Economic surplus

Economic surplus

Words matter. That’s why the ACCC has got it wrong.

Words matter.

With Australia’s competition laws, the wording of our ‘abuse of market power’ laws are ahead of the rest of the world. But the Australian Competition and Consumer Commission (ACCC) wants to change the words and introduce ambiguity just as the rest of the world is starting to recognise the benefits of the Australian approach.

What is the issue?

Australia’s competition laws make it illegal for “[a] corporation that has a substantial degree of power in a market” to “take advantage of that power” for an anti-competitive purpose. The ACCC wants to make three changes:

“The ACCC considers that making this provision effective could be best achieved through the introduction of an effects test, including a substantial lessening of competition, and amendments to overcome limitations inherent in the current interpretation of the ‘take advantage’ test.”

Making it clear that the law covers any acts that have a purpose of substantially lessening competition is benign.

The real issue is the combination of the other two changes. Together they weaken the link between market power and the anti-competitive objective of a business. At a minimum this will make businesses wary about engaging in pro-competitive actions that benefit consumers but harm competitors. At worst, it will force businesses to defend pro-competitive conduct before the Courts.

For a current state-of-play in the debate and a statement of the ACCC’s views, see the letter from the Chairman of the ACCC to the current Competition Policy Review.

Are we leading the world?

Coincidently, last Friday I heard a talk by one of the world’s leading experts on competition law, Professor Louis Kaplow from Harvard University. He outlined his new research on the failure of US and EU laws to link ‘market power’ and ‘anti-competitive conduct’. These laws look a lot like what the ACCC wants. Professor Kaplow noted that this had led the Courts to segment the analysis leading to poor decisions.

In contrast, Australia’s existing law links ‘market power’ and ‘conduct’.

A firm only ‘takes advantage’ of its market power if its behaviour is inconsistent with the behaviour of a business that doesn’t have market power. Any business can have a great idea, introduce a better product, or work hard to lower its costs. These actions raise its profits and usually harm its competitors. They do not depend on market power and are clearly not illegal in Australia under our current laws.

So our ‘take advantage’ test largely does what Professor Kaplow wants for the US and EU laws. The ACCC appears to agree.

“This means that the words "taking advantage” have had to do the heavy lifting in Section 46, distinguishing what is anti-competitive from what is pro-competitive.“

But the ACCC wants these words removed.

Why? Possibly because it makes the regulator’s job harder. It has to prove the link between ‘market power’ and the ‘anti-competitive conduct’. As The ACCC Chairman notes:

”[The] courts have been distracted into deliberations about what a hypothetical firm in a counterfactual world lacking substantial market power might do (for some other purpose).“

Sorry Mr Sims. These are not distractions. These are the key bits of the analysis. You cannot know if a business is abusing its market power unless you ask if its behaviour is inconsistent with a competitive business. Of course this bit of the law does the heavy lifting. It is the key economic test that ensures our competition laws promote, not prevent, competitive behaviour.

Throwing the baby out with the bathwater!

Don’t get me wrong. I am not saying that our laws are perfect. But our current law appears to be ahead of both the equivalent US and EU laws in making sure that competition, not competitors, is the focus.

Maybe the wording could be improved. But the ACCC suggestions clearly do not do this.

The US has partially overcome the problems that the ACCC wants to introduce through legal precedent. But their law is almost 100 years old. The ACCC amendments would throw out our own legal precedent and hope the Courts will ‘get it right’.

Why?

The Courts currently have guidance through the wording of the law and our legal precedent has become much clearer over the last two decades.

As for Professor Kaplow’s talk, I couldn’t help myself. I pointed out that the ‘missing link’ between power and conduct existed in Australia’s law. I am not sure that anyone else in the talk cared - it was in Europe and I think I was the only person from the Antipodes in the room.

It would, however, be ironic, if the ACCC got its way and had our law changed just as the rest of the world starts to catch up.