Monday, April 24, 2006

Chickens and collective boycotts

On Friday, the Australian Competition Tribunal handed down its decision on the application by the Victorian Farmers Federation (VFF) to authorise collective boycotts by chicken growers in Victoria when negotiating with chicken processors. The ACCC had earlier allowed the VFF this right but the Tribunal overturned that authorisation. So growers will not be able to collectively boycott. You can read the decision here.

I acted for the chicken meat processors in this litigation; although any views I express here are my own. Not surprisingly, however, I think that the Tribunal decision is a good one and that there were likely to be manifest detriments from allowing chicken growers to collectively boycott (i.e., strike) during negotiations with processors; even if the terms of a strike -- in terms of notification etc -- were constrained. Put simply, current negotiations didn't seem to me to be so dsyfunctional that investment in the industry was being harmed. However, collective boycotts may have had many uncertain consequences, including "gaming" behaviour recognised by the Tribunal, that would have been detrimental. This is in addition to the likely price rises (at least in the wholesale market) that would have occurred.

As noted by the Tribunal, the case was a little unusual:
As the hearing progressed a paradox emerged. In a negotiating context, a party threatening a boycott (whether or not lawful) will talk up the baneful effect of a boycott on the other party. Conversely, the other party will put on a brave front and minimize its potential effect. Yet, in the present case, the positions were reversed. The VFF contended that Processors would be able to make arrangements for alternative supplies and carry on pretty much as usual. Processors, on the other hand, predicted the most dire consequences. For the VFF, this is something of a diminishing return. The more readily ameliorated a boycott, the less effective the threat thereof to a point where the question arises whether there is much point in its authorisation at all.

The 'Twilight Zone' feeling of this is easier to understand if one remembers that for there to be net benefits to the public from a collective boycott it must not be too effective in yielding anti-competitive consequences or other costs. That means it can't be too effective at all.

My assessment was that there were real concerns that the collective boycott would be effective. In so doing, I used approaches from game theory -- that the Tribunal ended up adopting -- to analyse whether a collective boycott or at least the threat of one was likely to be effective. In so doing, it was critical to assess whether the boycott would be credible. The Tribunal put this nicely:

... two conditions must hold in order for a collective boycott to represent a credible threat that would enable Growers to have their demands met. First, the benefit Growers potentially could gain from a given demand in contract negotiations (such as higher growing fees, sharing of certain costs with the Processor etc) exceeds the costs to them of a collective boycott of a given duration. Second, the cost to Processors of acceding to the Growers demands must be less than the cost to them of a collective boycott of the given duration threatened by the Growers. It follows from this that combinations of demands by Growers and threats of collective boycotts of particular durations that met these requirements would be likely to generate a credible threat that would lead Processors to accede to the demands made by Growers.

Ultimately, the Tribunal assessed that there were circumstances under which collective boycotts may be highly effective and this was an important fact in driving their ultimate decision.

What is significant is that this is one of the first times I can remember that an Australian court has embraced game theory as a framework for analysing a competition issue and in particular the likelihood of a particular outcome. In regard to other antitrust cases, I had lamented lost opportunities to do this (see an account of the High Court's Rural Press decision here). This latest decision is a true step forward in economic analysis in our legal system.

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