Transcript
Check against delivery
Introduction
I am delighted to be giving the opening address at this 13th Competition Law and Economics Workshop.
Over the years, this workshop has made a significant contribution to the discussion and debate of Australia’s competition policy. Professor David Round, an economist from the University of South Australia’s Business School, was the driving force behind the workshop.
David created an annual conference with two key attributes. First, the conference focuses not only on competition law, but also on the economic principles underpinning that law. Second, the conference has always been a genuine ‘workshop’ in that most participants contribute their insights and perspectives.
With David’s retirement, everyone, including me, was keen that the workshop continue. It is particularly important for us that this workshop continues to discuss both competition law and economics. These are equally important disciplines for competition authorities.
We have reflected this in our own institutional structure, with a Legal and Economic Division, which houses both an independent Legal Group and an independent Economic Group.
Indeed, we will shortly be raising the profile of economics even further with the appointment of a Chief Economist to focus essentially on competition economics.
I will have more to say on the role of this position once an appointment is made. It is, however, at a minimum, an overdue recognition of the importance of sound competition economics under pinning the ACCC’s decision making.
I believe the ACCC’s decisions are already soundly based on good economics; as an economist myself you could not expect me to say otherwise. This position, however, will cement this in both perception and reality, now and in the years ahead.
The ACCC has for many years played a significant part in this workshop, both as presenters and attendees.
I am therefore very pleased that for the first time the ACCC is co-hosting this year’s workshop with UniSA’s Business School. ACCC staff inform me that they are even more pleased as UniSA has dealt with all the conference administration, leaving ACCC staff with the much more enjoyable task of suggesting topics and speakers. We hope that this new partnership will continue in years to come.
In keeping with the workshop theme, “applying competition law and economics to the ‘real world’”, there are three topics that I wanted to cover today:
- Some issues confronting the ACCC when applying Australia’s competition law to the ‘real world’.
- The importance of the Harper policy review in ensuring that Australia’s competition law and policy are appropriate for the ‘real world’.
- The reality of increasing globalisation.
Applying Australia’s competition law
The economic principles underlying Part IV of the Competition and Consumer Act 2010 (Cth) (CCA) are well understood.
Economy-wide productivity depends on the productivity results achieved by individual firms. This in turn depends upon both incentives and enablers such as infrastructure and education. The key message from the Hilmer Review, which was reaffirmed in the recent Harper Review, is that competition provides the key incentive for firms to improve economic efficiency – to:
- produce goods and services at least cost – technical or productive efficiency;
- allocate resources to their highest valued use – allocative efficiency; and
- innovate to create new products and production processes – dynamic efficiency.
Countless pieces of research, including by the Productivity Commission, the Australian Bureau of Statistics and the OECD, show a strong positive correlation between product market competition, innovation and economic growth[1]. This also accords with my own real world observation.
The purpose of Australia's competition law is, in essence, to improve the economic welfare of Australians by stopping conduct that would otherwise substantially lessen competition. The emphasis is on a substantial lessening of competition. Despite what has been said by some in the recent debate over section 46, this is a significant hurdle, as it should be.
Of course, the most common criticism of the ACCC is that we are not doing enough. That is, we are not blocking enough mergers, or not otherwise intervening enough. On the other side, there is a criticism that competition agencies, in interpreting competition law, are either overly legalistic in the way they interpret the law, or overly theoretical in the way they apply the law.
An example arises with the emergence of many peer-to-peer business models, which the ACCC strongly welcomes. The ACCC is keen to ensure incumbent firms, with substantial market power, do not attempt to thwart new business models, and indeed, the potential for creative destruction.
Some have said we are adopting a theoretical approach, out of touch with the real world; we should simply stand back and observe.
A recent example is the reaction by some commentators to the ACCC's draft decision not to authorise a joint venture between competing taxi networks to launch a new smartphone taxi booking app. Broadly, the tone of the criticism has been that the ACCC is proposing to block the taxi industry’s response to Uber.
Of course, most taxi networks already have their own smartphone apps that allow passengers to book taxis in the same manner that Uber allows passengers to book private vehicles. There are also many third party apps that individual taxi drivers can sign up to that allow passengers to book taxis from a range of networks in a range of locations – goCatch, for example, reports to have 35,000 taxi drivers signed up to its app across Australia.
This is the sort of competitive response we would expect to see to the type of disruptive innovation we are witnessing.
Our point in the iHail draft decision is simply that iHail has not demonstrated a sufficient benefit for the entire taxi industry to come together on a single app on the terms proposed. Competition in this sector is far more dynamic than the simplistic view of taxis versus Uber suggests. Allowing a collusive arrangement between competing taxi networks has the potential to significantly dampen emerging competition.
Of course, I do not agree that the ACCC is overly theoretical in the way it applies the law. The ACCC is acutely aware of the real world and the profit maximising incentives and strategies of commercial firms.
Indeed, I believe that many companies and their advisers wish we were more theoretical, and less practical and commercial.
Companies sometimes go to great lengths to convince us that they will not act commercially; their legal advisers often challenge us to prove their clients will act commercially.
I have many, unfortunately confidential, amusing examples.
Our constant challenge, of course, is how we bring a real world understanding into a commendably dispassionate, evidence-based courtroom.
The legal process traditionally relies on admissible evidence about past conduct and outcomes. The challenge with merger analysis, for example, is that it depends on what will or will not happen in the future. There is little evidence of actual conduct to assess.
Fact-finding which involves speculation about a less then certain economic future does not necessarily sit comfortably. And yet this is what any merger analysis requires.
Any arbiter of fact has to weigh up what is usually and understandably self-serving evidence from merger parties with, for a number of reasons, often little other evidence from market participants.
Considering the implications of a merger or grappling with alleged anti-competitive conduct is inherently difficult. The ACCC and then the court or Tribunal has to surmise what is likely to happen in a market with or without the conduct. This means that the ACCC and courts must not only understand how the market operates today, but how it is likely to operate in the future both with and without the conduct.
In making this necessarily speculative judgment, the ACCC considers a range of qualitative and quantitative evidence. Evidence of how rivalry works in the market and who constrains who is particularly valuable. It can be quantitative or qualitative, so long it is relevant and withstands rigorous scrutiny. Quantitative evidence includes market shares, past entry and relative price levels and price movements of the firm compared to potential substitutes. Qualitative evidence must include commercial logic, as well as information provided by market participants and internal firm documents.
Considering how a merger or other conduct will influence future competition where a market is rapidly changing is particularly challenging. Markets should be allowed to evolve, but not through mergers or anti-competitive exclusionary conduct which enables firms to gain or protect substantial market power.
Our decisions are not based on static analysis, but focused on dynamic changes happening in the real world. The ACCC tends to place more weight on evidence about likely future developments in the market where parties can identify the trends that are beginning to emerge. We give less weight to speculative predictions about the future state of competition from market participants where the business has a vested interest in the process.
I was particularly interested in a recent article in the Antitrust Law Journal on this topic. The author, Jon Baker, uses an empirical methodology to conclude that, in anti-trust litigation, US courts are biased towards non-intervention unless the cases involve price-fixing or market division, horizontal mergers resulting in duopoly or monopoly, or a narrow range of exclusionary conduct.[2]
In my experience, which includes 20 years in the private sector, engaged in a wide range of commercial activity, companies nearly always say what is in their own interest; and act accordingly. It is a compliment, not a criticism, when the ACCC assumes that a company, including a monopolist, is a rational, profit maximising firm.
As I have already said, I am consistently surprised by businesses which, in defending their actions or in seeking the ACCC’s approval, claim that they will do something other than maximise their profits.
It sits oddly with my experience. I find that the nature of our legal system however, is sometimes such that the testimony of a company’s business executives, even if in accord with self interest, can succeed over sound arguments based on commercial ‘real world’ logic.
I am sure that these views are just the start of a robust debate that will occur at this year’s workshop. As Sarah Court mentioned, a number of sessions are directly relevant to the issue of applying competition law and economics to the ‘real world’.
Policy reviews: Ensuring that Australia’s competition law and policy is appropriate
We are currently having a healthy debate on how to foster innovation. A range of measures are proposed.
As a very long time observer of such debates I hope we do not lose sight of the “three R’s” of innovation. A necessary condition for innovation is appropriate taxation, industrial relations and competition policy.
I am delighted that in Australia we are focussing on all three. Sound policy change in all three areas alone can drive Australia’s future prosperity; alongside, of course, budget policy that ensures we live within our means.
The Harper Review is currently the key focus of competition policy debate. The ACCC is very supportive of the vast majority of the Panel’s findings, both as they relate to the Act and policy settings more broadly.
As we all know competition policy involves exposing more sectors to competition and incentives, and having appropriate competition laws to ensure competition is not avoided by collusion or behaviour that seeks in some way to damage the competitive process.
The Harper Review focused equally on both. Its recommended actions on micro-economic reform can drive future growth. I believe the Hilmer Review boosted our GDP by over 5 percentage points; implementation of the Harper Review will likewise stimulate economic growth.
The Harper Review’s recommendations on competition law showed a desire to both take a real world view, and a desire to bring our law into line with that applying overseas.
Harper’s recommendations on mergers and concerted practices illustrate this, as does the Panel’s recommendation on the misuse of market power.
In relation to misuse of market power, of course, two aspects of the Harper recommendation indicate an overdue recognition that the Australian (and New Zealand) law has long been out of step with the rest of the world. The first is that the focus of the prohibition should be on the harm to the competitive process rather than individual competitors. The second is that conduct that is innocuous when undertaken by firms without market power can at times be very harmful when undertaken by firms with market power.
In the context of an innovation debate section 46 becomes more important. Innovation cannot flourish when large, established firms can exclude new potential rivals without appropriate laws to prevent this when it substantially lessens competition.
We will later in the conference have a session on disruptive technologies which will explore similar issues.
Further, both the use of market power and concerted practices recommendations will be discussed at tomorrow’s emerging issues session.
Some of the other Harper Part IV recommendations, I believe, do not get the focus they deserve.
For example, Harper’s recommendations on collective bargaining, which could more readily allow collective boycott, can improve the bargaining power of small businesses and farmers in particular circumstances.
More even bargaining power can deal with important market failures in many of Australia’s markets dominated by a few players.
Another important recommendation, that does not get enough attention, is to ensure the CCA’s treatment of commercial activities by governments is consistent with those of private sector players. This will be discussed later today.
There is work in all of this for the ACCC, but it is work we welcome. We stand ready to provide guidance on how we would approach a re-formulated prohibition in section 46, and a concerted practices provision. Likewise we are prepared to review our merger processes, our use of the section 155 coercive information gathering powers, and our approach to interactions with the media.
International insights: the reality of increasing globalisation
All competition agencies grapple with similar issues, and a key to our combined success is the ability to exchange views and learn from each other. We are part of the International Competition Network, a growing and energetic network of more than 130 competition agencies. It was a great honour to be able to welcome 500 of our ICN colleagues to Sydney for the ICN annual meeting earlier this year.
Economic globalisation has resulted in an increasing number of reviews of mergers and investigations into cartels and unilateral conduct that transcend jurisdictional boundaries. This reality requires competition agencies, including the ACCC, to act cooperatively and collaborate. The session on international mergers provides a good example of the reality of working on a matter that crosses multiple jurisdictions.
At the ICN meeting we sponsored a special project which considered some of the difficult issues about when vertical restraints are pro-competitive and when they are detrimental. This was an opportunity to provide a forum for a challenging exchange of views in an area of controversy vitally relevant to digital markets.
We also drew heavily on our ICN connections when making submissions to the Harper review. For example, on the basis of our discussions with ICN colleagues and analysis of laws in many jurisdictions including the US, Europe and Canada, we gained powerful insights into just how unique and unfit our law on misuse of market power is compared to laws in comparable jurisdictions, and on our need for concerted practices laws.
Our engagement with other competition agencies has also helped us understand the significance of competition advocacy and impressed on us the value of market studies as a tool for analysing complex competition and consumer problems. We are now more actively using the market studies tool with studies currently focussing on the Eastern Australian gas market as well as petrol markets in particular regional cities.
We have also learned the benefit of quiet and sometimes not so quiet advocacy within and to government. A good recent example is our engagement with state and territory governments in dealing with decisions to privatise ports.
In each ASEAN jurisdiction, we expect that, by the end of this year, there will be a competition law and, in most jurisdictions, an agency responsible for enforcing that law. This will complement other enforcement agencies in our region, including China, Hong Kong, Korea and Japan.
In addition to our focus on the ICN we have been putting increasing focus on working with our regional partners, and on bilateral relationships.
I am delighted that the ACCC is now a member of the East Asian Top level Officials Meeting (EATOP); alongside the annual ICN meeting this is my other “must attend” meeting each year. This year’s recent meeting in Vietnam was excellently attended and run; I learnt a lot and reinforced old relationships and met new competition leaders from our region.
We have many close bilateral relationships, and we are creating new relationships. We have, for example, MoUs with two of the Chinese agencies, and will soon have an MoU with the third. For this reason I am particularly delighted that we have a number of experts from China attending in this workshop. You are very warmly welcomed.
I am perhaps proudest of our now established Competition Law Implementation Program (CLIP). Through this we help the newer agencies in the region with practical assistance. We do this, for example, by running investigation workshops, and by being embedded for a while in teams investigating cartels or assessing mergers.
We do this because, as a mature agency, it is clearly the right thing to do to help less developed agencies.
As usually happens, of course, when you do the right thing, benefits flow also to us. We learn new insights from both teaching and observing; and we build lasting relationships.
On this note, I would like to welcome to this workshop two of our colleagues from the Fiji Commerce Commission, Mr Bobby Maharaj and Ms Joanne Young.
Conclusion
During the next two days we will be privileged to hear the insights of competition lawyers and economists with a diverse mix of professional experience. The purpose of this workshop is, as always, to facilitate a robust and productive discussion.
Thank you all for participating; I look forward to hearing the differing views on applying competition law and economics to the ‘real world’.
[1] Productivity Commission, Review of National Competition Policy Reforms (Inquiry Report No. 33, 2005); Productivity Commission and Australian Bureau of Statistics, Competition, Innovation and Productivity in Australian Businesses (Research Paper, ABS Catalogue No 1351.0.55.035, 2011); Sanghoon Ahn, Competition, Innovation and Productivity Growth: A Review of Theory and Evidence (Economics Department Working Papers No. 317, OECD, 2002); Secretariat, Working Party No. 2 on Competition and Regulation, Competition Committee, Directorate for Financial and Enterprise Affairs, Organisation for Economic Co-operation and Development, Factsheet on Competition and Growth (DAF/COMP/WP2(2013)11, 28 October 2013)
[2] Jonathan B. Baker, ‘Taking the Error Out of "Error Cost" Analysis: What's Wrong with Antitrust's Right; (2015) 80(1) Antitrust Law Journal.