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Guidelines

Guidelines on misuse of market power

31 August 2018

 

Overview/background

Image of abuse of powerOn 31 August 2018 the ACCC released Guidelines on misuse of market power.

The Guidelines follow the reforms to s 46 that came into operation on 6 November 2017 following recommendations in the Harper Report.

Previous iterations

The ACCC previously released a draft framework for s 46 guidelines in September 2016. Submissions to that consultation have not been published.

Following passage of legislation in 2017 the ACCC released interim guidelines for comment. These were very similar to the draft framework previously released. Key changes were:

  • the addition of 'restricting access to an essential input' and 'loyalty rebates' as types of conduct likely to have a greater potential to involve mmp;
  • changes to concentration levels in some of the examples
  • in the section detailing the ACCC's approach to investigating alleged MMP, consideration of the 'nature and extent of competitive constraints' moved from being listed as the fourth factor to the first factor.

The Submissions made as part of that consultation process have not been published and there was no response from the ACCC until the release of these Guidelines in August 2018.

A list of key changes from the 2017 Interim Guidelines to the current Guideline is provided below.

 

Guideline structure: contents

The Guidelines run to 21 pages and are structured as follows:

Purpose of these Guidelines

1 Why the ACCC takes action under section 46

2 Section 46 - key concepts

Market
Product market
Geographic market

Substantial market power

Purpose, effect or likely effect

Substantially lessening competition

3 Types of conduct that may involve a contravention of s 46

Refusal to deal

Restricting access to an essential input

Predatory pricing

Loyalty rebates

Margin/price squeeze

Tying and bundling

4 Types of conduct that are not likely to contravene s 46

Research and development

Price war

Investing in new production technology to increase efficiency

Rewarding behaviour

5 Authorisation

6 The ACCC's approach to investigating alleged contraventions of s 46

7 Sanctions

 

Changes from 2017 interim guidelines

Following is a list of changes (other than minor or stylistic changes) from the 2017 Interim Guidelines (Interim Guidelines) to the Updated Guidelines (the Guidelines):

Purpose of guidelines

  • The Interim Guidelines referred to section 46 having been 'significantly altered'.
  • The Guidelines refer to section 46 as having been 'revised'

1 Why the ACCC takes action under section 46

  • In paragraph 1.3 the words 'improve their performance' has been added as well as a new reference to Queensland Wire. The second part of para 1.3 now reads (with changes in bold):

    • ... This conduct is part of the competitive process, which drives firms to improve their performance and develop and offer products that are more attractive to customers, and should not be deterred. As stated by the High Court in Queensland Wire Industries v Broken Hill Pty Ltd (1989):

      Competition by its very nature is deliberate and ruthless. Competitors jockey for sales, the more effective competitors injuring the less effective by taking sales away. Competitors almost always try to ‘injure’ each other in this way…these injuries are the inevitable consequence of the competition section 46 is designed to foster.

2 Section 46 key concepts

Market

  • In relation to the functional definition of the market in paragraph 2.5 (changes highlighted in bold)
    • the Interim Guidelines stated the ACCC 'may also consider the functional dimension of the market'.
    • the Guidelines state that 'The ACCC also considers the functional dimension of the market'

    • The Interim Guidelines define functional dimension in brackets as (the different levels in the distribution chain such as the wholesale or retail functional level)
    • The Guidelines define functional dimension in brackets as (the different levels in the supply chain such as the production, wholesale or retail functional level)
  • Two paragraphs have been added before the 'Product market' sub-heading. These are not new - they previously appeared at the end of the 'geographic market' section and have been relocated here.

    Paragraph 2.6 now states:

    Market definition is purposive. In ACCC v Flight Centre [2016], the High Court observed that:

      • Identifying a market and defining its dimensions is ‘a focusing process’, requiring selection of ‘what emerges as the clearest picture of the relevant competitive process in the light of commercial reality and the purposes of the law’.

    Paragraph 2.7 now states:

    This means that a market is not defined in isolation. The definition of a relevant market will be considered in the context of the particular conduct under investigation. It is well recognised that market definition is not an exact science and that it is not possible or necessary to identify precise boundaries.

Product market

There is no significant change to this sub-section

Geographic market

  • Paragraph 2.8 Interim Guidelines/2.10 Guidelines has changed to incorporate reference to potential supply. The new paragraph reads as follows (change in bold):

    • To determine the geographic market, it is first necessary to identify the area in which the good or service under analysis is supplied or could readily be supplied. The ACCC then considers the geographic areas where consumers would be able or willing to find substitutes for the goods or services in question.

Substantial market power

There are a few changes to this section.

  • Paragraph 2.13 of the Interim Guidelines stated:
    • 'Whether or not a firm has substantial market power is an important threshold which needs to be met before considering whether a firm has misused its market power'
  • Paragraph 2.13 of the Guidelines now states:
    • 'A firm may only contravene s 46 if it has a substantial degree of market power'
  • The final sentence of paragraph 2.14 has changed (changes in bold):
    • Interim Guidelines: 'Substantial market power may also enable a firm to reduce the quality of goods or services, raise barriers to entry or slow innovation'
    • Guidelines: 'Substantial market power may also enable a firm to raise barriers to entry, profitably reduce the quality of goods or services or slow innovation'
  • In paragraph 2.15 there is a reference to QCMA factors re: competitive constraint. The Interim Guidelines state that these factors 'were outlined' in QCMA. The Guidelines state that these factors 'can include those outlined' in QCMA.
  • In paragraph 2.16 the Guidelines have added the sentence: 'Similarly, financial strength does not by itself determine whether a firm has market power'.
  • The final sentence in paragraph 2.16 (that the ACCC will assess each case on its merits ...) of the Interim Guidelines has been moved into a separate paragraph; it now appears (unaltered) as para 2.17 in the Guidelines.

Purpose, effect or likely effect

  • Paragraph 2.21 Interim Guidelines has been split into two parts and in the first part (now para 2.22 of the Guidelines') an example has been added. The new para 2.22 reads (new portion in bold):

    • When assessing a firm’s conduct, the ACCC considers the nature and extent of that conduct, including the firm’s commercial rationale. For example, whether the conduct is likely to be profitable for the firm because it improves its customer offer or because it restricts rival firms from improving their customer offers. A firm’s commercial rationale may be relevant to understanding the conduct in question and assessing its purpose and/or effect on competition. However, it will not amount to a defence. Conduct engaged in by a firm with substantial market power may still have the effect or likely effect of substantially lessening competition even where the firm did not have the purpose of substantially lessening competition.
  • Paragraph 2.23 of the Guidelines (the second part of 2.21 of the Interim Guidelines) has altered slightly. The old and new paragraphs are extracted below (change in bold):

    Interim Guidelines 2.21: When assessing effect or likely effect on competition, the ACCC may undertake a ‘with or without test’. This compares the likely state of competition ‘with’ the conduct, to the likely state of competition ‘without’ the conduct, to determine whether the conduct lessened competition as a result of the firm’s conduct.

    Guidelines 2.23: When assessing effect or likely effect on competition, the ACCC may undertake a ‘with or without test’. This compares the likely state of competition ‘with’ the conduct, to the likely state of competition ‘without’ the conduct, to determine whether any lessening of competition would be the effect or likely effect of the firm’s conduct.

Substantially lessening competition

  • The introductory sentence in the section on SLC has changed - the term SLC goes from being 'well understood' to being a 'longstanding' test!

    Interim Guidelines 2.22: There is no legislative definition of ‘substantially lessen competition’ however the term is well understood within Australia’s competition laws. ...

    Guidelines 2.24: There is no legislative definition of ‘substantially lessen competition’; however, the test is longstanding within Australia’s competition laws.

  • 'Substantially' now appears before 'lessening competition'.
  • Under 'lessening competition' (Interim Guidelines 2.26; Guidelines 2.25) the reference to 'field of rivalry' has been replaced with 'process of rivalry'.
  • The following paragraph appeared in the Interim Guidelines but does not appear in the Guidelines - however, there was duplication here, with the reference to consideration of commercial rationale appearing in para 2.22 of the Guidelines.

    Interim Guidelines 2.27: When assessing whether the conduct has the purpose, effect or likely effect of substantially lessening competition, the ACCC will consider the commercial rationale for the conduct. For instance, if a firm is engaging in conduct to make its products more attractive to customers, the conduct is unlikely to substantially lessen competition.

     

Types of conduct that may involve a misuse of market power

  • Minor modification to para 3.2 (para 3.1 also alters reference from 'misuse of market power' generally to a specific reference to s 46):

    Interim Guidelines: ... competition agencies and courts have regarded some types of conduct as having greater potential to involve a misuse of market power, either in isolation or combined.

    Guidelines: ... competition agencies and courts have regarded some types of conduct as having greater potential to contravene s. 46.

Refusal to deal

  • Generic references to 'misuse of market power' have been replaced with specific references to s 46 (here and in subsequent sections)
  • Changes to para 3.4 highlighted in bold:

    Interim Guidelines: However, in limited circumstances, a refusal to deal by a firm with a substantial degree of market power may amount to a misuse of market power. For instance, where a firm that has a substantial degree of market power in the supply of a key input:

    a) refuses to supply that input to its competitors in a downstream market and the purpose, effect or likely effect of the conduct is to substantially lessen competition in the downstream market, or

    b) states a willingness to supply a key input to its competitors in a downstream market, but only on terms at which no competitor would be willing to buy the input, (e.g. by charging an excessively high price ), and if the purpose, effect or likely effect of the conduct is to substantially lessen competition in the downstream market.

    Guidelines: However, in limited circumstances, a refusal to deal by a firm with a substantial degree of market power may amount to a contravention of s. 46. For instance, where a firm that has a substantial degree of market power in the supply of a key input:

    a) refuses to supply that input to its competitors in a downstream market and the purpose, effect or likely effect of the conduct is to prevent or hinder those competitors from being able to compete in the downstream market, or

    b) states a willingness to supply a key input to its competitors in a downstream market, but only on terms at which no competitor would reasonably be willing to buy the input (for example, by charging an excessively high price), and if the purpose, effect or likely effect of the conduct is to prevent or hinder those competitors from being able to compete in the downstream market.

  • Some modification to the example provided: Example 3: Refusal to deal.
    • The new example adds the sentence 'It is not possible to transport ready-mix concrete to the town from the next closest ready-mix plant'.
    • The 'Assessment' also changes from stating 'It is likely that the firm has a substantial degree of market power ...' to stating 'The firm has a substantial degree of market power'.
    • The 'Assessment' in the Interim Guidelines made reference to the conduct ultimately causing 'the incumbent firm to lay off workers' and this is removed from the Guidelines which now state: 'While one of the firm’s motivations is to protect the employment of its workers, it is seeking to achieve this by preventing the rival firm from entering the market for the supply of ready-mix concrete and competing away business. '

Restricting access to an essential input

  • Example 4 has changed - in the Interim Guidelines it was headed 'Land banking' and is now headed 'Restricting access to essential input' and there are some important changes to the facts provided.

Predatory pricing

  • The first sentence of para 3.8 in the Interim Guidelines now appears at the end of para 3.7 but has not changed in substance.
  • The words 'with the aim of' have been removed from para 3.8:

    Interim Guidelines: '... Predatory pricing occurs when a firm substantially reduces its prices below its own cost of supply for a sustained period with the aim of: ...'

    Guidelines: 'Predatory pricing occurs when a firm substantially reduces its prices below its own cost of supply for a sustained period: ...'

  • The wording in para 3.9 has changed:

    Interim Guidelines: '... if the practice causes competitors to exit the market or prevents new entrants from entering the market, the firm may be in a position to charge higher prices and maintain or increase its market share in the longer term.'

    Guidelines: '... if the practice leads to a reduction in competition or the potential for competition, the firm may be in a position to charge higher prices and maintain or increase its market share in the longer term.'

  • In Example 5 the language in the assessment has changed from the 'firm' having the purpose of SLC to the 'conduct' having that purpose. The reference has also changed from having the purpose of SLC to having the 'purpose, effect or likely effect' of SLC.

Loyalty rebates

  • Para 3.11 has changed (highlighted in bold)

    Interim Guidelines: Businesses are generally free to set their own sales promotions, including rebates. Rebates usually do not harm competition. In many cases, they promote competition by reducing the overall price customers pay for goods and services.

    Guidelines: Businesses are generally free to set their own sales promotions, including rebates. Rebates usually do not harm competition. In many cases, including where the firm offering a rebate has substantial market power, rebates are an example of the benefits of the competitive process, incentivising retailers to promote the supplier’s products and reducing the overall price customers pay for goods and services.

  • Para 3.12 Interim Guidelines refer to meeting 'sales targets' - the reference to sales has been removed from the Guidelines. See further changes in bold:

    Interim Guidelines: However, in limited circumstances, a firm with a substantial degree of market power offering loyalty rebates can substantially lessen competition. This is most likely to occur where a rebate is conditional on a distributor meeting certain sales targets. For instance, where a firm offers its customers long-term supply terms with volume rebates which are conditional on the customer purchasing a very large quantity of its requirements from the firm.

    Guidelines: However, in limited circumstances a firm with a substantial degree of market power offering rebates can substantially lessen competition. This is most likely to occur where a rebate is conditional on a retailer meeting certain targets. For instance, where a firm offers its retail customers volume rebates which are conditional on the retailer purchasing a large proportion of its requirements from the firm (loyalty rebates). Such conditions can have the effect of preventing retailers from purchasing from competing suppliers.

  • Para 3.13 reference to distributor has changed to 'retailer'.
  • Some details have changed in the example provided, including the percentage increase in transmissions required to be purchased to qualify for the rebate. There is also clear reference to no close substitutes being available to a 'patented system' preferred in most heavy-duty vehicles.

Margin/price squeeze

  • Reference to 'essential input' in para 3.15 has changed to 'key input'
  • In para 3.16 the words 'in the downstream market' have been added when referring to the conduct preventing 'equally efficient competitors' from competing on the merits.
  • In the example reference to new entry being unlikely has changed from 'new entry is unlikely' to 'new entry in the foreseeable future is unlikely'.

Tying and bundling

  • The following sentence has been removed from para 3.17 and inserted at the start of para 3.20:
    • Tying and bundling are common commercial arrangements which usually do not harm competition and in many scenarios promote competition by offering consumers more compelling offers.
  • The definition of bundling in 3.19 has changed:

    Interim Guidelines: 'Bundling' occurs when a supplier offers a lower price if two products are purchased as a package. ...

    Guidelines: ‘Bundling’ occurs when a supplier only offers two products as a package or for a lower price if the two products are purchased as a package. ...

  • In the example the sentence: 'Pharmacies must dispence Drug A to service their customers effectively' has been removed. Reference to 'as a bundle' has been changed to 'as a package' and the relevant heart condition related to Drug B in the example is now 'comparatively rare'.

5 Types of conduct that may not involve a misuse of market power

  • In Example 10 Price War, the first sentence in the assessment has been removed ('It is unlikely that any of the firms have a substantial degree of market power'.
  • In Example 12 Rewarding behaviour, the relevant product has become a 'patented product'. The reference to 'considerable profit' has become 'considerable margin'.
  • Example 13 'Standardised or national pricing by large retail chains' has been removed.

6 The ACCC's approach to investigating alleged contraventions of s 46

  • Para 2 has been changed as follows:

    Interim Guidelines: In deciding whether to take enforcement action, the ACCC focuses on the extent to which matters will, or have the potential to, harm the competitive process or result in widespread consumer detriment. ...

    Guidelines: In deciding whether to take enforcement action, the ACCC focuses on the extent to which matters will, or have the potential to, harm the competitive process especially where this is likely to cause widespread consumer detriment. ...

  • At para 6.3 the Interim Guidelines noted that the ACCC gives compliance and enforcement priority to matters demonstrating one or more of a range of factors that are then set out in the guidance. The list of factors has been removed and replaced with a reference to the ACCC's annual Compliance and Enforcement Policy setting out priorities for the following year.

7 Sanctions

No change.