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Protecting small business from misuse of market power.



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2003-04

No. 15, 27 October 2003

Protecting Small Business from Misuse of Market Power

Further debate has been rekindled with closer examination of the significant High Court decision, Boral Besser Masonry v ACCC (2003)4 delivered in February 2003. (The Dawson Committee reaffirmed its recommendations post Boral.) The Boral case involved an allegation against Boral that it had sold concrete masonry products below cost in a tough market and by doing so engaged in predatory pricing aimed at harming its competitors. The High Court, in a 6:1 decision, found that Boral did not have substantial market power and it priced its products below cost for a legitimate business reason. Boral did not breach section 46.

Misuse of Market Power

Misuse of market power is both a legal and economic concept. Prohibitions on the misuse of market power are commonly found in anti-trust laws in a number of countries and the prohibition appears as section 46 in Australia's Trade Practices Act 1974 (TPA).

The basic concept of misuse of market power can be stated briefly but the analysis of the types of conduct involved and the application of the law has, over the years, become highly complex.

Section 46 of the TPA makes it unlawful for a corporation to take advantage of its market power to harm a competitor. The types of conduct in question include refusal to supply, inducing anti-competitive price discrimination and predatory pricing (discussed below).

A long-running debate is whether Parliament intended that section 46 protect competition and/or protect small business. This was examined recently in Australia by the Dawson Committee1 which recommended in its January 2003 report that no amendment should be made to section 46 of the TPA.2 The Government has agreed with the Dawson Committee's recommendation.3 The Dawson Committee and the Government prefer that section 46 be left to the courts to clarify the law and then, if necessary, be reviewed. Section 46 will largely remain without definitions or criteria to guide the courts in addressing the abstract concepts contained in the section.

Small business is critical of the limited success section 46 has delivered.5 Small business argues that the High Court has set the bar for section 46 too high. In matters like predatory pricing, small business argues that the current test really only applies when an aggressive firm has the ability to act without competitive constraint— which basically confines the test to substantial control of a market.6

Lawyer and small business commentator Robert Gardini notes that, while the High Court of Australia has stated that the object of section 46 is to protect the interests of consumers and not competitors, read literally, section 46 is also intended to protect individual businesses from anti-competitive conduct.7

Some Views on Section 46

Section 46 which aims to prevent abuse of market power by large

corporations is as good as dead and buried. (Senator the Hon. Ron Boswell commenting on the Boral case).8

No amendment should be made to section 46. (Dawson Committee).9

And the terms and structure of s. 46 suggest that it is not well suited for dealing with claims of 'predatory pricing'. (His Honour Justice McHugh in the Boral case).10

The bad news is that section 46 remains in serious need of repair or reformation. (Prof. Michael Jacobs, DePaul University, Chicago, USA).11

The main issue is whether to amend or to leave intact the wording in section 46. Another option may be a brand new section.

The Focus of this Note

This Research Note argues that, since section 46 covers a variety of types of conduct, it may be better to deal separately and expressly with small business remedies by the insertion of a series of specific new sections in the TPA. Predatory pricing is used in this Research Note as an example.

Predatory Pricing

Interestingly, predatory pricing is not expressly mentioned in section 46 of the TPA—it has been implied.

Predatory pricing involves tactics such as pricing below the cost of production. In an oligopolist's market, price cutting initially suits consumers unless the purpose is to drive out competitors and to then charge supra-competitive prices thus hurting consumers (referred to as 'recoupment', i.e. to make good

losses incurred in a price war and to then move to 'monopoly' profits).

The High Court in the Boral case has decided that the interpretation of section 46 is found in the text and structure of the statute and not by over-reliance on the principles and theories relevant to the laws of other countries. The High Court's concern is that terms such as predatory pricing may take on a life of their own independent of the statute and inject into section 46 theories that are relevant to more broadly cast anti-trust laws, such as those of the USA.12

The Legislature's Intention

Originally, section 46 was enacted in 1974 as a prohibition on monopolisation to prevent an enterprise that is in a position to control a market from taking advantage of its market power. Section 46 was revised in 1986 to move away from the concept of monopolisation and control of a market and to establish the lower threshold test of having a substantial degree of power in the market—e.g. an oligopoly.13

A Suggested New Approach

The ACCC's submission to the Dawson Committee argued for the inclusion in section 46 of an effects test (i.e. the effects of suspicious conduct are easier to detect) and the introduction of cease and desist orders (a form of interim administrative restraining order).14 As noted above, these proposed legislative amendments to section 46 were not supported by the Dawson Committee.

Subsequently, the ACCC lodged a submission in September 2003 to the Senate Economics References Committee inquiry into the effectiveness of the TPA to protect small business.15 The ACCC again called for amendments to section 46, and in a range of suggested improvements, proposed a clarification to the meaning of 'take advantage' of market power. The ACCC also considered that it

should not be necessary to find an expectation of recoupment.

Another way to go, and using the example of predatory pricing, it could be argued that a more effective approach would be to insert factors to be considered by the courts in an alternative to section 46. The factors could include:

• a threshold measure for market share (e.g. 20 per cent)16 as an indicator of a potential for market power, but with regard to the relevant market structure

• price-cutting below cost but noting which company commenced the practice (i.e. a larger firm that matches a smaller competitor's price should not be penalised)

• evidence or reasonable inference of a proscribed purpose

• no necessity to find an expectation of recoupment, and

• the effect of any buyer or consumer pressure for lower prices (e.g. as in the Boral case).

Conclusion

The suggestion of a specific new statutory remedy for small business to counter predatory pricing would draw both critics and supporters.

Issues to consider include whether the proposed remedy's objective is to protect small business competitors and not competition, whether it would inhibit larger firms from running price reductions thus depriving consumers of bargains, whether it is ill-suited to Australia's relatively open markets and, whether it leads to more layers of regulation.

It is, however, an option to consider for predatory pricing and for other forms of anti-competitive conduct that affect small business.

1. Review Committee, Review of the Competition Provisions of the Trade Practices Act, Canberra, 2003.

2. ibid., p. 12.

3. The Hon. Peter Costello MP, Treasurer, Press Release, no. 021 of 16 April 2003.

4. Boral Besser Masonry v ACCC (2003) 77 ALJR 623 (Boral case). 5. Frank Zumbo, 'Boral ruling calls for section 46 review', Australian

Financial Review, 4 March 2003, p. 59. 6. Robert Gardini, 'The Dawson Review: A Small Business

Perspective', UNSW Law Journal, Sydney, vol. 26, no. 1, 2003, pp. 268-275. 7. ibid., p. 272.

8. Senator the Hon Ron Boswell, Media Release, 'Boswell Warns Open Season on Small Business…Boral Decision Removes Vital Section 46 Safeguard', 4 March 2003.

9. Review Committee (Note 2). 10. Boral case at p. 665. 11. Michael Jacobs, 'The Dawson Review and Section 46: The

Good, the Bad, and the Ugly', UNSW Law Journal, Sydney, vol. 26, no. 1, 2003, pp. 233-237. 12. Boral case at p. 642. 13. Trade Practices Revision Act 1986. 14. Submission to the Trade Practices Act Review, ACCC, June 2002, Chapter 3. 15. Available at: http://www.accc.gov.au 16. See Toni O'Loughlin, 'Call to set market share at 15pc', Australian Financial Review, 22 August 2003, p. 7.

Brendan Bailey* Law and Bills Digest Group Information and Research Services

Views expressed in this Research Note are those of the author and do not necessarily reflect those of the Information and Research Services and are not to be attributed to the Department of the Parliamentary Library. Research Notes provide concise analytical briefings on issues of interest to Senators and Members. As such they may not canvass all of the key issues. Advice on legislation or legal policy issues contained in this paper is provided for use in parliamentary debate and for related parliamentary purposes. This paper is not professional legal opinion.

 Commonwealth of Australia ISSN 1328-8016

*The author is on secondment to DPL and is an officer of the ACCC.