Small businesses facing large suppliers or buyers often form associations or buying groups to collectively negotiate in order to improve their bargaining power. While collective negotiation of the price, and terms and conditions of supply by competitors may breach the Trade Practices Act 1974 (Act), the ACCC may authorise such conduct where there are public benefits from the collective negotiations.
However, the effectiveness of collective negotiations to overcome bargaining power asymmetry may depend on the extent to which the group can agree to collectively boycott a supplier or buyer if suitable terms and conditions are not agreed. For example, an association comprising of a large number of small buyers collectively negotiating with one of two large suppliers may refuse (or threaten to refuse) to deal with the supplier (boycott it) if suitable terms and conditions can not be agreed. In these circumstances the group may take the aggregated business to the other large supplier. However, without the threat of a legal ability to collectively boycott, the bargaining power of the group is diminished. While collective boycotts are prohibited under the Act, the ACCC may authorise such conduct where there are public benefits from the ability to boycott.
A recent decision of the Australian Competition Tribunal (Tribunal) may have put an end to the authorisation of collective boycotts. The Tribunal overturned a determination of the ACCC authorising Chicken Growers Groups to collectively boycott Chicken Meat Processors. Setting out the test to be applied by the ACCC when considering whether to authorise a collective boycott under the Act, the Tribunal’s decision raises the question of whether the power of the ACCC to authorise collective boycotts is redundant. While the ACCC has previously expressed its view that authorisation of collective boycotts will be granted only in exceptional circumstances, it appears that the Tribunal has set the test for authorising collective boycotts so high that it is unlikely that there will be any circumstances where the ACCC’s power will be exercised.
In May 2004 the Victorian Farmers Federation (VFF) on behalf of various groups of Chicken Growers, applied to the ACCC for authorisation for the Chicken Growers Groups to:
- Collectively negotiate the terms and conditions of supply of their chicken growing services to Chicken Meat Processors.
- Engage in collective boycott arrangement by collectively refusing to supply chicken growing services to Processors where the Processors refuse to accept the terms and conditions sought by Growers.
The ACCC granted the Growers authorisation for both types of conduct, however, the authorisation for collective boycotts was subject to a number of conditions. The conditions required the Growers to undertake a minimum six months of negotiations with Processors, invite Processors to a mediation if the parties could not agree on the terms and conditions of supply, and notify the Processors of an intention to engage in a collective boycott before immunity from legal action is granted.
With these conditions in place, the ACCC considered that authorising the Chicken Growers Groups to boycott the Processors would ensure that the collective negotiations would lead to increased efficiencies as a result of increased input by the Growers into the terms and conditions of the growing contracts and lower transaction costs, creating an overall public benefit.
The Chicken Meat Processors sought review by the Australian Competition Tribunal of the authorisation to collectively boycott.
Section 88(1)(b) empowers the ACCC to authorise a contravention of s 45(2) providing competitors with immunity from court action with respect to a collective boycott. Section 90(8)(b) limits the power of the ACCC to authorise competitors to engage in a collective boycott where it is likely to result in a benefit to the public.
Growers provide a service to Processors of caring for and managing the growth of chickens. That is, the chicken growing service is an input to the supply of wholesale chicken meat.
The Tribunal found that a Victorian chicken growing service market existed, being three geographic markets which are effectively monopsony markets (one buyer and many sellers).
To grant authorisation, the Tribunal must be satisfied that in all the circumstances the collective boycott would result or be likely to result in such a benefit to the public that it should be allowed.
To apply the test under s 90(8) the Tribunal must compare
- The future state of competition in the relevant markets with the proposed boycott authorisation (the factual).
- The future state of competition in the relevant markets without the proposed boycott authorisation (the counterfactual).
Future without the proposed boycott authorisation - counterfactual
The Tribunal found that the Processors had significant market power that was likely to lead to market outcomes and inefficiencies not found in a competitive market.
The Processors’ market power arose from the following two sources:
- Processors are effectively the only purchasers of chicken growing services in their respective geographic market.
- Growers face significant sunk costs of investment in infrastructure specific to the chicken growing industry (incurred pre-deregulation), infrastructure that cannot be readily used for alternative purposes. Therefore, as Growers had no alternative use for their chicken growing facilities they had no option but to accept the terms offered by the Processors.
The Tribunal determined that the market power of the Processors arising from their position as the only purchaser gave them the ability and incentive to determine the terms and conditions of contracts for chicken growing services such that the level of demand and therefore level of output was lower than would be expected in a competitive (efficient) market.
Due to the market power of the Processors resulting from their monopsonistic status (as the only purchaser), on balance the Tribunal found that Victoria’s chicken growing market in the future, will fail to deliver efficient outcomes in the absence of authorised collective boycotts.
Future with the proposed boycott authorisation - factual
The Tribunal assessed that the authorisation of collective boycotts by the Growers would give Growers some countervailing bargaining power in their negotiations with Processors. Therefore, in assessing whether the authorisation would be likely to generate a public benefit, the Tribunal considered whether this countervailing bargaining power would reduce the degree of inefficiency that would result from monopsonistic behaviour by Processors.
The Tribunal determined that the countervailing bargaining power of the Growers would enable them to secure improved terms and conditions for the provision of chicken growing services. However, the Tribunal was not convinced that the Growers would exercise their power to boycott only to improve efficient market outcomes.
The Tribunal found that the authorisation of collective boycotts would effectively create a bilateral monopoly (a monopoly buyer and monopoly supplier), and standard economic analysis suggests that market outcomes are highly unpredictable in markets where both buyers and sellers have market power. The Tribunal assessed that there were too many variables and too much uncertainty to predict the likely future market outcomes with a bilateral monopoly created by authorising this collective boycott. Accordingly, the Tribunal was unconvinced that the authorisation of a collective boycott arrangement by the Growers would lead to improved (more competitive) market outcomes as compared to the market outcome in the absence of authorised collective boycotts.
End to authorised collective boycotts?
Despite the conditions attached to the authorisation granted by the ACCC and the ability of the Tribunal to impose even more stringent conditions, the Tribunal found that the authorisation would not result in a public benefit to justify approval.
This decision concerned an authorisation that effectively created a bilateral monopoly. The uncertainty of market outcomes arising from a bilateral monopoly did not result in a public benefit to justify approval. The Tribunal found that ‘many outcomes are possible, and none is sufficiently more likely than others, to enable the Tribunal to say that there is a real chance that one outcome is the most likely.’ [emphasis added]
As pointed out by the Tribunal, the power of the ACCC under the Trade Practice Act 1974 to authorise a collective boycott arrangement has never been used by the ACCC. This suggests that the ACCC not only recognises the significant potential public detriments arising from a collective boycott arrangement, but it also recognises the difficulty identified by the Tribunal of predicting the likely future market outcome. It is possible that terms and conditions attached to an authorisation to collectively boycott, may be appropriately drafted so as to address the uncertainty identified by the Tribunal. However, one may argue that attaching conditions to an authorisation with an aim to guiding market outcomes may not be that far removed from a regulated market – arguably something that should be avoided. The issue then may be whether collective negotiations without a legal right to boycott will be sufficient to redress the identified market failure.
This publication is intended as a first point of reference and should not be relied on as a substitute for professional advice. Specialist legal advice should always be sought in relation to any particular circumstances and no liability will be accepted for any losses incurred by those relying solely on this publication.