Friday, 30 September 2022

Spicy competition

I got to have a lot of fun in a panel session at the Competition Law and Policy Institute of New Zealand annual conference in Auckland last weekend. 

Donal Curtin summarises the whole conference. On our session:

Saturday morning, and we started off with 'Market studies, looking back and looking forward'. It was to have been chaired by Will Taylor of NERA, but at the last moment he came down with the dreaded lurgy, and the ubiquitous Ben Hamlin stepped in to preside over Eric Crampton from The New Zealand Initiative and Lucy Cooper from Chapman Tripp. Two big points from Eric: if you're concerned that competition isn't working in a market, the best first question to ask is, what are the barriers to entry? Why aren't new entrants able to come into a market and eat the incumbents' supernormally tasty lunch? And secondly, when you do that, you're liable to discover that there are "impenetrable thickets" of overlapping blockages which are the real issue: he mentioned the cumulative effects, for example, of regulation (including occupational licensing), statutory protections, zoning and consenting in the planning process, and the Overseas Investment Act. Both Eric and Lucy wondered about the selection process: so far the topics chosen (while good ones) have all been government priorities, and there could well be traction from ComCom being given its head to look at where it thinks there may be issues. Lucy raised something I hadn't thought of: she said that ComCom's strength is in analysis and findings, and perhaps there's scope for the policy recommendation piece to be shared with, or done by, others, given that policy development is an art form of its own. I can see the point, and Lucy (who's been through the supermarkets and petrol bunfights) knows more about process than I do, but FWIW, what you might gain in policy development you might lose in urgency (think s36, and others), unless the policy developers' feet were held to the fire in the same way that ComCom is forced to move right along with its market studies.

The most fun for me came in form of a question from the back of the room. 

I'd noted pharmacy ownership rules as a place where a ComCom market study could look at the restraints on competition caused by regulation. Pharmacies must be at least 50% owned by registered pharmacists. It looks, sounds, feels, smells and tastes like a cartel measure to prevent competitive entry. I note that the only real entry has been by virtue of complex capital structures developed to route around a different set of Australian regs. And while ComCom can put in submissions on this stuff, they get ignored. A market study draws an answer from the Minister. 

Anyway, question from the back of the room (more of a statement) was to the effect of whether I was aware that the only way that pharmacy grads can recoup the cost of their study is by being a pharmacy owner rather than a pharmacist employee. I let that sit there for a minute as the implications of the question worked their way through. Then I thanked the questioner for having made the case for strenuous anti-cartel investigation of those regulations; I think I noted that the pharmacy schools should be included in the study. 

I'd had a column in the Herald in August on related matters that I think I forgot to post here. Will do so now. I think it's why Ben Hamlin introduced me at the CLIPNZ session as the Sardaukar shock trooper of market liberalism. Had always considered myself more Atreides/Fremen-aligned; the Sardaukar support the Emperor, and the Emperor helps enforce (or, is allowed to serve at behest of) a pretty bad cartel. I don't like Empire-supported cartels. 

In Frank Hebert's classic Dune series, the Bene Gesserit sisterhood's supernatural abilities extended only so far. There was a place where their powers could not see – a place that repelled and terrified them.

Over thousands of years of careful influence over royal marriages, the Bene Gesserit sought the birth of the Kwisatz Haderach – the one able to look where they could not and shorten the way.

The Commerce Commission's relatively new market studies powers may not quite make them the Kwisatz Haderach.

Nevertheless, there are parallels.

The Commerce Commission has long been able to pursue anti-competitive activity. Cartels are illegal. Some cartel conduct can draw criminal penalties.

Anti-competitive activity running short of cartels is also prohibited.

But there has been a place the commission has not been able to look.

Section 43 of the Commerce Act exempts activities authorised by government. If a law or Order in Council authorises an activity, that activity is allowed even if it appears to be anti-competitive.

There is some sense to the Section 43 exemption if you think that government generally works well. Parliament and the ministries, at least in theory, will have weighed the public interest and considered any effects on restraint of trade when setting laws and regulations.

A statutory regime may have anti-competitive effects but still be desirable on balance.

In an ideal world, ministries overseeing these regulatory regimes would be running rolling reviews to ensure the regimes continue to be beneficial.

But successive governments have done an abysmal job in ensuring that regulatory and statutory regimes remain fit for purpose.

Reviews of regulatory regimes, when undertaken, tend to have a narrow focus. They do not look at how a regime intertwines with other agencies' regulations and practices and its effects on competition.

Statutory regimes have been the place where the Commerce Commission has been unable to look.

Commerce Act amendments in 2018 allowed the Commerce Commission to undertake market studies.

A market study lets the commission take a broad approach in examining conditions of competition in a sector, including the cumulative effects of different regulatory regimes, land use planning, and consenting practices. The commission then issues a report on its findings, to which the minister must respond.

The two most recent market studies show that rot has festered in places where the commission had previously been unable to look.

Earlier this year, the commission released its final report on competition in grocery retail. The findings should not have surprised anyone passingly familiar with regulatory barriers to entry in the sector.

Councils have not considered competition as a benefit when setting plans. If a single grocery retailer could plausibly serve a new subdivision, council will zone for only one. Any potential new entrant would need to find the small number of available sites zoned for use in grocery retail not already encumbered by covenants prohibiting their use in grocery retail. The Overseas Investment Act adds additional delays and uncertainty for any potential entrant with more than trivial levels of foreign ownership.

The combination of zoning restrictions, consenting practices, and Overseas Investment Act constraints have made it impossible to open any new large-footprint grocery retail chain.

The market study assembled the evidence. If you want more competition in grocery retail, opening a new supermarket chain shouldn't be effectively illegal. It should not have taken a market study to reach that conclusion.

Last week, the commission released the draft report of its study on building materials. Again, the findings should not surprise anyone passingly familiar with the sector. Again, a complex and toxic stew of regulatory barriers makes it far too hard for builders to use materials from overseas. Legislation, regulation, consenting practices, and liability regimes facing councils combine to make a strongly anti-competitive environment providing a heavy advantage for incumbent suppliers.

Suppose you want a more competitive building materials sector to scale up to meet changing demand. In that case, you need to unwind the regulatory morass that makes it far too difficult to use building materials from trustworthy places.

In both its review of grocery retail and building materials, the commission turned its gaze to the place it had not previously been able to look: statutory regimes exempted by Section 43 that combine to thwart real competition. And it found things in serious need of remedy.

Like Dune's Kwisatz Haderach, the commission's market studies authority is powerful and just a bit dangerous.

The commission's very detailed work documenting what had been well understood by sector observers at a high level was not without cost.

Supermarket executive teams would have been tied up for months responding to requests for information while also trying to run supermarkets during a pandemic.

Some future ill-intentioned minister could direct the commission to undertake market studies on areas he wishes to punish. The study process itself imposes a substantial cost, regardless of its findings.

The commission would do well to provide its minister with a list of areas most in need of future investigation. And top of that list should be the places where it previously has been barred from action by Section 43.

Conditions of competition in the provision of medical services would make for a superb market study.

Earlier this year, it was reported that some 150 foreign-trained doctors living in New Zealand have been unable to practice because the rules require them to take up a supervised training position first.

Those positions do not exist for foreign-trained doctors.

The simplest explanation for regulations setting impossible conditions is that the medical professionals who help to set the standards wish to prevent competitors from entering the market.

If we are to have a Kwisatz Haderach, best it be directed in beneficial ways. Let the spice of competition flow.

I'd also chatted with Bryan Crump at RNZ Nights on related matters this week. 

Update. A loyal reader notes, via email:

Pharmacy is an interesting one because they had less regulation when the school was in Wellington. When it relocated to Auckland uni the duration was increased to that of Otago, a full degree. Many would dispute the need for a full degree for a community pharmacy, which is partly why they are largely staffed by pharmacy technicians rather than pharmacists. These sorts of discussions become heated quickly.

A similar issue exists in nursing where the push to turn this large professional group into a university program and remove enrolled nurse pathways, has driven up costs and therefore the need to recover costs. Similar arguments are used in medicine and the same problem exists where under the Cth generalist system we effectively overtrain medical practitioners at great cost.

Pharmacy would be a good one to start with.

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