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


i Overview

The prohibition in Section 46 requires not only satisfaction of the elements of market power and engaging in conduct with the purpose or likely effect of substantially lessening competition.

Section 46(4) provides the following non-exhaustive list of factors the court may consider to determine whether a corporation has taken advantage of market power:

  1. whether the conduct was materially facilitated by the corporation's substantial degree of power in the market;
  2. whether the corporation engaged in the conduct in reliance on its substantial degree of power in the market;
  3. 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; and
  4. whether the conduct is otherwise related to the corporation's substantial degree of power in the market.
ii Purpose

The purpose element in Section 46(1) will be established where it can be shown merely that there is an intention to achieve a result, rather than the fulfilment of that intention.

While courts have taken a range of approaches to determining purpose, including assessing conduct on a subjective basis, it appears likely that the position going forward is that, while there are subjective elements to assessing purpose, the ultimate test is objective. In the Telstra Corporation case, the Federal Court placed weight on the requirement, which provides that the court may find that a corporation's purpose where that purpose is ascertainable only by inference from the corporation's conduct or the conduct of any other person, or from other relevant circumstances. The Court took the approach that if, upon consideration of the nature and substance of the conduct, it can be said that the substantial purpose for that conduct was to substantially lessen competition, or if such a purpose can be inferred, it is not necessary to consider the subjective reasons for the conduct.

To contravene Section 46(1), the proscribed purpose need not be the sole purpose for the conduct, merely a substantial purpose. If the conduct was motivated by both a legitimate purpose and purpose to substantially lessen competition, and both are substantial purposes, the corporation will have contravened Section 46(1). However, Section 46(1) will not be contravened where a corporation was motivated entirely by a legitimate purpose, or dual purposes where the purpose of substantially lessening competition was not substantial. For example, in Dowling v. Dalgety Australia Ltd, the respondents' dominant purpose was to use their valuable asset without sharing it with a person who had no proprietary interest in it, and restricting competition was found to be a subsidiary purpose.

iii Exclusionary abusesPredatory pricing

Predatory pricing will now be dealt with under the general misuse of market power prohibition in Section 46(1), and will be prohibited if engaged in by a corporation with market power, and the purpose or likely effect of the conduct substantially lessens competition in any relevant market. Conduct will be considered predatory pricing if the corporation has market power and is selling below cost. Typically, the conduct drives competition from the market, following which the offender will increase its price and recover its losses. As per Finkelstein J in ACCC v. Cabcharge Australia Limited:

Firms engage in predatory pricing 'to drive rivals out of business and scare off potential entrants' . . . Then, they raise prices, capturing monopoly oligopoly rents.

Once firms gain monopoly/oligopoly power, it is often extremely difficult to take that power away and firms are likely to be deterred from entering the market because they know that the incumbent has the ability to undercut them and to engage in predatory pricing.

To establish predatory pricing, two questions will arise. First is assessing when will the price be sufficiently low to be regarded as predatory. The record is whether the prospect of recoupment is necessary. In relation to costs, the courts have yet to settle on the appropriate costs measure to establish predatory pricing. In Eastern Express Pty Ltd v. General Newspaper Pty Ltd, the court found that no specific category of pricing tends to imply a misuse of market power. Accordingly, it is not a contravention to supply goods or services below the relevant cost where such conduct places the corporation at risk of a contravention occurring when its pricing conduct is for the purpose or likely effect of substantially lessening competition. On the question of the recoupment, the Australian courts have not yet established that recoupment is necessary to establish a contravention. In Boral Besser Masonry Ltd v. ACCC, per Gleeson CJ and Callinan JJ, 'While the possibility of recoupment is not legally essential to a finding of pricing behaviour in contravention of Section 46, it may be of factual impertinence'. Accordingly, the ability to recoup may be an indication of market power, and if it in fact occurs and drives others from the market, it may have the effect of substantially lessening competition.

Margin squeeze

While there is no judicial precedent, a possible theory of harm of a 'price squeeze' that may fall within Section 46(1) suggests that a vertically integrated firm with substantial market power in the provision of an essential upstream product sets the wholesale price for the upstream product and retail price for the final product in such a way that the margin 'squeezes' an efficient downstream rival from the market.

Exclusive dealing

The CCA specifically prohibits all corporations from, in trade or commerce, engaging in the practice of exclusive dealing where such conduct has the purpose, or would have the effect or likely effect, of substantially lessening competition.

A refusal to supply may not substantially lessen competition if it does not alter the market structure by raising barriers to entry or reducing price competition, and is unlikely to substantially lessen competition if it is a refusal to supply one of a number of competing retailers in a generally competitive market.

Additionally, regardless of whether the purpose or likely effect is to substantially lessen competition, a corporation will contravene the CCA if it:

  1. supplies, or offers to supply, goods or services at a particular price, or at all, or gives or allows, or offers to give or allow, a discount, allowance, rebate or credit, on the condition that a person to whom a corporation supplies, or offers or proposes to supply, the goods or services (or a related corporation), will acquire goods or services directly or indirectly from another person (not being a related corporation); or
  2. refuses to supply goods or services at a particular price, or at all, or to give or allow a discount, allowance, rebate or credit, for the reason that a person (or a related corporation) has not acquired, or has not agreed to acquire, goods or services directly or indirectly from another person (not being a related corporation).

Exclusive dealing conduct notified to the ACCC may be immunised unless the ACCC is of the opinion that the likely public benefit of the conduct will not outweigh the likely detriment.

Tying and bundling

A tying scheme may fall within one of the exclusive dealing provisions discussed above if it has the purpose or likely effect of substantially lessening competition. If a corporation with market power grants a discount on condition that a purchaser acquires other goods from it or a third party, such a tying or forcing arrangement may contravene Section 46(1) or Section 47(1) of the CCA.

It will need to be proved that the tying or bundling conduct was exclusionary. For example, in some cases, requiring a customer to obtain consumables from the equipment supplier may be justified as the only way to ensure the safe functioning of the equipment.

Refusal to deal

The general position is that there is no obligation to deal with everyone seeking to deal. Operators have the freedom to choose whom they deal with, and under what conditions. This is subject to the prohibition in Section 46. To contravene Section 46(1), there must be a connection between a refusal to deal and market power. A court considers the business rationale for the refusal, and whether a corporation would have refused to deal even if it was subject to competitive constraints in the market. In particular, where there was a cooperative relationship between parties and a party with substantial market power terminates such dealing, a court may require evidence of some change in circumstances justifying the refusal to continue that relationship. The court will also need to be persuaded that the purpose or likely effect of the conduct is to substantially lessen competition in a relevant market.

Some refusals to supply or acquire goods or services for failure to comply with a requirement will contravene the exclusive dealing provisions in Section 47 of the CCA.

Refusal to license intellectual property rights can also attract Section 46(1) if the criteria are met.

iv Discrimination

Price discrimination was specifically prohibited by the former statutory regime if it was likely to have the effect of substantially lessening competition. This provision was repealed in 1995 following a government report concluding that price discrimination generally enhances economic efficiency except in cases otherwise falling within Section 46. Price discrimination will only be prohibited if there is a misuse of market power where the purpose or likely effect of the conduct is the substantial lessening of competition in a relevant market. It will not constitute taking advantage of market power if it is justified by efficiency considerations.

Buyer-induced price discrimination can also constitute a misuse of market power within Section 46(1).

v Exploitative abuses

Mere exploitation of market power by charging the maximum price the market will bear does not generally fall within Section 46(1), provided it does not take advantage of market power for a proscribed purpose such as to damage competitors. Different considerations may apply where a monopoly input supplier competes in a downstream market, and the high price charged has an exclusionary purpose and is associated with price discrimination or a price squeeze.

For example, BHP was held to have contravened Section 46(1) by offering to supply QWI with Y-bars at an 'excessively high' price, which would have made it impossible for QWI to compete with BHP in the downstream rural fencing products market.