restrictions of competition in new zealand

The Economic Record VOl. 39 June, 1963 No. 86

RESTRICTION? OF COMPETITION IN NEW ZEALAND

I Since 1958 New Zealand has had in operation an enactment

which, in the words of the statute book, aimed a t “the prevention of trade practices contrary to the public interest ”. A relatively uncompli- cated statute, it clearly derives some inspiration from the British Restrictive Trade Practices Act, 1956, but also shows some marked differences. Together with an amending Act of 1961, it provides a statutory instrument worth studying in Australia, on account of both its achievements and defects, now that similar legislation is actively under consideration.’

Before considering the main structure of the legislation it is worth noting that registration was an important component of the original Act. Altogether 850 agreements were discovered under the statutory obligation placed on companies and persons to register ‘(any agreement o r arrangement” between two or more persons connected with the supply, distribution and pricing of goods and services. (Not all of these agreements were in fact restrictive of competition. Some were, for example, simple agreements whereby an importer or manufacturer individually, and without reference to his competitors, specified the terms on which he appointed agents or retailers of his products). The registration provisions were, of course, valuable in providing a ready- made check-list of agreements to be investigated. But they proved dis- appointing as a method of making public the character of trade practices. The responsible authority noted that, over a period of three years, hardly a score of people took pains to pay the 5/- fee and consult the Register of Trade Practices kept available for inspection. Of this number probably a large proportion were themselves trade association officers o r journalists. I n 1961, as the result of pressure from business interests and bodies, such as the New Zealand Manufacturers Federa- tion and the Associated Chambers of Commerce, the National Govern- ment amended the Act so as to cancel the whole of Part I1 devoted to registration. This action was taken despite the fact that the Register had raised scarcely a ripple of interest let alone any general discussion of restrictive activities. Businessmen had once again displayed re-

1 The Trade Practices Act 1958 No. 110 and the Trade Practices Amendmmt Act 1961 NO. 124. Except where evident to the contrary all references are to a consolidated version of these two Acts.

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markable sensitivity on matters connected with commercial regulation activities.

The main procedures encompassed by the Act can be arranged under the following four categories : (i) Investigation: There is provision for the appointment of an Examiner (a senior public service officer) who is obliged to investigate any trade practice which may appear to operate against the public interest in a manner specified by the Act. He does so mainly on the basis of complaints made by interested parties; but he may also act on his own initiative.2 For the purposes of investigation the extensive powers of a Committee of Enquiry (under the Industries and Com- merce Act 1957) are available and Departmental assistance may be called upon. Where satisfied that a prima facie case exists, the Ex- aminer is required to ask the Trade Practices Commission to conduct an Inquiry. For this purpose he forwards a report to the Commission specifying the nature of the practice, the damage to the public interest and a recommendation as to the judicial order he considers the Com- mission should make to remedy the situation. (ii) Inquiry : The Trade Practices and Prices Commission (composed of a chairman and one or more other members who normally have additional administrative or tribunal duties besides Trade Practices work) is the main authority set up by the Act. It is a quasi-judicial body appointed to conduct inquiries into trade practices to determine whether or not they operate contrary to the public interest and has wide powers to call for documents, subpoena witnesses, etc. Hearings are held in public (except where proceedings in camera are considered necessary), using the usual forms of procedure to be found in a quasi- judicial or administrative tribunal. Evidence is offered and called by the Examiner on the one hand and the respondent association on the other. At the conclusion of the Inquiry the Commission may make an order terminating or modifying the operation of the trade practices under inquiry. It may also recommend to the Minister for Industries and Commerce the imposition of price control over the relevant area of goods or services supplied if this particular form of remedy is thought appropriate. (Price control still operates over a wide range of goods in New Zealand; and the Trade Practices Commission may exercise all the powers and functions of the Prices Tribunal under the older Control of Prices Act 1947). However, price control is not a favourite remedy. It was requested once only and refused by the Minister. (iii) Orders : Orders may be made to terminate or amend a practice if the Commission is of the opinion that the continued operation of the trade practice is contrary to the public interest. The categories of

2 A trade practice in any kind of supply, manufacture or distribution of a good or service is liable to be investigated unless protected by an existing appropriate enactment. Thus the scope of the New Zealand Act is wider than the British Act and leaves it open to the Examiner to investigate, for example, insurance rates, certain aspects of commercial banking, hairdressing! real estate agencies, hire purchase companies, funeral undertakings and other semce industries.

1963 RJSSTRICTIONS OF COMPETITION 133

restrictive agreements which may be prohibited or modified by an order are specified in Section 19(2). They are comprehensive in coverage and include price-fixing arrangements, exclusive dealing, deferred rebates, discriminatory discounting arrangements, resale price maintenance, restriction of production, allocation of markets and ( a trifle surprisingly in this list of restrictive practices) any complete o r partial monopoly of goods in New Zealand or part of New Zealand. The parties to agreements may be found Within manufacturing groups, contractors, suppliers of services, wholesalers and retailers ; or agreements may be between the members of these various groups. For the purpose of the Act a trade practice is deemed contrary to the public interest (Section 20) only if its effect is to increase costs, prices or profits unreasonably, to limit or prevent the supply of goods o r services or to limit competition unreasonably. (In practice the Examiner has found it expedient to concentrate on the limitation of competition provision when bringing practices before the Commission). A consent order may be made whereby the respondents agree with the Ex- aminer’s analysis and recommendation (in effect, plead guilty) ; and in certain circumstances the respondents may influence or assist in the writing of the consent order which modSes or prohibits their practices. Offenders against these orders are liable, on summary conviction, to fines of El00 for individuals or G O O fo r incorporated bodies. (iv) Appeal: From the orders of the Commission there is right of appeal against the whole or part of the decision. The Appeal Authority ( a barrister or judicial person) normally sits in public and may receive any statement, document or information which may materially assist him in determining the appeal. Copies of the notes of evidence as well as the order of the Commission are forwarded to him. The Appeal Authority may then, at his discretion, confirm, modify or reverse the decision of the Commission. Or he may direct the Commission to re- consider the grounds on which the appeal is made. There is no further appeal from the proceedings of this authority on grounds of fact. However, the Chairman of the Commission, or the Appeal Authority, may state a case for the court of Appeal on any question of law (e.g. the general question of the Commission’s discretion).

I I

Even for a relatively small commercial and industrial community the staffing arrangements of this Act are austere. This is not very serious at the judicial levels although the Appeal Authority has various judicial duties, the Chairman of the Commission is also Presi- dent of the Price Tribunal and the members are part-time appointees. However, the Examiner has various other extensive administrative responsibilities covering distribution and price-control in the Department of Industries and Commerce. And for staff he has only. one executive officer and three investigating oEcers occupied full time on trade practices. These four are the hard core of the New Zealand offensive

134 THE ECONOMIC RECORD JUNE

against restrictions of competition. A small force indeed. Unfortunate- ly, a large part of the time and energies of these officers tends to be devoted to following up complaints to discover whether or not they are of some substance. And, so far, rather too little effort is given to the important task of preparing the evidence for cases which the Trade Practices division puts before the Commission.

Despite an administration which operates on a shoe-string, there is some reason f o r believing that the results of the legislation are significant. Over a period of three years to the end of 1962 more than 250 investigations were initiated by the Examiner. Of these about two- thirds turned out to be based on incorrect information, or were not of s d c i e n t economic importance to justify continued investigation. Tak- ing the end of this period as a reference point, the following facts indicate some of the accomplishments of the Act.

Some 22 substantial cases were under investigation ; that is, ewes likely to result in an inquiry before the Commission. These included, for example, complaints on the identical prices of hormone weed- killers, the refusal to extend to a co-operative drug-house the right to purchase at wholesale rates, collusive tendering arrangements among master builders, price-fixing by wholesale fish-merchants, collective resale price maintenance on T.V. sets, various refusals to admit firms to membership of wholesale associations and the advantages thereof, preventing a reseller from obtaining plumbing supplies at wholesale rates, price-fixing of an asbestos roofing material, etc. etc. Three further investigations (the retailing of toys, the distribution of bread, the refusal of a drug wholesaler to supply a complete line of drugs to certain firms) were completed and awaiting the jurisdiction of the Commission. Two inquiries were completed by the Commission, but decisions not then delivered. Finally, eleven trade practices had received decisions and, in some cases a subsequent determination by the Appeal Authority.

Of the eleven cases which have received jurisdiction, the following results are interesting. Three ceased operation in the course and as the result of the Commission’s hearing : a collusive tendering arrangement on glazing contracts ; price-fixing by wire mattress manufacturers and price-fixing among gramophone record suppliers. A further six had orders made against them to discontinue o r modify their practices subsequent to the hearing. These were : resale price arrangements on grocery lines (after three appeals) j a price agreement on hairdressing (after appeal) ; a price agreement on wire-netting (after appeal) ; a price agreement on aerated waters; a minimum price scale among New Zealand funeral undertakers together with understandings relat- ing to contracts with hospitals, with charitable institutions and the armed forces (determined by a consent order) ; and a price and exclusive dealing arrangement on electric lamps. In m e case the Commission refused to make an order where a timber firm selling plumbers goods was excluded from a wholesale plumbers’ association and certain benefits thereof. Finally, in only m e case, the price agreements and discounting arrangements of New Zealand booksellers, the order of

1963 RESTRICTIONS OF COMPETITION 135 the Commission to discontinue the arrangements was reversed on appeal.3

Altogether, three years work has put thirty-six restrictive arrangements under investigation and inquiry by the machinery of the Act. This is not a startling number but it should be borne in mind that each case which the Examiner succeeds in bringing before the Commission requires careful preparation of material and arrangement of witnesses. Also, each of these early cases has precedent value which, in the course of time, will help expedite future cases before the Commission. Further, it should be noted that a much larger number, between 70-80 practices perhaps, were withdrawn or modified t o remove objectionable characteristics a t some point during investigation procedures on the part of the Examiner and his staff. These cases, therefore, never reached the stage of inquiry. Potential respondents prefer to take this course, very often, in preference to risking an appearance before the commission ; others are persuaded OP encouraged by the investigating ofleers to abandon their practices. There is thus an important enforcement effect cohcealed in the machinery of the Act.

Finally there is the general “sanitation” effect which the machinery of the Act has on the business community. Potential respondents take note of the results of the various hearings and adjust business practices to avoid future conflict with the Act. An accumula- tion of adverse decisions will, at some critical stage in the operation of any Act of this type, bring into effect such self-enforcement. Whether the New Zealand legislation is approaching or has encountered this stage is not easy t o assess. However, it seems reasonable to predict that the knowledge of a series of adverse decisions, such as those enumerated, will not take long to permeate through the relatively small New Zealand business community and stimulate corresponding ad- justments in behaviour. The official view is that a perceptible change in this direction is now taking place among business people.‘

I I I The New Zealand legislation seems to show that, on the basis of a

straightforward piece of legislation and despite a slim budget, some moderate achievement in controlling restrictions of competition is possible. However, the Act may well be too simple in structure ; and its long-term success is prejudiced by certain defects which carry within them the seeds of future difficulty. (i) The first of these is the provision for the Trade Practices Com-

3Note that all of these agreements are collective agreements. So far no bi- lateral agreements between two parties have been reviewed; nor have any rnono- polies been examined.

4 However, there are also various discouraging factors at work. The National Party, the government now in power, is not especially sympathetic to the legislation. Consequently, as well as suffering from an inadequate establishment of investigation and inquiry officers, the Examiner and Commission receive no moral support from the Government, For this reason they find it expedient to avoid, for the present, contentious issues on trade practices which may bring them into conflict with important interests-for example, insurance premium rates and real estate business arrangements.


mission to exercise the powers of the Price Tribunal and apply price control where “it is of the opinion” that price control is in the public interest. So far the Commission has made only one order and in general seems disposed to avoid Using this power, although presumably price control could be useful in controlling a complete or partial monopoly were such a case to arrive on the list. However, the very existence of a power to control prices in the same Act which seeks to encourage competition, particularly “free price competition”, provides a strange contrast. This legislation, to be properly effective, should have in some degree the support or at least the acquiescence of a competition- minded business community. But even the fairest-minded business man must k d difficulty in giving much support to an Act which is itself a price-fixing authority. Price control may be necessary to the New Zealand economy, but at least it could be discreetly segregated from restrictive practices both in legislation and administration. (ii) The provision of an appeal authority in this type of Act probably is a mistake. Indeed, this provision appears to have been no part of the original draft and came into the Act only at the third reading before Parliament as the result of pressure from business interests. They, presumably, expected an appeal authority to exercise a con- servative influence. As well as being expensive it is also illogical to provide two quasi-judicial examinations. In restrictive practices cases, interpretations of the facts (sometimes very complex sets of facts) to establish what type of restrictive agreement and/or what degree of restrictive activity shall be prohibited constitutes the essential function of the tribunal. If the appeal authority is broadly in agreement with the main tribunal then he is redundant. If he takes a “tougher” line- pushing the boundary of competitive behaviour closer to the ideal- then no appeals will be made by business men or trade associations; and again he is redundant. But if he takes a “softer” line there will be a long succession of appeals in which his determinations will conflict with the decisions of the Commission. One likely result would be that the appeal authority and not the Commission would become the main interpretive authority. In the interests of consistency and certainty-and to avoid discord-it is desirable to have only one quasi- judicial authority in the Act.6 (iii) The third defect is the most serious. The nature of the tests which the tribunal is expected to apply is insuBciently defined. Two elements in the Act suggest that the Commission has discretion; but unfortunately they do not indicate how this discretion should be exercised. Section 19(1) states that the Commission may make an order directing the termination of a restrictive agreement. But it is not made clear in what circumstances ’it absolves itself from this duty-whether on grounds of reasonableness, lack of economic impor-

6In this connection it is worth making the point that above all the Commis- sioners must be persons of real ability and independence of mind. This practical point is of greater importance than any other single consideration concerning tribunal arrangements. An intelligent objective tribunal clearly determined to establish a consistent body of case law will make any piece of iegislation operate efficiently and will secure the co-operation of appeal authorities.

1963 RESTRICTIONS OF COXPETITION 137 tance, good intent, etc. Section 20, entitled misleadingly “Trade practices deemed contrary to the public interest”, states that a trade practice operates contrary to the public interest only if costs, prices and profits are thereby increased unreasonably; or if competition is limited unreasonably. However, what characterizes a reasonable practice is left to the imagination. True, it is impossible to provide for every little circumstance in this field. On the other hand, the legislators can, and should, lay down where the balance of advantage between competition and restriction is thought to lie for the purposes of the New Zealand economy. There is a value judgement here that no legislature should avoid. We may take as example, on the one hand, the Anti-Trust code of the U.S.A. In a development of case law there was evolved the position that most restrictive practices (price-fixing, tied contracts, exclusive dealing and discriminatory rebates) are per se offences- that is, automatically subject to prohibitions under criminal law wherever found regardless of any ameliorating circumstances. This position, although extreme, is clear and unequivocal and gives firm direction. A less dogmatic and more flexible procedure is provided by the British Act. In the key Section 21, although it is provided that all agreements or arrangements to restrict competition are deemed to operate against the public interest, various escape routes are also provided which per- mit the continuance of the restrictive practices if the Court “is satisfied” that they assist exports, prevent regional unemployment, are required to fight monopolist suppliers, etc. The most important of these escape routes requires that the practice provide “a specific and substantial advantage to the public” in order to avoid prohibition. Thus the presumption of the British Act is firmly in favour of competition ; and there is an onus on those who operate privately-arranged restrictive practices to prove that their arrangements are in some substantial sense superior to the public interest dictum that competition should prevail. On the other hand the possibility of exemption where it is clear that the public interest (i.e. the public as consumers, producers, etc.) can benefit is firmly indicated.

IV The price control defect is unlikely to have anything more than

nuisance value so long as this provision of the Act remains dormant. The same cannot be said of the two remaining weaknesses. Indeed, one recent case, an inquiry by the Commission into The Sale of Books by The Associated Booksellers of New Zealand (24th Nov. 1961) reveals the extent to which each of them carry the seed of fundamental discord in the operation of the Act.

The Associated Booksellers of New Zealand have an agreement covering all imported books, to observe fixed published prices as indicated in a schedule issued by the Association, to observe certain discounts for bulk buyers such as libraries, universities and schools, to hold “sales” of books only once per annum and with a maximum cut rate of 25 per cent off the published price, etc. etc. The facts of this restrictive agreement were not disputed before the Commission. On the


contrary, they were persuasively and articulately argued in a well- prepared case to show #at they were only too correct. The evidence made clear that the agreement had the full support of practically all booksellers in New Zealand and that it accounted for 90 per cent at least of all books sold, thus effectively eliminating price competition in books other than during sales. What the Association relied upon was not a denial, but rather the assertion that the agreement conferred a real benefit on the public; and that consequently the Commission should refrain from making any order discontinuing the agreement. It will be observed that the case for the respondent rested on three elements: (i) that the agreement in question did lzot “unreasonably re- duce or limit competition” as specified in Section 20(1)C; (ii) that the agreement operated “in the public interest” bearing in mind all the relevant circumstances; and (iii) the Act, in giving discretion to withhold an order, had in mind precisely this kind of situation.

To be brief on the results of the hearing. The Commission resisted the Association’s plea by taking a fairly literal interpretation of the Act. And certainly a plain reading of the main wording of the Act seems to indicate that the Commission was on solid ground. It clearly thought so. Judged by the terseness of the language the Commission felt no compulsion to go into great detail, and legal circumlocution was remarkable only for its absence. These bold statements sum up the Commission’s approach. First, since 90 per cent of all price competition was eliminated in retail book sales and sales to bulk buyers, the Commission felt it was circumscribed by the words of the Act to see this as an “unreasonable ” reduction of cornpetition. (Past decisions and determinations on appeal also supported this view.) Second, it was “neither required nor enabled to cast up a balance sheet” of detriment and advantage to ascertain the public interest as was claimed by the respondent’s counsel. I t was not the Commission’s duty “ to take a broad look at the whole business of boolrselling and say that by and large the public are being dealt with fairly or unfairly”. It is asked only to inquire into and ascertain the presence of unreasonable restrictions of competition. Third, it clearly had a duty to make an order since the Act did not extend discretion to withhold an order once satisfied that competition was reduced. The permissive power to make orders, the Commission suggested, was made available in the Act only to avoid giving decisions in situations where they were not required to enforce the discontinuance of agreements or where an order would be absurd. Forthwith, an order was made discontinuing the agreement and requiring the Association to revoke its relevant regulations and by- laws.

However, in this case the Appeal Authority, Judge Dalglish, dif- fered’ considerably from the Commission and favoured the views of the counsel for the respondent. He did so on two grounds: (i) the general interpretation of the powers and responsibilities which the Act conferred upon the Commission ; and (ii) the circumstances surround- ing this particular trade practice.

On the interpretation of the Act it was Judge Dalglish’s opinion

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1963 RESTRICTIONS OF COXPETITION 139

that section 20 left the question of what trade practices operated against the public interest very much a t the discretion of the Commis- sion : the legislature had ‘(not declared positively” which practices are repugnant. Section 20 indicated only that prices and profits had to be unreasonably high or competition unreasonably reduced ; and the term “unreasonably”, he held, must be construed bearing in mind all the circumstances of the case. There “must be a balancing of the various factors from the point of view of the public interest before a determination can be made that a trade practice is contrary to the public interest”. The kinds of factors the Appeal Authority had in mind (which he indicated had been stressed in previous determinations) were the reasonableness of set prices, services offered with the sale of goods, the breadth of selection offered to the consumer, the dis- play of stocks, the way in which a trade practice had been operated in the past and therefore may be expected to operate in the future, etc. Consequently it was not mandatory on the Commission to hold a trade practice contrary to the public interest even when it was established that prices or profits were high, competition reduced, etc. The decision of the Commission could still have regard for other, ameliorating, circumstances. In short, the Appeal Authority, in contrast t o the Commission, was unambiguously of the opinion that a balance sheet of detriment and advantage must be struck.

The Appeal Authority then went on to give his own determination of the Booksellers of New Zealand case based on this “balance sheet” approach to the public interest. Clearly he was influenced by the special importance of books. They were merchandise; but “very dif- ferent from most types of merchandise” in that they provided for an infinite variety of demands and tastes and were an important source of new ideas and thoughts. (“I t is in books that they find their per- manent form and it is through books that they are disseminated”). He accepted the evidence put forward as to the special characteristics of the book trade. Each year British publishers alone provided 17,000 new titles for sale; and at any given time some 300,000 titles are avaifable for sale. A bookseller cannot stock all of these. But in the interests of quality, service and good taste it is desirable that most booksellers hold a large fraction of the total. He was satisfied that New Zealand booksellers did well by the public in this respect. To conserve this service “there must be a sense of stability in the trade”. To hold titles of which only 2-3 copies are likely to be sold requires a nice dis- crimination and a great deal of experience. To hold a satisfactory range of such titles requires some degree of certainty which can be assisted materially by the absence of price competition. Price cornpetition can lead to the reduction of overall margins and an unwilling- ness to invest capital in a highly speculative type of stockholding. Consequently, the abrogation of the price agreement could well result in a reduction in the range of titles, the quality of service, etc. Special- ist booksellers would retire from main street sites to back street premises; they would carry a smaller number of titles; conceivably some would go out of business altogether. Further, books of scholarship


and some specialist Lines, at present subsidized by more quickly moving Lines, might rise in price to compensate for the smaller turnover of this type of bookseller? In addition to this evidence on the advantages of continuing the agreement the Authority was satisfied that the prices set were reasonable.

Consequently, the Appeal Authority stated that, “balancing the possible benefits to be derived by the public from a reduction in prices following the termination of the trade practice . . . against the likely detriments. . . , it is my view that so long as the present conditions in the bookselling trade continue to exist, the public interest is better served by the continuance of the trade practice than it would by termination”. And he forthwith allowed the appeal and thus reversed the decision of the C~mmission.~

The booksellers case thus exhibits a sharp divergence of opinion between Commission and Appeal Authority. The differences in interpretation could scarcely be more extreme. It seems safe to say, however, that neither is wholly right or wholly wrong. The true culprit is an Act which provided for two tribunals instead of one; and, more important, gave inadequate instruction as to the proper interpretation of the public interest. The future of the enactment is now rather ob- scure. Only one point now seems certain: most trade associations can be expected to resort t o the Appeal Authority in an attempt to secure a more lenient interpretation of its agreement based on a balancing-up of advantage and detriment. They will interpret the booksellers determination as having changed the bias of the Act, and the initiative in matters of interpretation will now, for a time, pass into the hands of the Appeal Authority. Whether this Authority wi l l retreat from the position created by the Booksellers case remains to be seen. Theo- retically he has laid the Act wide open to a range of claims based on

8 In evidence the Net Book Agreement of the British bookselling trade was in- stanced as having been established to offset precisely these conditions which existed prior to 1890. It is of interest that the book selected to initiate this famous restrictive practice was Alfred Marshall’s Principles of Economics, 1st ed. 1890. Apparently this step was taken with the express approval of Marshall himseif. The book therefore occupies a position in the history of the publishing trade almost as important as its place in the history of economic science. (See J. M. Keynes Essays in Biography, 1933, p. 220 and Sir F. Macmillan, Net Book Agreement, 1899, pp. 14-16.)

7 It is of interest that some months later a similar decision w a s handed down in the Restrictive Practices Court in London. The provisions of the British Act make this outcome more likely than for the New Zealand Act. Giving judgement, Mr. Justice Buckley said: “Inevitably we think the effects (of price competition) would be most severe in the higher reaches of literature.” And he had accepted the same type of evidence as in the New Zealand caso--that price competition created smaller holdings of stock, reduced turnover, gave higher retail margins, higher prices and a smaller choice for the public.

Essentially, what prevailed in both cases was a value judgement favouring the profession of quality bookselling-the cause of literacy and culture overcame prosaic considerations of economic and material advantagc Aesthetically such a decision is, of course, welcome. Unfortunately the cause of justice may not be so well served and could become confused. Had the-same articulate, dedicated witnesses been selling good quality fish and dups or hatrcpts there is little doubt.they would have been unsuccessful despite the fact that quality bookselling is at least as secure as these two trades and, as the New Zealand evidence showed, probably more secure.

1963 RESTRICTIONS OF’ COMPETITION 141

value judgements of matters such as “reasonable ” pricing policies, “stability” in retail trade, the right of distributors to earn a secure living, the quality of service accompanying the sale of goods, etc. What kind of arguments and value-judgement will be found accept- able, and precisely where the boundary line between advantage and detriment will be drawn is now at the discretion of one individual.

There is a lesson here for legislators when the proposed new legislation oh restrictive practices and monopolies comes before the Federal Parliament in Australia.

University of New Bout72 Wales. ~ L E X HUNTER

restrictions of competition in new zealand

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