1  Introduction

The purpose of this paper is to examine whether there is a case for adjustments to the standard competition policy approach in order to deal with the challenges posed by the location and relatively small size of the New Zealand economy.

The economic precepts underlying the Commerce Act 1986 were in substance taken from the Australian Trade Practices Act 1974, which in turn drew heavily (but not exclusively) on United States anti-trust law. But the United States is an economy of some 300 million people; by contrast, New Zealand is an economy of 3.8 million people: about two thirds the population of Sydney. Are concepts developed in the context of a large economy such as that of the United States, or even Australia, applicable without modification in a small isolated economy such as New Zealand? Certain country-specific characteristics—for example, population and geographic isolation—are exogenous to the operation of competition law and regulation, but others—for example, market structure and firm performance—are much less so, being moulded to a degree by these legal constraints as well as by the country’s given features. Thus various economy characteristics will variously reflect and determine its market structures.

New Zealand is an open economy by any standard measure and its export and foreign procurement markets are of relevance to its economic performance and to the conduct of domestic competition law. Under the Commerce Act 1986 and its subsequent amendments, competition law is defined with respect to New Zealand markets and not with respect to New Zealand (as opposed to foreign) entities or consumers. Further, the openness of the economy is important for the opportunities it presents industries for procurement and for exports and the competition that industries face. These factors may be relevant to effective competition law.

That New Zealand is remote is not news. If one looks at the globe, it is obvious that some countries are close to potential trading partners (eg, Germany) while other countries are in very remote locations (eg, New Zealand). Similarly, it is obvious that in some countries economic activity may be concentrated in a relatively small area (eg, Netherlands, Japan) while economic activity in other countries is quite dispersed (eg, Canada, Australia). In the Appendix we propose a summary statistic based on gravity models that reflect GDP and distance to capture these elements of remoteness. New Zealand has the most remote position (2.45) in this scale of all OECD countries. The scores of other countries with which New Zealand is often compared are: Australia (2.5), Finland (9.6), Sweden (11.92), Norway (12.05), Ireland (14.22), the Netherlands (26.57) and the UK (26.87). These figures crudely indicate the extent to which New Zealand is remote from potential trading partners. Such remoteness will affect transport and transactions costs of international trade of New Zealand vis à vis other countries and may have implications for competition law.

Alger and Leung (1999) report that New Zealand’s population, taking account of occupied areas, is less dense than for the four other countries—Australia, USA, UK and Sweden—they studied insofar as this resulted in a higher cost of telecommunication services, all other factors equal. Sweden was an exception: the relatively lower costs predicted for Sweden resulted from the more uniform distribution of the population within that country. The heavy concentration of the population in one city, Auckland, affected this result and would create a significant disparity of market size within New Zealand on a geographic dimension. Intra-country markets are not the focus of this report: essentially it is presumed that for any country institutional arrangements and transport costs are such that each can be taken as representing single markets for goods and services.[1]

Arnold, Boles de Boer and Evans (2003) using various databases—but particularly those of Standard and Poors Compustat, and the ANZ database of 400 New Zealand firms—describe the structure of New Zealand industry relative to the rest of the world and relative to the five selected countries. They conclude that these data plus certain assumptions imply that New Zealand, relative to other countries, generally has the highest industry concentration[2], the highest capital intensity across most industries[3], the highest total cost to revenue (with smaller firms having a relatively higher ratio than larger firms) and significant diseconomies of scale. These characteristics are those that might reasonably be expected in one of the world’s smallest and most geographically isolated developed economies.

The literature suggests that in small economies competition law should focus on efficiency evaluations of mergers and trade practices rather than rules of thumb that imply the elimination of some potentially efficiency-enhancing activities. The rule of reason is suggested for most relevant activities and practices at the expense of per se offenses. It is important to give producers’ surplus equal weight with consumers’ surplus in the calculation of efficiencies in small economies; particularly in activities that relate to (potential) exporting. Competition issues that arise in the so-called new economy industries should be examined placing most weight on dynamic efficiency. There is some suggestion that this implies that the behaviour of firms in these industries should be the criterion for the application of competition law, rather than traditional measures of market structure. Drawing together all the various issues, distance from trading partners may be relatively more important than size of the economy for industry structure and competition law in New Zealand, and low impediments to trade and investment are likely to be as important as competition law.