Imagine that a public health authority publishes a report on the nation’s diet. After 22 years of data and a 100-page methodology, it announces the four least nutritious food groups. They are: beverages, snacks, prepared meals and condiments.
The categories tell you nothing, because beverages include both water and vodka, and snacks include both carrot sticks and deep-fried Mars bars. The four least nutritious food groups are not food groups at all. They are categories with contents differing so much that any encompassing judgement about them is meaningless.
The Commerce Commission’s first State of Competition Report, released earlier this month, takes a hundred pages to make the same mistake. After 22 years of firm-level data, and a composite ranking exercise, it has identified the four least competitive divisions of the New Zealand economy. They are: electricity, gas, water and waste services; financial and insurance services; information media and telecommunications; and mining.
‘Financial and insurance services’ includes retail banks, wholesale banks, insurers, fund managers, KiwiSaver providers, finance companies and brokers. ‘Electricity, gas, water and waste services’ includes generation, transmission, distribution, retail electricity, gas pipelines, gas retail, water supply, wastewater and solid waste. These are grouped together for the national accounts, not for markets.
The report itself concedes the point. Its own methodology section warns that the industry classifications it uses differ from market definitions typically used in competition assessments. But the concession is in small print. The headline rankings are in the executive summary.
The report’s own structural data substantially undermines the headline narrative. The Commission’s two main concentration measures both moved in the opposite direction from its overall conclusion. The share of the largest five firms across the New Zealand economy has fallen steadily across the whole 22-year period. The Herfindahl-Hirschman Index, the standard measure of concentration, has done the same. If the test of competition is whether large firms are losing share to smaller rivals, then for two decades the New Zealand economy has been passing that test.
The report tries to rescue its headline by leaning on business dynamism and performance measures instead of concentration, and by noting that entry and exit rates have declined. But declining entry can equally reflect maturation, satiation, scale economies, or simply natural constraints on a small open economy. The report acknowledges these alternative explanations, then ranks anyway.
A deeper problem is that the report does not measure international trade, the single most important source of competitive discipline on a small economy. The Commission concedes that a measure for the level of import competition for each industry was not available, and uses imports used as inputs as a proxy for import dependence rather than import competition. But a New Zealand retailer competing with goods landed from China faces fierce competitive pressure, whereas a manufacturer using imported steel as a production input faces none. The proxy cannot distinguish between the two, and the rankings do not adjust for either.
In a small economy, competitive pressure often comes less from the number of incumbent firms than from how open the market is to new entry. Competition economists have understood for more than forty years that the number of firms in a market is a weaker signal of competitive intensity than the conditions of entry. A market with three firms and no barriers can be more competitive than a market with eight firms and high barriers. Incumbents discipline themselves against the threat of entry, not only against the firms already present. The report measures the firms. It does not measure the barriers.
The most binding barriers in the sectors the report has named as least competitive are regulatory, and beyond the Commission’s reach to remove – though within its market-study powers to examine and report on. The Reserve Bank’s bank capital settings raise the cost of entering retail banking. Resource Management Act planning delays raise the cost of entering supermarket retailing.
The report could have identified the regulatory barriers that bind in these sectors. Instead, it identified sectors and proposed the Commission’s own future work as the response.
The New Zealand Initiative’s 2018 report Who Guards the Guards? identified governance failures at the Commission. The 2025 Rebstock Review, which Parliament is currently acting on, addressed these failures. Among its recommendations was that the Commission publish an annual State of Competition Report and proactively engage with Government on its policy implications.
The Commission has an incentive to deem things uncompetitive. The more it does so, the more its powers expand. Each of its annual reports will therefore only add to the four sectors identified in its first. There will be no year in which the Commission concludes that competition is functioning adequately and that its work programme should shrink.
A competition regulator can do useful things. It can prosecute cartels, block anti-competitive mergers, and conduct market studies examining whether barriers to entry reduce competition. The State of Competition Report does none of these. Instead, it is a ranking exercise at a level of aggregation the report itself warns is unsuitable. Nonetheless, it asks readers to treat the ranking as a diagnosis.
A good diagnosis points to a treatment. The Commission has measured something other than the disease and prescribed more visits.
This column was first published in BusinessDesk on 22 May.
well done, as always, thanks Roger
" A good diagnosis points to a treatment. The Commission has measured something other than the disease and prescribed more visits. "
Funny, so topical. The irony of that specific metaphor, is that NZ Parliament parties appear to be effectively prescribing more visits, but doing very little to address supply, creating demand for a service which doesn't exist with no insights let alone plans on how to help. By focusing on monitoring rather than eliminating the regulatory barriers holding back new entrants, they’ve trapped Kiwi markets in a loop: more bureaucracy to treat the side effects of bureaucracy.
There is a specific and pointed example in both Australia and New Zealand healthcare: people are concerned about autism (https://rareinsights.substack.com/p/can-we-ever-know-how-many-autistic):
- The actual concern from parents/clinicians are to be able to access assessment and supports (e.g. schooling, respite care, etc.).
- The concern for autistic adults is typically discrimination / social inclusion.
But, Governments have heard, "let's help diagnose autism". And there's lots of people with an opinion, including many well-meaning clinicians who offer premium autism assessment services in private and may have a little cognitive dissonance around statement and management of interest. Policymakers are given ye old, "more with less", and try to figure out how to have high impact at low cost, often without understanding the domain let alone the specific issue, let alone the economic mechanisms available to them to influence. So, they've almost universally said (with one very notable exception, Peter Malinauskas, who is a very smart man dressed up as a street hustler), "why don't we screen for it more".
So policymakers fund more screening. It's typically in schools and early childhood (services like Plunket). And so more people are suspected to have autism, more people screen positive, the index of suspicion rises, and further converts latent into realised demand. Screen positive people are referred to health services, who have received no investment to handle increased referrrals. Funny thing is, a number of these policymakers are noted to have said things like, "The problem with healthcare is health managers", ignoring that they were often warned of the consequences but thought they knew better.
Peeps are referred to disability services who say, "we can't treat them until they're diagnosed". Then hobbiest policymakers come along and say, "let's help diagnose autism", and decide to introduce more screening... And so it goes.
Health is simply the language of my response, but it's analogous because whether one sits on the right and uses the language of business, or one sits on the left and uses the language of national provision of human services, these are complex systems where the problems typically have clear albeit dynamic causal models for which experts exist.
LLMs may well be a very useful policy governance tool to prevent the boom-and-bust of "truthy" policy design and political, but not understanding the causal mechanisms for complex, impactful and very expensive problems, means that more screening and monitoring will simply tell you more of what you already know, not how to address the issues.