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Competition regulators like NZ's Commerce Commission may help to combat rising prices for consumers

Business / news
Competition regulators like NZ's Commerce Commission may help to combat rising prices for consumers

It might seem an unlikely inflation buster, but New Zealand’s competition regulator may have a role to play in combating rising prices.

Inflation has been rocketing around the world, with the Organisation for Economic Co-operation and Development (OECD) highlighting a 10.2% year-on-year percentage increase in prices across the OECD’s 38 member countries just in the second quarter of 2022.

Antonia Horrocks, general manager of competition for the Commerce Commission, says it's important when the cost of living is going up that a market regulator is finding where competition is being harmed, in the industries that matter most to people.

Horrocks says since the start of COVID the commission has been talking to other regulators about the role of competition in supporting an economic recovery, and in relation to inflation.

For example, she says it's important if an economy is going through shocks to have a strong merger control regime and that cartels are detected, particularly if they're in critical industries, like the shipping supply chain.

“At the moment it’s very clear that consumers have strong views on food, fuel and energy costs, but there are things right at the bottom of the pyramid that are almost invisible costs that are markets, that are intermediary markets, or things like that. So I think for us, it's thinking about where those markets might be affected by competition issues as well.”

An OECD note published this year, Competition and Inflation, OECD Competition Policy Roundtable Background, says while weak competition is likely not responsible for the current high inflation environment, competitiveness of markets could have an impact on inflation over the longer term.

It points to evidence that average mark-ups have increased in the US from about 21% in 1980 to 61% in 2016, and says analysis suggests concentration in markets (less players) and profitability has increased, and some research suggests rising concentration in markets is an “amplifying factor” in the current inflationary environment.

The OECD note says a recent paper by researchers at the Federal Reserve Bank of Boston found more costs are passed onto consumers in concentrated industries, and that the decline of competition has made the inflation shock worse.

It also says concentrated supply chains due to less competition are also likely to be more brittle and susceptible to shocks.

Weak competition is also highlighted for potentially working against monetary policy in controlling inflation.

Research published in 2021 looked at data from 15 advanced economies and studied the response of firms to monetary policy shocks, finding that larger firms were less sensitive to monetary policy.

This research floats the idea that large firms, or those with significant market power, are less sensitive to changes in the cost of borrowing money and therefore less responsive to interest rate changes. 

“Hence, if lower levels of competition increase the propensity of larger firms, then this will reduce the ability of central banks to use monetary policy to control inflation.”

NZ Initiative chief economist Eric Crampton says all things being equal, competitive markets result in lower prices.

He says while challenging a monopoly might see a one-off reduction in prices, what we are seeing at present is “monetary pushes” from central banks pushing up demand which leads to ongoing increases in prices.

Get out the rule book

The commission has been given a number of new tools by the Labour government, including the power to conduct market studies, cartel conduct (agreeing not to compete) has been criminalised and a new “likely effects test” from next April will be used to police whether dominant firms have abused their market power.

Horrocks says the commission has grown its competition team after a restructure, going from about three to seven.

It’s not just investigations it's undertaking, it also looks at mergers, determinations and authorisations of transactions, including collective bargaining authorisations.

Horrocks says the team also has a number of covenant cases on the go in relation to the supermarket industry, including prosecuting a company in the residential building supplies industry for its use of covenants.

The market study into the grocery sector is the second study undertaken under the new powers the commission received under a law change in 2018, with fuel the first one done, and building supplies the most recent.

Land covenants have been identified as holding back competition, and the commission recommended covenants, or restrictions on how land can be developed, be prohibited.

“For me, it shows one of the uses of a market study that you can look right across the sector and see where sometimes one individual may not be having much effect, but when you have it, as we saw on groceries, right across the sector, starting to create a real barrier to entry,” Horrocks says.

She says the commission didn’t expect “to see the scale of covenants of the type we have”.

Market studies allow the competition watchdog to look at areas where there might not be a specific breach of the law, but there is some suspicion that there may be elements that may not be working as competitively as they could be. 

“So it can be a really useful understanding exercise.”

Horrocks says she recognises the studies have a cost burden for industries, and the commission is careful in choosing its targets whenever it decides to start looking into an issue.

Improving competition in a high inflation world

The OECD competition note discusses actions competition regulators can take to improve competition in a high inflation world, and says with uncertainty and finite resources authorities must prioritise how to focus their efforts to improve competition. 

It says pressure will be put on regulators to act in times of high prices, but it also provides a potential opportunity to advocate for the importance of competition.

This might include advocating for competition when it might be threatened by other government initiatives, or seeking to improve competition in a particular sector.

It says regulators can make it clear they will enforce the rules against price gouging while countries are facing high inflation, pointing to a speech by the commissioner at the Canadian Competition Bureau who said it “would have zero tolerance towards any firm seeking to use the current situation to increase prices”.

There may also be a case to focus on enforcement in times of inflation, the OECD says, and although enforcement may not have an impact now, that doesn't mean its not worth doing.

Ritchie Hutton, the commission’s head of investigations, says enforcement versus engagement is something all regulators have a challenge with.

“Generally speaking, all regulators will try to strike the right balance. And that is usually to use your educational tools ... because most businesses do want to comply with the law. That's the starting point. And so, use your tools to make sure you can get those businesses to comply with the law properly. And it's a easy, cheap win for everybody. And you save the more expensive and severe enforcement options for that small group of entities who you regulate who are willfully non-compliant and not willing to change.”

He says that is the basic premise all regulators apply to make sure taxpayers' money is used in the most effective way.

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34 Comments

Good piece - enjoying Rebecca's contributions very much.

Eric's contribution was as priceless as ever, '... all things being equal, competitive markets result in lower prices.' Well, yes, but companies across the world - including in NZ - have aggressively consolidated or cooperated to maximise their market power - that is literally their strategy. Countries that have stood back and watched this happen are now paying the price (literally). Good piece on this here.

If you look objectively at our economy and our biggest companies (and banks), what you see is a well-oiled machine that takes every spare dollar out of our pockets and channels it into the wealth of the few per cent of the population that own all of the shares and equity. It's basically a regressive taxation machine. 

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The company that takes the most money out of my pocket (and it ain't close), is the crown.

All of this is deflection. Reserve Banks and Governments that created this mess are trying to blame the private sector.

Nope, not buying it. They grossly inflated the money supply in a misguided response to virus that most likely is a result of a research related incident - probably in Wuhan.

The problem is government negligence compounded by government incompetence further compounded by government profligacy.

https://www.nzherald.co.nz/business/reserve-bank-called-on-to-cut-nzs-money-supply-fast/ZF3VOCQRNZEPOI7P5VJCZ2D4VI/

https://www.help.senate.gov/imo/media/doc/report_an_analysis_of_the_origins_of_covid-19_102722.pdf

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5

Ok mate. 

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7

Feel free to refute any of my points.

I agree with you that companies are increasing prices. They're required to maximise profits. We're looking in the wrong place if we're trying to solve the wider inflation problem though.

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The crown is all of us.

so it isn't a thief.

Look elsewhere: https://www.thegreatsimplification.com/

 

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7

Er, when did I sign up to be part of this Crown? I don't recall ever giving the Crown permission to take 1/3 of my income, and another 3/20 when I spend the remainder.

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Don't use the crown's currency then?!?!?!  

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8

Or the roads, education system, health system, fire service, Police...

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9

But I can't opt out, can I? That's exactly my point.

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1

Sure you can. Go live in Vietnam or something. Or the UAE if its taxes that annoy you. See how you find it there.

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You can opt out.  Don't drive on the roads, don't call 111 when you're in an emergency, refuse to go to the hospital when you're sick.  

Ask your employer to pay you in flour, sugar, yeast, spices and bottles of water.  Go live in a tree somewhere in your local park.  Saying you can't opt out is just being defeatist.  Sounds like you want to have your cake (a job) and eat it too (no tax).  

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I didn't say it was a thief. I said it was my biggest expense and the source of the inflation.

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Oh yes it must be the democratically elected entity that is responsible - gather the pitch forks while we turn a blind eye to price fixing, monopolies, record corporate profit and the not-so-free market. 

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11

There is competition on that front. Kiwis who don't like the government and their management of the economy jump on a plane and head to Oz or the UK.

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Take a look at the graph in this article. What do you think happens when money supply increases rapidly, but production does not?

More money, same or reduced production of goods? Join the dots.

https://www.nzherald.co.nz/business/reserve-bank-called-on-to-cut-nzs-money-supply-fast/ZF3VOCQRNZEPOI7P5VJCZ2D4VI/

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I agree. The governments share of GDP has increased from 35% to 44% over the term of the sitting labour govt. 

However. Wouldn’t it stand to reason that cutting taxes will inject more cash into the system. Thereby increasing inflationary pressures? Wouldn’t the govt be better to reduce share of GDP with the same tax take and reduce deficits or pay down debt?

in the theme of this article. Leftist memes are pushing record company profits as a key cause of inflation. To me this represents a problem of competition. This is certainly part of the equation. 

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6

I don't think that does stand to reason. The government spends the collected taxes back into the economy along with more money, borrowed into existence. The government's capacity to borrow is loosely linked to the amount of revenue it collects.

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research lab in Wuhan - this is no longer a conspiracy theory by the way, this is the generally accepted position held by the US government.

Have you heard the phrase exceptional claims require exceptional proof?

The fact that there was a research lab working on coronaviruses definitely raises some questions but theres no smoking gun showing a lab leak. We will probably never know for certain.

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Actually there are 3 studies published in Science that between them found there were 2 separate incidents of the virus species-hopping to humans at the Wuhan wet market.

https://edition.cnn.com/2022/07/26/health/wuhan-market-covid-19/index.h…

The studies were posted online as preprints in February but have now undergone peer review and were published Tuesday in the journal Science.

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Yup. It's the generally accepted - i.e. most likely source. It is not confirmed and probably never will be.

Here is the US senate paper:

https://www.help.senate.gov/imo/media/doc/report_an_analysis_of_the_origins_of_covid-19_102722.pdf

The conclusion:

Based on the analysis of the publicly available information, it appears reasonable to conclude that the COVID-19 pandemic was, more likely than not, the result of a research-related incident. New information, made publicly available and independently verifiable, could change this assessment. However, the hypothesis of a natural zoonotic origin no longer deserves the benefit of the doubt, or the presumption of accuracy.

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"At the moment it’s very clear that consumers have strong views on food, fuel and energy costs, but there are things right at the bottom of the pyramid that are almost invisible costs" 

Actually, energy is the thing at the bottom of the pyramid.

Food and fuel are energy.

And no dollar is underwritten, ex energy-availability.

When, oh when, will they make physics a necessary paper when studying economics?

Or reporting it, for that matter.

No amount of regulation, money-issuance, interest-rate alteration or anything else, can offset energy depletion. Ask her what they're going to do about that? Rather than pretending this is driven by something other than us hitting the Limits to Growth inflection(s).

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7

Is energy provided by wind, solar, hydro, nuclear and geothermal depleted or approaching depletion?

 

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In a way, yes. No dam. no windmill, no reactor, no solar panel, was ever made/transported/erected/maintained, without fossil energy. Hasn't been done, can't be done. The Laws of thermodynamics are LAWS - insurmountable. Sorry. EROEI applies (and you should have read up on that, by now).

Wind, hydro, are both solar, just one stage removed, remember, as is tidal, effectively. Nuclear (know tech) relies on a finite resource; use it to displace all current global energy-use, you'd deplete in maybe 40 years - the graphs (build vs deplete) would cross. Geothermal is site-specific. Very. And Carnot applies...

Homework needed.....

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In short, they're not approaching depletion. We can use fossil fuels to open up access to a wealth of energy. Then at some point we'll start tapping into off-planet resources.

The future is bright, despite recent calamity.

 

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Good article, however Com Com has proven rather ineffective when looking at supermarkets, and what are recommendations for the petrol companies?

How about farm sales being sold to overseas investors, all that does is drive up the drive up both land and meat prices.

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You can't regulate a market as complex as supermarket retail with tens of thousands of product offerings across hundreds of locations.

On petrol companies, one team within ComCom gave Z the greenlight to buy Chevron's NZ assets (Caltex fuel stations). 3 years later another team found the resulting market structure to be oligopolistic and dysfunctional. The market regulator needs reform before the markets are put under scrutiny!

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Confusing price rises with inflation yet again.

 

 

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Exactly. More money chasing the same product, therefore higher prices.

.. where did the extra money come from?

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Our banking sector regulator has staff turnover in the 20% plus/year range, it seems there are attractive job offers being made.  

Wonder if the Commerce Commission staffers will get similar offers.  

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It doesn't even offer the best pay and perks in the public sector; Kainga Ora is the winner in perks and MBIE pays above market rate for finance specialists.

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What are the Kainga Ora perks?

(not trying to be snarky, genuinely just curious)

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Perhaps a free state house!

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Jobs frequently advertised as [insert salary here], plus "five weeks' annual leave, Kiwisaver and a suite of benefits"

 

https://careers.kaingaora.govt.nz/a-great-place-to-work/benefits

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MBIE pay well above market rates for procurement roles too.  

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