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Misuse Of Market Power Notes

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This is an extract of our Misuse Of Market Power document, which we sell as part of our Competition Law Notes collection written by the top tier of University Of New South Wales students.

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Misuse of market power (s 46(1)) - any functional level S 46(1) A corporation that has a substantial degree of power in a market shall not take advantage of that power in that or any other market for the purpose of: a) eliminating or substantially damaging a competitor of the corporation or of a body corporate that is related to the corporation in that or any other market; b) preventing the entry of a person into that or any other market; or c) deterring or preventing a person from engaging in competitive conduct in that or any other market. S 46(1AAA) If a corporation supplies goods or services for a sustained period at a price that is less than the relevant cost to the corporation of supplying the goods or services, the corporation may contravene subsection (1) even if the corporation cannot, and might not ever be able to, recoup losses incurred by supplying the goods or services.

The aim of s 46

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S 46 does not prevent a firm acquiring market power. Rather it prohibits use of that market power for any of the three purposes in (a)-(c). No attempt is made to prohibit or regulate other exercises of market power.

Objective of s 46

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Queensland Wire : The High Court suggested that the purpose of the provision was to

protect the competitive process rather than particular competitors. This reasoning has been followed in subsequent decisions. Melway : the majority of the High Court stated: 'Section 46 aims to promote competition, not the private interest of particular persons or corporations.'

Steps under s 46(1)

1. 2.

3. 4.

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The respondent must be a corporation or the extension provisions must apply; The respondent must have a substantial degree of power in a market; The respondent must 'take advantage' of that power; The respondent must do this for one or more of the 3 proscribed purposes (i.e. 46(1)(a)(c)). Boral : you cannot begin with the purpose element when analysing s 46(1) (therefore above is the proper order of analysis).

1) Is the respondent a corporation? How are related corporations treated?

S 46 is directed towards corporations. It also uses the term 'a corporation.' S 6(2)(b) and (h) combine to make s 46 apply to individuals when the proscribed conduct occurs in one or more of the specified forms of trade. s 46(2) provides that market power of related corporations can be added together. o As a result of this provision, a respondent firm will be taken to have substantial market power if:
? A body corporate related to it has substantial market power.

* E.g. A subsidiary, holding company or a subsidiary of a holding company.
? Two or more bodies corporate related to it have that power.
? The respondent, together with one or more bodies corporate related to it, have that power when aggregated together.

2) Does the respondent have a substantial degree of power in a market?

Steps:

1) What is the market?
2) Does the respondent have substantial degree of market power?
o Market power is the freedom from constraints. o If the respondent is constrained in its price setting and decision making by its actual or potential competitors or by its buyers (like in the Boral Case), it does not have market power. There would then be no need to investigate further. What is the market?

* See above. What is 'market power?' QMCA:

* Market power is "the power to raise price and exclude entry. That power may or may not be exercised....The power is sufficiently free from market pressures to 'administer' its own production and selling policies at its discretion." S 46(3) In determining for the purposes of this section the degree of power that a body corporate or bodies corporate has or have in a market, the court shall have regard to the extent to which the conduct of the body corporate or of any of those bodies corporate in that market is constrained by the conduct of: a) competitors, or potential competitors, of the body corporate or of any of those bodies corporate in that market; or b) persons to whom or from whom the body corporate or any of those bodies corporate supplies or acquires goods or services in that market.

* Therefore ore than one corporation may have substantial market power in a market. It is not essential that for a corporation to have market power, that it substantially controls a market or enjoys absolute freedom from constraint.

* S 46(3) equates market power with discretionary power or an absence of competitive constraints. It requires the courts to have regard to the extent to which a corporation (and any related bodies corporate) is free to determine its own conduct in the market without being consistently inhibited from doing so by others (such as competitors, suppliers or customers). S 46(3B)

* Makes it clear that (3) and (3A) do not limit the factors that may be regarded for determining the degree of market power S 46(3C)

* Makes it clear that a body corporate can have a substantial degree of market power if it does not substantially control the market or does not have absolute freedom from constraint by the conduct of competitors/potential competitors or persons to whom the body corporate supplies or acquires good from. S 46(3D)

* More than one corporation may have a substantial degree of market power in a market.

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ACCC v Baxter Healthcare Pty Ltd [2008] : Justice Gyles noted [at 378] 'A substantial degree of power in a market is not the equivalent of monopoly power.'

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QLD Wire v BHP defined market power as the ability of a firm to raise prices above supply cost without rivals taking away customers in due time, supply cost being the minimum cost an efficient firm would incur in producing the product. Boral: Gleeson CJ and Callinan J: Pricing is not be the only indicator of market power. Other aspects include: o The capacity to withhold supply; or o To decide the terms and conditions, apart from price, upon which supply will take place. o A large market share may or may not give power. o The presence or absence of barriers to entry is critical. o Financial strength is not market power, although if a firm does have market power it may be part of the explanation for that power. o The financial ability to survive a price war is not market power, if when the war is over the market is still competitive. Power in a supplier ordinarily means the ability to put prices up, not down. But if a market is not competitive, putting prices down, seeking to eliminate a potential rival, in the expectation that when this occurs it can put prices up without competitive constraint, is ability to act in a manner reflecting the existence of market power (like in Compagnie Maritime Belge Transports SA v Commission of the European Communities where a shipping conference agreed to collectively not compete in prices and then target new comers).

Indicators of market power Courts have regard to 4 matters in s 46(3) to assess whether a corporation has market power:

1. The number and size of actual competitors;

2. The number and size of potential competitors;

3. Constraints from buyers;

4. Constraints from suppliers.

* The right question is not to look at market share but to ask whether a large market share would survive an attempt to charge higher prices and earn monopoly profits.

* If there is a large market share it may not be an indicator of market power. This is because it may just be offering a low price and competitive product.

* A corporation does not have market power if barriers to entry are low - even if it has 100% market share. Barriers to entry are key to an assessment of market power

* Barriers to entry are key to an assessment of market power. Not market share. This was recognised in QLD Wire Industries. Arnotts Limited v TPC (1990)

* Arnotts has been able to fix its prices, which was discussed in one of the companies' own

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documents (labelled as 'price leaders'). Arnotts has large brand loyalty and highly efficient and expensive infrastructure. It also has economies of scale which come from its market share in terms of volume and distribution costs - it accounts for 65% of sales of all biscuits. It is also given large shelf space and placed first in the traffic flow with 50% of the total biscuit bar. Any other supplier is in a catch 22 position: it cannot increase its shelf space unless it supplies more biscuits and it cannot supply more unless it increases its shelf space. It may not be a permanent problem but it is a barrier to entry.

FCFCA: Barriers to entry are barriers which confront the entry of a new firm into the market or barriers that confront an existing firm seeking to increase its market share. One of the indications of market power is the capacity of a participant to raise its prices without competitors taking away customers.

Financial strength as a source of market power

* In other words 'a deep pocket'. Boral v ACCC (2003)

* Gleeson CJ and Callinan J were not convinced it was a source of market power. While Kirby J stated that there was a link between financial strength and market power. BBM was found not to have a substantial degree of power in the relevant market because it was constrained by its customer's and structural barriers were low. Market power and oligopoly markets

* The application of s 46 in oligopoly markets was raised in Boral and Universal Music Australia Pty

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Ltd v ACCC (2003). In the Boral case the constraining influence of customers was crucial. This is because market power is the freedom from constraints; it is a discretionary power to set prices or terms of trade without fear of loosing market share when competitors respond. If this is the interpretation, s 46 may only be relevant for a monopoly with dominant market power. This may mean that s 46 will only apply to duopolies or oligopolies where there is actual or tacit collusion between the firms in the market. Yet s 46 can cover oligopoly markets when there are 2 or 3 firms of the same size. This was clear from the second reading speech to the 1986 amendments to the Act.

Section 46(1) and monopsony power to buying power

* S 46 was intended to cover monopsony power as well as monopoly power.

* Monopsony power can hurt consumers for a number of reasons. The monopsony buyer may not pass on lower prices to customers. Consumers may not be better off because monopsonist forces suppliers to sell at a lower price, reducing demand. Output will be reduced below the level that would prevail in a competitive market. Demand is unmet.

* ACCC v Australian Safeway Stores Pty Ltd (2001): Monopoly power is defined in terms of raising price compared with a competitive market; similarly monopsony power is defined as being able to get a lower price than would be available in a competitive market.

* S 46(4)(c) states that: (c) a reference to power in relation to, or to conduct in, a market is a reference to power, or to conduct, in that market either as a supplier or as an acquirer of goods or services in that market.

What does 'substantial degree' of market power mean?
S 46(3C) For the purposes of this section, without limiting the matters to which the court may have regard for the purpose of determining whether a body corporate has a substantial degree of power in a market, a body corporate may have a substantial degree of power in a market even though: (a) the body corporate does not substantially control the market; or (b) the body corporate does not have absolute freedom from constraint by the conduct of: i. competitors, or potential competitors, of the body corporate in that market; or ii. persons to whom or from whom the body corporate supplies or acquires goods or services in that market.

* S 46 is intended to have a lower threshold. Substantial is intended to mean 'large or weighty' or 'considerable, solid or big' it was found in the second reading speech but not

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the high degree of market power that used to be required under the old s 46(1) which required that the firm substantially control the market. Universal Music Australia Pty Ltd v ACCC : It was found that Universal enjoyed a temporary monopoly but this was not substantial under s 46(1) because retailers had the option to acquire stock by directly importing elsewhere.

Recoupment Recoupment as a test for market power where there is predatory pricing

* Price cutting can be legitimate. But there is a point where it becomes predatory and is taking advantage of market power.

* BUT: s 46(1AAA) means that recoupment can no longer be the test for predatory pricing. o There has been some debate about how a court should take the recoupment factor into account when determining whether below cost pricing is predatory or, rather, merely aggressive competition. The ability to recoup losses after a competitor has been forced out of the market has been said to indicate a use of market power. This was a useful test to show when a company had market power put forward by McHugh J in Boral.
? However it was made clear by Gleeson CJ and Callinan J that this was never a legal essential but may be of factual importance. Justices Gaudron, Gummow and Hayne agreed that recoupment analysis can be appropriate at least at an evidentiary level. Only McHugh J went further. o Recoupment refers to the ability of the corporation to be able to recover the losses incurred as a result of predatory pricing behaviour, at some later date when a competitor has been forced out of the market. o However now those claiming to be victims of predatory pricing will not need to prove that the predator has the ability to recoup losses from undercutting its' smaller rival because of s 46(1AAA). Boral Besser Masonary Ltd v ACCC (2003)

* Boral (BBM) set its prices as a result of competitive pressure from Pioneer and C&M. For some of

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the time BBM's prices were below its' variable costs. In no case is there any evidence to show that BBM set prices lower than was necessary to win the business it was seeking. In some cases it refused to reduce quotes to meet its competitors.

If one finds a firm is operating in an intensely competitive environment, a close examination of its pricing behaviour will show that it is responding to competitive pressure and not raising prices without fear of losing business. The conduct is of a different character. Gleeson CJ and Callinan J: In this case we are principally concerned with whether BBM had a substantial degree of power in a market and whether its' pricing behaviour and upgrading of its production facilities, took advantage of that power. Recoupment is not essential but may be of factual importance. BBM could not raise prices and this showed a lack of market strength. McHugh J: Recoupment involves the capacity of a firm to price in a manner inconsistent with what a competitive market would dictate in order, at a minimum, to make good the losses sustained during a price war. The greater degree of recoupment of a firm, the greater the market power. But a firm that is unable to recoup any of its' losses does not have market power. It is the capacity to give less and/or charge more or act in a way unconstrained by competitors that enables the price cutter to recoup all or part of its losses by earning supra-competitive profits. A recoupment test is useful for the court to analyse market structure rather than doing cost analysis and helps to determine if there has been predatory pricing. It is only when market structure is such

that a firm could recoup, that courts will need to consider the relationship between price and cost.

3) Did the respondent take advantage of that market power?
S 46(6A) In determining for the purposes of this section whether, by engaging in conduct, a corporation has taken advantage of its substantial degree of power in a market, the court may have regard to any or all of the following: a. whether the conduct was materially facilitated by the corporation's substantial degree of power in the market; b. whether the corporation engaged in the conduct in reliance on its substantial degree of power in the market; c. whether it is likely that the corporation would have engaged in the conduct if it did not have a substantial degree of power in the market; d. whether the conduct is otherwise related to the corporation's substantial degree of power in the market. This subsection does not limit the matters to which the court may have regard. Next Step: 3) Examine the conduct at issue and ask whether a competitive firm would be likely to engage in such conduct (the counterfactual)?
o It is necessary to examine the effect of conduct on consumers, not other individual competitors. o If consumers are better off as a result of the conduct, it is pro-competitive. 'Taking advantage' does not require commercial reprehensibility QLD Wire v BHP:

* Taking advantage of means 'use.' There does not need to be an abuse or something unusual, predatory, forceful or deceitful involved in the respondent's conduct.

* Dawson J: 'Take advantage of' do not have moral overtones in the context of s 46. There is no doubt that BHP took advantage of its market power in this case. Y-bar is the only product that BHP restricts and this is not in line with it's normal behaviour. The existence of barriers to entry in the steel product market have influenced BHP's course of action. THE COUNTERFACTUAL STEP Would the corporation be likely to engage in the conduct if it lacked a substantial degree of power?

* A casual relationship must be shown to exist between the conduct at issue and the respondent's market power. Only if that casual link exists can it be said that the conduct is a use of that market power. Therefore if a firm without substantial market power, but otherwise in the same position as the respondent, would have acted in the same way, it cannot be said that the respondent is using market power.

* The counterfactual: Requires the applicant to demonstrate that the respondent engaged in conduct which it would be unlikely to have engaged in under competitive conditions. o E.g. If the respondent could have engaged in the conduct under competitive conditions (i.e. in a situation where it lacked a substantial degree of power in the market) then the respondent did not rely on the market power to give effect to the conduct. In this scenario the requisite casual relationship between the conduct and the market is absent. QLD Wire v BHP:

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A case where the counterfactual test was satisfied. Toohey J: The question is: Is BHP refusing to supply Y-bar because of its' dominant power (due to the absence of competitors) in the steel products market? The answer to this question is yes because BHP can only withhold Y-bar because there are no other competitors in the market who can supply it. It is refusing to supply at competitive prices to prevent QWI getting into the star picket market. BHP offered no legitimate reason for refusal to sell Y-bar and it was the only product in its' rolling mills not offered for sale. In every other steel product with some competition it did sell.

Melway Publishing Pty Ltd v Robert Hicks Pty Ltd (2001)

* Robert Hicks and Co was a company that split in 2. Melway wanted to only deal with one partner.

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Thus have only one distributor and this meant the other partner would cease to be a wholesaler of Melway street directories. Melway had 90% market share of Melbourne street directories. It was also the only possible source of Melway street directories. Its' ability to stop the respondent becoming a wholesaler of Melway directories resulted from the fact that it was Melway and could appoint distributors as it saw fit.

HC found that Melway had a substantial degree of market power. But that it did not 'take advantage' of this power. This is because there was direct evidence that Melway had acted in this same way in situations where it did not have market power. This was shown because in Sydney it only had 10% share of the market but used the same market strategies. There was direct evidence to prove the absence of the counterfactual. Gleeson CJ, Gummow, Hayne and Callinan JJ: Distinguished QLD Wire. A firm possesses market power when it can behave persistently in a manner different from the behaviour that a competitive market would enforce on a firm facing otherwise similar cost and demand conditions. This only needs to be substantial. Melway's market power was substantial (found in trial). In a competitive market, without its market power, would Melway be compelled to supply the respondent? The real question is without its' market power, Melway could have maintained its' distributor system, or at least part of it? The answer is yes because in refusing to supply the respondent, Melway was not denying itself sales, and there was no justification for assuming that in a competitive market it would be denying itself sales.

Rural Press Ltd v ACCC (2003)

* A case where threats were made. Issue: Can a corporation with substantial market power in one market contravene s 46 by threatening to enter a new market where it has no presence?

* Bridge printing office was a wholly owned subsidiary of Rural Press. It published a regional

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newspaper in Murray Bridge called the Murray Valley Standard (Standard). Its prime circulation was Murray Bridge. Waikerie published a regional newspaper called River News in the Riverland area. They kept out of each other's territories until there was a re-organisation of council boundaries. River News began circulating in Mannum and so Rural Press and Bridge threatened Waikerie to withdraw from Mannum or they would publish, free of charge, in their area. Waikerie withdrew.

HC found that Rural Press did not take advantage of their market power. (but there was a breach under s 47 exclusionary provisions) HC: concluded that the words "take advantage" do not encompass conduct which, while having the purpose of protecting market power, have no other connection with that power - o "To reason that Rural Press and Bridge took advantage of market power because they would have been unlikely to have engaged in the conduct without the "commercial rationale" - the purpose - of protecting their market power is to confound purpose and taking advantage. If a firm with market power has a purpose of protecting it, and a choice of methods by which to do so, one of which

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