This week, my ECONS102 class covered monopoly. As part of that topic, we look at competition policy, and in particular whether a government competition or antitrust agency (in New Zealand, that's the Commerce Commission) should allow two (or more) firms to merge. In theory, the government should allow a merger if that merger would make society better off - in other words, if economic welfare were higher than without the merger.
However, as I noted in this post back in 2021, that isn't the remit of the Commerce Commission, which is expected to oppose any merger that 'substantially lessens competition'. As I noted then:
The wording "substantially lessening competition" comes from Section 27 of the Commerce Act, which is the legislation that the Commerce Commission exists to enforce (among other things). However, I think that wording is problematic, because lessening competition is not necessarily the same as decreasing total welfare. In fact, it is entirely possible for a merger between two firms to increase total welfare, while at the same time substantially lessening competition.
Anyway, this year's example comes from the supermarket sector, where Foodstuffs' North Island and South Island operations are looking to merge (they are currently separate companies). As the New Zealand Herald reported back in July:
Foodstuffs (both North Island and South Island) maintain that the merger is aimed at improving efficiency in their businesses, and that reducing costs - such as duplicate overheads across the likes of head offices and key supply-chain functions - will help to drive prices lower than they otherwise would have been (though perhaps not lower in an absolute “before and after” sense, given the significant other variables).
Chris Quin, head of Foodstuffs North Island and the proposed head of the merged entity, has also pointed to the freshly erected guard rails of the new regulatory regime as a reason to allow the merger to proceed.
The commission does not appear to share his view. The latest statement noted that the new regulations: “are designed to address some of the competition issues brought about by the existing high levels of concentration in the grocery sector. They are not intended to, and would not, mitigate the structural loss of competition in relevant upstream and retail grocery markets that would result from the Proposed Merger.”
It is interesting that the Commerce Commission does appear to be considering competition as it relates to suppliers, and not just consumers. And it is also interesting that Foodstuffs are pushing the idea that this merger will lead to efficiency and ultimately to lower prices (and therefore higher economic welfare, as shown in my 2021 post).
The Commerce Commission is due to make a final determination on 1 October. It will be interesting to see what their determination is.
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