It might seem an unlikely inflation buster, but New Zealand’s competition regulator may have a role to play in combating rising prices.
Inflation has been rocketing around the world, with the Organisation for Economic Co-operation and Development (OECD) highlighting a 10.2% year-on-year percentage increase in prices across the OECD’s 38 member countries just in the second quarter of 2022.
Antonia Horrocks, general manager of competition for the Commerce Commission, says it's important when the cost of living is going up that a market regulator is finding where competition is being harmed, in the industries that matter most to people.
Horrocks says since the start of COVID the commission has been talking to other regulators about the role of competition in supporting an economic recovery, and in relation to inflation.
For example, she says it's important if an economy is going through shocks to have a strong merger control regime and that cartels are detected, particularly if they're in critical industries, like the shipping supply chain.
“At the moment it’s very clear that consumers have strong views on food, fuel and energy costs, but there are things right at the bottom of the pyramid that are almost invisible costs that are markets, that are intermediary markets, or things like that. So I think for us, it's thinking about where those markets might be affected by competition issues as well.”
An OECD note published this year, Competition and Inflation, OECD Competition Policy Roundtable Background, says while weak competition is likely not responsible for the current high inflation environment, competitiveness of markets could have an impact on inflation over the longer term.
It points to evidence that average mark-ups have increased in the US from about 21% in 1980 to 61% in 2016, and says analysis suggests concentration in markets (less players) and profitability has increased, and some research suggests rising concentration in markets is an “amplifying factor” in the current inflationary environment.
The OECD note says a recent paper by researchers at the Federal Reserve Bank of Boston found more costs are passed onto consumers in concentrated industries, and that the decline of competition has made the inflation shock worse.
It also says concentrated supply chains due to less competition are also likely to be more brittle and susceptible to shocks.
Weak competition is also highlighted for potentially working against monetary policy in controlling inflation.
Research published in 2021 looked at data from 15 advanced economies and studied the response of firms to monetary policy shocks, finding that larger firms were less sensitive to monetary policy.
This research floats the idea that large firms, or those with significant market power, are less sensitive to changes in the cost of borrowing money and therefore less responsive to interest rate changes.
“Hence, if lower levels of competition increase the propensity of larger firms, then this will reduce the ability of central banks to use monetary policy to control inflation.”
NZ Initiative chief economist Eric Crampton says all things being equal, competitive markets result in lower prices.
He says while challenging a monopoly might see a one-off reduction in prices, what we are seeing at present is “monetary pushes” from central banks pushing up demand which leads to ongoing increases in prices.
Get out the rule book
The commission has been given a number of new tools by the Labour government, including the power to conduct market studies, cartel conduct (agreeing not to compete) has been criminalised and a new “likely effects test” from next April will be used to police whether dominant firms have abused their market power.
Horrocks says the commission has grown its competition team after a restructure, going from about three to seven.
It’s not just investigations it's undertaking, it also looks at mergers, determinations and authorisations of transactions, including collective bargaining authorisations.
Horrocks says the team also has a number of covenant cases on the go in relation to the supermarket industry, including prosecuting a company in the residential building supplies industry for its use of covenants.
The market study into the grocery sector is the second study undertaken under the new powers the commission received under a law change in 2018, with fuel the first one done, and building supplies the most recent.
Land covenants have been identified as holding back competition, and the commission recommended covenants, or restrictions on how land can be developed, be prohibited.
“For me, it shows one of the uses of a market study that you can look right across the sector and see where sometimes one individual may not be having much effect, but when you have it, as we saw on groceries, right across the sector, starting to create a real barrier to entry,” Horrocks says.
She says the commission didn’t expect “to see the scale of covenants of the type we have”.
Market studies allow the competition watchdog to look at areas where there might not be a specific breach of the law, but there is some suspicion that there may be elements that may not be working as competitively as they could be.
“So it can be a really useful understanding exercise.”
Horrocks says she recognises the studies have a cost burden for industries, and the commission is careful in choosing its targets whenever it decides to start looking into an issue.
Improving competition in a high inflation world
The OECD competition note discusses actions competition regulators can take to improve competition in a high inflation world, and says with uncertainty and finite resources authorities must prioritise how to focus their efforts to improve competition.
It says pressure will be put on regulators to act in times of high prices, but it also provides a potential opportunity to advocate for the importance of competition.
This might include advocating for competition when it might be threatened by other government initiatives, or seeking to improve competition in a particular sector.
It says regulators can make it clear they will enforce the rules against price gouging while countries are facing high inflation, pointing to a speech by the commissioner at the Canadian Competition Bureau who said it “would have zero tolerance towards any firm seeking to use the current situation to increase prices”.
There may also be a case to focus on enforcement in times of inflation, the OECD says, and although enforcement may not have an impact now, that doesn't mean its not worth doing.
Ritchie Hutton, the commission’s head of investigations, says enforcement versus engagement is something all regulators have a challenge with.
“Generally speaking, all regulators will try to strike the right balance. And that is usually to use your educational tools ... because most businesses do want to comply with the law. That's the starting point. And so, use your tools to make sure you can get those businesses to comply with the law properly. And it's a easy, cheap win for everybody. And you save the more expensive and severe enforcement options for that small group of entities who you regulate who are willfully non-compliant and not willing to change.”
He says that is the basic premise all regulators apply to make sure taxpayers' money is used in the most effective way.