5.3  Implications for small economies

Although Baumol (2002) claims that new economy industries are not pervasive and can be identified we are not sanguine about this conclusion. Such have been the changes wrought by digital goods and other elements of the new economy that most industries reflect their influence. Furthermore the adaptation of these goods to uses in other industries may result in goods that themselves have new economy goods characteristics. Indeed, Quah (2003) makes the case that digital goods can be used to represent many goods that are not obviously digital in nature: eg, biotechnology. We note that the distinguishing feature of competition law for new economy goods is that it should be applied with the objective of dynamic efficiency. Given this, it would be desirable to apply the approach on a case-by-case basis across the economy.[57] In small economies it will generally be that competition concerns arise in oligopoly or near monopoly industries where again dynamic efficiency considerations are important: for example, for New Zealand dynamic efficiency must be the competition law criterion if exploration for gas and oil are enabled. Thus, it may be that for small economies that already emphasise dynamic efficiency little adjustment may be needed. Across industries there already would be case-specific analysis focussing on the removal of institutional barriers to entry.[58]

As we have noted, cooperation is important to efficiently deal with externalities that arise in areas such as innovation and standard setting. The ability to semi-formally coordinate is provided through joint ventures.[59] There is a growing body of literature that argues that it is not efficient to limit coordination by per se offences. These impose direct and indirect inhibitions on potentially economically efficient coordination. This literature argues that rule of reason should apply, notwithstanding that monitoring and transaction costs of enforcement may be reduced by the per se approach. In small economies the issue is likely to be particularly acute because of the low population of firms in highly concentrated industries. In such circumstances any communication is likely to involve a significant share of the market and seem widespread. But to inhibit cooperation in such small markets is unlikely to be efficient. We note that firms can cooperate under the Commerce Act when it comes to exporting to non New Zealand markets: however other cooperation may be legitimate, and the division between exporting and domestic activity may not always be that sharp.

In small economies firms may engage in practices that in some larger economies would be per se illegal under competition law. For example, in larger economies price fixing arrangements are typically per se prohibited. As we have mentioned, some literature questions the wisdom of this approach on the grounds that agreements by firms to fix prices can be dynamically welfare enhancing.[60] It suggests that per se offences should be evaluated under the rule of reason. Nevertheless, a per se prohibition does provide some certainty as to the nature of the law and thereby potentially limits the practice and reduces transactions costs of enforcement. In Australia and New Zealand firms can apply for an authorization for such an arrangement, and it may be that a partial solution is to allow the penalty for per se offences to be based on the efficiency of the practice and to not have it mandated in any way. The inclusion of per se restrictions on behaviour deserves further investigation.

It is very likely that regulatory institutions have economies of scale that imply that the average cost of competition law enforcement will fall with the size of the economy, and that might imply optimally relatively less activity. However, the complexity of the dynamic efficiency issues and the need to consider the avenue of efficiency defences—rule of reason—suggest a resource intensive regulatory authority. However, there may be savings to be achieved in focussing on barriers to entry at the expense of market structure and (static) efficiency defences.