Keynote address to the RBB Economics Conference

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Introduction

I am delighted to be here today at this third RBB Economics conference. Given that RBB is the organiser, I will take the liberty of injecting a bit more economics today.

The Competition and Consumer Act 2010 is, of course, economic law. On taking my current position over two years ago I read “Competition Law in Australia” by Stephen Corones. The first 175 pages were an easy and delightful read: not just wonderfully written but almost pure economics.

As Professor Corones says in his book:

“… the overall objective of Part IV is the promotion of competition, not as an end in itself, but as a means of promoting economic efficiency for the benefit of consumers.” [1]

To me, it is all about incentives, market failure and economic welfare. Address market failure and competition will unleash the incentives to win by best meeting the needs of consumers.

The flyer for today’s event says I will discuss “the work that the ACCC is undertaking to strengthen competition law in Australia.” At the risk of engaging in misleading and deceptive conduct I will deal with this topic at a high level by discussing the following three topics.

First, I will argue that we should embrace the coming “root and branch review of competition policy and law”.

Second, I will discuss how each of the three tasks the ACCC performs enhances competition, and the close linkages between them.

Finally, I will reflect on the role of economic logic in Part IV (competition) cases.

Let’s embrace the coming root and branch review of competition policy and law

I am always delighted when the Hilmer Competition Review of 20 years ago is said to have been a great success. Indeed, I am delighted to see this review now “owned” by both competition lawyers and economists on the one hand, and micro economic reformers on the other.

The Hilmer Review had important recommendations for both groups. It widened the reach of the Part IV competition conduct rules and recommended what became the Part IIIA access rules; and it started the process that removed an enormous number of regulations that restricted competition and saw the reform of public monopolies which exposed many sectors to competition (the micro economic reforms).

The then Industry, now Productivity Commission, in 1995 estimated an “outer envelope” boost to growth of 5.5 per cent, essentially from the micro economic reforms.

The Government’s proposed “Root and Branch” review is intended to be another “Hilmer-type” review. It will, we are told, look at improvements to our competition laws and also impediments to competition generally.

That this is timely can be traced back to a recent paper by Fred Hilmer himself, titled “What’s wrong with microeconomic reform today” (given to the Sydney Institute in August 2010; the same speech is on the ACCC’s website as Learnings from successful competition policy and productivity). [2]

In the paper Fred argues that productivity depends on both incentives (essentially through competition) and enablers. Enablers are such things as investment in infrastructure, education, skills, R & D, and technology. Fred says:

“…enablers make it possible for firms and individuals to lift productivity. However, just because firms and individuals can improve productivity does not mean they will…”.

For this they need incentives, particularly provided through competition.

Fred’s thesis was that recent policy has focussed on the enablers, not incentives. He was and still is calling for a renewed focus on incentives, particularly competition.

Fred was and is correct in his diagnosis. I would add that if productivity is about getting more output from given inputs then spending money on more inputs will have a doubtful effect on productivity: much will depend on the quality of the investment. Improving incentives, particularly by removing impediments to competition, will virtually always boost productivity and national welfare.

I hope the review keeps the focus not just on competition, but also on broader incentives. Privatisation and congestion pricing, for example, are also measures that can greatly improve incentives.

I am aware, however, of some concerns with the review.

I gave a speech to the National Press Club in March 2013 subtitled: We are all economic philosophers. My point was that all Australians have a view about what our Act should cover, and the ACCC is often in the middle of some interesting debates, to say the least.

I remember debating many aspects of the late 80s / early 90s deregulation agenda with my mother over numerous games of scrabble when I used to visit her. She opposed reducing tariffs, and deregulation generally, and never changed her mind despite my best efforts.

Such debates, on a national scale, are healthy. Everyone has to feel a part of our market economy, and they need to see that it works for them.

I have heard the concern that there may be changes to the Act to protect individual competitors and not the competitive process. Without doubt the Act is, and should be, about protecting the competitive process, and it is good to be reminded of this.

We should, however, be careful about over argument here, to avoid losing this key message. For example, in a recent Monash Business Policy Forum paper, Agenda for National Competition Policy Inquiry, it is argued that adding “an ‘effects’ test to section 46 would create business risk with little if any gain. It is inconsistent with protecting the competitive process”[3].

I do not see how adding an additional “effect of SLC” test is “inconsistent with protecting the competitive process.” This seems a contradiction. In addition, such an effects test already exists in the same section in our Act applying to telecommunications.

I am not here today arguing one way or another for an effects test in section 46. It is a complex issue that I am sure will be much debated in the “Root and Branch” review.

Indeed, I have constantly said that I think it inappropriate for the ACCC to outline its views prior to the Terms and Reference being released and the Panel formed.

But when the Review is underway we will put our views, and I am looking forward to a wide ranging debate.

One argument that I am hearing more of is that we need more “national champions”. It is never far from the surface in our merger reviews, but importantly can also be heard in some of our section 46, access and other cases involving large companies.

Some argue “we need to achieve the scale in the Australian market necessary to be successful against overseas companies either in Australia or in international markets”.

Antitrust agencies generally interpret this as “we need to be protected from competition in the Australian market in order to be able to compete more effectively in overseas markets.”

These agencies then wonder how those who do not face significant competition at home can be competitive overseas, as they may have reduced incentives to innovate and drive efficiency.

Our Act already has an appropriate process to test such issues through the ability to seek authorisation for activity that would otherwise be a breach of the Act. In that process the claimed wider benefits can then be balanced against the detriment flowing from the reduced competition.

The ACCC’s three important and inter linked roles which all enhance competition

The ACCC performs three roles that can affect competition in Australia.

Our competition law role is to prevent mergers and agreements that substantially lessen competition; to prevent the misuse of market power for a prescribed anti-competitive purpose; and to prevent cartels.

Our utility regulation role is aimed at maximising economic efficiency, mainly by promoting competition upstream and downstream from monopoly assets. Our regulation of Telstra’s copper wire and wheat ports, for example, is to allow access and thereby promote, respectively, downstream and upstream competition.

Our consumer law role is to prevent consumers being misled or being sold unsafe goods, and to deal with unconscionable conduct. This may seem to involve conduct in a different category from the previous two, but this is not so.

Most of our consumer issues have an important competition dimension. For example, our work on credence claims, dealing with false claims as to where (Australia, King Island) or how (free range, or by a skilled artisan) a good is made is for two reasons. First, the consumer is not getting what they paid for; second, and often more important, genuine producers are losing out to those making the false claims.

This lack of competition on its merits involves both an efficiency and a welfare loss.

Even what could be called standard misrepresentations can have this effect. For example, when energy companies advertise discounts off a misleading base price the better competitor can lose out because of the misrepresentation.

The same can happen when someone sells unsafe goods, particularly inexpensive imported goods, without proper checks. There can often be more expensive but safe goods not getting sold, to the detriment of both competition on its merits and consumers.

Some see competition issues as being more important than consumer issues. Perhaps it is the complexity of the cases, or an assumed greater effect on economic efficiency and welfare.

This latter proposition in particular is questionable.

Consider an industry with high entry barriers and three competitors who collude to raise prices. Suppose the demand curve for the goods is or is near vertical. In this case there may be no efficiency loss (at least in a static sense), just a transfer of wealth from the consumers to producers.

How is the welfare loss from this cartel to be compared to inappropriate monopoly utility pricing, or misleading consumers about their consumer guarantee rights?

As another example, the ACCC has a much publicised investigation into both unconscionable conduct under consumer law and the misuse of market power under competition law involving supermarkets. They seem equally complex cases, both with important potential economic consequences. As I have said elsewhere, this potentially unconscionable conduct can affect planning, investment and innovation, and so economic efficiency.

Every now and then there are suggestions to split the ACCC’s three roles. The most recent of these is from the above mentioned Monash Business Policy Forum’s paper which posed the question “Is it appropriate to have a single mega regulator like the ACCC, or would it be better to separate out the consumer law and infrastructure access functions to alternative regulators?” They then describe what the alternative model would look like.

This proposal raises many issues. As but one example, which of the agencies would deal with the misuse of market power in telecommunications, which currently is in specific telecommunications provisions? Further, how much more would this model cost and, fundamentally, how would the considerable loss of scale affect each new agency’s effectiveness?

The ACCC is described as a “mega regulator”. The ACCC has around 800 people, well under half that of the Australian Securities and Investment Commission, considerably smaller that the Reserve Bank of Australia, and only a little larger than the Australian Prudential Regulation Authority and the Australian Communications and Media Authority, which are industry–specific regulators.

My underlying concern, however, is philosophical. The ACCC’s role is to address market failure so that a market economy works as it should. That is, to promote competition, and to have competition on its merits, and to otherwise promote consumer welfare.

In many ways the ACCC could equally be called the Australian Market Failure Commission, although I am not seriously suggesting such a name change.

Proposals to split the ACCC would separate out similar issues which benefit from similar judgements and frameworks. All involve weighing up the detriment from the market failure, and the cost of addressing it.

Such proposals misunderstand the synergies and crossovers, which are significant. In addition, and as I have said, three organisations would be much less effective than the current one.

All that said, I should add that the ACCC deals with competition, consumer and regulation issues in different organisational areas.

We also manage and track our competition and consumer enforcement cases separately.

We have around 30 in depth competition investigations underway, and around 70 in depth consumer investigations. In my first year we instituted proceedings in relation to two competition cases; in my second year five; and in this third year we will institute proceedings in relation to 5-8 competition cases.

This compares to instituting proceedings generally in relation to around 25 consumer cases per year.

This ratio likely reflects the relative complexity and resource cost of the cases; and this overall level of activity compares well to overseas competition and consumer agencies when adjusted for Australia’s population.

As I have said on many occasions, however, I think our effectiveness is significantly larger in other ways:

• the fact that we do enforce the law, and against large companies, means most companies obey the law
• our around 2500 assessments and 500 initial investigations per annum also send signals about appropriate behaviour.

Of the five competition cases instituted last year one involved allegations of a misuse of market power against Visa, and four involved alleged cartels, of which only one was purely domestic.

I would be happier with a slightly different mix of cases.

As one who feels cases involving exclusion are at least as important as those involving collusion, for the health of our economy, I would like to see, and indeed expect to see, more of the former.

With our collusion cases I expect more will be purely local cases, but international cases must always also be a priority, particularly when Australians, Australian businesses, and businesses in Australia suffer significant harm.

I expect to be able to announce the commencement of another domestic cartel case before the end of the year.

Finally, we need to find ways to gain increased penalties for our competition cases, to improve their deterrence value; but that is a topic for another time.

Some reflections on the role of economic logic

Part IV (competition) cases, especially those involving exclusion, necessarily involve micro economic analysis. This is at least in part because companies also learn micro economics, but they learn lessons that go the other way to where antitrust agencies would want.

Harvard Professor Michael Porter has taught a generation or two of business people that the best markets are those with high entry barriers, little competition, a diverse supplier base and customers who are so rusted on as to be price insensitive. Further, it is the role of business people not to outrun your competitors in an even race, but to focus their effort on increasing entry barriers, reducing competition say, by mergers, and making customers more price insensitive.

This is not at all controversial. It is basic corporate strategy 101, to be found in any strategy text.

Indeed, at the risk of a little exaggeration, and from one familiar with both fields, competition economics can be seen as equal to corporate strategy multiplied by minus one.

These and other micro economic concepts are fairly simple, but their application, I believe, is sometimes too complex in Part IV cases.

I will make four points.

First, some economists can make their arguments overly complex. This can make it difficult for non-economists to understand, which may explain why the messages conveyed by economists do not always get through to the court. Some economists have been heard to complain that judges “are just not interested in hearing from economists.”

To me this is the opposite of where the blame lies. If your message is not getting through, change your approach. You cannot change the message receiver.

In addition, if an economic case cannot be presented clearly, then it may not be right.

Second, some economists place a high burden on demonstrating that conduct will have an anti-competitive effect. We must remember that the test is whether the conduct would have, or be likely to have, the effect of substantially lessening competition.

Often it is not possible to demonstrate that particular conduct has or will have an anti-competitive effect. For example, demonstrating that coordinated conduct will result from a merger is not possible. It is a forward-looking assessment. We can, however, tell when circumstances will make coordinated conduct more likely and recognise that what companies have the incentive and capacity to do they will do.

Given the uncertainties inherent in making the necessary judgements, requiring proof that harm to competition will occur before taking action would be to immunise some anti-competitive conduct from the proper application of the Act.

It can be sensibly argued that if there is a strong economic theory of harm from the conduct and no credible alternative theory of economic benefit, then that may be sufficient to suspect that an anti-competitive effect is likely. After all, if a firm or firms can profitably act to lessen competition they very likely will.

Third, some economists place too high a reliance on econometric techniques. In my experience, econometric models can help test logic; they are never a substitute for it.

We are seeing a trend to more sophisticated econometric techniques and simulation models to predict the likely effect of particular conduct. Sometimes it is claimed that the analysis and models are “proof” of the likely effects of the conduct.

This claim seems based on the false premise that the economist has conducted a controlled scientific experiment. This is not so. It must be remembered that the predictions from this form of analysis depend on the decisions and assumptions made, which are often highly contestable.

We are seeing an increasing number of economist’s reports without sufficient critical assessment of those decisions and assumptions.

Finally, data limitations often mean that we need to assess the likelihood of competitive harm based on economic theory, and market incentives and realities, without supporting quantitative analysis.

This is not a problem. Logic can prevail. An inability to quantify competitive harm does not indicate an absence of harm.

More important, it does not mean an absence of economic analysis. Instead, it is when true economic argument, steeped in practical market understanding, can come to the fore.

Conclusion

To conclude, I have possibly strayed a little from my brief. I will try to do better if invited back next time. And then we will be well into the exciting debates that will surround the root and branch review of competition policy and law.