Misuse of market power

There have been numerous reports into Australia’s misuse of market power laws.

Below is an overview table followed by details about each of the reviews.

Blunt Review

In 1979 the Blunt Review (Chapter 9) recommended that the ambit of s 46 be extended to apply to firms that have a 'substantial degree of market power' (not just those that substantially control markets). (see 1986 amendments)

The Blunt Review also recommended that, to help ensure legitimate aggressive market behaviour was not put at risk, a provision should be inserted to remove from the ambit of the provision 'conduct of firms with comparable market power' (this recommendation was not implemented).

Green Paper 1984

Threshold test of control should be lowered to substantial degree of market power (para 26) (implemented 1986). Also noted difficulties arising from the term 'purpose' and recommended adding words 'or that has or is likely to have the effect' to ss 46(1) 'to give litigants an alternative method of establishing a contravention by proving the effect or likely effect of the corporation's conduct rather than having to establish a predatory purpose' (para 30) (not implemented). See Green Paper page.

The Trade Practices Revision Act 1986 (Act 17 of 1986) made this change. That Act also added a new s 46(7) which provided as follows:

"(7) Without in any way limiting the manner in which the purpose of a person may be established for the purposes of any other provision of this Act, a corporation may be taken to have taken advantage of its power for a purpose referred to in sub-section (1) notwithstanding that, after all the evidence has been considered, the existence of that purpose is ascertainable only by inference from the conduct of the corporation or of any other person or from other relevant circumstances.".

In his second reading speech, when introducing the 1986 Act, the Attorney-General, Mr Lionel Bowen, stated:

A competitive economy requires an appropriate mix of efficient businesses, both large and small. Whilst large enterprises may frequently have advantages of economies of scale, there are many occasions when large size does not of itself mean greater efficiency. However, a large enterprise may be able to exercise enormous market power, either as buyer or seller, to the detriment of its competitors and the competitive process. Accordingly an effective provision controlling misuse of market power is most important to ensure that small businesses are given a measure of protection from the predatory actions of powerful competitors. Unfortunately, section 46 as presently drafted has proved of quite limited effectiveness in achieving that result, principally because the section applies only to monopolists or those with overwhelming market dominance. Even in those cases, it has been extremely difficult for a plaintiff to establish the requisite predatory purpose on the part of the defendant corporation.

The amendments proposed in clause 17 address these two problems and are designed to make section 46 much more effective. The test for the application of the section is to be reduced from that of a corporation being in a position substantially to control a market to a test of whether a corporation has a substantial degree of market power. As well as monopolists, section 46 will now apply to major participants in an oligopolistic market and in some cases, to a leading firm in a less concentrated market. The amendment will also make it clear that the court can infer the requisite predatory purpose from the conduct of the corporation or from the surrounding circumstances. Section 46 in its proposed form, which will be described as misuse of market power rather than monopolisation, is not aimed at size or at competitive behaviour as such of strong businesses. What is being aimed at is the misuse by a business of its market power. Examples of misuse of market power may include in certain circumstances, predatory pricing or refusal to supply.

The Explanatory Memo noted that clause 17 (the change to s 46) was the most significant amendment in the bill and that it would (para 3):

'... lower the threshold of s 46, to apply the provision to those corporations which have a substantial degree of market power and improve the effectiveness of s 46 in other respects. ...'

...

36. The amendments to s.46 are designed to lower the threshold test for determining whether the section is applicable to the conduct of a corporation. The amendments also address the mode of proof. The new marginal note ‘misuse of market power’ is a more accurate characterisation of’ conduct of the kind to which s.46 is directed than ‘monopolisation’ as used in the Act now.

37. The amendment to sub-s.46(l), substituting the words ‘a corporation that has a substantial degree of’ power in a market shall not take advantage of that power for the purpose of’ is a composite provision. It should therefore, in the final analysis, be construed as a single provision even if particular words or expressions need to be looked at separately in the first instance.

Threshhold test

38. The test of whether a corporation has ‘a substantial degree of power in a market’ is substituted for the previous test of’ a corporation ‘being in a position substantially to control a market’. The new test is intended to provide a lower threshold for the operation of s.46. The section may be invoked in relation to a corporation that has a lesser degree of market power than is required under the present provision.

39. The expression ‘power’ is synonymous with ‘market power’ (see new sub-section 46(4)). 40. ‘Market power’ is a recognised economic concept which has been subject to considerable analysis in economic literature.

41. The use of’ the word ‘degree’ in the expression ‘degree of power in a market’ reflects the fact that ‘market power’ is a relative concept. All participants in a market possess a degree of’ market power which may range from negligible to very great.

42. The word “substantial” is used in several different contexts in the Act, and its meaning may change according to the context. Thus in Tillmanns Butcheries Pty Ltd v The Australasian Meat Industry Employees’ Union and Ors (1979) ATPR 40-138 at page 18,500, in the context of ‘substantial loss or damage’ , Deane J. preferred a meaning for ‘substantial’ of’ ‘real or of substance as distinct from ephemeral or nominal’ to the alternative ‘large or weighty’. However, in the context of s.46, ‘substantial’ is intended to signify ‘large or weighty’ or ‘considerable, solid or big’ (Palser v Grinling [1948] A.C. 291 at page 317).

43. The word imports ‘a greater rather than less’ degree of power, per Smithers J. in Dandy Power Equipment Pty Ltd & Anor v Mercury Marine Pty Ltd (1982) ATPR 40-315 at p.43,888. At the same time, ‘substantial’ in this context is not intended to require the high degree of market power connoted by the reference in existing s.46(l) to being in a position substantially to control a market, or by the reference in existing s.46(3) to the power to determine the prices of a substantial part of the goods in a market.

44. New sub-section (3) provides a guide to the way in which ‘market power’ is to be determined. It requires that consideration be given to the extent to which the conduct of’ a firm is or is not constrained by competition on the part of other participants in the market, potential entrants to the market, suppliers or purchasers.

45. The circumstances which give rise to absence of’ competitive constraint upon a corporation are diverse. They are not confined to size or market share in relation to competitors, or to those matters combined with technical knowledge, raw materials or capital. Other matters such as easier access to supplies or government controls on the market are relevant if’ they bear upon the extent to which the corporation can act without being constrained by competition.

46. A corporation having a ‘substantial degree of market power’ may have a lesser degree of market power than that of a corporation which ‘would be, or be likely to be, in a position to ... dominate a market’ as provided in s.50. ‘Dominance’ connotes a greater degree of independence from the constraints of’ competition than is required by a ‘substantial degree of market power’. Whatever the position in regard to ‘dominance’, more than one firm may have a ‘substantial degree of power’ in a particular market.

47. In Europemballage and Continental Can v. Commission /1973/ CMLR 199; United Brands v. Commission /1978/ 1 CMLR 429 and Hoffman La Roche v. Commission /1979/ 3 CMLR 211 the court had to determine the degree of market power in order to decide the question of dominance. Although the test of dominance is higher than that applying in the case of a substantial degree of market power, these cases adopt a similar approach to that envisaged by new sub-section 46(3) for the purpose of’ determining the degree of market power.

Prohibited conduct

48. A corporation having the requisite degree of market power is not prohibited from engaging in any conduct directed to one or other of the objectives set out in paras.46(l)(a), (b) and (c). Such a prohibition would unduly inhibit competitive activity in the market-place. The section is not directed at size as such, nor at competitive behaviour as such. What is prohibited, rather, is the misuse by a corporation of’ its market power.

49. A corporation which satisfies the threshold test by reason of its market power is not permitted by s.46(l) to take advantaqe of that power for the purpose of’ one or other of the objectives set out in paras.(a), (b) and (c). Those paragraphs describe various ways in which competition may be impaired in a market.

50. The term take advantage in this context indicates that the corporation is able, by reason of its market power, to engage more readily or effectively in conduct directed to one or other of the objectives in paragraphs (a), (b) and (c). It is better able, by reason of its market power, to engage in that conduct. Its market power gives it leverage which it is able to exploit and this power is deployed so as to ‘take advantage of’ the relative weakness of other participants or potential participants in the market. Whether this is so in a particular case is a matter to be inferred from all the circumstances.

51. Likewise, the reference to purpose in this context indicates that the conduct of the corporation, by which it takes advantage of its market power, must be directed to impairing competition in a market in one of’ the ways set out in paras. (a), (b) and (c).

52. Sub-section (7) makes it clear that whether a corporation has taken advantage of its power for a particular purpose is a matter which may be ascertained by inference from conduct or other relevant circumstances. While explicit statements if proved may establish the necessary purpose, direct evidence of’ that kind is not essential. The court may draw the necessary inference from conduct or other circumstances without the need for direct evidence. The ability to draw such an inference does not of course change the onus of proof. Proof of particular conduct or other circumstances may however give rise to a need for the other party to adduce evidence in order to rebut an inference which might otherwise be drawn.

53. By virtue of s.4F(b), it is sufficient if a requisite purpose (ie directed to s.46(l)(a), (b) or (c)) is one among other purposes of the corporation provided that the requisite purpose was a substantial one. In this context, ‘substantial’ is intended to signify a purpose which has substance or significance - as distinct from one which is ephemeral or nominal - rather than a purpose which is large, weighty or big.

54. Kinds of conduct which in certain circumstances could be in breach of the provision would include inducing price discrimination, refusal to supply and predatory pricing. These instances are indicative only and, in each case, it would be necessary to establish the requisite degree of’ market power and that advantage had been taken of the power for one of the specified purposes.

55. In regard to predatory pricing, in Victorian Egg Marketing Board v. Parkwood Eggs Pty Ltd (1978) ATPR 40-081, Bowen C.J. left open the question ‘whether in the ordinary course a monopolist can engage in predatory price cutting only if the price is below some particular cost, and not where the price set, although it may deter competitors, is one which merely does not rnaximise the monopolist’s profit’ (at p.17,789). It is not the intention of s.46 that pricing, in order to be predatory, must fall below some particular cost. The prohibition in the section may be satisfied ‘notwithstanding that it is not below marginal or average variable cost and does not result in a loss being incurred’ (at p.17,789). Nevertheless where a corporation with the requisite market power is, in the absence of countervailing evidence that its pricing was not aimed at destroying actual or potential competition, selling at below average cost there may be grounds for inferring that it is taking advantage of its power for a proscribed purpose.

56. On the other hand, a corporation which is able to price its goods very competitively by reason, for example, of’ economies of’ scale or the acquisition of new efficient production facilities, would not be inhibited from so doing by reason of the fact that it enjoys a substantial degree of market power. By reflecting in its pricing policy its efficiency it would not, without more, be taking advantage of its market power notwithstanding any effect of its pricing on its competitors.

[note: a supplementary EM was issued with the same content in relation to clause 17 but paragraph number differed - they start at 36 (not 36)]

Griffiths Committee 1989

In 1989 the Griffiths Committee considered the provision and noted difficulty in proving a corporation has taken advantage' of its market power.

Referred to the Papersave and Warman decisions as indicating possible limitations - noting that they:

'... are apparent authority for the notion that there is no contravention of section 46 if the conduct complained of can be categorised as taking advantage of a particular right, such as a legal or contractual right, or could have been performed regardless of market power. At issue is whether such conduct was intended to be or should be permitted under the Act. Also at issue is how to differentiate between legitimate business conduct and predatory behaviour'. The non-specific nature of section 46 reflects the difficulty in defining precisely the nature of predatory purpose.' [para 4.3.6]

The Report then refers in detail to the Qld Wire case. Much of the debate prior to the release of the report had centred around the first instance decision of Justice Pincus in that case - the High Court case, which overturned the decision of Pincus J therefore followed most of the early debate and submissions before the Committee:

... the High Court was unanimous in overturning the decision of Pincus J, in which he held that, in order to demonstrate a violation of section 46, it must be shown that a company has used its market power in some reprehensible way, rather than simply in a way which resulted in damage to a would-be competitor. Instead, the High Court adopted a neutral interpretation of the meaning of take advantage. ...[para 4.5.9]

Despite concerns expressed throughout the review, the Committee concluded:

[4.6.26] ... the Committee welcomes the High Court decision in the Queensland Wire Industries case for the degree of clarification which it has provided in relation to the various elements of section 46 of the Act. The judgement resolves the difficulties relating to market definition arising from the Full Federal Court's decision in the case. The decision also resolves the debate about the interpretation of the take advantage provision. It is the view of the Committee that the neutral interpretation adopted by the High Court should make it easier for aggrieved parties to establish a breach of section 46.

[4.6.27] ... The Committee is aware of concerns that the decision has not resolved all areas of uncertainty in relation to section 46. For example, there are concerns about the possibility of legitimate competitive behaviour being caught as a result of the neutral interpretation of take advantage, and concerns about the circumstances in which a refusal to supply will contravene the section.

[4.6.29] ... insufficient evidence has been presented to support the need for a major redrafting of section 46. ... the bulk of the evidence suggests that no change to the section is required, and that sufficient opportunity should be provided through the evolution of case law for the resolution of any potential difficulties in the section. Given that the High Court has now provided significant clarification of the existing wording of the section, the Committee is of the view that any major changes to the wording would at this time be a retrograde step which could lead to renewed uncertainty if new and untested prov1stons were substituted. In particular, the major proposals for reform suggested during the inquiry would not contribute to the achievement of any greater certainty in the law.

The Committee therefore recommended that s 46 be retained in its existing form.

Cooney Report 1991

Only two years later the matter was considered again by the Cooney Committee. The Committee considered three specific proposals

1. incorporation of an 'effects' test

2. addition of further conduct to that currently prohibited; and

3. extension of the range of remedies (including the possibility of divestiture)

Effects test

In relation to an effects test, the Committee noted concerns about the difficulty in proving purpose, including citing Justice Wilcox in Eastern Express, who observed:

... the outward manifestation of a decision to engage in predatory pricing is a lowering of prices, an action which, on its face, is pro-competitive. The factor which turns mere price cutting into predatory pricing is the purpose for which it is undertaken. That will often be difficult to prove. Traders rarely admit the existence of a proscribed purpose. [para 70]

The Committee noted that an effects test was considered and rejected by the Swanson Committee and in the Blunt Report and was not adopted in the 1986 amendments - however, they also noted s 46(7) was added in 1986 to facilitate proof of purpose by inference from conduct and other circumstances (para 5.19)

In favour of an effects test, the Committee referred to submissions from Prof Baxt, noting that an effects test would be consistent with the approach taken in other sections of the Act. They also noted the TPC's proposal to insert a new provision (in addition to the existing provision) which would 'subject to the conduct having the purpose or effect of substantially lessening competition, prevent a corporation with a substantial degree of market power from engaging in certain defined conduct', which would direct the section at competition rather than competitors (para 5.22). Treasury opposed that approach, suggesting 'a more direct approach would be tot urn section 46 into an effects rather than purpose related provision' (para 5.26).

Those opposed to an effects test included the AG Department, BCA, LCA, Dr Pengilley and Mr McComas. The BCA expressed concern was expressed that it might have 'unintended anti-competitive results' (BCA, para 5.28); the Law Council considered purpose a critical element of the contravention, prohibiting conduct which exploited a dominant position in a way harmful to the competitive process, and than an effects test would 'destroy this distinction and, in the process, act as a strong disincentive to healthy competitive conduct' (quoted para 5.30)

On this point the Committee concluded:

[para 5.62] The Committee accepted that 'establishment of purpose will continue to present difficulties of proof for litigants relying on section 46.

[para 5.63] Proposals to change the section by adopting an effects test would encourage greater use of the section by litigants, and have the virtue of consistency with the Act's other restrictive trade practices provisions.

[para 5.64] However, the Committee accepts that in a provision directed explicitly at misuse of market power it is appropriate that a distinction between purpose and consequence be retained. The Committee accepts that purpose is an essential element of the contravention. To prohibit the taking advantage of market power where this has or is likely to have the effect of, for example, preventing a person from engaging in competitive conduct would unduly widen the operation of the prohibition. It would force corporations to evaluate the potential effect of their every action on their competitors and potential competitors. [emphasis added]

[para 5.65] ... the process of effective competition involves engaging in conduct the potential effect of which is to produce the very ends proscribed in section 46, and considers that prohibiting such conduct by reference to its effect may challenge the competitive process itself. [fn omitted]

[para 5.66] If the difficulty with section 46 is proof of purpose, the Committee considers that this would best be dealt with by requiring a corporation, once the TPC, has established that it is as likely as not that an offence has occurred, to bring forward evidence showing that.it did not have a proscribed purpose .

[para 5.57] The Committee recommends that section 46 be amended by adding a further subsection to provide that, although the Trade Practices Commission has the overall onus of proving a breach of that section, when it has brought forward evidence which makes it as likely as not that one has occurred then one will be taken to have occurred unless the corporation in question shows otherwise.

This recommendation was not implemented.

Further conduct

The Committee noted some proposals for additional coverage (from 5.32).This included discussion of s 46's application to excessive pricing (TPC arguing s 46 may need to be amended to cover this; Dr Pengilley strongly opposed) and discussion about whether s 46 should capture conduct likely to cause significant injury to consumers.

In relation to other conduct the Committee concluded that excessive pricing is better dealt with under the Prices Surveillance Act (para 5.69) and that misuse of market power affecting consumers 'is adequately dealt withunder the existing consumper protection provisions' (para 5.70). However, the Committee did consider that doubt existed as to s 46's application to conduct affecting the competitive process (and not merely competitors) and recommended:

[para 5.74] that section 46 be amended to provide that where persons engaged in conduct for the purpose of eliminating from or harming a class of persons in a market they shall be taken to be doing so in respect of a specific member of it.

Remedies

In relation to divestiture the Committee noted that this was considered by the Griffiths Committee which recommended against divestiture power for s 46 contraventions. They noted submissions in support of such a power (inc Prof Baxt, AFCO and NCAAC) and those opposed (inc VECCI, CAI, McComas, BCA). Other possible remedies were also discused.

In relation to divestiture the Committee noted that it is essentially a structural remedy and misuse of market power is essentially a matter of conduct (para 5.77). They recommended that divestiture not be made available as a remedy (para 5.80).

Hilmer Report 1993

The Hilmer Committee did not recommend any change to s 46:

The Committee sees a need to strike a balance between deterring undesirable unilateral conduct, encouraging business certainty and minimising the regulatory interference in daily business decisions. The Committee is not satisfied that any perceived difficulties with the current operation of s.46 are sufficient to warrant an amendment that would create additional uncertainty and thus potentially deter vigorous competitive activity. The Committee recommends that the current misuse of market power provision should be included in the conduct rules of a national competition policy.

The Committee stated that (page 69):

The central conundrum in addressing the problem of misuse of market power is that the problem is not well defined nor apparently amenable to clear definition. There is considerable debate about what sorts of conduct should be prohibited. Even if particular types of conduct can be named it does not seem possible to define them, or the circumstances in which they should be treated as objectionable, with any great precision. For example, it may be possible to say that "predatory pricing" is undesirable, but it does not seem possible to give a clear definition of what will amount to predatory pricing in all circumstances.

Faced with this problem, but recognising that there are clearly some cases which do go beyond the limits of vigorous competitive conduct and extend into the realm of conduct by which firms damage the competitive process, the challenge is to provide a system which can distinguish between desirable and undesirable activity while providing an acceptable level of business certainty. In this respect it is important to stress that uncertainty over the bounds of legally acceptable behaviour may deter efficient and socially useful competitive behaviour.

In addressing this challenge, the Committee starts from the position that there is already in place a regime which provides a basis for making the appropriate distinctions, that the regime is broadly consistent with approaches in comparable overseas jurisdictions, and that it has been sufficiently interpreted by the High Court to provide a reasonable degree of business certainty as to the limits of acceptable conduct. Moreover, none of the submissions presented to the Inquiry gave practical examples of any particular behaviour that was not proscribed by the current law and yet was clearly unacceptable. The Committee thus considers that proposals for alternative mechanisms for dealing with misuse of market power should offer a demonstrable improvement over the current regime to justify introducing further uncertainty in this difficult area.

The Committee went on to consider a number of proposals, including:

• that a administrative investigation should replace legal prohibition
  Committee not satisfied deficiencies in current law warranted 'so bold a departure in approach' (page 70)

• that an effects test replace the purpose test
  Committee did not consider that an 'effect of SLC' test would ‘constitute an improvement on the current test' noting that it 'does not address the central issue of how to distinguish between socially detrimental and socially beneficial conduct'. The Committee noted that

  • ... the very essence of the competitive process is conduct which is aimed at injuring competitors. A firm that succeeds in aggressive competitive conduct may drive other firms from the market and achieve a position of pre-eminence for an extended period. It does not necessarily follow, however, that the competitive process will be damaged by the conduct or that the potential for competition will be diminished, even if the immediate manifestations of the successful competitive conduct may suggest it. Firms should be encouraged to compete aggressively by taking advantage of new and superior products, greater efficiency and innovation. There is a serious risk of deterring such conduct by too broad a prohibition of unilateral conduct. The Committee takes the view that an effects test is too broad in this regard. ...' (page 70)

• Modification to existing purpose test
  Committee considered various suggestions including that burden of proof be reversed in 'specific circumstances' by rebuttable presumption of prescribed purpose. The Committee noted that there was difficulty in determining what those 'specific circumstances' might be. None of the considered proposals for modification of the existing test were accepted.

• Authorisation
  The Committee considered whether there would be capacity to authorise misuse of market power, but was not 'persuaded of the need for or desirability of authorisation in misuse of market power situations' noting that conduct contraventioning other sections can be authorised and, while so authorised, will not be taken to contravene s 46 (page 73)

• Refusal to Deal
  The Committee was 'not convinced that alternative proposals for a generally applicable duty to deal are capable of being sufficiently specific in their application to ensure they would not themselves lead to inefficient results' (page 73)

The Committee concluded that 'any perceived difficulties with the current operation of s.46 are sufficient to warrant an amendment that would create additional uncertainty and thus potentially deter vigorous competitive activity.' (page 74)

Baird Report 1999

The Baird Committee (Joint Select Committee on the Retailing Sector)

The Committee considered merits of replacing purpose test with a 'reverse onus of proof' test, but was not convinced such a measure would be appropriate 'at this stage', but may be appropriate 'should the core recommendations prove to be ineffective in preventing predatory conduct'. (page ix)

Chapter 5 of the Report considered these issues in more detail (in the context of the retailing sector):

• Market cap
  Committee opposed market cap - 'based on figures, not on competition' and 'would be extremely interventionist, unworkable and detrimental to consumers' (para 5.26)

• Divestiture
  Break up of economies of scale and scope to divest stores 'would lead to an unpredictable result, and may undermine the benefits and efficiencies brought about by vertical integration' (para 5.31)

• Creeping acquisitions and mandatory pre-merger notification
  The Committee considered that 'mandatory notification may expose more clearly whether a major chain is implementing a deliberate strategy of creeping acquisitions.' (para 5.50)

• Ombudsman and Code of Conduct
  The Committee was concerned that small retailers were 'fearful of commercial retribution from big business if they were to raise their concerns in pubic' and recommended 'Retail Industry Ombudsman and a mandatory Code of Conduct be established to deal with this recurring problem' (para 5.91)

• Primary producers and supply contracts
  The Committee was of the view that 'power of individual growers in the market place is limited, and believes that a mandatory Code of Conduct will address the problems raised' (para 5.106)

Chapter 6 considered the issue of misuse of market power in the context of allegations of predatory pricing. It noted a 'significant amount of anecdotal evidence alleged instances of predatory pricing' (para 6.1)

The Committee also considered a 'reverse onus test' and an 'effects test' for s 46 and more generally, it considered the possibility of giving the ACCC powers to bring representative actions on behalf of small business to enforce Part IV provisions.

The Committee agreed the ACCC should have power to bring representative actions. However, it did not consider that a reverse onus of proof was appropriate at this time, nor did it recommend the introduction of an effects test (expressing the view that 'such far reaching changes to the law may create much uncertainty in issues dealing with misuse of market power' (para 6.32)

Hawker Report 2001

The Hawker Committee (House of Representatives Standing Committee on Economics, Finance and Public Administration) considered whether an effects test should be introduced into s 46. The specific proposal was that the word effect be added to purpose [see p 49]:

Section 46 would then prohibit a corporation that has a substantial degree of power in a market from taking advantage of that power for the purpose or effect of:

• eliminating or substantially damaging a competitor of the corporation or of a body corporate that is related to the corporation in that or any other market;

• preventing the entry of a person into that or any other market; or

• deterring or preventing a person from engaging in competitive conduct in that or any other market.

The Committee discussed the three decisions in Melway, Boral and Rural Press and concluded:

[para 4.31] Given these breakthroughs in the interpretation of section 46 and the repeated concerns expressed by various inquiries about the move to an effects test, the committee’s preference is to await the outcome of further cases on section 46 before considering any change to the law.

McKiernan Committee 2002

The McKiernan Committee (Senate Legal and Constitutional References Committee Inquiry into section 46 and section 50 of the Trade Practices Act 1974) - discussion but no recommendation because Dawson Committee Review had been announced - referred evidence to Dawson Committee.

The Committee considered the following proposed amendment (proposed s 46(8)):

(8) In an action brought against a corporation by the ACCC under subsection (1), if the ACCC can show that the corporation:

(a) has a substantial degree of market power; and

(b) has taken advantage of that power;

the onus rests with the corporation to show that the corporation has not taken advantage of its power for a purpose referred to in subsection (1).

The Committee noted that a reverse onus test, if implemented, was likely to achieve only limited benefits and instead considered in more detail submissions that the purpose test ought to be changed; in particular it considered whether an effects test should be introduced.

However, ultimately they concluded that:

it may be premature to make recommendations on these amendments while other reviews of the Trade Practices Act 1974 are proceeding, most notably the review of the competition provisions of the Act [Dawson Review] ... The Committee proposes to refer the public submissions, the transcript of the public hearing and this report to the review committee. [para's 3.76-3.77]

Dawson Report 2003

The Dawson Report included no recommendations for change to s 46.

Purpose v effect

The committee focussed exclusively on submissions that the purpose test in s 46 be replaced or supplemented with an effects test. The main proposal in this respect was to add 'effect' to the current prohibition, so that it would capture conduct by firms with substantial market power having the purpose or effect of, for example, excluding a single competitors. For example, the Committee noted (page 81):

Under an effects test the proscribed purposes in section 46 (substantially damaging a competitor; preventing entry to the market; deterring competitive conduct) would become proscribed effects. Normal competitive behaviour by a firm with substantial market power which injured a competitor would be likely to satisfy an effects test.

The Committee doubted the difficulty in proving purpose, noting to the ability to infer purpose from surrounding circumstances, the fact that it need only be proved to the civil standard and the fact that purpose need not be the sole or dominant purpose (p 77). The Committee was, therefore 'not persuaded that proving purpose is an unnecessarily onerous hurdle' (page 79). They also rejected the introduction of an effects test on the basis that the section is designed to pursue the objective of protecting and advancing 'a competitive environment and competitive process', rather than protecting individual competitors, that it does this by restraining 'misuse of market power' and that 'misuse' occurs when advantage is taken of market power for a proscribed purpose, regardless of actual effect.' (page 79) The Committee found international comparisons 'difficult and unhelpful' (para 79) and further considered that replacing the purpose test with an effects test would:

... render purpose ineffective as a means of distinguishing between legitimate (pro-competitive) and illegitimate (anti-competitive) behaviour. The section is aimed against anti-competitive monopolistic practices, not competition, even aggressive competition. ... An effects test, which would disregard purpose, would make it even more difficult to draw a distinction between pro-competitive and anti-competitive behaviour than is currently the position under section 46 where purpose may be called in aid. (page 80)

The Committee also briefly considered an alternative proposal, that section 46 be amended to prohibit a coproration having a substantial degree of market power from taking advantage of that power with the effect or likely effect of 'substantially lessening competition'. The Committee considered that this would 'exacerbate the difficulties' with s 46 cand change its focus from conduct with a proscribed purpose to that with proscribed effect and that this would be likely to catch pro-competitive as well as 'anti-competitive conduct.' (page 85)

Take advantage

The Committee did not separately consider the 'take advantage' element, other than as part of their consideration of the 'effects' test. However, they did observe that in their view current interpretations meant that this requirement 'means little, if anything, more than 'use' of its market power' with the ultimate test being whether 'the corporation's conduct was made possible by the absence of competitive conditions' (page 81) and further that:

‘take advantage of’ essentially means ‘use’ and a corporation with a substantial degree of market power can readily be seen to use that power by engaging in the competitive process (page 85)

It is notable, however, that several significant decisions were on appeal at the time the Dawson Committee released its report - including Rural Press, Australian Safeway Stores, ACCC v Universal Music and ACCC v Boral - and the Committee considered that those cases'should provide greater practical guidance in the application of section 46' (p 84) and further that:

... it would not be in the interests of competition or consumers to change section 46, given that the cases currently before the courts offer a real prospect of developing a better understanding of the true scope of section 46. The position can, of course, be reviewed when the cases have been decided and there has been an opportunity to appreciate the impact of the decisions. (page 84)

Senate Inquiry into the Effectiveness of the Trade Practices Act 1974 in protecting small business 2004 (post-Boral)

The terms of reference to this inquiry included:

(a) whether section 46 of the Act deals effectively with abuses of market power by big businesses, and, if not, the implications of the inadequacy of section 46 for small businesses, consumers and the competitive process

In relation to misuse of market power the Committee made 6 recommendations -

1. Substantial market power - that the Act be amended to state that the 'substantial degree of power' threshold his lower than the former 'substantial control' threshold and include declaratory provision outlining matters that can be taken into account [not accepted by the Government]

2. Taking advantage - that the Act include a declaratory provision outlining elements of 'take advantage' [not accepted by the Government]

3. Predatory pricing - the Act be amended to provide that, in determining whether s 46 has been breached, courts may have regard to the capacity of a firm to sell below variable cost and to provide that recoupment of losses is not an essential element of a predatory pricing claim under s 46 [this was prompted by the Boral case] [accepted in part by the Government - could be amended to ensure courts may consider below cost pricing, but not its capacity to price below cost in isolation and that s 46 should make clear that whether a corporation has a reasonable prospect or expectation of recruitment is a relevant factor in assessing misuse of market power]

4. Financial power - the Act be amended to state that, in determining whether a firm has substantial market power, the court may have regard to whether the corporation has substantial financial power [this was prompted by the Rural Press case] [not accepted by the Government - financial power not the same as market power]

5. Leveraging market power - that s 46 be amended to state that a corporation which has a substantial degree of power in a market shall not take advantage of that power in that or any other market [accepted by the Government]

6. Co-ordinated market power - that s 46 be amended to clarify that a company may have substantial market power by virtue of its ability to act in concert with another company (whether as a result of formal agreement or otherwise) [accepted by the Government in part - provisions hould be amended to ensure that when assessing marke tpower court may take acount of market power that results form agreements with others]

Subsequently the Trade Pactices Legislation Amendment (No 1) Act (2007) gave effect to the accepted recommendations. In particular, it included

• a new (3A) which expressly provided that a court, when determining the degree of market power held, may have regard to power resulting from agreements or covenants (related to recommendation 6)

• a new (3B) was introduced which made clear that the other sub-sections (inc 3A) did not limit, by implication, the mattes the court may have regard to when assessing market power

• a new (3C) was introduced providing that a corporation may have a substantial market power even though it does not substantially control the market or have absolute freedom from constraint by the conduct of competitors or suppliers/customers (related to recommendation 1)

• a new (3D) was introduced to make clear that more than one corporation may have a substantial degree of power in a market

• a new (4A) was introduced to make clear that, when determining whether a contravention has occurred, the Court may have regard to sustained below cost pricing and the reasons for that conduct (related to recommendation 3).

One year later the Trade Practices Legislation Amendment Act 2008 introduced a new subsection (6A) which set out a list of factors the court may have regard to when assessing whether a corporation has 'taken advantage' of its substantial market power. They include:

(a)  whether the conduct was materially facilitated by the corporation's substantial degree of power in the market;

(b)  whether the corporation engaged in the conduct in reliance on its substantial degree of power in the market;

(c)  whether it is likely that the corporation would have engaged in the conduct if it did not have a substantial degree of power in the market;

(d)  whether the conduct is otherwise related to the corporation's substantial degree of power in the market.

This subsection does not limit the matters to which the court may have regard.

The 2008 Act also amended s 86(1A) to confer jurisdiction on the Federal Magistrate's Court (now the Federal Circuit Court) in any matter arising under s 46 instituted by a person other than the Minister or ACCC. This power has never been used.

Birdsville Amendment

The most infamous amendment to s 46 was also introduced by the Trade Practices Legislation Amendment (No 1) Act (2007). This amendment (referred to as the Birdsville amendment after the name of the pub in which it was supposedly conceived) introduced a new subsection dealing specifically with below cost pricing - the new section 46(1AA) prohibits a corporation having substantial market share supplying goods or services below cost for a sustained period for one of the three prohibited purposes (the same prohibited purposes as for s 46(1). View more commentary on this amendment.

In 2008 the Trade Practices Legislation Amendment Act 2008 introduced a new sub-section (1AAA)  providing that:

If a corporation supplies goods or services for a sustained period at a price that is less than the relevant cost to the corporation of supplying the goods or services, the corporation may contravene subsection (1) even if the corporation cannot, and might not ever be able to, recoup losses incurred by supplying the goods or services.

The Birdsville amendment remained controversial and was never litigated before being repealed in November 2017.

Senate Report 2008

Inquiry by Senate Economics Committee into the Trade Practices Legislation Amendment Bill 200

The bill and report focused on predatory pricing.

Market power v market share

The Government proposed amending reference to market share in s 46(1AA) to market power, consistent with s 46(1) noting, amongst other things, that it is 'possible in a readily 'contestable' market for a firm to have a large market share but little market power' (para 2.10) and, conversely, that a 'firm may also have market power and the ability to engage in predatory pricing despite a modest market share if it has 'deep pockets'. (para 2.10)

The Committee, however, concluded that (page 8):

... the term 'market share', as currently legislated in section 46(1AA) of the TPA, is a better defined and more readily measurable term than 'market power'. Moreover, it is concerned that the High Court's definition of 'market power' in the Boral ruling has set the threshold for predatory pricing cases far too high. The best evidence of this is that the ACCC has not brought a predatory pricing case before the High Court since the Boral ruling.

It recommended (recommendation 1) that 'the government reconsider the implications of changing 'market share' to 'market power' in section 46(1AA).'

Predatory pricing and take advantage

The bill proposed to introduce non-exclusive factors to be considered when determining whether a corporation has taken advantage of market power. The Committee supported these proposed amendments

Predatory pricing and recoupment

The bill proposed inserting the following provision:

A corporation may contravene subsection (1AA) even if the corporation cannot, and might not ever be able to, recoup losses incurred by supplying the goods or services at a price less than the relevant cost to the corporation of the supply.

The Committee supported these proposed amendments

Federal Magistrates Court

The bill recommended conferring jurisdiction on Federal Magistrates Court in s 46 matters. The Committee recommended implementation of this recommendation.

Senate Economics Legislation Committee Inquiry 2014-2015

The Senate referred the Competition and Consumer Amendment (Misuse of Market Power) Bill 2014 (introduced by Independent Senator Nick Xenophon), to the Senate Economics Legislation Committee for inquiry and report in the first half of 2014. The Committee was originally due to report by 24 June 2014; after a number of extensions the final report was produced on 26 February 2015. The Committee recommended against passage of the bill.

The Bill would have provided the Court with the power to order a corporation to reduce its market share, where the corporation has been found to have contravened subsections 46(1) or 46(1AA) of the Act.

The Committee (Senator Xenophon dissenting) concluded:

2.43 ... the committee does not consider a convincing case has been made for the introduction of a divestiture power as a remedy for the misuse of market power. Evidence has not demonstrated that the potential advantages of such a power would outweigh the likely disadvantages. In particular, the evidence received by the committee was compelling in questioning the courts' ability to 'fix' perceived problems with a market by ordering that certain assets of a large, complex and unified business organisation be divested. The committee is concerned that court-ordered divestiture would risk significant disruption and economic damage, with unpredictable consequences for competition.

2.44 In the committee's view, the evidence available suggests that the debate about section 46 should be focused on whether the prohibitions contained in it are effective, not whether further penalties need to be available. The committee notes this is the approach that appears to have been taken by the current independent review of competition policy being chaired by Professor Ian Harper. The Harper Review provides an opportunity for a thorough and holistic examination of competition policy, and the committee awaits the Harper Review's final report with great interest.

Harper Report 2015

A major Competition Policy Review took place from 2014-2015 with a final report released in March 2015. The Independent Review Panel (Chaired by Prof Ian Harper) called for the introduction of an effects test for misuse of market power.

For details of the changes see my misuse of market power overview (PDF)

The substance of the recommendations were enacted with the passage of the Competition and Consumer Amendment (Misuse of Market Power) Act 2017.

The changes, which will come into operation in 2018, represent the most significant change to the provision since it was enacted in 1974.

Treasury Issues Paper 2015-2016

The initial government response deferred a decision on misuse of market power, instead referring it for a further Treasury consultation (Treasury Consultation on Options to Strengthen the Misuse of Market Power Laws). On 16 March 2016 then Prime Minister Turnbull announced the Government would adopt the proposed effects test and issued the following press release:

In a Press Release issued on 16 March 2016, the Government indicated it would adopt the Harper Review's recommendations in relation to s 46.

'Joint Media Statement - Prime Minister, Treasurer and Assistant Treasurer - Competition Policy

The Turnbull Government will legislate to fix competition policy in Australia through implementation of the Harper Review’s recommendation to amend Section 46 of the Competition and Consumer Act - the misuse of market power provision.

The Harper Review into competition policy - an election commitment of the Coalition Government - found Australia’s current misuse of market power provision is not reliably enforceable and permits anti-competitive conduct. This slows the entry and expansion of new and innovative firms, delays the entry of new technologies into Australia and impedes economic growth in the long term.

The Harper Review recommended that Section 46 be replaced by a new provision, which is better able to deal with harm to competition in Australian markets.

Following the review, and understanding of the concerns about the operation of the misuse of market power provision as well as the need to ensure the provisions enhance rather than inhibit competition, the Government undertook extensive consultation with stakeholders to soberly work through the issue.

Following this rigorous process the Government has decided to repeal the current Section 46, and adopt the changes recommended by the Harper Review in full. This will result in a new provision that prevents firms with substantial market power from engaging in conduct that has the purpose, effect or likely effect of substantially lessening competition.

The Government is committed to fixing Australia’s competition policy and the amendment of Section 46 to deal with unilateral anti-competitive conduct is an important step to ensure Australia has the best possible competition framework to support innovation and boost economic growth and jobs.

Conscious of the needs of business, the change is deliberately designed to reduce the uncertainty associated with amending a law. It uses existing legal concepts from within the competition law – such as ‘substantially lessening competition’ – and ensures the focus of the provision remains only on those firms that have substantial market power.

This reform represents a commercially and legally robust law, preventing firms with market power engaging in behaviour that harms the competitive process. It places Australia’s competition law on the right footing to encourage economic growth and innovation.

An effective misuse of market power provision is an important and necessary part of competition law, particularly for Australia’s more than two million small businesses which make up more than 97 per cent of all businesses.

The changes the Government has announced will more effectively focus on the long-term interests of both small businesses and consumers, improving the law’s clarity, effectiveness and force.

The change to Section 46 will protect the competitive process and is just one of the many actions the Government is taking to support small businesses, including by extending protections against unfair contract terms to small businesses and introducing Australia’s first Small Business and Family Enterprise Ombudsman.

Today’s announcement adds to the benefits small businesses are receiving from the Government’s response to the Harper Review.

The Government’s response will directly benefit small businesses through:

• access to remedies, with the Government supporting the Australian Competition and Consumer Commission to take steps to improve its communications with small business and to more actively connect small businesses to alternative dispute resolution schemes;

• improving the collective bargaining regime under the competition law, to provide more flexibility and increased information for small businesses, to help improve their bargaining position;

• encouraging state, territory and local governments to review their competitive neutrality guidelines, to ensure that their commercial operation do not negatively affect commercial businesses; and

• reviewing the anti-competitive impact of regulations, including standards and licensing, freeing up trading restrictions that apply to many businesses.

Protecting the competitive process is unashamedly pro-competition and allows everyone to have a go.

The Government will consult on Exposure Draft legislation before introducing it to Parliament later in 2016.'

Reproduction of media release 'Joint Media Statement - Prime Minister, Treasurer and Assistant Treasurer - Competition Policy': Source: Licensed from the Commonwealth of Australia under a Creative Commons Attribution 3.0 Australia Licence. The Commonwealth of Australia does not necessarily endorse the content of this publication.

International and supranational reports and guidance

International Competition Network, Report on the Analysis of Loyalty Discounts and Rebates Under Unilateral Conduct Laws (Unilateral Conduct Working Group, 8th Annual ICN Conference, Switzerland, June 2009 ) ➤

Recommended Practices on Domination/Substantial Market Power Analysis Pursuant to Unilateral Conduct Laws ➤

Report on the Objectives of Unilateral Conduct Laws, Assessment of Dominance / Substantial Market Power, and State-Created Monopolies (2007) ➤

Workbook Chapter on Assessing Dominance / Substantial Market Power, adopted at the 2011 Annual Conference in The Hague ➤

OECD

OECD Best Practice Roundtables on Abuse of Dominance ➤

Europe

European Commission Abuse of Dominance page ➤

European Commission, Guidance on the Commission's enforcement priorities in applying Article 82 of the EC Treaty to abusive exclusionary conduct by dominant undertakings (2009/C 45/02) ➤

Report by the EAGCP, 'An Economic Approach to Article 82' (2005) (PDF) ➤

DG Competition discussion paper on the application of Article 82 of the Treaty to exclusionary abuses (December 2015) (PDF) ➤

Foreign reports and guidance (select)

United Kingdom

OFT, 'Selective Price Cuts and Fidelity Rebates: A Report prepared for the OFT by RBB Economics' (July 2005) Economics Discussion Paper OFT 804 (related commentary) ➤

OFT, ‘Switching costs’ (Economic Discussion Paper 5, April 2003) ➤

United States

U.S. Dep't of Justice, Competition and Monopoly: Single-Firm Conduct Under Section 2 of the Sherman Act (2008) (Report withdrawn 2009) ➤

DOJ - Competition and Monopoly: Single-Firm Conduct Under Section 2 of the Sherman Act - 2008 Report (withdrawn by DOJ in May 2009) ➤