Competition in small markets

Another for the "New Zealand's Fixed Costs Matter" file: Aaron Schiff posts on the relative lack of competition in New Zealand. Where inefficient firms are driven from the market in other places, New Zealand has a long tail of pretty unproductive outfits.

Roger Procter has dug into the stats a bit deeper and found that some New Zealand firms have very high productivity but there is a very long tail of unproductive firms that are able to survive.

He notes that the ratio of the productivity of the firm at the 90th percentile (i.e. near the top) to the 10th percentile (bottom) of the productivity distribution in New Zealand industries is around nine.

In other words, a firm that is nine times less productive than the best in the same industry can survive in New Zealand. In Denmark, for example, the ratio is reported to be around 1.6 to 3.5. Danish firms that can’t achieve at least a quarter of the productivity of the best firms get killed off quickly.

Roger argues, and I agree, that lack of competition is a major reason for this. Competition forces firms to increase productivity and kills off those that don’t.

Aaron agrees with Procter's assessment that New Zealand's low level of international trade hurts things, then makes a rather interesting argument for import-led growth.

We’re stuck in a low-competition, low-productivity, low-trade equilibrium. New Zealand domestic markets are too small to support enough intense competition to get us out of this state. Exporting is hard work and not enough firms are motivated (or forced) to drag the economy up the productivity mountain.

On the other hand, if low cost imports from productive foreign firms start coming in, maybe NZ firms will be forced to improve their game, or get killed off.

I realise this is a harsh “stick” type strategy, rather than an export “carrot”. Exports create jobs and imports can destroy them, at least temporarily. Maybe I’m getting soft in my old age but there might need to be assistance for some workers during the transition. But given the dire productivity stats, maybe a strong shock to the system is required.

There's not a lot that we can do to make New Zealand even more open to imports: tariffs are very low, GST rules around imports currently make sense, and we see no need for the New Zealand government to enforce at the border any exclusive dealing arrangements that foreign manufacturers have seen fit to make with New Zealand retailers. But getting rid of our ability to run parallel importing, or doing dumb things imposing GST on low-value imports, or forcing a policy preference for New Zealand Made products, would do harm.

Standards shopping

Small jurisdictions have a hard time covering all the bases. Developing regulations is expensive. If you're determined to have "My Jurisdiction" versions of each and every regulation that could be out there, you're either going to have a ridiculously expensive regulatory regime or you're going to stymie development in niche markets.

Yesterday I pointed to the problems facing Manitoba's Harborside Farms. They want to develop traditional Italian cured meats in small artisanal batches for sale in Manitoba. But they're forbidden from doing it because, unless you can prove your product meets Manitoba regulations, you can't sell it. And it's a sufficiently small market that Manitoba never got around to writing any regulations that would allow them to operate.

Leaving aside for now the very sensible alternative of simply allowing standard consumer protection legislation and liability solve this kind of issue, there's an obvious alternative. Let them produce their product under the Italian regulations, then have Manitoba inspectors verify that they've met the Italian standard.

The problem is very similar to one facing importers of niche-market DVDs in New Zealand. How? You can't sell DVDs here unless you get them rated by the Censor's Office. And they don't rate DVDs for free. If you make a buck a piece on the sale, you'd still need to ship a thousand units in a country of four million people (and change) to cover just the ratings cost.

The solution there is the same as that which should obtain for Harborside. Allow import of films that have been rated by the Australians, or the Canadians, or the Brits, or the Americans, or some other set of trusted countries, and simply require that the ratings sticker note the country which issued the rating.

This kind of solution can be applied across rather a few thin-market small-jurisdiction scenarios. Why does every small area have to reinvent every wheel?

Take it a step further. If Manitobans can import Italian-made products meeting Italian standards, why shouldn't they be able to produce things in Manitoba to Italian specifications, even if a Manitoba regulation does exist? Simply require that the product be labelled as meeting Italy's standards.

Maybe it wouldn't work for everything. A building that meets Canadian building standards instead of New Zealand standards would be better than a New Zealand standard building, unless there's an earthquake. But again, it isn't hard to imagine strange niche construction areas where there might not be domestic specifications, but where the Japanese standards would work a treat.

The fixed costs of developing regulations aren't trivial. Why not allow a bit of forum shopping to spread the burden?

Labelling and non-tariff barriers

David Farrar asks why we shouldn't mandate nutritional labelling on alcoholic beverages. People may well forget that alcohol has caloric content; providing information has value.

Here's the case against them.

First, it is fairly easy for large producers of homogeneous products to add nutritional labels to their products. The one-off testing and label re-jigging is a fixed cost that is spread across a very large number of units. But, suppose you're a craft brewer and you get a notion to make a seasonal autumnal ale with pumpkin in it. It'll taste good and sell well as a small batch. But after you make a batch, you're going to have to send a bottle to the lab for testing, wait for the results, and attach the appropriate nutritional label to your new brew. This will add maybe a fortnight or more to your brewing cycle on the first batch of the product and cost you a bit in testing. You can't spread those costs over many units because you're not making many units. And heaven help you if you decide you should double the pumpkin in the next batch.

Second, it's a non-tariff barrier against imported products made in countries that do not have labelling requirements. When New Zealand implemented labelling requirements for standard drinks a few years ago, the shop where I bought my oddball foreign grey market craft beers had to print off little labels for each bottle of the one-offs that they sold, converting the percent alcohol content into a number of standard drinks. This added to the cost of foreign craft beer relative to domestic or mass market product.

You will rightly note that this is also an argument against mandatory nutritional labelling requirements on any small volume products.

If there's any steam behind nutritional labelling requirements, there are things we can do to make it less awful.

The easiest labelling requirement would only require that producers give a general range of calories contained per serving of the product based on the alcohol content alone. A gram of alcohol has seven calories, so a standard drink contains 70 calories. Most products could then simply say something like:

"One serving of this product provides 50-100 calories through its alcohol content."

If you really want to know the protein, carbohydrate, sugar and salt content for the drinks, carve out an exemption for small-batch products and for imported products. 

I really love the oddball small-batch beers that turn up in New Zealand, whether made domestically or imported. Anything that adds fixed costs helps to kill that product range. New Zealand has enough problems with fixed costs without inventing more of them.

Stupid NZ Fixed Costs

Tyler Cowen warned me that New Zealand would teach me about fixed costs.

Today's lessons: pens. Consequent to the new environment of heightened fiscal restraint at Canterbury, I have found that the Uniball Signo 207 pens I've preferred are $5 each via the University's preferred supplier.*

The same pens at Amazon are US$12.59 for a dozen with free shipping within the US. That's about $1.31 per pen. The cheapest online NZ price I've been able to find is $3. Freight brings it up to $3.50 - I'll leave GST off because Amazon doesn't charge it and because the University doesn't pay GST on business inputs. A $2.19 per pen NZ premium.

Prezoom charges $19.50 to on-ship a 500 gram package from the US. The pen weighs 10 grams, so a dozen comes in well under the 500 gram limit. So a dozen pens, that go from Amazon to Prezoom then on to me in NZ across the ocean arrives at my desk for $35.25; the same dozen shipped from New Zealand is $42. The hassles and delays are not worth $7. If I needed 50 pens, the most that would fit in the 500 gram pack, I'd save $90. But who needs 50 pens? And how many pens' weight would be in the packaging? Finally, the transactions costs of trying to convince University admin that it's worthwhile ordering case lots of pens in from the States seem insurmountable, especially if they already make it a hassle to try and use anybody other than the preferred supplier within NZ. [see update, below]

New Zealand... it's the little things that irritate. I'm not saying that NZ retailers are earning any kind of excess profit here: warehousing and logistics in a small country are just more expensive, and keeping any kind of inventory in a small market also just kills. It's simply an irritating fact of the world.

I'll tell you one thing though... next request to borrow a pen gets met with harsh words.

 


* UPDATE: that's the catalogue price. The departmental administrator tells me the University gets a pretty substantial discount against that price. It's still reasonably above the US price even counting shipping from the US, but below the cheapest online price. It's still cheaper to get a 50 pen lot shipped here from the States than to buy them from the University's preferred supplier.