Plenary presentation to the Pacific Finance & Investment Conference in Suva, Fiji on 9 May 2013

1. FINANCIAL INSTITUTIONS
ENERGY
INFRASTRUCTURE, MINING AND COMMODITIES
TRANSPORT
TECHNOLOGY AND INNOVATION
PHARMACEUTICALS AND LIFE SCIENCES
Competition Policy in Smaller Economies
Balancing Regulation and Investment
Dr Martyn Taylor
Partner
Pacific Finance & Investment Conference
Suva, Fiji
May 2013

2. 17752725.ppt2
Overview
A. Importance of competition law and policy
B. Economic traits of smaller economies
C. Competition law in smaller economies
D. Lessons from Australia and New Zealand
E. Application to Pacific Island economies
Dr Martyn Taylor
Partner
Norton Rose Sydney
+61 2 9330 8056
martyn.taylor@nortonrose.com

3. A. Importance of competition law and policy

4. Competition policy – why is it important ?
17752725.ppt4
• Competition policy is a core tenet of modern regulatory policy.
• Competition policy is any government policy that promotes
competition in any part of the economy.
• The objective of competition policy is to ensure the efficient and fair
operation of markets in order to maximise total economic welfare.
• Underlying philosophy:
• a market-based system is the optimal way for society’s scarce
resources to be allocated between competing uses;
• greater competition will ensure greater efficiency and hence
improved levels of total economic welfare.
• Competition policy is inherently deregulatory. It generally promotes
the removal of excessive Government regulation in order to ensure
that markets can operate freely.

5. Regulation is selectively targeted at market failures
17752725.ppt5
• Competition policy recognises that markets are imperfect; hence
regulation is still necessary to correct instances of market failure.
• Competition policy promotes a principled approach to regulation:
• regulation is selective and seeks to correct the relevant market
failure as directly as possible, hence minimising spillover effects;
• regulation is proportionate and informed by a cost-benefit analysis.
• Competition law is an instrument that gives effect to competition policy.
• Competition law regulates the obtaining and use of market power.
Excessive market power can give rise to a key form of market failure:
• in more concentrated markets, firms may use their individual or
collective market power to affect market processes;
• market power enables firms to raise prices and reduce output to
maximise their profits at the expense of consumers.

6. Tripartite structure of modern competition law
Competition law
Single party
conduct
Mergers and
acquisitions
• Misuse of market power
• Sectoral regulatory regimes
• Anti-competitive agreements
• Collusion, cartels and price fixing
• Anti-competitive acquisitions
Key focus is on regulating ‘market power’
•Firms may already have unilateral market power, so certain of their conduct must be regulated.
•Alternatively, firms can co-ordinate their business activities to achieve market power (whether by
agreement or by fully integrating their businesses by acquisition).
17752725.ppt6
Multi-party
conduct
Vertical
Horizontal
• Restraints of trade
• Exclusive dealing
• Boycotts of suppliers/customers

7. Balancing regulation against investment
17752725.ppt7
• All markets are imperfect, so what regulatory role should the
Government have? (This inherently depends on one’s political views)
• Regulation affects investment, both positively and negatively:
• market certainty and stability is important to investment, so
certain fundamental laws are required (e.g., property rights);
• regulatory uncertainty is anathema to investment, given
uncertainty increases risk and hence financing costs;
• excessive regulation can impose unnecessary costs that, in
turn, deter investment due to reduced private sector returns.
• The key questions:
• in smaller economies, what should be the appropriate role of
competition law?
• what balance should be adopted vis a vis investment?

8. B. Economic traits of smaller economies

9. What is a ‘smaller’ economy?
• The competitiveness of markets differs widely within every economy.
• However, smaller economies generally exhibit markets with a lower
level of competitiveness than larger economies:
• this conclusion is empirically confirmed and supported by
microeconomic theory;
• key factors of competitiveness in smaller economies include
market size and the existence of import competition.
• Generally a ‘smaller’ economy is an economy that has markets
that can only support a small number of competitors:
• Fiji with a population of 850,000 is small.
• New Zealand with a population of 4.2 million is also small.
• Australia has a population of 22 million, but its population is
dispersed and isolated – hence could be regarded as small
for some of Australia’s more concentrated sectors.

10. Competition issues facing smaller economies
• The ability of a market to support competition is determined by the
structural features of the market itself:
• The minimum efficient scale (MES) is the smallest level of output for
a firm that reduces/optimises its long-term average costs. MES
reflects the realisation of economies of scale in production.
• If the MES is achieved at levels of output that are a substantial
proportion of the market, there will be fewer competitors.
• In the absence of domestic competitors, smaller economies
are more reliant on imports as a source of competition:
• For economies co-located to large markets, imports
allow them to be regarded as part of the larger market.
• Market concentration is more likely in isolated smaller
economies that have higher import costs, such as Fiji.
• Smaller economies also tend to be less diversified and hence
are more reliant on a few key economic sectors.
Summary:
• MES will lead to
more concentrated
markets.
• Where economy is
isolated, imports
may not provide
sufficient alternative
competition.

11. Investment certainty in smaller economies
• Investments are heavily affected by cost and risk. Any NPV analysis will
discount the net cash flows of an investment, adjusted for risk.
• In order to optimise investment in a regulatory context, it is necessary to:
• minimise the cost of regulation, typically by ensuring that it is no
more burdensome than necessary to achieve the policy objectives;
• minimise regulatory risk, typically by ensuring that the law and
regulatory decisions are transparent, predictable and high quality.
• A smaller economy tends to be subject to the following concerns:
• Because markets are more concentrated and the economy is more
dependent on a few key sectors, domestic firms may have greater
political influence over regulatory policy (leading to rent seeking).
• Domestic firms may have less ability to tolerate compliance costs.
• Regulators may have less resources.
• To the extent law requires interpretation, a sufficient body of case
law may not exist to provide judicial guidance on interpretation.

12. Key issues for competition law and policy
• The different economic characteristics of smaller economies give rise to the
following key issues for competition law and policy:
1. Should a smaller economy adopt different competition laws and
policies than a larger economy?
2. How should a smaller and more isolated economy address the fact
that it has naturally more concentrated and less competitive markets?
3. How should smaller economies regulate mergers and instances of co-
ordinated activities, such as joint ventures?
4. How should smaller economies regulate anti-competitive conduct,
particularly if market structures make such conduct more likely?
5. Should differences occur in enforcement and regulation?
6. What techniques should be used to reduce investment risk?

13. C. Competition law in smaller economies

14. Objectives and structure remain unchanged
• The general principles underlying competition law are unaffected by
differences in the underlying markets subject to regulation:
• Competition law is generic in application, applying to all sectors
of the economy, so is inherently based on ‘one size fits all’.
• The objectives of competition law are generally uniform across all
economies, namely to promote economic efficiency. Some
economies may also include incidental distributional considerations.
• The tripartite structure of competition law reflects international best
practice in competition law. Again, there is no need to amend this
structure for different economic conditions.
• So what is subject to change?
• Differences in substantive legal thresholds.
• Differences in the application of those legal thresholds.
• Differences in enforcement and prioritisation.

15. Tolerating greater market concentration
• A key trade-off for competition law occurs in a merger review context:
• By merging, firms realise synergies in production that reduce
costs (i.e., increasing productive efficiency).
• By merging, firms also increase market power and can reduce
output and increase prices (i.e., reducing allocative efficiency).
• Merger laws trade-off productive and allocative efficiency; as well
as effects on dynamic efficiency (i.e., efficiency gains over time).
• As smaller economies achieve MES at higher market concentrations,
arguably they should tolerate greater domestic market concentration:
• Competition law should be more sympathetic to the need for firms
to increase scale in order to achieve efficiencies in output.
• High levels of concentration may be a ‘necessary evil’ in order to
achieve greater productive efficiency in the domestic market.
• In those markets where imports provide an important source of
competition, higher domestic market concentration can be tolerated.

16. Greater recognition of productive efficiencies
• Generally, any increases in co-ordination between firms have the ability
to increase productive efficiency:
• Firms may enter into long-term supply contracts with the objective
of increasing certainty and reducing the cost of production.
• Firms may enter into joint ventures (JV) to share critical resources
and therefore benefit from economies of scale.
• In more concentrated markets, such co-ordination is more likely to lead
to anti-competitive effects given that the relevant firms will have
substantial market shares within the domestic market.
• Smaller economies should therefore ensure that the benefits and
detriments of co-ordination are recognised in any competition analysis:
• Higher substantive thresholds for illegality may be appropriate,
hence permitting greater co-ordination to occur.
• Defences may be appropriate, including for joint ventures.
• Public benefit authorisations may enable such analysis to occur.

17. Greater emphasis on regulating market conduct
• A more relaxed merger policy will tend to result in more concentrated
markets and hence a greater risk of anti-competitive conduct:
• Moreover, arrangements between competitors are more likely to affect
a greater proportion of the market and confer market power.
• Accordingly, the quid pro quo of a more relaxed merger policy should
be a greater emphasis on regulating market conduct:
• Markets that are highly concentrated should be subjected to
greater scrutiny, consistent with international best practice.
• Where anti-competitive agreements do not have productive
efficiency benefits, they should be subject to enforcement.
• In very highly concentrated markets, sectoral competition regulation
may also be appropriate:
• Price controls may be appropriate in instances of monopoly.
• Where monopolies are vertically-integrated and control
infrastructure bottlenecks, access regulation may be required.

18. Promoting greater regulatory certainty
• Competition laws are not prescriptive and instead rely on the application of
legal concepts to different factual scenarios, creating some uncertainty:
• A key means for smaller economies to enhance regulatory certainty
is to provide guidance on the application of their competition laws.
• Guidelines also reduce compliance costs for firms by enabling the
legality of conduct to be more easily ascertained.
• If international best practice approaches are followed, regulators can
leverage case law from other jurisdictions and adopt similar approaches.
• The International Competition Network, for example, is an initiative
that is seeking to ensure consistency in the regulation of anti-
competitive conduct by regulators on a global basis.
• Rent seeking by domestic firms in concentrated markets can be
addressed by ensuring that domestic regulation reflects key competition
policy considerations:
• Where regulation is imposed, it should be most consistent with the
promotion of competition by maximising the number of competitors.

19. D. Lessons from Australia and New Zealand

20. Merger thresholds in Australia
• Australia’s approach to the regulation of mergers has changed over
time as the Australian economy has matured and diversified:
• From 1974, Australia applied a low ‘substantial lessening of competition’ (SLC)
threshold for merger control.
• The threshold was raised to ‘acquisition of dominance’ in 1977, expressly to
promote the development of economies of scale in Australian industry.
• In 1992, Australia migrated back to the SLC threshold (which applies today) on
the basis that the economy was sufficiently mature for the lower threshold.
• From 1992 – 2008, Australia applied a ‘safe harbour’ in its merger guidelines,
based on 40% market share and a four-firm concentration ratio of 75% (CR4).
• From 2008, Australia has now moved to a lower HHI concentration as used in
more advanced economies (currently an HHI of 2000 when screening mergers).
• While Australia permits public benefit authorisation when reviewing mergers, the
procedure is time consuming and rarely used. Instead, overwhelming emphasis is
given to net competitive effects, as one would expect of a larger economy with less
concentrated markets.

21. Merger thresholds in New Zealand
• New Zealand’s competition law has tended to follow Australia, but
has diverged in important respects to reflect New Zealand’s
naturally more concentrated markets:
• New Zealand initially adopted a higher ‘dominance’ threshold,
but followed Australia to the lower SLC threshold in 2001
(lowering its threshold a decade after Australia).
• New Zealand’s safe harbours have tolerated a higher level of
market concentration. New Zealand currently uses a 40%
threshold and a three-firm concentration ratio of 70% (CR3).
• In early 2013, New Zealand released draft new Merger
Guidelines that maintain the CR3 thresholds, but now treat
them as factors rather than safe harbours. However, New
Zealand will not migrate to the Australian ‘HHI’ approach.
• While New Zealand and Australia have similar procedures for the
public benefit authorisation of mergers, New Zealand’s procedure
has been used more frequently and is generally regarded as more
likely to result in a favourable authorisation decision.
Key differences:
• New Zealand
reduced its legal
threshold a
decade after
Australia
• New Zealand
will shortly
deemphasise its
‘safe harbour’,
but still uses a
much higher
concentration
ratio (i.e., CR3).

22. Differences in regulation of market conduct
Differences in regulation between Australia and New Zealand are consistent
with the differences one would expect between large and small economies:
•Australia’s approach to the regulation of market conduct is more
prescriptive than New Zealand. Australia generally deems more conduct to
be outright illegal:
• Australia’s an approach is more consistent with a larger economy
(i.e., Australia is less concerned that anti-competitive behaviour
may be justifiable for productive efficiency reasons).
• Australia has authorisation procedures, but they are harder to apply
than in New Zealand and subject to greater scepticism.
•Until 2001, New Zealand applied a higher threshold to the regulation of
market power based on a dominant position in the market:
• New Zealand lowered this threshold in 2001 to align with the
Australian ‘substantial market power’ threshold, but still retains an
stricter judicial approach to the regulation of market power.
• Again, New Zealand’s stricter approach is consistent with an
economy that allows more concentrated markets to exist.

23. Differences in enforcement and prioritisation
• New Zealand Commerce Commission (NZCC) has an annual budget of
FJD 65 million, which is roughly 20% of the Australian Competition and
Consumer Commission’s (ACCC) budget of FJD 330 million.
(The Fiji Commerce Commission annual budget is much lower).
• The different resources available to the regulators impact on their
enforcement and prioritisation activities, although the budgets are also
commensurate with the volume of issues that each of the regulators are
required to process each year:
• The ACCC is more heavily involved in international enforcement
activities, including co-ordinating with regulators in US and EU.
• The ACCC is more likely to take ‘test cases’ that seek to clarify
important aspects of the law in order to provide greater certainty.
• NZCC draws from the ACCC’s expertise in relation to matters that
have a trans-Tasman aspect, thereby pooling resources. Such
pooling of resources is providing important regulatory benefits.

24. E. Application to Pacific Island economies

25. More tailored approach to competition policy
• As evidenced by New Zealand, smaller economies generally prefer a
more tailored approach to the application of competition law and policy.
• Generally, competition laws in smaller economies are more sympathetic
to the realisation of productive efficiencies:
• Greater co-ordination of business activity may be permitted, provided
it can be justified on a productive efficiency basis.
• Greater levels of market concentration may also be permitted,
particularly in sectors subject to import competition.
• In smaller economies, markets tends to be more concentrated hence
are more prone to market failure. This may result in a need for:
• more heavy-handed regulation in heavily concentrated economic
sectors, including price controls; and
• additional regulation, if consistent with competition policy.
• Given the importance of import competition, openness to trade
can be as important as the application of competition law and
policy.

26. Different application of competition laws
• In relation to the application of competition laws themselves, the objectives
and structure of modern competition laws can be applied without change
• However, differences in thresholds and their application may be appropriate:
• Substantive thresholds for merger control should normally be higher,
thereby enabling more concentrated markets to exist. Merger safe
harbours may also be appropriate based on high concentration ratios.
• Screening of mergers and other forms of business co-ordination should
generally have regard to productive efficiency gains.
• Import competition should be an important feature of any analysis.
• Resources of the regulator may be limited, hence:
• enforcement priority should be given to highly concentrated markets
that are economically important where the conduct is not net
efficient;
• guidelines should be used to reduce compliance costs, provide
certainty, and promote compliance at least regulatory cost.
• Care needs to be taken that enforcement does not damage a firm to the
extent they exit a market (with a resulting loss of competition).

27. Should ‘micro’ economies have competition laws?
• What about very small ‘micro’ economies (e.g., population < 100,000): should
such economies have competition laws ?
• Competition law is costly to administer and enforce. At some point, the costs
of regulation will exceed the benefits.
• In micro economies, competition laws are generally of lower priority than laws
that create and maintain the markets themselves (e.g., property rights).
• However, this is not to say that competition law does not have a role, just that
different regulatory solutions may be appropriate:
• Competition regulation may be pooled with other regulatory functions.
• Jurisdictions may consider creating a multi-jurisdictional competition
regulator that is shared across a number of different jurisdictions.
• Competition regulation may be selectively applied to a few critical sectors
that are highly concentrated and not subject to import competition.
• Where competition regulation is applied, regard would generally need to
be had to net public benefits.

28. F. Conclusions

29. Points for discussion
1. How prevalent are competition policy considerations in the development
of regulatory policy in the Pacific region?
2. How frequently do competition concerns actually arise in practice?
3. To what extent do competition laws and policies in the Pacific region
already reflect the approach identified in this presentation?
4. To what extent would a multi-jurisdictional regulator be appropriate in
order to pool resources and reduce regulatory costs in the Pacific? (Such
a proposal has been developed by the Pacific Islands Forum Secretariat)
5. Which are the economic sectors that are likely to give rise to the greatest
competition concerns?
6. How does openness to trade sit with other policy objectives, such as
promoting the development of infant industries in small economies?
7. How should smaller economies address offshore mergers and conduct
that have substantive local effects?

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