Three cheers for competition (and for Paul Goldsmith)

Published in Insights, The New Zealand Initiative’s newsletter, 11 December 2015

cartelsOn 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.”

If you are unfamiliar with competition law, you would be surprised by such a statement. How, you may ask, could pro-competitive behaviour of companies ever be confused with anti-competitive behaviour?

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.

If two companies charge exactly the same price, they could be thought to be guilty of collusion. If one charges more, it might be accused of gouging. If it charges less, it could still be guilty of undercutting and “unfair competition”.

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.

In short, the nature of competition law is such that you would never want to make it the basis of criminal sanctions. Criminal law requires a great degree of predictability. If you commit a crime, you should know what penalty to expect if caught. With competition law, you often do not even know you have done something wrong until a judge tells you so.

If you really care about competition, forget about trying to make it happen by law. Instead, just remove all obstacles that stand in the way of competitors entering the market.

If Minister Goldsmith needs any ideas for that, he might wish to think of the effects of the Overseas Investment Act. For now, we should thank him for sparing us the criminalisation of business behaviour.

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