This chapter follows on from the previous chapter which outlined the
Australian Competition and Consumer Commission's (ACCC) investigation of Coles'
pricing decisions under Australia's competition law as it currently stands. Both
this inquiry and the committee's 2010 inquiry into competition and pricing in
the Australian dairy industry received a significant amount of information
regarding the effectiveness and perceived gaps in Australia's competition laws,
as well as concerns about the approach taken to their enforcement. This chapter
discusses these issues in detail, particularly those relating to price
discrimination, misuses of market power and mergers and acquisitions.
The principal legislation governing competition in Australia is the Competition
and Consumer Act 2010 (CCA), which was previously known as the Trade
Practices Act 1974. The object of the CCA is to enhance the welfare of
Australians through the promotion of competition and fair trading and provision
for consumer protection. Treasury describes the provisions related to general
anti-competitive conduct as follows:
The Part IV provisions are principally concerned with protecting
the competitive process, not individual competitors. They are not designed to
protect competitors from rigorous competitive behaviour, nor to force
businesses to compete.
An independent statutory authority, the ACCC, is responsible for
administering the CCA. Policy responsibility for most parts of the CCA lies
with the Treasury portfolio.
Anti-competitive price discrimination
Price discrimination occurs when a firm charges a different price to
different persons or groups of persons for identical goods or services for
reasons not related to costs.
The CCA previously contained a section which explicitly covered anti-competitive
price discrimination. Prior to its repeal,
subsection 49(1) had stated:
A corporation shall not, in trade or commerce, discriminate
between purchasers of goods of like grade and quality in relation to
prices charged for the goods;
discounts, allowances, rebates or credits given or allowed in relation to the
supply of goods;
provision of services in respect of the goods;
making of payments for services provided in respect of the goods if the
discrimination is of such magnitude or is of such a recurring or systematic
character that it has or is likely to have the effect of substantially
lessening competition in a market for goods, being a market in which the
corporation supplies, or those persons supply, goods.
Subsection 49(2) listed two defences to 49(1). The first was where the
price differences reflected differences in the cost or likely cost of
manufacture, distribution, sale or delivery resulting from the different places
to which the goods are supplied to purchasers. The second defence was where the
discrimination was constituted by the doing of an act in good faith to meet a
price or benefit offered by a competitor of the supplier.
In 2002, the ACCC described the operation of section 49 as follows:
Price discrimination was an issue under s. 49 if the
discrimination was of such magnitude or was of such a recurring or systematic
character that it substantially lessened competition. Section 49 did not apply
when the discrimination in price reflected a reasonable allowance for
differences in the cost of supply resulting from different delivery
destinations or different quantities supplied to purchasers.
Repeal of section 49
Section 49 was repealed in 1995 after the recommendations of the 1993 report
of the independent inquiry into a national competition policy (the Hilmer
Report). The view at the time was that price discrimination 'generally enhances
economic efficiency', except in instances which may be in breach of either
section 45 or 46, in which case those sections would apply.
In recommending its repeal, the Hilmer Report noted concerns that the
provision may discourage pro-competitive conduct.
The Hilmer Report summarised its view on the provision as follows:
The prohibition against price discrimination prevents the
sale of like goods to different persons at different prices, where such
discrimination substantially lessens competition. The provision is contrary to
the objective of economic efficiency and has not been of assistance to small
businesses. The Committee does not believe that it is the role of the
competitive conduct rules to protect any particular sector of society, and does
not believe that the competition rules should be used to achieve objectives
contrary to economic efficiency.
In its submission to this inquiry, the National Association of Retail
Grocers of Australia (NARGA) questioned this finding:
In Hilmer's own words, prevention of a substantial lessening
of competition would be "contrary to the objective of economic efficiency".
The corollary to Hilmer's logic is that a substantial lessening of competition
would promote economic efficiency. And, presumably, that monopoly would be most
efficient of all.
The position of the Hilmer Report was maintained in the 2003 report of
the independent review of the competition provisions of the Trade Practices Act
(the Dawson Report). Previous inquiries such as the Swanson Committee
(1976) and the Blunt Committee (1979) had also recommended the repeal of
A 2004 Senate committee inquiry into Parts IV and VII of the Trade
Practices Act examined whether section 46 required amendment to deal better
with price discrimination (previously addressed by section 49) and concluded
that section 46 was adequate.
The ACCC provided a useful summary of the reasoning behind the repeal of
section 49, noting that the Hilmer Report:
... observed that anticompetitive price discrimination almost
invariably involves a firm with market power. You have to have market power to
make it stick. Alternatively, a group of suppliers has to get together and
agree on the price discrimination; otherwise, it just does not work. The point
the committee made was that if it is a use of market power then that is what
section 46 is about. If it is a group of suppliers getting together and
deciding on the anticompetitive price discrimination, then that is what section
45 is about. Basically, the Hilmer committee said that they did not see a role
for section 49, because the conduct in question was already covered by sections
45 and 46.
Calls for the reintroduction of a
section 49-type provision
During this inquiry a number of individuals and organisations called for
a specific anti-competitive price discrimination provision to be
... we need an effective prohibition against
anti-competitive price discrimination. Australia is out of line, out of step,
with international practice in this area. Other jurisdictions have express
prohibitions against anti-competitive price discrimination. We do not. Any hope
that section 46 would deal with that issue, I have to say, with all due
respect, is somewhat misplaced if not delusional.
The AFGC is of the view that the switch from the s49 "effects"
test to the s46 "purpose" test was a significant weakening of the
provision against anti-competitive price discrimination.
The reintroduction of an anti-price discrimination clause
into the Act is absolutely warranted and should be a foundation recommendation
from the current Senate inquiry.
NARGA considers that the timing of the repeal of the anti-competitive
price discrimination is particularly relevant to the dairy industry:
... since the deregulation of the Australian dairy industry
in 2000, the supermarket chains’ private label milk has consistently been
priced substantially and continuously below proprietary branded milk.
Associate Professor Frank Zumbo warned that price discrimination conduct
'adversely impacts' independent retailers, who:
... will go out of business and will not be able to
provide any competitive tension to Coles and Woolworths. Coles and Woolworths
will just increase their dominance of the market.
It is apparent that the prices and terms of supply in the grocery
sector, and the effectiveness of competition laws in this regard, have been
raised as issues for some time. In 2003, the Dawson Report noted that during
its inquiry, parties involved in the wholesale and retail grocery industry were
the most vocal regarding price discrimination. The Dawson Report summarised
their concerns as follows:
Their complaint was that independent wholesalers (who sell
wholesale to independent retailers) are not able to obtain goods at prices
comparable to those charged by suppliers to the two major chains,
notwithstanding that their central distribution warehouses are, in comparison
with the facilities of the major chains, of comparable size and capable of like
performance. They submitted that this constituted a failure on the part of
suppliers to provide 'like terms for like customers' at this level of the
grocery distribution chain, namely, the central warehouse level. This meant,
they said, that the independent retailers were such that there could be no fair
competition between them and the major chains at the retail level, only the
later being able to reflect the benefit of lower wholesale prices in their
However, when asked at Senate Estimates whether it is price
discrimination when different prices are charged for the same product in
different packaging, the Chairman of the ACCC replied that 'it is not', and
referred to other issues such as the marketing elements of the branded product.
This interpretation was also supported by the chief executive of an independent
Senator XENOPHON—Is it price discrimination to be selling
branded milk and generic milk, or the home brand milk, for different prices
when in effect it is the same product?
Mr Markham—I think that is the case for most private labels
and branded products anyway. Branded products carry a marketing component, a
brand value, which has always put them at a higher price than a private label.
So, no, I do not believe so.
Effectiveness of section 49 and
criticism of its enforcement
When the price discrimination version of section 49 was in place, it was
invoked in legal proceedings in very few instances.
NARGA was critical of the enforcement by the ACCC and its predecessor (the
Trade Practices Commission) of anti-competitive price discrimination
provisions—both section 49 and, after it was repealed, section 46. NARGA noted
a private case where conduct was found to be in breach of section 49 to
support their argument that it was repealed without cause.
In 1981, a private case, JCool&Son v. O’Brien Glass
Industries, was taken to the Federal Court of Australia. Justice Keely
found that both s49 and s47 of the Trade Practices Act had been breached.
Treasury pointed out, however, that it is difficult to state with
certainty that section 49 was necessary in the outcome of J Cool & Son v
O'Brien, noting that if section 49 had not existed at the time, it is not
clear if section 46 or another provision may have been pleaded instead.
Treasury also cited two judicial observations made on the case:
There is some overlapping between the different sub-sections
of the Trade Practices Act. In particular, in the present case, it is alleged
that the same conduct of the respondent constitutes both exclusive dealing
contrary to Section 47 of the Act and price discrimination contrary to Section
49 of the Act. In other words, the giving of a substantial discount on certain
conditions can be price discrimination and also, constitute exclusive dealing contrary
to Section 47. Indeed, in the applicant’s submission, it is the combination of
the large systematic discounts and the exclusive dealing condition which
greatly increases the adverse anti-competitive effects in the present case...
It is also to be noted that the purpose of the discrimination
in s. 49(1) is irrelevant and this may be compared with the provisions of s.
Limitations of section 49
Following on from the few instances of section 49 being used in court
proceedings, and in addition to questions about the approach taken by
enforcement agencies to pursuing section 49 cases, are questions about the
possible limitations of the section. The Hilmer Report outlined what, in its
view, were practical difficulties with the provision:
It is not clear what degree of similarity is required for
goods to be regarded as being "of like grade and quality"; it is not
clear what might constitute a "reasonable" allowance for differences
in cost; and it is not clear whether, when meeting a competitor's price, the
goods must bear the same degree of similarity to the competitor's goods as is
required by the phrase "of like grade and quality". The cost defence
does not necessarily correspond with those factors which firms would monitor or
The ACCC also explained what it saw as the key limitations of the
If you look at section 49, basically it said price
discrimination is unlawful if it has the effect of 'substantially lessening
competition'. Then there were a couple of exclusions, which included price
discrimination because of differing costs and price discrimination in order to
match a competitor. When you took all of that into account you had to be able
to establish that there was the effect of substantial lessening of competition.
Various types of pricing were excluded. So you ended up with a fairly small set
of pricing behaviours which potentially would have fallen under that section
Although only a small set of pricing behaviours were likely to be
captured, it is not clear this should be interpreted to be a criticism of the
section, as such a provision should only be targeted at very specific
Price discrimination laws in other
It is evident that other key jurisdictions have a specific
anti-competitive price discrimination provision in place, although the ACCC
disagreed that 'most countries had it', asserting that these types of
provisions have been repealed in a number of countries in recent years.
United Kingdom and Europe
In the United Kingdom, subsection 18(1) of the Competition Act 1998
provides that, with certain exceptions, 'any conduct on the part of one or more
undertakings which amounts to the abuse of a dominant position in a market is
prohibited if it may affect trade within the United Kingdom'. This provision is
based on Article 82(c) of the EC Treaty, which covers trade between its member states.
The UK legislation extends the prohibition to cover trade within the UK itself.
Subsection 18(2) provides a non-exhaustive list of conduct which may
constitute an abuse of a dominant position, including the 'application of dissimilar
conditions to equivalent transactions with other trading parties, thereby
placing them at a competitive disadvantage'. The UK Office of Fair Trading (UK
OFT), in its non-binding guidelines on the abuse of a dominant position,
These are no more than examples, and are not exhaustive. The
important issue is whether the dominant undertaking is using its dominant
position in an abusive way. This may occur if it uses practices that have the
effect of restricting the degree of competition which it faces, or of
exploiting its market position unjustifiably.
The key aspect of this provision is that it requires an abuse of a
dominant position—in the absence of this there is no general provision in the
UK which prohibits discriminatory pricing.
A paper prepared for the American Bar Association examined a number of
price discrimination cases taken in the UK. One significant action by the UK OFT
against Napp Pharmaceutical Holdings
Napp Pharmaceutical Holdings produced sustained release
morphine tablets (MST) and distributed its product to both the hospital and
community sector of the market. Hospital usage was the 'trigger' for prescription
by doctors in the (much larger) community sector. Napp distributed its product
to hospitals at a 90% discount from the list price in the wider community. This
discount—a form of price discrimination—was held by the OFT to be an abuse of a
dominant position as it served to strengthen the dominant position of Napp in
such a way that the degree of dominance reached by this undertaking
substantially fettered competition in the market for MST.
Price discrimination in the United States is directly governed by the Robinson-Patman
Act of 1936 (RPA), which amended the Clayton Antitrust Act of 1914. The RPA
provides that, with some exceptions and defences:
It shall be unlawful for any person engaged in commerce, in
the course of such commerce, either directly or indirectly, to discriminate in
price between different purchasers of commodities of like grade and
quality ... and where the effect of such discrimination may be
substantially to lessen competition or tend to create a monopoly in any line of
commerce, or to injure, destroy, or prevent competition with any person who
either grants or knowingly receives the benefit of such discrimination, or with
customers of either of them...
An official of the US Federal Trade Commission described the rationale
behind the introduction of the RPA as follows:
In 1936, Congress believed that large firms could dominate
markets through predation and other forms of economic warfare directed against
smaller firms, and felt that "power buyers" such as large retailers
could use their market power to extract price concessions from manufacturers
and other sellers that were unavailable to their smaller competitors. As the
Commission has stated, [t]he major legislative purpose behind the Robinson-Patman
Act was to provide some measure of protection to small independent retailers
and their independent suppliers from what was thought to be unfair competition
from vertically integrated, multi-location chain stores.
In 2002, the Antitrust Modernization Commission was formed by Act of
Congress to examine whether the need exists to modernize the antitrust laws and
to identify and study related issues.
The Commission concluded that the RPA:
... appears antithetical to core antitrust principles. Its
repeal or substantial overhaul has been recommended in three prior reports, in
1955, 1969, and 1977. That is because the RPA protects competitors over
competition and punishes the very price discounting and innovation in
distribution methods that the antitrust laws otherwise encourage. At the same
time, it is not clear that the RPA actually effectively protects the small
business constituents that it was meant to benefit.
These criticisms were also discussed by the Dawson Report when examining
Australia's price discrimination laws. The Dawson Report noted:
In recent decades, this legislation has been widely
criticised as being too complex, deterring price competition and promoting
price uniformity. Although originally directed at large retailers, in practice
it has been applied mainly against small sellers who grant discounts in order
to compete against large sellers and against businesses engaging in vigorous
In 2008 the ACCC stated that it understood the approach of the US
Federal Trade Commission to enforcing the RPA:
... has been to use the Robinson-Patman Act less and to
now take action against price discrimination under the broader competition law
framework (e.g. § 2 of the Sherman Act 1890), and only where the practices
involved can be considered to be an attempt to monopolise. The ACCC considers
that this is similar to the existing situation in Australia.
Under section 50 of the Competition Act,
price discrimination between competitors who purchase similar volumes of a product
was prohibited. Section 50 was repealed in 2009.
There is a provision currently in effect addressing delivered pricing.
Delivered pricing under the Competition Act refers to the practice of refusing
delivery of a product to a customer, or a person seeking to become a customer,
on the same trade terms at any place where the supplier ordinarily makes
deliveries. Under section 81, and subject to certain exceptions, delivered
pricing conduct may be ordered to cease in circumstances where a customer, or a
person seeking to become a customer, is denied an advantage that would
otherwise be available to them in the market.
What would a price discrimination
provision in Australia achieve?
There appears to be two areas where price discrimination issues may be relevant
to the dairy industry and the grocery sector generally. The first issue is the
wholesale prices within the supply chain, including pricing differences between
generic and branded milk and the price of milk offered by processors to
different customers. The second is the different retail prices of generic and
branded milk, although they are essentially the same product. An
anti-competitive outcome may occur as a result of milk processors charging
smaller retailers a higher price for their branded milk, to offset the lower
wholesale price they receive for selling generic milk to Coles and Woolworths.
The Chairman of NARGA expressed his frustration at this:
... I have to admit that it does get up my nose that every
day I figure out that I am actually subsidising Fonterra to sell house brand
milk to Coles by the price they charge me for their branded milk and other
These issues were examined by the ACCC during its 2008 inquiry into the
competitiveness of retail prices for standard groceries. On the wholesale
issue, the ACCC noted that the volume of sales through the major supermarket
chains, their vertical integration, and likely ability to better execute
promotions largely explained wholesale price differences.
On these issues in the dairy industry, the ACCC stated:
Generally speaking, larger customers will be supplied on more
favourable terms (i.e. more generous rebates and discounts). For example, in
its public submission Fonterra stated that it achieves lower unit costs,
predominantly linked to volume, when selling to large customers. Fonterra
states that additional benefits in dealing with larger customers include
consistent purchasing patterns which enable manufacturing efficiencies.
Fonterra stated that if a smaller wholesaler or retailer was to purchase the
same volume as a larger customer, in general, they may be able to achieve
similar discounts from Fonterra to the larger customer.
The different retail pricing structures of goods that were 'essentially
the same' were also considered, with the ACCC stating that its view was:
As long as the labelling is not misleading, the ACCC will
generally not have a concern with such practices. This is because consumers
have different 'willingness to pay' for products, and this form of price
discrimination can have potential benefits in allowing end users to obtain
goods at more accessible prices.
The consequences of reinstating a section 49-type provision on the
future of generic products were also discussed. NARGA observed that generic
supermarket brand products existed when section 49 was in force. NARGA also
noted that in other jurisdictions where an anti-price discrimination law exists,
it has not resulted in generic products being unable to compete with branded
goods. In fact, NARGA pointed out that some of the most successful supermarket
chains which heavily rely on generic products operate in these environments.
Tesco in the UK was cited as an example:
If they can do it, there is no reason that Coles or
Woolworths or IGA or FoodWorks or Aldi could not do it in Australia. Aldi
operate in the UK; Aldi operate through all Europe.
This raises the question of what a specific price discrimination
provision would achieve for participants in the dairy supply chain, if such a
provision is in place in countries such as the UK. As noted in the committee's Second
Interim Report, conduct within, and the general operation of, both the
dairy and grocery sectors in the UK has at times been controversial. Various
governments in the UK have reacted by making a mandatory code of conduct for
dealings between major supermarkets and grocery suppliers, and by developing an
office with responsibility for enforcing that code.
The possible result of a price discrimination provision adversely
affecting consumer welfare was also raised by the ACCC:
Mr Cassidy—... before the Coles action we already had
quite a discrepancy in the price of branded versus home-brand milk. Indeed,
that was shown in the report of this committee in, I think, table 3.4 [of Milking
it for all it's worth]. The gap was about 60c or 70c a litre. What Coles
has done, followed by others, might have widened that gap by 10c or 12c a
litre. You then get the question: if it would have applied to the Coles
behaviour, what would then be the case in relation to home-brand milk and
branded milk more generally? Would that section result in the cost of
home-brand milk increasing by 60c or 70c a litre, back to being equal to
Senator O’BRIEN—Let me put another theoretical proposition to
you, and that is: if the provision was in place, the processor would have been
much more cautious about offering such a great differential in price for very
similar if not the same product, between what is in one carton and what is in
another, lest they offended the provision.
Mr Cassidy—Yes, if you go back in history, that could be
right. But I am just asking you to think a bit about what would be the outcome
of that—would it be that home-brand milk would be 60c or 70c a litre dearer
than it currently is?
The Law Council argued:
Such a law will more likely be harmful, since it would raise
the cost to retailers of offering a discount on any product, because this would
be required to be offered more widely than would otherwise have been the case.
Such a law is likely to have the effect of increasing prices for consumer goods
and staples generally, in all categories where generics or other forms of
product differentiation are used, to the detriment of consumers and the
Misuse of market power and predatory pricing
It is clear that Coles and Woolworths dominate the Australian grocery
Senator HEFFERNAN—What percentage of the market do Coles and
Woolies have in the prepackaged market? I say 80 per cent. You said it is less
Mr McLeod—I think it is about 60 per cent, between 60 and 70
per cent, depending which market you use.
Senator HEFFERNAN—Just say 70 per cent for a nice easy work.
That would be considerable market power, would it not?
Mr McLeod—We are very sensitive to the fact that the market
share that we have ... is something that you have to be very
A recent draft report issued by the Productivity Commission estimated
Woolworths' market share in 2009–10 to be 38 per cent, followed by Coles at 26
per cent, Metcash at 19 per cent, ALDI with three per cent and Franklins at one
Many submissions and witnesses criticised the market share and market
power held by Coles and Woolworths. The two major supermarket chains are able
to access products on more favourable terms and conditions, including at lower
prices, than other businesses such as smaller retailers and milk vendors.
Treasury commented on what is relevant when considering market power
issues, noting other issues which need to be taken into account:
Senator COLBECK—... I am trying to define how we
characterise misuse of market power, because that is one of the key things that
people are talking about in this instance. You have two supermarkets that
effectively control the retail sector. Everyone down the supply chain and some
of their competitors, who I accept have vested interests, are complaining about
the market power that they have in these sorts of circumstances. How do we
characterise that as far as the law is concerned so that we can ensure that the
balance is fair?
Mr Archer—Our submission points to a range of factors that
are relevant to the consideration of the degree of competition in a particular
market. That does include, but not exclusively, the degree of market share that
participants have, but it also includes other factors, importantly barriers to
entry that might exist in that market. We have seen in the retail sector Aldi
introducing competition into the retailing sector and there is the prospect of
other companies, such as Costco, coming in—they are in Melbourne.
As noted in chapter 6, the misuse of market power for an
anti-competitive purpose is prohibited by section 46 of the CCA. Specifically,
subsection 46(1) prohibits corporations that have a substantial degree of power
in a market from taking advantage of that power in that or any other market for
the purpose of eliminating or substantially damaging a competitor, preventing
the entry of a person or deterring or preventing a person from engaging in
competitive conduct in that or any other market.
The relevance of section 46 when considering aspects of Coles' pricing
decisions is clear. Treasury considers:
Concerns that the current conduct of supermarkets amounts to
anti-competitive conduct would, if proven, appear capable of being dealt
with under the existing prohibitions of the CCA, particularly section 46, which
deals with the misuse of market power.
One of the forms of anti-competitive conduct that is addressed through
section 46 is predatory pricing (see chapter 6 for a discussion of
However, as also discussed in chapter 6, after conducting an
investigation into Coles' pricing decisions, the ACCC announced in July 2011
that, in their view, the actions did not constitute predatory pricing. This led
to renewed calls for amendments to the anti-competitive conduct provisions of
Is section 46 adequate?
Section 46 differs from other provisions concerning general
anti-competitive conduct in the CCA, as the prohibition only relates to conduct
that has the 'purpose', as prescribed by the section, of substantially
lessening competition. Other sections in that part of the CCA that do not
prohibit conduct outright include an allowance for the 'effect' (or likely
effect) of the conduct to be considered.
The ACCC's recent announcement regarding its investigation of Coles' pricing,
discussed in more detail in chapter 6, demonstrates some of the possible
consequences of the lack of an effects test in section 46. The statement 'it is
important to note that anti-competitive purpose is the key factor here'
is particularly informative.
Recent reviews and reforms to
Section 46 has been a controversial aspect of Australia's competition
law, and accordingly has been subject to a number of inquiries and reviews. The
last major independent inquiry, the Dawson Committee, examined the operation of
section 46. In its submission to the inquiry, the ACCC argued that the object
of the general competition provisions of the CCA (then the Trade Practices Act)
... prohibit various types of conduct that are likely to
maintain or enhance market power other than by competitive means.
However, the ACCC's view at the time was that section 46 was of limited
... if the law does not even prohibit large firms with
substantial market power from taking advantage of it with the effect of
damaging competition—by virtue of such actions as an anti-competitive refusal
to supply, anticompetitive predatory behaviour, anti-competitive leveraging of
market power in one market to damage competition in another market—the law is
not only deficient as a matter of economic policy, but deficient in relation to
the above objectives.
The ACCC were particularly concerned about the lack of an 'effects' test
in section 46:
The reason for the distinction between s. 46 and the other
Part IV prohibitions is not obvious. The policy objective of s. 46 is
fundamentally the same as the other prohibitions in Part IV—that is, the prohibition of
specified conduct that will damage competition. As well, Australia’s
prohibition on misuse of market power is inconsistent with similar prohibitions
in the United Kingdom, Europe and the United States. The Commission believes
the distinction between s. 46 and the other Part IV provisions should be
removed. However, this does not suggest that the purpose test in s. 46 is
inappropriate. As in ss. 45 and 47 a purpose test is an important element of s.
46 where it can be proved.
However, on the need for an effects test the Dawson Report concluded:
The difficulty in proving purpose may be doubted. Not only
may purpose be inferred, but the proof that is required is on the civil
standard of the balance of probabilities only, and not on the criminal standard
of proof beyond reasonable doubt. The purpose does not have to be the sole or
dominant purpose. An admission of purpose is not required, much less an
admission in the documentary form of a 'smoking gun'.
The Dawson Report also provided reasons for section 46 being limited to
a purpose test, noting that the other provisions relating to anti-competitive
conduct, such as sections 45 and 47, are:
... concerned with conduct involving competitive
relationships between two or more corporations, whereas section 46 is concerned
with unilateral anti-competitive behaviour on the part of a corporation
with a substantial degree of market power. It is the behaviour which gives rise
to the prohibition rather than its effect...
The Dawson Report also considered that an effects test would discourage
Not only would the introduction of an effects test alter the
character of section 46, but it would also render purpose ineffective as a
means of distinguishing between legitimate (pro-competitive) and illegitimate
(anti-competitive) behaviour. The section is aimed against anti-competitive
monopolistic practices, not competition, even aggressive competition. The
distinction is sometimes a different one, but it is one that section 46 seeks
to maintain and in doing so seeks to balance the risk of deterring efficient market
conduct against the risk of allowing conduct that would damage competition and
A similar debate was conducted at the time of the Hilmer Report, with
the Trade Practices Commission, the forerunner to the ACCC, proposing that
unilateral conduct that has the effect of substantially lessening competition
should be prohibited.
The High Court's decision on the predatory pricing case Boral v ACCC
was a turning point for section 46. In March 1998 the ACCC commenced
proceedings in the Federal Court alleging that Boral Masonry misused its market
power by selling concrete masonry products at or below its cost of manufacture
to drive out a new competitor. The case went all the way to the High Court
which, in February 2003 and by a 6-1 majority, found that Boral did not have
substantial market power. The ACCC stated in 2003:
The High Court decision in the Boral case, in our view—and in
the view of senior counsel—has given a legal interpretation to the wording of
section 46, which indicates that parliament did not achieve its intention.
The use of the words 'substantial degree of market power' did not lower the
threshold below that of dominance as was previously the case with section 46.
This is a legal issue. What we have said is that as the High Court appears to
have made it clear that parliament did not achieve its intention and, as there
is now some uncertainty as to what 'substantial degree of market power' now
means, it is appropriate for parliament to revisit the intention it expressed
in 1986 to clarify the meaning of section 46 and, in particular, to clarify the
threshold for the application of the section in the way that was evidenced by
the intention of parliament in 1986.
Amendments were made to the competition provisions of the Trade
Practices Act in 2007 and 2008.
These included the clarification of what is meant by substantial degree of
market power, factors the court may consider in determining whether a
corporation has taken advantage of its market power, and an amendment
(subsection 46(1AAA)) to specify that a corporation may breach subsection 46(1)
even if it cannot, and might not ever be able to, recoup the losses incurred
from below cost supply. In 2007, a provision to address predatory pricing
conduct—subsection 46(1AA), or the 'Birdsville Amendment' —was also introduced.
The Law Council considers that 'these amendments have clarified section
46' and that 'the ACCC is now in a position where it could, in an appropriate
case, more confidently prosecute conduct in breach of section 46'.
However, issues about the sole reliance on the purpose test in section
46 may still remain. The ACCC's current ability to pursue a case under section
46 was examined by the committee:
Senator O’BRIEN—Is it the experience of the ACCC that proving
effect is easier than purpose?
Mr Cassidy—It can be. In subsection 46(7) there is a
provision where you can deduce what the purpose was from the conduct. So if you
look at the conduct and you say to yourself the only purpose they could have
had in doing what they did was in order to damage a competitor, you can get it
by that sort of deduction rather than unnecessarily having direct evidence of
what the purpose was. That makes it a bit easier. Having said that, I would
agree with the general proposition, and I suspect my colleagues would as well,
that it is probably easier to establish effect than it is to establish purpose.
Mr Bezzi—I slightly qualify that by saying that if you are
dealing with an organisation that is in the habit of having lots of exchanges
by email and you get your hands on emails which really indicate what their true
purpose was, it can sometimes be an easier case than for purpose, in practical
During this inquiry, the committee received evidence indicating that criticism
of the section still exists:
Section 46 has failed in its objective of dealing with abuses
of market power. There were High Court decisions that basically undermined the
effectiveness of section 46.
The lack of prosecutions under section 46 despite ongoing
concerns in industry suggest that it may not contain the powers necessary to
overcome problems within industries such as the dairy industry.
On the other hand, Treasury and the Law Council also point out that the
new provisions introduced in 2007 and 2008 are largely untested.
The ACCC also noted that since the Boral case they have succeeded in a
predatory pricing case against Cabcharge:
Mr Bezzi—... we have had one successful predatory pricing
case that we concluded in recent months, which we are very pleased about—I have
to put this on the record. We feel that the result we got in that was a very
good result and it sent a strong signal to industry that we are serious about
pursuing predatory pricing cases. There was a very substantial penalty imposed.
It was a difficult case. It was an industry where there were substantial
resources arrayed against us, but we pursued it and we got, I think, a
very good result.
Mr Cassidy—That was Cabcharge, and we are awaiting judgment
on another case in the courts at the moment.
Perhaps indicating a change in the ACCC's approach to deciding whether
to litigate matters, its new chairman
The ACCC's success rate in first instance litigation stands
at almost 100 per cent. This is frankly too high. It may sound strange to say
so, but benchmarking against our international counterparts we are sitting at a
much higher level of success. Of course I’m happy with the implication that
ACCC staff handle cases well, but the flip side is that we have been too risk
averse. We need to take on more cases where we see the wrong but court success
is less assured...
... There is a need, I believe, to test some aspects of
Section 46 in the courts. Although there is some case law on "taking
advantage of market power", the precise boundaries of that concept are not
yet clearly defined. There is also a need to test some relatively new laws. For
instance, in predatory pricing, we have yet to test our view of what "sustained
period" means. It is in the public interest that these issues are tested,
and the ACCC will take appropriate legal cases to do so.
When asked whether section 46 needed adjustment, the new ACCC Chairman
repeated his view that more test cases need to be taken, but also that:
... my own view is that the biggest issue is whether it
should be a purpose test or a purpose or effects test. To me, that is where the
rubber hits the ground, and that is, I think, a legitimate issue to debate.
Divestiture and limits on market share
This inquiry also heard calls for the major supermarkets to be forced to
divest their assets and for a general divestiture power to be available to the
courts as a remedy for anti-competitive conduct. The issue of divestiture
was also considered by this committee in its previous inquiry,
and as part of other inquiries, such as the inquiry into competition in the
Australian banking sector.
A general divestiture power which would enable the ACCC to take court
action to break up existing companies is not a feature of Australia's
competition laws. At present, the ACCC's divestiture powers are limited to
seeking divestiture in merger and acquisition matters if the merger parties
proceed with a transaction that is found to have the effect, or be likely to
have the effect, of substantially lessening competition in a market. An
application to the court for such a divestiture must be made within three
Associate Professor Zumbo explained how a general divestiture power could
Prof. Zumbo—The way that a divestiture power would work is
simply that a court would have that as a possible order in relation to, for
example, abuses of market power. There is no reason why it could not be
expanded to other potential breaches of the competition laws but typically it
is linked in with a monopolisation or an abuse of market power provision.
CHAIR—Is that a percentage of the company, if you like, that
has to be sold off or the whole lot? How does it work in practice?
Prof. Zumbo—In practice it could be sold off as particular
units, and it could be broken up on a geographical basis. It would be up to the
discretion of the court in appropriate circumstances. In the case of vertically
integrated companies it could be a vertical separation. It would need to depend
very much on the particular factual context.
The Australian Food and Grocery Council did not express a firm view on
the need for a divestiture power, but supported a broader inquiry to consider
issues such as divestiture. Their Chief Executive Officer argued that:
I do not think you would jump into something like anti-trust
laws or divestiture or whatever until you had really determined what the cost benefit
of that was.
A general divestiture power does exist in the United States and United
Kingdom. The use of the power is probably most well known in the context of
'trust-busting', such as the breaking up of Standard Oil ordered by the
Supreme Court in 1911.
The Dawson Report, with reference to United States of America v Microsoft
Corporation, commented that the experience in the United States has been:
... that divestiture is a remedy which is much more suited
to dealing with anti-competitive mergers than to dealing with the conduct of
unified enterprises, as would be the case if it were applied to a misuse of
market power. A corporation that has expanded by acquisition often has pre-existing
lines of division along which it may more easily be split than a corporation
that has expanded through organic growth. Courts have, in the United States,
referred to the logistical difficulty of 'unscrambling' the latter without
greatly harming the efficiency of a viable market participant.
In United States v Microsoft, the Court of Appeal observed that
'divestiture is a remedy that is imposed only with great caution, in part
because its long-term efficacy is rarely certain'.
The ACCC has in the past noted that in the United States, the
divestiture power is a remedy for monopolisation.
Depending on how it is drafted, such a law may not be effective for markets
where there is more than one large participant.
There are also likely constitutional implications. Section 51(xxxi) of
the Constitution states that:
The Parliament shall, subject to this Constitution, have
power to make laws for the peace, order, and good government of the
Commonwealth with respect to the acquisition of property on just terms from any
State or person for any purpose in respect of which the Parliament has power to
Depending on the form a divestiture law takes, it may fall under this
provision—thus requiring the acquisition to be on 'just terms' and likely
involving significant compensation.
Mergers and acquisitions
The law governing mergers and acquisitions, and the ACCC's approach to
assessing these transactions, is a particularly relevant area to consider due
to the high degree of market concentration in both the grocery retailing sector
and the milk processing industry.
Section 50 of the CCA prohibits acquisitions that would have the effect,
or likely effect, of substantially lessening competition in a substantial
market in Australia. Subsection 50(3) provides a non-exhaustive list of factors
which must be taken into account when assessing whether a merger would be
likely to substantially lessen competition. The ACCC's Merger Guidelines
2008 also provides guidance on the ACCC's approach when reviewing and
During its previous inquiry related to the dairy industry, the committee
heard a lot of criticism about the ACCC decision not to oppose, on condition
that certain divestitures took place, the acquisition of Dairy Farmers by
National Foods. The committee noted that the acquisition resulted in a
significant reduction in competition, notably in Tasmania.
On the other hand, the NSW Farmers' Association noted there may have been some
benefits from the divestitures the ACCC required:
The resulting divestiture of National Foods assets as a
result of their purchase of Dairy Farmers has provided opportunity for Parmalat
to enter the NSW industry both as a buyer of NSW milk off farm, as a processor
with NSW based infrastructure, and also a brand. This does provide an
additional market for farmers however the full extent of this competition is
not yet realised.
The committee is also aware of criticism from a number of areas regarding
the continued concentration of the grocery market in general, including through
The committee's 2010 report Milking it for all it's worth examined
market share issues, in both anti-competitive conduct and merger contexts, in
It is a matter for judgement what market share might be
regarded as raising potential concerns about market power. The European
Commission takes the view that a firm would generally have a dominant position
once it reaches a market share of 40-45 per cent and may achieve a dominant
position in the region of 20-40 per cent.
This is broadly consistent with approaches in some individual
European countries. The Austrian Cartel Act places the burden of proof on a
company to show it is not dominant where its market share exceeds 30 per cent.
In Germany a market share of a third is taken as indicating dominance. The
corresponding threshold in Bulgaria is 35 per cent and in Croatia, Estonia,
Lithuania, Poland and Serbia 40 per cent. In Malta a company with a 40 per cent
market share is deemed dominant unless it provides evidence to the contrary. In
Sweden a market share of 40 per cent is regarded as indicative of dominance.
Latvia and Slovakia have removed their previous 40 per cent thresholds for
defining dominance. A firm would, of course, have some market power well before
The US Department of Justice's benchmark for challenging
mergers is where the sum of the squared percentage market shares of the merging
companies exceeds 1800. This would occur if two firms each having a 30 per
cent market share wanted to merge; or a firm with a 40 per cent market share
wanted to take over a competitor with a 14 per cent market share.
The United States model is supported by some smaller retailers in
competition with Coles and Woolworths:
CHAIR—It is really all about market share, isn’t it? In the
United States they do limit market share. Do you think that would be something
that we should consider in Australia to facilitate competition?
Mr Reynolds—I would love to see that. There has to be a
balance of green sites going to the independents and also distance between
stores. The Woolworths store got the green site that we were chasing and had
spent several years trying to achieve. We got into a bidding war and, of
course, we could not afford it. We had done our sums and told the landlord what
we could afford, what we wanted to do, and Woolworths just outbid us. In the
end we are situated in the same footprint that we had when we started the
business 25 years ago.
The committee notes that the Competition and Consumer Legislation
Amendment Bill 2011, aspects of which relate to the consideration of
acquisitions in local markets (including creeping acquisitions), is currently
before the Senate.
Ex-post analysis of merger
The lack of any analysis of the actual effects of the ACCC's merger
decisions after they have been made was discussed in the committee's 2010
report, Milking it for all it's worth. The committee observed:
There is inadequate assessment of whether markets have become
excessively concentrated because the agency assessing this (the ACCC) is the
same agency that approved the mergers leading to the high degree of
This issue was also raised in the committee's recent inquiry into competition
within the Australian banking sector. Competition academic and former ACCC
Commissioner (during which time he chaired the ACCC's Mergers Review
Committee), Professor Stephen King, was asked about the merits of reviewing
past merger decisions during the banking competition inquiry. He appeared
generally in favour of the idea:
One of the things that we have not had in Australia which has
occurred within the competition agencies in the US, for example, is an ex post
evaluation of mergers—a looking back after five or six years out to see whether
the decision that was made was the right decision. We need to find out whether
a decision that was good at the time make a difference, whether that decision
was to allow a merger to go ahead or to oppose a merger. That sort of exercise
would allow us to, in a sense, check that our laws are appropriate.
Reflecting later, Professor King observed:
This type of retrospective study represents best regulatory
practice. The U.S. antitrust authorities have carried out this type of study.
One recently published example is in the Review of Industrial Organization
(subscriber only). However, such a study is a major piece of work as the
econometricians have to try and tease out the relevant effects.
The benefits of such a study are clear. It allows feedback to
both the regulators and the legislature about our competition laws and their
implementation. If the federal government made the resources available to do
this exercise (and required relevant businesses to provide relevant data, such
as retail scan data) then this would be a good outcome.
Is there a need to review the Competition and Consumer Act?
In its previous inquiry, the committee concluded:
A combination of narrow interpretations by the courts of
expressions in the Trade Practices Act 1974 and the repeal of section 49
mean that the Act fails to provide adequate protection against excessive market
concentration and abuse of market power.
The committee subsequently recommended that a review of section 46 and a
Productivity Commission review of the effectiveness of the National Competition
Policy be undertaken.
Some time has passed since the last major independent review of
Australia's competition framework. It is also apparent that some of the
findings of these reports take time to enact. Most of the amendments made as a
result of the Dawson Report came into effect at the start of 2007. While the
report furthered the push to introduce criminal sanctions for cartel conduct,
such laws were only passed by the Parliament in 2009.
Since the Dawson Report was published, however, there have been many
amendments either made or proposed to the Trade Practices Act/CCA. Australia's
competition laws are evidently not complete—the current proposals to address
price signalling and the issue of creeping acquisitions are clear examples.
A review of the CCA had some support:
The AFGC seeks a review of the effectiveness of the Competition
and Consumer Act 2010 ... to establish and respond to anti
competitive pricing behaviour.
Consideration and review of the Competition and Consumer
Act 2010 ... to determine if the Act is effective in dealing with
actions such as those taken by Coles recently with a view to changing
provisions to ensure that such conduct is not repeated.
The key advantage of a broad inquiry into Australia's competition laws
is that it would allow a wide range of views and issues to be considered with
an economy-wide focus. It would also allow the ACCC's and Treasury's views
and proposals on a number of issues to be examined.
Other organisations, such as the Law Council, considered the number of
recent changes make moves to review or reform the CCA premature:
... it is still too early for the full effect of these
changes to be confirmed, and so it is important that the ACCC be given the
opportunity to test those new powers before further reform of section 46 is
It is clear that care needs to be taken in recommending amendments to
economy-wide competition laws. Treasury warned:
Where policies are being proposed which contemplate
government intervention in markets in response to an identified market failure,
consideration must be given to Clause 5 of the Competition Principles Agreement
1995. Relevantly, it provides that, when intervening in markets, competition
should not be restricted unless it can be demonstrated that:
- the benefits of the restriction to
the community as a whole outweigh the costs, and
- the objectives of the legislation
can only be achieved by restricting competition.
... If a market failure is identified in a particular
industry, industry-specific measures may need to be considered, and it is
likely such measures would be preferable to amending the economy-wide
competition laws. Any proposals to amend the provisions of the CCA which seek
to correct market failures in one sector need to carefully weigh the full range
of possible costs and benefits which would accrue across the economy.
General concerns about the form of a government response were also
shared by participants in the grocery sector. IGA argued that although 'this
price war is not part of the normal competition in grocery
retailing ... government and regulatory intervention may be worse than
the problem that they try to solve'.
During this inquiry, the committee received many submissions and took a
significant amount of evidence at public hearings in which the effectiveness of
Australia's competition laws was questioned. Among other key issues raised were
the repeal of the specific anti-competitive price discrimination law in 1995
and the lack of an 'effects' test in provisions such as section 46 of the CCA,
which currently is tasked to deal with price discrimination issues as well as
other misuses of market power.
The committee notes that the object of Australia's competition law is to
enhance the welfare of Australians. Competition law is not intended to protect
competitors, but instead is intended to promote the competitive process. With
respect to this object, the concentration of the grocery market, the market
power that Coles and Woolworths may have and the ability of smaller retailers
to compete with their purchasing power, are concerning issues for the operation
of the grocery sector and for longer-term consumer welfare.
Concerns with aspects of the competition law and the approach taken to
their enforcement have also been raised in the context of other sectors and in
several other inquiries previously conducted by the pair of Senate economics
committees. However, the committee is firmly aware that this inquiry has been
primarily focused on the dairy supply chain, with broader elements of the
grocery sector necessarily examined as well. Australia's competition law is
usually framed to apply to the entire economy. Any amendments to the CCA that
are proposed as a result of issues facing the dairy industry and/or grocery
sector need to be examined to determine how they will impact other sectors and
overall consumer welfare. As this inquiry was directly focused on the dairy
industry, other sectors may not have had the opportunity to engage on these
issues as part of this process. Accordingly, the committee has not formed a
view on the merits or otherwise of the proposals put forward for amendments to
the CCA. Such issues could be appropriately dealt with by a specific
independent inquiry into the CCA which allows for submissions and evidence to
be taken from all areas of the economy.
The last independent inquiry of the CCA/Trade Practices Act was the
Dawson Committee, which commenced in 2002 and reported in early 2003. The
inquiry before that was the Hilmer Committee, which was finalised in 1993. Since
the Dawson Report, a number of amendments have been made to section 46 of the
CCA. The committee urges the ACCC to identify and litigate appropriate matters
that will enable these recent amendments to be tested in the courts. However,
questions remain about the operation of certain provisions. Additionally, in
recent years a number of other competition issues including price signalling,
creeping acquisitions, geographic price discrimination and, as noted earlier in
the report, the effectiveness of current collective bargaining arrangements
have been raised. It appears appropriate that, rather than recommending
piecemeal amendments, an independent inquiry be formed to fully address any
perceived gaps in Australia's competition law.
7.100 The committee recommends that the Government initiate an independent
review of the competition provisions of the Competition and Consumer Act
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