Section 46: Corporation with a substantial DEGREE of market power

46. Misuse of market power

46A. Misuse of market power--corporation with substantial degree of power in trans-Tasman market

• Section 46(1) begins with: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...

Definition of ‘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.”

Arnotts merger case (1990):

• the Full Court of the Federal Court, equated ‘dominance’ with a ‘high degree of market power’ and quoted the QMCA factors.

What degree of market power under s 46(3)?

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:

1. competitors, or potential competitors, of the body corporate or of any of those bodies corporate in that market; or

2. persons to whom or from whom the body corporate or any of those bodies corporate supplies or acquires goods or services in that market.

• (3) provides that: More 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).

What factors are relevant to determine the degree of market power?

Section 46(3A) – some factors are suggested to show the degree of power a body corporate has:

(3A) 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 may have regard to the power the body corporate or bodies corporate has or have in that market that results from:

1. any contracts, arrangements or understandings, or proposed contracts, arrangements or understandings, that the body corporate or bodies corporate has or have, or may have, with another party or other parties; and

2. any covenants, or proposed covenants, that the body corporate or bodies corporate is or are, or would be, bound by or entitled to the benefit of.

Section 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

Section 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 froms.

Section 46(3D)

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

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) – page 206

• Arnotts wanted to acquire Nabisco. The Commission challenged the merger on the basis that it contravened s 50.

• The primary judge concluded that the relevant market was the national market for the supply of biscuits to wholesalers and retailers.

• FC: He focussed on barriers to entry rather than market share to find market power. One such difficulty was that of obtaining shelf space for their biscuits in major supermarkets. Thus it would be difficult and expensive for a new entrant.

• 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.

• Arnotts has been able to fix its prices, which was discussed in one of the companies’ own 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...

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