Glossary
Market
Definition
In QCMA the Tribunal defined market as the field of rivalry between firms in which there is 'substitution between one product and another, and between one source of supply and another, in response to changing prices.'
Section 4E of the Competition and Consumer Act 2010 states that:
For the purposes of this Act, unless the contrary intention appears, market means a market in Australia and, when used in relation to any goods or services, 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.
This adopts the 'substitutability' approach to market definition applied by the Tribunal in QCMA.
The definition in s 4E is not exhaustive: SPAR Licensing Pty Ltd v MIS Qld Pty Ltd (No 2) [2012] FCA 1116 at [42] 298 ALR 69 at 80 (per Griffiths J)
For recent High Court consideration of the concept of market definition see: Air New Zealand Ltd v Australian Competition and Consumer Commission [2017] HCA 21
Legislative History
When first introduced the Trade Practices Act 1974 defined 'market' as 'a market in Australia' (section 4).
The Trade Practices Amendment Act 1977inserted s 4E as follows:
'For the purposes of this Act, 'market' means a market in Australia and, when used in relation to any goods or services, 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. '
This was further amended by the Trade Practices (Misuse of Trans-Tasman Market Power) Act 1990 which inserted the phrase 'unless the contrary intention appears,' after 'Act' (s 5 of the 1990 Act)
This definition was retained when the Act was re-named the Competition and Consumer Act 2010 and remains unaltered.
Case law
Air New Zealand Ltd v ACCC; Pt Garuda Indonesia Ltd v ACCC [2017] HCA 21
The issue on appeal was whether the relevant conduct occurred in a 'market in Australia'. The court unanimously concluded that it did, notwithstanding the fact that the relevant agreements were entered into outside Australia. [Emphasis added]
[Kiefel CJ, Bell and Keane JJ] 'Section 4E of the TPA proceeds upon the express footing that, notwithstanding the abstract nature of the concept of a market, it is possible to locate the market where the competition protected by the TPA occurs in Australia. Reconciling the abstract notion of a market with the concrete notion of location, so that they work coherently, presents something of a challenge. Particularly is this so because "competition" describes a process rather than a situation. But given that the TPA regulates the conduct of commerce, it is tolerably clear that the task of attributing to the abstract concept of a market a geographical location in Australia is to be approached as a practical matter of business. It is important that any analysis of the competitive processes involved in the supply of a service is not divorced from the commercial context of the conduct in question' [para 14] [footnotes omitted]
[Nettle J] 'As the majority in the Full Court of the Federal Court (Dowsett and Edelman JJ) recognised, market definition is a question of fact. More precisely, it involves “a fact-intensive exercise centered on the commercial realities of the market and competition”. And, as a consequence, the definition of a market is liable to vary according to the purposes of the exercise undertaken.' [para 39]
[Gordon J] 'Market identification is not a task undertaken at large, or in a vacuum. The task, and the extent of the task, are tailored to the conduct at issue and the statutory terms governing the contravention. The need to identify the market arises only in the context of determining whether the conduct constitutes a particular contravention of the TPA. That is, the question of whether there is a market “in Australia” is to be asked and answered in the statutory context in which that question arises. It is not to be asked or answered in isolation from that context or by looking only at what appears in s 4E of the TPA.' [para 57]
'The first step is to identify “precisely what it is that is said to have been done in contravention of the section”. As has been rightly said in the Federal Court of Australia, the court begins with the problem at hand and asks “what market identification best assists the assessment of the conduct and its asserted anti-competitive attributes”. Identifying a market is a “focusing process” which is “to be undertaken with a view to assessing whether the substantive criteria for the particular contravention in issue are satisfied, in the commercial context the subject of analysis” …' [para 58]
'That approach recognises that the concept of a “market” is “not susceptible of precise comprehensive definition”. It recognises that market identification is an economic tool, or instrumental concept, that uses and integrates those legal and economic concepts best adapted to analyse the asserted anticompetitive conduct. It recognises that market identification is “not an exact physical exercise to identify a physical feature of the world” and that there is often little or no utility in debating or identifying “the precise physical metes and bounds of a market”. It recognises that market identification is “not a physical thing, or essence, which can be identified in a manner divorced from the relevant context”. And it recognises that market identification depends upon the issues for determination – the impugned conduct and the statutory provision proscribing anti-competitive behaviour that the conduct is said to contravene.' [para 59]
'That is not to say that a market can be identified arbitrarily. It must be based on findings of fact. "The premise of that proposition”, as the Full Court of the Federal Court said in Australian Competition and Consumer Commission v Australia and New Zealand Banking Group Ltd, is that the identified market “has economic and commercial reality":
"It must accordingly not be artificial or contrived. Economists frequently construct economic models to analyse complex commercial or economic events or scenarios. But a model is unlikely to be a useful analytical tool if based on unrealistic assumptions that materially depart from the real world facts and circumstances involving commercial behaviour in which the events to be analysed occur."' [para 60]
'The identification of the market must therefore "accurately [and] realistically describe and reflect the interactions between, and perceptions and actions of, the relevant actors or participants in the alleged market, that is, the commercial community involved”. [para 61]
Embedded in the “focusing process” is the recognition that the substantive criteria for a particular contravention in issue will depend on the particular statutory provisions. That process “may lead to the drawing of different lines in different circumstances depending upon the purpose of the provision in question”. In turn, that process may “lead to different market definitions in relation to the same industry” or even different markets within the same case. That potential was recognised more than 25 years ago by Professor Brunt, who wrote that “[t]here can be more than one ‘relevant market’ for a particular case, in the sense of markets that will attract liability”. There is nothing odd about that conclusion. As Professor Brunt pointed out, it reflects the fact that market identification “is but a tool to facilitate a proper orientation for the analysis of market power and competitive processes – and should be taken only a sufficient distance to achieve the legal decision”. [para 62]
'Recognising that market identification is an economic tool has other important consequences. Economics is a social science and “does not furnish a body of settled conclusions immediately applicable to policy. It is a method rather than a doctrine, an apparatus of the mind, a technique of thinking, which helps its possessor draw correct conclusions”.' [para 63]
'The nature of economics as a social science is often highlighted by the existence of conflicting expert opinions about the identification of a relevant market. Deane J acknowledged as much in Queensland Wire Industries Pty Ltd v Broken Hill Proprietary Co Ltd, when his Honour said:
“The economy is not divided into an identifiable number of discrete markets into one or other of which all trading activities can be neatly fitted. One overall market may overlap other markets and contain more narrowly defined markets which may, in their turn, overlap, the one with one or more others.”' [para 64]
'When a court is required to draw its own conclusions about market identification, it is therefore inherent in that task – being one founded on economics as a social science – that the court will be required to make “value judgments about which there is some room for legitimate differences of opinion”. As a result, “[m]arket identification and definition is not an exact science. It is rooted in the analysis of commerce as an aspect of human behaviour”.' [para 65]
Australian Competition and Consumer Commission v P T Garuda Indonesia Ltd [2016] FCAFC 42 (note that this was appealed to the High Court)
The main issue on appeal was whether the relevant conduct occurred in a 'market in Australia'. The majority of the court adopted an exapnsive approach. A good overview of the decision can be found here:
[from ALR 517]: '... the identificaiton of markets must be the essential first step in assessment of present competition and likely competitive effects. In our view the usefulness of the "market" con cept goes beyond the determination of market concentration ot the identificaiton of rivarous relationships between sellers. ...
[518] We take the concept of a market to be basically a very simple idea. A market is the area of close competition between firms or, putting it a little differently, the field of rivalry between them (if there is no close competition there is of course a monopolistic market). Within the bounds of a market there is substitution - substitution between one product and another, and between one source of supply and another, in response to changing prices. So a market is the field of actual and potential transactions between buyers and sellers amongst whom there can be strong substitution, at least in the long run, if given a sufficient price incentive. ...
It is the possibilities of such substitution which set the limits upon a firm's ability to "give less and charge more". Accordingly, in determining the outer boundaries of the market we ask a quite simple but fundamental question: If the firm were to "give less and charge more" would there be, to put hte matter colloguially, much of a reaction? And if so, form whom? In the language of economics, the question is this: From which products and which activities could we expect a relatively high demand or supply response to price change, ie a relatively high cross-elasticity of demand or cross-elasticity of supply?'
In the Matter of Fortescue Metals Group Limited [2010] ACompT 2
Justice Finkelstein (president), Grant Latta and Professor Round[1009] ... to a businessperson, a market is a place or area where goods may be sold or, more broadly, where there are people who are sufficiently aware of a firm’s product to consider buying it. This concept of a market concentrates its attention on buyers rather than sellers.
[1010] We are not here concerned with the businessperson’s understanding of a market but rather with the analytical definitions developed by economists. Several classical economists have offered definitions. Cournot defined a market as: “The entire territory of which parts are so united by the relations of unrestricted commerce that prices there take the same level throughout, with ease and rapidity” ...
[1011] This economic (or relevant) market, then, consists of groups of buyers and groups of sellers in a geographic region who seek each other out as a source of supply of, or as customers for, products. The interaction of the buyers and sellers determines the price for the products.
[1012] We have not referred to a “group” of products because implicit in the classic economists’ definition of a market is the assumption that there is only a single homogeneous product and that the firms in the market produce perfect substitutes.
[1013] In the real world it is not only homogeneous products of rival sellers that affect price; price is also affected by the products of rival sellers that are close substitutes. Hence it is necessary to expand the definition of a market to include not only identical goods but also close substitutes.
[1014] The output of the process of defining the relevant market – the identification of the participating firms, a description of the products exchanged and the borders within which the exchange occurs – is critical to an assessment of the behaviour of firms in the market (ie whether or not they impose competitive constraints upon one another) and, importantly, whether or not a firm has, or a group of firms have, power to control price or reduce competition (ie to shift the price away from that which would be obtained in a competitive market, namely the marginal cost of the product).
[1015] In QCMA (at 517), the Tribunal defined a market to be a "field of rivalry" between firms in which there is "substitution between one product and another, and between one source of supply and another, in response to changing prices."
[1016] Section 4E was introduced in 1977 to give statutory recognition to the concept of substitution. It provides that "for the purposes of this Act, unless the contrary intention appears, 'market' means a market in Australia and, when used in relation to any goods or services, 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."
[1017] It is often difficult, and sometimes impossible, to define with any precision the relevant dimensions (product, geographic, functional and temporal) of a market. On occasion, it can be particularly difficult to describe the relevant product market and its geographic borders. The process often involves judgments as to matters of degree that can be difficult to measure.
[1018] As regards the product market, the notion of substitution refers on the demand side, to a customer’s practical ability to switch from one product to another and, on the supply side, to the capacity of a supplier to switch production from one product to another. There are various conventional approaches to determining substitutability. [emphasis added]
[1019] The first significant approach developed by the courts and leading economists in the US is the “reasonable interchangeability of use or the cross-[price] elasticity of demand between product itself and substitutes for it”: Brown Shoe Co. v United States 370 US 294 (1962) at [15]. Cross-price elasticity of demand measures the extent to which consumers will change their consumption of a product in response to a price change in another product. A high cross-price elasticity value suggests that products are good substitutes and are probably in the same product market.
[1020] Reasonable interchangeability of use is established by looking at actual and potential buyer substitution patterns. Relevant evidence will include product characteristics (including differences in grade or quality), price differences (including price trends), past buyer responses, the views of firms regarding who their competitors are, and the existence or absence of different distribution channels. [emphasis added]
[1021] On the supply side, cross-price elasticity is also relevant. Products will be in the same market if a firm can readily switch production from one product to another. What is important is the ease with which the switch can take place. It may be immaterial that consumers do not regard the products as substitutes, that a price difference exists, or that the prices are not closely correlated. [emphasis added]
[1022] The geographic market is the area of effective competition in which sellers and buyers operate. What is relevant, as a starting point, are actual sales patterns, the location of customers and the place where sales take place, and any geographical boundaries that limit trade. But it is not sufficient to measure only historical and current market behaviour. It is also necessary to consider whether customers would readily turn to more remote suppliers in response to a price increase by local suppliers or whether remote suppliers would choose to enter the local market.
[1023] In the United States, geographic markets are occasionally defined based on shipment flows. ...
[1024] A more recent (and increasingly popular) approach is to define a market as a group of products and a corresponding geographic area within which a hypothetical monopolist would be able to raise prices profitably. ...
[1026] The hypothetical monopolist test has been adopted by the ACCC. ... [emphasis added]
[1027] The test works this way. One looks at the effect of a price increase on a single product. If so many buyers would shift to alternative products that the monopolist would find the price increase to be unprofitable, the group of products is too narrow to constitute the market. The market should include all those products for which the hypothetical monopolist’s price increase would be profitable.
[1028] The factors that the guidelines use to determine whether the test is satisfied are conventional. The factors include buyers’ perceptions, similarities and differences in price movements between different sets of products over a period of years, similarities or differences in product characteristics and evidence of sellers' perceptions.
[1029] The test for the existence of significant market power is phrased in terms of the magnitude of the price increase that could be imposed by the hypothetical monopolist. It is generally accepted by both US and Australian regulators that a price increase is significant in size and length if it is at least 5% (sometimes 10%) and for at least one year, but there is flexibility in both the magnitude and the time period. It should be noted that these are not tolerance levels for anti-competitive price increases; they are merely a benchmark for assessing substitution. [emphasis added] ...
[1031] Geographic markets are defined in an analogous manner. One identifies tentatively a small geographic area such that a hypothetical firm that is the only present producer of the relevant product or service is not able to profitably impose a price increase. If the product or service could be obtained elsewhere, an attempt to raise the price could not be profitable and the tentative geographic area would be too small. The geographic area is expanded until the hypothetical monopolist’s price increase would be profitable.
[1032] The hypothetical monopolist definition was designed to satisfy three objectives: (1) To connect the relevant market in antitrust case law to economic policy justifications in merger cases; (2) To arrive at a standardised definition of a market; and (3) To develop a test that fell within existing jurisprudence that relied on the product and geographic dimensions of a market.
[1033] The hypothetical monopolist test has its critics. ... The test is, in essence, a "thought experiment". ... But the trend is towards acceptance of the test ... not only in merger cases, but wherever it is necessary for competition purposes to define the boundaries of a relevant market ...
[1034] Notwithstanding the criticisms, or in spite of it, the hypothetical monopolist test has gained currency in Australia ... [emphasis added]
Boral Besser Masonry Ltd v Australian Competition and Consumer Commission (2003) 215 CLR 374
Justice McHugh[252] [T]he market is the area of actual and potential, and not purely theoretical, interaction between producers and consumers where given the right incentive ... substitution will occur. That is to say, either producers will produce another similar product or consumers will purchase an alternative but similar product.
Australian Gas Light Company v Australian Competition and Consumer Commission [2003] FCA 1525; (2003) 137 FCR 317 at 426-427
Justice French (as he then was)[378] The concept of market describes, in a metaphorical way, an area or space of economic activity whose dimensions are function, product and geography. A market may be defined functionally by reference to wholesale or retail activities or a combination of both. The concept of product encompasses goods and services and, having regard to the definition of 'market' in s 4E, includes the range of goods or services which are substitutable for or competitive with each other.
[379] The process of market definition was expounded in QCMA where the Tribunal defined “market” as the area of close competition between firms and observed that substitution occurs within a market between one product and another, and between one source of supply and another in response to changing prices (at 190):
So a market is the field of actual and potential transactions between buyers and sellers amongst whom there can be strong substitution, at least in the long run, if given a sufficient price incentive.
Queensland Wire Industries Pty Ltd v Broken Hill Proprietary Co Ltd (1989) 167 CLR 177
High CourtJustice Deane: ''market' should, in the context of the Act, be understood in the sense of an area of potential close competition in particular goods and/or services and their substitutes.' [p 195]
Justice Dawson: 'A market is an area in which the exchange of goods or services between buyer and seller is negotiated. It is sometimes referred to as the sphere within which price is determined and that serves to focus attention upon the way in which the market facilitates exchange by employing price as the mechanism to reconcile competing demands for resources' [p 199]
Trade Practices Commission v Australian Meat Holdings Pty Ltd (1988) 83 ALR 299 at 317
Justice WilcoxA market is the field of activity in which buyers and sellers interact, and the identification of market boundaries requires consideration of both the demand and supply side. The ideal definition of a market must take into account substitution possibilities in both consumption and production. The existence of price differentials between different products, reflecting differences in quality or other characteristics of the products, does not by itself place the products in different markets. The test of whether or not there are different markets is based on what happens (or would happen) on either the demand or the supply side in response to a change in relative price.
Re Tooth & Co Ltd (1979) 39 FLR 1
Tribunal[at 18,196-18,197] '… it may be helpful if we summarise briefly the principles we have had in mind in approaching the task of market delineation. …
First, and most generally, we seek to identify the area or areas of close competition of relevance for the applications.
Second, such competition may proceed not just through the substitution of one product for another in use (substitution in demand) but also through the substitution of one source of supply for another in production or distribution (substitution in supply). The market should comprehend the maximum range of business activities and the widest geographic area within which, if given a sufficient economic incentive, buyers can switch to a substantial extent from one source of supply to another and sellers can switch to a substantial extent from one production plan to another. In an economist’s language, both cross-elasticity of demand and cross-elasticity of supply are relevant.
Third, there is the matter of time perspective. It is plain that the longer the period allowed for likely customer and supplier adjustments to economic incentives, the wider the market delineated. In our judgment, given the policy objectives of the legislation, it serves no useful purpose to focus attention upon a short-run, transitory situation. We consider we should be basically concerned with substitution possibilities in the longer run. This does not mean we seek to prophesy the shape of the future—to speculate upon how community tastes, or institutions, or technology might change. Rather, we ask of the evidence what is likely to happen to patterns of consumption and production were existing suppliers to raise price or, more generally, offer a poorer deal. For the market is the field of actual or potential rivalry between firms.
Fourth, all competition or substitution does not cease at the outer boundaries of the market; the economy as a whole is a network of substitution possibilities in consumption and production; competition is a matter of [18,197] degree. Rather, at the extremities of the market, there is such a break in substitution possibilities that firms within its boundaries would collectively possess substantial market power: were they to join forces as a cartel, they would be able to raise prices or offer a poorer deal without their market being substantially undermined by the incursions of rivals.
Fifth, within the bounds of the market, substitution possibilities may be more or less intense, and more or less immediate: the field of substitution is not necessarily homogeneous but may contain within it sub-markets wherein competition is especially close or especially immediate. There may be, too, certain key sub-markets such that their competitive relationships have a wider effect upon the functioning of the market as a whole. In these matters we have found that the identification of relevant sub-markets may be rather helpful in clarifying how competition works.
Finally, as is commonly recognized, the market is a multi-dimensional concept—with dimensions of product, functional level, space, and time. Taking (as just explained) the longer run time perspective as given, we have found it helpful in our market identification task to proceed in step by step fashion dealing with each of these questions: What is the relevant product? What are the appropriate functional levels? What is the geographic scope of the market?'
