Big business, market power and why we need more test cases

When big business misuses its market power, proving it can prove a challenge. Riccardo Cuppini/Flickr, CC BY-NC-ND

In advocating greater competition, less regulation and reduced red tape, the Harper Committee’s 300 page draft review of competition policy largely colours between the lines of its extremely broad terms of reference.

But in the area of market power, the Committee, led by Australian economist Ian Harper, has delivered some surprising - and somewhat inconsistent - recommendations, some of which will not be welcomed by big business.

For the most part, the Committee seems relaxed about apparent market power issues in various parts of the economy. On access to large infrastructure, for example, it recommends the current regime, which virtually never leads to increased competition, be tightened in favour of infrastructure owners.

Likewise, the Committee is comfortable with the approach to mergers of the Australian Competition and Consumer Commission (ACCC) - examining (and then dismissing) concerns that the competition regulator is too strict when considering mergers. Given the ACCC hardly ever blocks any, many may have thought the concern would have been the opposite.

In relation to misuse of market power, however, the Committee wants to blow up the current law and start again.

Australia’s prohibition against misuse of market power has three key elements (as discussed in The Conversation recently by Stephen King): substantial market power, “taking advantage” and the existence of an anti-competitive purpose.

An “effects” test with a twist

Over many years in Australia, we have had an “effects vs purpose” debate. Generally the suggested change involves removing the purpose element and inserting an effects test in its place.

This new proposal, however, is a little out of left field (although the ACCC did suggest it in its submission). The Committee recommends retaining the substantial market power element, but removing both the “take advantage” and “purpose” aspects in favour of an “effects” test which would be subject to a defence.

This means a corporation with substantial market power would not be able to engage in conduct which has the purpose or likely effect of substantially lessening competition. But if the corporation could show that the conduct reflected a “rational business strategy” by a party without substantial market power and that the conduct was likely to benefit the long-term interests of consumers, then a defence would be made out.

Room for ambiguity

Taking the various elements in turn, the Harper Committee considers that “take advantage”, as interpreted by our courts (read together with subsequent amendments to the statute), is “difficult to interpret and apply in practice”.

Opinions may differ as to whether this is true. The High Court has regularly stated that “taking advantage” of substantial market power simply means to use it. But the issue has certainly been a lively one before the courts.

The Committee itself provides some evidence for the claim “taking advantage” is confusing by failing to understand that its proposed defence contains a version of the very same test. Although it says that the meaning of “taking advantage” is “subtle and difficult to apply in practice”, the Committee has effectively used this test to reverse the onus of proof in including the “business rationale” defence. Thus, a potentially over-reaching law would be qualified only via a defence that - given it comprises two limbs, one of which the Committee thinks is difficult to interpret - will likely be very hard to establish.

In any case, the current application of the “effects test” - whether something has the likely effect of substantially lessening competition - is itself ambiguous. This was apparent in one of its more recent substantive considerations by a superior court (the Full Court’s decision in ACCC v Baxter Healthcare). Any examination of the various judgements in that case would leave the reader with no clear understanding of what the law involves.

There is, however, genuine concern that the proposed law could capture pro-competitive conduct that - due to a company’s superior efficiency - results in lessened competition. Some would argue that the effects test, properly interpreted, should not lead to this result. But as the Baxter case demonstrates, there remains plenty of scope for confusion when it comes to the application of this test.

Why get rid of purpose?

The Committee also recommends the removal of the purpose element. For many years, the ACCC has argued that “purpose” makes misuse of market power cases too hard. More recently, it has been challenged on this point as the cases suggest otherwise.

The Harper Committee, however, doesn’t engage in that aspect of the debate. Rather, it considers purpose should be removed because it inappropriately focuses on individual competitors, not the process of competition as a whole. This assessment suggests a misunderstanding of the role of the proscribed purposes, which act as a safety net protecting a very limited range of conduct which does not itself harm the competitive process.

So while no-one likes monopoly pricing (other than a monopolist), the purpose element “saves” this conduct from being illegal. Why? To preserve the carrot that prompts companies to improve themselves and their offerings so they can be the best in the business.

While it would be disingenuous to argue that the current law against misuse of market power is perfect, it is relatively well-understood (being considered by the High Court on five occasions). The Harper proposal would throw that jurisprudence out, meaning we would need to start from close to scratch to understand the extent of the law. That may well have the impact of “chilling” competitive conduct, as big business tries to understand the new scope of legitimate activity.

Either way, there should be more cases

Arguably, the biggest failing in our competition law is a lack of cases. Perhaps creating an “easier” prohibition might address this issue. But, while the effects test is a regular star of our various competition laws, the ACCC has brought no more effects cases than it has market power cases over the last decade. And its success rate for both types of matters is quite similar.

That said, many of the draft recommendations of the Harper Review should be welcomed. But there is definite room for improvement: to this end, we have further consultation, with submissions on the draft due by 17 November.