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ACCC Draft Framework for misuse of market power guidelines

Relates to: Competition and Consumer Amendment (Competition Policy Review) Bill 2016 (Exposure Draft)

Note that new interim guidance was released for comment on 25 October 2017 following passage of the Harper bills

 

Draft Framework - background

On the same day that the Government released its exposure draft legislation designed to implement the key recommendations made in the 2015 Harper Report, the ACCC released its draft framework for misuse of market power guidelines.

Its consultation page states that:

This framework provides a summary of the proposed content of the guidelines. It is intended to help interested parties understand the proposed reform to s.46 and provide them with the opportunity to give the ACCC feedback that will inform the development of the guidelines. The guidelines are intended to outline the ACCC’s approach to the interpretation and enforcement of the proposed misuse of market power provision.

The ACCC consulted from 5 September until 3 October 2016.

 

The Framework

The following is reproduced from the ACCC's draft framework document. Most footnotes have been omitted.

1 Purpose of this framework

The Australian Government has released an exposure Bill to implement reforms identified by the Harper Competition Policy Review. One area of reform included in the exposure Bill is to amend the misuse of market power prohibition, section 46, of the Competition and Consumer Act 2010 (CCA). If the Bill is enacted, the ACCC will publish guidelines about its approach to possible breaches of the misuse of market power prohibition.

This framework provides a summary of the proposed content of the guidelines. It is intended to help interested parties understand the proposed reform to s. 46 and provide them with the opportunity to give the ACCC feedback that will inform and improve the guidelines.

The guidelines are intended to outline the ACCC’s approach to the interpretation and enforcement of the proposed s. 46. The purpose of guidelines will be to provide clarity of the types of conduct and circumstances that may cause the ACCC concern under the proposed s. 46, and importantly, the types of conduct and circumstances that will not cause the ACCC concern. The guidelines will set out the views of the ACCC. Ultimately it will be a matter for the court to determine if particular conduct has breached the misuse of market power prohibition.

The ACCC welcomes feedback on this framework which it will take into account in preparing and publishing the guidelines if and when the CCA is amended.

...

2. The proposed section 46

... The key clauses in the proposal are in clause 46(1) and 46(2) They are set out below:

1) A corporation that has a substantial degree of power in a market must not engage in conduct that has the purpose of, or has or would be likely to have the effect of, substantially lessening competition in that or any other market.

2) Without limiting the matters to which regard may be had in determining for the purposes of subsection (1) whether conduct has the purpose of, or has or would be likely to have the effect of, substantially lessening competition in a market, regard must be had to the extent to which:

a) the conduct has the purpose of, or has or would be likely to have the effect of, increasing competition in the market, including by enhancing efficiency, innovation, product quality or price competiveness in the market; and

b) the conduct has the purpose of, or has or would be likely to have the effect of, lessening competition in the market, including by preventing, restricting, or deterring the potential for competitive conduct or new entry into the market.

3. The Objective of Competition Law

Competition law is critical for the effective operation of markets so that businesses have the incentive to operate efficiently, price competitively and offer products valued by consumers. This in turn delivers benefits to the community through lower prices, innovation and improved product offerings.

The aim of competition law is to protect the competitive process.

As noted by Harper et al:

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.

Importantly, the purpose of competition law is not to protect individual competitors. Effective competition is a vigorous process, where businesses which are less efficient or which no longer provide a compelling offer to consumers are replaced by more efficient or innovative businesses. This is part of the competitive process.

As stated by the High Court in Queensland Wire Industries v Broken Hill Pty Ltd (1989):

Competition by its very nature is deliberate and ruthless. Competitors jockey for sales, the more effective competitors injuring the less effective by taking sales away. Competitors almost always try to ‘injure’ each other in this way…these injuries are the inevitable consequence of the competition section 46 is designed to foster.

4. Objectives of a misuse of market power provision and the proposed s 46

Firms with a substantial degree of market power are able to damage the competitive process and restrict the ability of other firms to compete on their merits. [fn: external linkOECD 1996 Abuse of dominance and monopolisation OCDE/GC (96)131]

Although applying a misuse of market power provision in particular circumstances can be contentious, the objectives of a prohibition against misuse of market power are widely understood.

The objective of a misuse of market power provision is to prohibit unilateral conduct by a corporation with substantial market power that interferes with the competitive process by preventing or deterring rivals or potential rivals from competing on their merits. Sometimes this is broadly referred to as ‘exclusionary conduct’. The objective is not to protect individual competitors. Conduct by a corporation with a substantial degree of market power that harms an individual competitor should only be prohibited if it has a broader detrimental impact upon the competitive process itself.  As stated by the High Court in QWI:

The object of s. 46 is to protect the interests of consumers, the operation of the section being predicated on the assumption that competition is a means to that end.

The Government has decided to accept the recommendation of the Harper Competition Policy Review that reform of s. 46 is necessary to “improve its effectiveness in targeting anti-competitive unilateral conduct”.

The proposed s. 46 does not prohibit a firm obtaining a substantial degree of market power. Nor does it prohibit a firm with a substantial degree of market power from ‘out-competing’ its rivals by using superior skills and efficiency to win customers at the expense of firms that are less skillful or less efficient. This conduct is part of the competitive process and should not be deterred or interfered with.

However, consistent with the other competition provisions in the CCA and the object of the Act, the introduction of a ‘substantial lessening of competition’ threshold in the proposed s. 46 targets the provision to capturing conduct that interferes with the competitive process, rather than conduct that just damages individual competitors.

4.1 Proposed section 46 - key concepts

The key concepts in the proposed s. 46 are:

(a) ‘market’

(b) ‘substantial degree of power in a market’

(c) ‘substantially lessening competition’.

The concepts of ‘market’ and ‘substantial degree of power in a market’ are unchanged from the existing s. 46.

The concept of substantially lessening competition is new to s. 46, although it is a well-known concept in Australia’s competition law.

4.2 Market

The proposed s. 46 would not change the ACCC’s approach to market definition. A detailed overview of this approach is set out in the Merger Guidelines.

To determine whether a business has a substantial degree of market power, and to assess whether the conduct has the purpose, effect or likely effect of substantially lessening competition, it is necessary to define the relevant market or markets.

A market is defined in section 4E of the CCA to mean ‘a market in Australia’, and includes goods or services that are substitutable for, or otherwise competitive with, the goods or services under analysis.

In brief, a market is determined by considering the product range, geographic area, functional level and timeframe in which competition takes place.  Market definition is purposive.  This means that a market is not defined in isolation; the definition of a relevant market will be considered in the context of the particular conduct under investigation.  It is well recognised that market definition is not an exact science and that it is not possible or necessary to identify precise boundaries. [fn: For example see - Deane J in Queensland Wire at [196]; Allsop J in ACCC v Liquorland (2006) [2006] FCA 826 at [428] – [430]; Dowsett J in ACCC v ANZ(2015) 324 ALR 392 at [135].]

As explained in QCMA:

A market is the area of close competition between firms or ... the field of rivalry between them. ... 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. ... 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.

4.3 Substantial market power

The proposed s. 46 would not change the ACCC’s approach to analysing substantial market power. Whether or not a firm has substantial market power is an important threshold which needs to be met before considering whether a firm has misused its market power.

Market power comes from the lack of effective competitive constraint. A firm with market power is able to act with a degree of freedom from competitors, potential competitors, suppliers and customers. Substantial market power enables a firm to make decisions about its prices, product quality and production techniques with a significant degree of independence from the market.

The concept of market power was explained in QWI where Justice Dawson said:

The term ‘market power’ is ordinarily taken to be a reference to the power to raise price by restricting output in a sustainable manner…But market power has aspects other than influence upon the market price. It may be manifested by practices directed at excluding competition such as exclusive dealing, tying arrangements, predatory pricing or refusal to deal…The ability to engage persistently in these practices may be as indicative of market power as the ability to influence price. Thus Kaysen and Turner define market power as follows:

A firm possesses market power when it can behave persistently in a manner different from the behavior that a competitive market would enforce on a firm facing otherwise similar cost and demand conditions. [Kaysen and Turner, Antitrust Policy (1959), p. 75 in QWI at [200].]

A range of factors can influence the degree of competitive constraint faced by a firm and are likely to be relevant in assessing whether a firm has a substantial degree of market power.

These factors were reflected by the Tribunal in QCMA (1976):

The elements of market structure which we would stress as needing to be scanned in any case are these:

(i) the number and size distribution of independent sellers, especially the degree of market concentration;

(ii) the height of barriers to entry, that is the ease with which new firms may enter and secure a viable market;

(iii) the extent to which the products of the industry are characterised by extreme product differentiation and sales promotion;

(iv) the character of ‘vertical relationships’ with customers and with suppliers and the extent of vertical integration; and

(v) the nature of any formal, stable and fundamental arrangements between firms which restrict their ability to function as independent entities.

Analysis of whether a firm has a substantial degree of market power will also involve consideration of the factors identified in clauses 46(3) – 46(8) which elaborate further on how a substantial degree of market power might be constituted under the proposed s. 46.

4.4 Substantially lessening competition

Even with a substantial degree of market power, for a firm to engage in a misuse of market power its conduct will need to have the purpose, effect or likely effect of substantially lessening competition in a relevant market.

As noted above, while the substantially lessening of competition test is new to s. 46 it is well understood within Australia’s competition laws. The proposed law introduces this concept to s. 46 but, subject to the import of the two new statutory factors, the proposed law will not change the ACCC’s established approach to analysis of whether conduct substantially lessens competition.

The following provides a brief overview of the substantially lessening of competition test principles.

Substantially’ means meaningful or relevant to the competitive process. It is a relative concept and does not require an impact on the whole market.

In Rural Press v ACCC (2003), the majority of the High Court relevantly assessed ‘substantially’ by asking:

…whether the effect of the arrangement was substantial in the sense of being meaningful or relevant to the competitive process, and whether the purpose of the arrangement was to achieve an effect of that kind.

In Universal Music v ACCC (2003), the Full Court observed:

… The lessening of competition must be adjudged to be of such seriousness as to adversely affect competition in the market place, particularly with consumers in mind. It must be ‘meaningful or relevant to the competitive process’: Stirling Harbour Services Pty Ltd v Bunbury Port Authority [2000] FCA 38 at para 114.

See also Australian Competition and Consumer Commission v Cement Australia Pty Ltd (2013) [para 329].

Lessening competition’ means that the field of rivalry is diminished or lessened, or the competitive process is compromised or impacted, and extends to ‘preventing or hindering competition’ (s 4G CCA).

Competition’ refers to a process, rather than a situation, and is expressed in the form of rivalrous behaviour. Importantly, it is a means of protecting the interests of consumers, rather than individual competitors. Competition occurs within markets. It is assessed looking at both market structure and the strategic behaviour of market participants.

Under the proposed s. 46, the court would be required to consider the extent to which the conduct has the purpose of, or has or would be likely to have the effect of:

  • increasing competition in the market, including by enhancing efficiency, innovation, product quality or price competitiveness; and
  • lessening competition in the market, including by preventing, restricting or deterring the protection for competitive conduct or new entry into the market.

In its assessment of the conduct under the proposed s. 46, the ACCC will expressly take into account these statutory factors, along with other factors the courts have recognised as relevant to the substantially lessening of competition test.  This would include whether there are legitimate business reasons for engaging in the conduct.

4.5 Types of conduct that may involve a misuse of market power

It is not possible to identify with precision particular types of conduct that necessarily involve a misuse of market power. Whether or not conduct is a misuse of market power will always depend on the circumstances. 

However, while this is the case, some types of conduct have been regarded by competition agencies and courts as having greater potential to involve the misuse of market power, either in isolation or combined. These include:

  • refusal to deal
  • predatory pricing
  • tying and bundling, and
  • margin/price squeeze.

Refusal to deal

Businesses are generally entitled to choose whether or not they will supply or deal with another firm, including a competitor. Even if a firm has a substantial degree of market power, there is no absolute obligation on it to deal with other firms regardless of the circumstances.

However, in limited circumstances, a refusal to deal by a firm with a substantial degree of market power may amount to a misuse of market power.  For instance, where a firm that has a substantial degree of market power in the supply of a key input:

  • refuses to supply that input to its competitors in a downstream market, without any legitimate commercial reason for the refusal (e.g. credit risk, product shortages, etc.), and the purpose, effect or likely effect of the conduct is to substantially lessen competition in the downstream market;
  • states a willingness to supply a key input to its competitors in a downstream market, but only on terms at which no competitor would be willing to buy the input, (e.g., by charging an excessively high price or imposing unreasonable terms), without any legitimate commercial reason for the price or other terms, and if the purpose, effect or likely effect of the conduct is to substantially lessen competition in the downstream market.

An example of a refusal to deal that may cause the ACCC concern under the proposed s. 46 is outlined in Example A in Table 1.

Predatory pricing

Businesses compete by offering a more compelling offer to consumers than their competitors. This often involves businesses under-cutting prices offered by rivals. In almost all circumstances low pricing is beneficial for consumers and is part of the competitive process.

However, in rare circumstances, very low pricing by a firm with substantial market power may be predatory.  Predatory pricing occurs when a firm substantially reduces its prices below its own cost of supply for a sustained period with the aim of:

  • causing competitors to exit the market
  • disciplining or damaging competitors for competing aggressively, or
  • discouraging potential competitors from entering the market.

Predatory pricing might result in a firm losing money in the short to medium term, however, as a result of competitor’s exiting the market or new entrants failing to enter the market, the firm may be in a position in the longer term to charge higher prices and maintain or increase its market share.

Predatory pricing by a firm with a substantial degree of market power can harm an individual competitor; however, the test is whether the conduct has the purpose, effect or likely effect of substantially lessening competition in a market.

An example of predatory pricing that may cause the ACCC concern under the proposed s. 46 is outlined at Example C in Table 1.

Tying and bundling

Businesses are generally entitled to supply goods or services as part of a tied or bundled arrangement. Tying and bundling are common commercial arrangements which usually do not harm competition and in many scenarios promote competition by offering consumers more compelling offers.

Tying’ occurs when a supplier sells one good on the condition that the purchaser buys another good from the supplier. For example, a car dealer may sell a car on condition that the customer also buys mechanical services from the dealer. 

Bundling’ occurs when a supplier offers a lower price if two products are purchased as a package. For example, mobile phone operators offer bundles of handsets and mobile phone services plans where the price of the handset and plan is cheaper if you buy them together than if you buy each one separately.

However, in limited circumstances, tying or bundling by a firm with a substantial degree of market power may amount to a misuse of market power. This can occur when a firm with substantial market power in one market uses a tie or bundle to extend or ‘leverage’ this market power into another market.

An example of tying or bundling conduct that may cause the ACCC concern under the proposed s. 46 is outlined at Example D in Table 1.

Margin/price squeeze

Businesses are generally entitled to charge different prices to different buyers for the supply of goods or services along the supply chain.

However, a firm with substantial market power in the supply of an essential input can disadvantage its competitors in downstream markets by reducing the margin available to these competitors. It could do this, for example, by charging its competitors an input price that makes it uncommercial for them to offer a ‘competitive’ price in the downstream market. [fn: For example a price that is similar to the price the corporation charges in the downstream market.]

As competitors in the downstream market require the input and have limited alternative sources of supply, a margin or price squeeze has the potential to prevent equally efficient competitors from competing with the firm on their merits.

4.6 Examples of conduct likely to breach the proposed section 46

Whether conduct breaches the proposed s. 46 will depend on the circumstances of each case. The examples outlined in the table below are provided to indicate the kinds of conduct the ACCC considers are likely to raise concerns under the proposed s. 46.

The examples are highly simplified and stylised.  Their inclusion is for the purpose of providing broad guidance as to the types of conduct and circumstances that are likely to raise concerns under the proposed s. 46. 

Table 1
Examples of conduct likely to raise concerns under the proposed s. 46

A

Refusal to supply an essential input

Conduct

A firm owns the only cement works supplying a regional town. The next closest cement works is a considerable distance away. The cost of transporting cement to the town from the next closest cement works is substantial. The firm owns all the ready-mix concrete plants servicing the regional town. Cement is an essential input into ready-mix concrete. A new entrant plans to set up two ready-mix concrete plants in the regional town. The new entrant has a strong track record of operating successful ready-mix operations in other towns. The new entrant approaches the firm to acquire supplies of cement. The firm refuses to supply the new entrant with cement. One of its reasons for doing so is to protect the employment of its workers in its ready-mix concrete plants. The new entrant does not proceed with its plans to set up two ready-mix concrete plants.  

Assessment

It is likely that the firm has a substantial degree of market power in the supply of cement in the regional town. It is the only supplier and the nearest potential competitor would incur very high transport costs in transporting cement to the regional town.

While one of the firm’s motivations is to protect the employment of its workers, the end result it is seeking to achieve is that the rival firm is not able to enter the market and compete away business which could ultimately cause the incumbent to lay off workers. Further, a purpose of substantially lessening competition only needs to be a substantial purpose for the conduct and does not need to be the only purpose.

The effect of the firm’s refusal to supply is to prevent the new entrant entering the market for the supply of ready-mix concrete and competing with the firm on its merits.

The conduct has the purpose and effect of substantially lessening competition.

The ACCC is of the view that the conduct is likely to breach the proposed s. 46.

B

Land banking

Conduct
A firm operates 7 out of 8 retail fuel sites in a major town. The local planning authority has designated 2 other sites in the town as suitable for the establishment of new retail fuel sites. A potential new entrant is considering purchasing these sites. The firm buys the first option to purchase the 2 sites before the new entrant can do so. The firm has no plans to use the sites.

Assessment
It is likely that the firm has a substantial degree of market power. It has nearly 90% of retail fuel sites in the town and access to suitable sites creates a considerable barrier to establishing a new fuel retailing business.

The firm has no legitimate business reason for acquiring the sites. It plans to leave the sites idle for the foreseeable future. The firm has the purpose of preventing the entry of a new fuel retailing business in the town. The conduct has the purpose of substantially lessening competition

The effect of the conduct is to prevent the entry of a new fuel retailing business in the town. Given the high degree of concentration in fuel retailing in the town, new entry would likely substantially increase competition. The conduct has the effect of excluding the new fuel retailing business and therefore has the effect of substantially lessening competition.

The ACCC is of the view that the conduct is likely to breach the proposed s46.

C

Predatory Pricing

Conduct
A firm publishes the only newspaper in a major regional town. The firm provides the newspaper for free and has built up a substantial readership through its focus on local news and events. The firm attracts substantial revenues from local businesses who advertise in the newspaper and earns substantial profits.  Most local businesses consider it essential to advertise in the newspaper.

A new entrant commences publishing a competing regional newspaper and offers advertising rates comparable to those offered by the firm.  The new entrant starts to win some advertising sales from the firm. The firm reduces its advertising rates to all of its customers to less than 50% of the rates offered by the new entrant.  At the new advertising rates the firm does not cover its costs of printing and distributing its newspaper. The firm persists with its reduced advertising rates for 12 months incurring substantial losses.  The firm’s board documents indicate it is willing to incur these losses to reinstate its position as the sole regional newspaper and the profits that position generates.  The new entrant is unable to attract sufficient advertisers and closes its newspaper. After the closure the firm raises its advertising rates to their original level.

Assessment
It is likely that the firm has a substantial degree of market power.  Being the only regional newspaper has enabled the firm to build a substantial readership.  Advertising in the newspaper is the most effective way for local businesses to reach local residents.  There are no close substitutes for local businesses.  

The reduction in advertising rates by the firm was substantial.  The reduced rates were substantially below those offered by the new entrant and were not sufficient to cover the costs of printing and distributing the newspaper.  The reduced advertising rates were not temporary lasting for 12 month until the rival newspaper closed. The financial losses made by the firm during this period were substantial.

The firm had the purpose of forcing the rival newspaper to close and prevent it from competing on its merits.  In engaging in the conduct, the firm had the purpose of substantially lessening competition.

The firm did not have a legitimate business reason for the conduct.  Its effect was to force the rival newspaper to close and prevent it competing with the firm on its merits. The conduct had the effect of substantially lessening competition.

The ACCC is of the view that the conduct is likely to breach the proposed s46.

D

Bundling a competitive product with a monopoly product 

Conduct
A firm has the patent over the active ingredient in the only drug (Drug A) that can treat a common heart condition. The patent for Drug A lasts for another five years. The firm has the patent for another drug (Drug B) that treats a different heart condition. The patent for Drug B is about to end. Manufacturers of generic drugs are making plans to manufacture a generic version of Drug B. 

The firm decides to alter its selling practices to only sell Drug A and Drug B as a bundle. The firm writes to all pharmacies stating that it will only sell Drug A to a pharmacy if the pharmacy agrees to purchase all of its requirements of Drug B from the firm. Pharmacies acquire drugs from a range of manufactures. There are no benefits to pharmacies in acquiring Drug A and Drug B from the same manufacturer.

Assessment
It is likely that the firm has a substantial degree of market power in the supply of Drug A. It is the monopoly supplier of Drug A (for the duration of the patent) and there are no comparable drugs.

Pharmacies must dispense Drug A to service their customers effectively, and if a pharmacy cannot dispense Drug A, it is likely to lose a significant number of customers. As a result, it is likely that almost all pharmacies will purchase Drug A and Drug B as a bundle from the firm. This will prevent manufacturers of generic drugs from competing to supply Drug B to the vast majority of pharmacies

The conduct is likely to have the effect of substantially lessening competition.

The ACCC is of the view that the conduct is likely to breach the proposed s. 46.

 

4.7 Examples of conduct that would not breach the proposed section 46

Whether conduct breaches the proposed s. 46 will depend on all the circumstances. The examples outlined in the table below demonstrate the kinds of conduct the ACCC considers would not raise concerns under the proposed s. 46.

In summary, the ACCC considers that the following conduct, as stated, would not raise concerns:

  • innovation, regardless of how ‘big’ the firm is
  • efficient conduct designed to drive down costs
  • responding to price competition with matching or more competitive (above cost) price offers
  • responding efficiently to other forms of competition in the market such as product offerings and terms of supply.

The examples in the table below are highly simplified and stylised.  Their inclusion is for the purpose of providing broad guidance as to the types of conduct and circumstances that would not raise concerns under the proposed s. 46. 

Table 2
Examples of conduct that would not breach section 46


A

Research and development

Conduct
A firm with 80% of the market has developed a substantially improved version of an existing technological product. This new product supersedes the first generation products currently on the market. The vast majority of consumers prefer the new product causing many suppliers of the first generation product to close.

Assessment
Investment by the firm to innovate and improve its product to make it more attractive to consumers is part of the competitive process. The exit of other suppliers is the result of the firm engaging in competitive activity, not the result of the firm engaging in conduct to deter its rivals from competing on their merits.

The conduct by the firm does not have the purpose or the effect of substantially lessening competition.

The ACCC is of the view that the conduct would not breach the proposed s. 46.

B

Standardised or national pricing by large retail chains

Conduct
A firm which operates a large national retail chain opens up a retail store in a regional town. The retail chain has not had a presence in that town previously. The firm offers a standard product range and sets the same retail prices at all of its retail stores, including at the new store. As result of operating a national retail chain, the firm is able to achieve substantial efficiencies (including securing low prices for purchasing goods from suppliers). This enables the store to offer low prices to customers, while operating profitably. Some existing small retailers in the town are unable to match the retail prices offered by the firm and become unprofitable and close.

Assessment
If the retail chain has had an established practice of offering customers at all of its stores a standardised range with standardised prices, the application of that same practice to a new store will be unlikely to have the purpose or effect of substantially lessening competition.

In this example, the retail chain’s model is to attract customers with a standardised offer, which relies on the greater efficiencies and lower purchasing costs it enjoys due to its greater scale and scope. If it is operating its new store profitably, it is competing on its merits. This is likely to drive competition by causing competitors to seek to lower their costs and to focus on other aspects of competition, such as service, convenience and differentiated products. The relevant issue is whether there has been an interference with the process of competition, not whether competition has resulted in some competitors with a higher cost-base being forced to close.

The ACCC is of the view that the conduct would not breach the proposed s. 46.

C

Price ‘war’
Conduct
Four firms each with 20% of a market compete with a significant fringe of smaller suppliers. Periodically, one of the firms significantly discounts the prices of its product to win more customers. These price reductions are quickly matched by the other firms causing a price war. While the four firms remain profitable during the price war some smaller suppliers do not and decide to close.

Assessment
It is unlikely that any of the firms have a substantial degree of market power. Each firm faces significant competitive constraint from the other firms and smaller suppliers. The firm leading the price discounting has the purpose of winning customers from its rivals. The price matching by the other firms is a competitive response. This is competition on the merits. 
The ACCC is of the view that the conduct would not breach the proposed s. 46.

D

Investing in new production technology to increase efficiency

Conduct
A firm manufactures an iconic brand of lawn mowers. The popularity of the brand means that it currently supplies 80% of lawn mowers sold in Australia. It is rumoured that a large established international manufacturer of lawn mowers is planning to commence selling its lawn mowers in Australia. The firm invests in new production technology to lower its costs and improve the reliability of its lawn mowers. As a result of its lower production costs, the firm reduces the prices of its lawn mowers. The firm advertises the price reductions and improved reliability of its lawn mowers extensively. The international manufacturer of lawn mowers decides not to sell its lawn mowers in Australia.  

Assessment
Investing in new production technology to improve the reliability of its lawn mowers and to enable it to reduce its prices is a competitive response by the firm to the threat of new entry.  The firm’s conduct is not exclusionary. That is it did not prevent or deter the potential new entrant from competing with the firm on its merits. The decision by the international manufacturer not to enter the market is because the firm improved its offer to consumers. The conduct does not have the purpose, effect or likely effect of substantially lessening competition.

The ACCC is of the view that the conduct would not breach the proposed s. 46.



5. The ACCC's approach to investigating allegations of misuse of market power

In considering whether there has been a potential breach of the proposed s. 46, the ACCC will ask three broad questions:

  • Does the firm have a substantial degree of market power?
  • Has the firm engaged in conduct with a purpose of substantially lessening competition in a relevant market?
  • Does the firm’s conduct have the effect or likely effect of substantially lessening competition in a relevant market?

In assessing allegations of misuse of market power under the proposed s. 46, the ACCC will:

  • identify the nature and extent of the conduct
  • identify competitors or areas of competition to understand the impact of the conduct, including any pro-competitive outcomes
  • identify likely market outcomes, including what would likely happen if the conduct did not occur
  • identify the nature and extent of competitive constraints on the firm engaging in the conduct, and
  • identify whether and the extent to which the competitive process is being restricted, deterred or prevented in any relevant market.

In deciding whether to take enforcement action, the ACCC focuses on the extent to which matters will, or have the potential to, harm the competitive process or result in widespread consumer detriment. The ACCC cannot pursue all the complaints it receives and will direct its resources to matters that provide the greatest overall benefit for competition and consumers.

To assist with this determination, the ACCC gives compliance and enforcement priority to matters that demonstrate one or more of the following factors:

  • conduct resulting in a substantial consumer (including small business) detriment
  • conduct demonstrating a blatant disregard for the law
  • conduct involving issues of national or international significance
  • conduct involving essential goods or services
  • conduct detrimentally affecting disadvantaged or vulnerable consumer groups
  • conduct in concentrated markets which impacts on small businesses or suppliers
  • conduct that is industry-wide or is likely to become widespread if the ACCC does not intervene
  • where ACCC action is likely to have a worthwhile educative or deterrent effect, or
  • where the person, business or industry has a history of previous contraventions of competition, consumer protection or fair trading laws.

5.1 Authorisation

Authorisation provides protection against legal action for conduct or arrangements that might breach the competition provisions of the CCA. Parties apply for authorisation where they believe that there is some risk that the conduct they propose to engage in would or may breach the competition provisions of the CCA and they require the certainty provided by an authorisation to undertake the activity. Authorisation is a formal and public process.

In general, the ACCC may grant authorisation if it is satisfied that the likely public benefits flowing from the proposed conduct for which authorisation is sought, outweigh the likely public detriments flowing from that conduct.

Authorisation has not previously been available for conduct that may breach s. 46 of the CCA.
However, coinciding with the proposed s. 46, authorisation is now proposed to be available under a revised authorisation test by which the ACCC may grant authorisation if it is satisfied either that the conduct is unlikely to substantially lessen competition  or is likely to result in a net public benefit.

Under the proposed authorisation test, in order to grant authorisation to s. 46 conduct, the ACCC must be satisfied that the conduct meets at least one limb of the test; but for the ACCC to deny authorisation the conduct must fail both limbs of the test.

Guidance on the implementation of the revised authorisation test will be provided in the final s. 46 guidelines. Further detailed information on the authorisation process is available in the ACCC’s authorisation guidelines.

 

Consultation

Consultation on the Bill took place until 3 October 2016.

The ACCC's framework document states the following about consulation:

The ACCC is interested in receiving comments or suggestions from interested parties regarding the proposed content of the guidelines outlined in this framework. 

In particular, the ACCC is inviting feedback from consumers, businesses and other stakeholders about the issues and topics the ACCC can provide guidance on to assist them understand how the proposed s. 46 will operate and how the ACCC will approach potential breaches of the provision.

Consultation regarding the draft guidelines is a public process. Submissions will be published online in accordance with the ACCC & AER information policy: collection and disclosure of information.  We request that submissions be made online and in PDF format, if possible.  Information of a confidential nature, or which is submitted in confidence, can be treated as such by the ACCC, provided cause for such treatment is shown.

It goes on to set out specific issues/questions about which it is seekng public views:

1. Key concepts

Do you have comments or suggestions on the ACCC’s description of the following key concepts in the proposed s. 46:

(a) ‘market’

(b) ‘substantial degree of power in a market’

(c) ‘substantially lessening competition’?

2. Examples of conduct likely to breach the proposed s. 46

(a) Do you have comments or suggestions on the ACCC’s examples of conduct likely to breach the proposed s. 46?

(b) Do the examples in Table 1 provide useful guidance?

(c) Are there any other examples you would like to see included in the guidelines?

3. Examples of conduct that would not breach the proposed s. 46

(a) Do you have comments or suggestions on the ACCC’s examples of conduct that would not breach the proposed s. 46?

(b) Do the examples in Table 2 provide useful guidance?

(c) Are there any other examples you would like to see included in the guidelines?

4. Further guidance

Are there any other matters the ACCC should include in its guidelines on the proposed s. 46?

5. Structure

Do you have any other comments or suggestions in relation to the structure of the proposed guidelines? 

 

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