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About Price discrimination

Price discrimination is no longer separately prohibited in Australia. However, in appropriate circumstances price discrimination may contravene s 46 of the Act which prohibits misuse of market power.

When the Trade Practices Act (now Competition and Consumer Act) was originally introduced in 1974 it contained a prohibition on price discrimination in s 49. After numerous recommendations for repeal, it was eventually repealed by the Competition Policy Reform Act 1995, s 14.

 

Original provision

The original Trade Practices Act 1974 contained the following prohibition on price discrimination (which operated until its repeal by the Competition Policy Reform Act in 1995)

Section 49
Price discrimination

(1) 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 in relation to the supply of the goods;

(c)  the provision of services or facilities in respect of the goods; or

(d)  the making of payments for services or facilities provided in respect of the goods, if the discrimination is of such magnitude or is of such a recurring or systematic character that it 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.

(2) Sub-section (1) does not apply in relation to a discrimination if-

(a)  the discrimination makes only reasonable allowance for differences in the cost or likely cost of manufacture, distribution, sale or delivery resulting from the differing places to which, methods by which or quantities in which the goods are supplied to the purchasers; or

(b)  the discrimination is constituted by the doing of an act in good faith to meet a price or benefit offered by a competitor of the supplier.

(3) In any proceeding for a contravention of sub-section (1), the onus of establishing that that sub-section does not apply in relation to a discrimination by reason of sub-section (2) is on the party asserting that sub-section (1) does not so apply.

(4) A person shall not, in trade or commerce-

(a)  knowingly induce or attempt to induce a corporation to discriminate in a manner prohibited by sub-section (1); or

(b)  enter into any transaction that to his knowledge would result in his receiving the benefit of a discrimination that is prohibited by that sub-section.

(5) In any proceeding against a person for a contravention of sub-section (4), it is a defence if that person establishes that he reasonably believed that, by reason of sub-section (2), the discrimination concerned was not prohibited by sub-section (1).

 

Reviews of price discrimination laws

There have been several major reviews into competition policy which have either recommended the repeal of price discrimination laws or recommended against their re-introduction. This has been on various grounds, including the fact that price discrimination can be pro-competitive, that there are justifications for price discrimination which are not anti-competitive and that where price discrimination is anti-competitive, s 46 (misuse of market power) is the appropriate mechanism for consideration of the practice. See, for example:

  • Swanson Committee Report chapter 7 (1976)
    • Observing that the prohibition on price discrimination that was at the time contained in s 49 (and subject to a competition test) of the Act had 'operated substantially to limit price flexibility' and had 'produced such price inflexibility that the detriment to the economy as a whole from the operation of the section outweighs assistance which small business may have derived from it. It is price flexibility which is at the very heart of competitive behaviour' - the committee recommended that s 49 be repealed.
    • The recommendation to repeal was at first accepted by the Government, with John Howard stating in his second reading speech:
      • ... the Government has accepted the recommendation of the review committee that the prohibition of price discrimination be repealed. That prohibition has worked to inhibit price flexibility, and has not encouraged competition. In fact the review committee stated that this law has actually been used as a pretext to abolish discounts and effectively raise prices. (House of Representatives, Hansard, Wednesday 8 December 1976)
    • but the bill introduced to repeal the provision (Trade Practices Amendment Bill 1977) lapsed in February 1977 and when another amendment bill was introduced and passed (Trade Practices Amendment Bill 1977) it did not contain the provision to repeal s 49 - that was omitted for the express reason of small business protection (see, eg, second reading speech of Mr Tony Whitlam (here and here) and Mr Mick Young)
  • Blunt Report (Small Business and the Trade Practices Act) chapter 9 (section 4) and chapter 10 (1979)
    • This report considered price discrimination/price differentiation in great detail and is well worth reading. It is also useful for its comparisons of s 49 and the Robinson Patman Act in the US.
    • Observing (at 9.30) that 'the flexibility of pricing is impaired by the operation of section 49 ... We agree with the Swanson Committee's view ... that section 49 has had a detrimental effect' (the Committee considered price discrimination was more appropriately addressed under s 46 (misuse of market power) than through a separate prohibition.
    • The committee observed (at 10.6-10.7) that the section had its origins in the US Robinson Patman Act which "has been criticised with virtual unanimity by economists and academic anti-trust experts as impeding, rather than promoting, competition [and] there is now a strong move afoot to repeal it" (quoting Prof Stephen Breyar, Harvard Law School) (although not repealed, the Robinson Patman Act is now never enforced in the US). Quoting Breyar again, the Committee observed (at 10.8), that 'the more concentrated the industry in an economy, the more harm that can be done by a rule against price discrimination. For these reasons, a strict interpretation of s 49 is likely to prove particularly harmful in Australia ... the net effect of preventing price discrimination is more likely to be uniformly high prices than uniformly low ones'.
    • The committee noted (at 10.34): '... price differentiation may be desirable or undesirable, depending upon its effects on competition. Generally unsystematic price discrimination which is pro-competitive by encouraging price experimentation and maintaining flexibility is desirable and should not be discouraged. However, systematic price differentiation may have on occasion anti-competitive effects. It may be used to preserve and strengthen a monopoly position, to tie buyers together with sellers giving discounts for concentrated purchases or make entry into segments of a market difficult of impossible.'
    • At 10.100 the Committee expresses the view that section 49 'is not, and should not, be viewed as a charter for the preservation of small business. This is so, particularly in cases where such small businesses are inefficient ... and where their disappearance from the market would not make it less competitive. ...'
    • The Committee concluded:
      • [10.109]: "[Section 49] is one of the measures adopted under the Trade Practices Act in pursuit of its overall objective, which is the reduction of the level of conduct in Australian industry which works against the efficient and economic allocation of resources. In our view it is not a provision designed specifically to assist small business and it would not be appropriate to amend it to make it a provision to prohibit price discrimination that disadvantages individuals. Such price discrimination is but one manifestation of abuse of market power and should be regulated under the general provision section 46, as we suggest it be amended."
      • [10.111]: "It is our conclusion, however, that section 49 is not capable, in practice, of having the effects sought, because of doubts by business as to its interpretation, as well as inconsistencies with other provisions in Part IV of the Act, Its anticompetitive inflationary effects are undesirable. These difficulties cannot be overcome by redrafting the section."
      • [10.112]: "It follows that in reviewing section 49, we have come to the inescapable conclusion that we must recommend that it be repealed."
  • Hilmer Report chapter 4, section B (1993) - see in particular pages 74-80
    • Recommended "repealing the specific prohibition on price discrimination, with any anti-competitive conduct in this area addressed under the prohibition on the misuse of market power" (at page xxiii)
    • At page 74: "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."
  • Dawson Review chapter 4 (Trade Practices Act Review - reported 2003)
    • The Committee observed that:
      • "In 1993, the Hilmer Committee recommended that section 49 be repealed. The Hilmer Committee's recommendation echoed the concerns of previous inquiries, including the Swanson Review in 1976 and the Blunt Review in 1979. The concern was that section 49 generally discouraged competitive prices and so worked against economically efficient outcomes. The Hilmer Committee concluded that price discrimination generally enhances economic efficiency, except in cases which might be dealt with by section 45 (anti-competitive agreements) or section 46 (misuse of market power). To the extent that section 49 had any effect, the Hilmer Committee thought that it had diminished price competition. It recommended that a provision such as section 49 should form no part of a national competition policy. Section 49 was repealed in 1995. The second reading speech for the amending legislation, the Competition Policy Reform Act 1995, said:
        • 'The prohibition against price discrimination is to be repealed as the provision is largely redundant, and the conduct it is designed to address is adequately covered by other provisions of the Act.' "
      • "Price discrimination may be anti-competitive or pro-competitive. Price discrimination will be anti-competitive when it is used to create a barrier to entry to the market or to force competitors from the market. On the other hand, price cutting, even if it is in favour of a large buyer and hence discriminatory, may be more pro-competitive than anti-competitive. It may engender competition from rival suppliers or in the market generally. As the Swanson Committee observed in 1976, it is price flexibility which is at the heart of competitive behaviour and a general prohibition against price discrimination would substantially limit price flexibility."
    • Recommendation 4.1: "No change should be made to the Act in relation to price discrimination."

See also the submission of Treasury to the Senate inquiry into the milk price wars - it discusses the history of price discrimination in Australia and some of the key issues.

 

Further reading