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Economics

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Overview

EconomicsThe Competition and Consumer Act prohibits certain conduct which has the purpose or effect of substantially lessening competition, including the misuse of market power.

This requires an understanding of what constitutes a market, what will be considered market power and the nature of competition (so as to determine whether certain conduct will result in a lessening of competition).

 

Market structures

Markets may take many forms. Most markets are neither perfectly competitive, nor monopolistic, but the comparison serves to demonstrate why competitive markets are considered desirable.

At the extremes, a perfectly competitive market is generally said to feature:

  • Large number of suppliers and buyers
  • Small market share held by each
  • Homogeneous product
  • Low barriers to entry
  • Perfect information between all firms (on supply and demand side)

In such a market no single seller or buyer can influence the price of the product; the market forces of supply and demand establish the price. Such a market will generally maximise efficiency as firms have incentives to allocate resources to products consumers want and to do so in as efficient (cost-effective) manner as possible to maximise profits.

Conversely, in a monopoly, characterised by a single seller and high barriers to entry, these incentives do not exist; consumers lack the choice to shop elsewhere so a monopolist can simply pass on costs of inefficient production to consumers. Monopolists also have limited incentives to innovate (dynamic efficiency) in order to retain custom.

Most markets are neither perfectly competitive, nor monopolistic, but the comparison serves to demonstrate why competitive markets are considered desirable.

Market share

In relation to market structures, Justice Emmett, in his trial judgment in Metcash stated:

[161] In a perfectly competitive market, there will be many sellers, each lacking the ability to influence price through its own actions.  Each seller will, in such circumstances, lack market power.  Participants in such a market must sell their products at marginal cost, being the cost associated with producing additional units of a good or service.  On the other hand, in a classic monopoly market, there is only one seller, usually with significant discretion over price.  A firm that has no significant competitive constraints on its pricing discretion will be regarded as having monopoly power or significant or substantial market power.

[162] Between the extremes of a perfectly competitive market and a classic monopoly market, there are various kinds of imperfectly competitive markets.  In an oligopolistic market, there are a few sellers of identical or similar products.  Participants in such markets are generally aware of their influence over price, are cognisant of their interdependence and can often earn rates of return that exceed normal levels.  Some markets can be described as being monopolistically competitive, in that they contain many sellers of similar products.  Because monopolistically competitive firms sell similar products, they have some degree of market power and can charge prices exceeding marginal costs.

[163] In a workably competitive market, some or even all participants may have some market power, in the sense that they all have some discretion over price, but no participant will have a substantial degree of market power.  In such a workably competitive market, at any given time, prices might deviate from underlying costs and the deployed technologies might deviate from the most efficient ones currently available.  Economic forces drive such a market towards efficient prices, outputs and costs, but not instantly.

 

Market definition

The role of market definition in competition policy remains a contentious issue in Australia and elsewhere.

In QCMA the Tribunal defined market as the field of rivalry between firms in which there is 'substitution between one product and another, and between one source of supply and another, in response to changing prices.'

See separate market definition page for details.

 

Market power

See misuse of market power page for more details.

Justice Emmett in his trial judgment in Metcash stated:

[164] Realistically, almost every participant in a market has some economic market power in the sense that the participant has some discretion over its prices and its level of product quality.  However, the degree of market power that is of concern in relation to competition policy is higher than economic market power in that sense.  Thus, for example, s 46 of the Competition Act employs the concept of substantial degree of market power as the threshold of concern.  Substantial market power is the ability to earn returns substantially in excess of the opportunity cost of capital, without attracting the entry of participants who would be likely to impose significant competitive constraints.

[165] Market power is not necessarily correlated with market share, although participants with relatively high market share often exercise substantial market power and participants with relatively low market share seldom exercise substantial market power.  Participants are generally able to exercise substantial market power not only as a consequence of having a high market share, but also because the relevant market is protected by barriers to entry and expansion.  Markets that are easy to enter are generally characterised by intense competition.  On the other hand, where barriers to entry into a market are high, incumbents can more easily exercise market power because the threat of entry is more remote.

Market share

Section 46(1AA) previously (until 6 November 2017) prohibited predatory pricing, defined as a corporation having substantial market share supplying goods or services below cost for a sustained period for one of the three prohibited purposes (the same prohibited purposes as for s 46(1). This provision was introduced in 2007 and no cases were brought prior to its repeal.

On the correlation between market share and market power Justice Emmett, in his trial judgment in Metcash, stated:

[165] Market power is not necessarily correlated with market share, although participants with relatively high market share often exercise substantial market power and participants with relatively low market share seldom exercise substantial market power.  Participants are generally able to exercise substantial market power not only as a consequence of having a high market share, but also because the relevant market is protected by barriers to entry and expansion.  Markets that are easy to enter are generally characterised by intense competition.  On the other hand, where barriers to entry into a market are high, incumbents can more easily exercise market power because the threat of entry is more remote.

 

Competition

Promotion of competition is one of the objects of the Competition and Consumer Act 2010. Section 2 of the Act states:

The object of this Act is to enhance the welfare of Australians through the promotion of competition and fair trading and provision for consumer protection. [emphasis added]

As a result, many of the competition provisions of the Act use the term 'competition' and many use the phrase 'substantial lessening of competition'. In particular, anti-competitive agreements (s 45), dual listed company arrangements (s 49) and exclusive dealing (s 47) are prohibited only if they have the the purpose, effect or likely effect of substantially lessening competition (SLC) and mergers (s 50) are prohibited only where they have the effect or likely effect of SLC. In addition, the cartel provisions require that two or more parties be 'competitors' in a market.

See competition page for details.

 

Substantial lessening of competition

Anti-competitive agreements (s 45), dual listed company arrangements (s 49) and exclusive dealing (other than third line forcing - under s 47) are prohibited only if they have the the purpose, effect or likely effect of substantially lessening competition (SLC)

Mergers (s 50) are prohibited only where they have the effect or likely effect of SLC.

See competition page for details.

 

Expert economic evidence

The Hot Tub
The University of Melbourne's Competition Law & Economics Network (CLEN) has released of a video demonstrating Australia’s approach to expert evidence in competition law cases - a mock 'hot tub', based on the facts in Boral and presided over by retired the Hon Peter Heerey QC who was the first instance judge in that case. In addition to the Hon Peter Heerey QC, the expert roles were played by Dr Philip Williams (for the ACCC) and Richard York (for Boral) and counsel were played by David Shavin QC (who acted for the ACCC in the Boral case) and Jack Fajgenbaum QC.

 

Cases

Some key cases discussing economic aspects of the application of Australian competition laws; the list is not intended to be exhaustive

On market definition

On substantial lessening of competition

Market power

Other cases

externallinkACCC v Australian Safeway Stores Pty Limited [2003] FCAFC 149 (30 June 2003)
Misuse of market power, exclusive dealing, price fixing (relating to bread)

ACCC v Liquorland (Australia) Pty Ltd [2006] FCA 826
Exclusionary provisions, anti-competitive agreements, market definition

ACCC v Metcash [2011] FCA 967 (trial judgment and appeal)
Mergers - at first instance Justice Emmett set out relevant economic principles in some detail from para 147.

Auskay International Manufacturing & Trade Pty Ltd v Qantas Airways Ltd (2008) ATPR 42-256; [2008] FCA 1458
Alleged cartel - specificity of market

Australian Gas Light Company v Australian Competition and Consumer Commission (2003) 137 FCR 317

QIW Retailers Ltd v Davids Holdings (1993) ATPR 41-226
Mergers; Trade Practices Economics

Re QIW Ltd (1995) 132 ALR 225
Merger, Market definition

Re Queensland Co-Op Milling Association Limited and Defiance Holdings Limited (QCMA) (1976) 8 ALR 481
Mergers; Trade Practices Economics

Trade Practices Commission v Australian Meat Holdings (1988) 83 ALR 299
Mergers; Market Definition

Seven Network Ltd v News Limited [2007] FCA 1062; [2009] FCAFC 166 (the C7 case)
Anti-competitive agreements; misuse of market power; market definition

 

Commentary

For research and commentary on see the reading room.

Substantial lessening of competition

For a comprehensive summary of the case law on SLC, see Peter Armitage, 'The evolution of the substantial lessening of competition test – a review of case law' (2016) 44 Australian Business Law Review 74. See also John Kench, 'Substantial Lessening of Competition' (Competition Law Conference, Sydney, 21 May 2016).

Books

Useful books for lawyers on competition law economics include:

Articles and related commentary

The following articles are focussed predominantly on economic issues, such as market definition, market power and substantial lessening of competition; many other papers also discuss economic issues - see the main reading room for more resources.

Market definition

Rhonda L Smith, 'Market definition and substitution options' (2014) 22(2) Competition and Consumer Law Journal 105

Alex Sundakov, 'Economic(s) Matters - What is the magic of market definition?' (2014) 22 AJCCL 162

Stephen Corones, 'Market Definition in the age of the internet' (2010) 38 Australian Business Law Review 309

Justice Greenwood, ‘Recent Developments in Market Definition’, 2010 Competition Law Conference, Sydney, 29 May 2010

Rhonda Smith, 'Market definition: Going, going, gone? Developments in the United States' (2010) 18 Competition and Consumer Law Journal 119

Daniel Clarry, 'Contemporary approaches to market definition: Taking account of international markets in Australian competition law' (2009) 37 Australian Business Law Review 143

T Leuner, 'Time and the dimensions of substitutability' (2008) 36 ABLR 327

externallink Brenda Marshall, 'Mechanics of market definition' (2007) 13(2) The National Legal Eagle

Beaton-Wells, Proof of Antitrust Markets in Australia, Federation Press (2003)

Rhonda L Smith and David K Round, 'When is a Market a Market?' (2003) 31 ABLR 412

externallinkLynden Griggs, 'A Teleological Approach To Market Definition - Has It Led To Single Product Market Definition?' [2002] UNDAULawRw 4; (2002) 4 The University of Notre Dame Australia Law Review 77

externallinkMartin Algie & Brian Kewley (1998) Competition Law Market Definition in Practice (First published John Libby & Co 1997)
Internet publication by the Publication Trust, 2008
(available online; includes useful comprehensive analysis of cases and compreensive bibliography)

externallinkDavid Brewster, 'Market Definition and Substitutability - Australian Courts Continue to Struggle with Part IV of the Trade Practices Act 1974 (Cth)' (1996) 12 QUTLJ 246-263

George Hay, 'Market definition and market dominance: issues from the Davids/QIW case' (1995) 3 Competition & Consumer Law Journal 1.

Megan Richardson and Philip Williams (eds), The Law and the Market (1995) Federation Press

Maureen Brunt, 'Market Definition Issues in Australian and New Zealand Trade Practices Litigation' (1990) 18 Australian Business Law Review 86-128

Market power and barriers to entry

Ben Morawetz, 'Mobility barriers and market power - determining the extent of entry or expansion under Australian law' (2013) 20 Competition & Consumer Law Journal 213

Paulina Fishman, 'Australian competition law still trips over barriers to entry' (2013) 21(2) Australian Journal of Competition and Consumer Law 98-108

George Hay, 'Market power in Australian antitrust: an American perspective' (1994) 1 Competition & Consumer Law Journal 215

George Hay, 'Market definition and market dominance: issues from the Davids/QIW case' (1995) 3 Competition & Consumer Law Journal 1.

Substantial lessening of competition

Peter Armitage, 'The evolution of the substantial lessening of competition test – a review of case law' (2016) 44 Australian Business Law Review 74

John Kench, 'Substantial Lessening of Competition' (Competition Law Conference, Sydney, 21 May 2016)

Economic evidence

externallink Cento Veljanovski, Economists in Court: A Comparative Assessment of Procedures and Experience in Australia and England & Wales from an Economist's Perspective (December 7, 2009) (Working Paper)

Justice French, 'Expert testimony, opinion argument and the rules of evidence' (FCA) [2008] FedJSchol 4

Justice Middleton, 'Expert Economic Evidence' (FCA) [2007] FedJSchol 21

Caron Beaton-Wells, ‘Customer testimony and other evidence in Australian antitrust assessments - searching for the oracle’ (2005) 33(6) ABLR 451 [externallink see also [2005] UMelbLRS 2]

externallinkJustice Robert French, 'The role of the Court in competition law' (FCA) [2005] FedJSchol 4

externallink Greg Houston (Director, NERA), 'The Role of Quantitative Analysis In Competition Assessments (Federal Court/Law Council of Australia Seminar on Competition Law) (March 2005)

J Blunt, R Shafron and B Keneally, 'From Arnotts to QIW - a study of expert evidence in trade practices cases' (1994) 1 Competition & Consumer Law Journal 181

Justice R S French, 'Judicial Approaches to Economic Analysis in Australia' (1994) 9 Review of Industrial Organization 547-568

K Yeung, 'The court-room economist in Australian antitrust litigation: an underutilised resource?' (1992) 20 Australian Business Law Review 461

Economics generally

R Smith and J Walker, 'Part IIIA Efficiency and Functional Markets' (1998) 5 Competition & Consumer Law Journal 183

John Creedy and Robert Dixon, 'The Distributional Effects of Monopoly', The University of Melbourne, Department of Economics, Research Paper Number 576, July 1997

Robert Dixon, 'Empirical Estimates of the Social Cost of Monopoly: A Brief Survey', The University of Melbourne, Department of Economics, Research Paper Number 490, November 1995