Dialogue: Striking a competitive balance

By PAUL SWAIN*

The Commerce Amendment Bill (No 2), passed this year, was a significant piece of legislation for New Zealand business. The bill beefed up the Commerce Act, giving the Commerce Commission more teeth, and bringing New Zealand in line with Australia.

Last year we signed a Memorandum of Understanding on Business Law Coordination with Australia. The MOU promotes similar rules between New Zealand and Australia so that businesses on both sides of the Tasman can operate with greater certainty.

It is also good for competition in New Zealand, especially for small-to-medium-sized businesses and, ultimately, consumers.

One of the changes made to the Commerce Act was in the prohibition against anti-competitive mergers. Instead of preventing mergers that had the effect of strengthening or acquiring a dominant position, it now prevents those which substantially lessen competition.

Why change from the dominance test?

There are two ways that a merger may have an anti-competitive effect:

* It results in the merged entity having a substantial degree of market power. That is, the merged entity is able to reduce output and raise prices without its competitors taking away its customers, or:

* It enhances the likelihood of the merged entity and the remaining competitors colluding to exercise market power collectively.

My main concern with the old test was that the courts interpreted it too narrowly. They concluded that dominance meant having a commanding, prevailing, paramount, or ruling influence, or, more recently, high market control.

This meant a merger would be prohibited only if it would result in the merged entity being able to dictate the terms of its trading on a sustainable basis. This could equate to a high threshold of harm to New Zealand consumers.

My objective when reviewing merger prohibition was to provide greater protection to New Zealand businesses and consumers against anti-competitive arrangements.

At the same time, it was important to ensure New Zealand firms could grow and compete internationally. The new test, prohibiting mergers that substantially lessen competition - along with authorisation provisions under the act - achieves this balance.

An important consideration in adopting the new test is that it is not unique. A similar test has applied since 1986 to other contracts or arrangements between New Zealand firms under section 27 of the Commerce Act. Canada and Australia have a similar test.

The adoption of this test means domestic competition policy will be consistent with international best practice, and the approach taken by almost all OECD countries.

It will reduce transaction costs to business by spreading the cost of testing the limits of competition policy across market participants in New Zealand and Australia.

It will increase the level of certainty with interpretation of the legislation. The Commerce Commission has adopted tested analytical frameworks to apply them to mergers in New Zealand.

The main criticism of the new test is that it may prevent New Zealand firms from gaining sufficient economies of scale to compete internationally. I do not consider this valid.

The Commerce Act does not apply to New Zealand firms' activities in overseas markets.

The test does not itself prevent firms acquiring a significant share of any New Zealand market. It is directed at preventing firms gaining a substantial degree of market power, raising prices and causing harm to New Zealand consumers.

Mergers that result in a significant market share are likely to be permitted in the tradeable sector, particularly if there are low barriers of entry to the market or effective competition from imports.

In practice, mergers triggering the threshold would still be allowed if the parties could demonstrate they would generate efficiency gains that would outweigh any anti-competitive detriment.

Alternatively, the proposal could be reconfigured through divestiture of shares or assets.

To date there have been two applications under the new test and both have been cleared.

I think these early indications should give the business community comfort.

* Paul Swain is Minister of Commerce.