The Interaction Between Contract and Competition Law

This paper provides some economic perspectives on the interaction between contract law and competition (antitrust) law. First it surveys some relevant aspects of the literature and provides some specific examples relating to:(i) The theory and development of contract enforcement institutions(ii) Vertical contractual relationships between firms at different levels in the production and supply chain; and (iii) The role of contracts in enabling specialised investments to take place by limiting opportunism spreading risks and assigning property rights.Second it considers the lessons that developing countries may draw from this literature as they consider the sequencing of reforms relating to contract and competition law and the economic implications of the commitment of resources to developing Western-style legal frameworks in each area of law. Most contractual relationships raise questions about the balance between the efficiency gains from ex ante specification of rights and entitlements and the potential reduction in social welfare that may come from the exclusion of other parties from the relationship and the resources committed to it. By focusing only on the detriment side of the welfare ledger especially where the resources committed or the market shares of the contracting parties are large in the context of the relevant markets enforcement of competition law may sometimes reduce welfare by overturning or undermining contracts that have large efficiency benefits but nonetheless may have some lesser anti-competitive detriment. Further setting aside contracts on anti-competitive grounds that have been on foot for a significant term due to changed circumstances that were unforeseen at the time of contracting imposes external costs on the wider economy

The Performance Based Research Fund and the Benefits of Competition Between Universities

Until the late 1980s competition between universities was limited and the allocation of funding by the University Grants Committee created a system that was more akin to central planning than to a competitive market. Following the advice of the Treasury the Labour government of the late 1980s and the National government of the early 1990s increasingly encouraged universities to compete for students. From 2000 onwards the Labour-led government began to question the value of competition between public institutions such as universities and to seek ways to minimise competitive duplication of courses and research programmes (Associate Minister of Education 2000; Watkin 2000). Despite the position of the Labour-led governments since 2000 competition between universities over 2000-06 has been perhaps more vigorous than it has ever been. This is because competition to attract students continues and a range of schemes such as Partnerships for Excellence Centres of Research Excellence and the Performance-Based Research Fund (PBRF) have encouraged universities to enter into vigorous competition for the limited funds available.2 The vigour of the competition is also a result of changes in the international environment. For all sectors including higher education both the level of competition and the opportunities for benefit have been increased by the declining cost of travel the improvement in standard of living of formerly low-income countries the growing importance of the service sector and the dramatic fall in the costs of communication including those relating to modes of learning.3 The government has actively promoted 'export education' as a strategy for the tertiary sector which has the effect of placing New Zealand tertiary institutions in direct competition with universities in Australia Canada the United States of America (US) the United Kingdom (UK) Europe and (increasingly) Singapore Hong Kong and Thailand. Even without export education the universities now need to compete with the best universities in Australia to retain the best domestic students in New Zealand let alone attract students from other countries

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)

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

Competitive and Centrally Planned Decision Making in the Electricity Industry

This supplement was published in May of 2003 and discusses: The Electricity IndustryPrices in the Electricity MarketCentral planning applied to electricit

Contracting, Incentives for Breach, and the Impact of Competition

In this paper we provide an economic perspective on the application of competition law to contracts

Common Elements in the Governance of Deregulated Electricity Markets, Telecommunications Market and Payment Systems

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

Accident Compensation: The Role of Incentive Consumer Choice and Competition

With the exception of the introduction of experience-rated premiums the incorporation of the term "insurance" in the title of the 1992 legislation and the short-lived reforms to the structure of workplace accident compensation in 1998 New Zealand's accident compensation scheme has continued to adhere to the principles laid down in the Woodhouse Report. In particular public monopoly provision comprehensive coverage and mandatory purchase separation from other segments of the market for personal risk (where private insurance companies operate) and cross-subsidies between different categories of insured risk were explicit components of Woodhouse's conception of the scheme. Retention of these aspects of the scheme has been justified by the claim that accident compensation is a component of the social welfare net rather than an insurance scheme and that the social welfare approach is superior from the point of view of those covered by the scheme.This paper reviews three of the economic issues raised by the structure of our accident compensation scheme: the role of incentives the relationship with the broader insurance market and the costs of government monopoly provision. We use our analysis of these issues to consider the veracity of the claim that potential accident victims in New Zealand benefit from our adherence to the principles laid out by the Woodhouse Report. We conclude that the current structure of our scheme creates perverse incentives that substantially reduce its efficiency while also denying those covered by the scheme the potential benefits that would come from consumer choice among competing providers offering a broader range of risk products

An Analysis of the Reserve Bank of New Zealand's Policy on the Incorporation of Foreign Banks

In this study we analyse the objectives underlying the Reserve Bank's policy ofmandatory local incorporation and provide an assessment of the effectiveness of the policy in meeting these objectives. We review both the legal and regulatory framework within which branches of foreign banks now operate in New Zealand and we review the international literature on the costs benefits and efficiency tradeoffs associated with a policy of mandatory local incorporation. We consider the consistency of mandatory local incorporation with the Reserve Bank's current approach to the regulation of financial institutions and we show that the governance structure that is imposed on New Zealand banks by mandatory local incorporation is likely to reduce the efficiency of their operations. Finally we examine a number of approaches that may meet the current concerns of the RBNZ at lower cost than a policy of mandatory local incorporation

The Efficiency of Contractual Arrangements in Private Agricultural Product Markets

Co-operatives provide a vehicle for the vertical integration of production andprocessing in agriculture. The producers provide capital for and control theprocessing entity so that their interests are aligned. Returns to producers bundle together the commodity price and the return from the capital invested in processing. Many of the agricultural product markets in New Zealand operate within this cooperative structure and in the case of the dairy industry it has been required by statute. The forestry wine and processed vegetable industries are notable exceptions in that these industries use contracts between producers and processors as an alternative to vertical integration via co-operatives.In this paper we use examples of contracts between producers and processors in the forestry wine and processed vegetable markets to consider the extent to which contracts may provide efficient vehicles for the alignment of interests between producers and processors in agricultural markets. We consider the ways in which these contracts: Minimise transaction costs; Use incentive mechanisms and monitoring to limit opportunism; Allocate risk; Facilitate investment in specific assets; and Allocate property rights.We assess the implications of the annual crop cycles and perishability of grapes and vegetables with the longer crop cycles of forestry. We conclude that contracts appear to be viable alternatives to co-operative structures and that this is true even in the market for perishable agricultural products