about a merger of renderers? Does it say anything about how competition authorities should think about mergers between buyers? At the moment Catherine and I have come to different conclusions, but I'll wait to see the final paper before I get too entrenched.

Stephen Hudson talked about "Pass-through analysis in dynamic markets with differentiated products", which was largely about the Commission's recent fossick into whether internet service providers (ISPs) had passed on cuts in regulated input prices. The Commission got Aaron Schiff to look at a thumping great sample of phone bills, and the answer was that roughly 90% of the cut got passed on. And that in turn would lead you to be reassured about the state of competition in the ISP market, given that the standard wisdom is that only half of a cut would be passed on by a monopolist, but progressively more gets passed on as markets get more competitive.

And finally there was Diego Villalobos, with "Regulated firms in unregulated markets: friends or foes?". This was mainly about electricity, and maybe I can best explain it with an example. Suppose your friendly local electricity lines business says, listen, we'll sell you a battery, put it in your garage, and we'll charge it up when it's cheap to, and run it down when otherwise you'd have paid high prices. Sounds good, right? And it is good: there are economies of scope (the company that transmits your power also does your battery), and you and your lines business get to split some savings.

Except that independent battery providers risk getting shut out. The lines business, if it is allowed to put the battery into its 'regulatory asset base', gets a nice, guaranteed return. Whereas your Cheap And Cheerful Battery Company has to run the risk that if nobody buys its batteries, it's kaput, yet is trying to compete against someone who doesn't run the same risk. So would you be as enthused about the lines company's offer, if you knew that the guy who'd actually supply the cheapest battery, can't get a look in?

Diego got to the point (as I did, in a bit of client work), that this is a horrendously difficult area, and one that's getting trickier as technology advances: it's not just batteries, but also those solar panels on your roof, and who knows what down the pike.

And there were also interesting competition/regulation papers in other sessions. I went along to AUT's Lydia Cheung and her paper on "Divestiture as Conglomerate Merger Remedy, with Case Study of 2005 P&G-Gillette Merger". Procter and Gamble were made to divest some deodorant brands when they bought Gillette's ones: how'd it work out? I'm a huge fan of these after-the-event studies: how else are we going to find out what works and what doesn't? In this case, it's still not entirely clear. Sometimes it is, but whether you can find a smoking gun or not is a bit irrelevant: the point is to look, rather than rely on unquestioned assumptions about the efficacy of regulatory decisions.

We all know that the internet is changing everything, and in its little way the NZAE conference is another example. Organisers can now go on the web and see if someone can give a good presentation. Up to now you could rely to some degree on (say) graduate students who were in a professor's course, and they could tell you how well it went across. It's a good deal better, though, to watch it for yourself via say a TED talk. So someone like William Strange from Toronto gets onto the agenda, as he should: a brilliant presenter of his big set piece, and just as good in Q&A afterwards. He told me afterwards, modestly, that he'd put more effort than usual into his speech. The fact is, he's a natural (or has put a lot of effort into becoming one), and he could read the bus timetable and we'd all find it interesting. We've only begun to scratch the surface of matching up good suppliers with interested buyers.

And I'm pleased to say I've helped nudge the NZAE into the age of social media. In principle, all presentations each year have been on a 'Chatham House rules' basis. In Wellington, in particular, you can see the point, where public servants might have wanted to contribute to a policy debate without landing their organisation or their Minister in it. But otherwise it is a nonsense. NZAE publicly publishes a programme, with abstracts of what the speaker is going to say, but social media are supposed to play along with the fiction that nobody knows? And remind me why there's a #nzae2017 hashtag, if you can't tweet who said what?

I don't think so. And neither did the membership at this year's AGM when I proposed (and folks like Eric Crampton at the NZ Initiative supported) that the default setting of Chatham House rules should be junked. If speakers still want Chatham House, they can say so, and commenters can still safely comment without being fingered. But the default now is, on the record. As it should be: I'd tweeted, for example, about the session on this new 'CORE' curriculum for economics. Someone who'd never heard of it picked up on it, and found that CORE was just what they'd been looking for. Payoff for them, payoff for the value of the NZAE conference: Pareto would be pleased.

Friday, 7 July 2017

The good bits from the half-baked cake

It's a shame that MBIE's inquiry into the petrol industry was semi-botched. The commissioned report did some good stuff, but was unable - and was always going to be unable, given the time and resource constraints it was lumbered with - to get to the only answer that would have really mattered: are the returns ('WACC') earned by the petrol companies excessive compared to what is reasonable for an industry like petrol retailing?

That, self-evidently, requires a set of standardised financial information so the companies can be assessed in a sensible way. But as the report team found the data wasn't always there at all, let alone reported on an industry-wide consistent basis, and it would have involved a good deal of heavy-duty financial analysis to make it consistent, as anyone involved with price regulation under Part 4 of the Commerce Act knows. The back end of Chapter 4 of the report lists all the knotty issues: they weren't going to be put to bed in the few months the report team were given.

I'm no great fan of finger-pointing with the benefit of hindsight, but on this occasion I think that the government and MBIE should have known there was a high risk that the profitability numbers, key to any definitive answers, weren't going to be forthcoming given the time and resources allotted.

And I'm also uncomfortable with this kind of judicial limbo. The petrol companies are neither clearly off the hook, nor clearly convicted. I'm not sure governments should be publishing reports, about anyone, effectively saying "you could well be up to something". That can't be right: prove something, or clear off.

That's another benefit, by the way, of properly resourced market studies rather than hurried half-measures. People tend to think that market studies are mostly used to find rorts and abuses, and of course they can and have, but equally they can clear companies of popular misconceptions. In New Zealand (and even more so in Australia) there is always going to be somebody having a go at some industry or other. Sometimes the go is well-founded, sometimes it's basely political: properly run market inquiries can put the facts to bed and see off the uninformed muckrakers. This half-baked time round, we ended up with just about the worst outcome, for everyone, of suspicions left unresolved. And we're now going to have to do the full, proper inquiry that should have been done in the first place.

More positively, the report did find some interesting non-WACC results. This pattern of regional petrol margins, for example, confirmed a lot of what the Commerce Commission's Z / Chevron decision had also found.


This is consistent with Gull constraining profitability where it operates (only north of Wellington). As the Commission put it (para 205), "The evidence suggests Gull is acting as a significant competitive force driving prices downwards".

What's happening in the rest of the country? Three of the Commissioners in Z / Chevron kicked for touch: they said (para 231.2) that in non-Gull areas, "it is unclear whether, viewed in the round, individual local market conditions can be said to be conducive to a coordinated outcome. There are a range of market features, that do not all point in the same direction", and anyway Z acquiring Chevron wouldn't make any difference to whatever was happening. The dissenting Commissioner, Dr Jill Walker, felt (para 10 of her dissent) that "there is currently evidence of such tacit coordination among petrol retailers which follows a leader-follower pattern".

She'd also argued (para 13, footnotes omitted) that "The increase in margins...appears to have come about from Z’s different strategy from Shell. Z has told us that Shell focused on generating volumes of sales and led prices down. Z has shifted to a strategy focused on increased margins at the expense of volume ".

This latest report found the same, as this graph (on p63) shows.


In the bottom half of the chart, Shell often used to take the lead in cutting prices: it never led prices up (BP tended to be first). In the top half, these days Shell, now Z, still does a fair amount of being first to cut prices, but it is now also prepared to lead prices up (it's slightly more active at it than Caltex and BP).

I'd stress there is nothing wrong from a Commerce Act point of view with any of this: any of these companies can pursue any independent pricing policy they like, even if it is follow-my-leader. And as the report notes (page 63) about the change in pricing strategy, "Z Energy – and some other interviewees – maintain that this was necessary, due to margins being too low because of Shell’s approach". But as I argued yesterday the excessively short-term focus of the MBIE enquiry - what's happened to margins since 2011? - meant that the question of whether margins had merely returned to more normal longer-term averages could not be explored properly either.

Finally, there's the finding that the pre-tax price of petrol is high by international standards, as this graph (on page 3) showed: the report said that "New Zealand is now an outlier when it comes to the pre-tax price of fuel".


Well, strictly true I suppose, depending on how "out" you need an "outlier" to be. Here's the same data graphed a bit differently (it's here on MBIE's website). Some countries are a bit higher than the average, some a bit below, nobody is a zillion miles out of line, so I wouldn't necessarily make a song and dance about "outliers".


That said, we are where we are. And while the pre-tax price isn't the be-all and end-all of anything - as the charts show (and the report also notes), taxes tend to make up most of the retail price - it's still an interesting fact that our pre-tax price is on the high side. If indeed it is a permanent fact at all, and not some unlucky draw of prices in particular one quarter at one particular set of exchange rates.

If it is a genuinely ongoing thing, 15 US cents a litre above the OECD average is worth a squizz. Is it transport costs? Some sort of inefficiency? And what on earth explains the grouping of New Zealand, Korea, Mexico, Australia and Switzerland down the dearer end, and the grouping of the Czech Republic, the UK, Slovenia, Ireland and Finland down the cheaper end? Damned if I can see any obvious common explanatory feature among that lot.

Yet another thing that an under-resourced inquiry wasn't able to look at properly.