The Commerce Commission has always been able to take on traditional cartel arrangements: secret agreements where businesses divvy up a market, restrict output, and raise prices. Those arrangements are rightly subject to heavy monetary penalties.
But cartels are not the only way competition gets blocked.
Regulation can do an excellent job of blocking competition. So can government procurement practices. It’s largely been outside of the Commerce Commission’s remit.
For almost a decade, the Commission has been able to undertake ‘market studies’. And within those studies’ sprawling reports were pointers to regulations and land use planning restrictions that made it harder for new firms to enter or existing ones to expand. One chapter of the market study into retail groceries focused on all the ways that regulations, typically land use planning restrictions, discourage new entrants that might want to give it a go.
Preventing competition is rarely Parliament’s intent when it comes up with a regulatory regime. But the combination of multiple regulatory regimes combined with government procurement practices can easily stifle competition. Nobody checks whether the combined effect is a de facto cartel. And if everyone is merely following the rules set by Parliament and regulatory agencies, cartel enforcement action hardly seems appropriate.
That’s one reason the National-ACT coalition agreement promised to “Reform market studies introduced by the Commerce Amendment Act 2018 to focus on reducing regulatory barriers to new entrants to drive competition.” An admirable intention, particularly when paired with another innovation: regulatory reviews by the Ministry for Regulation.
Here’s how that could work.
The Commerce Commission could examine a market, say medical services. It could ask whether combination of occupational licensing and Health New Zealand procurement practices creates a “substantial lessening of competition”. That’s a term of art. The Commission knows how to test whether competition has been substantially lessened. But the Commission is not a regulatory quality agency.
If the Commission found that regulation and procurement settings were creating a substantial lessening of competition, it could hand that advice over to the Ministry for Regulation. The Ministry could then do the next step: test whether the same public benefits could be achieved with less stifling of competition.
Maybe the current regime really is the least-bad way of securing those benefits, and those benefits exceed the costs. If so, it would be good to know that. But if there were better ways of getting those benefits, the Ministry could propose changes. Or we could find that the least-bad way of regulating things still costs more than it’s worth. We could find out.
It sounds like exactly the kind of thing that a center-right, red-tape-cutting government might want to do.
So it’s disheartening to read the proposed revisions to the Commerce Act now before Select Committee.
The Bill has a few laudable changes. It strengthens the confidentiality of material supplied to the Commission – good and important.
But the proposed changes to market studies are not what was promised. Rather than narrowing market studies to sharply focus them on regulatory barriers that stymie competition, the revisions expand them.
A market studies that followed the coalition agreement’s promise would be shorter, more practical exercises requiring less complex modelling work. Start with a simple question set from a potential entrant’s perspective. For example: “If I wanted to start a pharmacy in Upper Hutt near other pharmacies and dispense funded medications, what would I have to do to comply with regulation and secure a contract?”
Answering that question means mapping the barriers to entry and expansion. It does not require defaulting to complex modelling, nor should it require turning businesses into unpaid research assistants for the regulator.
The Bill creates a new class of “studies of pro-competition regulation’ and gives the Commission new powers within that category. The Commission will be able to compel businesses to produce forecasts and plans that follow a Commission-prescribed method, backed by substantial penalties for noncompliance.
It is neither necessary nor proportionate for barrier-focused studies. It also sits awkwardly with the Commission’s usual role here. Compelling production of documents can be necessary in cartel investigations. Compelling firms to generate new forecasts to a Commission methodology is different. It asks businesses to do the Commission’s work for it. It asks businesses to help prove the regulator’s case on behalf of the regulator.
For almost a decade, the Commission has been able to undertake ‘market studies’. And within those studies’ sprawling reports were pointers to regulations and land use planning restrictions that made it harder for new firms to enter or existing ones to expand. One chapter of the market study into retail groceries focused on all the ways that regulations, typically land use planning restrictions, discourage new entrants that might want to give it a go.
Preventing competition is rarely Parliament’s intent when it comes up with a regulatory regime. But the combination of multiple regulatory regimes combined with government procurement practices can easily stifle competition. Nobody checks whether the combined effect is a de facto cartel. And if everyone is merely following the rules set by Parliament and regulatory agencies, cartel enforcement action hardly seems appropriate.
That’s one reason the National-ACT coalition agreement promised to “Reform market studies introduced by the Commerce Amendment Act 2018 to focus on reducing regulatory barriers to new entrants to drive competition.” An admirable intention, particularly when paired with another innovation: regulatory reviews by the Ministry for Regulation.
Here’s how that could work.
The Commerce Commission could examine a market, say medical services. It could ask whether combination of occupational licensing and Health New Zealand procurement practices creates a “substantial lessening of competition”. That’s a term of art. The Commission knows how to test whether competition has been substantially lessened. But the Commission is not a regulatory quality agency.
If the Commission found that regulation and procurement settings were creating a substantial lessening of competition, it could hand that advice over to the Ministry for Regulation. The Ministry could then do the next step: test whether the same public benefits could be achieved with less stifling of competition.
Maybe the current regime really is the least-bad way of securing those benefits, and those benefits exceed the costs. If so, it would be good to know that. But if there were better ways of getting those benefits, the Ministry could propose changes. Or we could find that the least-bad way of regulating things still costs more than it’s worth. We could find out.
It sounds like exactly the kind of thing that a center-right, red-tape-cutting government might want to do.
So it’s disheartening to read the proposed revisions to the Commerce Act now before Select Committee.
The Bill has a few laudable changes. It strengthens the confidentiality of material supplied to the Commission – good and important.
But the proposed changes to market studies are not what was promised. Rather than narrowing market studies to sharply focus them on regulatory barriers that stymie competition, the revisions expand them.
A market studies that followed the coalition agreement’s promise would be shorter, more practical exercises requiring less complex modelling work. Start with a simple question set from a potential entrant’s perspective. For example: “If I wanted to start a pharmacy in Upper Hutt near other pharmacies and dispense funded medications, what would I have to do to comply with regulation and secure a contract?”
Answering that question means mapping the barriers to entry and expansion. It does not require defaulting to complex modelling, nor should it require turning businesses into unpaid research assistants for the regulator.
The Bill creates a new class of “studies of pro-competition regulation’ and gives the Commission new powers within that category. The Commission will be able to compel businesses to produce forecasts and plans that follow a Commission-prescribed method, backed by substantial penalties for noncompliance.
It is neither necessary nor proportionate for barrier-focused studies. It also sits awkwardly with the Commission’s usual role here. Compelling production of documents can be necessary in cartel investigations. Compelling firms to generate new forecasts to a Commission methodology is different. It asks businesses to do the Commission’s work for it. It asks businesses to help prove the regulator’s case on behalf of the regulator.
The coalition agreement promised a market studies that would actually help improve conditions for competition. Nobody else casts a competition lens over the operation of regulatory and procurement regimes. There are a lot of places to point that lens.
Instead, the legislation grants intrusive and costly new powers in areas where they hardly seem needed, shifting the focus from where it ought to be.
Select Committee at least has time to set things right.
Dr Eric Crampton is Chief Economist at the New Zealand Initiative. This article was first published HERE
Instead, the legislation grants intrusive and costly new powers in areas where they hardly seem needed, shifting the focus from where it ought to be.
Select Committee at least has time to set things right.
Dr Eric Crampton is Chief Economist at the New Zealand Initiative. This article was first published HERE
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