Fran O’Sullivan on Paula Rebstock
Fran O’Sullivan has some good points to make today in her article on the departure of Paula Rebstock.
Fran begins her column:-
Paula Rebstock’s “decision” to step down as competition tsar was a fait accompli once the stalking horses for fed-up Kiwi blue chips began ganging up on her.
Even before John Key’s party swept to power at the November election, protagonists in the commercial community were letting it be known that the Commerce Commission’s approach to stamping down on corporate malfeasance was too “Paula driven”, “too lacking common sense” and even “dangerously interfering with the very survival of NZ companies”
Personally Adam thought Rebstock was doing a good job: unlike Jane Diplock at the Securities Commission. The fact that Rebstock trod on corporate toes was no bad thing. In the incestuous world of NZ business and over mighty SOEs you need a tough competition overseer and cartel buster. One of Rebstock’s major successes in Adam’s eyes was seeing off the Air NZ/Quantas deal. That deal had anti-competitive stitch up/consumer price gouge all over it. Quantas would have called the shots and NZ would have suffered.
O’Sullivan notes:-
Rebstock stood on plenty of powerful toes during her five years as chairwoman of the New Zealand Commerce Commission. When she started going after the cartels, she found plenty of evidence of deliberate anti-competitive behaviour by companies that should have known better.
Mutterings around town about “that woman” increasingly got louder as boards and management of the misbehaving firms used the jawbone to try and deflect attention away from their own errant behaviour.
We need a strong Commerce Commission not a rubber stamp for the ‘top end of town’.
Fran raises legitimate concerns over delays to the Commerce Commission’s report into the power generating industry:-
And she has recently been putting the finishing touches on the “electricity investigation report” which probes the pricing policies of the power generators, including those owned by the state.
The report produced by Stanford University professor Frank Wolak was expected last month. But yesterday the commission could not even say whether it would be released before Rebstock’s departure on March 31.
The commission should get this out asap.
If there are delays until after Rebstock’s departure, it will play into concerns that she has also come under pressure at government level over her intended approach to the generators.
Adam would be concerned at any delay. It would fuel concerns that the Government is playing games and is content to connive at a rigged market which gouges the consumer. This would be something for the Labour opposition to get their teeth into.Simon Power needs to ensure the Government is not seen, even by inference to be condoning anti-competitive behaviours of any kind.
In a recession is not the time for the Government to give the impression of being soft on big business, nor of being the playthings of business fat cats and the Business Roundtable.
We need a strong and vigourous Commerce Commission not an emasculated one.
alphainventions
The Inquiring Mind 
Did a little bit of homework and it’s Wolak not Wolnak and skimming his articles I’m not holding my breath. One of the big failings of these reviews is they use academics with no direct experience of the industry or they use legal beagles with no direct experience of the industry or they use … You see the pattern.
He is also out of Stanford, which implies bias and serves on an independent panel that monitors the electricity market for the California Independent System Operator.The operator oversees the state’s power grid. California is a failed power model – I hope he has not been there a while – I could not find out how long.
I’m guessing he received his remit from Labour but I may be being too cynical here.
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It will be interesting to see if the Wolnak report sees the light of day and what it recommends
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adam – I also have some exposure to the power industry – the government is the price setter regarding generation as they own the bulk of the generation capacity – the rules around the pricing for power are not competitive – set by a government body from memory. The rules are the biggest problem at the moment not the companies – fix the rules and at least it will be more competitive.
The rules around other costs are looked at by a government body (I forget which) and they relate mainly to value of assets and the replacement costs of these assests – thus the power companies play with these valuations to allow them to charge more.
So – no I don’t reckon floating them will make a difference as this an incredibly difficult market to make competitive and the current rules are easily manipulated – would transfer profits out of the country probably – not sure of the answer to this one personally as there are permament monopoly components in power generation. In this case we have two bad choices – government monopoly or commercial monopoly – if it’s a foreign owned monopoly they tend to be a little worse than government owned monopolies. The least worst choice
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I tend to agree re cartels.
Though I wonder if the 3 state owned power companies were sold down and floated on the stock market would we have a market as opposed to what is effectively a cartel in my view as I am not convinced that the 3 SOEs really compete.
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bad day the sentence “What I do agree with is that permanent predatory pricing does not work” should read “….. does not work in the long term”
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Just adding to my previous point – predatory pricing is not a real problem in NZ – cartel like behaviour and monopoly pricing is.
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Wandered across from kiwiblog frpm a reference from adamsmith.
First comment – this comes across as quite an academic discussion. I’m a business man with a scientific and maths background and amateur economist – but made sure I read all the classics and the modern stuff. So I’m probably the equivalent of a bad undergrad. So, I’ll comment from almost 30 years of exposure to almost 100 industries across several countries with a nod to economics.
For instance, looking at the article on predatory pricing I can see several faults from here. Predatory pricing does not necessarily mean selling at a loss, it does not take into sufficient account of barriers to entry in to markets, does not allow for future profits via the removal of competition and ignores protection of sunken costs. If predatory pricing does succeed then it does serve as a further barrier to entry as other potential entrants now see a more difficult market to enter and in the real world there is normally a limited supply of potential competitors. They see an incumbent determined to protect that market. That didn’t seem to warrant a mention. From my perspective, all the article appears to prove is that Standard Oil probably didn’t do predatory pricing. This makes me think of the efficient markets theory – a theory everybody knows isn’t true but in theory it should be I work out there; predatory pricing works when done correctly. For instance, any market where the cost of obtaining a customer is high and repeat business is the norm is a classic opportunity for predatory pricing – I work in such an industry. What I do agree with is that permanent predatory pricing does not work but predatory pricing is invariably a temporary situation – sort of a game of economic chicken.
I think Paula’s main fault on the supermarket debacle is she (or her cohorts) did not understand the “food” retail market. Supermarkets make the bulk of their profits from fresh products and the vices (booze and fags). Dry goods are about neutral but get the foot traffic. Supermarket purchasing is partially convenience but is incredibly sensitive to price, thus the success of Pak ‘n Save over the last 10 years. All the top supermarket money makers have existing competitors in their high margin goods with the veggie supermarkets and liquor stores locating themselves close to supermarkets. I’m sure if they sold fags at a greater price they would suddenly find themselves losing huge market share here. Thus, it did not matter in the slightest that the Warehouse was trying to get in to the supermarket market. Frankly, they were also never likely to succeed – it was a surprising lapse in judgement by the boys in red.
And here’s the next bit of the supermarket market secret – location, location, location. Building a supermarket in just the right spot is the key to success especially if you can limit the competition or be already in place and they thus know building a supermarket in that location will be a Pyrrhic approach i.e. both organisations will lose money. A supermarket has a minimum turnover requirement to make money. Once again, the Warehouse was unlikely to do anything here as the red sheds are typically one of the anchor tenants in malls with, you guessed it, a supermarket or two.
Back to the need for the CC. Through exposure to many of the oligopolies in NZ I can categorically state that we end up paying monopoly like prices for many goods (or an equivalent lack of service or quality). I am utterly convinced of this. We need a good CC who will be actively disliked by big business as that means they will be doing their job. If Fran is accurate about her assessment of Paula then we are probably worse off with her gone.
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“I would agree that predatory pricing does not make sense, but why then do organisations indulge in it.”
My problem here is that I’m not sure we do have organisations that indulge in it. Part of the problem is that the courts who make findings of “predatory pricing” use rules that really don’t make must sense.
“Regarding the other part of my comment how would you deal to the issue of I think the term is monopoly rents vis a vis the power companies,which entities despite the supposed ‘market’ seem to behave like monopolists rather than true competitors.”
Here, the first thing I would do is get the government out of the business by selling off the government controlled power companies. Then you may see more competition. Also you have to ask What good has the CC done as far as power companies are concerned?
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Paul
I would agree that predatory pricing does not make sense, but why then do organisations indulge in it.
Regarding the other part of my comment how would you deal to the issue of I think the term is monopoly rents vis a vis the power companies,which entities despite the supposed ‘market’ seem to behave like monopolists rather than true competitors.
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I guess my short answer would be predatory pricing doesn’t make economics sense. The classic paper on this is by J. McGee, “Predatory price Cutting: The Standard Oil (NJ) Case”, J. of Law and Economcis, 1: 137-69, 1958.
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Paul
Thinking about your comments. A hypothetical. What happens in the case where there is a dominant player eg Air NZ and a new entrant seeks to enter and the dominant player uses predatory pricing to drive the new player out and then jacks up prices?
Or as many suspect the power companies ramp prices because they can, as in many respects there is no real alternative.
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“I follow your line of argument, but if say NZ did what you suggest what else would they have to do.”
A very good question. You would need a programme of deregulation in many areas. You would have to look at all of industry policy, trade policy, copyright/patents etc. But these things should be looked at anyway and are not dependant on removing the CC. The big issue is that the CC interferes with the market process and in the process of doing so may cause more problem than it fixes. Thus just removing the CC may have benefits to the wider economy. Doing other forms of deregulation would have even more in the way of benefits. There isn’t much we can do about the effects of overseas regulators, the CC can’t do much about them either. As to having two or three entities in markets: 1) you have to ask why this number, it could be optimal, 2) if not optimal, then what is stopping other firms from coming in?
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Paul
I follow your line of argument, but if say NZ did what you suggest what else would they have to do.
I assume simply dis-establishing the Commerce Commission would not work.
Further, even if we had a perfect market, would not the distortion caused by regulators in say Australia negatively impact here. Further how would you deal with say the fact that much of our market is carved up by two or three entities?
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The problem with the scenario of a Air NZ/Quantas cartel is lack of entry. The problem with entry is that the government controls it. So the answer over all is to get the government to set up open entry, and if a cartel tries to rise prices, some other airline can enter the market and drive prices down. The use of regulation via the CC is a second best answer, at best.
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Bryce
I get your point
However, what is your answer if the only provider is Air NZ/Quantas.
Let us not forget that Australia is not a bastion of domestic competition
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AS1922 Question to Paul. Who do you want Paul to be? If he is Jo Public he takes the deal that suits him best – which may be the listed provider, a competitor, an alternative means of transport, or an alternative to transporting himself. If Paul is Virgin Blue or Singapore Airlines or a charter operator, he thinks about his business opportunities with respect to New Zealand. If Paul is head of the Commerce Commission he would no doubt raise the quality of its analysis of interventional options – and take action in accordance with its legislation. If he is the responsible minister he would no doubt seek to improve the quality of the legislation, perhaps by radical changes. If you are asking Paul for his best guess currently as to whether a Commerce Commission can be expected to do more good than harm with such situations, it seems that you already have his answer.
If you ask an economist as to where the greatest welfare losses from monopoly are likely to arise, the likely answer is statutory monopolies . We have far too many statutory monopolies in New Zealand. But how useful is the Commerce Act for dealing with this problem?
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Paul
I have no problem with free trade, assuming you mean free trade and not regulated commerce.
How though would you deal with the scenario of a Air NZ/Quantas cartel or a Telecom/Vodafone stitch up etc etc
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Adam. We have had some problems with anti-competitive practises in the past but I ask how many of those were due to government regulation which prevented competition. For example, if you were the only person allowed to import some good then you could act in an anticompetitive matter. You had no competition. And given the NZ economy, in particular pre-84, this was common. But the answer to this isn’t the Commerce Commission but to more towards free trade. I’m just saying that there are better ways of getting to the same result. Added to this is what happens if the CC gets it wrong? Also market dominance is a lot harder to get and keep than most people seem to think. Without government help being a monopolist is very difficult.
Let me add her that this is yet another reason why we want free trade, it increases competition in the local market.
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Paul
I like your comments. I wonder though whether the examples quoted would work better in a much larger economy, for example the US, than here where participants are fewer. This problem being exacerbated by the considerable number of players in dominant positions and with a history of anti-competitive behaviour.
THe US has a long tradition of competition and the nature of their economy with a strong reliance on freedom is different from the licence raj mentality of much of NZ business until the 1980s. I am not sure that many NZ businesses want to be competitive as such. They would it seems to me aim for market dominance and then gouge the consumer.
Of course I might be totally wrong.
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Adam, I’m a little late getting into this issue but I take the opposite view, here, and argue we may be better off without the Commerce Commission.
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I thought I saw the other day that Wolnak had finished the report and that it was with Rebstock.
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I think the electricity report delay may be more due to it being done in LA by an international academic. Maybe we are not his top priority and so the work is being done slowly?
The real issue is that these companies have captured the energy minister’s policy and are looking to improve returns to the SOE minister. There is going to be one hell of a political mess if the report says they have been screwing the market.
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We are confident that Rebstock acquitted herself well on many occasions. However, we believe that her outstanding failing was an overreaching attempt to make the market in New Zealand into something that it has never been. In that regard she increasingly portrayed an idealistic or academic approach to competition in New Zealand.
Rebstock has never agreed that duopoly constititutes an acceptable competitive construct. Maybe she is right. However, in the process she overlooked the prevailing history of corporate New Zealand where competition in particular industries has largely evolved over time into two dominant competitors functioning duopolistically. Some attribute this to the small size of the NZ market. This is a strong argument. A strong business drives for economy of scale, and the small market in New Zealand means that scale requires market dominance in one way, shape, or form.
Multi-competitiveness is also discouraged in New Zealand due to relentless and pervasive government rules and regulations. The RMA, for example, has consistently discouraged multi-competitive structures and indirectly encouraged duopolies. It is only large companies who can afford to negotiate and fight with city hall for long and sustained periods.
Rebstock had a tendency to clap the telescope to a blind eye and ignore these commercial realities. Duopolies became a major evil, apparently. To our mind probably her worst hour was the attempted blocking of Woolworths or Foodstuffs taking over The Warehouse. She appeared to lose sight completely of the “general merchandise” category and insisted on seeing it as an issue of competition in the supermarket category. Of course there were plenty of competitors in the former; neither Woolworths nor Foodstuffs would have mattered at all, except the strength of their balance sheets would have led to increased competition with Briscoes, Farmers, Shoe Warehouse, etc.
But Rebstock could not stop thinking about food. Her academic approach led her to see The Warehouse as a “potential” competitor that would break down an existing duopoly. Here is where she began to act and react not to the competitive market as it actually was, but in terms of how she would like it to evolve. Acting in a vain attempt to achieve an abstract ideal is not the role of a Commerce Commission. At that point, the Commission began to act as a bureaucratic central planner, not an anti-monopolistic regulator.
Of course the end result (when The Warehouse withdrew from the supermarket business, dissolving the whole basis of the Commission’s objections) left the Commission with a great deal of egg on its face, and a consequent loss of credibility. And, oh yes–the amount of time taken by the Commission to get through the process was completely unacceptable. But we think that regardless of how many more millions of dollars are pumped into the Commission, or how many new eager beaver staff they employ, as long as the Commission tries centrally to plan the market place–as it began to do under Rebstock’s watch–the process will be as speedy as the making of Mainland Cheese. Finding justifications for an untenable position is inevitably a long and complex task. You have to make it up as you go along, then window dress it to try to make it appear credible.
We believe that Rebstock’s growing unpopularity with the business sector stemmed not from principled and focused (and statutory) actions by the Commission. Rather they arose out of cases like The Warehouse takeover, where Rebstock took an idealistic, abstract, and artificial view on competition which was divorced from commercial reality–and ultimately, therefore, from the interests of consumers. She misused her position to try to make the market place into an ideal something it was not. Maybe underneath it all she was just another frustrated politician who had never got into Parliament or enjoyed a ministerial warrant.
JT
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John
I agree with much of what you say.
However, I am concerned that the musings of Grant David and the attitudes of some of the corporates and SOEs indicate a desire for a poodle rather than a bulldog.
A highly competitive duopoly may be acceptable.
Anti-competitive behaviour though needs to be stamped on in the main.
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