The Government is proposing to amend the Commerce Act to make illegal a lot more of the actions of a firm that has substantial power in a market. The changes will involve applying an effects test instead of the existing test, which focuses on taking advantage of market power. The proposals are up for consultation until 1 April 2019.

The proposed new test would simply ask whether the firm with substantial market power has engaged in conduct that has or is likely to have the effect of substantially lessening competition in a market. This is very similar to the test that now applies in Australia, which changed from a taking advantage test in 2017.

The existing test

The existing test, set out in section 36 of the Commerce Act, has long faced criticism for not capturing a range of actions that damage competition. It involves asking the question of whether a hypothetical firm, alike in all respects to the real firm whose actions are alleged to breach section 36, except that it doesn’t actually have market power, would act in the same way as the real firm.

This test has meant that actions such as exclusive dealing, where a manufacturer will only supply to one retailer, are unlikely to be illegal. This is because a firm with no market power is likely to, and does, engage in exclusive dealing.

In the hands of the firm with no market power, however, those actions doesn’t reduce competition and indeed can even enhance competition. In contrast, in the hands of a firm with substantial market power, it is claimed those actions can severely limit competition between suppliers.

Other claimed examples of the existing law giving the wrong answer are land banking and the bundling of products and/or services (e.g. Microsoft bundling its internal browser and media player with Windows).

The efficient component pricing rule

The proposed change could also see the end of the efficient component pricing rule. This rule applies where a wholesale service provider also sells those services at the retail level, competing with its wholesale customers. An example is the telecommunication sector, where some telcos provide data services at wholesale to other telcos and also compete with those other telcos customers at the retail level, using the same wholesale services.

The rule says that the wholesale supplier would sell the wholesale services at a price that would mean it would not care whether the services were sold at wholesale or retail, but no more than that price. In theory, this is the price at which a firm with no market power would sell the wholesale services.

While the application of the rule has led to some reductions in pricing, anecdotally, there are claimed instances where it has resulted in wholesale services not being provided.

A change to an effects based test would ask whether the price being offered by the wholesaler has the effect of reducing competition in a market. Arguably, this could mean that the wholesaler will be limited to charging no more than a price which allows its wholesale customers to compete at the retail level. This is not potentially bottomless, however. We think that it will be constrained by a requirement that the wholesaler must also be able to compete at retail.

Is the change justified?

The Ministry of Business, Innovation and Employment, which has released a discussion paper, sees the change to an effects test as advancing the purpose of the Commerce Act, which is to promote competition in order to advance the interests of consumers over the long-term. The change will also align with competition law in most other OECD countries.

Opposition to the effects test in the past has included that it penalises companies that have worked hard to gain strong market position, by stopping them from doing things that would be perfectly acceptable if they had no market power.  

The debate about whether or not the change is appropriate is therefore largely a debate about the overriding purpose of competition law.

Implementation questions

Putting that aside, there are still many questions that could be asked about how the test should be expressed. For example, could some guidance be given as to the situations it will apply to, to reduce the likelihood of it applying too indiscriminately?  Could some thought be given to what will replace the efficient component pricing rule?  Could a clearance authorisation procedure be used to permit conduct that breaks section 36, but is overall pro-competitive or has other public benefits, such as higher efficiencies?

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