Imagine a New Zealand where every major company is neatly divided between the North and South Islands. You would fill up at BP North Island or BP South Island, shop at The Warehouse North Island or The Warehouse South Island and get your mobile service from Spark North Island or Spark South Island.

It sounds absurd, does it not? Yet this scenario is not far from the reality facing Foodstuffs, the cooperative running supermarkets like New World and PAK’nSAVE.

For historical reasons, Foodstuffs operates as two separate entities divided by the Cook Strait. Now, as they seek to unify into a single, more efficient national company, they face regulatory scrutiny under New Zealand’s competition law framework.

Before elaborating further, I should disclose that Foodstuffs North Island is a member of the organisation I lead. However, the views I express here are entirely my own, shaped by over two decades of pondering competition law and economics, dating back to my PhD studies in the field.

My fascination with competition law has always been tinged with a sense of paradox. On one hand, it aims to foster market competition and benefit consumers. On the other, it often leads to regulatory interventions that second-guess market processes.

The Foodstuffs case brings this paradox into sharp focus. It reminds me why, towards the end of my PhD, I found myself gravitating more towards (Austrian School) economics than law – and why I came to intensely dislike competition law.

The Commerce Commission’s recent statement on “unresolved issues” regarding the Foodstuffs merger reflects the complexities inherent in applying competition law. But let’s be fair and note that the Commission may simply be executing what the Commerce Act requires. So, this is not personal but a fundamental, first-principles question.

Which brings me to one of my favourite economists, Friedrich Hayek.

Hayek taught us that markets are not static entities but dynamic, evolving processes of discovery. They exist to find out what works, what consumers want and what market structures are efficient.

Hayek’s concept of the “knowledge problem” is relevant here. He argued that the information required to make good economic decisions is dispersed among countless individuals and cannot be centralised or processed by any single entity – not even a well-intentioned regulator.

In the Foodstuffs context, this insight raises important questions. How can regulators predict with any certainty the market outcomes of such a merger? Is it not possible that a unified Foodstuffs might achieve efficiencies that could benefit consumers through better products or lower prices?

Moreover, Hayek’s ideas about market processes as discovery mechanisms challenge the notion that regulators can engineer optimal market structures. In a dynamic market, businesses and consumers constantly adapt to changing conditions. Suppliers evolve their strategies, new competitors emerge, and consumer preferences shift.

The proposed Foodstuffs merger, rather than stifling this process, could potentially spur innovation and efficiency improvements throughout the supply chain.

The focus on maintaining a specific number of major players in a market, which often underpins competition law analyses, seems arbitrary when viewed through this lens.

Many successful, competitive markets globally have only two or three major players complemented by a diverse ecosystem of smaller, specialised competitors. The grocery sector, in particular, benefits from economies of scale in procurement, distribution and technology investment.

It is worth considering whether attempting to maintain an artificially fragmented market structure might deprive consumers of the benefits these economies of scale can provide. A larger, more efficient organisation might be better positioned to invest in new technologies and services that could benefit consumers.

Cases like the Foodstuffs merger highlight the tensions inherent in competition law. There is always a delicate balance between protecting competition and allowing markets the freedom to evolve and innovate.

While it may be necessary to have some mechanisms in place to prevent grossly anti-competitive behaviour, we must also be wary of regulatory overreach that might stifle the very market processes we seek to protect.

This does not necessarily mean abandoning all regulation, but rather adopting a more nuanced approach that recognises the dynamic nature of markets and the limits of centralised decision-making.

It would also mean getting any regulatory barriers to entry out of the way – and that is an area in which the Commerce Commission has played (and should continue to play) an important role.

The Foodstuffs merger offers a chance for our grocery sector to evolve and innovate. But it also invites us to reflect on the purpose and application of our competition laws, and to consider whether they are truly serving the best interests of consumers and the economy as a whole.

In the spirit of Hayek’s insights, perhaps we should view this situation not as a problem to be solved, but as an opportunity for discovery – a chance to learn more about how grocery markets can function most effectively for the benefit of all New Zealanders.