3. Why Have Thresholds in the Act?
The Role of the Act's Thresholds
1. The purpose of the Commerce Act is to promote competition in markets in New Zealand. The Act has this focus as a means to facilitate gains in economic efficiency across the economy. Improvements in efficiency enable the economy to produce more output with the same level of resources and thereby enhance the welfare of New Zealanders.
2. To achieve its purpose, the Act relies on both structural prohibitions (section 47) and behavioural prohibitions (sections 27 and 36). In theory, structural prohibitions would not be required if the enforcement of behavioural prohibitions were perfect, as no market structure is in itself of harm for the economy. However, certain market structures are likely to soften competition and to be more conducive than others to anti-competitive conduct such as tacit collusion, which is difficult to detect and to prevent. Because it will be prohibitively costly and simply not practical to directly address behaviour that leads to, or follows from, a substantial lessening of competition in all cases, structural prohibitions can be viewed as a second-best solution to address competition concerns.
3. Given the Act's structural and behavioural prohibitions, judgements are required as to what mergers and other activities are likely to be harmful to the economy and which are beneficial. Such judgements can be difficult to make, as they demand predictions about competition and efficiency effects in markets that are constantly changing. As Brunt (1990) said:
Competition is a process rather than a situation. Dynamic processes of substitution are at work. Technological change in products and processes, whether small or large, is ongoing and there are changing tastes and shifting demographic and local factors to which business firms respond. Profits and losses move the system: it is the hope of supernormal profits and some respite from the "perennial gale" that motivates firms' endeavours to discover and supply the kinds of good and services their customers want and to strive for cost-efficiency. Such a vision tells us that effective competition is fully compatible with the existence of strictly "limited monopolies" resting upon some short run advantage or upon distinctive characteristics of product (including location). Where there is effective competition, it is the on going substitution process that ensures that any achievement of market power will be transitory.17
4. The thresholds in the Commerce Act are used to identify activities that are likely to result in significant economic harm. Harm in this context relates to the exercise of market power that results in efficiency losses.
5. The underlying rationale for including thresholds in the Act is to avoid not only administration, compliance and litigation costs imposed by the Act, but also other economic costs such as uncertainty due to such things as lack of statutory clarity and judicial error. Due to the presence of such costs, the use of competition law in an economy will only be of benefit where the harm prevented is greater than the costs of scrutiny and prohibition. Hence, to minimise these costs, there are thresholds in the Act that have to be passed before activities are subject to further scrutiny.
Criteria for the Act's Thresholds
6. For the thresholds to be effective, their focus must be sufficiently narrow to avoid interfering with transactions that will enhance efficiency, but not so narrow that potentially harmful behaviour escapes scrutiny. A threshold for mergers, for example, must capture for scrutiny only those acquisitions that threaten substantial economic harm by the creation of market power.
7. As well, the thresholds need to be clear about the types of behaviours and structures subject to scrutiny to provide certainty to market participants. Obscure thresholds could lead firms to engage in anti-competitive or efficiency reducing behaviour in the belief that it is permitted. Alternatively obscurity may cause some firms to forego efficiency enhancing behaviour because of the possible costs of defending the behaviour and the possibility that the behaviour will be prohibited.
8. Thus, for the thresholds to assist in achieving the purpose of the Commerce Act they must:
- capture for scrutiny those activities likely to impose efficiency losses;
- not deter or prevent efficiency enhancing behaviour; and
- minimise uncertainty and the costs of administration, compliance and enforcement.
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