National Competition Policy

Stephen P. King∗

Economics Program

RSSS

Australian National University

Canberra, ACT, 0200.

National competition policy is having a major effect on Australian industry. The

Hilmer committee recommendations on infrastructure access, competitive neutrality,
restructuring of public enterprises and legislative review have been accepted by all
Australian governments. The underlying economic principles, however, are not
necessarily reflected in the reforms. The process of negotiated infrastructure access
established under national competition policy may lead to monopoly rather than
competitive pricing. Structural reforms of government business enterprises have
ignored the benefits of integration and the relevant market characteristics. Legislative
review has resulted in considerable political controversy. In some cases, competition
policy can be improved by simple amendments to legislation while in other cases a
clearer understanding of the relevant trade-offs may improve the reform process.

∗
I would like to thank Peter Forsyth, John Freebairn, Joshua Gans, Rod Maddock and John
Quiggin for their helpful comments on an earlier draft of this paper.
 National Competition Policy 1

1 Introduction

National competition policy is having a major effect on Australian industry. Cur-

rent changes in gas, electricity, water, transport, telecommunications, and a host
of other major infrastructure industries are based on the competition policy re-
forms recommended by the Hilmer committee. However, the underlying eco-
nomics behind these reforms is often unclear or misunderstood. The aim of this
paper is to both summarize the major reforms that have been gathered together
under national competition policy and to critically analyze the economics behind
these reforms.

2 The Hilmer report and COAG reforms

Part IV of the Trade Practices Act 1974 has been the cornerstone of Australian
competition policy for more than two decades and has led to major changes
in Australian business behavior (For example, see Round 1995). The scope for
applying the Trade Practices Act however has been limited by constitutional
factors, the legal doctrine of ‘the shield of the crown’, and a variety of (often
state based) exemptions.1
In 1992 the Keating labor government established a Committee of Inquiry
(the Hilmer committee) to report on four principles of competition policy. The
commonwealth, state and territory governments had agreed to these principles,
which dealt with anticompetitive conduct against the public interest, universal-
ity and uniformity of competition rules, and procedures to evaluate and review
claims of public benefit from anticompetitive conduct. The committee reported
to the prime minister in August 1993. The Hilmer report focussed on three main
areas; the application of existing rules under Part IV of the Act, new regulatory
rules, and the administrative structures necessary to implement the recommended
changes.
The Hilmer committee recommended an number of changes to Part IV of the
1
The Hilmer report notes twelve sectors and areas of activity that were subject to special
treatment under the Act in 1993, including government owned businesses, professions and other
unincorporated businesses. See Commonwealth af Australia (1993, p.123-4).
 National Competition Policy 2

Trade Practices Act. For example, the committee recommended that section 49
of the Act, prohibiting anticompetitive price discrimination, should be repealed
(recommendation 4.2). They recommended extending the application of the Act
to government enterprises engaged in commercial activity in competition with
other businesses (recommendation 5.7 and p.126) and all non-incorporated busi-
nesses (p.139), but also recommended retaining a number of statutory exemptions
under the Trade Practices Act, including the exclusion of actions relating to labor
contracts (recommendation 6.1).
The committee considered five additional reforms that were then outside the
Trade Practices Act. These involved procedures to review and evaluate regulatory
restrictions on competition, the structural reform of public monopolies through
vertical and horizontal separation and divestiture, the creation of a third-party
access regime for essential facilities, oversight to prevent monopoly pricing, and
principles of competitive neutrality between government and private businesses.
Finally, the committee made a series of administrative recommendations, in-
cluding the formation of a new National Competition Council (NCC) to advise
governments on competition issues.
The major recommendations of the Hilmer report were accepted by the Coun-
cil of Australian Governments at its Hobart meeting on 25 February 1994. On
April 11, 1995, the prime minister and the leaders of all state and territory
governments signed the Competition Principles Agreement (CPA), which is de-
signed to implement the key national recommendations from the Hilmer report.
The agreement covers competitive neutrality, prices oversight, legislative review
and infrastructure access. At the same time, the prime minister and state and
territory leaders signed the Conduct Code Agreement and the Agreement to Im-
plement the National Competition Policy and Related Reforms (Agreement to
Implement). The Conduct Code Agreement requires state and territory govern-
ments to pass relevant legislation in order to extend the operation of Part IV
of the Trade Practices Act nationally to all relevant persons. The Agreement
to Implement sets out payments from the commonwealth to participating states
based on progress in competition policy reforms. The conditions for payment
 National Competition Policy 3

specifically refer to reform in electricity, gas, water and road transport.2

In mid-1995 federal parliament passed the Competition Policy Reform Act
1995, modifying the Trade Practices Act in line with the Hilmer committee rec-
ommendations. Most notably, a new Part IIIA was added to the Trade Practices
Act, establishing procedures for access to relevant services. The Trade Prac-
tices Commission and the Prices Surveillance Authority were merged to form
the Australian Competition and Consumer Commission (ACCC). The NCC was
established in November 1995 and by the end of 1995 Victoria and New South
Wales had already enacted their own Competition Policy Reform Acts. All states
have now fulfilled their requirement under the Conduct Code Agreement to pass
legislation extending the coverage of Part IV of the Trade Practices Act and
significant progress has been made towards a national electricity market and
increased competition in gas.3

3 National competition policy and GBEs

National competition policy is having and will continue to have a significant effect
on the operation of government business enterprises (GBEs). In part, this policy
simply continues ongoing reforms. Corporatisation – the restructuring of the in-
ternal organization of a GBE to more closely mimic the structure and incentives
that characterize private firms – has been transforming the operations of both
state and federal GBEs since at least the mid-1980s.4 These reforms have been
motivated by the perceived poor performance of Australian GBEs in terms of pro-
ductivity and return on capital investment.5 Competitive neutrality formalizes
2
The three agreements together with agreements on related reforms are collected in Na-
tional Competition Council (1997a). Quiggin (1996b, p34) argues that the reform path has
side-stepped “popular disenchantment” by using intergovernmental agreements and opaque
legislation to remove the process from open political debate.
3
See National Competition Council (1996a).
4
Quiggin tends to bundle corporatisation together with the Hilmer reforms. While national
competition policy has a significant focus on making “government business enterprises more
like private firms” (Quiggin 1996a p160), particularly in terms of competitive neutrality, corpo-
ratisation policies in Australia precede the Hilmer recommendations by almost a decade. See
for example National Competition Council (1997b, p14, note 6).
5
See for example Steering Committee on National Performance Monitoring of Government
Trading Enterprises (1993). Forsyth (1992) reports on the progress of reforms in Australian
 National Competition Policy 4

and extends the corporatisation process. Paragraph 3.4.a of the CPA requires
that governments “where appropriate will adopt a corporatisation model” for
GBEs. The principle behind competitive neutrality, that “[g]overnment business
should not enjoy any net competitive advantage simply as a result of their pub-
lic sector ownership” (paragraph 3.1 of the CPA), means that GBEs should be
subject to similar, if not identical, regulations to private firms, should pay the
same taxes as private industry and should not receive the benefit of a lower cost
of capital from government ownership (paragraph 3.4.b of the CPA).
Corporatisation is often linked with other reforms, such as outsourcing by
competitive tender. It has also been used as a precursor to privatization in
Britain (Vickers and Yarrow, 1988, p.168) and in other countries (King 1995).
The benefits and costs both of contracting out and of privatization have received
substantial attention in Australia and overseas.6
The Hilmer reforms consider the introduction of competition rather than own-
ership. In this sense, national competition policy addresses neither privatization
nor contracting out, although some elements of competition policy potentially
may involve these issues. For example, paragraph 4.3 of the CPA lists issues
to be reviewed by a government before it “introduces competition to a market
traditionally supplied by a public monopoly, and before [it] privatizes a public
monopoly”.7
The structural reform requirements under national competition policy also, in
part, simply formalize existing trends in Australian public sector management.
Some of the requirements repeat elements of corporatisation, while others, such as
the separation of regulatory functions from the competitive operations of a GBE
(paragraph 4.2 of the CPA) reflect changes that have previously occurred, for
example, in telecommunications (See Commonwealth of Australia, 1993, p217).
However, the structural reform requirements go well beyond many previous re-
GBEs over the 1980s and early 1990s.
6
For examples of the debate on contracting out, see Domberger and Li (1995), Domberger,
Meadowcroft and Thompson (1986), Rimmer (1994), Borland (1994), Quiggin (1994). See also
Hart (1996). On privatization, see Kay and Thompson (1986), Armstrong, Cowan and Vickers
(1994) and Quiggin (1995).
7
See also National Competition Council (1997b).
 National Competition Policy 5

forms. The Hilmer committee considered structural reform, including horizontal

and vertical divestiture, as a substitute for more extensive regulatory intervention
(p221).
The access provisions of the CPA also alter the ground rules for large parts
of the public sector and for private infrastructure owners. For example, the first
request for access declaration under the new Part IIIA of the Trade Practices Act
involved the commonwealth department of employment, education, training and
youth affair’s computer network.8

4 Access and the essential facility problem

The Hilmer committee recognized that competition is not always desirable. For
example, if a final good or service is most efficiently produced using a ‘natural
monopoly’ technology then, by definition, competitive supply of that good or
service will be socially wasteful. In chapter eleven, the Hilmer report considers
the case of an essential input produced using a natural monopoly technology, and
recommends a system of regulated negotiations to address this essential facility
problem. These recommendations, with some important exceptions, form the
basis of the access principles in the CPA (clause 6) and of the new Part IIIA of
the Trade Practices Act.

4.1 What is an essential facility?

An essential facility involves two distinct characteristics.9 First, the facility must
involve a natural monopoly technology. In other words, at all relevant levels of
output it is more efficient (in terms of lower production costs) to have the output
supplied by a single producer than by more than one producer (see Panzar 1989
and Waterson 1984). For example, consider transporting coal via a railway line
from a mining area to a port. If rail services involve an initial outlay which
is invariant to throughput (for example the construction and some maintenance
8
The application was made by the Australian Union of Students. The NCC recommended
against declaration and the treasurer accepted this recommendation. See National Competition
Council (1996a).
9
See King and Maddock 1996a and 1996b.
 National Competition Policy 6

of the track) and a constant marginal cost per tonne of coal transported, and
all demand for transporting coal between the mining region and the port can
be met using a single line, then the rail services involve a natural monopoly
technology.10 It is always cheaper to transport all coal by a single railway line
than to use multiple railway lines.
Because ‘natural monopoly’ refers to a technology and not to a configuration
of firms, an industry with a natural monopoly technology will not necessarily
have a monopoly provider. In the example above, there could be two competing
railway companies transporting the coal even though creating duplicate railway
lines would be a waste of social resources. The existence of multiple facilities
does not prove that production does not have a natural monopoly technology.
Thus, the roll-out of two pay-TV cable networks in Sydney and Melbourne may
represent an example of wasteful facility duplication. Similarly, the existence of
only a single provider does not prove that technology must be ‘natural monopoly’,
particularly if there are barriers to competitive entry in the relevant industry.
The existence of a natural monopoly technology is an empirical question.
What is and is not a natural monopoly is likely to change over time as technol-
ogy changes and as demand shifts. For example it is unclear whether US local
telephone services currently involve a natural monopoly technology (see Albon,
Hardin and Dee (1997, ch.2) for a useful survey).
An essential facility involves more than just a natural monopoly technology.
In addition the good or service produced by the facility must be an input for
further production. If a natural monopoly facility produces only final goods or
services, then this may be a cause for concern. For example it may be desirable to
impose price regulation on a producer of final goods or services who uses a natural
monopoly technology.11 However, this is not an essential facility problem, but a
10
Freebairn, J. and Trace, K. (1992) consider rail freight of coal in Queensland and argue
that the technology can be approximated by a fixed cost and constant marginal cost.
11
There will be some circumstances where this is uneccessary. For example, if the industry
is perfectly or almost perfectly contestable or if there are only a small number of buyers of the
product who can directly negotiate with the producer. Martin (1993 chapter 11) reviews the
theoretical and empirical literature on contestability while King and Maddock (1996a p82-85)
consider negotiation.
 National Competition Policy 7

standard issue of market power. Further, natural monopoly production of final

goods or services may raise issues of industry stability that require regulatory
intervention (Spulber 1989 and Carlton and Perloff 1994) but again this differs
from the essential facility problem.
An essential facility must produce an input to further production that passes
two essentiality tests in addition to involving a natural monopoly technology. For
an input to be essential it must:

1. be used to manufacture a specific good or service and there must be no alter-

native input or process which enables a competitor to produce an equivalent
final good or service at a comparable cost; and

2. there must be no alternative, substitutable final good or service that can

be manufactured and sold at a comparable price without using that input.

To see the implications of these two essentiality tests, consider a factory that is
supplied by gas via a natural monopoly transmission/distribution system. If the
factory can easily switch from gas to another fuel source and the alternative fuel
is available at a comparable cost to gas then the gas transmission/distribution
system is not an essential facility. The system fails the first of the two tests of
essentiality.
Alternatively, consider rail transport. An urban rail network probably involves
a natural monopoly technology. Access to the rail network is also necessary
for any producer who wishes to provide urban rail passenger transport services.
However, it is unlikely that the rail network is an essential facility for passenger
transport as it fails the second of the two tests given above. There are a variety
of alternative forms of urban passenger transport, including private cars, taxis,
buses and trams, which successfully compete against rail transport.
As a comparison to the definition of an essential facility presented above, the
United States ‘essential facilities doctrine’ involves four elements. The essential
facility must be controlled by a monopolist. It must be impractical or unreason-
able for a competitor to duplicate the facility. Use of the facility must be denied
to the competitor. Finally, it must be feasible to provide access. In the European
 National Competition Policy 8

Union, essential facility issues can be dealt with under article 86 of the Treaty of
Rome. Facilities which have been considered essential by the courts in Europe
and/or the US include sporting stadiums, ATM networks, bus stations, airline
reservation systems, and some types of intellectual property. It is doubtful that
some of these would pass the two-stage essentiality test presented above.12

4.2 The essential facility problem and Part IIIA access

procedures
The owner of an essential facility can manipulate the vertical chain of production
to maximize his profits. This is obvious when the facility owner is vertically
integrated into the supply of relevant final goods or services and prevents any
potential final product competitors from buying the essential input. The owner
of the essential facility becomes a final product monopolist in this case. However,
neither downstream competition nor vertical separation will eliminate the ability
of an essential facility owner to seize substantial monopoly profits.
Consider, for example, the owner of an electricity transmission/distribution
network. Such a network is likely to involve a natural monopoly technology and,
given the lack of substitutes for electricity in a variety of domestic and commercial
uses, access to the transmission and distribution network will be essential to
compete in the electricity market.13 Competition, however, may be both feasible
and desirable at the upstream ‘generation’ stage and the downstream ‘retailing’
stage of electricity production. If each of these stages is highly competitive and
the network owner does not participate in generation or retailing, then he can
still seize monopoly profits by raising the price of access to his network. As the
price of access rises, so too will the competitive final market price for electricity.
By setting an appropriate access price the network owner can raise the retail
price of electricity to the monopoly level, with retail and generation competition
12
A useful summary of legal approaches to essential facilities in a variety of countries is
presented in OECD (1996). There are numerous articles on the US essential facilities doctrine,
including Areeda (1989) and Werden (1987).
13
While economists tend to use the word ‘market’ loosely, under trade practices law in Aus-
tralia there are well defined rules and precedents for market definition. See for example Brunt
(1990).
 National Competition Policy 9

guaranteeing that all monopoly profits are gained by the network owner.14
Even if competition is lacking in generation and/or retailing, the owner of
the essential network facility can still seize monopoly profits by using non-linear
access prices.15 For example, consider that retailing was monopolized but gen-
eration was highly competitive. The network owner could set an access tariff
which involved a marginal price equal to short-run marginal cost, and an upfront
fee. Setting a ‘cost reflective’ price for marginal network access means that the
monopoly retailer will face the true marginal economic cost of electricity. Com-
petition in generation will drive the wholesale price of electricity to marginal cost
and access is also priced at marginal cost. The retailer will then set the profit
maximizing monopoly price for final electricity sales. However, the owner of the
essential network facility can then seize all these profits through the upfront (or
fixed) access fee. The electricity retailer simply acts like an agent who collects
monopoly profits on behalf of the network owner.16
Vertical integration by the network owner into either electricity generation or
retailing may help maintain monopoly pricing, but neither integration nor the
degree of competition in other parts of the vertical chain of production change
the basic essential facility problem. The owner of the essential facility can design
access prices that lead to monopoly pricing of final products and enable the owner
of the essential facility to seize all the monopoly profits.
Various regulatory procedures have been proposed to deal with the essential
facility problem. It may be possible to directly regulate access prices, for example,
14
If the service being provided by the facility owner is substitutable to some degree with
another service, then it may not be possible for the facility owner to seize identical profits when
providing access as when operating as a vertically integrated monopoly. Raising the marginal
price of access may lead to some (inefficient) substitution to the alternative input. However,
often these substitution possiblities will be limited and if the service is highly substitutable
then it is not essential.
15
The discussion here only considers two-part tariffs. For a more detailed analysis of non-
linear pricing, see Mitchell and Vogelsang (1991, especially chapter 5).
16
A more likely result would be that the monopoly network owner and the monopoly retailer
would bargain over the distribution of the monopoly profits. We discuss this below. If non-
linear access prices were impossible, say due to regulatory restriction, then the network owner
could not seize all the monopoly profits. However, in such a situation ‘double marginalization’
is likely to lead to even higher retail prices and a Pareto inefficient outcome that is worse for
both suppliers and consumers than simple monopolisation. See Perry (1989) and Tirole (1988).
 National Competition Policy 10

by using price caps, rate-of-return regulation or a variety of cost-based rules.17

Alternatively, if the essential input is used to produce only one or a few well
defined products, then restricting the prices of these final products will indirectly
limit access prices. The owner of the essential facility cannot raise the access price
too high or else he will drive the final producers bankrupt. A number of rules tie
together final product and access prices. For example, the ‘efficient components
pricing rule’ sets access prices together with rules for final product prices.18
The approach to access pricing and essential facility regulation adopted under
Part IIIA of the Trade Practices Act significantly differs from standard regulatory
procedures. The Part IIIA rules attempt to minimize regulatory intervention in
setting the terms and conditions of access. As a first step, any person may
approach the NCC asking the Council to recommend that a particular service be
declared (s44F1).19 The service must fit the definition given in section 44B which
includes the use of an infrastructure facility, handling or transporting things and
communications services, but does not include the supply of goods, the use of
intellectual property or a production process.
If the service passes a number of tests presented in section 44G2, then the
NCC can recommend declaration to the relevant state or federal minister.20 The
tests include a requirement “that access (or increased access) to the service would
promote competition in at least one market (whether or not in Australia), other
than the market for the service” (s44G2a). This test can be seen as a weak
essentiality test, requiring that the service is used as an input rather than for
final consumption. The NCC (1996b, p.19) note that “while a trivial increase in
competition would not satisfy this test, access would not need to substantially
17
See for example Carlton and Perloff (1994) on rate-of-return regulation, and Sappington
and Sibley (1992) and Braeutigam and Panzar (1993) on price cap regulation. Total service long
run incremental cost access pricing has been recently supported by the Federal Communications
Commission for US telecommunications. For a more general discussion, see Vickers and Yarrow
(1988) and Armstrong, Cowan and Vickers (1994).
18
For a discussion of efficient components pricing see Baumol and Sidak (1994), Armstrong,
Doyle and Vickers (1996) and Economides and White (1995). For examples of other access
pricing rules see Laffont and Tirole (1993 and 1994) and Ralph (1996).
19
All section references refer to the Trade Practices Act 1974 as amended.
20
At the federal level, the designated minister will usually be the treasurer. See Miller (1996).
 National Competition Policy 11

promote competition”.21 Also, it must “be uneconomical for anyone to develop

another facility to provide the service” (s44G2b). This test may capture services
provided by natural monopoly facilities although the NCC (1996b) provides a
preliminary interpretation of the test extending to a variety of other facilities, in-
cluding situations where “a business controls an essential or unique primary input
or resource, or obtains an exclusive right to produce for the market” (p24). The
exclusive right could derive from a trademark, patent or legislative restrictions.22
The facility must also be of national significance (s44G2c).
In part, the declaration tests deliberately distinguish the Australian approach
from the US essential facility doctrine. The Hilmer report criticized the clarity
and breadth of the US doctrine (Commonwealth of Australia, 1993, p244) and
both the definition of a ‘service’ and the national significance test can be viewed
as attempts to narrow the scope of the Australian regime (see Miller 1996 p107
and 111).
If a service is declared then the facility owner and the access seeker(s) nego-
tiate an access agreement. Such an agreement is simply a commercial contract
between the parties and, contrary to the original recommendation of the Hilmer
committee, does not have to be registered (although it can be if all parties to
the contract and the ACCC agree, s44ZW). Also, unlike the Hilmer recommenda-
tions, the NCC does not provide access pricing principles when declaring a service
(Commonwealth of Australia 1993 p266-7). As shown below, these changes from
the Hilmer committee recommendations are likely to significantly alter the type
of negotiated access agreements.
If negotiations break down then either the access seeker(s) and/or the declared
facility owner can apply to the ACCC to determine the terms and conditions of
access (s44s1). An ACCC access determination must satisfy constraints imposed
by s44W and s44X of the Act. Both declaration decisions and ACCC determi-
nations are appealable to the Australian Competition Tribunal.
The Act provides two alternative regulatory mechanisms that bypass deter-
21
See however Industry Commission (1997).
22
See also King and Maddock (1996a, chapter 5) and Industry Commission (1997).
 National Competition Policy 12

mination. First, if the ACCC accepts an access undertaking from a facility owner
under s44ZZA of the Act, then the service cannot be declared (s44H3). An un-
dertaking must include terms and conditions of access and can only be accepted
by the ACCC prior to declaration (s44ZZB). Secondly, a service cannot be de-
clared if it is “already the subject of an effective access regime” (s44G2e). An
effective access regime may be a state based regime established in accordance
with the Competition Principles Agreement or a regime, for example, established
by a vertically separated facility owner (see King and Maddock 1996a p163-4,
and National Competition Council 1996b).

4.3 Regulation by negotiation

The access rules established under Part IIIA of the Trade Practices Act can
be characterized as ‘regulation by negotiation’. Declaration requires a facility
owner to negotiate in good faith, while the threat of ACCC intervention limits
the ability of one negotiating party to either arbitrarily stall proceedings or to
demand unworkable access conditions. Negotiated access has previously been
used in telecommunications in both Britain and New Zealand with little success.
Access negotiations between BT and Mercury Communications in Britain were
unsuccessful until regulatory intervention in 1985, four years after Mercury was
granted a telecommunications licence (Armstrong, Cowan and Vickers 1994).
Access negotiations between Telecom New Zealand and Clear Communications
led to a dispute under s36 of the New Zealand Commerce Act which resulted in
an appeal to the Privy Council.
There are obvious incentives for a vertically integrated facility owner to stall
access negotiations. Consider the owner of a declared gas reticulation network
who is currently a monopoly gas retailer. While access negotiations are stalled,
the owner of the reticulation network can continue to reap monopoly profits from
gas sales. Successful access negotiations will lead to retail gas competition. At
best, the facility owner will continue to achieve monopoly profits through sales
of reticulation access but, more likely, the profits that flow to the facility owner
will fall. Agreement is not in the facility owner’s interest.
 National Competition Policy 13

While the threat of ACCC intervention helps avoid obfuscation by facility

owners, negotiated access has a more fundamental problem. The access seeker(s)
and provider involved in negotiations will be interested in maximizing joint prof-
its rather than economic efficiency. If monopoly profits can be seized from the
relevant final product markets, then the access seeker(s) and provider will find
it mutually beneficial to agree on access prices that prevent competition from
diluting these profits. As we noted above, often access terms and conditions can
be crafted to maintain monopoly profits regardless of the degree of final market
competition. All negotiating parties will want to agree on profit maximizing ac-
cess prices although they will argue over the division of these profits. In other
words, negotiation will involve each party trying to seize as large a share of
monopoly profits as possible, with no party interested in competition that may
benefit consumers but reduce profits.
The disappointing (but rather obvious) conclusion is that negotiating parties
will have strong incentives to agree on terms and conditions of access that promote
monopoly profits rather than economic efficiency.
The ability of negotiating parties to perfectly maximize joint profits will be
limited by a number of factors. As noted above, separated producers cannot
perfectly achieve monopoly profits if higher marginal access prices lead to the
inefficient use of access substitutes. Also, the non-linear tariffs that are required
both to achieve monopoly output in final product markets and to divide profits
may be complex and will depend on predictions of the degree of downstream
competition.
The complexity of the bargaining process may limit the ability of even a single
access seeker and provider to coordinate perfectly on profit maximizing prices.
To avoid continual obfuscation, the access seeker must have the credible threat
of calling for ACCC intervention. However, such intervention will hurt both
parties to the negotiations. The ACCC is unlikely to deliver a determination that
maintains downstream monopoly pricing. The tension between the desire of the
access provider to stall negotiations and the access seeker’s need to appear ready
to call for intervention may lead to ‘brinksmanship’ and bargaining outcomes
 National Competition Policy 14

that provide more profits than an ACCC determination but less than monopoly
profits. King and Maddock (1997) use an alternating offers bargaining game to
show that a wide variety of negotiated outcomes are feasible.23 These outcomes
can be influenced by the ACCC. In particular, if the ACCC acts quickly following
a request for intervention and either implicitly or explicitly favors the party calling
for intervention, then this may increase the possibility that the negotiating parties
will reach an outcome maintaining less than monopoly profits.
When multiple access seekers either simultaneously or sequentially bargain
with the facility owner it may be impossible for the parties to simply divide
monopoly profits if the access provider can privately renegotiate with any access
seeker. To see this, consider that there are two access seekers and a vertically sep-
arated access provider. The contracts that maximize joint profits will most likely
involve an access price that exceeds marginal cost, together with upfront fees. The
marginal access price will be designed to promote final product monopoly pricing
after downstream competition while the upfront fees will divide the monopoly
profits between access seekers and the facility owner. Once these contracts are
signed and the upfront fees have been paid, however, it is often in the interest of
the access provider and any one of the access seekers to secretly renegotiate their
contract, setting a lower marginal access price. This renegotiation will undermine
the competitive position of the access seeker who retains the original contract,
but can bolster the profits of the renegotiating parties.
If all access seekers know that secret renegotiations are possible then this will
limit the contracts which they are willing to sign. This in turn will limit the abil-
ity of the facility owner and access seekers to seize monopoly profits. Rey and
Tirole (1996) show that simultaneous negotiation subject to secret recontracting
may more closely resemble Cournot competition rather than monopoly.24 McAfee
and Schwartz (1994) consider sequential negotiations and show that simple con-
23
The model, based on Rubinstein (1982), allows either party to the negotiations to call
for intervention after any offer is rejected. As is well known, the results of non-cooperative
bargaining games with an outside alternative depend crucially on the timing of the game. See
Shaked and Sutton (1984), Binmore, Osbourne and Rubinstein (1992) and Avery and Zemsky
(1994) for a broader analysis of these games.
24
See also Hart and Tirole, 1990.
 National Competition Policy 15

tracting devices, such as most-favored-customer clauses, may not fully remove

the problem of opportunistic recontracting. However, other contract clauses may
help reduce this problem and there will be clear incentives for all negotiating
parties to agree to contract conditions that limit secret recontracting.
While access negotiations may not result in prices that perfectly support
monopoly profits, the process provides strong incentives for the facility owner
and access seekers to try and limit any consumer benefits that arise at the ex-
pense of joint profits. Such negotiations avoid the costs of direct regulatory
intervention, but they may not create a substantial improvement in economic
efficiency compared with integrated monopoly supply.25
Minor amendments to Part IIIA could alter this situation. For example, if
a service is declared, any access contract for that service could be required to
pass ACCC scrutiny before becoming legally binding. The ACCC or NCC could
provide guidelines for acceptable access pricing which would constrain the out-
come of access negotiations. These amendments would be similar to the original
Hilmer recommendations that declaration be accompanied by access principles
and that access contracts have to be registered.

4.4 Regulatory alternatives for access

Access undertakings and effective state access regimes provide alternatives to the
declaration-negotiation-determination procedure, and involve direct regulatory
input. The ACCC must approve an access undertaking and the NCC decides
whether an access regime is effective. If these regulators can convince the facility
owner to offer access terms and conditions that will promote more competitive
final product prices, then undertakings and effective access regimes may be eco-
nomically efficient compared with negotiated contracts.
At the same time, it is not clear how the NCC, the ACCC or relevant state
25
The costs of negotiation must also be taken into account. These costs can be quite substan-
tial. For example, see Ahdar (1995). There may also be a free-rider effect in the negotiation-
arbitration process. Each access seeker may have incentives to avoid being the first to negotiate
access if there are high negotiation costs and any subsequent contract becomes available to all
access seekers (P. Forsyth, personal communication).
 National Competition Policy 16

authorities will carry out their regulatory roles. For example, the ACCC is given
little guidance on acceptable access undertakings in the Trade Practices Act.
The first undertaking considered by the ACCC, for electricity transmission ac-
cess, has involved extensive negotiations with the National Grid Management
Council. The undertaking is based on rate-of-return procedures and the details
of the undertaking have led to considerable debate.26 When considering access
to gas distribution networks in New South Wales, the Independent Pricing and
Regulatory Tribunal (1996b) has attempted to avoid formal rate-of-return pro-
cedures by relying on a group of financial indicators. Gans and Kay (1996) have
criticized this approach, claiming it lacks clarity and involving ‘circular’ reason-
ing. In contrast, price caps will be used to control access to services for privatized
airports.
The access procedures provide significant scope for interested parties to ‘play
off’ the regulators. An access seeker may try to have a service declared by the
NCC at the same time as the facility owner discusses an undertaking with the
ACCC. If a facility owner is concerned about the ACCC’s approach to access
then he may informally approach the NCC with an ‘effective’ access regime,
possibly even testing that effectiveness by seeking declaration of his own services.
Alternatively, a facility owner may try and rush an undertaking through the
ACCC to forestall declaration. It may be possible for access seekers to use both
Part IIIA and section 46 of the Trade Practices Act to pressure a facility owner.
Section 46 has previously been used for access-type issues and it is still possible
to pursue action under this section of the Act. The separation between the older
laws against anticompetitive behavior, such as section 46, and the new Part IIIA
access procedures, is not clear.27

5 Structural reform

The Hilmer report strongly supported the structural reform of integrated monopoly
producers to “dismantle excessive market power and increase the contestability of
26
For example, see King (1996) and Independent Pricing and Regulatory Tribunal (1996a).
27
See Abadee (1997).
 National Competition Policy 17

the market” (Commonwealth of Australia, 1993, p215). The report noted three
relevant types of structural reform: the separation of regulatory and commercial
functions, the separation of natural monopoly elements from activities that are
potentially competitive, and horizontal separation to divide potentially compet-
itive parts of a monopoly enterprise into smaller business units. The potential
benefits from the first and third of these reforms are transparent. If one firm in
an industry is also the regulator then any regulation is likely to be distorted in
favor of that firm. In such a situation, socially desirable competition is unlikely
to emerge. No-one is going to fight an incumbent player who is also the industry
umpire. Similarly, a large monopoly incumbent may pose a serious barrier to
the evolution of a competitive market. It may be desirable to break the incum-
bent into a number of competing firms. This reduces the market power of any
incumbent firm and creates ‘ready-made’ competition.
The benefits from vertical structural separation are less obvious. For example,
if electricity generation is potentially contestable, should the owner of a natural
monopoly transmission grid be allowed to own generation facilities? Similarly,
if rail transport is to be opened to competition, should a monopoly track owner
be allowed to run trains in competition with operators who buy access to the
track? The Hilmer report provides two arguments for structural separation.28
First, monopoly activities may be used to cross-subsidize potentially competitive
activities, allowing an integrated provider to engage in anticompetitive behavior
such as predatory pricing. Secondly, if the natural monopoly input is essential
for competition in a final product market, then the monopolist may limit access
to this input if it is also a competitor in the provision of the final good.
The Hilmer report notes that effective separation requires the “full separation
of ownership and control”(p220). Accounting separation may reduce the potential
for anticompetitive actions but will be less successful than full vertical separation.
The Hilmer recommendation reflects increasing concern among economists
about vertical arrangements, particularly in deregulating industries. This con-
28
The Hilmer report considers natural monopoly elements integrated either vertically or
horizontally with potentially competitive activities (Commonwealth of Australia, 1993, p219).
We shall concentrate on vertical relationships in this paper.
 National Competition Policy 18

trasts with the view, common in US antitrust literature in the late 1970s, that
vertical arrangements were usually beneficial and at worst benign (see Dobson
and Waterson 1996). In part, the change in attitude towards vertical relation-
ships reflects experience in deregulating industries, such as telecommunications
in the US and gas in the UK. The forced vertical breakup of the Bell Group in
the US in 1984, creating monopoly local telephone companies (the regional Bell
operating companies or the ‘baby Bells’) and a long distance carrier (AT&T),
resulted from an antitrust case on anticompetitive, entry-deterring behavior.29
The change in attitude has also been spurred by research into vertical constraints
and integration which show that they may not be benign and may lower social
welfare in certain situations.
The Hilmer structural reform recommendations are incorporated into clause
4 of the CPA. Paragraph 4.2 requires that regulatory functions are removed from
a public monopoly prior to the introduction of competition, while paragraphs
4.3.b and 4.3.c require vertical and horizontal separation to be considered as
part of competitive reforms to a public monopoly. Major structural reforms have
occurred, particularly at the state level. For example, in Victoria electricity dis-
tribution, generation and transmission have been divided vertically into separate
companies and distribution and generation have also been horizontally separated.
In New South Wales, similar reforms have vertically separated Pacific Power, the
integrated electricity transmission/generation utility, and generation has been
horizontally restructured. Melbourne Water has undergone similar reforms. The
Victorian Gas and Fuel Corporation has been vertically restructured and hori-
zontal separation, to form a number of independent distribution companies, is
planned. The New South Wales rail system now involves separate authorities
that own the track and operate the trains.
29
Brennan (1987) provides a useful overview of the AT&T divestiture.
 National Competition Policy 19

5.1 Vertical integration in regulated industries

A regulated firm may gain advantage by integrating into a related market that
is either unregulated or has a weaker form of regulation.30 The firm may be
able to distort competition in the related market and increase its profits. For
example, if the single firm which owns rail track infrastructure and coordinates
train movements on the rail system also owns a train company, then it may be
able to undermine competing train companies. It could do this in a variety of
ways – by giving its own subsidiary the most sought after routes and times,
by placing restrictions on other train companies that its own subsidiary ignores,
or by always giving its own trains priority in case of congestion, maintenance
or breakdowns. Even if the track company was restricted by profit regulation
and could not explicitly discriminate between its own and other train companies,
these tactics would tend to raise its own (unregulated) downstream profits at the
expense of competitors.
It has also been argued that an integrated firm can use regulated monopoly
profits to cross-subsidize its other operations. The potential for such cross-
subsidization, which could be used to fund a predatory price war against other
firms in the competitive sector, was a major issue in the AT&T case. However,
as Hausman, Tardiff and Belinfante (1993) note, at the time of the break-up of
AT&T the (potentially competitive) long distance services provided large cross
subsidies to the (natural monopoly) local services. In other words, the subsidies
were the opposite of the anticompetitive case.31
A regulated firm may also gain from integration into an unregulated sector
if it can shift costs between its businesses. For example, consider that a firm
faces a restriction on allowed profits. If the firm is able to shift costs from an
unregulated subsidiary to the regulated area, then it can satisfy the regulatory
constraint while making greater profits overall.32
30
These issues are more broadly canvassed in Brennan (1987). See also King and Maddock
(1996a, ch.8).
31
See also Temin 1990.
32
Morris (1992) provides an analysis of distortions with integration under ‘pass through’
regulation.
 National Competition Policy 20

A more subtle cost distortion can arise when the regulated firm provides an in-
put for a downstream market. A regulator who does not have perfect information
about the cost structure of the firm will have to rely, in part, on the firm’s own
cost reports to implement regulation. The firm will have an incentive to distort
these cost reports in its own favor. The extent of misreporting will depend on
the expected benefits to the regulated firm relative to the costs of detection and
punishment and an integrated firm will receive relatively more benefits from over-
reporting costs. Increasing cost reports will usually enable the regulated firm to
increase the price of its product. This will increase non-integrated competitors’
costs in the downstream market, raising the profits that accrue to the regulated
firm’s downstream subsidiary. Overall, an integrated firm has more incentive to
distort reported costs because this provides a benefit to its own subsidiary at the
expense of downstream competitors.

5.2 The costs of vertical separation

The above discussion appears to strongly support the restructuring recommen-
dations of the Hilmer report. However, vertical separation is not costless. In-
tegration is desirable if it is more efficient to transact within a single organiza-
tion than to coordinate transactions through arms length contracts and market
exchange.33 Economies of scope may make it cheaper to produce an upstream
and downstream product in an integrated environment. High transactions costs,
due to say limitations in monitoring upstream quality, also may make vertical
integration desirable. More generally, the inability to write complete contracts to
govern market exchange may lead to opportunistic behavior which can be reduced
or eliminated through integration.
There is a large literature supporting the existence of these benefits from in-
tegration in a variety of industries. For example, Lieberman (1991) concludes
that integration both reduces transactions costs and provides supply assurance
for US producers of chemical products. Kerkvleit (1991) finds evidence of oppor-
33
Perry (1989) and Carlton and Perloff (1994, ch.13) provide useful surveys of the literature
on vertical integration.
 National Competition Policy 21

tunistic behavior after transaction specific investments are sunk in relationships

between non-integrated coal mines and mine-mouth electricity generators. This
opportunism, which will tend to reduce transaction specific investments below
an optimal level, is absent when the mine and generator are integrated. Kaser-
man and Mayo (1991) find significant economies of scope between electricity
generation and distribution, concluding that “[f]or a vertically integrated firm
producing the sample mean generation and distribution levels, the estimations
suggest that costs of vertically disintegrated production are 11.96 percent higher
than for vertically integrated production” (p.499).
Integration may be desirable if it is the most efficient way to overcome exter-
nalities or other market imperfections. When analyzing large firms with monopoly
or monopsony power, a particularly important market imperfection involves addi-
tional imperfect competition in a vertically related market. If a monopoly access
provider cannot write a contract that guarantees him all monopoly profits due
to limitations on non-linear pricing or an inability to commit not to renegotiate,
then vertically integrating with one of the access purchasers and then denying
access to any other purchaser may maximize profits. To the degree that integra-
tion avoids inefficient input substitution and reduces double marginalization it
may also improve social welfare.
Similarly, if a facility owner sells access to two or more different types of pur-
chaser, but cannot prevent resale between different purchaser types, then vertical
integration may raise profits by allowing the facility owner to price discrimi-
nate. Perry (1989) shows how integration allows an input supplier to segment
the downstream market by selling to non-integrated suppliers at a higher price
than it charges its own subsidiary.34 While this price discrimination will raise
profits, it may raise or lower social welfare. Market segmentation tends to lower
welfare because the marginal willingness to pay for the input differs between cus-
tomers. However, if price discrimination allows more customers to be profitably
served then welfare can rise (see Varian 1985).
While restructuring may make it easier to regulate a monopolist, the case is
34
Perry (1980) provides a useful example of this strategy in the US aluminum market.
 National Competition Policy 22

not unambiguous. Vertical separation can make regulation more difficult. For ex-
ample consider that restructuring results in two vertically separated monopolists,
say a monopoly electricity transmission company selling access to a monopoly
distribution company. A regulatory problem similar to double marginalization
arises. The regulator will depend on information from the companies to set input
and final market prices. Each firm has an incentive to distort up any cost report if
this raises its profits. When separated, however, each firm will not take account of
any reduction in profits to the other firm caused by its information manipulation.
Gilbert and Riordan (1995) show that regulatory distortion will increase, leading
to higher prices if the sequential monopolists are vertically separated rather than
integrated.35

5.3 Case-by-case restructuring

The Hilmer recommendations for structural separation can best be viewed as a
starting point. There may be benefits from structural separation, but these need
to be weighed carefully against potential costs.36 The Competition Principles
Agreement takes this broader approach, requiring that restructuring and regu-
lation are reviewed before competition is introduced to a market traditionally
supplied by a public monopoly, but it is far from clear that all state governments
have fully reviewed the relevant costs and benefits before embarking on reforms.
Urban passenger rail provides a useful example. In New South Wales, the man-
agement of the tracks used for urban rail transport have been separated from
the ownership of the trains.37 Theoretically, private operators can also provide
urban passenger rail services. However, it is far from clear that this separation
provides any benefits. The regulatory problems of vertical integration discussed
above are unlikely to arise in urban passenger rail due to the intense competition
from other modes of public and private transport. At the same time, there may
35
Vickers (1995) considers the trade off between regulatory distortion and excessive entry
when a regulated firm is vertically restructured and shows that the welfare effects are ambiguous.
See also King (1994).
36
Of course, many of these costs and benefits will be difficult to measure in practice.
37
See Sims (1996) for an overview of the New South Wales rail reforms.
 National Competition Policy 23

be considerable economies in operating and co-ordinating an integrated train sys-

tem. Independent train operators can cause large negative externalities to other
operators, for example, if they suffer a breakdown which blocks the track or if
they run off schedule. It may be possible to overcome these problems through
arms length contracts but it is far from obvious that integration is not a preferred
solution.
Vertical restructuring is most likely to be desirable when it is relatively easy
to create arms length contracts, the scope for opportunism is small and there are
few externalities between upstream and downstream operations. For example,
there seems to be little reason why an airline would also need to own a major
urban airport. In contrast, difficulties in monitoring water quality or determining
the source of any quality deterioration and the potential public health risks, may
make it desirable to maintain an integrated urban water system.
Restructuring is also likely to be beneficial when there is significant scope for
regulatory abuse and when competition is likely to emerge in one vertical sector.
For example, in telecommunications, the rapid development of new technologies
may make it difficult for a regulator to audit costs and service quality, while
making it relatively easy for an integrated firm to shift costs between sectors. If
competition is likely in long distance but not in local telephone services, then
vertical separation may be the best way to limit regulatory abuse. At the same
time, if the entire vertical production chain is subject to competition, as is the
case with urban rail, then restructuring may simply raise costs with no regulatory
benefit.

6 Legislation review

The Competition Principles Agreement requires governments to review all exist-

ing legislation that restricts competition by the year 2000 (paragraph 5.3), and
to check any new legislation for competitive effects (paragraph 5.5). Reviews
must be repeated at least once every ten years (paragraph 5.6). The ‘guiding
principle’ for legislative review, established under paragraph 5.1 of the CPA, is
that “legislation (including Acts, enactments, Ordinances or regulations) should
 National Competition Policy 24

not restrict competition unless it can be demonstrated that (a) the benefits of
the restrictions to the community as a whole outweigh the costs; and (b) the
objectives of the legislation can only be achieved by restricting competition”.
Reviewing legislation to explicitly consider the costs and benefits to the entire
community seems highly desirable. However, the review test placed on govern-
ments is fairly onerous. In particular, to check that the relevant objectives can
only be achieved by restricting competition, governments must consider all alter-
native, competition-friendly ways of achieving the desired objectives and show
that these are inadequate.
Probably the most contentious review to date has involved the Victorian Audit
Act 1994. This review recommended restructuring the role of the auditor general,
increasing his independence by reporting directly to parliament and maintaining
his role “at the centre of the accountability chain between the Executive and the
Parliament” (Maddock, Dahlsen and Spencer, 1997, p6). However, the review
also requires that the actual provision of audit services be open to competitive
tender although the auditor general could “bypass the tender process in the rare
cases of extreme public interest” (Maddock, Dahlsen and Spencer, 1997, p7). The
recommendations have been strongly opposed by the Victorian auditor general
and a variety of political issue have imposed on the review process. In particular,
the antipathy between the current Victorian premier and the auditor general
threatens to derail any reform of the audit process.
The NCC has expressed concern that some states are avoiding the strict obli-
gations placed on them by the legislative review provisions of the CPA. Some
states are trying to avoid reviewing certain legislation. As the NCC (1996, p18)
notes “[w]hile there might be a case for exempting certain anti-competitive reg-
ulations from reform, . . . there is little justification for exempting a class of anti-
competitive legislation from review” (italics in original). Some governments are
also scheduling more contentious, but also more important reviews close to the
December 2000 deadline (NCC, 1996, p19). In 1996, the ACT passed new leg-
islation which restricted competition in the retail grocery market by reducing
the opening hours for large supermarkets in urban shopping centres. While the
 National Competition Policy 25

passage of this Act involved repealing “more restrictive legislation” (NCC, 1996,
p19), the new restrictions in the Trading Hours Act were deliberately designed
to reduce competition and aid small grocery retailers. These restrictions almost
certainly failed the second part of the CPA test. Direct subsidies could have the
same effect of aiding small supermarkets without the competitive detriment and
public inconvenience caused by early closure of large supermarkets. Of course,
the ACT government may have judged that such subsidies would be even more
politically unpopular than the new shopping hour restrictions.38
The initial process of legislative review still has some years to run. However, it
appears that some states are having second thoughts about the strict, two-stage
review process in the CPA. If the NCC fails to act decisively in the face of new
anticompetitive legislation and allows states to avoid more controversial reviews,
then the process will become irrelevant. The Victorian Audit Act review may
become a test case to see whether competitive reforms can survive the political
process.

7 Conclusion

The Hilmer report and the subsequent agreements between the federal, state and
territory governments have fundamentally changed Australian competition pol-
icy. While some of the national competition policy reforms probably would have
occurred anyway, they would have been on an ad hoc state-by-state and industry-
by-industry basis. Access in telecommunications and for some infrastructure,
such as the Moomba-Sydney gas pipeline, precedes the National Competition
Policy reforms. Some structural reforms in electricity, gas and water would have
been driven by the desire of state governments to raise funds through privati-
zation. One example is the sale of the Loy Yang B electricity power station in
Victoria by the former state labor government. As noted above, corporatisation
reforms have been occurring since the 1980s and the tendering and contracting-
out of service delivery has been a feature of local government reforms throughout
38
Public discontent over the restrictions forced the ACT government to reverse the legislation
in mid 1997.
 National Competition Policy 26

the 1990s.
The key feature of National Competition Policy is not that it envisages previ-
ously uncontemplated reforms, but rather that it provides a unified structure to
the microeconomic reform path throughout Australia. This, in turn, speeds up
the pace of reform and prevents reform from stalling on interstate differences.
The specific reforms embodied in the intergovernmental agreements, state
legislation and amendments to the Trade Practices Act, have both strengths
and weaknesses. Some of these have been explored in this paper. New reforms
are being introduced. For example, from July 1997, new telecommunications
regulations come under the purview of the ACCC.
It is too early to judge the success or failure of particular reforms. Many of
the industry specific reforms, such as the creation of a national electricity grid
with spot market trading of power, are in their infancy. Others, such as gas
reform, are stalled by arguments over access, contracts and the need to create
new infrastructure to make interstate trading feasible. States are moving at
different speeds. Victoria has embraced the reform process with more vigor than
most other states, although some of its reform proposals appear problematic.
One example is the creation of a spot market for gas trading when there is only
one relevant joint venture that is physically able to supply gas at the present
time. Even so, there are benefits in moving forward in the reform process, even if
some states initially ‘get it wrong’. Experimentation between states may provide
valuable information that aids the national reform process.
Over the next decade, some of the Hilmer reforms will be reversed, but many
others will remain as permanent features of competition in Australia. The cur-
rent structures created from the Hilmer recommendations, however, need to be
carefully monitored. In particular, policy needs to be adjusted both as problems
become evident and as technological and market developments render the current
rules obsolete.
 National Competition Policy 27

8 References

Abadee, A. (1997) “The essential facilities doctrine and the national access
regime: a residual role for section 46 of the Trade Practices Act?”, Trade
Practices Law Journal, 5, 27-47.

Ahdar, R. (1995) ‘Battles in New Zealand’s deregulated telecommunications

industry’, Australian Business Law Review, 23, 77-116.

Albon, R., Hardin, A. and Dee, P. (1997) “Telecommunications economics and

policy issues”, Industry Commission Staff Information Paper, AGPS, Can-
berra.

Areeda, P. (1989) “Essential facilities: an epithet in need of limiting principles”,

Antitrust Law Journal, 58, 841-853.

Avery, C. and Zemsky, P. (1994) “Money burning and multiple equilibria in

bargaining”, Games and Economic Behavior, 7, 154-168.

Armstrong, M., Cowan, S. and Vickers, J. (1994) Regulatory Reform: Economic

Analysis of the British Experience, MIT Press, Cambridge, MA.

Armstrong, M., Doyle, C. and Vickers, J. (1996) “The access pricing problem:
a synthesis”, Journal of Industrial Economics, 44, 131-150.

Baumol, W. and Sidak, J.G. (1994) Towards competition in local telephony, MIT
Press, Cambridge, MA.

Binmore, K., Osbourne, M. and Rubinstein, A. (1992) “Noncooperative models

of bargaining”, in R. Aumann and S. Hart (eds) Handbook of Game Theory,
Vol. 1., North Holland, Amsterdam.

Borland, J. (1994) “On contracting out: some labour market considerations”,

Australian Economic Review, 3/94, 86-90.
 National Competition Policy 28

Brennan, T. (1987) “Why regulated firms should be kept out of unregulated

markets: understanding the divestiture in United States v. AT&T”, The
Antitrust Bulletin, 32, 741-793.

Breutigam, R. and Panzar, J. (1993) “Effects of the change from rate-of-return

to price-cap regulation”, American Economic Review (AEA Papers and
Proceedings), 83, 191-198.

Brunt, M. (1990) “Market definition: issues in Australian and New Zealand

trade practices litigation”, Australian Business Law Review, 18, 86-128.

Carlton, D. and Perloff, J. (1994) Modern Industrial Organization, (2nd. ed.),

Harper Collins, New York.

Commonwealth of Australia (1993) National Competition Policy, Report by the

Independent Committee of Inquiry (the Hilmer report), Commonwealth
Government Printer, Canberra.

Dobson, P. and Waterson, M. (1996) “Vertical restraints and competition pol-

icy”, Office of Fair Trading Research Paper 12, December.

Domberger, S. and Li, E. (1995) “An ordered-probit analysis of price and perfor-
mance in competitively tendered contracts”, Australian Economic Review,
2/95, 14-22.

Domberger, S., Meadowcroft, S. and Thompson, D. (1986) “Competitive ten-

dering and efficiency: the case of refuse collection”, Fiscal Studies, 7, 69-87.

Economides, N. and White, L. (1995) “Access and interconnection pricing: how

efficient is the efficient components pricing rule?”, Antitrust Bulletin, 40,
557-579.

Forsyth, P. (1992) “Public enterprise: a success story of microeconomic re-

form?”, CEPR Discussion Paper No. 278, The Australian National Univer-
sity, Canberra.
 National Competition Policy 29

Freebairn, J. and Trace, K. (1992) “Efficient railway freight rates: Australian

coal”, Economic Analysis and Policy, 22, 23-38.

Gans, J. and Kay, J. (1996) Draft Determination on the Proposed Access Un-
dertaking of AGL Gas Companies - Submission by London Economics, Oc-
tober, Melbourne.

Gilbert, R. and Riordan, M. (1995) “Regulating complementary products: a

comparative institutional analysis”, RAND Journal of Economics, 26, 243-
256.

Hart, O. (1996) “Privatisation and the proper scope of government”, in 1996

Industry Economics Conference, Industry Commission, AGPS, Canberra.

Hart, O. and Tirole, J. (1990) “Vertical integration and market foreclosure”,

Brookings Papers on Economic Activity, Microeconomics, 205-285.

Hausman, J., Tardiff, T. and Belinfante, A. (1993) “The effects of the breakup of
AT&T on telephone penetration in the United States”, American Economic
Review (AEA Papers and Proceedings), 83, 178-184.

Industry Commission (1997) Industry Commission Submission to the National

Competition Council on the National Access Regime: A Draft Guide to Part
IIIA of the Trade Practices Act, AGPS, Canberra.

Independent Pricing and Regulatory Tribunal (1996a) Electricity Prices March

1996, Sydney.

Independent Pricing and Regulatory Tribunal (1996b) Draft Determination on

the Proposed Access Undertaking of AGL Gas Company (NSW) Limited,
September, Sydney.

Kaserman, D. and Mayo, J. (1991) “The measurement of vertical economies and

the efficient structure of the electric utility industry”, Journal of Industrial
Economics, 39, 483-502.
 National Competition Policy 30

Kay, J. and Thompson, D. (1986) “Privatisation: a policy in search of a ratio-

nale”, The Economic Journal, 96, 18-32.

Kerkvliet, J. (1991) “Efficiency and vertical integration: the case of mine-mouth

electric generating plants”, Journal of Industrial Economics, 39, 467-482.

King, S. (1994) “Competition and vertical separation”, Discussion Paper No.

317, Centre for Economic Policy Research, Australian National University,
Canberra.

King, S. (1996) “Infrastructure access: the case of electricity in Australia”, in

1996 Industry Economics Conference, Industry Commission, AGPS, Can-
berra.

King, S. and Maddock, R. (1996a) Unlocking the infrastructure: the reform of

public utilities in Australia, Allen and Unwin, Sydney.

King, S. and Maddock, R. (1996b) “Competition and almost essential facilities:

making the right policy choices”, Economic Papers, 15, 28-37.

King, S. and Maddock, R. (1997) “Regulation by negotiation: bargaining and

Australia’s essential facility access regime”, mimeo, ANU.

Laffont, J. and Tirole, J. (1993) A Theory of Procurement and Regulation, MIT

Press, Cambridge, MA.

Laffont, J. and Tirole, J. (1994) “Access pricing and competition”, European

Economic Review, 38, 1673-1710.

Lieberman, M. (1991) “Determinants of vertical integration: an empirical test”,

Journal of Industrial Economics, 39, 451-466.

Maddock, R., Dahlsen, J. and Spencer, K. (1997) Audit Act 1994 Review Report,
April, Government of Victoria, Melbourne.

McAfee, R.P. and Schwartz, M. (1994) “Opportunism in multilateral verti-

cal contracting: nondiscrimination, exclusivity and uniformity”, American
Economic Review, 84, 210-230.
 National Competition Policy 31

Mitchell, B. and Vogelsang, I. (1991) Telecommunications Pricing: Theory and

Practice, CUP, Cambridge.

Miller, R. Annotated Trade Practices, 17th. ed., The Law Book Company, Syd-
ney.

Morris, J. (1992) “Upstream vertical integration with automatic price adjust-

ments”, Journal of Regulatory Economics, 4, 279-287.

National Competition Council (1996a) Annual Report 1995-96, Australian Gov-

ernment Publishing Service, Canberra.

National Competition Council (1996b) The National Access Regime: A Draft

Guide to Part IIIA of the Trade Practices Act, Melbourne.

National Competition Council (1997a) Compendium of National Competition

Policy Agreements, Australian Government Publishing Service, Canberra.

National Competition Council (1997b) Competitive Neutrality Reform: Issues

in Implementing Clause 3 of the Competition Principles Agreement, Aus-
tralian Government Publishing Service, Canberra.

OECD (1996) “The essential facilities concept”, Roundtable Series on Compe-

tition Policy, No. 5, Paris.

Panzar, J. (1989) “Technological determinants of firm and industry structure”,

in R. Schmalensee and R. Willig (eds) Handbook of Industrial Organization,
Vol. 1., North Holland, Amsterdam.

Perry, M. (1980) “Forward integration by Alcoa: 1888-1930”, Journal of Indus-

trial Economics, 29, 37-53.

Perry, M. (1989) “Vertical integration: determinants and effects”, in R. Schmalensee

and R. Willig (eds) Handbook of Industrial Organization, Vol. 1., North Hol-
land, Amsterdam.
 National Competition Policy 32

Quiggin, J. (1994) “The fiscal gains from contracting out: transfers or efficiency
improvements”, Australian Economic Review, 3/94, 97-102.

Quiggin, J. (1995) “Does privatisation pay?”, Australian Economic Review,

2/95, 23-42.

Quiggin, J. (1996a) Great expectations: microeconomic reform and Australia,

Allen and Unwin, Sydney.

Quiggin, J. (1996b) “The Hilmer reforms: issues benefits and proposed next
steps” in I. Marsh (eds) Implementing the Hilmer Competition Reforms,
CEDA, Melbourne.

Ralph, E. (1996) “Regulating an input monopolist with minimal information:

the local cap”, Graduate Telecommunications Program, George Washington
University, Washington, DC.

Rey, P. and Tirole, J. (1996) “A primer on foreclosure”, mimeo, IDEI, France.

Rimmer, S. (1994) “Competitive tendering and contracting out: theory and

research”, Australian Economic Review, 3/94, 79-85.

Round, D. (ed) (1995) The Australian Trade Practices Act 1974: Proscriptions
and prescriptions for a more competitive economy, Kluwer, Amsterdam.

Rubinstein, A. (1982) “Perfect equilibrium in a bargaining model”, Economet-

rica, 50, 97-109.

Sappington, D. and Sibley, D. (1992) “Strategic nonlinear pricing under price-

cap regulation”, RAND Journal of Economics, 23, 1-19.

Shaked, A. and Sutton, J. (1984) “Involuntary unemployment as a perfect equi-

librium bargaining model”, Econometrica, 52, 97-109.

Sims, R. (1996) “Changing the signals to put railways back on track”, in I. Marsh
(eds) Implementing the Hilmer Competition Reforms, CEDA, Melbourne.
 National Competition Policy 33

Steering Committee on National Performance Monitoring of Government Trad-

ing Enterprises (1993) Government Trading Enterprises Performance Indi-
cators 1987-88 to 1991-92, Industry Commission, Canberra.

Temin, P. (1990) “Cross subsidies in the telephone network after divestiture”,

Journal of Regulatory Economics, 2, 349-362.

Tirole, J. The Theory of Industrial Organization, MIT Press, Cambridge, MA.

Varian, H. (1985) “Price discrimination and social welfare”, American Economic

Review, 75, 870-875.

Vickers, J. (1995) “Competition and regulation in vertically related markets”,

Review of Economics Studies, 62, 1-17.

Vickers, J. and Yarrow, G. (1988) Privatization, an economic analysis, MIT

Press, Cambridge, MA.

Waterson, M. (1987) “Recent developments in the theory of natural monopoly”,

Journal of Economic Surveys, 1, 59-80.

Werden, G. (1987) “The law and economics of the essential facilities doctrine”,
St. Louis University Law Journal, 32, 433-480.