Australia: Product Bundling: The Implications Of The Recent Baxter Decision

Last Updated: 15 December 2008
Article by Richard Owens and Simon Uthmeyer

The Full Federal Court has recently issued its decision in ACCC v Baxter Healthcare. This decision has significant implications for any firms that are considering bundling products. It is particularly relevant where a firm is bundling one product in relation to which it has a high market share with another product for which it faces greater competition.


ACCC v Baxter Healthcare Pty Ltd is the first time that bundling has been found to be a misuse of market power under section 46 of the Trade Practices Act. The Full Federal Court's decision on 11 August 2008 illustrates the risks involved in implementing a bundling strategy. In particular, it shows that if you have market power in relation to one product, then you may need to be extremely careful when offering discounted pricing in return for an exclusive (or near exclusive) deal for that product and another product for which you face greater competition.

The Baxter decision also shows that section 46 is alive and well. The ACCC had expressed the view following previous unsuccessful section 46 cases that the section needs amendment and sets the bar too high. But Baxter shows that the current section still has some potential teeth and cannot be ignored.


There is currently no clear test for determining when bundling will breach the Act. Bundling itself is not a breach. Instead, it is the pricing of the bundle that can constitute a breach. It will therefore turn on an assessment of the prices of the bundled products.

Economic tests have been developed and used overseas for assessing whether bundled prices are anti-competitive, but the Baxter judgments show that Australian judges tend to be sceptical of the usefulness of those tests. Both parties presented extensive evidence from economic experts, and Baxter's pricing was shown to breach the ACCC's economic tests. However, the judge at first instance decided that those models were not reliable and he did not base his decision on them. In the Full Federal Court, none of the judges even referred to the economic tests.


As a result, the Baxter decision has not given us a brightline test. However, the various Baxter judgments enable us to develop several useful guidelines.

It's no defence that the buyer asked for bundled pricing

Baxter makes it clear that it is not a defence that the buyer expressly permitted or even asked for a bundled or exclusive offer. This point follows from the fact that it is not the making of a bundled offer itself that breaches section 46. Instead, it is the pricing of the bundle that is a breach. As a result, suppliers need to be careful when responding to tenders that request or allow bundled pricing. The need for caution is reinforced by the fact that an exclusive or near-exclusive offer could also constitute exclusive dealing that breaches section 47, as was the case in Baxter.

The ACCC's test for exclusionary bundling is a useful guide

In the original hearing, the ACCC set out a test for determining when bundling breaches section 46. Although that test was ultimately not relied on by the courts, it remains a useful indicator of the ACCC's approach and it can be a guide for assessing the risks that the pricing of a bundle may breach the Act. The ACCC's expert economist referred to bundling that breaches section 46 as 'exclusionary bundling'. If a firm has market power in product A but faces competition in product B, then 'it engages in exclusionary bundling when the incremental price for an AB bundle over A alone is less than the avoidable costs of B'.

The first step of this test is to impute a stand-alone price for the competitive product. This imputed price represents the price that competitors would have to offer in order to match the bundled price. This price is calculated by taking the bundled price for both products and deducting the unbundled price for the monopoly product. This imputed price is then compared with the cost of supplying the competitive product. If the imputed price for the competitive product is below the incremental cost of supplying that product, then a competitor could not match that price and the bundled pricing constitutes taking advantage of market power under section 46. The ACCC calculated the incremental cost of the competitive product by calculating the costs that Baxter would save if it ceased to provide that product, including a share of common costs.

Overseas regulators have endorsed tests that are similar to the ACCC's test in Baxter. For example, the European Commission's test for assessing whether bundling by a dominant firm breaches Article 82 of the EC Treaty is almost identical to the ACCC's test1. The Commission assesses whether the bundling 'has a market distorting foreclosure effect' by asking whether 'the discount is so large that efficient competitors offering only some but not all of the components, cannot compete against the discounted bundle'. The Commission imputes a price for the competitive product in exactly the same way as under the ACCC's test in Baxter. It then considers that there is a foreclosure effect if that imputed price is less than the dominant firm's incremental cost of the competitive product.

The judges in Baxter appear to have applied a similar informal test

The judges in Baxter did not base their decisions on these economic tests. In the first instance, Justice Allsop reviewed the tests in detail but did not rely on them. His Honour had concerns about the robustness of the cost information and the treatment of uncertainty. In particular, Justice Allsop accepted Baxter's argument that in a tender situation, an accurate test should account for the uncertainty as to whether Baxter's tender would be successful and what would be the final prices and quantities, but that there are currently no models that can account for this uncertainty. On appeal, the Full Federal Court judges did not even refer to the economic tests.

However, the judges appear to have at least in part relied on a more 'gut feel' application of a similar informal test. Each of the judges appears to have asked himself whether the bundled price was so low compared with the unbundled prices that it was impossible for another supplier to make a competitive offer. Both the Federal Court and the Full Federal Court considered that Baxter's bundled prices contained such a large discount over the unbundled prices that there was no realistic prospect that a competitor could make an offer that the buyers could accept without paying substantially more than under Baxter's bundled offer.

In Baxter, this assessment was made easier by the very high bundled discount. Indeed, in relation to the offer in South Australia, Baxter's discount was so great it went beyond even giving the competitive product away for free and it actually cost significantly less to buy both products than to just buy the non-competitive product. In less clear cut cases, it may not be possible to apply this type of test without detailed economic modelling.

The beliefs of the supplier's personnel are important

Following on from the point above, internal documentation and evidence regarding the beliefs of the supplier's personnel that developed and approved the pricing will be important. If the evidence shows that they believed that the bundled price was so low compared with the unbundled price that it would be impossible for competitors to make an offer that had a realistic chance of success, then there is a high risk of a breach. Both courts in Baxter held that the evidence showed that senior management at Baxter knew that it would be impossible for competitors to match their prices and that the only way that a competitor could be successful would be if it had a significantly higher quality product. This evidence was a significant factor in the findings that Baxter had taken advantage of its market power and that it had acted with an anti-competitive purpose.

The purpose for offering the bundle and discount is also important

The supplier's purpose for making a bundled offer and including a discount in the bundled price will also be important. If the discount reflects cost savings and efficiencies from offering the two products together, then the risk of a breach is low. The ACCC's economists in Baxter conceded that bundling that breached the ACCC's tests would be justified where the bundled discount reflected cost savings from bundling. The ACCC's economists also conceded that low bundled prices would be rational in certain circumstances, such as when clearing stock, or if the firm failed to realise that prices were below cost, or where the cost of exit and re-entry is higher than the cost of staying in the market. A similar approach is taken by some overseas regulators. For example, the European Commission expressly recognises defences of 'objective justification' and efficiency2.

However, if the purpose is to prevent competition in relation to the competitive product then there is a real risk of a breach. The line between seeking to win the business and seeking to prevent competition is a very fine one and the judges in the Full Federal Court disagreed on this issue. The majority considered that it is a breach if the purpose was to exclude the competition from putting in a realistic offer in that particular tender, and that the supplier did not need to have the purpose of forcing competitors to exit the market and not bid in future tenders.

The unbundled price should be a serious and realistic price

The unbundled price should be a serious and realistic price so that the customer has a genuine choice as to whether to accept the bundled offer. The judges in Baxter were clearly influenced by the fact that Baxter had no expectation that the unbundled price would be accepted and that Baxter's management did not consider it to be a serious offer. As an illustration, Baxter's bundled prices for the various tenders were 25 to 75% cheaper than its unbundled prices. The unbundled prices were also 50 to 80% higher than the prices currently paid by the relevant contracting parties. The judges saw this second point in particular as a clear indication that the unbundled pricing was not a serious offer that the buyers could conceivably accept.

Baxter also shows the risks of simply using your standard list price as the alternative to the bundled offer. In Baxter, the unbundled prices were taken from Baxter's 'basic hospital price list', but in practice those prices were only used for very small customers and were never paid by hospitals.

It is also no defence that the unbundled prices are not 'monopoly prices'. The Full Federal Court held that Baxter had taken advantage of its market power even though there was no evidence that its unbundled prices were totally unconstrained or were greatly in excess of its costs of production.


These guidelines put firms with market power in a difficult position where competing aggressively can constitute a breach of the Act. That result may seem counterintuitive, given that the purpose of the Act is to promote competition. This conflict can only be reconciled by the fact that the Full Federal Court in Baxter acknowledged that different standards apply to firms with market power. For example, Justice Gyles stated that 'it has been recognised that the conduct of a firm with market power may be subject to restraints to which others without power are not'. Justice Mansfield also quoted with approval a comment made by Justice Scalia in the Supreme Court of the United States in Eastman Kodak:

'Where a defendant maintains substantial market power, his activities are examined through a special lens: Behaviour that might otherwise not be of concern to the antitrust laws – or that might even be viewed as procompetitive – can take on exclusionary connotations when practiced by a monopolist'.

Corporations with market power need to bear this point in mind. They should ensure that their staff understand that they need to take extra care as a result of that market power.


Baxter has applied to the High Court of Australia for special leave to appeal. It is therefore likely that we have not heard the final word on this issue. Hopefully, the High Court will use the opportunity to provide a clear test for assessing when bundling is simply an example of vigorous competition and when it crosses the line to become anticompetitive conduct.


1 European Commission, DG Competition discussion paper on the application of Article 82 of the Treaty to exclusionary abuses, December 2005, pages 57-58.

2 European Commission, DG Competition discussion paper on the application of Article 82 of the Treaty to exclusionary abuses, December 2005, page 60.

Phillips Fox has changed its name to DLA Phillips Fox because the firm entered into an exclusive alliance with DLA Piper, one of the largest legal services organisations in the world. We will retain our offices in every major commercial centre in Australia and New Zealand, with no operational change to your relationship with the firm. DLA Phillips Fox can now take your business one step further − by connecting you to a global network of legal experience, talent and knowledge.

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.

To print this article, all you need is to be registered on

Click to Login as an existing user or Register so you can print this article.

Some comments from our readers…
“The articles are extremely timely and highly applicable”
“I often find critical information not available elsewhere”
“As in-house counsel, Mondaq’s service is of great value”

Mondaq Advice Centre (MACs)
Up-coming Events Search
Font Size:
Mondaq on Twitter
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
Email Address
Company Name
Confirm Password
Mondaq Topics -- Select your Interests
 Law Performance
 Law Practice
 Media & IT
 Real Estate
 Wealth Mgt
Asia Pacific
European Union
Latin America
Middle East
United States
Worldwide Updates
Check to state you have read and
agree to our Terms and Conditions

Terms & Conditions and Privacy Statement (the Website) is owned and managed by Mondaq Ltd and as a user you are granted a non-exclusive, revocable license to access the Website under its terms and conditions of use. Your use of the Website constitutes your agreement to the following terms and conditions of use. Mondaq Ltd may terminate your use of the Website if you are in breach of these terms and conditions or if Mondaq Ltd decides to terminate your license of use for whatever reason.

Use of

You may use the Website but are required to register as a user if you wish to read the full text of the content and articles available (the Content). You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these terms & conditions or with the prior written consent of Mondaq Ltd. You may not use electronic or other means to extract details or information about’s content, users or contributors in order to offer them any services or products which compete directly or indirectly with Mondaq Ltd’s services and products.


Mondaq Ltd and/or its respective suppliers make no representations about the suitability of the information contained in the documents and related graphics published on this server for any purpose. All such documents and related graphics are provided "as is" without warranty of any kind. Mondaq Ltd and/or its respective suppliers hereby disclaim all warranties and conditions with regard to this information, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. In no event shall Mondaq Ltd and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use or performance of information available from this server.

The documents and related graphics published on this server could include technical inaccuracies or typographical errors. Changes are periodically added to the information herein. Mondaq Ltd and/or its respective suppliers may make improvements and/or changes in the product(s) and/or the program(s) described herein at any time.


Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:

  • To allow you to personalize the Mondaq websites you are visiting.
  • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our information providers who provide information free for your use.

Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.

If you do not want us to provide your name and email address you may opt out by clicking here .

If you do not wish to receive any future announcements of products and services offered by Mondaq by clicking here .

Information Collection and Use

We require site users to register with Mondaq (and its affiliate sites) to view the free information on the site. We also collect information from our users at several different points on the websites: this is so that we can customise the sites according to individual usage, provide 'session-aware' functionality, and ensure that content is acquired and developed appropriately. This gives us an overall picture of our user profiles, which in turn shows to our Editorial Contributors the type of person they are reaching by posting articles on Mondaq (and its affiliate sites) – meaning more free content for registered users.

We are only able to provide the material on the Mondaq (and its affiliate sites) site free to site visitors because we can pass on information about the pages that users are viewing and the personal information users provide to us (e.g. email addresses) to reputable contributing firms such as law firms who author those pages. We do not sell or rent information to anyone else other than the authors of those pages, who may change from time to time. Should you wish us not to disclose your details to any of these parties, please tick the box above or tick the box marked "Opt out of Registration Information Disclosure" on the Your Profile page. We and our author organisations may only contact you via email or other means if you allow us to do so. Users can opt out of contact when they register on the site, or send an email to with “no disclosure” in the subject heading

Mondaq News Alerts

In order to receive Mondaq News Alerts, users have to complete a separate registration form. This is a personalised service where users choose regions and topics of interest and we send it only to those users who have requested it. Users can stop receiving these Alerts by going to the Mondaq News Alerts page and deselecting all interest areas. In the same way users can amend their personal preferences to add or remove subject areas.


A cookie is a small text file written to a user’s hard drive that contains an identifying user number. The cookies do not contain any personal information about users. We use the cookie so users do not have to log in every time they use the service and the cookie will automatically expire if you do not visit the Mondaq website (or its affiliate sites) for 12 months. We also use the cookie to personalise a user's experience of the site (for example to show information specific to a user's region). As the Mondaq sites are fully personalised and cookies are essential to its core technology the site will function unpredictably with browsers that do not support cookies - or where cookies are disabled (in these circumstances we advise you to attempt to locate the information you require elsewhere on the web). However if you are concerned about the presence of a Mondaq cookie on your machine you can also choose to expire the cookie immediately (remove it) by selecting the 'Log Off' menu option as the last thing you do when you use the site.

Some of our business partners may use cookies on our site (for example, advertisers). However, we have no access to or control over these cookies and we are not aware of any at present that do so.

Log Files

We use IP addresses to analyse trends, administer the site, track movement, and gather broad demographic information for aggregate use. IP addresses are not linked to personally identifiable information.


This web site contains links to other sites. Please be aware that Mondaq (or its affiliate sites) are not responsible for the privacy practices of such other sites. We encourage our users to be aware when they leave our site and to read the privacy statements of these third party sites. This privacy statement applies solely to information collected by this Web site.

Surveys & Contests

From time-to-time our site requests information from users via surveys or contests. Participation in these surveys or contests is completely voluntary and the user therefore has a choice whether or not to disclose any information requested. Information requested may include contact information (such as name and delivery address), and demographic information (such as postcode, age level). Contact information will be used to notify the winners and award prizes. Survey information will be used for purposes of monitoring or improving the functionality of the site.


If a user elects to use our referral service for informing a friend about our site, we ask them for the friend’s name and email address. Mondaq stores this information and may contact the friend to invite them to register with Mondaq, but they will not be contacted more than once. The friend may contact Mondaq to request the removal of this information from our database.


This website takes every reasonable precaution to protect our users’ information. When users submit sensitive information via the website, your information is protected using firewalls and other security technology. If you have any questions about the security at our website, you can send an email to

Correcting/Updating Personal Information

If a user’s personally identifiable information changes (such as postcode), or if a user no longer desires our service, we will endeavour to provide a way to correct, update or remove that user’s personal data provided to us. This can usually be done at the “Your Profile” page or by sending an email to

Notification of Changes

If we decide to change our Terms & Conditions or Privacy Policy, we will post those changes on our site so our users are always aware of what information we collect, how we use it, and under what circumstances, if any, we disclose it. If at any point we decide to use personally identifiable information in a manner different from that stated at the time it was collected, we will notify users by way of an email. Users will have a choice as to whether or not we use their information in this different manner. We will use information in accordance with the privacy policy under which the information was collected.

How to contact Mondaq

You can contact us with comments or queries at

If for some reason you believe Mondaq Ltd. has not adhered to these principles, please notify us by e-mail at and we will use commercially reasonable efforts to determine and correct the problem promptly.