5 August 2015

Statement on making our misuse of market power laws workable, more predictable and more effective

Healthy competition is one of the surest ways to lift long-term productivity growth, incomes, economic prospects and performance.  It drives enterprises to excel and to find new ways to delight customers – new offerings, new entrants, better value and choice.   

A key responsibility of Government is to ensure the right settings are in place to enable efficient businesses – big and small - to thrive and prosper, and that the contest to win customers is determined on merits not on pure financial muscle.  

That is why the Abbott Government commissioned Professor Ian Harper and his Panel to conduct a ‘root and branch’ review of the competition policy, laws and institutions - the first comprehensive examination in a generation.

The Harper report’s 56 recommendations seek to lay the groundwork for a more competitive and flexible economy and to make markets work better for the benefit of all Australians. 

Despite Harper’s broad remit, a single recommendation aimed at making the important ‘misuse of market power’ (Section 46) provisions more workable, effective and pro-competitive seems to attract nearly all of the media attention and interest group advocacy.

Calibrating these ‘misuse of market power’ provisions to ensure conduct by a business with substantial market power is not damaging to the economy or consumers, while not impeding conduct that is pro-competitive and pro-consumer, is a particularly important task for all advanced economies and even more so for ours.

Markets dominated by two or three large companies are common in Australia, occurring in many industries and at multiple levels of the supply chain.   Without healthy competition, or at least the threat of competition, it can be too easy for such large dominant companies to lapse into comfortable duopolies or oligopolies to the detriment of Australia’s consumers and economy.

Our competition laws must be effective and enforceable in preventing dominant companies misusing their market power to ‘fortify’ their position or protect their market share by restricting competition and/or new entrants.

Australia and New Zealand are unique in that they have more concentrated markets but have weaker misuse of market power protections than all other developed economies.

The current codified and technical laws prohibiting the misuse of market power do not satisfactorily distinguish pro-competitive conduct from anti-competitive conduct, and do not provide the utility and application of the law, consistent with its original economic policy intent.

This limits the capacity for less well-resourced market participants to understand the rules, and favours firms which can afford the legal representation to deftly dodge the ‘landmines’ and potentially engage in anti-competitive conduct while remaining just within the bounds of the enforceable law.

To take successful enforcement action, the ACCC has to satisfy the courts that a firm ‘took advantage’ of its substantial market power in what is a uniquely Australian and New Zealand concept. 

This requirement, alien to competition laws elsewhere, has been interpreted to mean that a dominant business with substantial market power need only show that the anti-competitive conduct it has engaged in is something a small firm can engage in, despite the very different  harm it may cause to the economy and consumers, to not breach the law. 

The result is that the current law against the misuse of market power has failed to do the important work it was designed to do - to protect the economy and consumer welfare from damage caused by the conduct of businesses with substantial market power.

Under current law, the ACCC has been unable to take enforcement action to stop a firm using long term contracts to lock up crucial supplies, distribution outlets or customers; land banking or lodging planning objections to stall or prevent the entry of competitors; making retaliatory threats; and a dominant vertically integrated retailer imposing ‘joint marketing fees’.  

The ‘reframing’ of section 46, as recommended by the Harper Review, attempts to align the provision to its core economic objectives; bring the misuse of market power provision somewhat closer towards a principle-based approach, balance the pro- and anti-competitive impacts of conduct both in the short and longer term and, in theory, reduce the risk of unintended consequences.

The Harper recommendation embraces well known and existing competition law principles, such as that of ‘substantial lessening of competition’ (the SLC test) and clarifies that it is harm to the competitive process that matters, not harm to a particular competitor. It also modernises the provision, consistent with laws prohibiting the misuse of market power in other similarly developed economies, including the US, EU, UK and Canada.

Some argue that the Harper re-framing of section 46 would reduce productivity, chill investment and lead to higher prices. The reverse is true.

The application of the SLC test captures anti-competitive conduct, but also allows firms to gain market share by being more innovative and efficient than their rivals, since this benefits consumers and raises productivity.  Innovation is at the heart of competitive conduct. Even where innovation and strategic investments lead to market dominance, the courts and ACCC would not regard that as a lessening of competition. 

Misuse of market power cases are rare and even with the proposed changes to section 46 will continue to be so — since the turn of the century, the full Federal Court or High Court has heard scarcely more than a case every two years.

There is a strong case for change, and the well-orchestrated, and understandably self-interested, campaign against change by some of Australia’s biggest companies and their representatives are overstated and unsubstantiated.

Harper’s recommendation focuses on the public interest, since healthy competition is what is best for the vitality of our economy and delivers durable benefits for consumers.

Managing transitional concerns is clearly important and will require a continuation of the collaborative and constructive consultation displayed right through-out the Harper Panel process and the Government’s handling of its Final Report.

Is there an alternative, superior proposal? One that will deliver durable benefits for consumers, raise our productivity and economic performance, while giving adequate consideration to the concerns of some parties about uncertainty?

If there is, I have repeatedly invited it and the Government would welcome it.

If not, then serious and sober consideration needs to be given to implementing the Harper Review recommendation.