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Not such a great bargain


Feature Articles

Cite as: (2008) 82(4) LIJ, p. 40

Amendments to the Trade Practices Act that are intended to attack predatory pricing by large corporations may have unintended effects on consumers’ access to goods and services at lower prices.

By Dugald McWilliams

The pub has an iconic place in Australian life and many of us have enjoyed the ambience and conviviality it offers. But rarely have we seen it play a part in such sweeping legislative reform as was seen in the “Birdsville amendments” to the Trade Practices Act (TPA), introduced by Senator Barnaby Joyce, which were allegedly conceived in the public bar at the Birdsville Hotel. The Trade Practices Legislation Amendment Act (No 1) 2007 (Cth) (the Amending Act) received royal assent on 24 September 2007 and has amended s46 of the TPA and the mirror provisions in ss151AH and 151AJ dealing with the telecommunications market.

Although the amendments were introduced to attack the predatory pricing by a corporation with a “substantial” market share, they also introduce a proscription on “below cost pricing” by a corporation or a body corporate associated with a corporation having that substantial market share. The difficulties arise because not only is below cost pricing an often-used weapon in the competition for the consumer’s business, but the amendments have introduced several new expressions for which no definition is provided by the TPA. A concept of a corporation having a “substantial share of a market”, a corporation supplying or offering to supply goods or services for a “sustained period” at a price that is “less than the relevant cost to the corporation of supplying such goods and services” are all new expressions introduced by the Amending Act which will require judicial interpretation. However, with anti-competitive conduct enjoying the limelight in recent times, the uncertainty brought about by these amendments is unnerving to those corporations that, while not having market power, may have a substantial share of a market.1 The risk of fines of up to $10 million for the contravention of s46 is enough for any competitor in a market to sit up and take notice.

Misuse of market power

The principal amendments are to s46 of the TPA, which proscribes misuse of market power.

As the title to the section suggests, it is aimed at corporations that enjoy power in a particular market. The amendments introduce sub-ss 46(1AA) and 46(1AB) as follows:

“(1AA) A corporation that has a substantial share of a market must not supply, or offer to supply, goods or services for a sustained period at a price that is less than the relevant cost to the corporation of supplying such goods or services, for the purpose of:

(a) eliminating or substantially damaging a competitor of the corporation or of a body corporate that is related to the corporation in that or any other market;

(b) preventing the entry of a person into that or any other market; or

(c) deterring or preventing a person from engaging in competitive conduct in that or any other market.

(1AB) For the purposes of subsection (1AA) without limiting the matters to which the court may have regard for the purpose of determining whether a corporation has a substantial share of a market, the court may have regard to the number and size of the competitors of the corporation in the market.”

Not only does this amendment expose a corporation which may not have a substantial degree of power in a market (rather, merely a “substantial share of a market”), it also creates the same broad ambit as appeared previously in s46, in that it regulates the activities of a corporation not only in the market in which that corporation competes but also in any other market.

However, it also lowers the threshold for establishing that a corporation with a substantial degree of power in a market has engaged in misuse of its market power. The introduction of s46(4A) by the Amending Act permits the court to have regard to:

(a) any conduct of the corporation that consisted of supplying goods or services for a sustained period at a price that was less than the relevant cost to the corporation of supplying such goods or services; and

(b) the reasons for that conduct.

As discussed later in this article, while the previous position was that even the sustained sale of products below cost was not evidence of predatory pricing, the amendments change the complexion of s46 actions so that evidence of below cost pricing may stand as prima facie evidence that there has been a contravention of the TPA.

Substantial share

However, the previous basis on which the law operated was that simply because you had a large share of the market, it did not flow that market power was also enjoyed. This position has now changed considerably. The introduction of the concept of having possession of market share to qualify a corporation for possible contravention of s46 is likely to expose a number of smaller operators. While the parliamentary documents make it clear that the aim is to promote small business growth, it may be that what might ordinarily be considered a small business enjoys a substantial share of a market, as in the case of a product for which there is only a small number of manufacturers. If there are a limited number of competitors in that market then the impact of s46 (1AB) is activated. The offending conduct may be committed by a proprietary company with a distribution network that adopts a practice of selling its product at below cost. The motivation may merely be to increase its market share or broaden its distribution network. However, distinguishing between the legitimate intent of increasing custom and nefarious conduct as proscribed in s46 (1AA) is a difficult one to draw and may expose what would ordinarily be considered a small business (albeit with a substantial market share) to sanction for breaching s46.

Previously, market share was seen only as an indication of the existence of market power and the key factor as to the existence of market power is barriers to entry.3 We now see market share elevated to the same level of importance as market power in assessing whether a corporation has offended s46 of the TPA. The concept of what is “substantial” has been considered in cases involving s46 as it appeared previously. Despite the Federal Court stating that the proper instruction of the term “substantial” is the subject of “inconclusive debate”, it has been interpreted as meaning “a greater rather than lesser” portion and also as being something “more than trivial or minimal”.4 Although the concept of “substantial power” means that the assessment of whether a corporation has substantial power is not merely an arithmetical calculation (a corporation with a 51 per cent market share does not necessarily have substantial power in a market), it is quite likely that a corporation that enjoys a 51 per cent market share would be considered as having a “substantial share” of a market for the purposes of s46. Furthermore, the previous s46 was tempered by the definition ascribed to “market power”, which is distinct from other types of power such as financial power.5 A greater number of corporations are therefore exposed to potential breach of s46 because the threshold of possessing a market share is more easily achieved than that of market power.

Sustained period

Although the expression was not used in s46 previously, in assessing whether a corporation had market power it was important to consider whether that corporation could behave in a market for a sustained period in such a fashion that was not constrained by competitors. What is considered a sustained period is a matter which must turn on the facts. A sustained period is arguably not confined to one discrete period, but may also relate to individual periods or even periods at regular intervals. For example, petrol stations are in the habit of varying their prices daily. The cheapest day on which to buy petrol is Tuesday and the prices are raised for the weekend. Such conduct could, if the other elements of s46 (1AA) are satisfied, constitute anti-competitive conduct in contravention of that sub-section. The practice of advertising a continuing commitment to always beat a competitor’s price may also expose a corporation to liability.

While the introduction of this expression would appear to eliminate the “one-off” reductions in the sale price of goods or services, such as seasonal sales, it is still possible that continued activity along those lines may constitute a breach of the TPA. However, it is still arguable that the repetition of sporadic periods of reduced prices may attract the interest of the Australian Competition & Consumer Commission (ACCC) if it can be said that it is a means to eliminating competitors from the market or another of the criteria in s46(1AA).

Although a corporation will not offend s46 unless it undertakes this conduct for a proscribed purpose, the task of divining whether the act is undertaken to eliminate a competitor from the market, raise the barriers to entry or deter a competitor from entering the market will be difficult. All cost-cutting activities are an attempt by a competitor to take custom from another competitor or competitors. However, the conduct can also be employed to ultimately remove competitors from the market altogether.

Relevant cost and the possibility of recoupment

The position adopted by the US Supreme Court towards predatory pricing is that, for a contravention of clause 2 of the Sherman Act to have occurred, two criteria must be satisfied: the price complained of must be “below some measure” of cost and there must be a reasonable recoupment of these losses in the future.8 Heerey J was attracted by the requirement of recoupment in determining a breach of s46 in Boral at first instance.9 The High Court, while not adopting the US position into Australian law expressly, agreed that proof of recoupment may be of factual importance in considering whether a breach of s46 has occurred.10

So as the law now stands, in interpreting whether a corporation has offended s46, evidence that the corporation stood to enjoy some subsequent recoupment of the loss suffered by engaging in the conduct may be evidence of the offence.11 What is of additional concern is that Parliament has made it clear that the likelihood of or intention to recoup the losses sustained in engaging in this conduct is not necessary in establishing conduct contrary to the TPA.12

This express exclusion then dilutes the corporation’s ability to establish any other reasons it would have engaged in the price-cutting exercise in the first place. If the regulator or an applicant need not rely on any evidence that there was any prospect or intention to recoup the losses incurred, this is likely to have the effect that, in the event that such evidence is available, it will be virtually conclusive of a breach of the Act and put beyond doubt any ambiguity that existed in the common law previously.

Large competitors

With fuel prices rising rapidly, most consumers now make the most of their supermarket receipts, which they use at the corresponding service stations to fill up. This is one way petrol stations often undercut competitors. If they overstep the mark and start to deliver the fuel at below cost, then the ACCC is very likely to step in. Supermarkets will not be immune to exposure, either. If discounted goods are provided at below cost for a sustained period with evidence it is done for a proscribed purpose, they also risk scrutiny under these new amendments. Given their broad exposure across the country, it may be difficult to police, but it will also be hard for the corporation itself to regulate. The same could be said for a department store or for large hardware retailers. This is particularly so because the offending conduct need not take place in the market in which the corporation enjoys the market share. So, for those corporations that enjoy a substantial market share over various markets, the risk is increased exponentially.

Under the changes introduced by the Amending Act there is an absence of any requirement that a competitor be taking advantage of a market share or market power. Under s46 as it appeared previously, if a competitor could establish there was a “business rationale” to explain the reason for their conduct and why it did not offend s46, then it operated as a defence to an action for breach.13 On one view, the lack of any requirement that the competitor is taking advantage of a market share would remove the “business rationale” defence. However, it is likely that this defence will still be available to permit a competitor to explain why its conduct does not fall within the proscribed purposes in s46(1AA)(a)-(c).

Conclusion

Although these amendments pose a problem for the big players in a market, there is a risk that an ordinarily smaller player may be affected if they enjoy a substantial share of a market. The ultimate loser is likely to be the consumer. With big business gun-shy about dropping prices, it may be that the discount, stocktake and seasonal sales we are so used to will not offer the bargains they once did. Although small business may enjoy some benefit from the introduction of these changes, the intended beneficiary of the TPA, the consumer, is still left to pay a higher price for their everyday commodities.


DUGALD MCWILLIAMS is a Victorian barrister, practising in commercial and insurance matters.

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