Home Page | Law | Competition Law Economics | Overview

Competition Law Economics | Overview

 

Overview of economic concepts in the Act

The Competition and Consumer Act prohibits certain conduct which has the purpose or effect of substantially lessening competition or which constitutes a misuse of market power. This requires an understanding of what constitutes a market, what will be considered market power and the nature of competition (so as to determine whether certain conduct will result in a lessening of competition).

 

Market structures

Markets may take many forms. At the extremes, a perfectly competitive market is generally said to feature:

  • Large number of suppliers and buyers
  • Small market share held by each
  • Homogeneous product
  • Low barriers to entry
  • Perfect information between all firms (on supply and demand side)

In such a market no single seller or buyer can influence the price of the product; the market forces of supply and demand establish the price. Such a market will generally maximise efficiency as firms have incentives to allocate resources to products consumers want and to do so in as efficient (cost-effective) manner as possible to maximise profits.

Conversely, in a monopoly, characterised by a single seller and high barriers to entry, these incentives do not exist; consumers lack the choice to shop elsewhere so a monopolist can simply pass on costs of inefficient production to consumers. Monopolists also have limited incentives to innovate (dynamic efficiency) in order to retain custom.

Most markets are neither perfectly competitive, nor monopolistic, but the comparison serves to demonstrate why competitive markets are considered desirable.

 

Market definition

Overview

The role of market definition in competition policy remains a contentious issue in Australia and elsewhere.

For discussion of market definition issues in Australia, with some comparative assessment of the changing role of market definition in the United States, see Rhonda Smith, 'Market definition: Going, going, gone? Developments in the United States' (2010) 18 Competition and Consumer Law Journal 119.

Maureen Brunt identified some of the difficulties in the following passage (in Maureen Brunt, Economic Essays on Australian and New Zealand Competition Law, Kluwer Law International, The Hague (2003) at 211 - as quoted in Smith's paper):

the outer boundaries of a market are not necessarily sharp and obvious. Sometimes there will be a break in substitution possibilities which does not admit of much argument. At other times, substitutability, competition, and market power are all matters of degree, requiring the exercise of some judgment in the delineation of relevant markets.

The legislation: Section 4E

Section 4E of the Act expressly refers to substitutes in the context of defining markets:

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.

Case authorities: market definition

Re Queensland Co-operative Milling Association Ltd; Re Defiance Holdings Ltd (1976) 25 FLR 169

The seminal definition of 'the market' in Australia is contained in the decision of the Trade Practices Tribunal in this case (at 190)

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. Let us suppose that the price of one supplier goes up. Then on the demand side buyers may switch their patronage from this firm’s product to another, or from this geographic source of supply to another. As well, on the supply side, sellers can adjust their production plans, substituting one product for another in their output mix, or substituting one geographic source of supply for another. Whether such substitution is feasible or likely depends ultimately on customer attitudes, technology, distance, and cost and price incentives.

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 the matter colloquially, much of a reaction? And if so, from 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, i.e. a relatively high cross-elasticity of demand or cross-elasticity of supply?

For more case law discussing market definition see cases page.

 

Market power

Section 46(1) prohibits a corporation with substantial market power taking advantage of that market power for a prohibited purpose. On the issue of market power (in a case relating a merger) Justice Emmett in his trial judgment in Metcash stated:

[164] Realistically, almost every participant in a market has some economic market power in the sense that the participant has some discretion over its prices and its level of product quality.  However, the degree of market power that is of concern in relation to competition policy is higher than economic market power in that sense.  Thus, for example, s 46 of the Competition Act employs the concept of substantial degree of market power as the threshold of concern.  Substantial market power is the ability to earn returns substantially in excess of the opportunity cost of capital, without attracting the entry of participants who would be likely to impose significant competitive constraints.

[165] Market power is not necessarily correlated with market share, although participants with relatively high market share often exercise substantial market power and participants with relatively low market share seldom exercise substantial market power.  Participants are generally able to exercise substantial market power not only as a consequence of having a high market share, but also because the relevant market is protected by barriers to entry and expansion.  Markets that are easy to enter are generally characterised by intense competition.  On the other hand, where barriers to entry into a market are high, incumbents can more easily exercise market power because the threat of entry is more remote.

 

Market share

Section 46(1AA) prohibits predatory pricing, defined as a corporation having substantial market share supplying goods or services below cost for a sustained period for one of the three prohibited purposes (the same prohibited purposes as for s 46(1). This provision was introduced in 2007 and no cases have yet been brought in relation to it. It remains controversial.

On the correlation between market share and market power Justice Emmett, in his trial judgment in Metcash, stated:

[165] Market power is not necessarily correlated with market share, although participants with relatively high market share often exercise substantial market power and participants with relatively low market share seldom exercise substantial market power.  Participants are generally able to exercise substantial market power not only as a consequence of having a high market share, but also because the relevant market is protected by barriers to entry and expansion.  Markets that are easy to enter are generally characterised by intense competition.  On the other hand, where barriers to entry into a market are high, incumbents can more easily exercise market power because the threat of entry is more remote.

 

Competition and competition policy

In 2014 the Harper Review Issues Paper described competition and competition policy in the following terms (emphasis added):

Competition is the process by which rival businesses strive to maximise their profits by developing and offering desirable goods and services to consumers on the most favourable terms’ [para 1.1]

Competition policy is a set of policies and laws that protects, enhances and extends competition’ [para 1.7]

The Harper Review Issues Paper listed some of the benefits of competitive markets as follows:

Lower resource costs and overall prices, better services and more choice for consumers and businesses, stronger discipline on businesses to keep costs down, faster innovation and deployment of new technology, and better information, allowing more informed choices by consumers (page 1)

Consistent with these statements, the Harper Report expressed the following view about competition policy (pages 7-9):

Competition policy is aimed at improving the economic welfare of Australians. It is about meeting their needs and preferences by making markets work properly.

In the Panel’s view, competition policy should:

make markets work in the long‐term interests of consumers; • foster diversity, choice and responsiveness in government services; • encourage innovation, entrepreneurship and the entry of new players; • promote efficient investment in and use of infrastructure and natural resources; • establish competition laws and regulations that are clear, predictable and reliable; and • secure necessary standards of access and equity.

The Panel believes that markets work best when consumers are informed and engaged, empowering them to make good decisions. The Panel sees scope for enhancing Australian consumers’ access to data to better inform their decisions.

 

Substantial lessening of competition

Anti-competitive agreements (s 45), dual listed company arrangements (s 49) and exclusive dealing (other than third line forcing - under s 47) are prohibited only if they have the the purpose, effect or likely effect of substantially lessening competition (SLC)

Mergers (s 50) are prohibited only where they have the effect or likely effect of SLC.

Counterfactuals

On the issue of counterfactuals (relating to mergers) Justice Emmett in his trial judgment in Metcash stated:

[166] ... Counterfactual assessments are necessarily prospective, in that assessments of the state of competition as it would be with the proposed acquisition, and without the proposed acquisition, both involve a prediction of the future.

[167] Ordinarily, the state of competition expected to prevail if an acquisition does not occur will be a continuation of the state of affairs existing prior to the implementation of the proposed acquisition, which is, in the present case, the acquisition of Franklins by Metcash.  Thus, ordinarily, one would endeavour to define the relevant product and geographic market and to measure the existing level of concentration.  That level of concentration would then be compared with the level of concentration expected to prevail if the acquisition proceeds.  If the market would be relatively unconcentrated both before and after a proposed acquisition, there is a presumption that the proposed acquisition would not adversely affect competition.  Even if the market is relatively concentrated, but the proposed acquisition will have only a small impact on the level of concentration, a conclusion may be drawn that there would be no adverse effect on competition.

 

Expert economic evidence

The Hot Tub
The University of Melbourne's Competition Law & Economics Network (CLEN) has released of a video demonstrating Australia’s approach to expert evidence in competition law cases - a mock 'hot tub', based on the facts in Boral and presided over by retired the Hon Peter Heerey QC who was the first instance judge in that case. In addition to the Hon Peter Heerey QC, the expert roles were played by Dr Philip Williams (for the ACCC) and Richard York (for Boral) and counsel were played by David Shavin QC (who acted for the ACCC in the Boral case) and Jack Fajgenbaum QC.

 

Cases

For more case law discussing market definition see cases page.

 

Reading