The competition test attracts odd political bedfellows, but isn’t going away

How did the so-called ‘effects test’ on market power become such a polarising topic for business and politicians?

The same day prime minister Malcolm Turnbull cemented a deal with the Nationals for a continuing Coalition partnership, the misuse of market power ‘effects test’ issue lit up the Senate. Greens Senator Peter Whish-Wilson called on the Liberal government to introduce an effects test to “better protect farmers and small business from anti-competitive conduct”.

The motion was lost, but interestingly, the Nationals voted with the Greens for the motion while Labor voted with the Liberals to defeat it. This unfolded on the very day that the deal to continue the Coalition was concluded, including, according to the Nationals, a commitment to reform the misuse of market power law.

At its national conference the previous weekend, the Nationals had voted unanimously to introduce an effects test; an outcome the Business Council of Australia is trenchantly opposing and the small business sector is fighting equally as hard to secure.

How did this become such a polarising issue for the business community and such a political hot button issue? Tensions between big and small business are nothing new, but it was the Competition Policy review, led by Professor Ian Harper, that enlivened the debate.

Since 1974 the law has focused on whether or not a company with market power had taken advantage of that power for the purpose of damaging a competitor or preventing a competitor entering a market.

The Harper Committee thought that, in our modern and sophisticated economy, the law should focus on the impact of conduct on competition, rather than on purpose. They thought, quite rightly, that protecting the competitive process is what is important for the Australian economy and for consumers. After all, if conduct is actually anti-competitive, should not that be the basis on which the law intervenes?

If this is good public policy, why is big business so opposed to a change? They argue that an effects test would chill competition and be detrimental to consumers. Neither logic nor experience supports that view.

There is nothing remarkable about competition laws focusing on anti-competitive conduct. Many other countries with robust economies and good records in protecting consumers have such a law. Closer to home, since 1974 the law has prohibited conduct (in the form of understandings) that has the effect of substantially lessening competition. Is it really suggested that companies can tell when their conduct is anti-competitive when reaching understandings, but not when they conduct themselves otherwise?

Possibly the concern is in the detail and whether the law would be amended in precisely the terms Harper has suggested. First, Harper recommended that purpose be retained, but that only confuses the issue and should be reconsidered. Companies work to defeat their competitors by competing wholeheartedly. That is the essence of competition and companies with market power should not be penalised for having that purpose.

Secondly, there seems to be a concern that the suggested draft does not provide sufficient protection for large companies that compete on the merits. There may be some validity in that, but the concern is vastly overstated. The parliamentary process will sort out the drafting. It is the policy principles Harper has enunciated that are important now, not suggested legislation.

We need to make sure that legitimate competition on the merits is protected. The principles are these:

  • The prohibition should only apply to companies with a substantial degree of market power. On this there seems to be universal consensus.
  • The object should be to prohibit anti-competitive conduct. Purpose or intent should only be relevant in cases of unfulfilled attempts to misuse market power.
  • The focus should be on harm to the competitive process rather than harm to competitors.
  • The law should encourage pro-competitive conduct, while dealing appropriately with anti-competitive conduct explicitly. It should do so by:
  • allowing companies to raise pro-competitive business justifications (eg efficiency, innovation, product quality or price competitiveness); and
  • if pro-competitive business justifications are raised, require the ACCC (or private litigant) to establish that the anti-competitive harm outweighs pro-competitive business justifications.
  • The law should only apply if the ACCC or private litigant proves that the anti-competitive harm outweighs pro-competitive business justifications.
  • The law should include attempted anti-competitive conduct, in which case proof of intent should be required.

If the government were to adopt these principles and then move on to legislate in accordance with them, then our law would align closely with that of the United States and many other countries that have had a so-called effects test for many years.

In reality the change Harper proposes, encompassing the principles set out above, will not chill competition or be bad for consumers. Nor will it be the panacea small business seeks. It will provide a logical, coherent law in a very contentions area – a law aligned to enhancing a competitive Australian economy and benefiting consumers. In short, it will be good public policy.

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