Friday, 27 December 2013

The economics of Game of Thrones

I'm a reader, the old-fashioned kind. The house is full of books, there's a stack of unread ones beside the bed and a Unity Books loyalty card in my wallet, I've got accounts with Amazon, and Barnes and Noble, and The Book Depository (NB no postage charges to New Zealand). I've got nine library books currently checked out, and another five books stacked up as requests on the (excellent) Auckland Library system.

And normally I wouldn't give you tuppence for the film or TV adaptation of any book I've read, as I like to think the images you create for yourself when you read are better than the ones confected for you by someone else. Especially when the confections are by the big US studios, where you're pretty much guaranteed a dumbed down slab of sugary pap.

With one big exception.

I passed on the books. And I let three and a bit seasons of the TV series go by before deciding to give it a try. And then I got hooked on - well, you saw it in the title of this post, it's Game of Thrones. I binged on the thing, two or three episodes a night till I'd done the lot.

Why, you ask, is this in an economics blog?

First up, because I was kind of intrigued by the reaction of the makers of Game of Thrones (HBO) to the news that GoT was the most pirated TV show of 2013 (ditto in 2012). Instead of the "piracy is killing Hollywood" moaning you might have expected, they were upbeat about it. In this article, for example, we got the views of the top brass:
Similar to Game of Thrones director David Petrarca, [Jeff] Bewkes [CEO of HBO's parent company, Time Warner] believes that the free word of mouth advertising eventually leads to more paying subscribers.
“Our experience is that it leads to more paying subs. I think you’re right that Game of Thrones is the most pirated show in the world. That’s better than an Emmy,” Bewkes said.
I'm aware, from expert economic evidence given in legal proceedings, that there are theoretical arguments that piracy may not in fact harm the copyright holder, though I have to say it's always looked a bit of an uphill argument when stacked against what looks like a more immediately obvious "taking the bread from our mouths" line. I suspect that economists in the expert witness game who take a benign view of piracy will be making good use of this latest GoT evidence. And I also suspect that we are in the absolute infancy of internet business strategy: when the makers of a red-hot series are relaxed about piracy, you sense that they are on to something that isn't yet in the Harvard Business Review.

And second, what's all this about piracy?

Did I go trolling through the deepest darkest internet for GoT? Visit dubious torrent sites? Set up some devious VPN workaround to convince US sites I wasn't in New Zealand?

No. I went to Polly Streaming. I've no idea who they are, and their 'About us' page is uninformative, but they offer basic free services (which include the whole of GoT) plus a premium subscription, and have a Facebook page, so they're hardly lurking in some shadowy internet lair. And they don't seem to care where in the world you are. All of which tends to suggest that the GoT folks know all about them, and either don't give a damn, or reckon it's a good thing, or are actively in on it with them. Every which way, you sense, again, that there's a cunning strategic plan behind this "piracy".

And then there are the economic lessons from GoT itself.

The big lesson from GoT is that if you're spending up big, spend the money on the right things. If the choice is (and it often seems to be), (A) spend US$20 million on the bankable name that you think will put bums on seats no matter what the movie is, or (B) spend US$20 million on sets, locations, effects, no-name but highly competent actors and a quality product, then HBO has successfully demonstrated that the second choice works better, no matter what the bean counters might advise. The more I look at successful products, the more I'm convinced that out of the SPQR mix (service, price, quality, range), quality trumps all in the longer run.

Another lesson is that the public is not made up of ninnies in a convent school. Do we want to watch only MLVS movies? No. But do we want to see sanitised, infantilised, prettified versions of MLVS issues? No we don't. GoT treats its customer base like adults. And like most business strategies that rely on people being intelligent judges of the product, it's a winner.

Another is that it made me wonder about the supposed wonderfulness of our new Ultra Fast Broadband (UFB) rollout. My copper-based ADSL internet service delivered GoT to my laptop, with completely acceptable video quality (and I'm not even getting the top end of copper-based delivery). Remind me why I need to pay more for the same experience delivered over fibre?

Finally, I was struck by the quality of the GoT opening credits. And it seemed to me that there was a good economic motivation for the high quality (as there was for the equally stunning opening credits for the Rome series). Bankers used to adopt the same strategy, and for the same reason. How do you signal to new customers of an intangible service, who know nothing of you or your reputation, that you are a quality service provider? In the case of banks, and I'm thinking here of the likes of Irving Trust and Morgan Guaranty and their erstwhile palazzi on Wall Street, by having extraordinarily opulent-looking head offices. Look how rich we are! How dependable!

And so it goes with the opening titles. Put your production values into the opening - sophisticated computer graphics, lush colouring, an original and striking theme tune, a bit of ambiguity, a hint of special effects - and before they see the rest of it, consumers are convinced that here's a quality product that's had thought and money spent on it.

Maybe, to come full circle, you can't judge a book by its cover. But you can choose a TV series by its opening.

Phone line rentals are still too high

Just before Christmas the Commerce Commission came out with its latest report (carried out for them by Teligen) which benchmarks retail prices for fixed line phone and broadband services against the rest of the OECD (here's the media release and here's the full report). There'll be a similar one on retail mobile prices in February 2014.

There are so many interesting results in this report that it's hard to know where to start. Why don't we start with a good outcome, from p16 of the report (especially as the telco folks at the Commission likely regard this survey as in some sense a report card on outcomes from their work).

For various reasons the Commission's reports don't allow tracking of how prices of comparable products have evolved over time, but there is one that appeared in both the 2011 report and this latest one, and it's the price of a 60GB broadband plan, either bundled with voice calling or standalone ('naked'), and it's shown below.

In both cases prices have fallen (-14% for bundled, -41% for naked) though the naked result is somewhat misleading as it is typically available as a product only when you're an on-account mobile customer.

It's hard to keep going with the good things, though, as the rest of the report leaves you with two disquieting thoughts - the extent to which we are still being ripped off by high copper line rentals, and the heavyhanded price discrimination against power broadband users (who want a lot of data at high speed).

The line rental issue shows up implicitly and explicitly. Here, for example, is how New Zealand rates on voice-only fixed line products. I know, few households these days buy standalone voice, but (as the report shows) typically buy a bundled broadband and voice package. And yes, in our household too the bulk of the voice calls we get are cold-call marketers, robot diallers and wrong numbers ("Anecdotal evidence indicates that many households now make very little use of their home phone for conventional voice calls", report, p17). But the Teligen voice data still throw light on the issue of relative line rental costs: here's a service where the line rental is most of everything. The table below shows four levels of phone calling: typical New Zealand usage is somewhere between the 60 call and 140 call baskets.

We're being stiffed. The value on offer is dire by OECD standards. And don't be misled by the apparently good outcome vis-a-vis Australia for the bigger call baskets: that's only because "Australia is also a poor performer" (p18).

And why is this? In Teligen's words, "The poor ranking is largely driven by the high monthly line rental charged in New Zealand, which in turn has largely been driven by the TSO price cap, which allowed line rental to increase by the CPI every year" (p18). The good news is that in Teligen's view "competition from alternative voices services such as mobile is now constraining the price of the fixed-line voice service", and copper line owners are no longer able to keep ratcheting up the rental. But you are still left with the strong impression that there is a good deal of legacy fat in the copper line rental charges. And it corroborates the Commission's other benchmarking work, which has shown that the cost of access to the local copper and its electronics is too high.

This next table is arguably the key result in the report - how we compare for the typical bundled voice/broadband package that NZ consumers use.

Relative to the value on offer elsewhere in the developed world, it's not great for any package, and it gets worse the bigger the package you want. "Some of this differential", Teligen say (p12) "could be attributable to price discrimination by retailers to recover the relatively high wholesale costs of providing a voice plus broadband retail service. Only the wholesale price of unbundled lines is currently cost based".

I'm left with three thoughts about this result.

One, obviously, is that we need more cost-based pricing rather than the legacy write-your-own-rental prices we are still paying - ideally brought about by infrastructural competition, but if not, then by the kind of regulatory cost-modelling the Commission does.

Two, the degree of price discrimination.  We know that price discrimination is not a problem in itself. It can be good, neutral, or bad from an efficiency or equity point of view. And higher-spec products often go for higher prices, for obvious reasons. And yet: in the earlier days of broadband, it seemed to me that Telecom was trickling out broadband as slowly as it could, minimising the pace of its capital spend and soaking the most desperate-to-have-it users (monopolists limit quantity as well as raising prices). So I'm agnostic, to say the least, about whether this price discrimination is more of the same exercise of market power, or an efficient way of recovering costs.

Three, the pattern of price discrimination. If the providers of copper and fibre based broadband are going to hit the heaviest users of big fast broadband really hard, then you can kiss goodbye to the "build it and they will come" dreams attached to the UFB network. Build it, price it like this, and they'll walk away. And how many of the benefits of UFB are predicated on precisely this group of intensive users?

Friday, 20 December 2013

Good papers from the Reserve Bank

I like the Reserve Bank's series of 'Analytical Notes' (you can subscribe to the Bank's e-mail update service here if you'd like to know when new ones come out). They're good, practical, background papers which don't have to be scrubbed up to peer-review publication status, don't commit the Bank's policy arm to anything ('views of the author, not the Bank'), and generally have something interesting to say about topical issues of the day.

Two more came out this week, Chris McDonald's 'Migration and the housing market' and Elizabeth Watson's 'A closer look at some of the supply and demand factors influencing residential property markets'.

From the migration paper, here's the overall relationship between net migration and house prices.

And if you're more of a numbers person than a graphs person, here are some numerical estimates of the impact of net migration both on house prices and (on the supply side) new housebuilding consents.

More info is better than less, and I'm glad this research is out there, but I also hope it isn't abused by the troglodyte protectionists in several of our political parties, who are already liable to blame high house prices on people arriving at the auction with suitcases full of Korean won. As the paper notes, there's more going on here than the suitcase story: generally good economic conditions in New Zealand (as right now, for example) simultaneously drive up local consumer confidence, reduce emigration, and encourage immigration, all of which are likely to feed through to house prices. 

The supply and demand paper is also full of interesting stuff. Before reading this paper, I'd have said that house prices relative to some set of fundamentals were at an all-time high, but perhaps the perspective from my home office has been distorted by the beyond-white-hot North Shore property market outside my window. Here's one chart from the paper, which shows that prices appear to have been even more out of whack in 2007. That's not to say we shouldn't worry about some aspects of where we are now, but we've seen worse.

Another thing that emerges, to me, is the role of local authorities in impeding housebuilding. In a previous post I'd concluded that "if you want to find the real culprit behind Auckland's housing shortage, look no further than your friendly local council staff". This paper shows that residential building consents (including apartments) dropped sharply in Auckland from 2002-04 to 2008-11: some of this reflected cyclical conditions, and slower population growth in Auckland than previously (from the paper, 1.2% a year 2006-13 compared to 2.4% a year 2001-06), but the consents drop was bigger than the population slowdown. You'd wonder (my take, not the paper's, just to be clear) if there wasn't an anti-development ethos gaining force in Auckland's planning offices. 

Beyond higher prices than necessary because of the supply constraints, another outcome (as the chart below shows) was that Auckland people were getting more cramped in their living arrangements, just when the rest of the country was getting more room to live in.

I've got one small question about one of the conclusions of the paper. It quotes some earlier research from Arthur Grimes and Andrew Aitken at Motu that "relative to population growth, districts in Auckland had the lowest supply responsiveness in the country during that time [1991-2004]. Grimes & Aitken (2006) estimate that Manakau, North Shore, Auckland City and Waitakere are the areas that have the least responsive housing supply in the country and that, within Auckland, areas with lower supply responsiveness tend to have higher house price inflation", and then it graphs these four least-responsive regions (in the top graph) against four other regions in Auckland (bottom graph), as shown below.

It might be down to my advancing decrepitude, but if there was a pattern there before, I can't see it now.  

In any event, have a look at these Notes for yourself - you're bound to find something interesting and informative. And I'd also like to commend them, and the Bank, for adopting the very useful practice of including, upfront, a 'Non technical summary' for the intelligent lay reader. It seems to be spreading as good practice across a variety of media, and not before time. You've probably been as maddened as I've been by those useless 'summaries' in some of the academic journals (of the "In Section 5 we present our results and in Section 6 we present some conclusions" variety - what results? what conclusions?). 

The journals are getting better - I've just gone through all the articles in the latest American Economic Review, and every single one had a meaningful summary - but the non-technical summary goes one step better again. 

Wednesday, 18 December 2013

Another quiz

The Herald's Viva magazine this morning had a round-up on the past year's restaurant scene, 'The Year in Food: What we loved and loathed in 2013'. It's a good article, even if I disagree on the attraction of communal tables in restaurants. And 'raw' cooking, if it comes to that.

It also provided the opportunity for another quiz, so here it is.

Context (quote from the Viva article):

"Failed restaurants ... yes, we love a new restaurant as much as the next person but if the council keeps granting permission, without a massive influx of people to Auckland to support them, expect to see some close. Better planning please".

Q1 What happens when supply of a service is restricted?
A Prices go up
B Choice goes down
C Potentially better providers get shut out
D Businesses unproductively invest in the approval process
E Incumbents get an unfair advantage
F The planning process gives market power to functionaries, who may abuse it
G All of the above
H Consumers benefit

Q2 Is keeping every incumbent business going a good aim of public policy?
A No
B No
C Both of the above

Q3 Why should new restaurants, or any other licit business, have to get local authority planning approval?
A Buggered if I know
B Sounds daft
C Mostly A
D Mostly B

A flight of fancy

As I mentioned last week, I said I'd start to have a look at the submissions various parties have made to the Productivity Commission on our regulatory institutions and practices.

Air New Zealand wants to escape from the ambit of the Commerce Commission and be primarily regulated by the Ministry of Transport, because the airline business is allegedly different to others ("international aviation is a unique market operating outside the normal influencers of a domestic economic or consumer environment") and the Ministry knows the scene best ("The Ministry is the national centre of expertise in international aviation and is the incumbent authority for alliance approvals").

On the other hand it wants precisely the opposite to happen to the airports. They should be taken out from under the shelter of the Airport Authorities Act ("permissive legislation designed for a time when airports (and indeed airlines) were state-owned and operated and therefore allows airports to ‘set prices as they see fit’") and policed more toughly by the Commerce Commission ("the light handed regulation of airports has failed and heavier handed regulation is required. Air NZ advocates the use of the negotiate / arbitrate provisions from the Commerce Act").

Good luck keeping both those balls in the air, lads!

Tuesday, 17 December 2013

Follow the money...

I know I've said it before, but there really are so many business surveys around these days that even dedicated economy-watchers can't keep track of all of them. Inevitably some slip under the radar.

One you might have missed (and I came across it only accidentally while foraging a while ago for something else on the bank's website), is the quarterly ASB Kiwi Dollar Barometer. It's well worth having a look at: it's quite a decent sized survey (390 firms with turnover of at least $1 million) of businesses' exchange rate expectations and their forex hedging plans.

The latest one came out last week. The headline result was that businesses (averaging out both importers’ and exporters’ views) expect the Kiwi dollar to peak against the US$ around the 81 cent mark  in the March ’14 quarter, and to decline to 76.5 cents by the end of next year. Currency forecasting, many would say, is a complete waste of time, and perhaps these businesses' expectations will prove just as wide of the mark as any other forecaster's. But I doubt it.

For one thing, consensus forecasts across wide groups tend to do better than a single guy with his spreadsheet.

And for another - and this, to me, was the really interesting bit - the businesses are putting their money where their mouths are, as this graph shows.

Notice that the percentage of importers planning to hedge has hit a new high: in real time, with real dollars, import businesses are increasingly taking out protection against the Kiwi dollar falling.

You might wonder (as the ASB economists did) why the proportion of exporters planning to hedge also ticked up a bit in this latest survey - if they really believed the Kiwi dollar is going to fall, they'd be planning to do less hedging. The ASB team commented that "It is likely the recent strength in the NZD has seen exporters look to protect themselves against further increases in the NZD, even if their core view is that the currency will ease over the year ahead".

I think this is absolutely right, because I've seen this happen before. Years ago I worked for a forex consultancy business in London, and our customer list looked like a hospital ward: every corporate in Europe that had run into financial grief appeared to be on our books as clients. Why? Because they were already in such a difficult position that the last thing they wanted was to have forex losses on top of everything else.

And that's where Kiwi exporters are right now. They might believe the Kiwi dollar is going to fall - but they can't live with the risk that it might tighten the screws even further on them with another bout of appreciation.

Thursday, 12 December 2013

No surprises from the Bank

I'll summarise quickly because the media and the bank economists are already all over it, but the guts of this morning's Monetary Policy Statement from the Reserve Bank was straightforward and as expected: "it is becoming unnecessary to maintain the OCR at 2.5 percent, with GDP growth becoming increasingly self-sustaining. The Bank's assessment is that ... growing demand and inflation pressure should warrant a withdrawal of stimulus beginning in 2014" (p5). The Bank's forecasts have the 90 day bank bill rate rising from 2.7% currently to 3.8% by this time next year and to 4.6% by December '15.

Rising interest rates might sound like bad news (at least to borrowers), but let's note the big picture, which is a strong economic outlook. Here's the Bank's forecast for unemployment.

Anything interesting in the details?

A few things. The Bank reckons that its LVR loan restrictions will take between 1% and 4% off the rate of house price inflation - okay, that's a wide and uncertain band, and it's early days, but if we take the mid-point as a guess, 2.5% off house price inflation is a pretty big impact.

The Bank also played with a scenario where world commodity prices don't actually come off their current high levels, but hold up and even press on a bit more (see Box C on pp24-5). Good news for New Zealand, sure, but a mixed bag for the RB. Higher incomes from fancy export prices boost the economy and domestic inflation pressures (bad news for the RB) but the high commodity prices also likely lead to a higher Kiwi dollar (which restrains the economy and dampens inflation, good news for the RB). Net effect? The net upward pressures on inflation mean that interest rates would need to rise more than the RB currently plans, as shown below.

While it's mostly a benign outlook, there's still one thing that bothers me. I've blogged about it before, but here it is again in its latest version.

It's that forecast for non-tradables inflation, the cost pressure that arises in those parts of the economy not facing import competition. Yes, you'd expect it to pick up as spare capacity gets used up: that's an understandable cyclical process. But it might also rise for structural reasons: inflexibility, insufficient domestic competition, a 'cost plus' mentality. If we do get lumbered with domestically sourced inflation of close to 4%, let's hope it's wholly or largely cyclical.

When regulation moves the market

There was quite a useful series of answers to questions in Parliament yesterday - I'm tempted to add, "for a change" - when Bill English was asked about his recent statements about the impact of regulatory decisions (the Commerce Commission's impact on Chorus being the biggie).

When Peter Dunne asked Bill English about the view that his statements could be seen as "code for seeking to nobble the Commerce Commission", he replied, "that is simply not the case. If one thinks of the Commerce Commission as the referee, it applies the rules as it finds them, and we need to do a health check on what the rules are that it is applying". And replying to a supplementary question from Peter Dunne, he also said "The commission will be free to continue as an independent statutory body, as it always should, just as the Government is free to look at the rules that the Commerce Commission applies".

I totally agree. The issue is the rules. There are those who think that the real issue is that the Commission has gone off the rails in how it's been applying the rules: it's not. I can't see that at all.

You might think that I have an instinctive pro-Commission viewpoint, given that I sat on the Commission for over a dozen years, but I'm perfectly capable of disagreeing with it. While I was there, I formally dissented (a rare event) on the Commission's valuation approach to Auckland Airport's asset base, and since I've left I've criticised some statistical jiggery-pokery it was tempted to use in the UBA benchmarking. But on the Chorus process I don't see anything materially wrong with how the Commission went about it, either with process (draft, consultation, submissions, updates on its thinking, clear and logical reasons in its final decision) or with substance. It closely followed the terms and the spirit of the Telco Act.

Incidentally, this morning's High Court's judgement on how the Commerce Commission applied Part IV of the Commerce Act to regulating electricity lines businesses, is also evidence of the Commission playing with a straight regulatory bat (see, for example, 'Vector loses key elements of Com Com challenge' in the Herald).

If you don't want abrupt changes to local regulated prices, then don't ask the Commission to set local prices based on overseas ones that may be much lower.

If you don't want slow, expensive, complicated and uncertain price setting, then don't provide for the cumbersome machinery of the forward-looking cost-modelling exercise.

I emphasise if, because sometimes sharp drops in these prices are exactly what should happen, if (for example) local incumbents have been rorting the local consumer.

John Small in his post 'My Christmas deathwish for TSLRIC' over at his blog SmallTorque comes to much the same conclusion: "So we have hard-wired into the [Telco] Act some very significant risks for both investors and consumers. This is a recipe for very big and expensive fights, not to mention political lobbying around the fringes". I don't enthuse over John's suggested solution out of this position (a simpler version of rate of return modelling), and that's a debate for another day, but I think we're all agreed that if there are predictability problems here, it's not the Commission, it's the Act.

There's also the interesting question about why the Chorus decision appeared to come as such an unpredicted shock, when the Commission was following a publicly transparent requirement with a methodology that had been over the fences a few times already, as Clare Curran asked at Question Time.

Bill English said "That is actually a very good question from the member" - I agree - and went on to say that "It is a bit of a puzzle that sharemarkets, which are normally quite good at evaluating probabilities around price tracks, for instance, clearly got it wrong in this case, and maybe everyone else did as well. That is really the main reason why we are interested in doing a health check".

It's easy to point the finger with hindsight and say that people should have seen some pitfall looming - we'd all be rich if we had a dollar for every eventuality we never saw coming - but there's probably some truth in the view that investors and their advising analysts were more concerned with the operational side of the Chorus build (rollout costs, likely UFB uptake, and so on), and to some degree took their eye off the regulatory aspects.

As things have played out, the decision to get the Productivity Commission to look at 'Regulatory institutions and practices' is now looking more and more timely. And if they were to some degree blindsided before, it's clear that businesses and investors have been wising up to the potential ramifications of regulation, and have been putting in extensive submissions on the issues, which I'll cover in future posts.

Monday, 9 December 2013

A win for the ACCC - petrol will be dearer

Last week I posted about the increasingly difficult calls competition authorities are having to make about business behaviour, and I mentioned as an especially vivid example the ACCC's investigation into what the Aussies call "shopper dockets", petrol discount vouchers issued by the two big supermarket chains. When the petrol discounts get large, are they demonstrating vigorous competition between supermarkets, with large pro-consumer payoffs in the form of much cheaper petrol, or is the Aussie supermarket duopoly trying to drive third-party petrol retailers out of business?

I'd speculated that this was proving a tough one for the ACCC to call (their investigation was getting somewhat overdue, and my guess is that they were having a vigorous internal debate), when on Friday out popped a media release from the ACCC, 'Coles and Woolworths undertake to cease supermarket subsidised fuel discounts'. The key bits were a freeze of 4 cents per litre on discounts to the end of this year, and from next year a new regime where discounts (which could be greater than 4 cents) must be funded from the petrol business and not subsidised from the supermarket business. As the chair of the ACCC said, it's a win of sorts - "We’ve accepted the undertakings because they address the ACCC’s principal competition concerns and allow the matter to be resolved quickly and efficiently" - but it's also a big kick for touch on the substantive issue ("The ACCC’s investigation was nearing completion...although we had yet to make a decision in the matter").

Having declared victory, I'd guess the ACCC could well decide there's now no need to make a definitive conclusion on their investigation, and if they do flag it away, then I can understand their call from various perspectives, including not wasting the taxpayer's dollar on an investigation that is now moot for all practical purposes. Especially as the ACCC has also warned off any other (non-supermarket) organisations minded to get into the petrol discount game in any serious way.

At the same time I'd be disappointed if it all gets swept under the bed.

For one thing, it's usually better if everyone - business, consumers, the ACCC itself - know exactly where they stand. The supermarkets still say they were doing nothing wrong: you don't want to get into a highly uncertain multi-million-dollar legal stoush with your competition authority if you can help it, and the undertakings avoided one, but equally businesses oughtn't have to give up what they genuinely believe to be okay deals because it's too risky or expensive to prove that they are. And consumers ought to be given the full chapter and verse on exactly why their big petrol discounts have just been vapourised.

And for another, while it's a close call, I think the ACCC may be wrong.

Wednesday, 4 December 2013

Excellent presentations at the GEN conference

Yesterday we had a cracker of an annual conference from the Government Economics Network.
There have been individual star turns at previous conferences - notably Harvard Professor Raj Chetty's 2011 presentation, "The long term impact of teachers", which is one of the best, if not the outright best, economics speeches I've ever listened to (links here if you haven't come across it before) - but this year's conference had the highest overall standard of the three conferences run so far.

Professor John FitzGerald led off with "Contributions of economic analysis to policy making success and failures". John had the perfect professional background to talk to this, having spent a dozen years in Ireland's Department of Finance (he and I were colleagues there in 1976,  and I knew him socially around the Dublin traps in any event) before moving to Dublin's Economic and Social Research Institute (the ESRI). There's nothing he doesn't know about the use of economic analysis for policy in Ireland (where there were especially serious and instructive mistakes made), the UK and across the EU, and it showed.

He'd evidently also put in some time thinking about how his ideas would be relevant to New Zealand's circumstances. Keep an eye out for his speaking notes when they go up on the GEN website - they're well worth reading. One of the guys sitting near me had brought along a copy of John's ESRI working paper, 'Restoring Credibility in Policy Making in Ireland', which gives you a flavour of some of his ideas (as well as taking you through the near-death experience of the Irish economy).

John is one of the most articulate speakers you could hope to listen to - as Kim Hill, who was compering events, said, we'd have listened to him reading the phone directory - and it showed the value of choosing speakers with high communications ability.

Professor Anthony Scott of Melbourne  University's Institute of Applied Economic and Social Research followed him, on "The role of financial incentives in improving performance in health care". This was good stuff, too, though the state of play (as he summarised it) is that there are few rigorous studies of the links between incentives and changes in medics' behaviours (though what there is, seems to say that well-designed incentives can be material) and less again on the links between medics' behaviours and ultimate health outcomes.

One point I took away is that it can often be a good policy idea to incentivise improvements in quality, rather than achievement of absolute standards of quality. Absolute standards can throw superfluous rewards at the top performers (who are already over the absolute threshold) but be beyond the practical reach of the worst or the most dysfunctional performers. Improvements, though, can be made by anyone.

If there was a drop-off during the day, it was the panel discussion on "Future strategies - how can enhanced economic analyses help shape more effective policies?". Panel discussions are always a bit of a risk, and this one just didn't fizz. Maybe there wasn't much more to say on this after John's presentation, maybe it was just one of those things where the conversation didn't get its own momentum going, but it any event, despite everyone's efforts, I don't think it gelled.

But then things picked up again with two terrific presentations on methodology.

Dr David McKenzie, lead economist at the Development Research Group within the World Bank's Finance and Private Sector Development Unit, gave a presentation on "The value and use of randomized experiments to learn about employment and productivity policies" which first went through the rationale for randomised experiments and then showed us how three had worked out in practice.

One was the randomised use of wage subsidy vouchers for women graduates of community colleges in Jordan (ineffective - employment temporarily picked up while the subsides were available, and then dropped back to square one). One was randomised access to vocational training courses in Turkey (marginally effective on employment - it worked when the courses were provided by private sector trainers who faced stiff competition in the training market. Funny, that). And the third was randomised introduction of modern management practices into Indian textile manufacturing (very effective - a 20% increase in total factor productivity relative to a control group).

And we finished up with Professor Adam Jaffe, Director of Motu Economic and Public Policy Research, talking about "Regression discontinuity made easy" (according to the conference flyer - I think he headed his actual speech with something else which I didn't keep a note of, but the topic was the same in any event). You'd have to think this would be one of the more forbidding presentations, right up there with "Oxidative Phosphorylation For Beginners", and would be a tough challenge either to deliver or to listen to. It turned out to be a marvel of exposition - the most technical of topics laid out with an lucid explanation of how it works; why, when and how you could use it; and a comparison between it and randomised experiments, so it happily dovetailed with David McKenzie's presentation.

This was a really good day all round. Full marks to the organising sub-committee in particular, and to GEN's executive in general.

For serious telco addicts only

You know what UBA is, and UFB? You got the whole initial pricing principle/final pricing principle thingie sussed? You can recite s18 of the Telco Act? Okay, we're good to go.

So. Chorus is taking the Commerce Commission to the High Court over the Commission's UBA pricing decision. It's not always the best idea to fire all the weapons you have, and there's now more expense, uncertainty and delay, but never mind: at least Chorus had the grace to take a "more in sorrow than in anger" tone, and who knows, if the rest of us were sitting around the Chorus management table, maybe we'd have pressed the legal button, too.

We haven't seen the details of Chorus's suit: maybe they haven't been finalised yet. All we have got to go on is this Chorus press statement, which gives a brief if rather disjointed description ("the limitation of two benchmarked countries despite the specific factors set out in section 18 and 18(2A)") of the grounds Chorus might have for challenging the Commission's decision.

But even without knowing the details, I rate Chorus's chances of success at low, and here's why.

My guess is that, perforce, Chorus's suit will focus on s18(2A) of the Telecommunications Act, the bit that says,

"(2A) To avoid doubt [often a warning marker, by the way, that what comes next will significantly increase the uncertainty of meaning], in determining whether or not, or the extent to which, competition in telecommunications markets for the long-term benefit of end-users of telecommunications services within New Zealand is promoted, consideration must be given to the incentives to innovate that exist for, and the risks faced by investors in new telecommunications services that involve significant capital investment and that offer capabilities not available from established services".

The government, at one point, was certainly taking the line that s18(2A) was legalese for, "We, the government, are telling you, the Commission, not to set low copper-based prices that will impede take-up of the fibre-based UFB", and no doubt Chorus will be saying something similar.

So here's why I think the Chorus case will struggle.

One, the Commission is only required to "consider". It clearly did. If this suit goes the distance, then there'll be some very clever lawyers dancing on the head of the "consider" pin and on the adequacy and extent of "considering". I think the Commission will scrub up okay on those sorts of adequacy and extent arguments. And at the end of the day it's a consideration, not a mandatory over-riding instruction, and it looks to me that the consideration test was met.

Two, the Commission was simultaneously told to follow quite a prescriptive price-setting process - the "initial pricing principle" of discovering a particular set of overseas prices, and using them as a benchmark. This was clearly the main thing it had to do, though with a weather eye out for considerations like s18(2A).

Personally, I think s18(2A) was a largely incoherent overlay over the initial pricing principle: you can't ask a regulator to (a) set prices at the level overseas and (b) set prices so as not to cause trouble with local UFB prices. But if you're obliged to make the best of the statutory hodge-podge you've been given, as the Commission was, then in my view its major responsibility was to do the benchmarking (the whole scheme of the Act, for years, has been based on this initial pricing/final pricing process), and where any discretion might be available (eg picking points within a benchmark range), then it should try and incorporate s18(2A). As the Commission did.

I've been wrong before when I've had a go at guessing how the Commission's litigation, and litigation against it, might pan out. No doubt I'll be wrong again from time to time.

But I don't think this is one of those times.

Sunday, 1 December 2013

Crime, victimless crime, or no crime at all?

The latest American Economic Review CD arrived in the PO box the other day, and it had an article that reminded me of just how difficult it can be to distinguish competitive from anti-competitive behaviour.

If you've never paddled in this particular pool before, your first thought might be that the job can't be as hard as all that. Standover intimidation of the minnows by the dominant incumbent, hard core cartels, dirty tricks employed against potential new entrants - should be easy to spot, right? Especially as these days there's often a treasure trove of internal corporate e-mails to shed light on what was going through people's minds at the time.

Well, no, actually. I'd say that a range of behaviours are increasingly becoming more difficult to characterise, often because economic theory has been coming up with new ways of analysing and interpreting them.

And it's not just behaviours that fall under Section 36 of the Commerce Act ("Taking advantage of market power") that are difficult to make a call about. While there often important issues at stake in s36 cases, as anyone unfortunate enough to get caught up in one of these things knows they can often be a complete toss-up, and Section 36 cases, when they hit the courts, are infamously arbitrary. In the Pink Batts case*, for example, it went to a penalty shoot-out in the House of Lords, with three judges seeing it as Carter Holt's right to compete vigorously and two judges seeing it as unlawful predatory pricing to drive a new entrant from the market.

Rather, the difficulty extends across a whole range of behaviours. And it's further complicated by the fact that sometimes new theorising leads you to think that formerly unacceptable practices are actually okay from a competition viewpoint, and sometimes it goes the other way, with new theory suggesting that formerly okay things can actually be problematic for competition.

This latest AER article, "Competition with Exclusive Contracts and Market-Share Discounts" (Vol 103, No 6, pp2384-2411) has a bit of both, with one behaviour found less anti-competitive than usually thought, but another pinged.