Predatory pricing, geographic price discrimination
and the Trade Practices Act
Predatory pricing and the TPA
Section 46(1) of the Trade Practices Act is a general prohibition
against the abuse of market power. It precludes a corporation that has 'a
substantial degree of power in a market' from taking advantage of that power
for the purpose of substantially damaging or eliminating a competitor(s),
preventing the entry of a person into the market or deterring or preventing a
person from engaging in competitive conduct in that (or any other) market.
Section 46(1AA) of the Act deals specifically with predatory
pricing. It states that a corporation that has 'a substantial share of a market'
must not supply goods or services for a sustained period at a price that
is less than the relevant cost to the corporation of these goods or services,
for the purpose of eliminating or substantially damaging a competitor or
deterring or preventing a person from engaging in competitive conduct in that
(or any other) market.
Price discrimination and the TPA
The TPA formerly included an explicit 'price discrimination' provision.
Section 49(1) stated:
A corporation shall not, in trade or commerce, discriminate
between purchasers of goods of like grade and quality in relation to
(a) the prices charged for the goods;
(b) any discounts, allowances, rebates
or credits given or allowed in relation to the supply of goods;
(c) the provision of services in
respect of the goods;
(d) the 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
Section 49(2) listed two defences to 49(1). The first is where there is
reasonable allowance for 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 is 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.
As highlighted by the Law Council of Australia, the Swanson Committee
(1976), the Blunt Committee (1979) and the Hilmer Committee (1995) all
considered the operation and utility of the Section 49 amendment and
recommended its repeal.
Section 49 was finally repealed in 1995 on the recommendation of the
Hilmer Review. The Review found that:
The Committee does not consider that competition policy
should be distorted to provide special protection to any interest group,
including small business, particularly where this is potentially to the
detriment of the welfare of the community as a whole. Sectoral assistance
policy of this sort is generally most efficiently implemented by more open and
direct assistance, including budgetary and taxation measures of various kinds. In any event, it seems clear that small businesses have not achieved any
significant benefit from the presence of s49.
The Review concluded that 'to the extent that section 49 has had
any effect it seems to have diminished price competition'. It also noted that
price discrimination 'generally enhances economic efficiency, except in cases
which may be dealt with by s.45 (anti-competitive agreements) or s.46 (misuse
of market power)'.
In 2003, the Dawson Review found that the effect of price discrimination
on competition should be considered on a case-by-case basis. In this context,
it noted that section 46 is the most appropriate means to tackle
anti-competitive price discrimination. Further, the Review considered that
there are reasons for differences in wholesale prices in the grocery industry
which do not involve anti-competitive practices.
Section 46 is inadequate and ineffective
The Southern Sydney Retailers Association argued that section 46 of the
TPA is 'totally and completely useless against geographic price
discrimination'. The Association's President, Mr Craig Kelly, criticised the
section 46(1) threshold of 'a substantial degree of market power' and cited
Justice McHugh in the Boral case who noted that conduct that is predatory may
not be captured by section 46 simply because the predator does not have
substantial market power.
The National Association of Retail Grocers of Australia (NARGA) claimed
that a prohibition of price discrimination 'would be a simple way to address
that way in which market power can be misused'.
The Blacktown Amendment would reduce the potential for predatory behaviour and
does not depend on a decision of the ACCC to act.
NARGA argued that price discrimination legislation will assist to make
the Australian marketplace more competitive. In NARGA's opinion, section 46 has
not been effective at addressing geographic price discrimination. It argued
that it is very difficult to prove that market power has been misused. For
example, it would not be possible for a small competitor in the petroleum
market to determine whether the price at which fuel is being offered by a large
chain retailer nearby is predatory.
Section 46 is adequate to proscribe geographic price discrimination
Other submitters have argued that section 46(1) of the TPA effectively
proscribes predatory pricing and, to the extent that it constitutes predatory
pricing, geographic price discrimination.
Coles argued in its submission that the TPA's provisions on predatory
pricing are adequate to proscribe against 'geographic price discrimination'. It
noted that the Second Reading Speech of the bill did not describe any types of
alleged behaviours in the retail sector that could not be addressed under the
existing provisions of section 46.
Indeed, Coles argued that the bill's ban on all geographic price discrimination
is 'incongruous with the spirit and intent of s46 more generally'.
Treasury wrote in its submission that the section 46 provisions in the
...well targeted to prevent predatory pricing since it takes
into account the relevant requirements necessary for a firm to engage in
predatory pricing. At the same time it also allows businesses sufficient
pricing flexibility to compete effectively and to provide their products at
In contrast, the Bill's single price rule does not
distinguish between pro‑competitive and anti-competitive behaviour.
This echoes the finding of the 2003 Dawson Review which found that
section 46 of the TPA remained the best means of delineating between competitive
and anti-competitive price discrimination.
The Australian Association of Convenience Stores wrote in its
We see no evidence that collusive practices are determined by
geographic or indeed any other size implications and affirm that the Trade
Practices Act 1974 (Commonwealth) already provides protection for small retail
business against corporations that appear to have a substantial degree of power
in the market.
ANRA told the committee that in its opinion, section 46(1) of the TPA is
sufficient to deal with the threat of predatory pricing. It noted that this
section required proof of anti-competitive intent and that the bill is silent
on this matter. ANRA argued that the bill would effectively be an effects based
test rather than a determination of the principle of anti-competitive intent.
As Dr Brendan Long told the committee:
...it is a mistake to confuse normal market differentials
with a deliberate attempt to engage in an anticompetitive practice. The
challenge for a regulator is to separate those two elements, which is what the
Trade Practices Act does and what the proposed amendment does not do.
The committee notes that there are alternative approaches to preventing
predatory pricing if the existing trade practices legislation is regarded as
inadequate. In October 2008, the Senate Economics Committee explained that the
Fuelwatch scheme would reduce the scope for predatory pricing:
Another problem for the independents is that the major chains
can spread losses at one station over a number of other stations. This makes it
easier for them to engage in a predatory pricing strategy of very aggressively
cutting prices at a station next to an independent to drive out the independent
(or at least discourage it from trying to undercut the price set by the major
station) and covering the loss at this station from profits at other
stations...This strategy is less likely to work under Fuelwatch, as more
motorists will switch from the profitable stations of the major company to the
one offering the low price, reducing the chain's ability to cross-subsidise its
loss. Furthermore, Fuelwatch makes it much more obvious when large retailers
are engaging in predatory pricing and would make it easier for an independent
victim to gather the evidence to show a court or the ACCC.
The international approach
Neither New Zealand, the UK or Canada have any legislation similar to
the Blacktown Amendment dealing with price discrimination. An alternative
approach to what this bill proposes was, until recently, legislated in Canada.
Rather than prohibiting any variation in price for the same product within a
geographic area, provision 50 of Canada's Competition Act established
nationwide price discrimination offences with key threshold requirements
relating to the anti-competitive effect and purpose.
In March 2009, provision 50 was repealed because price discrimination,
predatory pricing and geographic price discrimination were considered not
necessarily harmful to economic welfare and could be beneficial to competition.
As a result of the amendments, non-dominant businesses are free to offer
different prices for the same product in different parts of Canada. Dominant
firms will still 'have to be careful not to engage in any practices that could
be found to have an anti-competitive purpose and be likely to prevent or lessen
Predatory pricing will now be dealt with under the civil abuse of dominance
provisions in the Competition Act.
Treasury noted in its submission to this inquiry that the trend in
Australia and overseas has been to repeal provisions similar to those contained
in the bill because of the negative consequences of these provisions.
As the Law Council of Australia stated in its submission:
In New Zealand, the UK and the EU there are no specific
legislative provisions dealing with price discrimination and actions for anti‑competitive
price discrimination are instead pursued under their respective prohibitions on
misuse of market power.
The literature distinguishes between price discrimination as a
competitive and legitimate pricing tactic and the constraints of anti-trust
(predatory pricing) legislation. Dr Nagle, for example, considers geographic
price discrimination to be both a common and acceptable competitive tactic, but
One must be particularly careful when segmenting by location
to counter competition. The Robinson-Patman Act explicitly forbids anyone "to discriminate in price...where the effect of such discrimination may be
to substantially lessen competition..." As a rule, you can cut price
selectively in one geographical area to meet the price of a competitor. It is
risky, however, to undercut the prices of a local competitor while keeping
prices higher elsewhere. Unless the local competitor is itself financially strong
and the selective price cutting is done only to defend rather than to gain
market share, the local competitor has a good chance of winning a claim that
your local price cutting is anticompetitive.
The ACCC in giving evidence to the committee also highlighted their
concerns that this Bill is unlike any other trade practices legislation in
operation in any other similar jurisdiction to Australia. Whilst the United
States does have some legislation it was described by the Law Council of
Australia as "overly complex and preventing price competition".
The ACCC commented that:
Moving to the US experience, the Robinson-Patman Act has been
quoted by some as being akin to the proposals in the Blacktown amendments.
Commentators that draw that analogy must be reading different text to what I
am. I understand that US laws do not prohibit price discrimination per se but
rather prohibitions require a finding of a substantial lessening of
competition. Defences are also available, allowing businesses to reflect
differing costs and to match prices. These are big differences to what is on
the table here today. I note also that both judicial and academic commentators
in the US encourage a reading down of those provisions, and commentators note
that regulators have not been particularly active in the field.
Costs differences and matching a
The former section 49(2) of the TPA contained two defences relating to
the higher cost of the manufacture, distribution, sale of delivery of goods to
different areas and where a company acts in 'good faith' to match a
competitor's price. Submitters to this inquiry have highlighted both these
factors in defence of geographic price discrimination.
Treasury has argued that the bill 'seems to be premised' on the
assumption that 'a good that looks the same is the same, regardless of where
and how it is sold'. It emphasised that location, surroundings, service and
convenience are all significant components of any product and must be taken
into account when determining price.
Coles has cited the following factors as to why its retail sites may
sell the same product at different prices:
- freight costs vary in transporting products to different sites (a
point also highlighted by 7-Eleven Stores);
- rental tenancy agreements can vary from site to site;
- products delivered directly to site commonly have different
wholesale prices in different regions;
- products may be chosen for promotion in some sites but not others
due to its popularity within the demographics of a particular area;
- fresh products may have 'subtle quality distinctions' based on
their sourcing origins which is often reflected in minor price variations;
utility and other rates vary at different sites; and
- staffing levels and wages differ between different sites.
The July 2008 ACCC report into the competitiveness of retail prices for
standard groceries found that grocery prices differ between locations for a
number of reasons. The report concluded that price differences for groceries
were largest for goods which are more likely to be regionally sourced, such as
fresh produce. The minimal competition in some areas partly reflects the small
size of the communities:
...which means that there is limited scope for the entry of
multiple stores. Higher prices for groceries in these locations may partly
reflect a lack of competitive pressure, but also results from higher operating
costs relative to turnover.
Treasury's submission noted the ACCC's publication Understanding petrol
pricing in Australia which listed various reasons as to why petrol prices,
and competition in petrol retailing, might vary among locations. The ACCC
The influence of these factors can vary considerably between
locations, resulting in substantial differences in prices. It is not surprising
therefore that there are considerable variations in petrol prices across
locations, including differences between city and country prices.
There will obviously be some cost differences between locations. The
ACCC study showed that there are price differences resulting from lack of
competition in some locations. What is not clear is the relative size of these
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