22 March 2013

Keynote address to the International Bar Association (IBA) 9th Competition Mid-year Conference

Note

Sydney

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Introduction

Thank you for the warm welcome. It is a pleasure to be giving the keynote address for the second day of the International Bar Association's Competition Conference.

From looking at the agenda, I am sure that you have already had some very interesting discussions about current challenges in competition policy ‑ including yesterday's session on market power and 'when is big bad?'. These are complex questions worthy of in-depth consideration.

Today I would like to speak to you about how the Australian Government is responding to issues of market concentration and the challenges they bring for competition policy.

Promoting well-functioning markets

The Government supports well-functioning markets that will enhance the wellbeing of Australians.

Well-functioning markets are typically supported by regulation that protects the competitive process and provides incentives for innovation and investment, while not imposing unnecessary and disproportionate obligations.

One of the pillars of the effective functioning of the Australian economy is the Competition and Consumer Act 2010. This Act prohibits certain forms of conduct which are detrimental to the competitive process and harm the interests of consumers.

Competition facilitates the efficient allocation of resources, puts downward pressure on prices and encourages businesses to innovate and reduce costs.

Competition is also an important driver of productivity and economic growth, which benefits all Australians.

Empowering consumers

One way in which the Government can stimulate competition is by empowering consumers to make well-informed choices in the market.

The Australian Consumer Law (ACL), which I was proud to have introduced as the then-Parliamentary Secretary to the Treasurer in 2011, replaced approximately 20 Commonwealth, State and Territory laws with one national law. As a micro-economic reform, the ACL has removed almost $1 billion in red tape and greatly improved consumer protection.

Under the ACL, we now have more consistent protections for Australian consumers, so that consumers all around the country can expect the same rights and obligations to apply, regardless of where they live.

I am very proud of the fact that the ACL contains a strong set of consumer protections, that both built on and enhanced the range of Commonwealth, State and Territory laws. Important protections like a national unfair contracts law, guaranteed rights for consumers when they buy goods and services and a national product safety law and enforcement regime.

At the same time, businesses have greater certainty over their rights and obligations when operating across State and Territory borders, complying with a single set of consumer laws that are consistently enforced by a network of Commonwealth, State and Territory based regulators that are working together with unprecedented levels of cooperation.

But we should never fall into the trap of thinking that all the work is done in the area of consumer wellbeing. Just as important is ensuring that Government policy keeps pace with innovations and developments in rapidly changing markets. To this end, I would like to take the opportunity to highlight recent work by the Commonwealth Consumer Affairs Advisory Council (the Council) on matters that I have referred for further investigation.

The Council is made up of a range of competition and consumer policy experts and includes academics, legal professionals, consumer advocates and economists who collectively provide me with independent advice on a range of issues that are important to Australian consumers.

Recent developments in this space include a review into the sharing of repair information in the automotive industry; and application or 'app' purchases made by consumers on mobile and handheld devices.

I am looking forward to receiving the Council's final report on 'app' purchases by Australian consumers on mobile and handheld devices.  In this study, the Council has been considering a range of issues related to the information disclosed to consumers, the adequacy of existing measures to address any consumer concern, and other issues related to what is a rapidly innovating new market.

Other issues examined by the Council in recent times include consumers' use of gift cards in the Australian market and ticket on‑selling.

Each of these issues highlight that an informed consumer is an empowered consumer and underscores the point that regulation, while oft-sought, does not always provide an answer. I expect that information is likely to become more and more important as products and services become increasingly complex.

The Government welcomes the work of the Australian Competition and Consumer Commission (ACCC) and state and territory consumer protection agencies who provide information and education materials for consumers in a variety of formats, including phone apps to help consumers make well-informed choices. A good example is the ACCC Shopper app that explains refund, return, warranty and lay-by rights.

Promoting competition, concentrated markets and oligopolies

As a broad policy, the Government considers that competition is generally the best means of lowering prices and improving choices for consumers.

The Government has been active in introducing important and long-overdue reforms to the competition law framework. 

One of the most important reforms has been the criminalisation of cartel conduct. In 1998, the OECD recommended that its members adequately prohibit hard core cartel conduct and ensure there are effective sanctions to deter it. As we promised before the 2007 election, the Government introduced legislation to give effect to the OECD Recommendation within the first 12 months of coming to office.

Individuals that engage in serious cartel conduct now face maximum criminal penalties of 10‑year jail terms and/or a fine of $340,000.

The Government has also clarified various elements of the misuse of market power provisions, in particular in relation to predatory pricing.[1] Last year, we strengthened the provisions in the Australian Consumer Law which prohibit persons from engaging in unconscionable conduct towards businesses and consumers.[2] The Government has also acted to enhance consumer empowerment through the introduction of a Unit Pricing Code, which enables consumers to make more informed choices about the comparative prices of common supermarket items, thereby enhancing competition in these markets.

In promoting competition it is important to note that in Australia, some markets have been, and are likely to continue to be, characterised by relatively concentrated structures. Our banking, airlines, and media markets to name a few.

Although concentrated markets are by no means unique to Australia, they arise in part due to factors like our geographic isolation, relatively small population and geographically dispersed markets.

Given these tendencies in some of our markets, the Government has been keen to ensure that our broad, underlying legal framework – our competition and consumer laws – are working well. But concentrated markets in themselves are not necessarily a bad thing and can still result in a highly competitive environment, especially if barriers to entry are low and there is the constant threat that a new competitor will come in and take your market share.

We must also keep in mind that size enables and facilitates economies of scale – an important element of achieving efficient and low-cost production.

Supermarket issues

To expand on competition issues in concentrated markets, I would like to turn now to the issues we are facing in the Australian supermarket sector.

Almost everyone has an opinion about our concentrated supermarket sector. For at least the past decade, this has been a continual source of public debate and controversy here in Australia. These are not new issues, and the Government has been keeping a watchful eye on this sector.

I would point out that, sometimes contrary to popular perception, there does appear to be strong competition between the two major supermarket chains, Coles and Woolworths – competition not just on price but also on product range, service, quality and convenience for consumers.

Indeed, price competition between these two key players appears to be fierce and constant, with each supermarket known to match the other's specials or promotions, and respond to price cuts almost immediately.

Where there is aggressive competition, it is consumers, of course, who are the major winners—and rightly so. And with Australians dealing with the cost of living pressures, competitive pressure on grocery prices should always be welcomed.

Competition from small business and new entrants

While it is true that our grocery retail market has two domestic supermarket chains, Coles and Woolworths, that are both highly successful with a large share of the grocery market – there are many other businesses that still provide substantial competitive pressure in this market.

Independent retailers provide a level of convenience and service that can provide strong, non-price competition to the major players. Niche businesses such as grocers and bakers are commonly found near supermarkets. Corner stores that are now partly delicatessens are often stronger competitors than they were before.

Undoubtedly, the most significant competitive pressure on the major players has come from the entry to the market of two major international chains, ALDI and Costco.

Concerns from suppliers

The aggressive competition between the major supermarkets, however, has also given rise to some concerns about the long-term impacts on the supply chain and ultimately for consumer welfare. These concerns have typically coalesced around the relationships between retailers and their suppliers and primary producers and the exercise of power in those relationships. The Government has been keeping a close eye on these issues, including the sorts of matters raised by primary producers in the two Senate dairy inquiries.

For example, a common concern relates to a perceived imbalance of bargaining power between the major supermarkets and their various suppliers, which include grocery processors, food manufacturers and primary producers.

The suggestion is that this unequal bargaining power allows the supermarkets to impose undue pressures, costs and risks upon their suppliers.

Some have claimed that supermarkets are 'squeezing' suppliers, and by extracting rents from the supply chain, are threatening the viability of the food and grocery industry and in doing so, are potentially stifling innovation and investment.

I should also note that concerns about trading relationships between supermarkets and suppliers are not unique to the Australian grocery market. I understand this sort of issue was the basis for the United Kingdom's Groceries Supply Code of Practice, which came into effect in 2009.

Here in Australia, these issues have received frequent commentary through a number of channels, including Parliamentary committees and industry reports.

ACCC investigations

The independent competition regulator, the ACCC, has also voiced concerns and is currently investigating some of these allegations.

The ACCC has spoken publicly on the alleged behaviour by the major supermarkets that raise concerns relating to payments to suppliers, the placement of products on shelves and the role of private label products.

According to the ACCC, the relevant questions for consideration are:

  • firstly, whether the major supermarket chains are engaging in unconscionable conduct in their dealings with their suppliers; and
  • secondly, whether the major supermarket chains are misusing their market power or dominance by discriminating in favour of their own private label products to deter or prevent suppliers of proprietary brands from engaging in competitive conduct.

With a better understanding of the behaviours of concern, the ACCC is now investigating further to determine whether a breach of our competition laws has occurred.

I believe that it is important that we let the ACCC get on with the job of investigating these issues in the context of its responsibilities under the Competition and Consumer Act 2010.

Codes of Conduct

Against this backdrop, there has been much speculation recently about possible regulation of the supermarket sector and I'd like to take this opportunity to speak about the Government's views.

Over the last 18 months in particular there have been many calls for the Government to take some sort of regulatory action, ranging from a mandatory code of conduct and an ombudsman to full-scale legislative amendment.

However, the Government has always taken the view that regulatory intervention should be a last resort. It is worth highlighting that, separate to the investigations that I referred to above, the supermarkets and suppliers themselves initiated a process last year to try to resolve the issues which exist along the supply chain.

I think anyone observing this debate would acknowledge that this in itself was a significant step.

At a Government-hosted industry forum in September 2012, industry participants including the major supermarkets acknowledged there is scope to improve trading relationships in the supermarket supply chain.

The industry parties set up a working group and committed to developing a new voluntary code of conduct for the food and grocery industry that would be prescribed under the CCA and overseen and enforced by the ACCC. Such a code would be inserted into the CCA only after rigorous consultation and acknowledgement that it would effectively address the concerns that have been raised by suppliers.

The Government appreciates the work of this industry group, which has provided valuable insights and perspectives about what industry members, including the supermarkets, see as the key issues of concern and has been closely monitored by the Treasury and the ACCC.

Our preference throughout this process has been for industry to work out a voluntary resolution to the concerns that suppliers have raised in relation to the behaviour of the major supermarket chains.

It is clear that some form of resolution is required to ensure that the market continues to work effectively and in the long-term interests of consumers. To this end, if the process to develop a voluntary approach breaks down, or does not produce an effective solution, the Government will examine the regulatory options available to it. On Wednesday of this week one of the key stakeholders in this process, expressed concerns around the development of a voluntary code of conduct.

While it is disappointing that the National Farmers' Federation has come to this view, the Government will continue to work with all participants to ensure that suppliers get a fair deal and that consumers also get the best deal at the check-out.

The Government will continue to consult with stakeholders about a way forward, and we encourage all stakeholders to continue to do the same.  

What would a code need to do?

In 2011, I released policy guidelines on prescribing industry codes under Part IVB of the Competition and Consumer Act 2010. In the foreword to that document I stated that 'where self-regulation has not succeeded and a legislative solution is not appropriate, prescription of an industry code of conduct allows the Government to provide a clear set of rules to define the best practice for conduct of participants in an industry'.

That is the approach the Government would be taking in considering a possible prescribed code in this sector. In considering this sort of approach, the Government is conscious that it would have to get the balance right. It is very important to emphasise that when the Government receives a final version of the voluntary Code it will need to assess whether the Code strikes the right balance.

What does this mean?

At the very least, I consider that an effective Code would need to contain meaningful obligations and processes to address:

  1. Issues of unilateral contract variation and retrospective changes in supply agreements;
  2. The determination of prices and making of payments, and conditions for de-listing of products from supermarket shelves;
  3. Effective and accessible dispute resolution arrangements to allow industry participants to address complaints or disputes without the need for intervention by a regulator or formal legal recourse.

On the one hand, any code would need to contain meaningful obligations – not just high-level principles and aspirational statements, but on the other hand, not impose prescriptive requirements that might unduly hinder commercial flexibility with resulting adverse outcomes for consumers.

The Government is mindful that a dispute resolution system which is costly for industry participants is likely to eventually flow through to higher costs for consumers – meaning that any arrangements need to be as cost-effective as possible.

Where to from here?

Going forward, we know there are no easy answers to concerns about supermarkets and, more broadly, concentrated markets - a common feature of Australia's economy.

Only by being proactive and listening to the concerns of consumers and industry can the Government achieve the right balance between allowing markets to function freely and ensuring that any issues in the supermarket sector can be effectively addressed.

Conclusion

I would like to thank the International Bar Association for the opportunity to address you today.

As I mentioned at the start of my address, empowering consumers is a key focus for Government. Information plays a key role in this. Informed consumers are better equipped to make well‑informed choices in the market, which helps to drive competitive market outcomes.

Concentrated markets are complex and continue to be a challenge for policy makers. Today I have sought to shed some light on current issues in Australia's supermarket sector in particular. The Government remains committed to ensuring that our robust framework of competition and consumer laws continues to work well into the future.

I wish you well for the remainder of the conference. Thank you.


[1] Changes in relation to what constitutes 'taking advantage' and clarifying that 'recoupment' is not necessary to prove a breach of section 46.

[2] Inserting 'interpretative principles' to assist the courts.