Economic surplus

Economic surplus

Why the Australian Consumer Law can help small business

Is there a ‘war’ between big and small business in Australia? Does small business need more protection in the market place? And, if so, is this a role for our competition laws?

The Monash Business Policy Forum has just released a paper, authored by Graeme Samuel, Chris Jose and myself, that considers the parts of Australia’s competition laws that need review. The laws dealing with small business are a key element in such a Review. However, trying to undermine big business is not the solution to small business problems. Rather we need to rethink the types of protections small business needs and to understand that, in many situations, small business faces the same vulnerability as consumers.

Let me explain.

Roughly speaking, competition is regulated by two broad sets of rules - the competition laws in Part IV of the Competition and Consumer Act 2010, and the Australian Consumer Law, which is in Volume 3 of the Act. These laws have very different functions.

The competition laws aim to protect the competitive process in the interests of consumers. As the High Court noted, the aim of competition laws “is to promote competition, not to protect the private interests of particular persons or corporations. Competition damages competitors. If the damage is sufficiently serious, competition may eliminate a competitor”.

Competition is about rivalry between businesses. The aim of competition is to win customers from business rivals through better products and lower prices. Competition laws try to moderate this process. But it has to do so carefully. Competition must be in the consumers’ interest, and the law must tread carefully between vigorous but fair pro-competitive conduct, and conduct that ‘crosses the line’ and will harm consumers in the longer term. And the law will be conservative, because the rivals that are harmed by pro-competitive conduct have a strong interest in stopping this conduct. That will help the rivals but hurt consumers.

Unfortunately, this objective of competition laws is sometimes forgotten. The objective should be stated explicitly in the Act: that the “objective of competition laws is to protect the competitive process, not to protect individual competitors”.

The failure to understand the objective of competition laws is illustrated by the debate around the ‘misuse of market power’. Formally, section 46 of the Act makes it illegal for a firm with a substantial degree of market power to take advantage of that power for an anti-competitive purpose. It is sometimes thought that this is a law to protect small business.

Wrong!

While small business (or large business) may be a victim of the misuse of market power, the real victim is the consumer and the objective of section 46 is to protect consumers.

Attempts to use section 46 as ‘small business law’ will lead to the protection of competitors and harm consumers. There have been a variety of suggested (and actual) amendments to section 46 in the past decade. Some of these have been explicitly aimed at protecting individual businesses, say by limiting the size of competitors or weakening competitive conduct. These are simply wrong-headed.

Others, such as altering section 46 to make illegal conduct that has an ‘anti-competitive effect’, create significant risk. As we note in the paper, an effects test “risks making unlawful strong but fair competitive conduct by efficient businesses that benefits consumers but harms competitors”.

So how should the law protect small business?

The starting point is to realise that small business faces different competitive issues to either large business or consumers. Anti-competitive activities, such as price fixing, by small businesses can be as harmful to a local community as anti-competitive conduct by big business. So small business needs to be included under our competition laws. However, small businesses often lack the resources and sophistication of big companies. This makes small business vulnerable to unconscionable and unfair conduct in the market place. We already have a set of rules to protect consumers from such behaviour. So the real starting point for helping small business is in the consumer laws, not the competition laws.

For example, there is concern about the vulnerability of small suppliers when contractually dealing with large buyers like the major supermarkets. But we already have laws to protect consumers from unfair contracts. Why not extend these laws to small business?

The law protects consumers from unconscionable conduct by business. This law has recently been extended to protect small business. Good! But these laws have been difficult to implement. Recent changes should help, and this will protect both consumers and small business.

Any review of Australia’s competition laws needs to consider how best to meet the legitimate needs of small business, while maintaining appropriate competitive safeguards for and constraints on small business. The starting point should be an examination of the Australian Consumer Law, to see which parts of this law should be extended to protect small business.

Small business has legitimate concerns. But it is not in a war against big business. And trying to help small business by undermining the competitive process will just make us all worse off.