Boral Besser Masonry Ltd v ACCC

Chief Justice Gleeson

Justice Gaudron

Justice McHugh

Justice Gummow

Justice Kirby

Justice Hayne

Justice Callinan

Boral Besser Masonry Ltd v ACCC [2003] HCA 5

BBM appealed to the High Court which overturned decision of the Full Federal Court. Held by 6-1 majority (Kirby J dissenting) that BBM did not have substantial market power and, even if it did, it did not take advantage of that power for purposes of s 46.

In the following extracts emphasis has been added and footnotes omitted.

Gleeson CJ and Callinan J

[121] The essence of power is absence of constraint. Market power in a supplier is absence of constraint from the conduct of competitors or customers. This is reflected in the terms of s 46(3). Matters of degree are involved, but when a question of the degree of market power enjoyed by a supplier arises, the statute directs attention to the extent to which the conduct of the firm is constrained by the conduct of its competitors or its customers. The main aspect of the conduct of BBM in question in the present case was its pricing behaviour. Therefore, the Federal Court was required by the statute to have regard to the extent to which BBM's pricing behaviour was constrained by the conduct of other CMP suppliers, or by purchasers of CMP. The reasoning of Heerey J followed that statutory direction.

[122] The purposes proscribed by s 46 include the purpose of eliminating or damaging a competitor. Where the conduct that is alleged to contravene s 46 is price-cutting, the objective will ordinarily be to take business away from competitors. If the objective is achieved, competitors will necessarily be damaged. If it is achieved to a sufficient extent, one or more of them may be eliminated. That is inherent in the competitive process. The purpose of the statute is to promote competition; and successful competition is bound to cause damage to some competitors.

[123] It follows that, where the conduct alleged to contravene s 46 is competitive pricing, it is especially dangerous to proceed too quickly from a finding about purpose to a conclusion about taking advantage of market power. Indeed, in such a case, a process of reasoning that commences with a finding of a purpose of eliminating or damaging a competitor, and then draws the inference that a firm with that objective must have, and be exercising, a substantial degree of power in a market, is likely to be flawed. Firms do not need market power in order to put their prices down; and firms that engage in price-cutting, with or without market power, cause damage to their competitors. Where, as in the present case, a firm accused of contravening s 46 asserts that it is operating in an intensely competitive market, and that its pricing behaviour is explained by its response to the competitive environment, including the conduct of its customers, an observation that it intends to damage its competitors, and to do so to such a degree that one or more of them may leave the market, is not helpful in deciding whether the firm has, and is taking advantage of, a substantial degree of market power. ...

Market power

[132] The questions whether BBM had a substantial degree of power in a market between April 1994 and October 1996, and whether its behaviour, and in particular its pricing behaviour, during that period involved taking advantage of, that is, using, that power, are closely related. But, as the decision in Melway shows, they are two questions, not one. The appellant in that case conceded that it had a substantial degree of power, but it was held that its conduct did not involve taking advantage of that power. In the present case, both questions are in issue.

[133] There is a threshold problem of market definition. A market is an area of close competition; a field of rivalry. As the passage from Re Queensland Co-operative Milling Association Ltd quoted above indicates, and as s 46(3) recognises, both the supply side and the demand side are relevant to an assessment of the market. It does not solve, but merely re-states, the problem to speak of sub-markets. There may be a wider, and a narrower, area of rivalry; but, if the narrower area itself constitutes a market, then it is power and conduct in that area that must be examined. That is not to say, however, that an evaluation of power and conduct in the narrower area can be undertaken in isolation. It may be, in a given case, that the dynamics of rivalry in the narrower area are influenced by what goes on in the wider area.

[134] The Full Court rejected the conclusion of Heerey J that there was no market for CMP in Melbourne but only, relevantly, a market for wall and paving products. The reasons given by the Full Court, and in particular by Beaumont J, for deciding that the trial judge erred in that respect are cogent. It may be accepted for present purposes that there was a market in CMP in Melbourne.

[135] Definitions, or explanations of the concept, of market power normally address the market as an area of rivalrous behaviour in which there are suppliers and acquirers of goods or services. That is consistent with s 46(3), which requires consideration of constraint, by reason of the conduct of competitors or customers, or both.

[136] In Queensland Wire, Mason CJ and Wilson J defined market power as the ability of a firm to raise prices above supply cost without rivals taking away customers in due time, supply cost being the minimum cost an efficient firm would incur in producing the product. Each side in the present case called an economist as a witness. They both defined or described the market power of a supplier in terms of its ability to raise prices above supply cost without losing business to another supplier. Pricing may not be the only aspect of market behaviour that manifests power. Other aspects may be the capacity to withhold supply; or to decide the terms and conditions, apart from price, upon which supply will take place. But pricing is ordinarily regarded as the critical test; and it is pricing behaviour that is the relevant conduct in the present case.

[137] Power, that is, the capacity to act without constraint, may result from a variety of circumstances. A large market share may, or may not, give power. The presence or absence of barriers to entry into a market will ordinarily be vital. Vertical integration may be a factor.

[138] Financial strength is not market power, although if a firm has market power, its financial resources might be part of the explanation of that power. The financial ability to survive a price war is not market power, or a manifestation of characteristics that give market power, if, when the price war is over, the market is still highly competitive. Power in a supplier ordinarily means the ability to put prices up, not down. But if a market is not competitive, and a firm puts prices down, seeking to eliminate a potential rival, in the expectation that it will thereafter be in a position to raise prices without competitive constraint, its ability to act in that manner may reflect the existence of market power. An example of such conduct is Compagnie Maritime Belge Transports SA v Commission of the European Communities in which a liner conference, whose members were collectively in a dominant market position, used fighting ships and offered selective price reductions to force an entrant out of business. Ordinarily, where the members of a shipping conference agree between themselves not to engage in price competition, their agreement not to compete on prices will be a source of market power. If an outsider enters the trade, and they make the outsider a target, their conference agreement means they need not fear price competition from each other. Shippers cannot play them off against one another. They may then take advantage of the market power that results from their agreement to force the outsider from the trade, knowing that they can withdraw their offers of reduced prices when the outsider leaves, because the market will then be uncompetitive.

[139] Such a case is far removed from the present. There can be circumstances in which price-cutting may be undertaken by a powerful firm, or combination of firms. But the ability to cut prices is not market power. The power lies in the ability to target an outsider without fear of competitive reprisals from an established firm, and to raise prices again later.

Gaudron, Gummow and Hayne JJ

[159] … the Act has never contained any specific and comprehensive prohibition of a practice of cutting prices to below cost. That is not surprising …

McHugh J

[198] In my opinion, BBM did not have a substantial degree of power in the relevant market – the sale of concrete masonry products – because it was not able to raise prices to supra-competitive levels without its rivals taking away customers. Nor was it in a position to recover the losses it made by pricing below relevant cost when and if the price-cutting finished. Accordingly, irrespective of the purpose of its pricing, it did not have a substantial degree of market power of which it could take advantage.

[269] … Conduct that is predatory in economic terms and anti-competitive may not be captured by s 46 simply because the predator does not have substantial market power when it sets out on its course to deter or injure competitors … [footnote omitted]

[278] … Although s 46 does not use the term “predatory pricing”, two of its key components are “a substantial degree of [market] power” and a taking “advantage of that power”. A firm does not possess “substantial market power” if it does not have the power to recoup all or a substantial part of the losses caused by price-cutting by later charging supra-competitive prices. … [para 279] Nor if a firm has substantial market power can it be said that it “take[s] advantage of that power” if it has no intention of recouping its losses. …

Kirby J (dissenting)

[365] Vertical integration: The primary judge erred in not considering this factor as one important determinant of market power. In particular, the vertical integration of BBM within the Boral group, and the ability of BBM to sustain prolonged losses in the CM market, undoubtedly enabled BBM to maintain its below cost pricing strategy for a longer period that competitors (except perhaps Pioneer) might not, from a strictly financial point of view, have been able to withstand. Knowing and relying on this, BBM would have been entitled to expect that minor competitors would be forced to retreat; which is what happened in two cases. … [footnotes omitted]

[374] In the context of a price war in the market, it is clear that a corporation with a substantial degree of market power (whatever that term means) would not be able to raise the market price by restricting its own output. Yet one way it could engineer a rise in prices would be by rapidly expanding its own output in the short run, in order to depress prices further and discipline or punish rivals that engage in price-cutting. This would be done with the aim of either chilling competitive conduct or inducing the exit of operators, and securing an ultimate desired result of an increase in market price

[381] An integrated concept: The members of the Full Court unanimously concluded that BBM had "taken advantage" of its power for a proscribed purpose. This was a correct, and certainly an available, conclusion having regard to the meaning of that expression, as it appears in the context of s 46; the state of legal authority explaining that expression; and the uncontested evidence and the findings of the primary judge, upheld in the Full Court, concerning the conduct of BBM and the proscribed purposes that it had at the relevant times. [footnotes omitted]

[382] There are those who want to dissect the concepts in s 46. However, to attack s 46 with scissors is not only to offend the orthodox approach to the interpretation of legislation. It is also to defy three particular rules upon which this Court has insisted concerning the approach that is to be taken to that task. ...

[384] ... where, as here, the identified statutory purposes are beneficial, in the sense of promoting the public good of competition and preventing and sanctioning practices that inhibit or restrict those ends, courts will give such legislative provisions a beneficial construction. At least, they will do so to the extent that the language enacted by the Parliament so permits. Where that language is expressed in general terms, reflecting large concepts of economic theory, it is appropriate for courts, so far as the language allows, to inform themselves about the considerations that sustain the beneficial purposes of the statute. So far as possible within the text, decision-makers will construe the legislation to advance and achieve those beneficial purposes - not to frustrate their attainment. [footnotes omitted]