Thursday, 8 March 2018

Unintended consequences?

The bill that aims to rein in non-residents buying New Zealand houses - the Overseas Investment Amendment Bill - is currently before the Finance and Expenditure Committee.

It's had a lot of submissions - 239 of them, available here - and hopefully this point will already have been registered by the Committee, but if not I'd like to alert the members to the reality of housing development in our neck of the woods.

We live on Auckland's North Shore. It's an established area, which means that any extra housing comes from infill redevelopment. I can't speak for the whole of the North Shore, still less for Auckland more widely, but in our East Coast Bays the reality is that this redevelopment is largely being done by Asian developers with Asian crews. The typical projects aren't large - an existing house on a large section bowled and replaced with three new ones, two adjoining houses bought at the same time and their combined back gardens used for three new houses (both real examples) - but their aggregate contribution to expanding housing supply is significant.

There is provision in the Bill (sections 16C and 16D) for this sort of activity to continue, by way of approval from the Overseas Investment Office. But how many developers are going to go this route, which involves both uncertainty around an eventually positive vetting outcome and possibly some significant delay in the interim while the OIO mulls the decision?

My guess would be, not many. Maybe New Zealanders will end up better off in some affordability sense if foreign buying demand is taken out of the North Shore equation. But the evidence of my own lying eyes is that foreign supply is also being taken out of the market, and in our area at least it's not obvious that New Zealand will be the winner in any sense at all.

And what's true here may be true more widely. As the submission from the New Zealand Institute of Economic Research puts it
as well as preventing single-purchase investments by overseas persons, the Bill also makes it more difficult for foreign investors, including New Zealand-domiciled companies with more than 25% foreign ownership, to invest in large-scale residential projects. This is at a time when New Zealand has relatively few large-scale property development companies and New Zealand banks are increasingly tightening up on development funding.
This will reduce the supply of housing beneath what it might otherwise have been, pushing up prices for New Zealand resident and citizen buyers, including first home buyers. The Bill could therefore have precisely the opposite effect of what is intended. 

Monday, 5 March 2018


For a while there, it looked as if the dairy sector was going to be one of the quieter stretches of the regulatory front line: our regulatory regime was running smoothly along a pre-planned route.

The regulatory scheme of the Dairy Industry Restructuring Act - DIRA, pronounced "dye rah" if you've been lucky enough not to encounter it before - had, sensibly, included provision for a review of the Act if it looked as if it might no longer be needed. If at least 20% of the market for collecting milk from farmers was in non-Fonterra hands, North and South Islands considered separately, DIRA triggered a review of the state of competition. That review could then recommend whether regulation was still necessary, could re-address the 20% threshold, and could suggest routes to deregulation. In default of any new bright ideas, parts of DIRA would automatically lapse.

The 20% trigger was reached in the South Island in 2015 and the Commerce Commission duly published a competition review in March 2016 (the full thing is here and there's a handy summarised briefing here).

Overall, the Commission judged DIRA should be left much as is, but with limited recommendations for improvements, which were mostly around some modest deregulation of "DIRA milk". That's the milk Fonterra is required to supply, at a regulated price, to domestic processors of raw milk (cheese makers and the like), a requirement intended to counter what would otherwise be Fonterra's ability to ramp up the input price to processor buyers. The Commission also said that the 20% threshold for adequate non-Fonterra market share was too low, and suggested 30%, and recommended another look at the Act in any event by 2021-22, or when the 30% threshold was reached if it was triggered earlier (the Commission expected it wouldn't be).

All this looked sensible and it very largely was, though I'm not convinced about one proposal giving Fonterra the discretion not to accept new large dairy conversions as shareholder suppliers. The government of the day thought the package looked sensible too, and it consequently introduced the Dairy Industry Restructuring Amendment Bill in March 2017 to implement it. The Bill had gone nowhere, however, by the time the general election came round.

Which left room for the incoming Minister of Agriculture Damien O'Connor to say, on December 19, forget all that, nothing's getting deregulated, there'll be no change for dairy conversions, and no bits of DIRA are going to lapse for the time being. The Minister's statement is here (it includes a helpful Q&A) and the replacement Dairy Industry Restructuring Amendment Bill (No 2) is here.

The stated rationale was that "The Government wants to take a strategic view of the dairy industry", and limited changes now might get in the way of a big picture rethink later: "The intention is simply to prevent expiry at this time, and then take a holistic approach to all other dairy-related issues. There is little merit in taking a piecemeal approach to parts of the 2017 Bill, as opposed to a comprehensive review of all interrelated issues". There will be "a comprehensive review of the DIRA as a matter of priority" carried out this year.

So my question is, wazzup? It's fair enough to want to review how one of our major industries is performing, but it's still not clear exactly what's bothering the government about DIRA.

It could be that Fonterra's set it off.  For example it pursued a doomed attempt to discriminate, in breach of the 'open entry, open exit' regime, against former suppliers who'd rejoined Fonterra, and over 2015-17 lost all the way to the Supreme Court. And it decided to slow down payments to its trade suppliers  which got it bad press in 2016 and 2017 and suggested that, despite regulation, it still possessed the ability and the incentive to give less and take more. It looked as if they were reading from my DIY playbook,  'How to get regulated'. More recently Fonterra has woken up to playing a more strategic regulatory game, and has been running a charm offensive with its TV ads, but the harm may already be done.

Or it could be that the government is having a rethink about the big regulatory bargain struck at the start. Left unregulated, the merger that created Fonterra would have been bad for New Zealand: the Commerce Commission, in its draft decision in 1999, said there would be a net cost to the economy. The numbers are highly squishy but, the Commission said, there would have been a cost to the country ranging from around a smallish $75 million to around a sizeable $450 million. The overall Fonterra/DIRA deal was consequently an attempt to bank the benefits while containing the costs, turning the combo into a net plus for the economy. And irrespective of the net benefit calculus, it also got the support of those infected by the National Champion virus.

But did the benefits eventuate, were the costs contained, and did the National Champion sweep all before it? There's certainly room for a rethink on the benefits side. In 1999, for example, the Commission noted at para 624 that "The goal is to expand the present business, which currently has revenues of $8 billion per year, to one of $30 billion in ten years, an ambitious target which some have argued lacks specification of the means by which it is to be attained". Quite. In the event, 18 rather than 10 years on, Fonterra's revenues have reached $17.9 billion.

And still on the benefits side, why has the biggest financial payoff from marketing innovation come from outside the Fonterra stable? A2 Milk, currently worth $9.5 billion, is roughly equal to the value of Fonterra. If you take the view that one of the downsides of creating monopolies is a loss of dynamic efficiency, the value of A2 is a chunky bit of circumstantial evidence.

If they'd known then what they know now, it would be an interesting question what dairy farmers would have gone for back in 1999. Would the industry behemoth still look as good an option, compared (say) with creating two decent sized entities, each competing for the farmers' custom, and each with its own approach to product innovation, marketing, and overseas investment? But even if with hindsight some alternative might have been better, it's hard to see how that particular cake can now be unbaked.

All that said, there have been positives from the current regime. Fonterra has come up with some good ideas: Trading Among Farmers for one, and the listing of the Fonterra Shareholders' Fund for another. And DIRA has handled some issues a good deal better than the Aussies have been able to manage theirs. The ACCC's draft report last November on the Aussie dairy industry found that Aussie dairy farmers were at the bottom of a totem pole with the supermarket duopsony at the top and the processor oligopsony in the middle: "Unlike others in the supply chain, most dairy farmers have no bargaining power and limited scope to reposition their businesses to mitigate this ... Imbalances in bargaining power between processors and farmers result in practices that reduce competition for raw milk and transfer disproportionate levels of risk onto farmers" (pages 12-13). Kiwi farmers, with their right to join Fonterra and get a price policed by the Milk Price Manual, are in a better place.

It's also unfair to see everything that happens - good or bad - as down to what Fonterra did or didn't do. The reality is that Fonterra is a middleweight player in a big global market: what it can do is heavily circumscribed by global demand and supply factors. Rather than assuming that Fonterra is an unconstrained free agent, and playing the blame game New Zealand is so good at, the better questions are, has it played the hand it's been dealt as well as it might have? And has it worked the strategic angles so that the next deal of the cards falls more its way? I've no idea, and without good evidence people shouldn't be jumping to any premature conclusions.

In any event we'll know what precisely was on the government's mind when we see the terms of reference for the dairy review, which can't be far away. And the whole episode, by the way, is yet another example of why we need a 'market studies' power for the Commerce Commission. The last government, in what had become sadly typical of its too little too late approach to competition policy, had reached the point where it was prepared to give the Commission some circumscribed powers to look at how industries were travelling. This new government is more friendly to the idea, and rightly so: if there are competition issues in any industry, the specialist in the competition game should be able to take a proactive look and come up with some fixes.

Friday, 16 February 2018

Back to square one

First we were going to criminalise cartels - the main effect being that business executives could go to jail. That was back in October 2011 when a bill was introduced which allowed for a criminal cartel offence in addition to the existing civil offence (where companies and employees can be fined, but not jailed). And if you think October 2011 is ancient history, you're right, but then you haven't been following the recent pace of competition policy reform in New Zealand.

Criminalisation wasn't the only thing on the bill's menu. It also made various other changes, including splitting out 'cartel' into three distinct infringements (price-fixing, collective output restrictions, and divvying up markets). And it provided both exemptions from cartel accusations for various desirable business activities such as joint ventures, and a new mechanism where businesses could get a new kind of okay ('clearance') from the Commerce Commission for cartel provisions that were "reasonably necessary" for a collaboration, in addition to the existing 'authorisation' route.

The proposals made it through the Select Committee process, but in December 2015 the National government yanked the criminalisation bit (the rest of the bill made it through, a mere five years and ten months after it had been introduced). I wasn't happy about the yanking. As I said at the time
Let's get serious here. Piddling offences not worth the courts' time are prosecuted every day. But "hard core" cartels,  about as obnoxious and harmful as it gets when it comes to white collar crime, escape the dock. It's not right.
or a little later
For cases that fit the classic hard core model - anti-competitive intent that is manifestly not bona fide, secrecy, collusion, persistence, materiality - it's beyond absurd that the shop assistant who pockets $25 from the till will end up in the District Court, whereas the shadowy guys who meet on the fringes of industry fairs to steal $25 million from the public won't hear the knock of the cop at their door.
And now reason has prevailed, with the news that criminalisation is back on again. MBIE's write-up of the new Commerce (Criminalisation of Cartels) Amendment Bill can be read here, and the Cabinet paper proposing the return to square one is here.

I had some interesting exchanges on Twitter when I welcomed the tack back to the original course. As one guy sarcastically put it, "Great. I look forward to the bright line definition of cartel behaviour which unmistakably distinguishes it ex ante from pro-competitive cooperation and coordination in all circumstances, and absolutely no chilling effects through uncertainty. Brilliant".

That's fair comment, and indeed the potential chilling effect was the stated rationale for the yanking in the first place.

But personally I think there are enough safeguards to prevent chilling desirable collaboration or - more importantly - miscarriages of justice where people end up jailed for well-meant behaviour. There has to be a clear intention, or as the Cabinet paper put it in paragraph 23, "this mental element of the offence will target the offence to those persons who meant to engage in cartel conduct or who would be aware that this result would occur in the ordinary course of events". And people will be able to argue that they genuinely thought one of the collaboration/cooperation exemptions applied.

I did wonder about paragraph 33 of the Cabinet paper which said
The [Commerce] Commission has raised concerns about the breadth and complexity of the defences proposed. It will raise these concerns at Select Committee.
Concerns about the complexity - maybe. Concerns about the breadth: if the Commission thinks the defences aren't robust enough and need bolstering, excellent, but if it thinks they've gone too far, I can't agree. This is an area where criminalisation really needs to catch only the "hard core" cartels, and nothing else, and the protections need to be industrial strength to prevent a mistaken view of clause 206 in a joint venture agreement turning into a two year sojourn in Mount Eden.

I'm no lawyer (as my lawyer friends occasionally point out) but if anything I'd err even further on focussed targeting of the provisions. As extra protection, I'd be inclined to have a closer look at that "intention" element and tighten it up a bit more, especially that second leg of being "aware that this [cartel] result would occur", and at some stage the Select Committee is likely to get my best impression of the mens rea bits of Legally Blonde.

Saturday, 10 February 2018

Should we obsess about 2% inflation?

For a moment, watching the webcast, I thought there were going to be no questions at all at the Reserve Bank's press conference last Thursday, after its latest Monetary Policy Statement. The Bank had been universally expected to leave policy unchanged, as it did, so there was little "news" in the official statement, and the acting governor Grant Spencer will shortly hand over to the incoming Adrian Orr, so there was no massive interest in what an outgoing caretaker might have to say.

In the end the journalists (with a big assist from Bernard Hickey) filled in the awkward pause* and the conference limped into life. The most coverage was for Grant's remark that people on large mortgages at unusually low interest rates ought to be sure they can handle the payments if rates go up a few per cent. It was a sensible remark, but as the big takeaway, duh.

The questions around the Bank persistently undershooting the 2% midpoint of its target inflation range were more interesting. Some critics have argued for a long time that inflation has been too low, and unemployment correspondingly too high, compared to what would have happened if the RBNZ had run a more stimulatory policy. Michael Reddell for example said it again last week, and added that the Bank's view that inflation is actually heading back to 2% may be proven overoptimistic yet again.

The Bank's responses were first that people shouldn't get obsessed with the 2% number - the Policy Target Agreement says there should be "a focus on keeping future average inflation near the 2 per cent target midpoint" and the Bank seemed to parse this as "a focus" - and second that too many microadjustments of the steering wheel to keep close to 2% will make the passengers in the back seat carsick.

There are arguments both ways. My own take is that central banks virtually everywhere have been blindsided by unexpectedly low inflation: something, still not pinned down, has meant that inflation in the post-GFC world hasn't been behaving like it "should" relative to pre-GFC relationships. In that context, our own Bank hasn't done too badly: at least we've had recent core inflation in the 1% to 1.5% range, when others have fared worse. The European Central Bank still hasn't got core eurozone inflation clearly back over 1.0%, and the Bank of Japan despite extraordinary levels of monetary stimulus has struggled to get up it from zero (currently 0.2%).

The "something" that's changed means that the old 'Philips Curve', if it still exists at all, has shifted to the left. Any given rate of unemployment brings less inflation with it than before, or as critics of the RBNZ would put it, for any given inflation target, like 2%, you can safely drive unemployment down lower than you would have before. But (a) this is all in hindsight and (b) we still don't know exactly how hard you can push unemployment down without setting off an unwelcome bout of too-high inflation.

That's where the RBNZ's latest research will be highly interesting. As the Monetary Policy Statement said on page 5, and both Bernard Hickey and Michael Reddell have picked up on, the Bank's done some new research on where that trigger rate of too-low unemployment (the 'NAIRU' as it's called in the trade) might be. All we know at the moment is that the latest best point estimate is an unemployment rate of 4.7%, within a plausible wider band of 4.0% to 5.5%. Given that we're currently at 4.5%, the Bank would argue it's gone as far as it should.

We don't know the full details yet: the Bank will be coming out with an Analytical Note on the research in the near future. My first reaction (and others') is that 4.7% looks a bit on the high side. But it could well be in the lower 4's somewhere: we're not the States, but it's interesting that the American unemployment rate has needed to drop to 4.1% before there have been a clear pickup in wage growth.

Finally, it's often puzzled me that the media don't reproduce more of the graphs in the Policy Statements. Maybe it's part of the dumbing down of the big media outlets. But in any event here are two interesting ones.

Why are world equity prices currently retreating? Because equity valuations, particularly in the U.S., had been overinflated by a period of unusually low interest rates. But as this graph clearly shows, the interest rate tide has been on the turn for some time. Valuation correction was overdue.

Nearer to home, here's how little inflation is being generated domestically, outside of housing-related costs. The blue bars are everything from school fees to doctor's visits to hairdressing prices, and currently inflation for all those sorts of things comes to only a little over 1.0%. As noted earlier, it's still a bit of a mystery that an economy with 4.5% unemployment is generating so little inflation, but enjoy it while you can: the Bank thinks it won't last.

*I've been at a press conference that died on its feet. As a financial journalist in the early 1980s I went to hear the then Japanese finance minister talk at one of the big annual multilateral meetings (ADB or IMF, can't remember which). Noboru Takeshita gave a speech of such inane banality that none of us could think of a single thing to ask him about it.

Friday, 29 December 2017

New thinking

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

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

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

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

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

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

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

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

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

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

Greg starting his presentation
The panel ready to take questions

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

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

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

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

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

Friday, 22 December 2017

The full monty

Now that we've got the full decision in NZME/Fairfax, what can we take from it? Apart from some admiration for the combined writing style of Justice Dobson and Professor Richardson: I liked the crack at [98], about the likes of Facebook, that "Fifteen recyclers of the product of two producers of news are still only making two views available", the worked examples, and the historical footnote disquisitions.

Let's start with the clearance arguments - whether the merger would or wouldn't lead to a substantial reduction in competition, an 'SLC'. This was always going to be an uphill ask for the appellants, and so it proved. The court agreed with most of the SLCs the Commission had found.

It's not a great idea to give good advice away for free, but here's some anyway for NZME/Fairfax: don't even think about appealing the clearance judgement. When a judgement says at [74] that in the online news market "the merged entity would employ over 300 more editorial staff than the three next biggest mainstream media organisations combined" and at [135] that "The Sunday newspaper reader market is a duopoly so that each firm is the greatest constraint on the other", you haven't a snowball's.

On to the authorisation arguments - whether there were net benefits to the public that compensated for the adverse effects of the SLCs.

The first point traversed was how the net benefit test should work. One argument was that the balancing exercise to determine a net benefit should count benefits in the markets where there were SLCs, detriments in the markets where there were SLCs, and any benefits anywhere else, but not costs anywhere else.

This is manifest nonsense from any economic, commonsensical or public policy point of view: why should some of the detriments be ignored? The trouble was, though, that the Commission, in its 2013 Mergers and Acquisitions Guidelines, went with the lawyerly view that this daft detriment test (DDT) was indeed what the Commerce Act and its jurisprudence required. In its NZME/Fairfax decision, however, the Commission decided to count the detriments elsewhere (particularly the national cost of loss of media plurality). The appellants, wholly understandably, called foul.

I'd thought that the DDT had been definitively and rightly knocked on the head in the various Godfrey Hirst cases (see 'The net benefit test' and 'Common sense - at last'). But whatever lingering zombie existence it still may have had has been well and truly terminated now. Sample quotes from the decision: at [195]
It is inconsistent with Parliament’s approach to infer, without any clear indication of such an intention, that Parliament intended to discriminate between the scope of benefits to which the Commission could have regard, and then a narrower subset of detriments
and at [213]
Proposed mergers will have widely varying levels of impact on New Zealand consumers generally and where those impacts are as broad and as significant as arose here, then it would be inconsistent with the statutory scheme to require the Commission to ignore them. Parliament cannot have intended such an outcome
and at [221]
The broader approach in the Court of Appeal’s reasoning in Godfrey Hirst 2 suggests the detriments that may be taken into account need not be confined to those arising in the relevant market. Non-quantifiable factors may be decisive, and no logical reason for limiting the type of detriments is suggested
and at  [223]
There should not be an artificially limited assessment of detriments if such limitation would prevent the preferable advancement of the long-term interests of consumers. That cannot have been parliament’s intention
and at [232]
it would be illogical to exclude consideration of identifiable detriments that affect an overall assessment of the benefits to the public merely because those detriments do not arise in the market in which the merged entity would operate.
The DDT is now buried at a crossroads with a silver stake through its heart, and good riddance. Our competition regime is the better for its demise.

The next bunfight - once it was established that the Commission could indeed count detriments elsewhere, even touchy-feely ones ("Non-quantifiable factors may be decisive") - was whether the Commission had been right to put a large adverse value on the potential loss of media plurality. In short, yes it was.

The court didn't much take to attempts to put a number on the plurality loss: at [299] "Material unquantifiable detriments are simply unquantifiable". And at [301] it sympathised with merger parties that "it can be frustrating for participants in an authorisation application to be confronted with an outcome that is determined by findings of unquantifiable benefits or detriments".

But at the end of the day someone's got to make the call. It mustn't be a guess: at [301] "a decision on such matters must strive not to rely on a purely intuitive judgment and is to avoid undisciplined subjectivity". Rather, still at [301], "An outcome determined by application of unquantifiable factors (detriments and/or benefits) is a matter of qualitative judgement, informed as in this case by expert opinion".

And in this instance, at [305]
We are satisfied that maintaining media plurality and the quality of the media produced are fundamental values of benefit to the public and of real and national significance.
There were also arguments about the Commission's processes. In the end, none of the objections - the Commission only talked to anti-merger people after its conference, it commissioned a hatchet-job rather than an independent expert report - stuck. But if the Commission's got any sense it will take on board, from this judgement, ideas for improvements in how it goes about its business in those two areas.

For economists, there are other interesting points in this judgement. If you haven't mugged up enough on two-sided markets, you'd better, and especially that article cited at [63] and quoted with approval at [64] ("We agree with that analysis of the two-sided markets in which the appellants operate"). And there are some aspects of the economics of this case that I wouldn't mind challenging at some point.

Market definition, for one: at [161] the court said that "The appellants made the superficially attractive submission that it was illogical to find the prospect of an SLC in a market of undefined scope", but I'd dispute that "superficially". How to treat "wealth transfers" to non-New Zealanders in the net benefits test - see [291] to [297] - where in my view the law is at best chaotic and probably wrong. Even the basics of how to decide if products are substitutes or complements, for example when as in this case you observe people consistently visiting different online sites ("multi-homing").

But that's enough free analysis for one day.

Tuesday, 19 December 2017

Quick reaction to NZME/Fairfax

Back in June I wrote a piece - 'Howzat!?' - on the likely outcome of the two appeals against Commerce Commission decisions that were live at the time, Skyfone, and NZME/Fairfax.

And I finished up saying
We can't see everything - there's a wholly blacked-out bit in paragraph 19(c), for example, in the 'Natural justice and fairness' section of the NZME / Fairfax appeal - but on what we can see, what are the umpires likely to do with these appeals?
I'll be surprised if I see the Commission trudging back to the pavilion.
I won't be dashing off to the TAB to exploit my newly discovered tipping skills, because, to be fair, it wasn't a hard call. You had unacceptably high post-merger levels of concentration in some markets, and little realistic prospect of divestments as a remedy: the market for Old Media assets isn't exactly thriving at the moment. And the appellants were asking the court to ignore or downweight a stonking great albeit qualitative detriment, loss of media plurality. The Commission didn't win on everything, but it was in my view at short odds-on with the bookies on the overall yay/nay outcome.

We, the general public, haven't got the full decision yet - as I write there's only a media release from the court and an extract from the decision summary - but there are two things I'll be especially interested in when we do get it.

One is the discussion around qualitative things like the value of media plurality in a democracy, and whether, and to what extent, and how, they should be included in the benefits and detriments balancing. My answers would be yes they should, as completely as possible (I quite liked this Aussie court's approach), and ideally with whatever numbers you can put on it.

There may be companies thinking that mergers have just got a lot harder if they've got to allow for all this airy-fairy social impact stuff on the detriment side. I wouldn't see it that way: it also opens up the opportunity for companies to argue qualitative payoffs on the benefit side. In 'new economy' sectors, for example, I could see companies successfully arguing, who knows what sort of blue-sky benefits might emerge from bringing two sets of research talent together.

The other thing that caught my eye in the court's press release was that the court "dismissed the prospect of one of the appellants introducing a pay wall for their online publication, post a merger". That sounds like a finding of fact. But even if the merger had actually enabled a pay wall, and NZME/Fairfax consequently decided to introduce one, I can't see that as much of a detriment. It seems to me that's a completely normal development in online media: consumers mightn't like it, but I don't have an issue with media charging readers for valuable content. I can even see a logic that without the paywall, there might not be valuable content in the first place.

Speaking of content quality, the press release also said that "The Court found the Commission was also entitled to place significant weight on the prospect of reduced quality of the products produced by the merged entity".

Live by clickbait, die by clickbait.

Friday, 8 December 2017

Ideas? Sure. Answers? Not so much

Today's well-attended Government Economics Network (GEN) conference in Wellington on the theme, "Responding to Global Challenges", covered the back end - the challenges - pretty well. But as for "responding" - if I were in the policy sausage grinder, as many of the attendees were, I'm not sure I came away with enough new policy ideas, or even a clearer policy research agenda.

My highlights? The IMF's Jonathan Ostry made a good case that growth and (re)distribution as policy targets aren't as incompatible as once thought - indeed, redistribution may facilitate higher levels of GDP growth. Structural reforms, for example, often have winners and losers, and properly compensating losers may cement support for the GDP-enhancing reforms: win-win all round. That's a big policy lesson right there, and not one we knew enough about in the '80s and '90s when we were crashing through with our reform programme. So I would take one big bit of practical policy guidance away: check the inequality and equity outcomes of what you plan to do. If there's enough of a GDP payoff, and there likely will from initiatives like trade liberalisation, then there'll be enough cash in the kitty to see the losers treated right.

I also liked Australian National University Professor Warwick McKibbin's presentation on recent global trends and future prospects: he's very good at explaining the dynamic interplay of macroeconomic variables. But it's not all just seat of the pants judgement calls: he's got a multi-sector multi-country model which enables him to make a stab at calculating the global and national impacts of different policies or shocks. He modelled, for example, the Trump policy package of immigration controls, big tax cuts, infrastructure and defence spending increases, and higher tariffs, against a background of tighter Fed monetary policy (good for US GDP in the short term, pretty horrible longer term), and he also had a go at modelling what would happen if a global trade war broke out (bad news for everyone, but especially bad news for China and Germany).

What I took away from his presentation was that we ought to run any bright ideas we have - joining or not joining the Trans Pacific Partnership, introducing different forms of carbon emission policies - through a practical model like his, before we press any buttons. My impression from chatting to people in the policy game is that we don't*. And it's not helped by economists here and overseas putting the bulk of their modelling efforts into fragile DSGE-style models which fall apart if the wind shifts, rather than into more robust, empirical, simpler and useful models that will give you sensible answers to real world questions.

Kaila Colbin, 'New Zealand and Australia Ambassador for Singularity University' - no, made no sense to me, either - turned out to be a highly impressive speaker who made a convincing case that the pace of technological change is high and increasing far faster than practically anyone realises. And she also dealt to some of the more alarmist 'the robots will take all our jobs' perspectives. Wouldn't you prefer, she said, an artificial-intelligence medical device to read your X-rays with complete accuracy, and leave your doctor to talk through treatment options? It also left me - again - with the strong impression that our (and other countries') productivity and GDP data can't be properly capturing the full extent of these extraordinary advances in our capabilities.

But as with many of the issues raised, attendees might now have a better idea of some of the global trends that are going on around us, or might happen down the pike, but we weren't given many suggestions about what to do in response.

And the issues that were raised didn't cover all of the waterfront. Nobody knows for sure why New Zealand's got the low productivity issues it already has, and what we need to fix to meet both our current and future challenges. But a partial list of plausible factors would include insufficient physical and other infrastructure; weak entrepreneurial and managerial incentives and capabilities; low international connectivity; the deadweight burden of poor regulation (think housing land in Auckland, or local regulatory reactions to Uber and Airbnb); policy sluggishness in the bureaucracy and the legislature; low intensity of performance-forcing competition; social and cultural attitudes to success, innovation, unorthodoxy, experimentation and failure; and you've probably got some further candidates of your own.

They didn't get much of a look-in, nor (as the New Zealand Initiative's Oliver Hartwich pointed out in a panel session towards the end) did the challenges of urbanisation, which he rightly said was one of the most important global megatrends. It's also one of the challenges we're failing to meet: neither Auckland nor Wellington work properly.

So a good grade to GEN for bringing expert overseas and domestic speakers together, and a decent grade for consciousness-raising. And maybe the paucity of policy responses this year could be the motivation for next year's agenda.

*Update December 9 - this should probably be "we don't all the time" or "we don't enough", as John Ballingall at the NZIER has helpfully been in touch to say that the TPP was actually run through a model.