Misuse of market power: What's the effect of The Effects Test?

Stephen Booth

Last month, the Federal Government announced that, after lengthy consideration, it had decided to legislate for the “full Harper;” that is, to accept the recommendation of the Harper Review that whether conduct of a company with market power should be judged a misuse of that power should depend on the effect of that conduct, rather than whether the company intended to lessen competition. 

In the lead-up to this decision, Treasurer Scott Morrison, had speculated that perhaps the Government would choose “partial Harper,” rather than “no Harper at all” which is the position of the ALP. As large businesses (such as Coles and Woolworths) tend to oppose an effects test and small business is strongly in favour of it, the “full Harper” outcome was seen as a victory for small business.

So what will the shift to an effects test mean for “misuse of market power” cases?

Section 46 of the Competition & Consumer Act has been in the legislation, with some changes of wording, since 1974, but the ACCC hasn’t had much success in trying to enforce it, to the point that it hasn’t commenced many market power cases in the last decade because they are just too hard to win. Amendments to the Act to try to overcome this problem (such as Barnaby Joyce’s “Birdsville amendment,” announced at the Birdsville Hotel) but these haven’t had any material effect on the frequency or success of ACCC misuse of market power cases.

Section 46 currently sets out that a corporation with a substantial degree of power in a market must not take advantage of that power to eliminate or substantially damage a competitor, prevent entry of a competitor into a market, or to deter competitive behaviour.

This immediately sets up a conundrum, because the courts have accepted that competition is a ruthless process where competitors get hurt, and the Act is supposed to foster, not hinder vigorous competition. So, how to tell apart legitimate vigorous competition and illegitimate competition by a big player in the market?

One form of conduct potentially caught by section 46 is predatory pricing: persistent pricing below cost by a big player, with a view to driving out smaller players and ending up with a bigger market share.  The player with market power can act in this way because they feel unconstrained by competition thanks to large resources and an ability to  outlast a price war. They may plan to recoup losses when the competitors have been “disciplined” and will follow the lead on price, rather than competing, so in the long run, the big player wins.

Under the Harper Review recommendations, section 46 will still apply to corporations with market power however, the ACCC will no longer have to prove taking advantage or anti-competitive purpose. Instead, the ACCC will have to prove that the effect or likely effect of the conduct will be a substantial lessening of competition (the “effects test”).

On the face of it, that formulation sounds easier for the ACCC:  it will not need to prove an intention (essentially subjective), but can point to the effects (or likely effects) in the market (objective). So even if the big player can say its purpose was only innocent competition on price, however vigorous, the ACCC should succeed if its predatory pricing behaviour looks likely to restructure the market to its advantage.

However, proving substantial lessening of competition is no simple business. It is necessary to define the market to see whether effects are substantial or not. It isn’t sufficient merely to show that a competitor, or some competitors, have been injured - that is, after all, what competition is about. As such, the ACCC will have to prove that the overall process or structure of the market has been detrimentally affected (or is likely to be), because of the conduct in question.

The “big business” argument against the effects test (supported by the ALP) is that  hesitation about competitive action, caused by having to consider the effect of such action, will “chill” competition to the detriment of consumers (the beneficiaries of price wars between supermarkets, for example) and the development of larger business, with the scale to expand into Asian markets. The ALP’s preferred course is to encourage more small businesses to sue in their own right (rather than relying on the ACCC to do so) by limiting exposure to costs orders, where the claimant can pass an initial “merits” test. The claimant would then only have its own costs to worry about, not the costs of some much larger defendant.

So, two things remain to be seen:

If the Turnbull Government is returned, will the post-election Senate pass legislation providing for an “effects test?”

If it does, then when the ACCC tests the waters on the new provision, how well will the new wording work to identify offensive behaviour, and distinguish it from legitimate, even if it is aggressive, competition?

There may be interesting developments ahead.

For further information please contact:

Stephen Booth, Principal
Phone: + 61 2 9895 9222
Email: sbooth@colemangreig.com.au