Wednesday, May 26, 2010

World Metrology Day and Trade Practices

I've been thinking about "standards" a lot lately. I know regular readers might think this is another tangent about ethics, but I'm talking technical and commercial standards.

In particular I've been reviewing the literature on de joure and de facto standards, or standard setting by committees/regulation nd by markets respectively. My interest has been in mobile communications standards with an eye to describing the battle (not yet a war) for 4G standards.

Standards are interesting because they reflect part of the conundrum of capitalist market economies, they represent a need to co-operate to compete. More technically they represent the need to co-operate to trade. I was therefore interested in an item that pointed out that 20 May is World Metrology Day and celebrates the meeting in 1875 that set the global standard for the metre.

The article also gives a really good example of how frustrating our Federation has been and is. Despite weights and measures being a Federal power (logically as Federation was about trade between the States and between us and the world) we are only in the late stages of the latest process to create national standards.

There is so much about economic organisation for a market state that we do very very badly.

I would also share some of the concerns expressed by Frank Zumbo in his questioning of whether anyone stands up for small business. Of course the anti-trust cognescenti would argue that the purpose of the laws are to protect competition not competitors, but that begs the question of whether "competition" as an abstract can be considered outsie of the question of market structure.

The two issues - standards and market structure - are linked though. One of the economic justifications for increasing industry concentration - both vertically and horizontally - is the "cost of co-ordination" or transaction costs. My gut feel is that we benefit more by forcing firms to invest in the means of co-ordination than by allowing them to internalise co-ordination.

That means a major change to the last two decades of trade practices law in Australia. The Act (the TPA) includes per se restrictions and other things prohibited (e.g. mergers) only if they decrease competition or utilise significant market power. The trend has been to change the law so that the per se exemptions are replaced by prohibitions o the equivalent act only to the extent that they increase market power or relied upon market power to be achieved.

The best single example is one Frank mentions as being a requirement in the Act - a prohibition on price discrimination. Section 49 of the Act (TPA 1974 No 51) originally included a prohibition on price discrimination except as justified by differences in cost or by need to meet a competing offer. The provision was deleted by the Competition Policy Reform Act 1995 (No 88) (Bills Digest entry) and the apparent justification was that price discrimination that was a "competition issue" was prohibitted by s46.

A major difference, however, was that s49 placed the onus of proof on the corporation that the price discrimination met the requirements of the exemption. Section 46 is far more problematic and requires the ACCC to prove the misuse of market power. Additionaly, the Commission staff remain very confused - they believe that price discrimination is not illegal and is efficient. They also ignore the theory that says "efficient" price discrimination can only be exercised by a firm with market power - hence the discrimination itself should be evidence of market power. They also ignore the fact that predatory pricing can be "efficient" in the short run.

There is a lot to be said for a thorough review of the TPA. That review needs to focus more on the question of how cases should be made than on what should be illegal. My distinct recollction during the Dawson inquiry was that the committee thought there was no problem with s46 because forthcoming cases would clarify it - they did, but not in the way the committee expected.

Note: As an interesting aside, I was also reviewing the early literature on the idea of auctioning spectrum, and noted that one of the earliest papers (Herzel 1950 - cited in the more famous Coase 1959) actually was a paper about colour television standards, the idea of spectrum auctioning was part of the authors proposition that markets should set colour television standards, not regulators.

Note 2: I must start a calendar of interesting "days" - e.g. Alexander Grahame Bell's birthday (3 March) and now Metrology Day.

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