If done poorly, competition law can actually reduce competition. Image sourced from Shutterstock.com

Confusion reigns in options for Australia’s misuse of market power laws

How can two words create so much confusion?

The government has released its options paper on Australia’s misuse of market power laws. But all the options miss the key point.

The law is section 46 of the Competition and Consumer Act. The Harper review recommended substantial change to this law. Some of the suggestions are sensible. For example, the law should protect competition, not individual competitors. But it is currently ambiguous. It can be fixed by making the offence an act to “substantially lessen competition”.

But the Harper review went further. The law currently requires that a business “take advantage” of its market power to breach the law. This means that a business with market power only breaches the law if it undertakes an activity that depends on that market power. If it just behaves like a competitive business without market power it cannot break the law.

The two words, “take advantage”, are an important protection for competition.

It is well understood that aggressive competition laws can actually reduce, not increase, competition. Sir Garfield Barwick, the “father” of Australia’s first effective competition laws in the 1960s understood this and was worried whether his new laws would stop business engaging in tough but fair competition.

Competition is all about serving customers by selling better products at lower prices. But this harms high priced, less innovative businesses. If market power laws are drawn too broadly, big business may temper its pro-competitive actions for fear of harming competitors and being accused of harming competition.

The “take advantage” test is Australia’s protection against these mistakes. However, all of the proposals for change put forward in the options paper start with the removal of these two words. Worse still, they do not consider the sensible option of changing the other words (for example, moving to a “substantial lessening of competition” test) while leaving the “take advantage” protection. In other words, they miss the simple and sensible reform alternative.

So what happens if we remove the “take advantage” test?

One way is just to leave it to the courts. Surely our judiciary can work out which action is pro-competitive and which is anti-competitive?

This is the US approach. About 100 years of case law in the US has led to a court-based protection set in legal precedent. This is called “the rule of reason”. Roughly speaking, it provides the same sort of protection to competition as our “take advantage” test. Of course, it also took many years to develop. So we could go the US route and we might get sensible law in 20 or 30 years time.

The alternative adopted by the Harper review is to try and write down a US-style defence as an add-on to the law. But it is hard to capture thousands of pages of legal precedent in a few lines. So the Harper review recommendation of removing the “take advantage test” but have a wordy and vague add-on defence is second best.

A third alternative is to go down the EU route. Remove the “take advantage” test and replace it with nothing. This is option B in the Treasury paper. The results will be anti-competitive. It would mean big business wouls have an onus to protect competitors and not compete too hard. This is the Google problem. Because it has been a successful search firm, Google is being prosecuted in the EU for using its success in search to also compete in internet advertising. Google’s advertising/search innovation helps customers but harms competitors.

Needless to say, inefficient businesses that cannot innovate and effectively serve customers would love this alternative.

So what should the government do?

The most obvious way forward is to keep the “take advantage” test but adjust the other words to bring the misuse of market power laws in line with the rest of the competition laws. So:

A corporation that has a substantial degree of power in a market shall not take advantage of that power in that or any other market if to do so has the purpose or would have or be likely to have the effect of substantially lessening competition in that market or any other market.

This option keeps the pro-competitive protection of the “take advantage” test but removes other anomalies.

Or if the words “take advantage” really are “forbidden”, then adopt an alternative set of words that clearly offer alternative protection. As Graeme Samuel and I have previously suggested.

(1) A corporation that has a substantial degree of power in a market shall not misuse that power in that or any other market if to do so has the purpose or would have or be likely to have the effect of substantially lessening competition in that market or any other market.

(2) For the purposes of sub-section (1), a corporation shall be deemed to have misused its power in a market if the conduct alleged to constitute the misuse of its power in that market would be inconsistent with conduct that would be engaged in by a corporation that does not have a substantial degree of power in that market.

Neither of these sensible options is in the options paper. So the fight over two words may mean an anti-competitive future for Australian business.