This presentation by the New Zealand Commerce Commission was delivered during a workshop on “Methodologies to measure market competition” held virtually for competition authorities officials on 23 February 2021. More materials on the topic can be found at http://oe.cd/mmkts. This presentation was uploaded with the author’s consent.

1. OECD Workshop
February 2021
Dr John Small
Competition Indicators

2. Setting the scene
• New Zealand is a small, remote economy
o 2019 GDP: $223.0 billion USD (30th out of 37 OECD countries)
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• The New Zealand economy can be
characterised by high concentration and
low productivity in many sectors
• Productivity growth rates are also low
o Average annual labour productivity growth
between 1996 and 2018: 1.4%
(28th out of 35* OECD countries)
Sources: https://data.oecd.org/gdp/gross-domestic-product-gdp.htm; https://www.productivity.govt.nz/research/productivity-by-the-numbers-2019/
*excluding Colombia and Estonia

3. Productivity and competition
• This motivated a 2019 study investigating the link between
productivity and competition
o “Competition and productivity: Do commonly used metrics suggest a relationship?” by David
C. Maré and Richard Fabling, on behalf of Motu, with funding from the Productivity Hub
• Their study found no conclusive link between the two, possibly
because there were no pronounced changes in competition over
the sample period
• But the researchers’ attempts to quantify competition in an
industry are of interest to us as a regulator
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4. Competition indicators
• To measure competition in a given industry, Fabling and Maré computed
four competition indicators:
1. Profit elasticity (PE)
o how an industry’s profits respond to changes in its costs
2. Price-cost margin (PCM), a.k.a. Lerner index
o difference between price and marginal cost as a fraction of price
3. Hirschman-Herfindahl Index (HHI)
o the sum of the squared market shares of each firm in an industry
4. Dominance, a.k.a. concentration ratio
o the amount of market share belonging to the top twenty firms
• These indicators were applied to a 39-industry dataset over the time
period 2001–2016
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5. Productivity Commission analysis
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Overview of the distribution of competition indicators
(excluding dominance) across industries, 2001–2016
Source: Aaron Schiff & Harkanwal Singh, 2019 (https://www.productivity.govt.nz/research/competition-in-new-zealand/)
= in the upper quartile (most competitive) of industries = in the lower quartile (least competitive) of industries = in between
PE (fixed effects)
PE (OLS) PCM (average) PCM (aggregate) HHI

6. Commerce Commission data
• The Commission was provided competition indicator data, pooled
into two time periods: 2001–2008 and 2009–2016. This data
included three indicators:
o Profit elasticity (OLS)
o Profit elasticity (fixed effects)
o Price-cost margin (average)
• The data we received was disaggregated into 318 ANZSIC Level 4
industries. This level of disaggregation would be useful to the
Commission going forward
• However, the visualisations on the following slides refer to the 39
aggregated industries
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7. Commerce Commission analysis
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Average price-cost margin for 39 industries,
compared between 2001–2008 and 2009–2016
horticulture and
fruit growing
dairy cattle
farming
forestry and
logging
financial and
insurance services
Source: Commerce Commission analysis, data from Richard Fabling and Dave Maré
rental and hiring
services (except
real estate)
supermarket, grocery stores
and specialised food retailing
building
construction

8. Commerce Commission analysis
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Change in normalised competition indicator by industry
(indicators are normalised by being transformed on a scale of 0 to 100)
Source: Commerce Commission analysis, data from Richard Fabling and Dave Maré
dairy cattle
farming
non-metallic
mineral product
manufacturing
supermarket, grocery stores
and specialised food retailing
mining
rail, water, air and
other transport
electricity, gas, water
and waste services
financial and
insurance services

9. Methodological challenges
• Different indicators can give different indications of the degree of
(and changes in) competition in an industry
• Industry classifications do not typically correspond with markets
that would be defined for competition law analysis
• Marginal costs are difficult to compute in practice, so the margin
indicators need to be calculated using an approximation (in this
case, variable costs)
• Margin indicators do not account for fixed costs, which can play
an important role in competition (eg, barriers to entry)
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10. Data challenges
• For confidentiality reasons, all published concentration indicator
data uses share of labour employed (not share of output) to
represent market share
• We currently only have access to disaggregated data for the
margin indicators, not the concentration indicators. This limits our
analysis
• We would also like annual (ie, not pooled) data that is more
recent. The underlying dataset used by the researchers is in the
process of being updated to 2018
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11. Potential applications
• In future, this type of analysis may be used for intelligence
gathering and prioritisation for competition investigations, eg,
cartel screening
• But given the time delays in receiving the data, it might be more
suited to longer-term work such as:
o the Commission’s market studies pipeline
o understanding the medium/long-term effects of Covid-19 on
markets
o advocating for legislative or policy changes to protect and enhance
competition
o assessing the Commission’s performance
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