The New Zealand Institute for the Study of Competition and Regulation · ISCR

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Information on the Institute for the Study of Competition and Regulation

Founded in 1998 and closed in 2015, the Institute for the Study of Competition and Regulation (ISCR) was an independent, nonprofit research institute located at Victoria University of Wellington's Pipitea Campus. Funding of its activities was provided by members, project work, and research grants. The primary objectives of ISCR research were to assist in understanding:

how markets and organisations operate
how markets provide appropriate incentives and disciplines for organisations
the limitations of markets, and the role of regulation in addressing these limitations
the importance of property rights and institutional structures in facilitating effectiveness of markets, organisations, competition, and regulation in New Zealand

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Open Access
The East Asian Financial Crisis
(Te Herenga Waka—Victoria University of Wellington, 1998) Young, Leslie
After describing the major events in the regional financial crisis I shall link them to structural problems in Asian finance. These structural problems arise from institutional limitations grounded in the culture and political economy of East Asia. The "East Asian Model" of political economy was successful in manufacturing giving rise to triumphant rhetoric on Asian values from Asian leaders last year. I shall attempt to identify why the "East Asian Model" failed in finance. I conclude with a discussion of the dangers & opportunities created by the regional financial crisis.
Open Access
The Critical Importance of Information: Incentive Regulation and its Application in Electricity
(Te Herenga Waka—Victoria University of Wellington, 1998) Evans, Lewis
This paper outlines the key distinguishing features of light- and heavy-handed regulation. It Provides an analysis of the importance of informational issues for the conduct of commerce Provides an analysis of informational issues for the design and operation of incentive regulation Uses incentive regulation to assess heavy and light-handed regimes and Analyses certain of the regulatory issues of the electricity market.
Open Access
The Accident Compensation Scheme and Unfunded Liability
(Te Herenga Waka—Victoria University of Wellington, 1998) Evans, Lewis
The ACC is currently funded on a pay-as-you-go (pay-go) basis. This means that levies on participants in the scheme cover only its current period operating costs. In the past these costs have been lower than the amount required to fully fund the cost of the new claims being added to the ACC each year. This has created a $7.5 billion unfunded liability that the government must address as part of any long term reform of the ACC. The introduction of competitive private delivery of the Employers' Account of the ACC requires that all future participation by employers be on a fully funded premium basis. What should the government do with the unfunded liability of the Employers' Account at the time that competition is introduced? This paper argues that if the government wants to create an efficient accident compensation market for employers it should not levy current employers for this unfunded liability. The government should not in any way entangle the funding of past liabilities with the operation of the ongoing competitive market.
Open Access
The Theory and Practice of Privatisation
(Te Herenga Waka—Victoria University of Wellington, 1998) Evans, Lewis
In this paper the arguments for privatisation are reviewed in some depth. Forcompetitive markets the view of Balladur (1997 54) that "The state has no legitimate grounds for assuming control over business in the competitive sectors of the economy. Everyone recognises this nowadays" is accepted. For concentrated markets a separation theorem of Willig (1993) that means that in the presence of secure property rights a regulated private firm will perform in a superior manner to a public sector firm is also accepted. This theorem is discussed in some detail because it has explanatory power for empirical studies of privatisation in the presence of regulation and implications for the form of regulation. The process and design of privatisation are discussed before briefly reviewing empirical assessments of privatisation. The paper starts with a section about state owned enterprises (SOEs) because these are the government entities that most closely resemble privatised firms.
Open Access
Common Elements in the Governance of Deregulated Electricity Markets, Telecommunications Market and Payment Systems
(Te Herenga Waka—Victoria University of Wellington, 1998) Quigley, Neil; Evans, Lewis
We use the telecommunications industry and electricity market in New Zealand and payments systems in Canada and New Zealand to examine the implications of modern network technology for the organisation and governance of deregulated markets. Our analysis identifies natural monopoly components of networks as the key issue for the governance of these markets. We show how technological change has enhanced the scope for competition and reduced the desirability of public management and regulation in network industries. We argue that where natural monopoly or other problems persist private joint ventures are superior to public sector monopoly as a means of organising the activity. Light-handed regulation in which markets are constrained only by economy-wide competition law provides for the development of efficient private solutions to the special governance problems of network industries.
Open Access
Exclusive Dealing in New Zealand Alcoholic Beverage Markets
(Te Herenga Waka—Victoria University of Wellington, 1998) Mulcare, Tim
This paper analyses exclusive dealing in New Zealand alcoholic beverage markets. Various explanations were used to argue against statutory prohibitions on exclusive dealing in New Zealand alcoholic beverage markets at the turn of the twentieth century. These markets were probably the first in New Zealand where exclusive dealing was used.
Open Access
Open Ownership - Not Common Carriage
(Te Herenga Waka—Victoria University of Wellington, 1998) Alger, Dan
We consider regulating natural monopolies with open ownership and competitive rules as a substitute for common carriage regulation and illustrate it with an application for natural gas pipelines. A single set of production assets exhausts any economies of scale or scope while owners compete with each other due to incentives from open ownership rules that promote efficient investment choices primarily by breaking down barriers to entry and competitive rules that promote an efficient secondary market. We argue that regulating a natural monopoly with these rules in a market structure we call a competitive joint venture significantly increases the efficiency of pricing output and capacity choices and may dramatically reduce regulatory costs when compared to regulating with common carriage.
Open Access
Money and Medicines: An Economic Analysis of Reference Pricing and Related Public-sector Cost-containment Systems for Pharmaceuticals with Special Reference to New Zealand, by Alan Woodfield, John Fountain and Pim Borren (a review)
(Te Herenga Waka—Victoria University of Wellington, 1998) Quigley, Neil; Evans, Lewis
Money and Medicines (WFB) analyses government provision of prescription pharmaceuticals in New Zealand focussing on the performance of the Pharmaceutical Management Agency Ltd. (Pharmac). Pharmac is a wholly owned subsidiary of the Transitional Health Authority (THA) and has the responsibility of managing the national Pharmaceutical Schedule on behalf of the THA. Pharmac does not purchase pharmaceuticals but it does set the terms and conditions under which pharmaceuticals are subsidised to the final consumer. The operation of Pharmac is so closely intertwined with the unique characteristics of the market for pharmaceuticals and government policy towards the health sector that it is not possible to consider any of these individual elements in isolation. The approach adopted by WFB is to weave the key economic and New Zealand institutional factors into all of their discussion and evaluations. To a certain degree this reflects the "Pharmac" focus of the book but makes it more difficult for even an informed reader to understand the scope and insights of their analysis and arguments. Some critical features of the pharmaceutical market are not mentioned until late in the book and on occasions are not drawn out as central issues. We believe that it would have improved the clarity of the arguments made in the book if the authors had written a comprehensive introduction summarising the key characteristics of the pharmaceutical market and Pharmac's role in it. We start by briefly providing such an introduction.
Open Access
The Privatization of New Zealand Rail Part 1: Assessment of History Markets and Data
(Te Herenga Waka—Victoria University of Wellington, 1999) The New Zealand Institute for the Study of Competition and Regulation
The Treasury requested tenders for an empirical evaluation of the impact on the New Zealand economy of the privatisation of NZ Rail Limited now Tranz Rail Ltd. Their terms of reference were to: determine the nature and extent of the economic welfare gains andlosses resulting from the privatisation identify which groups have gained or lost estimate the quantum of the gains or losses and analyse in depth the decision and consequences of the privatisation. The aim of the review is to determine whether the privatisation of NZ rail was in the public interest and to provide input to examinations of welfare changes associated with privatisation more broadly.
Open Access
The Political Economy of Six O'clock Closing
(Te Herenga Waka—Victoria University of Wellington, 1999) Mulcare, Tim
Public bars in New Zealand traded from nine o'clock a.m. to six o'clock p.m. from Monday to Saturday between 1917 and 1967 despite the fact that demand was concentrated on five out of six trading days in the hour before closing. The statutory closing of bars at six o'clock p.m. in 1917 was initially a wartime regulation to restrict consumption of a narcotic; this paper suggests that it was extended because it was favoured by key interest groups namely trade unions hotel owners and prohibition organisations.
Open Access
Globalization and Financial Regulation
(Te Herenga Waka—Victoria University of Wellington, 1999) Young, Leslie
There has been no shortage of villains in the financial crisis which began in Asia and has now encompassed all major emerging markets: bankers regulators hedge funds and the IMF have all been excoriated for incompetence and immorality. This paper argues that the problems which have emerged from the crisis are structural i.e. they arise from the very nature of financial activity. While the structural problems have been present from the beginnings of finance the advance of technology and of globalization has so exacerbated the problems as to undermine the foundations of the international market order. To highlight the structural nature of the problems this paper will eschew the search for villains and examine the theoretical basis for the globalization of financial markets - the major direction of their recent evolution. Economic theory identifies major difficulties in the presumption that this drive will lead to socially desirable outcomes. The financial crisis can be understood as the exacerbation of these difficulties by globalization and the advance of information technology.
Open Access
The Relative Costs of Local Telephony Across Five Countries
(Te Herenga Waka—Victoria University of Wellington, 1999) Alger, Dan; Leung, Joanne
In this paper we take three steps towards evaluating the relative performanceof the telecommunications markets in these five countries. First weidentify and then limit our examination to only those components of thetelecommunications network that may generate market power concerns. Wedetermine that market power concerns where they exist at all are limited tothose facilities connecting a customer with its neighboring central officecollectively called the local loop. Second we identify regional factors that maysignificantly affect relative costs for the local loop. Using data and a cost modelfrom the US to examine these regional factors we find that customer density is the most significant. Third using this same cost model along with regional data we estimate local loop costs relative to the US for New Zealand Australia the UK and Sweden.
Open Access
Thresholds for the Scrutiny of Mergers and the Problem of Joint Dominance
(Te Herenga Waka—Victoria University of Wellington, 1999) Quigley, Neil; Evans, Lewis; Hughes, Patrick
In this Report we consider:1. How the potential for tacit and explicit collusion associated with joint dominance can best be assessed in merger applications.2. Whether the inclusion in section 47 of the Commerce Act of the competition test proposed above in place of the existing dominance test will provide an efficient and effective means of identifying markets where tacit collusion is likely to result from joint dominance.3. Whether the evidence from Canada and the USA (where a substantial lessening of competition test is applied to mergers) supports the claim that the test proposed by the Ministry of Commerce is superior to one of pure dominance in respect of identifying joint dominance (oligopoly) problems.
Open Access
The Ultimatum Game: Optimal Strategies without Fairness
(Te Herenga Waka—Victoria University of Wellington, 1999) Evans, Lewis; Burnell, Stephen; Yao, Shuntian
The Ultimatum game is simple and this facilitates its use in the study of predictions of game theory. Experimental evidence suggests that it doesnot predict individual behavior well unless individuals gain welfarefrom fairness in transactions or have expectations about some widergame. Our model excludes any notion of fairness by including (potential)rivalry in transactions. In this game the proposer's expectations yieldoutcomes that are consistent with experimental evidence. Offers can belarge or small with none in an intermediate range. The consequent distribution appears in Dictator game experiments. Our model explains how it is generated by expectations.
Open Access
The Privatization of New Zealand Rail Part 2: Quantitative Cost Benefit Analysis
(Te Herenga Waka—Victoria University of Wellington, 1999) The New Zealand Institute for the Study of Competition and Regulation
In this study we estimate the social impact of privatisation by means of cost-benefit analysis. It includes assessing the performance of the privatised firm against counterfactual situations and examining economic efficiency at points in time as well as assessing the dynamic efficiency of investment.
Open Access
Economic Measurement and the Authorisation Process: The Expanding Place of Quantitative Analysis
(Te Herenga Waka—Victoria University of Wellington, 1999) Evans, Lewis
The paper takes the efficiency objective of the authorisation process under theCommerce Act 1986 as given. This objective makes competition law completely consistent with thrust of New Zealand public policy since the early 1980s. This has entailed the separation of efficiency and equity in policies and functions of government departments.4 Equity is treated through tax social welfare and access to health and education. The provision of goods and services is left to markets that are in most instances encouraged to be efficient by means of open entry few tariffs an absence of industry-specific special treatments and the implementation of the Act. Consequently there is no reason to adopt any special framework for measuring benefits and detriments for the public benefit test over those that would apply in the assessment of any aspect of the provision of any goods and services. Indeed the ramifications of quantifying the public benefits and detriments of economic efficiency are exactly those of economic welfare assessed by means of cost-benefit analysis. This paper examines the nature and the sources of increased quantification. Itargues that the costs of quantification are falling and the information yielded by it is growing so that it is likely that more rather than less quantification will be appropriate in the future. This change and increased the sophistication of the economic analyses and quantitative techniques make expertise in these areas an important ingredient of judgements about the evidence and change the nature of debate.
Open Access
Contracting, Incentives for Breach, and the Impact of Competition
(Te Herenga Waka—Victoria University of Wellington, 1999) Quigley, Neil; Evans, Lewis
In this paper we provide an economic perspective on the application of competition law to contracts.
Open Access
The Optimal Network Contract Under Partial Bypass in Oligopolistic Network Industries
(Te Herenga Waka—Victoria University of Wellington, 1999) Evans, Lewis; Burnell, Stephen; Yao, Shuntian
The rapid widespread technological change and concomitant deregulation of network industries has engendered a burgeoning demand for connection between technologically similar as well as technologically dissimilar networks. The processes by which interconnection contracts are reached and the nature of these contracts is important for the performance of these industries. The basis for public policy concern about these contracts stems from the perception that there remain natural monopoly elements in networks. Wherethese elements are absent or equivalently if networks are open to economic bypass interconnection contracts will generally not pose special competition concerns. The purpose of this paper is to examine the effect of credible potential bypass of a network on the economic efficiency of a privately chosen network contract. There is no regulation excepting the requirement that there must be no non-price discrimination against a firm that wishes to utilise the network.The set up is one in which there are two downstream retail firms that require a network to do business. They supply different but possibly very similar services and they compete as a duopoly for retail customers. They each face the same contract for the use of the network. There is a vertically integrated firm (the incumbent) that owns the network and one retail firm. Two organisational structures are considered. In one the vertically integrated firm is a conglomerate that chooses the network contract and its retail firm's output subject only to the reaction of the other retail firm. The second is a divisional organisational structure where the incumbent's retail firm takes the network contract as given and acts independently to maximise profits subject to interaction with the other retail firm. In the divisional structure the network contract is designed to maximise the profits of the total firm but subject to divisional autonomy. The divisional structure yields relatively more efficient contracts than does the conglomerate but total incumbent profits are lower. As a practical matter this represents a factor to be considered in choosing an organisational structure because there canbe organisational performance gains in decentralised structures.The second retail firm may build its own network to bypass the incumbent's network. There is no regulatory intervention and because of the threat of bypass the vertically integrated firm does not price the other firm off the network. The vertically integrated firm has the inherent natural monopoly characteristic of taking leadership in the design of its two-part tariffcontract for the use of its network. It therefore designs the network contract taking cognisance of the ability of the second retail firm to construct a bypass network and its strategic output reaction to actions of the incumbent.The results indicate that when the full network has to be bypassed if at all the vertically integrated firm has very considerable latitude to raise the variable component of the network charge to restrict the other retail firm's output. This inefficient situation is tantamount to bypass not being possible.The position is different when the second retail firm can partially bypass the incumbent's network and use a combination of its own and the incumbent's network to service customers. Assuming that if the second retail firm did partially bypass it would do so by bypassing targeted network segments that are relatively densely populated by potential subscribers (e.g. the central business district) partial bypass is such a threat to the incumbent that it designs a much more efficient contract. The vertically integrated firm designs a contract that raises the variable component of the network contract as much as possible to reduce the outside firm's output while ensuring that the outside retail firm does not bypass much of the network. This threat of bypass forces in the range of examples described in the paper a relatively efficientoutcome and a contract that approximates the incumbent's network cost function.Because the network contracts are relatively economically efficient the profit performance of the divisional and conglomerate structures are so similar that a choice between them could be made on grounds of organisational performance. This is not considered in the paper.Although the paper's assumption that there is one contract for all segments of the network is restrictive the paper does illustrate the strong competitive influence of potential bypass on an unregulated firm's choice of a network contract.
Open Access
Strategic Behaviour of Internet Service Providers in New Zealand and the Performance of this Market
(Te Herenga Waka—Victoria University of Wellington, 2000) Enright, Christina
This study provides an economic history of the Internet access market in New Zealand from 1996 essentially the inception of the market to early 1999. It reviews the strategy literature about entry to new markets and tests a resource-based theory concerning the timing of entry.
Open Access
The Efficiencies Defence in Merger Analysis in Canada and the US
(Te Herenga Waka—Victoria University of Wellington, 2000) Mathewson, Frank
Whatever the statutory differences or language differences in Guidelines between Canada and the US the application of competition rules and procedures is remarkably similar in the two countries. Recent adjustments to the role of efficiencies in merger analysis in the two countries reveal a potential departure from this claim. The Canadian Competition Bureau (the agency responsible for the implementation of competition policy in Canada) has moved from a clear and focused position on the role of efficiencies in merger analysis to one that is much less certain and focused. For its part the US agencies (Department of Justice and the Federal Trade Commission) have moved from a more ambiguous or undefined position on the role of efficiencies in merger analysis to one that is more certain and focused.