The policy of competition law - actual and desired - has been the subject of much debate in Australia and elsewhere. Debate has centered around whether or not the competition laws are intended to promote competition per se or whether it has a broader purpose and/or is intended to operate for the benefit of particular groups; in this respect 'small business has often been singled out. On this page some of the background and debate surrounding the purpose of Australian competition law is discussed.

A major review of competition policy in Australia took place in 1992-1993 by an Independent Committee of Inquiry chaired by Professor Fred Hilmer.

In addition to specific recommendations, the Report included the following statements on competition policy [footnotes omitted]:

[Page xv] As the Prime Minister has observed, "the engine which drives efficiency is free and open competition". Competition is also a positive force that assists economic growth and job creation. It has triggered initiative and discovery in fields ranging from the invention of the telephone to the opening of new retail stores and small manufacturing operations. In fact, it is these developments in smaller firms, prompted by the belief of these firms in their ability to compete, that are the main source of both new jobs and value-added exports.

The benefits of fostering more competitive markets are being increasingly recognised by governments around Australia, and indeed around the world. ...

[page xvi] Competition Policy
Competition policy is not about the pursuit of competition per se. Rather, it seeks to facilitate effective competition to promote efficiency and economic growth while accommodating situations where competition does not achieve efficiency or conflicts with other social objectives. These accommodations are reflected in the content and breadth of application of pro-competitive policies, as well as the sanctioning of anti-competitive arrangements on public benefit grounds.

Australian competition policy is sometimes seen as solely comprising the provisions of Part IV of the Commonwealth Trade Practices Act 1974 (TPA) [now the Competition and Consumer Act 2010]. While laws of that kind are an important part of competition policy, the relevant field of policy interest is much wider. In its broadest sense, competition policy encompasses all policy dealing with the extent and nature of competition in the economy. It permeates a large body of legislation and government action that influences permissible competitive behaviour by firms, the capacity of firms to contest particular economic activities and differences in regulatory regimes faced by different firms competing in the one market.

[page xvii] The Committee has considered competition policy in terms of six specific elements, each of which is supported by laws, policy and/or government action ...

[The six policy elements listed were:

1. 'Limiting anti-competitive conduct of firms'

2. 'Reforming regulation which unjustifiably restricts competition'

3. 'Reforming the structure of public monopolies to facilitate competition'

4. Providing third-party access to certain facilities that are essential for competition'

5. 'Restraining monopoly pricing behaviour'

6. 'Fostering "competitive neutrality" between government & private businesses when they compete'

These elements re-appear in 'Box 2' of the 2014 Competition Policy Review]

The Need for a National Competition Policy

The imperative for developing a national competition policy rests on three main factors.

First, there is increasing acknowledgment that Australia is for all practical purposes a single integrated market. The economic significance of State and Territory boundaries is diminishing rapidly as advances in transport and communications permit even the smallest firms to trade around the nation. The increasing national orientation of commercial life has been recognised by a series of significant cooperative ventures by Australian Governments. ... [page xviii] ... Business and the community generally are impatient for much more rapid progress by governments in reforming our infrastructure and regulatory systems.

Second, while trade policy reforms have markedly increased the competitiveness of the internationally traded sector, many goods and services provided by public utilities, professions and some areas of agriculture are sheltered from international and indeed domestic competition. In this regard, recent micro-economic reforms have highlighted that an important part of Australian competition policy - the Trade Practices Act - remains limited in its application to these sectors, with coverage depending on ownership or corporate form rather than considerations of community welfare.

Third, the domestic pro-competitive reforms implemented to date have all been progressed on a sector-by-sector basis, without the benefit of a broader policy framework or process. Reforms undertaken in this way are typically more difficult to achieve, with the ground rules - including the respective roles of Commonwealth, State and Territory Governments - having to be negotiated on a case-by-case basis. A national competition policy presents opportunities to progress reform more broadly, to promote nationally consistent approaches and to avoid the costs of establishing diverse industry-specific and sub-national regulatory arrangements.

Considerations of these kinds led Commonwealth, State and Territory Governments to agree on the need to develop a national competition policy which would give effect to the principles set out below:

(a) No participant in the market should be able to engage In anticompetitive conduct against the public interest;

(b) As far as possible, universal and uniformly applied rules of market conduct should apply to all market participants regardless of the form of business ownership; [page xix]

(c) Conduct with anti-competitive potential said to be in the public interest should be assessed by an. appropriate transparent assessment process; with provision for "review, to demonstrate the nature and incidence of the public costs and benefits claimed;

(d) Any changes in the coverage or nature of competition policy should be consistent with, and support, the general thrust of reforms:

(i) to develop an open, integrated. domestic market for goods and services by removing unnecessary barriers to trade and competition;

(ii) in recognition of the increasingly national operation of markets, to reduce complexity and administrative duplication.

[page 1] For much of this century, competition policy was seen as limited to laws dealing with the anti-competitive conduct of firms. Particularly over the last decade, however, competition policy has been understood in a wider sense, embracing a range of laws and policy actions that influence the role of competition in the economy. Recent examples of pro-competitive reforms of these kinds range from the the introduction of competition into telecommunications to the deregulation of egg marketing.

Competition policy has been increasingly recognised as a key element of national economic policy. The national significance of competition policy was recognised by the establishment of this Inquiry in October 1992 by the Prime Minister in consultation with the Premiers and Chief Ministers of the States and Territories. Drawing upon written submissions from nearly 150 organisations and interests, and discussions with all Australian Governments and a broad range of individuals and representative groups, this report presents the Inquiry's proposals for a national competition policy for Australia.

...

[page 2] Competition may be defined as the "striving or potential striving of two or more persons or organisations against one another for the same or related objects".

...

[page 3] The relationship between competition and community welfare can be considered in terms of the impact of competition on economic efficiency and on other social goals.

(a) Economic Efficiency

Efficiency is a fundamental objective of competition policy because of the role it plays in enhancing community welfare. ...

[page 4] Economic efficiency plays a vital role in enhancing community welfare because it increases the productive base of the economy, providing higher returns to producers in aggregate, and higher real wages. Economic efficiency also helps ensure that consumers are offered, over time, new and better products and existing products at lower cost. Because it spurs innovation and invention, competition helps create new jobs and new industries. ...

Increased economic efficiency also means that firms are better able to adjust to changes, including unforeseen changes. This makes the economy more resilient and robust, and better able to adjust to changes in global economic conditions.

The promotion of effective competition and the protection of the competitive process are generally consistent with maximising [page 5] economic efficiency. However, there are some situations where unfettered competition is not consistent with economic efficiency. Examples of such "market failure" include situations where participants in a market have imperfect information about products, producers or suppliers, and the existence of so-called "natural monopolies" where a single firm can supply an entire market significantly more efficiently than two or more firms.

(b) Other Social Goals

The promotion of competition will often be consistent with a range of other social goals, including the empowerment of consumers. However, there may be situations where competition, although consistent with efficiency objectives and in the interests of the community as a whole, is regarded as inconsistent with some other social objective. For example, governments may wish to confer special benefits on a particular group for equity or other reasons.

In some cases competition in a particular activity may be restricted to allow a public monopoly to pursue these wider objectives. Thus, for example, public monopolies in areas such as electricity, water and ports have often been directed to provide goods or services to particular groups at prices below the full costs of production, with the resulting deficits often funded through higher charges applied to other users. Arrangements of this kind would be difficult to sustain in a more competitive market.

Similarly, particular firms may seek exemption from rules governing competitive conduct to allow them to increase their returns relative to those that would be available in a more competitive market. Thus, for example, some agricultural producers have been permitted to collude to restrict output or fix prices at least in part to raise farm incomes or regional employment at the expense of consumers or other producers.

In a third situation, some suggest that rules governing competitive conduct should aim to protect competitors, rather than. the competitive process, and should prevent larger firms from engaging in efficient competitive conduct where that would cause less efficient firms to become non-viable.

[page 6] In each of these cases, however, it is possible for governments to achieve objectives of these kinds in ways that are less injurious to competition and the welfare of the community as a whole.

2. Competition policy

In its broadest sense, competition policy encompasses all policy dealing with the extent and nature of competition in the economy. It permeates a large body of legislation and government actions that influence permissible competitive behaviour by firms, the capacity of firms to contest particular economic activities and differences in the regulatory regimes faced by firms competing in the one market.

Traditionally, rules prohibiting the anti-competitive behaviour of firms have been seen as the cornerstone of competition policy. ...

Competition policy is not about the pursuit of competition for its own sake. Rather, it seeks to facilitate effective competition in the interests of economic efficiency while accommodating situations where competition does not achieve economic efficiency or conflicts with other social objectives. These accommodations are reflected in the content and breadth of application of pro-competitive policies, as well as in the sanctioning of anti-competitive arrangements on public benefit grounds. [emphasis added]

A major review of competition policy in Australia began on 27 March 2014. The Competition Policy Review ('Harper Review') will report within 12 months. The Draft Report was released on 22 September 2014 and the Final Report was released on 31 March 2015. The Government is currently consulting on the final report.

The Issues Paper released as part of the review states, in part:

Competition is the process by which rival businesses strive to meet customer needs by developing and offering desirable goods and services on the most favourable terms. Competition spurs ongoing productivity growth.

For the most part, more competitive markets lead to greater efficiencies in the use of scarce resources. The benefits of competitive markets include 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 consumer choices. Competitive markets are dynamic and innovative, which can benefit Australians both now and into the future.

Competition policy seeks to protect, enhance and extend competition. ...

[source: The Australian Government Competition Policy Review]

It also contains a dedicated section on Competition Policy (from page 8; footnotes omitted)
[source: The Australian Government Competition Policy Review]

Why competition matters

1.1 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.

1.2 More competitive markets can lead to:

• 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. These are all ways in which the economy delivers more value added for every hour worked - in other words, higher productivity - and this is the source of sustainable rises in Australian living standards.

1.3 Competitive markets are characterised by various forms of price and non-price competition between businesses seeking to provide what consumers want. Price competition occurs when businesses selling the same or very similar goods seek to increase sales by offering low prices.

1.4 Non-price competition involves businesses seeking to gain an advantage over rivals by differentiating the goods, services and terms they offer to make them more attractive to buyers—a key mechanism for small and medium-sized businesses to compete with large businesses.

1.5 Poorly designed regulatory impediments to competition—for example, restrictions on who can be in the market or how they can trade - can deliver less competitive outcomes and narrow consumer choice. Governments may need to intervene in a market in some cases - for example, where there are natural monopolies, or to ensure the provision of social welfare services. In these cases, market and institutional design is very important in fostering competitive outcomes.

1.6 Vigorous competition can be tough and firms that misjudge the market or have a higher cost structure may lose market share and end up exiting the market. However, in doing so, they free up labour, land and capital for the expansion of other businesses better able to meet the needs of consumers. [page 9]

Box 1: Competition and Productivity

Competition reforms can boost productivity growth. Productivity refers to the quantity and quality of goods and services that can be produced from available resources. By market participants competing among themselves to provide the goods and services that consumers want at the lowest possible cost, resources are used more efficiently, adding to productivity.

Growth in productivity is the key driver of growth in our living standards.

Competition reforms under National Competition Policy (NCP) contributed to the pick-up in Australia’s productivity growth in the 1990s. Following a period of below-average growth during the 1980s, when labour productivity grew by an average of only 1.2 per cent per year, in the 1990s the rate of productivity growth accelerated to 2.1 per cent per year.

However, over the past 13 years, productivity growth has again slowed, with labour productivity only growing by an average of 1.4 per cent per year.

While incomes and living standards were supported by a large boost in the terms of trade in recent years, the terms of trade are expected to fall over the next decade. Exacerbating this, we have also entered a period when population ageing will reduce participation in the workforce. Because of these factors, we must expect lower growth in living standards if we cannot lift productivity growth. A new round of competition policy reform is a key way to achieve this goal.

 

Why we need a competition policy

1.7 Competition policy is a set of policies and laws that protects, enhances and extends competition.

1.8 Competition works best when there is a stable, certain and well understood legislative framework and effective design principles underpinning certain markets (for example, utilities markets).

1.9 In Australia, competition policy has been important in ensuring that our markets - many of which have been relatively concentrated, reflecting our small and spread out population - operate as efficiently as possible to the benefit of consumers and businesses.

1.10 Concentrated markets are not a concern if market participants are operating in a way that delivers durable and competitive outcomes; that is, trying to win business by offering consumers better products at more attractive prices than rivals.

1.11 However, in the absence of effective laws and institutions to protect the competitive process, market participants (including businesses, shareholders, employees, professions and governments) in concentrated markets may try to increase prices and profits by either unilateral or collusive action aimed at lessening the competition they face.

1.12 There are also regulations or policies that can have the effect of limiting competition, even though their purpose is to achieve another policy objective. For example, some types of work are restricted to individuals with certain qualifications on health and safety grounds, or to [page 10] ensure a minimum level of quality or reliability. These can act as barriers to entry, inhibiting competitors from entering the market. In these cases, regular assessments can ensure that the overall public benefit continues to be enhanced by these regulations or policies, and not diminished.

1.13 In some markets there may be very few businesses - perhaps only one - operating in an environment with little competitive pressure (for example, utility networks, ports and airports). Where these markets are sufficiently important and the lack of competition is likely to persist, governments may regulate in the public interest to constrain the exercise of market power, limiting adverse impacts on consumers.

1.14 Further, governments may also operate businesses and supply goods and services to consumers. However, the rationale for government involvement in a market may change over time, and consumers may benefit from lower barriers to entry or fostering greater competition in the supply of various elements of government services.

1.15 An effective competition policy aims to deal with all these issues.

Competition Principles

The Terms of Reference

Parts 1, 2 and 4 of the Terms of Reference provide broad direction to consider competition policy as a means of delivering competitive markets and enhancing the welfare of Australians.

1.16 An effective competition policy framework aims to address a wide range of behaviours by market participants in an ever-evolving economic environment. With this in mind, governments have often established competition policy frameworks built upon a set of overarching principles.

1.17 Box 2 below outlines the key elements underpinning the agreed National Competition Policy (NCP) framework that followed the Hilmer Review. [page 11]

Box 2: Elements of National Competition Policy

The fundamental elements of Australia’s competition policy can be summarised as:

1. Limiting the anti-competitive conduct of firms.

2. Legislation should not restrict competition unless it can be demonstrated that:

a. the benefits of the restriction to the community as a whole outweigh the costs, and
b. the objectives of the legislation can only be achieved by restricting competition.

3. Structural reform of government monopolies to facilitate competition.

4. Providing for third-party access to significant infrastructure facilities that are essential for competition.

5. Independent prices oversight of government business enterprises.

6. Fostering competitive neutrality to ensure that government businesses do not enjoy a competitive advantage simply as a result of their public sector ownership.

 

1.18 Since the commencement of NCP, many areas of Australia’s economy have been further opened up to competition, including:

• reforms to increase competition in industries with heavy government involvement such as the electricity, gas, water and road transport sectors;
• the review and removal of regulatory restrictions that were adversely affecting competition in areas as diverse as the professions and occupations, statutory marketing of agricultural products, fishing and forestry, retail trading, transport, communications, insurance and superannuation, child care, gambling, and planning and development services; and
• privatisation of government assets, especially in the areas of financial services, electricity, transport and communications.

1.19 NCP has contributed significantly to improving Australia’s welfare over the past two decades. However, over this time the economy has changed significantly, and it is timely to examine whether the earlier NCP elements continue to be ‘fit for purpose’ for the current and emerging economy.

There was no objects clause in the original Act, but in his Second Reading Speech, then Attorney-General, Senator Lionel Murphy, stated that its purpose was 'to control restrictive trade practices and monopolies and to protect consumers from unfair commercial practices.' (Parliamentary Debates, Senate, 30 July 1974, page 540). At page 548 the purpose of the Act was also described as being 'to promote efficiency and competition in business, to reduce prices and to protect all Australians against unfair practices.' (see French 2004). Justice French has observed that '[b]eyond that very broad statement of intent and the other statements referred to earlier there was not much in the way of a coherent policy framework or theory to explain the presence in the one statute of its seemingly disparate measures.' (French 2004)

In Qld Wire the Court referred to competition in the context of the Act as being a means to an end. Justice French explains:

Competition is not so much a goal in itself as a means to an end. What Mason CJ and Wilson J said of s 46 in the Queensland Wire case could be applied to all of the provisions of the Act designed to protect competition:

‘… the object … 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 Hilmer Committee said that competition policy ‘seeks to facilitate effective competition to promote efficiency and economic growth while accommodating situations where competition does not achieve efficiency or conflicts with other social objectives’. The protection of consumers as a group was seen as an area distinct from competition policy despite its acknowledgment ‘that both policies benefit consumers and that some consumer protection provisions improve the efficiency of markets’ [p XVI and fn 3]. The Dawson Committee, focussing upon Pt IV of the Act, acknowledged that competition is not an end in itself but ‘an important means whereby an economy can achieve economic efficiency’. This it linked to the ultimate outcome of sustaining ‘economic welfare’ [p 33]. (French 2004 at para 7)

The current Act contains an objects clause in s 2.

'The object of this Act is to enhance the welfare of Australians through the promotion of competition and fair trading and provision for consumer protection.'

This clause was inserted by Competition Policy Reform Act 1995 (Act 88 of 1995)

It has been observed that since its enactment, 'there have been ongoing pressures to broaden or diversify that general [consumer welfare] objective in favour of the protection of particular classes of competitor ... There has also been ongoing pressure to qualify or limit the application of the Act with respect to particular sectors of the economy' (French 2004 at para 8)

A relatively unique feature of Australian competition law is the ability for parties to seek 'authorisation' on public benefit grounds for conduct that would otherwise contravene the competition legislation. This suggests that in some circumstances at least, public benefits beyond those generated by competition may be considered more desirable than competition per se. When recommending amendment of authorisation test (to remove the requirement that a public benefit be a 'substantial' benefit), the Swanson Committee stated (in 1976):

‘However, if in a given case it can be shown that public benefits, ie,not merely benefits to the parties to the restrictive conduct, are available, and that those benefits outweigh the benefits to the public foregone by the absence or restriction of competition, then that conduct should be permitted to continue. In other words, we still favour the maintenance of the primary position that competitive behaviour is to be preferred, but that many who engage in restrictions of competition should be able to obtain an authorisation if they can show that on balance there are public benefits that outweigh the effects on the public of the restrictions on competition.’ [at para's 11.14 and 11.15)

Similarly, the Hilmer Committee observed:

‘Competition policy is not about the pursuit of competition per se. Rather it seeks to facilitate effective competition to promote efficiency and economic growth while accommodating situations where competition does not achieve efficiency or conflicts with other social objectives. These accommodations are reflected in the content and breadth of application of pro-competitive policies, as well as the sanctioning of anti-competitive arrangements on public benefit grounds.' (at p xvi)

In relation to authorisation Justice French has observed:

[para 40] '... While Pt IV of the Act is directed to the maintenance of workable competition, the authorisation provisions recognise that legitimate public benefits can flow from conduct otherwise prohibited. They recognise that competition is not ‘a theory of everything’ when it comes to the public interest. Or as a famous American cosmologist once remarked, ‘There is more to everything than meets the eye’. The political pressures to amend the Act in various ways in the interests of particular groups such as small business, exemplify that reality.'

In Re 7-Eleven Stores the Tribunal stated:

‘We cannot rely upon the functioning of competitive markets to deliver everything ‘of value to the community generally’.

This was quoted with approval by the Tribunal in Qantas Airways Ltd [2004] A Comp T 9.

Similarly, French J has observed that the authorisation process

'enables social objectives ranging well beyond the realm of economic efficiency not only to be taken into account by the regulator but also to be defined by it in determining whether or not there is a benefit. Moreover the regulator is entitled to weigh the benefit and thus effectively assign non-justiciable priorities or weightings to various classes of benefit which may have something or nothing at all to do with the competition objectives of the Act. In the process the ACCC may negotiate by attaching conditions to its authorisations effectively fine-tuning to achieve satisfactory levels of public benefit or to reduce the risk of anti-competitive detriment. ' (French 2004 at para 11)

Following recommendations by the Independent Committee of Inquiry on National Competition Policy (Hilmer Committee) the Council of Australian Governments (CoAG) implemented the National Competition Policy. View National Competition Policy page.

View relevant articles in the reading room.

See also:

• Parliament of Australia, 'Australia's National Competition Policy: It's Evolution and Operation' (E-Brief online, June 2001, updated June 2003)