Analogue competition laws in a digital world

Published in The National Business Review (Auckland), 30 June 2017

In blocking the NZME/Fairfax and Vodafone/Sky mergers, the Commerce Commission again demonstrated its crucial role in shaping New Zealand markets. Both decisions were subject to close public scrutiny and attracted support and criticism, almost in equal measure.

Of course, one could go through the commission’s respective rulings and ask questions. One could ask if the markets were properly defined, the potential effects of the mergers correctly identified and public benefits duly weighed.

These questions are difficult questions to answer as they are economically and legally complex. It is not the purpose of this column to pass judgment on whether the commission did a good job given its mandate under the law.

Instead, we might follow Friedrich Hayek’s advice that “from time to time it is probably necessary to detach oneself from the technicalities of the argument and to ask quite naively what it is all about.”

So indeed: What is competition law all about? As naïve as this question sounds, it is harder to answer than most lawyers or economists believe.

The more you delve into the philosophy, history and practice of competition law and the economics supposed to underpin it, the more questionable the exercise of regulating for competition appears.

At the root of the problem is a distinction which is not merely semantic. “To compete” is a verb while “competition” is the corresponding noun. Yet between these two words lies a central tension of competition law: Do we understand competition as the sum of competitive actions? Or do we think of it as a state of affairs?

In other words, are we satisfied that competition manifests itself in the competitive behaviour of market participants? Or do we believe that there needs to be a certain market structure to assume the existence of competition?

For a long time since Adam Smith laid the foundations of economics with his Wealth of Nations (1776), the profession tended to view competition as the sum of competitive actions. It was a perspective not too dissimilar to a Hayekian view of markets as processes.

Classical economists would have been highly sceptical of regulating for a certain type of market structure.

Many people might mistakenly assume that Smith himself would have been happy with competition law, given one his most famous quotes: “People of the same trade seldom meet together, even for merriment and diversion, but the conversation ends in a conspiracy against the public, or in some contrivance to raise prices.”

The problem with the quote is, however, that it is incomplete. Smith immediately went on to clarify that “It is impossible indeed to prevent such meetings, by any law which either could be executed or would be consistent with liberty and justice.”

The economics profession’s views on competition have changed since Smith wrote these lines. However, the dilemmas competition law faces, and which Smith correctly identified, remain.

There are two main reasons why the use of competition law has become widespread. The first is political. From historical research, we now know it was often smaller, inefficient companies that were behind initiatives to regulate their larger competitors. The public choice perspective has shed light on the forces which resulted in the rise of antitrust law in the US that culminated in the Sherman Act (1890), a landmark in the history of competition law.

Meanwhile, within economics the creation of the model of perfect competition shifted the focus away from market behaviour to market structures. As a mental tool for thinking about markets, “perfect” competition might have been appropriate. However, it often became confused with a kind of efficiency utopia which should be approximated by intervention.

Though this approach has sometimes been mocked as a “nirvana fallacy,” its normative influence continues to be great. It’s even present where people explicitly reject perfect competition as a benchmark – only to replace it with other static characteristics by which to define supposedly competitive markets.

The recently proposed mergers were rejected mainly because their resultant market structures were not deemed appropriate for maintaining competition.

A process-oriented view might have come to a different conclusion. Seen this way, the mergers themselves could have been interpreted as thoroughly competitive actions in a radically changing media environment. Because the media market is evolving with new technologies and new players, market structures in one country may not tell us much about the nature of competition.

Again, this is not to criticise the Commerce Commission’s rulings. The commissioners did what they had to do under the Commerce Act. But the rulings raise questions whether competition law that has been with us since the Sherman Act is still appropriate for the digital age (if it ever was).