We don’t have real competition, or the market structure to encourage it

Friday, 23 August 2024

Rob Campbell CNZM has an extensive background in trade unionism, business leadership, governance and public service. He is chancellor of AUT, and the chair of Ara Ake and NZ Rural Land.

OPINION: One of the great and enduring myths of our economic system is that of competition. Competition, reflected in “free” markets, is regarded as “good” on the basis that it produces efficient and fair outcomes.

While pretty much everything we know about real life contradicts this, the myth endures for two reasons. First, in the abstract it has elegance and simplicity. Second, it suits those with economic power.

Not that they believe the myth themselves. For a few this is because they have had the opportunity to study economics and understand the limitations of the theory outside rigorous assumptions. For most it’s simply because they know they seek to avoid competition in their own economic activities.

This second group knows Adam Smith was right when he wrote, in Wealth of Nations (1776), that “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”.

Even a strongly pro-market economist like George Stigler begins his work on markets with a very limited number of competitors by noting that “oligopolists wish to collude to maximise joint profits”. It is as clear and basic as that. He might have added “but they will continue to claim that they are competing and not colluding”.

Let’s be clear, when an industry with limited competitors talks about competition they know they are promoting a myth. They can hire people to spread the myth and its application to their circumstance, but they know it is not true and even the most pro-market economists do not accept it.

Which brings us neatly to where we are today. In late-colonial Aotearoa, bemoaning high prices for key goods and services, low innovation and productivity, and low economic growth. How can markets have performed so badly when the myth says they are so good?

Well, think about it. A banking sector dominated by a small group of large players. An energy sector to match. A supermarket sector at the highest end of dominance on a world scale. Similar with media business, with insurance. Need one go on? We not only have small markets but highly concentrated ones.

Now this is not only a problem for consumers. As so often an industry dominated in this way creates upwards pricing power towards end consumers but it often also creates equivalent buying power where suppliers are not similarly powerful. Supermarkets may be the best example here, where the opportunity to exercise power against competing. suppliers of goods and labour matches their ability to price up at the checkout.

So anyone can see we do not have effective competition, or market structure which encourages this in critical parts of our economy. Competition may be good but it’s not what we have and those with economic power are not keen to reduce it in the wider community interest.

It would seem that, like liberty, the price of competition is eternal vigilance – an idea usually if somewhat cynically attributed to slave owner Thomas Jefferson.

Such vigilance on competition as we have here centres on the Commerce Commission but as evidenced by the facts of our major markets it has often been distracted or captured. This week it has issued a report on competition in banking which presents something more like activism on the issue.

The Commission formally adopts the view that “competition is a key driver for delivering greater productivity and growth…. it incentivises firms to innovate, and rewards efficiencies…. through regulation we seek to achieve comparable outcomes in markets with little or no competition”. All very worthy though neither practice nor theory suggests outstanding and complete success in this is likely.

I thought I might find a champion for competition in the National Party but apart from a pretty notional nod to “competitive enterprise” its most recent official policy statements in the area are mainly about what governments can do on other matters. The coalition agreements do focus on the powers of the Commission to promote competition, specifically in supermarkets and banking, by lessening barriers to a new entrant or entrants.

It is to be hoped that the positive initial responses from the coalition to the Commission’s banking report will lead to prompt and decisive action. But I’m not holding my breath. Successive governments have paid ritual lip-service to the myth of competition without really acting to enforce it.

They have let oligopolies continue with limited restraint, especially when, as in electricity, they are part-owners and participants. I’m inclined to the view that adding private funding for Kiwibank and making it subject to capital market discipline might add something to its financial performance but is highly unlikely to do much more than add a new player to the oligopoly from a competition point of view.

It’s just how markets work. If you have a few big participants, similarly incentivised with similar business models, they will collude and pretend they are not. In practice you have to break them up, disrupt their market power upstream and downstream and stay really vigilant on their behaviour or live with the consequences.