Australia: Market Power, Market Share, And The Changes To Section 46

Last Updated: 22 October 2008
Article by Michael Corrigan

Key Points

  • Part of the Government's changes to the misuse of market power law have been passed into law, but the Birdsville amendment remains in force.
  • The amendments will make it easier to show a firm "used" or "took advantage" of its market power.

The Government's bid to abolish the so-called "Birdsville" amendment to trade practices law and replace it with an alternative test to protect small business against below cost selling by powerful firms has been defeated by the Senate.

It also defeated the Government's bid to resolve the vexed issue of predatory pricing.

Importantly, the amendments to section 46 of the Trade Practices Act that were passed included clarification of the circumstance in which a corporation has "used" or "taken advantage" of its market power, which has being a hurdle in recent market power cases brought by the ACCC.

Birdsville amendments

As we've noted previously, the so-called Birdsville amendment prohibits a corporation with a "substantial share of a market" from engaging in sustained below-cost pricing for a prohibited anticompetitive purpose aimed at damaging or eliminating competitors.

There is also a second limb in section 46 that a corporation with a "substantial degree of power" in a market will be prohibited from taking advantage of that power in any market by supplying, or offering to supply, goods or services for a sustained period below cost, where the conduct is engaged in for one or more of the anti-competitive purposes presently prescribed in section 46(1AA).

The Birdsville amendment, which was first introduced by the previous Government last year, is controversial and the ACCC has questioned its usefulness. No cases have been brought under the amendment to date.

The current Government had proposed a new test of predatory pricing that was closer to the existing section 46 by focusing on the issue of whether a company has substantial market power, rather than merely a substantial market share.

Market power has always been the usual test for abusive market behaviour, as opposed to market share, and most courts and regulators around the world agree that a high market share cannot be equated with having any significant degree of market power.

The Federal Government's new formulation was more workable for business groups and the ACCC. However, the Senate defeated the move, with Senators Fielding and Xenophon citing that it wasn't necessary to remove the Birdsville amendment and reasoning that the case for change had not been made.

Predatory pricing and the recoupment of losses

Currently, there are concerns that investigators must prove that a company which engaged in predatory pricing expected that it would be able to recoup its losses in subsequent trading. We are not convinced that those concerns are warranted and the issue of recoupment was left open in the Boral case - it is a factor in a pricing matter but arguably not a requirement in every case.

Nonetheless the Government's attempt to remove this "requirement" - if expectation of some recoupment is a "requirement" - was also blocked by the Senate.

Comparatively, predatory pricing in US antitrust law requires some expectation of recoupment as noted in the High Court decision in the Boral case.

Some small business interests have lobbied against any suggestion that it is a requirement in section 46 cases, because they perceive it makes cases too difficult to prove.

"Taking advantage" hurdle

One of the amendments that did pass the Senate was the clarification of the circumstances in which a corporation has "taken advantage" of its market power, which has been the source of much debate. The proposed insertion after section 46(6) determines whether, by engaging in conduct, a corporation has taken advantage of its substantial degree of power in a market. There are four new sub-paragraphs all aimed at addressing this issue which will ultimately be left to the judges to interpret.

Arguably, this codifies what was previously considered the courts' interpretation of section 46 as it relates to market power. This is a particularly topical change in light of the somewhat narrow view of market power adopted by the High Court in the recent high-profile Boral and Rural Press cases.

Implications for business

Broadly, section 46 cases are extremely complex and these amendments will only slightly reduce that complexity - so their utility is questionable.

However, the ACCC recently won a section 46 case against Baxter as we noted in our last Insights and has launched another case recently, so the ACCC still believes there is life in this section.

The Government will possibly try again to fix the quirky nature of the Birdsville amendment, when other legislative commitments permit.

Small business interests continue to campaign for more protection by strengthening section 46 - however protectionism can hurt efficient firms (even if they are large), and also hurt consumers, so getting the balance right remains controversial.

For the time being, the Government will continue to have a battle on its hands in the Senate to resolve those competing interests in any section 46 reforms. It's a fascinating insight into the clash between politics and arguably the most complex economic provision in the TPA.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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