A cold chill to kill competition

More than a decade ago the Australian Competition and Consumer Commission tried, and failed, to have the misuse of market power provisions in the Act it administers amended. Despite similarly unsuccessful attempts by others since, it is still trying.

In 2002 it was then chairman Allan Fels who argued strongly for changes to the provisions in Section 46 of the Act. Today it is the current chairman, Rod Sims, arguing that the current section fails to capture conduct that damages competition. The chairman who served between them, Graeme Samuel, has been on the public record with a differing view.

The context for the latest debate about Section 46, of course, is the Harper Review of competition policy and laws.

In a speech today that contained much that was worthy, most notably his urging of governments to consider ways to maximise the competitive benefit rather than the sales proceeds when privatising state-owned enterprises, Sims said the commission considered there was a significant gap in the coverage of the misuse of market power provisions in Section 46.

“The ACCC considers that the provision is deficient in two respects: first due to its failure to capture unilateral conduct which has a deleterious effect on competition and second, due to the way in which the ‘take advantage’ limb of the test is currently being applied,” he said.

Under Section 46 a corporation that has a “substantial degree of power in a market” cannot take advantage of that power in that or any other market for the purpose of eliminating or substantially damaging a competitor, preventing the entry of a competitor into a market or deterring or preventing a competitor from engaging in competitive conduct in a market.

The key “deficiency” identified by Sims – the claimed failure of the current provisions to capture conduct that has a deleterious effect on competition – is one that has been debated for a decade and a half.

Fels, Sims and others believe that the “purpose” test in the provision is too difficult to prove and too low a threshold for assessing behaviour by companies with substantial market power that may damage competitors or competition. They, and the small business lobby, would prefer to see an “effects” test introduced to the section.

In other words, if the conduct of a company with substantial market power had the effect of damaging a competitor or the intensity of competition in a market, it would be illegal regardless of whether the company’s intention was to damage the competitor or reduce the level of competition in the market.

In a paper written for the Monash Business Policy Forum last year Samuel, former ACCC commissioner Stephen King and Herbert Smith Freehills’ Chris Jose cited the High Court judgement in the Boral case in 2003 to argue against an effects test.

“The purpose of the Act is to promote competition, not to protect the private interests of particular persons or corporations. Competition damages competitors. If the damage is sufficiently serious, competition may eliminate a competitor,” the court said in that decision.

The Monash paper made the significant point that any form of effects test would risk making unlawful strong but fair competitive conduct by efficient businesses that benefitted consumers but harmed competitors.

That is the problem with using the competition laws to try to protect competitors, as the small business advocates – particularly those representing competitors to the two big supermarket chains – are advocating.

Using the Act to shelter competitors from competition would reduce competitive intensity and undermine the consumer benefit and economic efficiency the Act seeks to promote.

It would have a chilling effect on any company with a substantial degree of power within a market – and the concentrated nature of most of our markets means that most large companies have some degree of market power.

They would have to be very wary about doing anything that might have the effect of damaging a competitor whether or not they deliberately set out to damage them – which means they’d have to second-guess just about anything they might do.

Competition damages competitors. Restraining the most efficient and competitive competitors from competing would damage competition.