An extract from The Dominance and Monopolies Review - 7th edition

Market definition and market power

The prohibition against misuse of market power contained in Section 46 of the CCA applies only to corporations that have a 'substantial degree of power in a market'. Courts in Australia have tended to consider the analysis of market definition and market power together.

i Market definition

Sections 46(8)(b) and 4E of the CCA provide that, for the purposes Section 46, a reference to 'market' is a reference to a market for goods or services, and includes a market for those goods or services and other goods or services that are substitutable for, or otherwise competitive with, the first-mentioned goods or services; and is a market in Australia.

Given the definition of market in the CCA, analyses focus initially on the identification of substitutes. Both the ACCC and the Australian courts often commence an analysis of the borders of a market using the hypothetical monopolist test (HMT). The HMT examines the effect of a small but significant non-transitory increase in price on a hypothetical monopolist in a market for the good or service in question.

Owing to the input-intensive nature of the HMT analysis, the ACCC limits its inquiry in most cases to examining a list of product and geographic characteristics that tend to satisfy the test. This analysis consists of physical characteristics and portability, respectively, but also economic metrics such as cross-elasticity of demand.

The meaning of 'in Australia' has recently been the subject of consideration in a decision of the Full Court of the Federal Court of Australia. A majority of the Court held, in the context of price-fixing enforcements in the airfreight market, that a market that is located both outside and within Australia was a market in Australia for the purposes of the CCA.

ii Market power

Unlike most other jurisdictions, there are no statutory or court-based market-share presumptions. Proof of market power in Australia always needs to proceed on the basis of a full economic analysis. Market shares are helpful in identifying the degree of market power; however, a large market share does not necessarily mean that there is a substantial degree of market power in that corporation. Section 46(7) provides that more than one corporation may have a substantial degree of market power in a market. Australian courts place significant focus on the existence and scale of barriers to entry in determining to what extent an entity possesses market power. Courts have also placed weight on other evidence of related but distinct indications of market power, including:

  1. the ability of the firm to raise prices above the supply cost without rivals taking away customers in due time;
  2. the extent to which a corporation's conduct in the market is constrained by that of competitors or potential competitors;
  3. the market share of the corporation (although not determinative by itself); and
  4. the existence of vertical integration.

In its interim guidelines for market power, the ACCC indicates that market power exists where a firm can only engage in the conduct in question absent competitive constraint. This freedom, the ACCC notes, can be assessed having regard to the factors indicated in Queensland Co-operative Milling Association Limited and Defiance Holdings Limited:

  1. the number and size of distribution of independent sellers, especially the degree of market concentration;
  2. the height of barriers to entry; that is, the ease with which new firms may enter and secure a variable market;
  3. the extent to which the products are characterised by extreme product differentiation and sales promotion;
  4. the character of 'vertical relationships' with customers and suppliers, and the extent of vertical integration; and
  5. the nature of any formal, stable and fundamental arrangements between firms that restrict their ability to function as independent entities.

An important element of the analysis is determining whether market power is 'substantial' in nature. For market power to be substantial, courts have held that it needs to be 'real and of substance rather than trivial or minimal', or put another way, 'large or weighty' or 'considerable, solid or big'.

Courts have held that merely because a corporation is not profitable does not mean that it lacks market power. Financial power is also not evidence of market power.

Since the amendment, the provision no longer explicitly provides that a corporation with a substantial market share is prohibited from supplying, or offering to supply, goods or services for a sustained period at below the relevant cost of supplying goods or services where the corporation's purpose was to substantially damage or eliminate a competitor, competitors generally, a class of competitors or any particular competitor; or prevent or deter anyone from engaging in competitive conduct in any market. Such conduct will now be subject to the general prohibition.

iii Purpose or likely effect of substantially lessening competitionSubstantial market power

For the provision to apply, it is necessary to establish that a corporation has substantial market power. Such market power can be described to be 'considerable', 'big' or 'not merely nominal'. The explanatory memorandum accompanying the bill introducing the concept in 1986 indicated that substantial was to be regarded as 'large or weighty' or 'considerable, solid or big'.

While the introduction of the competition test is recent for the operation of Section 46, the test is well established in the Australian legal landscape in relation to anticompetitive contracts, arrangements or understandings, and mergers or acquisitions, which have all been prohibited where the conduct concerned has been likely to result in a substantial lessening of competition for some time. These authorities will also guide parties as to the likely treatment of the courts in relation to Section 46.

The ACCC, in its interim guidelines, has observed that 'conduct substantially lessens competition when it interferes with the competitive process in a meaningful way by deferring, preventing or limiting competition. This can be done by raising barriers to entry or to entry into a market'. As noted elsewhere in this chapter, 'substantial' must be meaningful to the competitive process., The ACCC identifies at Paragraph 2.26 of its interim guidelines that lessening competition means that the field of rivalry is diminished or lessened, or that the competitive process is compromised or impacted. The ACCC notes that the commercial rationale for the conduct will be relevant to the assessment.