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Price cutting and anti-competitive behaviour

Feature Articles

Cite as: (2003) 77(10) LIJ, p.62

The High Court decision in Boral will help analysts and players in a market determine whether particular conduct is legitimate (pro-competitive) or illegitimate (anti-competitive).

By Amelia Burgess

On 7 February 2003, the High Court handed down a decision relating to s46 of the Trade Practices Act 1974 (Cth) (TPA).[1] The High Court set aside the orders of the Full Court of the Federal Court and set out reasons according with the trial judge’s assessment of the actions of Boral Besser Masonry Ltd (Boral).

The two main issues were whether Boral had a substantial degree of power in the relevant market and, if so, whether it took advantage of this power. This article discusses the High Court’s approach to each of these two issues. It also discusses the differences between the approaches of the Federal Court, the Full Court and the High Court. Finally, there is comment on some of the concerns raised in Kirby J’s dissenting opinion.

The facts

In the 1990s there was a price war among the manufacturers of masonry products. At the same time, Boral commenced negotiations for the acquisition of another company’s plant. When these negotiations broke down, Boral reduced its prices to below cost level.[2] The ACCC issued proceedings against Boral, alleging it had contravened s46 of the TPA by engaging in predatory pricing.[3]

Section 46 of the TPA prohibits a corporation that has a substantial degree of power in a market from abusing its market power. Specifically, it is prohibited from using that market power for the purpose of:

  • eliminating or substantially damaging a competitor;
  • preventing the entry of a person into a relevant market; or
  • deterring or preventing a person from engaging in competitive conduct in a relevant market.[4]

Did BORAL have a substantial degree of market power?

The Federal Court
At first instance, Heerey J concluded that Boral did not have a substantial degree of market power. The evidence he looked at included tenders for major projects, customers’ ability to force masonry manufacturers “down and down”, low barriers to entry and the existence of strong competitors. Heerey J believed Boral had made legitimate business decisions consistent with it being run in a competitive market and with it not having any degree of market power.[5]

The Full Court
In contrast, the Full Court’s conclusion that Boral had a substantial degree of market power was based on its belief that “to a significant extent, Boral was able to behave independently of competition and competitive forces”.[6] The Full Court’s belief in the lack of constraint, combined with its interpretation of the increase in Boral’s market share, formed the basis of its conclusion.[7]

The High Court
In their majority judgment, Gaudron, Gummow and Hayne JJ stated that in determining the degree of power Boral had in the market, the Court was obliged to have regard to the extent to which the conduct of Boral was constrained by the conduct of:

  • competitors of Boral in that market;
  • people to whom Boral supplied goods or services in that market; or
  • people from whom Boral acquired goods or services in that market.

The majority also listed a number of other matters which might also be relevant, such as the number of competitors, their strength and size, the height of barriers to entry and the stability or volatility of demand.[8] The majority asserted that the reasoning of the trial judge regarding the question of substantial degree of market power and taking advantage of that power was in accordance with the evidence, the statute and the decisions of the High Court.[9]

In Gleeson CJ and Callinan J’s opinion, the Full Court had reasoned from a purpose (to eliminate competitors) to the existence of substantial market power. They believed this approach inverted the reasoning process mandated by the decisions in Queensland Wire Industries Pty Ltd v Broken Hill Proprietary Co Ltd and Melway Publishing Pty Ltd v Robert Hicks Pty Ltd.[10]

Gleeson CJ and Callinan J believed that in assessing market power, the statute directs attention to the extent to which the conduct of the firm is constrained by the conduct of its competitors or its customers. Therefore, the main aspect of the conduct in question was its pricing behaviour.[11] Boral had demonstrated it had the financial strength to stay in the market but it had not demonstrated, or achieved, a substantial degree of power in the market.[12]

McHugh J did not believe Boral had a substantial degree of power in the market because it was not able to raise prices to supra-competitive levels without its rivals taking away customers. Similarly, it was not in a position to recover the losses it made by pricing below cost when and if the price-cutting finished. On this basis, McHugh J concluded that, irrespective of the purpose of its pricing, Boral did not have a substantial degree of market power of which it could take advantage.[13]

On the other hand, Kirby (in dissent) endorsed the approach of the Full Court. He believed the list of relevant criteria by which the presence of a substantial degree of power is to be judged included market share, barriers to entry, characteristics of product and relationships between the corporations.[14] Kirby stated:

“Essentially, such power involves the capacity of an impugned corporation, over a sustained period, to do any of the things mentioned in s46(1) for perceived long-term benefits even if, in the short term, the conduct may appear irrational and contrary to the corporate duty to act reasonably so as to maximise profits for the shareholders”.[15]

In Kirby J’s opinion, Boral did have a substantial degree of market power.

One of the main points of difference between the decisions of the Full Court and the High Court was the interpretation of Boral’s market power. Contrary to the Full Court’s position, the High Court found on balance that Boral did not have market power. However, the High Court still provided an extensive discussion about whether price-cutting could be seen as taking advantage of market power.

Did Boral take advantage of any market power for a prohibited purpose?

Price cutting
An important issue was how the High Court perceived Boral’s price-cutting. The price war that occurred through the early 1990s meant Boral was selling masonry products at below cost price. The majority said the issue is not to be considered by looking to what has been said about the practice of “predatory pricing” and then reviewing the factual findings made by Heerey J. Instead, it is necessary to look first to the text and structure of the TPA, particularly s46.[16]

The majority summarised Boral’s behaviour in the following way:

“There is no real controversy about what Boral did and why it behaved in that fashion. For 30 months Boral cut its prices for some of the goods it made and sold, in the expectation that one or more of its competitors would leave the market for those goods”.[17]

The High Court was critical of the Full Court’s approach to the issue of pricing. The Full Court considered that in light of Boral’s financial resources, price-cutting was an illustration of its ability to take advantage of its market power. In contrast, the High Court said that considerations such as financial resources and Boral’s choice not to cease production/sale of masonry products did not lead to the conclusion Boral had a substantial degree of market power.[18]

The High Court also criticised the Full Court’s failure to take into account the influence of Boral’s customers. This criticism is illustrated by the comments of Gleeson CJ and Callinan J:

“the unchallenged finding that customers were ‘able to force’ the price of masonry products ‘down and down’ is of major importance in considering whether Boral, or any other supplier, had, and took advantage of, a substantial degree of power in the market”.[19]

McHugh J discussed the commercial reasons for Boral’s behaviour and the question of whether Boral’s ability to recoup its losses at a later stage was relevant. McHugh J concluded “reducing prices does not per se establish any degree of market power”. McHugh went on to say, “price reductions are beneficial to consumers unless the quid pro quo is higher prices at a later date”.[20]

Interestingly, Kirby J (in dissent) relied on the same evidence in order to draw completely different conclusions. Kirby J emphasised the link between financial power and substantial market power.[21] He dismissed the “economic rationality of corporate conduct” as providing a reasonable explanation for Boral’s behaviour. Kirby J thought Boral was likely to recoup its costs in the long run – by getting rid of some of its competitors and increasing prices at a later date.[22] However, he also believed it was unnecessary to establish that recoupment in the form of supra-competitive prices was a certain result of the corporation’s conduct.[23]

In short, the High Court’s view is that a company’s ability to cut prices does not necessarily mean it has taken advantage of market power.

Expansion of Boral
A secondary issue was whether Boral’s expansion of its plant took advantage of any market power it may have had. In 1994 Boral offered to purchase the plant of one of its competitors (this never eventuated). In 1996 Boral announced its intention to upgrade its facilities at Deer Park, Victoria. The ACCC contended that because of its market power, Boral was able to expand during a time when all companies in the market were struggling for sales.

Gleeson CJ and Callinan J believed the expansion demonstrated Boral’s financial strength, but, as already observed, stated financial strength is not the same as market power. Their Honours believed financial strength was simply a matter to be considered in evaluating market strength.[24]

While McHugh J agreed upgrading the Deer Park plant signalled a commitment that Boral was a long-term participant in the market, he thought this irrelevant because Boral had no substantial market power at the time.[25]

The majority had little to say on this matter.

It seems that in different circumstances, Boral’s expansion could have been an indication of its intention to use market strength. However, the High Court did not see Boral as having market power. Therefore, it did not need to extensively discuss the effect of the expansion.

Conclusion

Cases based on allegations of predatory pricing will always involve a level of confusion as the court needs to assess a company’s purpose. For example, a firm’s price-cut may be intended to cause its rivals to leave the market or it may simply be a highly pro-competitive response to new entry.[26] Clearly trying to distinguish between legitimate competition on the merits and anti-competitive predatory conduct is complex.[27]

In the High Court’s opinion, Boral did not have a substantial degree of market power. Nonetheless, the High Court discussed whether price-cutting and expansion on the market could have been considered “taking advantage of any market power”. The High Court concluded price-cutting is not in itself evidence of misuse of market power. Similarly, financial resources and the ability to expand during difficult times are only factors to be considered in assessing use of market power. The High Court criticised the Full Court for looking at Boral’s behaviour and inferring that its ability to cut prices meant it had market power.

The High Court’s reasoning accords with Melway. That is, the Court looked at whether the actions and decisions of Boral were logical in a realistic and competitive market[28] – or, as Heerey J interpreted it, whether Boral had a legitimate business rationale for its price-cutting. Both Heerey J and the High Court concluded that it did.

In general, the High Court agreed with Heerey J’s decision in the first instance. Thus, the Full Court’s interpretation was overruled.[29]


AMELIA BURGESS is a solicitor in commercial law with Aitken Walker & Strachan. She is a member of the LIV Commercial Law Section and Young Lawyers’ Section and a member of LEADR (Leading Edge Alternative Dispute Resolvers).


[1] Boral Besser Masonry Ltd (now Boral Masonry Ltd) v Australian Competition and Consumer Commission [2003] HCA 5.

[2] L Griggs and S Hardy, “ACCC v Boral – the High Court awaits another section 46 case!”, Trade Practices Law Journal, vol 9, December 2001, 203.

[3] C Oddie and S Heindl, “Boral High Court decision – 10 February 2003”, http://www.aar.com.au/pubs/comp/boral10feb03.htm.

[4] R Steinwall, Annotated Trade Practices Act 1974, Butterworths, Australia, 2001, p150.

[5] Note 1 above, at 174.

[6] Note 1 above, at 185.

[7] Note 1 above, at 190.

[8] Note 1 above, at 168.

[9] Note 1 above, at 196.

[10] Note 1 above, at 194: Queensland Wire Industries Pty Ltd v Broken Hill Proprietary Co Ltd (1989) 167 CLR 177; Melway Publishing Pty Ltd v Robert Hicks Pty Ltd (2001) 205 CLR 1.

[11] Note 1 above, at 121

[12] Note 1 above, at 147.

[13] Note 1 above, at 199.

[14] Note 1 above, at 354.

[15] Note 1 above, at 379.

[16] Note 1 above, at 165.

[17] Note 1 above, at 173.

[18] Note 1 above, at 194.

[19] Note 1 above, at 32.

[20] Note 1 above, at 291.

[21] Note 1 above, at 364.

[22] Note 1 above, at 430.

[23] Note 1 above, at 436.

[24] Note 1 above, at 149.

[25] Note 1 above, at 315.

[26] RL Smith and DK Round, “Section 46: A strategic analysis of Boral, Australian Business Law Review, vol 30, June 2002, p213

[27] G Edwards, “The perennial problem of predatory pricing”, Australian Business Law Review, vol 30, June 2002, p170.

[28] W Pengilley, “Misuse of market power: Australia Post, Melway and Boral”, (2002) 9 Competition & Consumer Law Journal 222.

[29] The position in Boral was recently relied on and affirmed in ACCC v Australian Safeway Stores Pty Ltd [2003] FCAFC 149.

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