With the upcoming review of Australia’s competition laws under way, Professor Fred Hilmer was recently reported as urging the review not to be blindsided by politics advocating ‘protecting small business from big business’. Australia has traditionally protected inefficient producers that lack the scale to compete in world markets. The jewel in the crown of politically inspired competition law is the ‘Birdsville amendment’ concerning predatory pricing.

It is hard for our international trading partners to grasp that this important area of competition law was drafted in a pub, and bears every hallmark of its genesis. This seriously adds to the problem, already underlying Australian (and overseas) competition law, that it is difficult to distinguish price cutting which may be justified as a normal incident of competition (e.g. “meeting competition”) from exclusionary conduct that contravenes the legislation.

Section 46 of the Competition and Consumer Act 2010 (CCA) prohibits a corporation with a substantial degree of market power from taking advantage of that power for purposes that include a substantial purpose of eliminating or substantially damaging a competitor or deterring or preventing a person from engaging in competitive conduct. There has been ongoing debate whether the law should be changed to encompass an “effects” test, however, at present, proof of a proscribed anti-competitive purpose is the key element once market power is proven.

The concept of market power has been judicially defined to be the ability to “give less and charge more” without being constrained by the response of competitors or customers. The legislation makes clear that a corporation can have market power without necessarily being in a position to control the market, and it is possible for more than one corporation to have a substantial degree of power in the market. Market power is not the same as market share, as “power” depends on the response of competitors and customers, i.e. a corporation can have a high market share without necessarily having market power if it is constrained by the conduct of its competitors and customers.

It is judicially recognised that a corporation fighting to retain its market share in a buyer’s market, i.e. when supply capacity exceeds demand, may not have the  required  threshold  “market  power”. Further, the words “taking advantage” are open to interpretation, i.e. they suggest that the corporation would not be able to act the way it does if it did not have market power, but also have been construed to require consideration of what the corporation could be expected to do in a more competitive market. Both these counterfactuals are problematic in distinguishing permitted from prohibited price-cutting: you don’t need market power to be able to cut prices.

The ACCC has not successfully prosecuted a case of predatory pricing. Following a failed case in 2003, the CCA was amended in two relevant respects. First, a provision was inserted which permits the court to have regard to conduct of the corporation supplying goods “for a sustained period at a price which was less than the relevant cost to the corporation” and the corporation’s reasons for so doing. A further amendment makes clear that it is unnecessary to consider whether the corporation might ever be able to recoup any losses arising from that conduct. This side-steps an important debate under the corresponding US law.

Second, the Birdsville amendment prohibits a corporation that has a substantial share of a market from offering to supply goods for a sustained period at a price less than the relevant cost for any of the prohibited purposes mentioned above. This prohibition is based on market share and lowers the bar for predatory pricing allegations.

Amazingly, the expression “relevant cost” in the provisions above is not defined.In economic theory, the relevant cost is “marginal cost” being the additional cost incurred as a result of producing one more unit (which includes allowance for “normal profits”). As this is generally indeterminable, case law supports “average variable cost” as the relevant benchmark, i.e. in theory a supplier would cease production if it could not cover the variable costs of producing a product. The High Court has cautiously endorsed “average variable cost” as a relevant benchmark (without deciding the point). It is conceivable that in a buyer’s market, where supply exceeds demand, prices may fall below average variable cost due to competitive market forces. There is inconclusive discussion in the High Court of US concepts that would restrict predatory pricing to conduct which has the purpose of excluding from the market an equally or more efficient competitor. These laws add to the strategic armoury of competitors and so distract attention from real competition on products and prices.

There is also some inconclusive discussion by the High Court of intra-group transfer prices which leaves multinational groups in an uncertain position, i.e. you should exclude from a corporation’s “cost” the profit margin charged by related companies, but the point has not be clarified by the courts.

The Australian provisions are based on the corporation’s “purpose”, which includes one substantial purpose among many. This exposes corporations to what one Australian judge has called “metaphysical analysis of dual purposes”, i.e. in a zero sum world one competitor looking out for itself necessarily stands to harm competitors, so it is easy for competitors or the ACCC to characterise the “purpose” as including a prohibited one. Clearly, meeting competition, preserving market share from aggressive competitor price- cutting, competitive tendering, etc should be defensible, but the position under our law is unclear. Much will depend on the way corporations manage and communicate (both internally and externally) their strategies during periods of intense price competition. Careful advice is required to avoid inadvertently opening the corporation to an allegation that its purposes included a prohibited purpose of harming competitors.