What You Need to Know
- The Federal Government has announced it will accept certain changes to the misuse of market power prohibition, including the introduction of an “effects” test. This change is unlikely to be implemented before the next election.
- Despite perceptions, for most large organisations an “effects” test is unlikely to produce a significant change to their commercial dealings. However there may be certain strategic decisions or projects that require a more detailed market competition assessment.
- More rigorous forward looking legal and economic analysis will be necessary where decisions could have significant market consequences. For example, decisions to cease offering goods or services, limit access or terminate particular arrangements should be examined more closely to determine their likely effect on competition in any market and whether they can be associated with enhanced efficiency, product quality or price competitiveness over a reasonable time period.
- Small businesses facing significant competitors, suppliers or customers may be able to challenge – either directly or via complaints to the ACCC – a broader range of unilateral conduct. Moreover, the competition regulator will have a strong incentive to test the scope of the revised prohibition, which is likely to produce more ACCC investigations.
Criticisms of Existing Law
The misuse of market power provision (s46) of the Competition and Consumer Act 2010 (Cth) (CCA) was designed to regulate unilateral anti-competitive conduct. Currently, businesses with a substantial degree of market power are prohibited from “taking advantage” of that power for the purpose of:
- eliminating or substantially damaging a competitor;
- preventing the entry of a business into a market; and
- deterring or preventing a business from engaging in competitive conduct.
The prohibition is intended to identify inefficient, monopolistic practices that exclude rivals and harm the competitive process, while not interfering with legitimate, vigorous competitive activity. Whether s46 is achieving this goal has long been the subject of debate and disagreement amongst business and consumer organisations, legal advisers and the ACCC.
The Harper Competition Policy Review (Harper Review), which was released on 31 March 2015, placed the prohibition under the spotlight and found it was deficient for two reasons:1
- The “take advantage” element reflects an economic argument that a firm with substantial market power should be able to engage in business conduct if firms without market power could engage in the same conduct. However, conduct that is competitively benign when undertaken by a small firm can be harmful when a firm has market power. Therefore, it is not a useful test for distinguishing between competitive and anti-competitive conduct.
- The “purpose” test is unique in the CCA and across equivalent overseas jurisdictions2 with its focus on harm to individual “competitors”. Instead, the prohibition should be directed to conduct that has the purpose or effect of harming the competitive process.
Key Elements of the Effects Test
The Harper Review recommended s46 be re-framed to prohibit a business with a substantial degree of market power from engaging in conduct if the proposed conduct has the purpose, or would have or be likely to have the effect of substantially lessening competition in that or any other market (the Effects Test). The key changes are:
- the “take advantage” element would be removed;
- the current purpose test would be replaced with a test of whether the conduct has the “purpose, effect or likely effect of substantially lessening competition” in any market;
- the provision would specify mandatory factors that a court must have regard to, when determining whether there has been a breach, including:
- the extent to which the conduct has the purpose or effect of increasing competition, including by enhancing efficiency, innovation, product quality or price competitiveness in the market; and
- the extent to which the conduct has the purpose or effect of lessening competition, including by preventing, restricting or deterring the potential for competitive conduct in the market or new entry into the market; and
- conduct at risk could be authorised by the ACCC, subject to meeting a net public benefit test.
On 16 March 2016 the Federal Government confirmed it would accept the Effects Test in full. It plans to consult on exposure draft legislation before introducing the final bill to Parliament later in 2016. This suggests that a vote is unlikely to take place before the next election.
- Potential complexity – whether conduct has the effect of “substantially lessening competition” has traditionally been determined by a comparison of likely future states, with and without said conduct. Clearly there will be circumstances where this forward looking test will not be simple or timely to apply in practice, despite the ACCC’s view that “Courts and practitioners (already) have extensive experience in assessing whether conduct is likely to substantially lessen competition”.3
- Fact specific analysis – while the Effects Test offers greater opportunities for small business to challenge unilateral conduct, the fact specific nature of the analysis cannot be overstated. For example, a large manufacturer reducing its distributors and thereby “refusing to supply” some of them may be able to demonstrate the overall effect is to increase competition by enhancing efficiencies. Alternatively, a vertically integrated company that refuses to supply a key component to a potential new downstream entrant may be substantially lessening competition in that market.
- Higher prices are not the sole determinant – a lessening of competition cannot simply be equated with higher prices. Instead, it may occur where prices remain the same or fall but there is deterioration in another aspect of the service offering in the market (e.g. lower quality, less range or variety, lower customer service standards). Moreover, sustained deep price discounting below cost could have the effect of substantially lessening competition where it erects artificial barriers to others participating in the market.
- Authorisation may often be impractical – while an ACCC authorisation may be available, it is only likely to be deployed in rare circumstances where a business is able to wait approximately 6 months to implement a strategic decision, can demonstrate net public benefits and is willing to allow a public examination of the decision prior to its implementation.
In the event an Effects Test is introduced, large organisations likely to have a “substantial degree of market power” should:
- Develop a process to identify strategic decisions are more likely to be high risk – for example, ceasing to offer or acquire goods or services, engaging in sustained deep discounting, terminating the supply or acquisition of goods or services or refusing to deal with a particular party.
- Introduce a new step in their decision making processes that involves a rudimentary assessment of the competitive consequences of such a decision in any market – in particular, whether it prevents, restricts or deters the potential for competitive conduct in the market or new entry into the market. In many cases businesses will already be undertaking regular market analysis and be well versed in predicting how competitors, suppliers and customers are likely to respond.
- Appropriately record and capture the competitive benefits associated with the decision, including enhanced efficiency, innovation, product quality or price competitiveness. This may well form part of business cases that are already regularly produced and could also act to demonstrate the pro-competitive purpose of the decision (rather than a purpose of substantially lessening competition).