Market Failure is a Social and Economic Emergency

My Opinion Piece from Stuff and ThePost 29 September 2024 - for those who dont have the premium subscription.

Competition. It’s an indispensable component of every properly-functioning market. But it’s failed New Zealanders across a range of utterly crucial industries to the point that its absence is making our country too expensive to live in and changing our social fabric for the worse. It’s an economic and social emergency, the blame for which lies squarely with a generation of politicians.

“Market Failure” is the term economists use to describe the state of a large swathe of New Zealand business. In our banking, building products, electricity and grocery markets we have seen years of uncontrolled price increases far ahead of anything that can be justified. Don’t just take my word – our Commerce Commission has produced hectares of quality research analysing what has gone wrong. Individually each are problematic but together their effect is becoming catastrophic.

It’s a commercial equivalent to cancer. Our squeezed middle, especially our low-income families, are especially hard hit. Market failure is entrenched in these most basic of human needs. Nobody, rich or poor, escapes completely.

Market failure happens when competition fails to do its job of finding a balance between the interests of efficient sellers and buyers. In a competitive and well-functioning market, a trader who sets prices unreasonably high will be constrained, and eventually closed down, by a competitor who sells at a more attractive price. Competition is utterly key – no capitalist economy can function effectively without it.

However, large and powerful businesses are highly motivated to use dirty tricks to stop competition working. If not constrained they buy out their competitors, or make start-ups impossible through land banking, or deploy undue political influence, or collude tacitly at the edge of the law to manipulate markets and hike prices upwards. They seek to concentrate market power until competition no longer works as a constraint on pricing - then they can do what they like.

These powerful business owners and managers become oligarchs, controlling the necessities of life and stamping out any smaller business that tries to challenge them. Customers and staff get poorer and poorer as a small cluster of rich prosper. Its like a game of Monopoly, but more serious because real people’s lives and the basic necessities of existence like food, housing, and energy are at stake. The community’s resources transfer progressively from the working poor to a handful of capitalist rich.

Is that the kind of society Kiwis want to live in? Doesn’t it sound remarkably like the society our European ancestors left their homeland a couple of hundred years ago to escape? Yet it’s happening around us - the word “oligopoly” is increasingly being used in Commerce Commission market studies.

The four industries under the spotlight have taken different paths to market failure. So while the outcomes have been similar – excessive enrichment of shareholders at the expense of the rest of the community including smaller businesses and consumers - different solutions are needed.

In banking, we have four extremely powerful incumbents, each Australian owned. Somehow, they have managed to stop significant entry, see off smaller competitors including the Hong Kong Bank, keep the minnow KiwiBank and a couple of regional banks compartmentalised in a corner, and create what the Commission describe as a “stable oligopoly.” They match each other’s prices rather than compete for market share, having worked out that a stable market share with monopoly profits is better for shareholders than engaging in price competition – a classic example of tacit collusion. Innovation has been put into reverse gear; customer service is non-existent.

In building supplies, Fletchers have taken control of the market over a number of years. They’ve exerted undue influence over the standards system so that only their own products comply, captured local government building inspectors so they specify Fletcher brands, paid rebates that force builders to exclusively utilise Fletcher products, and thus seen off the competition. Notwithstanding all that, somehow their Board has managed the unlikely achievement of bringing its business to its knees despite dominating the market! But everyone who builds or buys a house these days pays a huge premium because of our failed building products market.

Electricity stands alone as a train wreck. In the 1990s the government of the day restructured the sector, driven largely by dogmatic dissatisfaction with what was then a state-owned and run utility. The outcome was a structure that was poorly understood and poorly thought through, leading to strong incentives to maximise shareholder returns (including to the government as part owner) and very little incentive to build new generation capability. Surprise – now we see not only very high prices, but a supply crisis that is already closing factories permanently in the regions and is going to get much worse. The old timers from the much-maligned Ministry of Works must be laughing in their graves – they used to build more generation capacity and roads in a year than the private sector has achieved in decades, usually close to budget and almost never having to be dug up again after a few months due to potholes, slips and general under-engineering!

As to groceries, our once dynamic and efficient grocery sector has been concentrated into effectively two pairs of hands. Along the way its swept up a mass of adjacent industries, pushed highly promising food producers out of business, and destroyed any genuine competition. Masses of supermarket owners have made the country’s “rich list” which was once the preserve of genuine entrepreneurs, not people who own a franchise for a grocery shop. Suppliers live in fear of retaliation if they protest.

So what needs to be done?

Like all developed countries New Zealand has a competition regulator, in our case the Commerce Commission. The Commission is to competition what police on the street are to crime, and referees are to sport – they are all an essential part of a functioning, civilised, orderly, fair society. But they need not only the mandate but the overt support of the community, in this case through the government, to function effectively.

For a decade the Commission had a low profile. Some would argue that it was the creator of some of our problems, just as taking police off the beat proved detrimental to public safety. But in recent times it has re-emerged, doing high quality work on failed markets. Yet despite its efforts we have reached a point where conventional regulatory solutions have become impossible. We need serious action including enforced breakups. We saw the effectiveness of divestment in our famous Telecom experience, but it’s something that requires strong political will.

Its crucial to reflect that this is not a battle between “business” and consumers. It’s a battle between a tiny number of businesses with excessive and ill-gained market power, and the rest of our economy including small and medium businesses who are the victims.

The Prime Minister’s recent characterising of big businesses as “A grade” and smaller ones as “C grade” speaks volumes. His career has been in well-entrenched big businesses with significant market power. That’s fine when he was at Unilever or Air New Zealand, but as Prime Minister he needs to understand the importance and needs of entrepreneurial small upcoming businesses who deserve to be protected from the bullying behaviour of big corporations in failed markets. A day out with some of our small food manufacturers or horticulturists could be enlightening.

Its politicians who through years of inaction created the problem and they as a whole need to accept responsibility for the solution. Younger politicians especially need to reflect on what kind of society we want to become - they should park their political ideologies at the door, rattle the cages of their older peers who are entrenched in their comfort zones,  and demand practical solutions. This is a social and economic emergency that need imaginative and bold solutions now – not something to kick out to the next election or the one after.

Will the politicians follow up with action? The next few months as they deal with some Commerce Commission findings will be telling. But much hangs on their direction – oligopolies once entrenched are not easily reversed.

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