Tuesday, August 30, 2011

Market structures

The Federal Court decision in the case of the etcash acquisition of Franklins raises some interesting questions.

The first is to note that the judgement is based on the question of the ACCC's definition of a market and the court's decision that both Woolworths and Coles are actually involved in the wholesale market. It also hinged on the delightful thing called the "counterfactual" which is what is the likely outcome if the merger is not approved.

Counterfactuals are little more than modern day prophecies with economists and merchant bankers playing the role of soothsayers.

But the decision that the acquisition will not substantially lessen competition in the wholesale market does not mean that the merger improves competition.

Indeed as Heinz asserted today the home brand "revolution" is what is killing competition, and there is not a thing the ACCC can do about it.

From a technical point of view Coles and Woolies are using their market power in retail to exercise power in the upstream manufacturing market. Neither has enough market power to fall foul of the misuse of market power test.

The Competition and Consumer Act is fundamentally broken as a tool of economic policy. The concepts of "market" and "market power" and of "competition" embodied in it are sufficiently weak that any competent lawyer can steer their way around them.

The solution perhaps lies in a different set of laws that look more like the access regime laws under which the ACCC can declare certain things to be markets and to have specific characteristics. This could include simple things as specifying indices of concentration (such as the HHI)above which it would be determined a market is not effectively competitive.

In passing I will note however that vertical arrangements are not always bad. The move by AAP into telecommunications as AAPT was good, but the move by Telstra into media via Foxtel is less so. (Note that I worked for AAPT long after that, and I was up to my eyeballs in trying to make the Foxtel deal happen).

But talking of AAP provides an excuse to note the closure of its NZ counterpart the New Zealand Press association since their biggest market, Australian media, now owns the local media!

I will be speaking about competition policy for the digital economy at this year's Communications Policy and Research Forum. I will also be discussing the change in corporate Australia's relationship with competition policy in a column on ATUG..

Novae Meridianae Demetae Dexter delenda est

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