Australian Competition Regulator Comments On New Predatory Pricing Prohibition: Trade Practices Act 1974 (s 461AA) - Antitrust, EU Competition

Background

With effect from 25 September 2007 the Australian Trade Practices Act was amended, among other matters, to include, in the context of the prohibition on misuse of market power, a specific provision prohibiting predatory pricing. The expressed purpose of the new provision is to "specifically target(ing) anticompetitive below-cost pricing by corporations with a substantial market share"¹

The new predatory pricing provision prohibits a corporation possessing "substantial market share" from discounting below its "relevant cost" for a sustained period" for the purpose, among others, of eliminating or substantially damaging a competitor.

Recently, in the context of its Report into the price of unleaded petrol in Australia² the Australian Competition and Consumer Commission discussed the new provision and proffered some preliminary guidance as to its likely interpretation.

General Comments

The ACCC noted that the new provision differed from the general provision prohibiting misuse of market power (which remains in force and may still apply to predatory pricing conduct) in two fundamental ways. First, the general provision requires that the corporation in question possess substantial market power, while the new provision merely requires the demonstration of a substantial market share. Secondly, there is no requirement in the new provision that the corporation "take advantage" of its market power or substantial market share.³ The ACCC commented that the key challenge in implementing the new provision was to capture anticompetitive pricing behaviour without reducing the incentives for legitimate competitive pricing.⁴ With this objective in mind, the ACCC expressed the view that in interpreting the new provision Australian courts were likely to pay particular attention to the requirement to establish a proscribed anti-competitive purpose which was the only requirement present in the new provision, absent the requirement to establish market power and a taking advantage of that power, limiting what would otherwise be a prohibition of "strict liability".⁵

Specific Elements

Substantial Market Share

The ACCC cautions against adopting a simple calculation of the percentage of units sold or value of those units as demonstrating that a firm’s market share is "substantial" in any given market. It notes that the term "substantial" has been interpreted by Australian courts as signifying "large or weighty" and that the new provision states that courts may have regard to the number and size of the firm’s competitors in the relevant market in determining this issue. The ACCC suggests that other factors which may be relevant in determining whether a firm’s market share is substantial include:

"the capacity of the firm;
the degree of product determination in the market;
the degree of brand loyalty;
the presence and size of sunk costs; and
the presence and size of economies of scale"

In a traditional analysis of market power one would define the relevant market by reference to demand and (in Australia) supply side substitutability in response to an SSNIP,⁷ calculate market shares (which Australian courts have recognised provide evidence of market power but do not necessarily mean that a substantial degree of market power is present⁸) and then consider potential constraints on the behaviour of the firm in question, including barriers to entry and other structural features of the relevant market. While economies of scale and the presence of sunk costs may each be a sine qua non in establishing market power, query whether the same can be said for the establishment of market share. Further, it is arguable that the capacity of a firm (at least insofar as it is not employed and if employed would be cost efficient) is more relevant to an assessment of a firm’s future competitive behaviour as opposed to determining whether it possesses a substantial market share at the time of engaging in the impugned behaviour.

While the Australian Parliament, in requiring only a substantial market share as opposed to substantial market power, clearly intended to provide for a lower threshold for establishing a potential predatory pricing breach, the list of factors suggested by the ACCC as being relevant to establish substantial market share suggest there is likely to be some overlap between the two concepts. Indeed, it raises the question as to whether a market share may only be "substantial" in the context of the new provision where other conditions in the market clearly demonstrate that such market share equates to substantial market power.

Sustained Period

Not surprisingly, in the ACCC’s view what constitutes pricing below cost for a sustained period will vary depending on the circumstances of each particular case with the duration, frequency and timing of price discounting being important considerations, as well as the breadth of the products priced below cost and the relative size of the customer group offered the product below cost. As an illustration, the ACCC contrasts the position of a retailer offering weekend price specials on perishable goods with an established retailer facing the threat of new entry offering consistent discounts below its relevant cost for a continuous period of six months; the former circumstances indicating legitimate competitive conduct, while the latter raising suspicions of predatory pricing.⁹

Relevant Cost

A part of the suite of amendments to the general provisions on misuse of market power, introduced at the same time as the new specific prohibition on predatory pricing, was a provision providing that a court may consider pricing below "relevant cost" for a proscribed purpose in determining whether a misuse of market power had occurred. The relevant Explanatory Memorandum¹⁰ notes the alternative options of providing for pricing below average variable cost or leaving it to the courts to determine the appropriate measure of costs in any given circumstance. The latter option is preferred on the basis that, as a decision of the High Court of Australia had demonstrated,¹¹ there may be legitimate competitive reasons for a firm to price below its average variable cost; for example, where such pricing contributed to the profitability of a group of companies as a whole, or avoided the transaction costs associated with exiting a market. "Thus, a corporation that persistently priced under a simple measure of variable costs may not be engaging in commercially irrational conduct".¹² The option of leaving it to Australian courts to determine the appropriate measure of costs in any given situation was therefore preferred in order to avoid wrongly penalising firms.¹³ It is anticipated that these statements will be relied on by Australian courts in interpreting similar terms in the new predatory pricing provisions.

The ACCC notes that economists have advocated a range of cost measures in determining below cost pricing and that there are no general rules as to the measurement of relevant costs. It acknowledges that there may be circumstances where pricing below any cost standard is legitimate competitive behaviour.¹⁴

Other than to say that a firm selling above its appropriately measured total costs will not breach the new provision, the ACCC states that what constitutes relevant costs will depend upon all the given circumstances, which will include the duration of the pricing conduct, whether the discounted prices were offered to all or some only customers and whether the firm was selling complementary products¹⁵ (the latter suggesting that "loss leaders" or "traffic generators" may not give rise to predatory pricing concerns).

Recoupment

The ACCC notes that an earlier draft of the bill which introduced the new predatory pricing provision specifically provided that it was not necessary for a court to find that recoupment of profits foregone in predatory pricing activity, consequent upon the exit of, or exclusion of competitive activity by, competitive firms, was likely in order to establish a breach of the provision.¹⁶ A statement to this effect is however to be found in the amendment to the Explanatory Memorandum.¹⁷ The ACCC suggests that the absence of such a provision within the legislation itself may reflect a desire by the Australian Parliament to provide courts with as much flexibility as possible to determine, in any given case, the relevance of the existence or absence of recoupment.¹⁸ It is considered that this reasoning is sound.

Conclusion

As the ACCC recognises, ultimately issues of interpretation of the new predatory pricing provisions will be for the Australian courts to determine. While the ACCC’s comments are welcome both in indicating its attitude to any prosecution for an alleged breach of the new provision and in suggesting ways in which Australian courts may interpret that provision, firms carrying on business in Australia still face significant uncertainties which may impact negatively on their legitimate competitive pricing behaviour.

The new Australian Government has yet to indicate whether or not it will seek to repeal the new predatory pricing provision but has given public indications of proposed further amendments to the general misuse of market power provisions with a view to clarifying the relevance of recoupment and the circumstances in which a firm may be said to "take advantage" of its market power. While these proposals have not yet reached the stage of a draft Bill, further developments are likely in the near future.

Footnotes

^{Trade Practices Amendment Bill (No 1) 2007,
Supplementary Explanatory Memorandum, p1}
^{Petrol prices and Australian consumers:
Report of the ACCC inquiry into the price of unleaded petrol,
December 2007}
^{ACCC Report, p233}
^{ACCC Report, p232}
^{ACCC Report, p236}
^{ACCC Report, p234}
^{Small but significant increase in
price}
^{Queensland Wire Industries Pty Ltd v
Broken Hill Proprietary Company Limited (1989) 167
177[19]}
^{ACCC Report, p234}
^{Trade Practices Amendment Bill (No. 1) 2007,
Explanatory Memorandum, pp11-12}
^{Boral Besser Masonry Ltd v ACCC
[2003] HCA 5}
^{Explanatory Memorandum,
p12}
^ibid
^{ACCC Report, p235}
^{ACCC Report, p236}
^{ACCC Report, p236}
^{Trade Practices Amending Bill (No. 1) 2007,
Supplementary Explanatory Memorandum p6}
^{ACCC report, p236}

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Australia: Australian Competition Regulator Comments On New Predatory Pricing Prohibition: Trade Practices Act 1974 (s 461AA)