The antitrust case against Google

From the Cato Daly Podcast comes this interview in which Geoffrey Manne of the International Center for Law and Economics evaluates the claims in the antitrust case against Google.

Costs of regulation

There is a new NBER working paper out on Measuring the Cost of Regulation: A Text-Based Approach by Charles W. Calomiris, Harry Mamaysky and Ruoke Yang.

The abstract reads,

We derive a measure of firm-level regulatory costs from the text of corporate earnings calls. We then use this measure to study the effect of regulation on companies’ operating fundamentals and cost of capital. We find that higher regulatory cost results in slower sales growth, an effect which is mitigated for large firms. Furthermore, we find a one-standard deviation increase in our preferred measure of regulatory cost is associated with an increase in firms’ cost of capital of close to 3% per year. These findings suggest that regulatory risk is a major cost to firms, but the largest firms are able to manage that risk better.

One obvious point here is that regulation is costly to firms. But it is less costly to large firms than small, this has implications for competition policy. Large firms may support regulation as a way of increasing the costs of small firms relatively more than for large firms. This means that large firms can use regulation as a way of forcing new, innovative small firms out of the market, and thus reduce competition.

Horizontal integration can be good for you

It has long been recognised that vertical integration can enhance efficiency. It can deal with hold-up problems etc. But horizontal integration has been looked at with much more suspicion.

The conventional view is that anticompetitive mergers increase industry concentration and hence increase market power, harm competition ex post, and therefore need to be carefully reviewed and possibly restricted by regulators. Hence, regulators, such as the Antitrust Division of the Department of Justice or the Federal Trade Commission, have the mandate to prevent situations that “excessively” transfer welfare from consumers to firms via buildups of dominant positions or firms with disproportionate market power, including mergers perceived to be anticompetitive.

Are these policies effective or desirable? We take a dynamic approach and find the answer to be No in both cases.

This quote is from a posting at the Pro-Market blog by Dirk Hackbarth and Bart Taub in which they ask Can Horizontal Mergers Actually Boost Competition?

To reach these conclusions we built a dynamic, noisy collusion model that captures firms’ optimal output strategies prior to a merger. [...] We thus focus only on the desire of firms to collude prior to merging or potentially to merge if collusion fails.

The conventional view fails to account for dynamics. Firms in our dynamic model are forward-looking, aware that they are in a dynamic cartel-like situation, but are unable to directly observe the actions of the rival firm, which would enable them to enforce the cartel. The inability of each firm to observe the other firm’s output reflects the real world: regulators punish firms that directly track and coordinate with each other’s actions for market power purposes.

Hackbarth and Taub go on to explain,

The conventional view fails to account for dynamics. Firms in our dynamic model are forward-looking, aware that they are in a dynamic cartel-like situation, but are unable to directly observe the actions of the rival firm, which would enable them to enforce the cartel. The inability of each firm to observe the other firm’s output reflects the real world: regulators punish firms that directly track and coordinate with each other’s actions for market power purposes.

Because they are blocked from observing each other directly, firms are unable to punish their rival for directly perceived deviations from collusion–that is, for producing too much in order to realize temporarily higher profits at the expense of the other firm. The inability to directly observe and punish deviations therefore requires a tacit collusion arrangement, in which firms attempt to observe each other indirectly–via prices. This indirect observation is imperfect, however, because prices are affected by random influences, in addition to the effects of the firms’ output choices.

Because of the random influences a firm can mistakenly appear to produce too much output. Under the tacit collusion arrangement this triggers a punishment in which the rival firm increases output, thus driving down prices and so harming the deviating firm: there is a price war, resulting in low profits for both firms. It is the fear of this price war that sustains the tacit collusion arrangement in the long run.

The potential to merge weakens those punishments, because it prematurely terminates them under terms that are an improvement over the price war for the firm that is being punished. Instead of the price war, the deviating firm gets a share in the monopoly that the firms form when they merge. Because the potential for punishment is concomitantly reduced, the trepidation about aggressively producing output in contravention of the interests of the cartel arrangement is reduced: there is more competition, resulting in more output and lower prices. Our conclusion is thus the exact opposite of the conventional view that mergers are harmful for society: making mergers more difficult (i.e., costlier for the firms) is actually harmful to society, because it strengthens the ability of firms to punish each other and enforce the cartel.

In addition to this fundamental result, we also show that pre-merger collusion is dynamically stable: episodes of collusion are long-lasting, and price wars are unusual and brief. Because mergers occur in the face of an incipient price war, mergers are therefore rare–pre-merger collusion is the normal state of the firms.

and

Although the monopoly gains stemming from merging harm consumers in the long run, the enhancement of pre-merger competition benefits consumers in the short-run and those benefits dominate the losses to consumers from the later formation of the post-merger monopoly. This is because discounted expected losses from post-merger increases in market power are small if mergers are rare [empirically they are] and hence the contemporaneously pro-competitive effect of the potential for mergers exceeds those losses if firms spend most of their time in pre-merger competition. This gives further impetus to a regulatory policy that is therefore a bit counterintuitive: reduce barriers and costs of merging in order to harness the pro-competitive effects of mergers.

In short, Hackbarth and Taub show, somewhat counter-intuitively, that regulators can increase consumer welfare by facilitating mergers by lowering frictions, such as barriers, costs, and expenses formally or informally placed by merger regulation such as merger guidelines of the Commerce Commission, the US Department of Justice or the European Commission.

Now just wait for the sound of heads exploding at the Commerce Commission!

Are Google and Facebook monopolies?

On this episode of The Big Question, Chicago Booth’s Luigi Zingales and George Mason University’s Tyler Cowen discuss the market power wielded by digital platforms, and how to promote competition.


This is a very interesting discussion of an important issue. Well worth the half hour needed to watch it.

Austan Goolsbee on concentration in America

From the Pro-Market blog comes this short interview with Austan D. Goolsbee (Robert P. Gwinn Professor of Economics and the University of Chicago Booth School of Business) on the question of concentration in American industry.

Q: The discourse on concentration, market power, and bigness in many U.S. industries has increased dramatically in the last year. Do you believe that we have enough empirical evidence to show that concentration is on the rise and having adverse effects on the economy?

Definitely not. The only representative evidence we have comes from the Economic Census data every five years and is released with a lag. Everything else comes from court cases or non-representative samples and is filled with ambiguity and myth.

Q: In your opinion, what are the main reasons for the rise in concentration?

Wow. Very hard to say so far. Actually, there’s an important task to be done to convincingly even document that is an actual fact.

Q: Which industries should we be concerned with when we look at questions of concentration?

We care about market power, not concentration. Industries where market power can harm consumers the most are the ones we should care the most about. If it slows the rate of innovation, those are probably the worst ones.

Q: Has consolidation in the financial industry played a role in concentration or antitrust issues in the U.S.?

As a factual matter, yes, it has played a role.

Q: The five largest internet and tech companies—Apple, Google, Amazon, Facebook, and Microsoft—have outstanding market share in their markets. Are current antitrust policies and theories able to deal with the potential problems that arise from the dominant positions of these companies and the vast data they collect on users?

There are lots of particulars to the industries of those five different cases.

Q: Is there a connection between the growing inequality in the U.S. and concentration, dominant firms, and winner-take-all markets?

Probably. But we don’t really know more than correlations at this point.

Q: President Trump has signaled before and after the election that he may block mergers and go after certain dominant companies. What kind of antitrust policies should we expect from him? Pro-business, pro-competition, or political antitrust?

I don’t expect antitrust enforcement from his administration, basically, at all. I guess in your schema that would be a combination of pro-business and political.

Sam Peltzman on concentration in America

From the Pro-Market blog comes this short interview with Professor Sam Peltzman (Ralph and Dorothy Keller Distinguished Service Professor Emeritus of Economics at the University of Chicago Booth School of Business) on the question of concentration in American industry.

Q1: The discourse on concentration, market power, and bigness in many U.S. industries has increased dramatically in the last year. Do you believe that we have enough empirical evidence to show that concentration is on the rise and having adverse effects on the economy?

There are two questions here. We have enough evidence that concentration has increased in recent years. The best data are for manufacturing. I’ve documented the trends in that sector in a 2014 article in the Journal of Law and Economics. Briefly, concentration began rising in this sector in the late 1980s and continued doing so for the next 20-25 years. This process may still be going on. While the data for other sectors is not so good, it is likely that concentration in sectors such as retailing and services has also increased over roughly the same period.

We do not have enough evidence that this process is having adverse effects on the economy. There are some retrospective merger studies that tilt in that direction. But they are focused on a few industries. And there are many ways beyond mergers that concentration increases. There is simply no broad base of evidence that the rise in concentration has had adverse—or beneficial— effects on the economy.

Q2: In your opinion, what are the main reasons for the rise in concentration?

Again, we don’t really know. The timing of the upward trend (beginning in the 1980s) makes it tempting to implicate the relaxed antitrust policy toward mergers, which was formalized in the 1982 merger guidelines. Perhaps there is something to such a connection. But the trend is pervasive and not driven exclusively by mergers.

This raises the possibility that larger scale has just become a more efficient way of doing business. That possibility may, in turn, be related to evidence that the economy has become less dynamic, in the sense that job turnover has been historically higher for small firms than for large, so the reduced turnover seems to signify less innovation and risk taking by small firms. That can be both a symptom and a cause of growing concentration.

Q3: Which industries should we be concerned with when we look at questions of concentration?

The traditional answer, embedded in the merger guidelines, is “be concerned if concentration increases in an already concentrated industry.” The evidentiary basis for this is thin. A much older literature struggled vainly for years to find a broad pattern whereby adverse effects of concentration could be localized to highly concentrated industries. I am unaware that the state of knowledge on where we should be concerned—or indeed if we should be concerned—has improved much. Basically, antitrust policy relies more heavily on beliefs rather than a strong consensus about facts.

Q4: Has consolidation in the financial industry played a role in concentration or antitrust issues in the U.S.?

I don’t know, but my guess would be ‘no.’ The question suggests that perhaps smaller firms have had increased difficulty in raising capital. That remains to be demonstrated. There is, to be sure, a regulatory issue in that Dodd-Frank rules make it harder to grant ‘character’ (unsecured) loans and to avoid writing them down when they stop performing. This can’t help someone with little more than a good idea and a willing banker.

Q5: The five largest internet and tech companies—Apple, Google, Amazon, Facebook, and Microsoft—have outstanding market share in their markets. Are current antitrust policies and theories able to deal with the potential problems that arise from the dominant positions of these companies and the vast data they collect on users?

See my answer to question 3 above. It is hubris to believe that economists and antitrust officials can predict the future, which is what you need to do in this sector. Who remembers that free web browsers were once thought to be a dangerous threat to competition?

Q6: Is there a connection between the growing inequality in the U.S. and concentration, dominant firms, and winner-take-all markets?

The timing suggests so, but there are a lot of unconnected dots in this question. We do know that wage inequality across firms has increased. Larger firms have always paid more. That premium has increased. That may be symptomatic of the ‘larger firms are more productive’ view raised above in question 2.

Q7: President Trump has signaled before and after the election that he may block mergers and go after certain dominant companies. What kind of antitrust policies should we expect from him? Pro-business, pro-competition, or political antitrust?

See question 5 above. I prefer humility to hubris.

Should we worry about monopoly? (updated)

The obvious answer that most people would give would give is yes, but that answer may be wrong.

Having a monopoly may not be a problem if that monopoly is contestable. The danger with monopolies isn't the monopoly as such, its the ability to exploit that monopoly that is the problem.

Writing over at the Forbes blog Tim Worstall makes this point with a couple of nice examples:

As I've pointed out before I had an effective monopoly on the global trading of scandium for a few years. And I didn't exploit it because I wasn't able to. Being a scandium dealer was just a matter of putting in a couple of month's work to find out who produced and who used and making sure you had their phone numbers. I wasn't able to therefore jack up my prices and wax fat off my monopoly--because what I had was an eminently contestable monopoly. Indeed people came along, contested it and I'm not in the field any more.

The important thing about monopolies therefore is not whether one exists. It's whether someone is trying to exploit it and if they are, can people contest that monopoly?

Take another such monopoly that people have worried about recently. In 2010 China started trying to exploit it's near monopoly of the production of rare earths. As I pointed out back then that was a contestable monopoly they had. Their throwing their weight around would lead to competition. As it did. China's monopoly was broken and prices are now well below what they were in 2010.

Tim notes that the recent decision by the European Union Commission to block a merger between the London Stock Exchange and Deutsche Boerse (German marketplace organizer for the trading of shares and other securities) was wrong because even if the merger did create a "de facto monopoly" in the clearing of bonds and fixed-income products, as the Commission claims, the important question is if the merged company tried to exploit their monopoly could competition to it arise? Would competitors be able to enter the market? If so there are no grounds to stop the merger.

Thus even if we see an increase in concentration in markets which looks like a move towards monopoly before we panic one question we have to ask is, is that monopoly one which could prevent entry into its market if it was to attempt to exploit its market power? If not then increased concentration is not as dangerous as it may look at first glance.

Update: In a related posting Levi Russell discusses Contestability theory in the real world [Ag-Biotech Symposium]

Dennis Carlton on concentration in American industry and competition policy

This is from a short interview with Dennis W. Carlton, the David McDaniel Keller Professor of Economics at the Booth School of Business at the University of Chicago, dealing with the question, Does America have a concentration problem?

Q: The discourse on concentration, market power, and bigness in many U.S. industries has increased dramatically in the last year. Do you believe that we have enough empirical evidence to show that concentration is on the rise and having adverse effects on the economy?

There is some evidence of increased concentration. But the evidence I have seen in manufacturing (I thank Sam Peltzman for his data) suggests that these increases are unlikely to have large effects on the U.S. economy. For example, using census data, with all its limitations such as ignoring imports, the evidence indicates that the U.S. economy is still generally characterized by manufacturing industries with low concentration levels.

I am skeptical of claims and have seen no convincing evidence that increased concentration overall across all industries has been a major factor in explaining poor U.S. economic performance.

Q: In your opinion, what are the main reasons for the rise in concentration?

Technology explains the rise in concentration in some industries. Regulation, which tends to burden small firms disproportionately, explains it in others.

Q: Which industries should we be concerned with when we look at questions of concentration? Do we have evidence of excessive market power, reduction in quality or investment, or growing political influence?

Every industry with very high concentration deserves scrutiny from an antitrust viewpoint. Industries where data collection is important might raise privacy issues that need to be addressed, in addition to antitrust issues.

Q: Has consolidation in the financial industry played a role in concentration or antitrust issues in the U.S.?

Concentration in the financial industry can raise antitrust concerns. The recent ABA advisory report on antitrust for the next administration raises this issue and suggests that the Federal Reserve should not adopt different merger standards than the Department of Justice.

But if the question is suggesting that bank concentration is responsible for increased concentration in other industries, I have seen no evidence of that.

Q: The five largest internet and tech companies—Apple, Google, Amazon, Facebook, and Microsoft—have outstanding market share in their markets. Are current antitrust policies and theories able to deal with the potential problems that arise from the dominant positions of these companies and the vast data they collect on users?

The report of the Antitrust Modernization Commission explicitly addressed the question of the adequacy of antitrust laws in light of new technologies in great detail, and the bipartisan panel concluded that the current antitrust laws were indeed adequate. However, special concerns regarding privacy protection can arise.

Q: Is there a connection between the growing inequality in the U.S. and concentration, dominant firms, and winner-take-all markets?

Technology influences market structure. Technology is the major factor explaining earnings inequality. But it would be misleading to say that an exogenous increase in concentration is the significant cause of increased earning inequality. The changing role of jobs because of technological change is the major reason for increased inequality.

As to the big question as to what we could see with regard to antitrust policy under the Trump administration Carlton has this to say (pdf) in the February 2017 (Vol 16 No 4) issue of The Antitrust Source.

Over at least the last ten years, complaints that antitrust policy is too lax have grown steadily in volume. Some critics have even suggested that the U.S. economy has become less competitive as a result, which they argue has led to slowing economic growth and increasing income inequality. I hope that the Trump administration’s response to such claims will be to ask for the evidence that supports these views before altering antitrust enforcement. This does not mean that the complaints should be ignored. To the contrary, it means that the Trump administration should alter antitrust policy to address concerns only when those concerns are based on evidence—not rhetoric—and only when those concerns can be appropriately addressed by antitrust policy. In the wake of these criticisms of antitrust policy, President Obama called not only for the government antitrust agencies to pursue vigorous antitrust enforcement but also for regulators to intervene in the industries they regulate to make them more competitive. I hope that the Trump administration will ask for specific evidence that any proposed regulatory intervention would likely improve competitive conditions in particular industries. The experience of regulation shows that often (though not always) regulatory intervention harms rather than helps competitiveness and economic performance, sometimes by making it more difficult for new firms to enter an industry.

Some have called for antitrust policymakers to take into account the effects of antitrust policy on income inequality and unemployment. My hope is that the Trump administration will use antitrust policy only for what antitrust does best—protection of the competitive process. Goals such as reducing poverty or decreasing unemployment are important but antitrust policy is ill-suited to achieve those goals. Over time, competition raises living standards by allocating resources to new, higher valued uses. Attaching other goals to antitrust enforcement can interfere with that process.

There are many antitrust topics that the Trump administration can usefully address. It can encourage the use of retrospective studies to evaluate past mergers as well as the techniques used to evaluate those mergers. Did past mergers systematically raise prices and do our techniques identify such cases or not? Noting that price goes up in some mergers is not a sufficient analysis unless one also takes into account that prices go down in other mergers. The issue is whether we see a systematic bias in what our government agencies are doing. A small sampling of other important topics would include guidance on the antitrust analysis of two-sided markets, bundled discounts, and tie-in cases. Finally, the FTC should think hard about its consumer protection mission, especially with regard to privacy.

An empirical analysis of mergers

Are mergers between firms always the great evil that some people would have us believe? A recent working paper by Celine Bonnet and Jan Philip Schain suggests may be not.

The paper is An Empirical Analysis of Mergers: Efficiency Gains and Impact on Consumer Prices. Its abstract reads,

In this article, we extend the literature on merger simulation models by incorporating its potential synergy gains into structural econometric analysis. We present a three-step integrated approach. We estimate a structural demand and supply model, as in Bonnet and Dubois (2010). This model allows us to recover the marginal cost of each differentiated product. Then we estimate potential efficiency gains using the Data
Envelopment Analysis approach of Bogetoft and Wang (2005), and some assumptions about exogenous cost shifters. In the last step, we simulate the new price equilibrium post merger taking into account synergy gains, and derive price and welfare effects. We use a home scan data set of dairy dessert purchases in France, and show that for two of the three mergers considered, synergy gains could offset the upward pressure on prices post. Some mergers could then be considered as not harmful for consumers.

Antitrust: where did it come from and what did it mean?

Is the title of a new working paper by Richard N. Langlois.

This paper is a draft chapter from an ongoing book project I am calling The Corporation and the Twentieth Century. In The Visible Hand, Alfred Chandler explained the rise of the large vertically integrated corporation in the United States mostly in terms of forces of technology and economic geography. Institutions, including government policy, played a quite minor role. In my own attempt to explain the decline of the vertically integrated form in the late twentieth century, I stayed true to Chandler’s largely institution-free approach. This book will be an exercise in bringing institutions back in. It will argue that institutions, notably various forms of non-market controls imposed by the federal government, are a critical piece of the explanation of the rise and decline of the multi-unit enterprise in the U.S. Indeed, non-market controls, including those imposed in response to the dramatic events of the century, account in significant measure for the dominance of the Chandlerian corporation in the middle of the twentieth century. One important form of non-market control – though by no means the only form – has been antitrust policy. This chapter traces the history of antitrust and argues that, far from being a coherent attempt to address an actual economic problem of monopoly, the Sherman Antitrust Act emerged from the distributional political economy of the nineteenth century. More importantly, the chapter argues that the form in which antitrust emerged would prove significant for the corporation, as the Sherman Act and its successors outlawed virtually all types of inter-firm coordinating mechanisms, thus effectively evacuating the space between anonymous market transactions and full integration.

The last couple of sentences of the abstract are interesting. An unintended(?) consequence of competition policy is an all-or-nothing approach to firm organisation. It's either a market transaction or a fully integrated organisation with little between them being legal. This removes many options in terms of organisational form for entrepreneurs to use to structure a transaction. This can result in an loss of efficiency in those cases where coordination of activity is most effectively carried out by an organisation that is not neither a fully integrated firms or a market transaction. Developments in competition policy in the US during the period around 1900 sent a clear signal that coordination through inter-firm agreements would surely face legal scrutiny whereas coordination within the boundaries of a single legal entity likely would not. This created a palpable incentive for firms to integrate.

Langlois notes an irony in all of this,

Here we begin to glimpse the great irony of American antitrust policy at the turn of the twentieth century: legislation pushed in part by small independent businesses to ward off the threat of the giant corporation actually harmed the small firms, which relied on coordination through contract, and reduced the relative cost of coordination within boundaries of large enterprises.

But such unintended consequences are so often the outcome of government intervention in economic activity.

Is no competition policy the best competition policy?

Donal Curtin at the Economics New Zealand blog writes.

We had a session at last week's RBB Economics conference in Sydney on "How can a Chief Economist's team enhance competition law enforcement? - an examination of different approaches", with a panel made up of people who should know: Lilla Csorgo, chief economist on the competition side of our Commerce Commission; Graeme Woodbridge, chief economist for the whole caboodle at the ACCC; and RBB founding partner Simon Bishop to talk about the European Commission's experience.

One conclusion that emerged was that competition authorities had experimented over the years with various internal structures, ranging from a separate 'consultancy on call', through the EC's model of an internal quality check unit, through to integration (or at least close involvement in) the investigation teams. Of the various models, integration with the investigation teams, or, at a minimum, close and early involvement with the cases at hand, seemed to be working best.

I want to suggest a question that I'm sure no one at the conference would dare ask, Should there be competition policy in the first place? After all if you make a living out of competition policy, for your own good, you will concentrate on technical issues such as how should economists be integration into the enforcement process rather than suggesting putting yourself (and others) out of a job.

I'll guess that all those at the conference shared the view that a competition body is needed and that it should be a powerful player in its role as competition regulator. I would suggest that the first question the chief economist should ask is, Is this really right? May be competition policy does more harm than good. Would it be better to do away with it?

The idea behind competition law in New Zealand is, according to the Act, “to promote competition in markets for the long-term benefit of consumers”. This is to say, it is believed, by the Act's supporters, that markets left to themselves, without any oversight from regulators, without any regulation of prices, quantities, or structure, would be harmful to consumers. Such a view rests on the notion that there is a large danger of monopoly power being used to harm consumers and, therefore, competition is a state of affairs which must be regulated and managed by the authorities because undesirable situations of monopoly can emerge all the time.

Frederic Sautet, ex-economist at NZ Treasury and the Commerce Commission, makes the point that this thinking is wrong headed:

At the end of the day, the problem assumed by competition law is only exacerbated by regulation, while economics shows that the entrepreneurial process solves it. So while there may be situations where competition law may seem warranted, in fact there is no crime at the crime scene. While competition law aims to protect consumers, the danger is that it may affect the self-correcting properties of the market system — an outcome worse than the disease it tries to cure.

Much of the problem is due to the fact that competition law was established on an misunderstanding of the nature of competition. The law in New Zealand aims to achieve "workable competition" but the practice of competition law relies on the view of competition as a static (equilibrium) state of affairs - derived from the idea of perfect competition. However, actual competition is a rivalrous entrepreneurial process by which the knowledge enabling a better coordination of individual plans is discovered over time. Again, as Frederic Sautet points it

[...] it must be understood that the competitive process takes place within a set of institutions that guarantee the functioning of entrepreneurial discovery and the exploitation of business opportunities over time. These institutions and regulation must guarantee entry into any market to anyone desiring to compete.

Sautet goes on to make the important point that

Under the disguise of consumer protection, competition law has in fact protected some producers from the greater efficiency of their potential competitors. Indeed, competition can be difficult for some incumbents who run the risk of being outcompeted. However, this process is necessary if the ultimate goal is to let consumers (indirectly) dictate the allocation of resources according to their preferences. The danger with competition law is that it interferes with the entrepreneurial process — a cure worse than the disease.

Thus the danger of the Commerce Commission is that it may so damage or restrict the true competitive process that it harms the very people it set out to help, consumers, but helps the people it wished to control, producers. The law of unintended consequences strikes again.

As far as empirical evidence goes it tends to suggest that competition policy does not improve consumer welfare by much. Robert W. Crandall and Clifford Winston look at the effects of antitrust enforcement in the US and ask Does Antitrust Policy Improve Consumer Welfare? And the short answer is, not much. Crandall and Winston write,

In this paper, we argue that the current empirical record of antitrust enforcement is weak.

and add

We then synthesize the available research regarding the economic effects of three major areas of antitrust policy and enforcement: changing the structure or behavior of monopolies; prosecuting firms that engage in anticompetitive practices, namely, price fixing and other forms of collusion; and reviewing proposed mergers. We find little empirical evidence that past interventions have provided much direct benefit to consumers or significantly deterred anticompetitive behavior.

Overall I'm not sure that we really do want a strong interventionist Commerce Commission.

Such questions and arguments will not win friends within the likes of the Commerce Commission but perhaps it would be good for the soul of those within such such bodies to sometimes think about these issues. And coming up with an answer may even be fun.

Refs.:
The Sautet paper, which is well worth reading, is "The Shaky Foundations of Competition Law", New Zealand Law Journal, pp. 186-190, June 2007.
The Robert W. Crandall and Clifford Winston paper is "Does Antitrust Policy Improve Consumer Welfare? Assessing the Evidence", Journal of Economic Perspectives, 17(4) Fall 2003.

When antitrust runs amok: bulletin board material

Timothy Taylor at the Conversable Economist blog posted this cartoon from Dale Everett at the Anarchy In Your Head website in 2008:

An interesting cartoon given this quote from 1981 about why Ronald Coase gave up teaching antitrust:

“Ronald [Coase] said he had gotten tired of antitrust because when the prices went up the judges said it was monopoly, when the prices went down they said it was predatory pricing, and when they stayed the same they said it was tacit collusion.”

–William Landes quoted in Edmund W. Kitch, “The Fire of Truth: A Remembrance of Law and Economics at Chicago, 1932-1970”, Journal of Law and Economics 26(1) (Apr., 1983) p. 193.

The role of governments in hostile takeovers

Maximilian Rowoldt and Dennis Starke discuss "The role of governments in hostile takeovers – Evidence from regulation, anti-takeover provisions and government interventions" in the latest issue of the International Review of Law and Economics (Volume 47, August 2016, Pages 1–15).

The abstract reads:

This paper addresses the role of governments in hostile takeovers by analysing 263 hostile takeover bids in Europe and North America during 2000–2014. Our results suggest that governments may influence the openness of the domestic hostile takeover market through takeover regulation, potentially implementing protectionism. The corresponding features of the regulatory regime may in turn stimulate the deployment of anti-takeover provisions by entrenched target managers. Rather than increasing takeover premiums, anti-takeover provisions are associated with lower success rates of hostile bids, and may thus harm corporate governance. Governments’ direct intervention in hostile takeovers is more likely in case of a foreign bidder, large transactions, high unemployment and high GDP growth rates, pointing to both protectionist and populist motives. The hostile bid failed in all cases of government intervention identified in our sample. Direct government intervention may thus serve as ultimo ratio in order to block unwanted transactions.

Rowoldt and Starke write

Hostile takeover bids emphasise the conflicting interests of shareholders, managers and governments (Romano, 1988; Shleifer and Vishny, 1997). While targets’ shareholders are interested in maximising their return on investment, targets’ management may seek to entrench themselves and protect their job position by deploying anti-takeover provisions (ATPs). The misalignment of shareholder and management interests is especially pronounced in the case of hostile takeover bids (Armour and Skeel, 2007; DeAngelo and Rice, 1983; Jensen and Meckling, 1976). Against this background, the role of governments is of particular importance as they define the playing field for hostile takeovers through takeover regulation. Furthermore, governments may directly intervene in corporate takeovers. Takeover regulation and direct intervention in hostile takeovers may therefore follow national interests.

One is left wondering exactly what the "national interest" is. Interestingly the French takeover regulations were amended in 2014 in ways that help block unwanted foreign takeover bids. In particular, the French government eliminated mandatory board neutrality and shifted to a system which enables managers to deploy ATPs without shareholder approval.

A neutrality rule provides restrictions on board activity once a bid has been commenced or is imminent. These restrictions prevent a unitary board of directors or a management board from using corporate powers provided to them to frustrate the bid without obtaining shareholder approval for using the powers for such a purpose. The term ‘neutrality’, whilst widely used, is somewhat misleading as the requirement is not that the board remains neutral. In all Member States the board is required to give its views – whether in favour or against – on the hostile bid, and can legitimately search for an alternative and, in their view, more favourable suitor. It is only in relation to the use of board power to defend a bid where such a rule neutralises or disempowers the board in the absence of contemporaneous shareholder approval. (Gerner-Beuerle, Kershaw and Solinas 2011)

Rowoldt and Starke continue

In this paper we examine the role of governments in hostile takeovers and its implications on corporate governance. We focus on hostile takeover bids as they pronounce the conflict of interest between strong corporate governance and protection of the domestic industry. Our analysis involves three steps. First, we focus on the direct effects of takeover regulation. We analyse whether national takeover regulation is a potential protectionist tool for governments. In particular, we test whether the existence of a board neutrality rule (BNR) affects the openness of the domestic hostile takeover market to foreign bidders as measured by the likelihood of cross-border hostile bids and the deployment of ATPs by the target’s management. Second, we turn to the implications of takeover regulation on corporate governance by examining whether ATPs stimulate management entrenchment as measured by the success rate of hostile bids or benefit shareholders by strengthening their bargaining power. We measure bargaining power as the likelihood of bid increases and the final takeover premium. Third, we analyse determinants of direct government intervention in hostile takeovers and its consequences on the bid success.

Our results indicate a lower probability of cross-border hostile bids in case no BNR is considered in takeover regulation of target countries. Takeover regulation may thus limit the openness of the domestic hostile takeover market to foreign bidders. This supports the notion that takeover regulation may serve protectionist motives of governments as indicated by the implementation of the European Takeover Directive 2 (Davies et al., 2010). As board neutrality is only one feature of the legal environment, we additionally use alternative measures of shareholder protection in our analysis and find similar results. Thus, our results may be driven by the general legal environment and not necessarily the BNR alone. However, the recent reform of the French takeover law and the implementation of the European Takeover Directive emphasise the particular importance of board neutrality as a potential protectionist tool (Hopt, 2009). Moreover, not only board neutrality but also the general regulatory environment fall into governmental responsibility and may thus be used by governments to implement protectionism.

With this respect, the regulatory choices made by governments may affect corporate behaviour. In specific, board neutrality determines whether target managers are able to deploy ATPs without shareholder approval. Our results show a negative association between BNR and the application of ATPs by targets’ management, confirming that if takeover regulation grants the option to deploy ATPs to the targets’ management, they are likely to exercise it.

Regarding the role of ATPs in corporate governance, our results indicate that the application of ATPs does neither increase the likelihood of bid increases nor the final takeover premium offered. On the contrary, ATPs seem to decrease the likelihood of a successful completion of a transaction. This finding supports the management entrenchment hypothesis. A regulatory framework that favours ATPs may therefore increase managerial power and in turn decrease the effectiveness of the corporate government system (Humphery-Jenner, 2012; Masulis et al., 2007).

Finally, our results suggest that direct government intervention is more likely in case of a foreign hostile bidder, pointing to protectionist motives for government interventions and supporting prior evidence provided by Dinc and Erel (2013). Additionally, we find positive associations between negative government interventions and transaction size as well as the unemployment rate in the targets’ nation supporting the idea that government intervention follows populist motives in search for votes (Hopt, 2009).

Besides, the hostile takeover bid failed in all of the identified cases of negative government intervention. Due to this missing variation in the bid outcome in case of a negative government intervention in our sample, we are unable to empirically assess the corresponding relationship. However, this observation potentially points to the role of direct interventions for governments as ultimo ratio to block hostile takeovers of domestic companies.

Ref.:

• Gerner-Beuerle, Carsten, David Kershaw and Matteo Solinas (2011). Is the Board Neutrality Rule Trivial? Amnesia About Corporate Law in European Takeover Regulation, LSE Law, Society and Economy Working Papers 3/2011 .

Competition policy, again (updated)

In the latest Insights newsletter at the New Zealand Initiative Oliver Hartwich discusses the recent decision by the government not to criminalise cartel behaviour. Hartwich writes,

On Tuesday, Minister of Commerce Paul Goldsmith decided not to proceed with the long debated criminalisation of cartel behaviour.

The Minister’s explanation was telling: “In weighing up the benefits of criminalising cartel activity, the government had to consider the significant risk that cartel criminalisation would have a chilling effect on pro-competitive behaviour between companies.”

As Hartwich notes it may sound strange that pro-competitive behaviour of companies could ever be confused with anti-competitive behaviour. Hartwich writes,

The problem lies in the nature of competition law. It is an area of law which is prone to arbitrariness. Practically everything is a matter of interpretation.

William Landes summaries the point in the following quote on why Coase gave up antitrust,

Ronald [Coase] said he had gotten tired of antitrust because when the prices went up the judges said it was monopoly, when the prices went down they said it was predatory pricing, and when they stayed the same they said it was tacit collusion. (William Landes, “The Fire of Truth: A Remembrance of Law and Econ at Chicago”, Journal of Law and Economics (1981) p. 193.)

If everything is illegal what is a firm to do?

Hartwich continues,

Similarly, the benchmark of “competition” is vague. For what should it mean? Is it the theoretical but unrealistic state of so-called “perfect competition” taught in many economics textbooks? Or is it the process of companies actually competing with each another? And if so, how do you measure that?

Then there is the difficulty in finding proper definitions. To quote the late economist Murray Rothbard, “there is nothing anticompetitive per se about a cartel, for there is conceptually no difference between a cartel, a merger, and the formation of a corporation: all consist of the voluntary pooling of assets in one firm to serve the consumers efficiently.” Indeed. Yet somehow the formation of a corporation is fine whereas a merger or a cartel might be illegal.

Rothbard's point about cartels being illegal while mergers which can achieve the same result being legal is comment on a relatively recent change in thinking on competition policy. If you go back to, say, the 1950s integration was looked at with just as much suspicion as cartels are today. Recently I came across an interesting comment on the old view on integration and antitrust policy by Joseph J. Spengler

RECENT decisions suggest that the United States Supreme Court is beginning to look upon integration as illegal per se, under the antitrust laws. It may be presumed, in so far as this inference is valid, that the Court believes that integration necessarily reduces competition "unreasonably." No sharp distinction is made by the Court between vertical and horizontal integration. (Joseph J. Spengler, "Vertical Integration and Antitrust Policy", Journal of Political Economy, Vol. 58, No. 4 (Aug., 1950), pp. 347-352.)

This was written in 1950 and things have changed since it is now accepted that there are often efficiencies that result from integration and now the US Antitrust Division typically requires a showing of market power before it considers whether a such arrangement poses serious competitive concerns.

At least part of the reason for the change in view is due to the work of Oliver Williamson, Williamson was sceptical of the conventional wisdom of the time (1960s), which presumed that the purpose and effect of many integration practices was the enhancement of market power and the erection of entry barriers. Contrary to this view, which was widely adopted by antitrust lawyers and courts in the 1960s, Williamson could see rationales for various integration practices that were based instead on economic efficiency.

If we accept that integration can have efficiency justifications then why not cartels? At least we should ask what the reasons for the formation of the cartel are and not just assume that cartels are evil per se. The government's decision can be seen as a small step in this direction.

Update: Donal Curtin at the Economics New Zealand blog takes a more traditional (and anti) view of the government's decision when he argues "Hard core" cartelists are criminals.

Do we need competition policy?

On twitter Vanilla Thrilla asked,

NZ - the weakest competition law regime in the developed world? https://t.co/t2H2NOGBj5

— Vanilla Thrilla (@Vanilla_Thrilla) December 8, 2015

I replied,

@Vanilla_Thrilla no competition policy the best policy?

— Paul Walker (@psw1937) December 8, 2015

then Vanilla Thrilla said,

@psw1937 interesting question. pretty sure self-licensing professional guilds, labour unions and large corporates would all say yes

— Vanilla Thrilla (@Vanilla_Thrilla) December 8, 2015

and then I said,

@Vanilla_Thrilla Companies can use competition law to protect their position and harm competitors

— Paul Walker (@psw1937) December 8, 2015

Let me expand a bit on my general point with an argument from a previous post on this topic.

Many people seems to think that a body such as the Commerce Commission is needed and that it should be a powerful player in its role as competition regulator. I ask why? May be the commission does more harm than good. Would it be better to do away with it?

The idea behind competition law in New Zealand is, according to the Act, “to promote competition in markets for the long-term benefit of consumers”. This is to say, it is believed, by the Act's supporters, that markets left to themselves, without any oversight from regulators, without any regulation of prices, quantities, or structure, would be harmful to consumers. Such a view rests on the notion that there is a large danger of monopoly power being used to harm consumers and, therefore, competition is a state of affairs which must be regulated and managed by the authorities because undesirable situations of monopoly can emerge all the time.

Frederic Sautet, ex-economist at NZ Treasury and the Commerce Commission, makes the point that this thinking is wrong headed:

At the end of the day, the problem assumed by competition law is only exacerbated by regulation, while economics shows that the entrepreneurial process solves it. So while there may be situations where competition law may seem warranted, in fact there is no crime at the crime scene. While competition law aims to protect consumers, the danger is that it may affect the self-correcting properties of the market system — an outcome worse than the disease it tries to cure.

Much of the problem is due to the fact that competition law was established on an misunderstanding of the nature of competition. The law in New Zealand aims to achieve "workable competition" but the practice of competition law relies on the view of competition as a static (equilibrium) state of affairs - derived from the idea of perfect competition. However, actual competition is a rivalrous entrepreneurial process by which the knowledge enabling a better coordination of individual plans is discovered over time. Again, as Frederic Sautet points it

[...] it must be understood that the competitive process takes place within a set of institutions that guarantee the functioning of entrepreneurial discovery and the exploitation of business opportunities over time. These institutions and regulation must guarantee entry into any market to anyone desiring to compete.

Sautet goes on to make the important point that

Under the disguise of consumer protection, competition law has in fact protected some producers from the greater efficiency of their potential competitors. Indeed, competition can be difficult for some incumbents who run the risk of being outcompeted. However, this process is necessary if the ultimate goal is to let consumers (indirectly) dictate the allocation of resources according to their preferences. The danger with competition law is that it interferes with the entrepreneurial process — a cure worse than the disease.

Thus the danger of the Commerce Commission is that it may so damage or restrict the true competitive process that it harms the very people it set out to help, consumers, but helps the people it wished to control, producers. The law of unintended consequences strikes again.

As far as empirical evidence goes it tends to suggest that competition policy does not improve consumer welfare by much. Robert W. Crandall and Clifford Winston look at the effects of antitrust enforcement in the US and ask Does Antitrust Policy Improve Consumer Welfare? And the short answer is, not much. Crandall and Winston write,

In this paper, we argue that the current empirical record of antitrust enforcement is weak.

and they add

We then synthesize the available research regarding the economic effects of three major areas of antitrust policy and enforcement: changing the structure or behavior of monopolies; prosecuting firms that engage in anticompetitive practices, namely, price fixing and other forms of collusion; and reviewing proposed mergers. We find little empirical evidence that past interventions have provided much direct benefit to consumers or significantly deterred anticompetitive behavior.

Overall I'm not sure that we really do want a strong interventionist Commerce Commission.

At the very lest we should start a discussion about the nature of the Commerce Act and the role of the Commerce Commission by asking questions about what form of competition policy we really want.

References:

The Sautet paper, which is well worth reading, is "The Shaky Foundations of Competition Law", New Zealand Law Journal, pp. 186-190, June 2007.

The Robert W. Crandall and Clifford Winston paper is "Does Antitrust Policy Improve Consumer Welfare? Assessing the Evidence", Journal of Economic Perspectives, 17(4) Fall 2003.

Competition and productivity

The Competition and Markets Authority (CMA) in the U.K. has produced a report (pdf) which looks at the the theoretical and empirical evidence on the relationship between competition and productivity. The report states that,

The evidence reviewed here addresses two separate but related questions: first, does stronger competition between firms lead to higher levels of productivity; and second, does competition policy and enforcement lead to stronger competition and hence higher productivity?

There is a strong body of empirical evidence showing that competition can drive greater productivity. Within-country studies demonstrate a positive relationship between strength of competition and productivity growth across sectors. Similarly, cross-country studies suggest that countries with lower levels of product market regulation, enabling stronger competition, tend to have higher levels of productivity growth.

There is also an extensive literature examining the impact on productivity of changes in competition over time, including as a result of deregulation. These studies show generally strong positive effects on productivity in sectors where deregulation has occurred, including transport and utilities.

There are three main mechanisms via which competition drives productivity. First, within individual firms managers are forced to become more efficient when facing competition from other firms. Secondly, competition means that the more productive firms increase their market share at the expense of those firms that are less efficient. The low productivity firms may, in the end, be forced out of the market having been replaced by more productive firms. Thirdly, and perhaps most importantly, competition drives firms to innovate, coming up with new products and processes which can lead to step-changes in efficiency.

These ideas kinda seems obvious when you see them but they are often forgotten when people talk about the advantages of deregulation and increased competition in markets.

Is competition policy outdated?

As the economy changes so should competition policy. But does it? The "new economy" or the "information economy" or the "knowledge economy" or whatever you want to call it has altered the way the economy works. Changes in technology, in particular information and communication technology (ICT), have become the major drivers of change in the economy and of economic growth. But has competition policy kept up with this change? May be not.

The European Commission’s antitrust case against Google is the latest in a series of attempts to prevent tech giants from "monopolising" EU markets, or so we are told. But it can be argued that past cases against Intel and Microsoft demonstrate the need review what may be an outdated competition policy in the EU. And not only in the EU.

The European Commission has formally charged Google with anti-competitive practices, the latest twist in a case that was first launched way back in 2010. The EU’s competition watchdog accuses the US tech giant of systematically favouring results from its own specialist search engine, Google Shopping, over competitors like Amazon and eBay. And this, it is alleged, has had an adverse impact on competition and consumer well-being.

Diego Zuluaga has been looking at the case and argues, in an article at EurActiv.com, that,

Superficially, it would indeed seem that Google holds a dominant position online, with a 92 per cent share of the EU market for general (known as ‘organic’ or ‘horizontal’) search. Google has also been expanding its offering of specialist (a.k.a. ‘vertical’) search engines for items like flights and consumer products. Does this mean that competition online is being undermined, and that regulatory authorities should intervene to put it right?

It could of course be that they are dominant simply because they are better than the competition.

Zuluaga goes on to say that the answer to his question is, Not necessarily.

The test for any antitrust investigation must be whether competition, not individual competitors, are being harmed. And by any available measure, competition and specialisation in online search services is thriving. New players focusing on specific market niches, from SkyScanner for flights to DuckDuckGo for greater privacy, have emerged in recent years. In the specific case of comparison shopping which the Commission is worried about, it does not look like Google Shopping is catching on, despite the tech giant’s best efforts: In three key EU markets – Germany, France and the UK – Google’s own product search engine is a marginal player, with Amazon, eBay and local competitors (Idealo in Germany, Fnac in France) boasting multiple times the number of user visits of Google Shopping. What is more, the gap between Google’s own service and its leading competitors is growing, if anything.

Intuitively, this makes sense. If I want to purchase Malcolm Gladwell’s latest bestseller, I am much more likely to browse for it on Amazon, as the latter is reputed for its excellent catalogue, user reviews and related recommendations. Rather than search for it on Google and then look for the best result, I will go to the Amazon website directly. The same goes for flights, hotels, restaurants and any other topic where there is a wealth of specialist search services. Even for those who tend to go through Google, competing options are still there – one only need scroll down to see them. This makes it hard for Google to divert large amounts of traffic to its own services – and it helps explain why Google Shopping has not taken off, as we might have expected it to.

A question one could ask is, Have past actions by competition authorities in previous digital cases been appropriate? May be not, just think of the Intel and Microsoft cases.

In 2009, the Commission fined chip-maker Intel more than €1bn for offering ‘predatory discounts’ to computer manufacturers, which allegedly harmed Intel’s competitors. Yet, by all measures, competition in the chip sector was fierce during the period of Intel’s anti-competitive behaviour. Chip prices declined by up to 75 per cent, while performance grew tenfold. Far from increasing at the expense of competitors, Intel’s market share remained stuck at 80 per cent, and the fluctuations in its share are strongly correlated with new product launches, both by itself and by rivals like AMD.

How about the other previous high profile digital probe, the 2004 ruling against Microsoft? Commission officials worried at the time that the company founded by Bill Gates was strengthening its grip on all PC-related products and services, thanks to its dominance of computer software. Barely a decade later, it is astonishing how things have changed: Microsoft still provides software for a lot of the world’s PCs, but the rise of smartphones – where Google’s Android and Apple’s iOS prevail – has made its share of the overall software market (for smartphones, tablets as well as PCs) shrink to as low as 20 per cent, according to Goldman Sachs research from 2012. Innovation killed the software star.

Both the Intel and Microsoft cases illustrate the shortcomings of EU competition policy when it comes to the digital sector: Despite Intel’s large market share in the chip market, competition was no less aggressive, and consumers still benefited from steadily dropping prices and ever better performance. And even though Windows was the dominant player in software in 2004, innovation outside the PC market – which no one, least of all Microsoft, foresaw – has turned it into one among several competitors in a much larger market.

Aa obvious point is that competition policy rulings should be grounded in sound economic analysis. It is not clear that they have been.

DG Competition has enormous powers to intervene in the internal market, acting as judge, jury and enforcer of antitrust proceedings in the EU. This makes it imperative that its rulings be rooted in sound, convincing economic analysis. Such analysis seems to be lacking in the case of Google Shopping, as it was in the Intel and Microsoft rulings. The digital economy lies at the heart of economic growth in the 21st century, so getting antitrust wrong in this sector will have a longstanding negative impact on innovation and growth in Europe.

A lesson from this is that the new technology underlying the new economy has changed the way companies do business in all sorts of sectors, and competition policy, in all countries, must evolve with it. Is not clear that it has in many countries, including New Zealand.

Horizontal integration and competition policy

Today I came across an interesting comment on integration and antitrust policy by Joseph J. Spengler

RECENT decisions suggest that the United States Supreme Court is beginning to look upon integration as illegal per se, under the antitrust laws. It may be presumed, in so far as this inference is valid, that the Court believes that integration necessarily reduces competition "unreasonably." No sharp distinction is made by the Court between vertical and horizontal integration. (Joseph J. Spengler, "Vertical Integration and Antitrust Policy", Journal of Political Economy, Vol. 58, No. 4 (Aug., 1950), pp. 347-352.)

This was written in 1950 and things have changed since, at least with respect to vertical integration,

Because there are often efficiencies to vertical integration, the Antitrust Division typically requires a showing of market power before it considers whether a vertical arrangement poses serious competitive concerns.

At least part of the reason for the change in view is due to the work of Oliver Williamson,

Williamson was skeptical of the conventional wisdom of the time [1960s], which presumed that the purpose and effect of many vertical practices was the enhancement of market power and the erection of entry barriers. Contrary to this view, which was widely adopted by antitrust lawyers and courts in the 1960s, Williamson could see rationales for various vertical practices that were based instead on economic efficiency.

The view of horizontal integration has changed less, but the work of Hart and Holmstrom may be a step in the direction of greater change even here. In their model, two firms are in a lateral relationship and yet they can show that there are conditions under which integration is optimal. So they can show that even horizontal integration can be efficiency enhancing.

This result follows on from a similar conclusion found by Williamson, arrived at via a different framework of analysis, who argued that there is a trade-off between reduced market competition and increased efficiencies due to a horizontal merger. Hart and Holmstrom gives us another reason to consider the efficiency side of the argument.

Commerce Commission: good or bad?

There has been some discussion lately of changes at the Commerce Commission. Everyone seems to think that such a body is needed and that it should be a powerful player in its role as competition regulator. I ask why? May be the commission does more harm than good. Would it be better to do away with it?

The idea behind competition law in New Zealand is, according to the Act, “to promote competition in markets for the long-term benefit of consumers”. This is to say, it is believed, by the Act's supporters, that markets left to themselves, without any oversight from regulators, without any regulation of prices, quantities, or structure, would be harmful to consumers. Such a view rests on the notion that there is a large danger of monopoly power being used to harm consumers and, therefore, competition is a state of affairs which must be regulated and managed by the authorities because undesirable situations of monopoly can emerge all the time.

Frederic Sautet, ex-economist at NZ Treasury and the Commerce Commission, makes the point that this thinking is wrong headed:

At the end of the day, the problem assumed by competition law is only exacerbated by regulation, while economics shows that the entrepreneurial process solves it. So while there may be situations where competition law may seem warranted, in fact there is no crime at the crime scene. While competition law aims to protect consumers, the danger is that it may affect the self-correcting properties of the market system — an outcome worse than the disease it tries to cure.

Much of the problem is due to the fact that competition law was established on an misunderstanding of the nature of competition. The law in New Zealand aims to achieve "workable competition" but the practice of competition law relies on the view of competition as a static (equilibrium) state of affairs - derived from the idea of perfect competition. However, actual competition is a rivalrous entrepreneurial process by which the knowledge enabling a better coordination of individual plans is discovered over time. Again, as Frederic Sautet points it

[...] it must be understood that the competitive process takes place within a set of institutions that guarantee the functioning of entrepreneurial discovery and the exploitation of business opportunities over time. These institutions and regulation must guarantee entry into any market to anyone desiring to compete.

Sautet goes on to make the important point that

Under the disguise of consumer protection, competition law has in fact protected some producers from the greater efficiency of their potential competitors. Indeed, competition can be difficult for some incumbents who run the risk of being outcompeted. However, this process is necessary if the ultimate goal is to let consumers (indirectly) dictate the allocation of resources according to their preferences. The danger with competition law is that it interferes with the entrepreneurial process — a cure worse than the disease.

Thus the danger of the Commerce Commission is that it may so damage or restrict the true competitive process that it harms the very people it set out to help, consumers, but helps the people it wished to control, producers. The law of unintended consequences strikes again.

As far as empirical evidence goes it tends to suggest that competition policy does not improve consumer welfare by much. Robert W. Crandall and Clifford Winston look at the effects of antitrust enforcement in the US and ask Does Antitrust Policy Improve Consumer Welfare? And the short answer is, not much. Crandall and Winston write,

In this paper, we argue that the current empirical record of antitrust enforcement is weak.

and add

We then synthesize the available research regarding the economic effects of three major areas of antitrust policy and enforcement: changing the structure or behavior of monopolies; prosecuting firms that engage in anticompetitive practices, namely, price fixing and other forms of collusion; and reviewing proposed mergers. We find little empirical evidence that past interventions have provided much direct benefit to consumers or significantly deterred anticompetitive behavior.

Overall I'm not sure that we really do want a strong interventionist Commerce Commission.

References: The Sautet paper, which is well worth reading, is "The Shaky Foundations of Competition Law", New Zealand Law Journal, pp. 186-190, June 2007.

The Robert W. Crandall and Clifford Winston paper is "Does Antitrust Policy Improve Consumer Welfare? Assessing the Evidence", Journal of Economic Perspectives, 17(4) Fall 2003.