This presentation by the John Small, Commissioner at the New Zealand Commerce Commission, was made during the discussion “Methodologies to Measure Market Competition” held at the 135th meeting of the OECD Competition Committee on 11 June 2021. More papers and presentations on the topic can be found out at oe.cd/mmmc.

1. OECD Hearing
11 June 2021
John Small, NZ Commerce Commission
Measuring Market Competition –
the NZ Perspective

2. Outline
• Context for the analysis
o Broad rather than deep
• Data and Methods
o What is feasible, given the data?
• Methods we used
o Strengths and weaknesses
• Applications for the results
o Current and potential
2

3. Broad rather than deep context
3
• Deep – merger and RTP analysis
• Question:
• How does competition work here?
• Measures/methods:
• Market definition /constraint
analysis
• Diversion ratios
• Residual demand elasticities
• Structural indicators
• Entry/expansion barriers
• Question:
• Broad - Market scanning
• Which sectors should we
worry about?
• Measures/methods:
• Conduct indicators
• Sector role in economy
• Scale
• Forward/backward linkages

4. Data dictate methods
4
• For the whole NZ economy, we have access to firm level
data:
o Statistics NZ
– Employees, revenue, costs, lines of business
o Inland Revenue (Tax) department
– Quarterly (GST) and annual financial reports
• These data sets can be matched at the firm level, but:
o Industry classifications are not anti-trust markets
– So structural indicators are unreliable
o Accounting costs are not economic costs
– So margin indicators are preferred to profit indicators

5. We used 2 measures
5
• Price-Cost Margin (Lerner Index)
o Prices are averages derived
from each firm’s reports to
StatsNZ (revenue/volume)
o Costs are variable costs, so
generally higher than SRMC
and likely involving some cost
allocation
o Available annually (2001-16)
• Profit Elasticity (Boone Indicator)
o Firm-level profit change (%)
from a 1% change in variable
cost
o Includes any effect from
entry/exit
o More negative values indicate
stronger competition (+ve
values a very bad sign)
o Needs regression over time, so
only two estimates (2001-08
and 2009-16)

6. Commerce Commission analysis
Change in normalised competition indicator by industry
(indicators are normalised by being transformed on a scale of 0 to 100)
6
Source: Commerce Commission analysis, data from Richard
Fabling and Dave Maré

7. Interpretation of Results – Two Levels
• Competition interpretation
o Different sectors are highlighted by different measures
– Consistent signals across measures likely to be more
reliable
– And/but further investigation is needed
• Broader economic interpretation
o Weak competition is a bigger problem when the sector is
– Relatively large; and
– Not primarily an exporter
7

8. Applications – actual and potential
• Guiding a more proactive competition enforcement stance
o Ideally, we would be able to target sectors with weak
competition
– Rather than waiting for eg leniency applications
• Directing our market study resources
o New function for us, and can only handle 1 per year
– So we need to pick the sectors with biggest potential for
improvement
• Demonstrating our value
o Constant pressure to measure the difference we make
– This is potentially a complement to the GEF business survey results
we currently use
8