Competition law fix could seriously harm competition

Economist Ian Harper has recommended changes to the misuse of market power provisions in Australian competition law. Mark Graham/AAP

The current debate about potential changes to Australia’s competition laws against the “misuse of market power” has been clouded by many myths.

The proposed changes recommended by the Harper report have three elements:

  • Clarifying that the anti-competitive outcome is a “substantial lessening of competition”

  • Adding the word “effect” so an abuse can have an anti-competitive purpose or effect; and

  • Removing the words “take advantage” that link “market power” with the conduct.

The first two changes are superficial. The last one is key. It takes “misuse” out of the “misuse of market power” test.

If you listen to the proponents of the changes, you would think the debate is all about adding the word “effect”. This is a myth. Unfortunately myths are hard to kill.

This “effect” myth was included in Russell Miller’s recent article for The Conversation. But it is also being widely broadcast by ACCC Chairman Rod Sims.

For the record, we have no issue with the adoption of an effects test. But that is not the issue.

The problem is the proposal to remove the concept of “misuse”. Rather, it is proposed that any conduct engaged in by a business that has market power will be prima facie prohibited if it is likely to substantially lessen competition. That is an extraordinary proposition and is not, as claimed by proponents of this amendment, mirrored elsewhere in the developed world. Other jurisdictions focus on the “misuse” of market power, usually by dominant businesses. This is much narrower than the Harper recommendation.

The problem with the Harper recommendation is that it could capture competitive behaviour.

As the High Court has stated:

“Competition by its very nature is deliberate and ruthless. Competitors jockey for sales, the more effective competitors injuring the less effective by taking sales away. Competitors almost always try to ‘injure’ each other in this way. This competition has never been a tort and these injuries are the inevitable consequences of the competition s 46 is designed to foster.”

This position was reaffirmed in the Boral predatory pricing case:

“Competition damages competitors. If the damage is sufficiently serious, competition may eliminate a competitor.”

Competition as usual

Under the Harper amendment, a business with significant market power that engages in vigorous competitive behaviour runs a risk. Its behaviour may be completely consistent with the behaviour of any competitive business. But the harsh discipline of competition means that better businesses will thrive and the poor performers will wither and possibly fail. In the extreme, an effective competitor could eliminate its rivals. In some cases, that very process may result in a “substantial lessening of competition”, with an efficient big business surviving and potentially becoming dominant in a market. But that will have been the result of poor business performance by others, not a misuse of market power by the big business.

The risk for the business, however, is that with the benefit of hindsight, the ACCC or a private party will take the business to court. Even if it has done nothing that depends on or relates to its market power the business could find itself on the wrong side of the law.

Proponents of the change claim that our concerns are ill-founded. “Don’t worry”, they cry. “The courts will be able to sort it out.” Or, they argue, if you are worried about being submitted to a lengthy, costly and uncertain process of litigation by the ACCC, submit yourself to an equally lengthy, costly and uncertain process of seeking authorisation from the ACCC, where your competitive strategies will be laid out in full public view for your competitors to examine, criticise and complain about.

Perhaps. But in the meantime, businesses will curb their competitive behaviour because of the legal risk.

And neither the ACCC nor the courts may “sort it out”. For example, does a highly efficient business that can profitably out-compete its rivals by offering better products at a lower price have an obligation not to compete too hard in order to ensure its competitors survive? Such an obligation would be the antithesis of competition, but has seriously been suggested by some leading US scholars in competition law and economics. Under the Harper recommendation, this obligation could become mandatory for a business with substantial market power.

Taking advantage of power

The fundamental problem with the Harper proposal is it removes the need to demonstrate that big business has misused its market power to bring about a substantial lessening of competition. That occurs as a result of Harper removing the need to demonstrate that big business has “taken advantage” of its market power.

Proponents of the reform argue that it is too hard to prove that a business has taken advantage of its market power. But so it should be, because we should be focusing on the narrow range of activities that constitute a misuse of market power, not on every act undertaken by a big business.

Further, if there is a need to clarify what constitutes the “taking advantage” of market power, then let’s focus on that issue.

Strengthening this section of the act could include a clarification on how a corporation shall be deemed to have taken advantage of its power. Specifically, it would be deemed to have done so if the conduct was inconsistent with conduct that would be engaged in by a corporation that does not have a substantial degree of power in that market.

It is essential the law has a true “misuse” test. We must also ensure we do not so broaden the law that it can capture “any” conduct by big business, because such a law will undermine the very competition it is meant to protect.