The Public Interest in Competition Policy

The Economics of the Commerce Act. Ed A. Bollard (NZIER Research Monograph 52, October 1989) Chapter 4, p.66-88.

Keywords: Business & Finance;

4.1 Introduction

The merger provisions of the Commerce Act 1986 contain a two stage test for refusal. Section 66 subsection 7 states that the Commerce Commission shall give clearance unless it is satisfied that the merger or takeover would result in any person acquiring a dominant position in a market or strengthening an already dominant position.

But the following subsection 8 provides for the clearance if despite the merger generating dominance, as set out in subsection 7, the outcome “would result or would be likely to result in a benefit to the public which would outweigh any detriment to the public” as a consequence of the dominance.

A similar provision appears with regard to anti-competitive trade practices, which may be authorised if the public benefit outweighs the lessening of competition.

This paper is about this public interest provision of the Act, particularly as it applies to mergers. Because in so few cases has it been necessary to apply the public interest test, it is not possible to give a comprehensive account of what it might mean. Rather this paper examines various public interest justifications which have been raised, in the light of economic theory and those few cases. It also considers what changes in procedures and consequential actions may be necessary.

One such common justification has been an increase in ‘efficiency’. As it has been argued that the Commerce Act should be dramatically restructured, to replace the Act’s objective of the promotion of competition with the promotion of efficiency, this wider issue is first considered.

4.2 The Meaning of ‘Efficiency’

In common parlance the expression ‘efficiency’ is a positive word with connotations of motherhood and apple pie. The Concise Oxford defines it as “the ratio of useful work performed to the total energy expended”. More popularly it refers to doing something in the best possible way. It is in strange circumstances, indeed, where someone announces that they are pursuing a matter inefficiently. However, in economics the term has a rather stricter meaning; complicated by different economists using different definitions.

There is a formal definition in economics of ‘Pareto efficiency’. A Pareto efficient improvement occurs where at least one person’s welfare is ~m~roved but no other people are made worse off as a consequence. Within a not too onerous value frame, such a move may be said to be beneficial: This applies irrespective of the individual beneficiary. For Instance It would still be Pareto efficient if the beneficiary was the richest person in the land, or the poorest; all that is required is that no-one else is worse off.

A situation from which no Pareto efficient moves are possible that is someone can be made better off only by making others worse off is described as ‘Pareto efficient’. All other things being equal, it would be better to be in a Pareto efficient situation than not to be, since in the latter case someone can be made better off.

This formal notion is not what is being referred to when the expression :economic efficiency’ is being used. This may seem a round about way of introducing the concept, but it is important to emphasize that two crucial features of Pareto efficiency do not apply to economic efficiency, even though the terms are sometimes confused. First, as we shall see, economic efficiency is not as rigorously defined, and may have a number of different meanings. Second, as we shall also see, it contains much stronger value judgements.

To illustrate the first point, consider these various recent quotations in relation to the interpretation or reform of the Commerce Act:

(1) “competition policy should have one clearly defined objective efficiency, defined as maximising consumer satisfaction ( consumer welfare) within resource and technological constraints” (Economic Development Commission, 1988).

(2) “The promotion of competition is a means to an end, rather than an end in itself. The benefit of rivalrous competitive behaviour is that it limits the abuse of market power so that economic efficiency is not compromised. Economic efficiency is concerned with the production of goods and services in a least cost manner and in the determination of what is produced in a manner such that a different combination of goods and services would not increase consumer welfare i.e: that goods and services are not “mispriced”… economic efficiency, that is production of goods and services in a least cost manner and the minimisation of the abuse of market power to raise prices or reduce output” (Southpac, 1988).

(3) “The [Act’s] objective should be stated in terms of economic efficiency (the efficient use of economic resources through market processes being central to the welfare of all citizens as consumers) …The efficiency of resource use is a valid objective of economic policy because resources are scarce relative to people’s demands for them. More output of one type of good can only be at the expense of a lower production of alternative outputs. …Economists use the concept of efficiency to evaluate the success with which an economic system combines scarce resources to satisfy competing wants. This criterion explicitly ignores the effect of different distributions on welfare. In terms of static analysis, efficiency has two dimensions: productive efficiency [and] … allocative efficiency… Efficiency has a further dynamic dimension: inter-temporal efficiency. The efficiency criterion can be reinterpreted in terms of minimising the sum of production and transaction costs in present value terms.” (Business Round Table, 1988)

(4) “According to mainstream economic theory, economic efficiency should be the rationale underlying competition law. The potential harm arising from a lack of competition in a market [leads to] additional resources required to satisfy a given level of consumer demand [which] involves a loss of allocative efficiency. The other type of efficiency which is important to competition economics is productive efficiency. Together, allocative and productive efficiency comprise total economic efficiency and determine the level of consumer welfare, i.e. the extent to which consumer demands are satisfied given a fixed level of resources (including technology).” (Jennings and Begg, 1988)

(5) “it would perhaps reduce confusion if the term ‘competition policy’ were discarded in favour of ‘efficiency policy’ since economic efficiency should be the sole rationale for this type of intervention.”(Kerr, 1988)

There are two salient features of these quotations. First, there is not a lot of consistency about the definition of efficiency, with sometimes two or more different concepts being used by the same writer(s). It is not surprising that no submission on Commerce Act reform actually recommended a legal definition of efficiency.

The second salient feature is that in each case the notion of ( economic) efficiency is presented as a concept that is supportable in its own right, and by implication value free. It is not.

It is beyond the scope. of this paper to reconstruct a rigorous economic definition of efficiency (Greer, 1989; Easton, 1989b). We shall take an increase in efficiency to mean an increase in national income for a given level of inputs. This increase may arise from what is described above as improvements in allocative and productive efficiency, and (if the time frame is important) inter-temporal and/or innovation efficiency (Greer, 1989). It can be shown that an increase in national income is equivalent to an increase in consumer welfare in the sense that the Economic Development Commission uses the term.

That the notion of economic efficiency is not value free is skirted in the above quotations. The Economic Development Commission refers to consumer welfare, but does not mention the multitude of consumers. We may ask what if some consumers are better off, and some consumers are worse off as a result of this change? Is that an improvement in efficiency? The answer is likely to be that if there is, those worse off could be compensated for the change, and still there are some better off, then there has been an increase in efficiency. But the compensation need not occur, so efficiency may increase but some consumers may be worse off, and there is no obvious, value free reason why this situation should be described as an improvement, without further consideration of the distributional implications.

The Business Round Table quotation is misleading when it states that “this criterion explicitly ignores the effect of different distributions of welfare” because it does not state what is the implicit assumption about the income distribution. This takes a little space to establish, but it can be shown that the implicit assumption is the extremist one which is unwilling to sacrifice any increase in national income for an increase in equality (Easton 1989b). That is the notion of (economic) efficiency as used above is not neutral towards the degree of income inequality; rather it positively discourages social goals of greater income equality, and income redistribution.

Sometimes the neglect of distributional issues is made by an appeal to ‘Hume’s Law’.

“that a dollar is a dollar. Hume’s law means that if two persons are bidding at an auction for a sea-side cottage and a poor homeless family is outbid by a wealthy family wishing to own a sea-side weekender, the result of the bidding is efficient. The house has been placed in the hands of the most dollar votes. The effect of Hume’s law is to divorce consideration of the allocation of resources from consideration of the distribution of wealth (or income).” (Williams, 1988)

There is an irony that the name of Hume should be associated with a principle which is so manifestly not a natural law. The doyen himself would perhaps have described it as a principle of conduct, and subjected its standing to a far more rigorous analysis than its users do today.

All this is enough to warn us that making efficiency the objective of competitions policy is a far from value free criterion. Those who propose it either have a set of values they are unwilling to reveal, at least as evidenced by the above quotations, or they have not properly understood the concept they are advocating.

As the scope of this paper is the public interest provisions of the existing Commerce Act, the question of whether its primary objective should be changed to efficiency will not be further pursued.

4.3 Efficiency as a Public Interest Concern

Suppose a merger ( or restrictive practice) has been found to cause or strengthen dominance (or lessen competition) in a market. Is there a case that the increase in efficiency from the action should be sufficiently in the public interest to justify authorization? To discuss this it is necessary to clear away some less controversial points.

First there is a small problem of terminology. The adjective ‘public’ can sometimes be used to mean ‘non-private’ and sometimes to mean ‘private and non-private’. In my view the Commerce Act probably means to include the private benefits to the firms involved in the totality of the ‘benefit to the public’. Because the Act requires a balancing of public detriment, this particular interpretation would give the same outcome as the alternative one which excludes the firm benefit and detriment. It is merely a matter of being clear as to the terminology. The broader one is used in this essay.

Second and obviously, any public benefit has to be measured in net, not gross terms, which means that account has to be made also of the public detriments.

The third point is that an economist would tend to argue that any claims for efficiency in the public interest imply there is no other reasonable or more competitive way of attaining the cost reductions. If there was, say via another suitor, then the public interest could be attained this way without the detriment of the lessening of competition. This suggests that the measure of the public benefit should be in comparison to the next best option, not to the pre-merger situation. This approach is not mentioned in the Commerce Act, but some of the Commission’s decisions have tended along this line.

Fourth, it is well to note that in actual practice estimates of the efficiency gains typically are crude, and may well be optimistic. Transition costs, in particular, are likely to be underestimated. The impression I have gained from the various cases in which I have been involved is that the business community gets involved in mergers (and restrictive practices) on the basis of hunch and strategic considerations as much as after careful cost accounting.

This results in a real practical problem for the Commission, if it wants quantitative estimates of any public benefits, because it requires procedures to evaluate the claims and counterclaims. Confidentiality and time pressures will add to the difficulty of determining the reliability of the estimates.

Fifth, and moving towards the main focus of this section, it is rare for a merger case before the Commission not to involve some increase in (production) efficiency, in that the applicants claim that they will be able to reduce costs, typically from rationalisation and/or economies of scale, following the merger .

Who benefits from these cost reductions will depend upon the market circumstances. Sometimes consumers will experience lower prices and/or better service; sometimes the producer will get a boost to profits. While in the situation where there is no lessening of competition the cost reductions are more likely to be more passed onto the direct consumer -relative to what would have happened if there had been no merger -that is not inevitable.

Thus while the circumstance where the public interest arises involves the possibility that all or most of the costs savings will be retained by the firm, this case by itself is not a particularly important one since consumers need not be worse off. What is at issue is the possibility that because of the acquired dominance the (direct) consumer will face a higher price and/ or inferior service relative to the pre-merger situation. That is, the merged firm will keep all the savings, and in addition will gain profits from charging higher prices.

Thus we have a tradeoff between a loss of direct consumer welfare and a gain in production efficiency. The application of the public benefit provisions of the Act cannot avoid such a tradeoff. It could be ignored .by focusing only on efficiency, but that would be an equivalent to a tradeoff in which the (direst) consumer interest is given zero weight.

It is not sufficient to argue that producers are consumers too. Even if there are no foreign shareholders (whose consumption welfare is outside the direct domain of New Zealand policy objectives) then the producer / consumers are likely to differ from the direct consumers. Sometimes there may be a close coincidence. A merger between exporting dairy factories in the same region may benefit the dairy farmer shareholders at the expense of the dairy farmer suppliers. But as the two groups are almost identical the issue is not acute. Such situations are rare.

More often the groups are much more separated. This was very evident in the merger involving the two Auckland milk suppliers, for the consumers were Auckland city households and the producers were South Auckland and Waikato dairy farmers. Similarly forestry company shareholders may be a tiny subset of the ultimate purchasers of the company products.

Practically then, efficiency as a public benefit generates a tradeoff between the return to the producer and the return to the suppliers and direct consumers. The Commission is given little guidance on how to balance their interests.

The extremes are fairly straightforward. The situation where the few producer/shareholders had substantially higher incomes than the many consumers and where the efficiency gains are small compared to the return the merged firm could generate from using its market dominance is likely to result in a ruling against the merger. The situation where the consumers and producers are on similar income levels, and where the efficiency gains are large compared to the gains from market abuse is likely to get more favour able consideration.

In practice most decisions will involve less clear comparisons. At this stage all the Commission might ask for is convincing estimates. of the relevant ratios. And all the public might ask for is some clarity and consistency in the Commission s reasoning.

This conclusion differs dramatically from that of Vautier who argues that

“public benefit should not require applicants to prove that potential public benefit is distributed to any particular group, e.g. consumers in a particular market. The more emphasis that is placed on the distribution of potential gains, as distinct from their realisation, the more political must be the decision making process.” (p62)

Arguing that the public benefit excludes distributional issues involves an odd view of the public benefit. Suppose the outcome was that all the gains, and then some, went to very rich shareholders domiciled overseas and who never visit New Zealand. Could it be seriously argued that this was in the “public benefit”? Vautier appears to be trying to confine “public benefit” to some notion of efficiency, which as we have reported involves a latent distributional assumption.

Thus the application of the public benefit test cannot avoid the question of distributional effects. If distributional issues be political, then so is the public benefit test.

How then is the Commission to interpret the public benefit? Ultimately this has to be within the public policy framework of current economic and social management.

4.4 The Public Policy Framework

There is specific provision in the Act for the Government lo advise the Commission of its economic policies. This has nol yel been invoked.

However, it would be idle to assume that the Commission decisions are not influenced by the public policy framework. One only has lo consider how an open minded Commission might be intellectually persuaded by a Marxist as to a particular interpretation of competition policy, and yel the likelihood is that such an interpretation would not be adopted in the Commission’s decisions.

Practically the Commission has the choice of being conscious about its use of the public policy framework, or of being unconscious. This is a different issue from being explicit or implicit in the judgement. Transparency and clarity however would suggest consciousness and a cautious explicitness

There is, of course, room to debate what is public policy. For instance some of the advocates of efficiency as the Commerce Act objective, have argued this is the primary objective in public policy generally. It would be hard to gel a government certification lo this effect. And in any case il is easy lo get a long list of instances of industrial reform where il is evident that the objective of efficiency has been moderated by transitional easing and other considerations; border protection, deep water fishing, taxi licensing, town milk supply, vineyards, the West Coast railway line. It could also be argued that in a number of cases of slate owned enterprise reorganisation, the objective was the introduction of competition rather than static efficiency gains.

Such examples provide an indication of how the Commission might interpret the public benefit. Moreover if there were a change in government policy, the Commission can easily respond. For instance, suppose the government decided to be more interventionist in terms of supporting failing regions. This would be a signal to the Commission to consider regional issues more weightily, without there being a letter of direction from the Government.

4.5 Labour Reductions

This approach indicates how the Commission should think about the question of the public benefit, then considering the labour shedding that usually goes with efficiency gains. (There may be other factor mputs for which the issue arises, but labour is the most obvious and the exemplar.)

Practically this issue arose in the Whakatu/Advanced case (Commerce Commission Decision 205). The Commission accepted the Combmed Trade Unions’ argument that the labour market should be taken into account. It went on to find there was a detriment from the loss of employment, mentioning in particular that skilled meat workers would find it “difficult (and impossible in some cases) to relocate theIr skills (para 56).

The majority opinion found that there were some employment benefits, from the enhanced security of those who retamed theIr posltton but these were not outweighed by the detriment from redundancies. The minority opinion argued “I do not accept that a substantial loss of employment should be viewed lightly”.

There is a paradox in all this. As a first approximation, the economic evaluation of the immediate detriments from the redundancy wlll almost exactly balance the gains from efficiency. Thus if efficiency and employment were to be given equal weight in the public benefit the net effect would be near zero in the short term.

One resolution is that if there were adequate redundancy packages, an effective active labour market program, and full employment, the shed labour would be easily redeployed, in which case the additional output from the released resources would convert this part of the public benefit back into a quantum similar to the efficiency gains.

Alas these preconditions no not currently apply, particularly the third one. What is the Commission to do?

The public policy framework argued earlier, suggests that the Commission should look at similar cases. In particular, it is evident from the corporatisation policy that the government has given a considerably higher weighting for efficiency gains relative to redundancies, even where there is little hope of early labour redeployment. Without cases to the contrary the Commission would make a similar weighing. Even if each Commissioner has considerable reservations about the rightness of the labour market component of the corporatisation policy, the Commission has little choice but to follow the general policy framework.

4.6 Rationalisation

The Whakatu/Advanced case provides illustration of another public benefit issue; that of rationalisation. There was a complicated irony in the case which may have escaped the Commissioners.

The reason why the rationalisation would lead to a lessening of competition was that the freezing industry has significant entry and exit costs; it is not a contestable industry (Grimmond 1986). These were the very same factors which required the collective agreements aimed at rationalising the Hawkes Bay industry.

Suppose, as the Commission concluded, that this rationalisation was in the public interest. And suppose, as a majority of the Commissioners concluded, that there was no other obvious or less painful way of rationalisation. In reaching this conclusion, it would note that before 1984 a government-led restructuring may have been feasible, but that the current policy framework would rule such an option out.

In such circumstances the irony is that the very factors which generate the need for the collective agreement, are the factors which result in the lessening of competition. In the light of this analysis it is not surprising that some (in fact a majority) of the Commissioners found the public benefit from the rationalisation of the industry outweighed the detriment from a loss of competition. It is noteworthy that the main point of the minority report is that there was an alternative private sector way of bringing about this rationalisation.

4.7 The Auckland Town Milk Supply Case

Perhaps an even more interesting case, where the complexity of the market regulation generated an unexpected public benefit, was the proposed merger between NZ Cooperative Dairy Company (NZCDC) and the Auckland Cooperative Milk Producers (ACMP). Relating the story involves some detail, although a number of aspects involved in the merger will be ignored for simplicity and brevity.

NZCDC is New Zealand’s largest dairy company, based in the Waikato concerned primarily with manufactured milk – that is milk which is mainly exported as butter, cheese, casein, and such like. It also is involved in town milk supply to a number of South Auckland centres and to greater Auckland City, (as well as related products such as yoghurt, cream and cottage cheeses, cream, dairy foods).

ACMP was not at all involved in manufactured milk, being a town milk supplier, mainly to Auckland City, plus the production of a similar line of related products

For five decades the town milk supply had been regulated quite separately from manufactured milk. Town milk supply was based upon a system of the licensing of milk delivery. Those who had the licences had the protected monopoly for delivery in the area, including to bulk purchasers such as hospitals and supermarkets.

As a result of the licensing regime, town milk supply dairy farmers used a different technology from manufactured milk supply. The latter only supplied ‘seasonally’ , typically for eight or nine months, drying their cows off when there was insufficient feed. Town milk demand was annual, so that the suppliers kept their cows milking all year, using expensive fodder over the winter months. Not surprisingly, town milk supply was more expensive per litre.

In late 1987 legislation was introduced, to be passed in March 1988, which increased competition in the town delivery, with the aim being to integrate the two dairy industries. Ultimately – in 1993 – there would be no licensing of local delivery, but initially only bulk supply was liberalised. In many cities this was not of great immediate effect, since they already had only a single supplier, but in Auckland with its two suppliers it meant that the each could supply all bulk purchasers, who made up about 10 percent of total purchasers, including those in the other company’s supply area.

Cynics will not be surprised to learn that shortly after the thrust of the liberalisation measures were announced, ACMP and NZCDC began discussions which led to the merger proposal. However ACMP was in a difficult position, with problems with long term milk supply and no access to the manufactured milk industry.

(There was an alternative merger proposal involving ACMP and a consortium of South Auckland dairy companies who were in competition with NZCDC, mainly in the manufactured milk area. ACMP management and shareholders did not consider their terms as attractive.)

While NZCDC argued that other dairy producers were potential entrants in the market, the Commission found that the merger would create dominance. The question then turned on whether, nonetheless, the merger was in the public interest. The NZCDC argued that there would be efficiency gains from rationalisation, and the benefits to be discussed in the next section of improving the economic situation of the export dairy industry.

However they also claimed that there was another technology which would lower milk supply costs, and integrate the town and manufactured milk supply. This would be induced by a Winter Milk scheme, .which involved town milk suppliers being paid manufacturing milk prices in the on-season, and a premium for milk supplied in winter months, signalling them to switch to a manufactured milk mode of production, but delaying some of the calving to bridge the milk supply in the off-season.

There was no doubt that if economically viable, this was the sort of industry rationalisation that the new regulatory environment was intended to generate. Normally ordinary market processes would ?0 this. The NZCDC, with its cheaper milk would offer lower prices to city consumers, forcing ACMP to adopt the change. NZCDC thought there were other parts of New Zealand where a Winter MILK scheme would also be successful and cheaper, but that their area was the best place to introduce it. However in the opinion of NZCDC the new regulatory environment discouraged the scheme’s introduction.

They reasoned as follows. Suppose the NZCDC were to introduce the scheme which would take three years to become fully operational. A number of NZCDC suppliers personally attested to the Commission that they would resist any such change to their traditional practice? They were understandably apprehensive at the rearrangement to their lives the Winter Milk Scheme would entail. It was a reasonable inference that they would transfer to ACMP, who would welcome them.

This would leave NZCDC with a shortage of supply of milk over winter months. Even if they were to withdraw from bulk supply; NZCDC would not have been able to meet all their household commitments for the first year or two of the scheme. Under the town milk .licensing scheme that would remain in operation, given a shortage of milk supply in winter months NZCDC would have had to return some of their household district licences, which would have been snapped up by ACMP who already had the supply capacity from the farmers who had changed companies. (Nor would the ACMP be as interested in a winter supply scheme because its farmers were not involved in manufactured milk supply.) However, as the NZCDC built up its supply capacity, the reverse would not happen, because ACMP would not release its extra licences.

The effect, then, of the introduction of the new low cost regime would be for NZCDC to lose suppliers and hence, because of the town milk supply licensing arrangements, markets. As long as the licensing regime was in place they would not be able to recover market share at a later date, even if cheaper supply conditions meant they sold cheaper milk. The outcome would be the reverse of reverse of the normal market situation where a cheaper technology would increase market share.

NZCDC explained that to avoid this, they would delay the introduction of the scheme, by up to three years. The costs would be a less efficient milk supply and (possibly) higher milk prices, for Auckland and other centres where the scheme was commercially viable. A quantitative estimate of this loss, albeit over a limited period, suggested it was larger than the rationalisation gain.

Of course there are problems with this story. An illustration of one powerful weakness will do here. Suppose the merger is proceeded with, but that the scheme proves to be more expensive than the current system. Presumably the company would easily pass the burden on to the milk drinkers of Auckland.

However the Commission found that the potential public benefits of the merger, of which the Winter Milk Scheme was a major part, outweighed the detriment from dominance and authorised for the merger to go a head. Ironically, the regulatory environment was a major contributor to the post merger dominance and to the public benefit that the merger would generate

Subsequent events throw little light upon the correctness of the decision. It is true that NZCDC raised its prices three times in the period from January 1988 to May 1989. This could be argued to be a result of the lack of competition, but equally it could be argued that NZCDC tended

to follow other North Island suppliers in their hikes. In any case, the logic of the changed market regulation was that town milk prices would more closely follow manufactured milk prices, and this was a period of rising world dairy prices. However it can be reported that NZCDC did introduce a Winter Milk scheme, but because it is phased in it is not yet possible to assess its success.

4.8 Other Reasons for the Public Benefit

Various other reasons for the public benefit have been submitted. In the Fletcher Challenge Limited/New Zealand Forest Products proposed merger (Commerce Commission Decision 213), Fletchers argued there were benefits from various forms of rationalisation, synergies, reduced use of public roads, and export market development. The Commission did not find these benefits weighty enough to compensate for market dominance.

In Amcor/New Zealand Forest Products (Commerce Commission Decision 208) claims were made for enhanced export potential, the introduction of new products, lower prices to customers (presumably an efficiency claim), regional benefits to the depressed Northland region, and CER. Again the Commission did not find them sufficiently weighty.

In the NZCDC/ACMP case, as well as rationalisation and regulatory distortion, export development, the importance of the dairy industry, CER, and new products were claimed as public benefits. It would appear that the latter group of arguments were given as little weighting as in the previous two mentioned cases.

From the public policy framework, this is not surprising. Suppose each firm had gone to the government requesting tariff protection, a subsidy, or some such intervention on the basis of these claimed public benefits. The government response would have been a sympathetic hearing, an admission these were public benefits, and a firm no -not unlike the Commission. At issue is not whether they are public benefits, but whether the benefits are so large that they justify the intervention, particularly that the intervention itself is likely to have deleterious effects.

The FCL/NZFP case included another public benefit plea which deserves a little more consideration. It was argued that the merger would maximise shareholder wealth. It is doubtful that asking for a government intervention in order to increase or maximise shareholder wealth would get a sympathetic hearing from government. However what was really being submitted was that the efficiency gains from rationalisation (which did not appear in lower prices) would benefit owners. So that argument amounted to an alternative presentation of earlier claimed public benefits, rather than a new one.

One can but muse as to the sort of debate which might ensue if the evidence of shareholder wealth as assessed by share prices was to be seriously considered as a public benefit. The debate would certainly keep a number of economists well renumerated. Since there is good evidence that mergers frequently depress the share price of the successful company in the long run, and may (but less often) depress total shareholder wealth (Duncan et al, 1988) one might end up with the Commission prohibiting all competition lessening mergers as being against the public benefit! This is perhaps another example of the dangers of assuming that the rationalisation efficiency gaining benefits claimed by management are always reliable.

There may well be other circumstances in which the public benefit on this could be found weighty. For instance a good example of the failing firm case has not yet confronted the Commission. However cases where the public benefit is likely to outweigh the detriment of dominance are likely to be rare and idiosyncratic.

4.9 Weighing and Balancing

T he rarity of opportunities to weigh and balance the net public benefit against the detriment from dominance leaves few case examples and a degree of uncertainty from the lack of case law.

The public policy framework proposed here may reduce the uncertainty. The Commission might ask itself is are there cases where the government has given a favourable intervention for parallel public benefits.

It would of course, be inappropriate for the Commission to approach the government for a ruling. However it might invite the applicants to submit suitable cases for its consideration, or explain why there are no parallels.

4.10 Procedures and Consequences

A significant weakness in cases where the public benefit is to be argued, the public is not represented by a counsel. This means the Commission does not have the benefit of alternative scrutiny of any arguments, in an area which we have seen is really quite complicated.

Perhaps the Commission should appoint an amicus curiae in such cases, who would have access to his or her own expert advisers/witnesses. The expense would be paid for by the applicant, and, if confined to cases where the public benefit provision was invoked, would discourage frivolous invocations.

If dominance is found but a public benefit is considered to outweigh the detriment, it is reasonable to suppose that the merged firm will use its new market power at the expense of the consumer (or supplier). The standard assumption in antitrust is that if the fox is put in with the chickens he will eat some, irrespective of his protestation of innocence before the occasion. Of course there are foxes sensitive to the rights of chickens; it is just that you cannot run a farmyard on the assumption that all are.

To an extent the public benefit has to outweigh the consumer exploitation. However in the NZCDC/ACMP case the Commission indicated the price control powers in the Commerce Act could be used if it thought the abuse was excessive.

The trouble is with such a threat that there is a clear and understandable reluctance to use price controls (Collinge 1988). They are clumsy in even favourable circumstances (Easton 1986) and the experience of officials with them in the pre 1984 era was far from happy.

Perhaps the Commission should not have bothered with such a threat. Alternately, perhaps there is a need for a wider set of policy measures to restrain firms where, say, a merger is approved in the public interest, despite the acquisition or increase of dominance. These could include

requiring “four p” reporting of annual productivity, price, profit and performance in the dominant market, to indicate the firm was under notice of consideration for price controls,
divestment provisions in the Act, which even if never used may represent a deterrence to abuse of market power ,
and, when the public sector regulatory framework is settled, similar provisions for parallel private sector firms, particularly private sector common carriers (or essential facilities).

This is not a comprehensive set of measures. What has to be recognised is given the public benefit provisions of the Commerce Act, that on occasions the Commission will authorise mergers which subsequently prove to create market dominance, and that dominance can develop in ways other than via mergers. There may well be a tendency towards monopolisation in some sectors of the economy, particularly as the present round of government liberalisation measures are exhausted. It is not obvious that the provisions of section 36 of the Act provide sufficient restraint.

Moreover, the traditional concerns which lead to a heavily regulated industrial structure have not disappeared. The Commission is familiar with aspiring merger candidates explaining that they need the whole of the domestic market to ward off foreign competition or as a base for exporting. Local raw materials, exchange rate variations, distribution advantages, and overseas supply circumstances and uncertainties among many things -may give the firm a comfortable degree of market dominance. There may be a public benefit, but may it not be greater if there is regulation in the public interest, where there is not adequate market regulation? The traditional concerns do not go away by ignoring them.

4.11 Conclusions

Sometimes there will be a public benefit in a merger, despite a lessening of competition. Such occasions may be rare, but it makes sense to include this situation as one appropriate for merger authorization.

Crude criteria such as efficiency need to be tempered by rigorous economic analysis. It is not possible to avoid ‘political’ judgements ignoring them with covert assumptions is hardly adequate. However the assessment of public benefit is likely to be most satisfactory if it is recognised that decisions are taken in the context of the existing public policy framework and consideration be given to parallel public policy decisions taken elsewhere.

Moreover there needs to be consideration as to the way the matter is presented before the Commission, and mechanisms to regulate the situation after a merger is approved in the public benefit.

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