Listener: 28 February, 1981.

Keywords: Business & Finance;

With today’s fashion for advocating ‘more market”. it may be useful to consider the structure of New Zealand markets. A market may have one of many structures, and government intervention in each ought to reflect that.

If the market is highly competitive. with a large number of buyers and sellers, then much of the economic regulation may be left to it. With a single seller and many buyers, the government may have to limit the monopoly’s ability to abuse its own power There are many other market structures, including few sellers, many buyers and sole seller sole buyer.

The study of market structures is not a well-developed part of a New Zealand economics, but a few studies offer some guidance.

Economist John Whitehead examined consumer spending according to the level of competition among sellers He round that only 24 percent of consumer spending was on commodities subject to a high degree of competition. Another 42 percent was subject partial competition and the remaining 34 percent experienced little or no competition.

These figures are unlikely to be exactly correct but they strongly suggest that competition does not dominate the consumer in the New Zealand marketplace.

But this does not tell us why. In many areas of spending the government is the monopolist (e.g. electricity) or has given a monopoly to a quasi-government agency (e.g. fruit and some dairy products) In other products however, there may be only one or a few firms in the industry.

Some idea of the problem is gained from John Ellis’s study Industrial Concentration for the 1970-71 year and from Department of Statistics data 1976-77. Each examines only manufacturing industries, where there little government ownership.

The degree of “monopoly” or industrial concentration, can be measured by the employment figures of each the industry’s three largest business units . For instance, in 1976-77 there were 44 meat export works owned by 20 business units. Of the 33,056 workers employed in the industry, 15,338 (46.4 per cent) were employed by the three largest units.

In the 144 industries studied, the measure of industrial concentration in the three largest units varies from 100 percent in 18 industries to 10.7 percent in the case of builders, carpenters and joiners.

Ellis suggest those industries whose ratios exceed 66 per cent should be identified as high-concentration industries, and those whose ratio is below 34 percent. Thus 42 percent of manufacturing industries are in the highly concentrated range, 37 per cent in the medium range. and 21 percent in the low range. Compared with Britain or the United States, our manufacturing, industries are apparently much more concentrated. or as a layperson might say, monopolistic.

Perhaps this is not surprising: ours is a much smaller economy, But this obvious conclusion proves that we would be foolish to administer our economy as if it were a larger one a view frequently advocated by those in favour of ‘more market’.

Curiously enough, in some areas we seem to be much less interventionist. Some of the mergers of the past few years have been subject to much less rigorous scrutiny than they would have had in Britain or the US.

What we do know is that concentration has been rising. For the 49 industries available for comparison between 1971-72. and 1976-77, some 35 (71 per cent) show a rise in concentration in the five-year period. It seems likely that this concentration has continued to increase over the past four years of economic stagnation and restructuring. There has also been a growth of conglomerates. like Fletcher Challenge, with holdings in several industries.

Monopolies are not necessarily bad thing. Because they are technologically innovative and reap the benefits of long production runs, they can make major contributions to economic growth. A conglomerate may be the best way to restructure if the government is unwilling to implement effective economic and social planning. We may need export monopolies in order to meet the challenges in our overseas markets. These can be real benefits to balance against their excessive economic power.

There is no unique formula for striking the right balance between the benefits and disadvantage of concentrated industries. One’s choice will also depend on political taste. A social democrat might argue for the following changes in New Zealand.

(i) Legislation to enable the identification, investigation and, if necessarily, prohibition of restrictive practices, The investigation needs to be public.

(ii) Similar legislation dealing with mergers.

(iii) More information published by firms, particularly when they are monopolistic, The information would include data on production, markets and plans. In addition, I find it astonishing that not even shareholders know who firms make political donations to.

(iv) A review or government regulation, legislation and practice that restricts competition or prevents new competitors from entering the market,

This is not a plea ‘for unlimited competition. But workable competition can be an effective way or ensuring social control over monopolistic economic power. In New Zealand we are a long way from the ideal.