Productivity Commission backs Commerce Act competition test reform

Wednesday 29th January 2014

The Productivity Commission is backing calls by the competition watchdog, the Commerce Commission, to reform the country's increasingly ineffective and "idiosyncratic" competition law.

In its interim report on improving productivity in services industries, covering more than two-thirds of economic activity, the Productivity Commission homes in on the Section 36 competition test in the Commerce Act, which it says has been changed substantially by court interpretations.

The section is intended to "prevent firms misusing their market power" and was drafted to be similar to Australian provisions.

"But New Zealand courts have diverged from Australian courts in interpreting it," the productivity body says, and the Australians are revising their code anyway.

Meanwhile, "New Zealand's highest court has come to rely solely on a 'counter-factual test'. This sole reliance appears flawed because it poses too high a risk of false negatives and some risk of false positives to the detriment of competition outcomes."

While some may fear the loss of precedents and unintended consequences from reforming S36, the Productivity Commission says "there does seem to be a strong case to reform New Zealand's idiosyncratic approach."

"The economy can ill afford large firms to suppress the competition and innovation that smaller or new firms offer. It can also ill afford the risk that large firms are unable to implement changes and improve efficiency."

It proposes two possible approaches to reform. One would be "a more flexible approach where courts do not rely on a single counterfactual test for an abuse of monopoly power, regardless of the case." The other would seek "more of an 'effects' approach that aims to minimise the economic costs of decision errors."

Also discussed is greater use of market studies, funded by the Commerce Commission or other relevant government agencies, "to deepen understanding of how industries, markets, and market practices are working."

While the commission might fear the cost of such studies, they could "fill a gap between the general competition advocacy role of the Commerce Commission and the formal, narrowly scoped Commerce Commission investigations."

The report, on which submissions are sought by March 7 before a final report to the government in April, also covers potential productivity gains to be achieved in the use of information and communications technology.

A survey of 15,000 New Zealand firms, undertaken by Colmar Brunton for the report, found that close to half saw no value in investing in new ICT to improve business productivity.

That was evidence of the relatively low levels of competition faced by many firms in New Zealand's relatively small markets, a factor which is believed to contribute to the country's relatively poor productivity record, said Productivity Commission chairman Murray Sherwin.

BusinessDesk.co.nz

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