Cooney Report 1991
(Full Report)

1.1 On 16 May 1991 on the motion of Senator Spindler, the Senate resolved to refer to the Standing Committee on Legal and Constitutional Affairs for report on or before the first sitting day in October 1991:

(a) the adequacy of the existing legislative controls in the Trade Practices Act 197 4 over mergers and acquisitions, with particular reference to:

(i) the appropriate test that should apply; and

(ii) whether compulsory pre-merger notification should be introduced and, if so, in what circumstances.

(b) whether, in situations of existing market dominance, the Trade Practices Commission should be able to examine conduct in addition to that already covered by s46, and, if so, what action (including divestiture) might be taken as a result of such examination.

(c) the extension of section 52A (unconscionable conduct) to all commercial dealings;

any other matters (including review mechanisms) considered by the Committee to be relevant to any or all of these matters.[1]

1.2 On 11 September, 27 November and 11 December 1991 the Senate resolved that the time for presentation of the Committee's report be extended to 1 , 12 and 19 December 1991 respectively. [2]

1.3 On 24 May 1991, the Committee advertised the inquiry in major national, state and territory newspapers seeking written submissions from interested persons by 28 June 1991. In addition, the Committee wrote to various individuals and organisations likely to be interested in the inquiry.

1.4 The level of community interest was reflected in the wide range of individuals and organisations that made submissions to the Committee and in the media publicity which the Committee received.[3] The Committee received 62 written submissions. The list of people and organisations who made submissions to the Committee is set out in Appendix I to this report.

1.5 The Committee held public hearings in the following places on the dates indicated:

Melbourne 17 September 1991

Canberra 26 September 1991

Canberra 6 November 1991

Canberra 2 December 1991

1.6 Witnesses who appeared before the Committee at its public hearings are noted in Appendix II to this report.

1.7 The submissions authorised for publication and the transcripts of the evidence given are available from the Senate Committee Office and the Parliamentary Library.

1.8 The structure of the report reflects the terms of reference of the inquiry. It begins with a background to the inquiry and with a brief summary of recent reviews of Australian Trade Practices Legislation.

1.9 Chapter 3 deals with mergers and acquisitions. The issue of the appropriate test that should apply in section 50 is discussed.

1.10 Chapter 4 deals with the issue of whether compulsory pre merger notification should be introduced, and if so, in what circumstances. The issue of a mandatory authorisation requirement for 'sensitive' industries is also considered.

1.11 In Chapter 5, the Committee considers whether in situations of existing market dominance, the Trade Practices Commission should be able to examine conduct in addition to that already covered by section 46 and, if so, what action (including divestiture) might be taken as a result of such circumstances.

1.12 The report then deals in Chapter 6 with the possible extension of section 52A (unconscionable conduct) to all commercial dealings.

1.13 Chapter 7 looks at related matters, and in particular remedies, including review mechanisms considered by the Committee to be relevant to any issues under inquiry.

1.14 Finally, the document sets out the dissenting reports of Senators Spindler and Schacht with respect to additional remedies for breaches of section 46, and in particular with the appropriateness of divestiture; and the dissenting report of Senator Kemp on the issue of the appropriate merger test in section 50 and the issue of the standard of proof in section 46.

2.1 The Trade Practices Act 1974 (the Act) came into force on 1 October 1974. The Act relies on the power of the Commonwealth under the Constitution with reference to s51(1) (trade and commerce), s51(xx) ( corporations), s51 (xiii) (banking), s51 (xiv) (insurance), s51 (v) (post and telegraphs) . In addition, ss51 (xxix) (external powers) and s51 (xxxix) (the incidental power) are important. The Act applies in relation to corporations supplying goods and services.

2.2 The Act was extensively amended in 1977 following the report of the 1976 Trade Practices Review Committee (Swanson Committee). In 1979 the Trade Practices Consultative Committee (Blunt Committee) also recommended various amendments to the Act. Further substantive amendments were made in 1986 following the publication of the 1984 Green Paper: The Trade Practices Act - Proposals for Change.

2.3 The Act adopts a proscriptive approach by prohibiting a range of restrictive trade practices. Part IV of the Act deals with practices which inhibit competition in the market place. Part V deals with consumer protection.

2.4 In 1989 the House of Representatives Standing Committee on Legal and Constitutional Affairs presented its report on 'Mergers. Takeovers and Monopolies: Profiting from Competition?' (the Griffiths Report). That Committee was required to look into issues similar to those of the present inquiry. In particular,

the adequacy and extent of legislative controls over mergers, takeovers and monopolisation, with particular reference to:

• the extent of control of mergers, takeovers and monopolisation as necessary to safeguard the public interest;
• the adequacy of existing legislation;
• the role and effectiveness of the Trade Practices Commission in its implementation of sections 46 and 50 if the Trade Practices Act 1974.

2.5 The Griffiths Committee recommended, among other things:

• the retention of the current dominance test in s50 [1]
• that pre-merger notification not be introduced in the Trade Practices Act [2]
• with qualifications, the private right to injunctive relief in relation to mergers be reintroduced [3]
• the procedure for authorisation of mergers be retained in its existing form [4]
• sub section 76(1) be amended to provide for a substantial increase in the existing maximum penalties in relation to breaches of the merger and misuse of market power provisions [5] and
• that a range of other remedies be introduced for contraventions of Part IV.

2.6 In tabling the Government's response to the Griffiths Report, the Attorney-General, the Hon M Duffy MP said:

Honourable members will be aware that the Senate has since referred to its Standing Committee on Legal and Constitutional Affairs for inquiry and report several trade practices issues which were also the subject of inquiry and report by the House of Representatives Committee. These relate to the adequacy of the existing merger test in section 50 and aspects of the misuse of market power provisions in section 46. The Government obviously would wish to have and study the report of the Senate Committee before making final decisions on the matters.[6]

2.7 The Attorney-General then proceeded to indicate that:

the following response, therefore, represents the Government's views of the House of Representatives Committee recommendations which will be examined again, if necessary, in light of any contrary recommendations of the Senate Committee'. [7]

2.8 In light of the above qualification, the Attorney-General stated that:

the Government agrees with the Committee that the issue of market power provisions in section 46 should be retained in the present form ... like the Committee it is not convinced that there is sufficient justification for reverting to the 'substantial lessening of competition' test in merger cases ... [8]

The Government also accepts the general thrust of the Committee's recommendations that:

• a private right to injunctive relief against mergers should be introduced [9]
• the procedure for authorisation of mergers should be retained in its existing form [10]

...

• there should be a substantial increase in the existing maximum pecuniary penalties for sections 46 and 50 ...

...

Recommendation 3 recommended against the introduction of pre-merger notification into the Act. The Government believes ... that a form of pre-merger notification which has sufficiently high thresholds, is sufficiently flexible and does not involve unduly onerous burdens would be advantageous. [11]

2.9 In view of the need to report promptly the Committee has focused on the matters specified in the terms of reference although related issues cannot and have not been ignored.

2.1 0 In its considerations the Committee has examined the submissions that were made, the evidence presented at its hearings, and the various reports referred to above.

Download chapter 3 (PDF)

Mergers and competition

• The empirical evidence on mergers
• The theoretical analysis of mergers
• Conclusions

Section 50

Previous consideration of amendments

Objectives of s50

• Efficiency scale and international competitiveness
• Damage to competition?
• Certainty
• Regulatory and compliance costs

Raising the threshold

Lowering the threshold

• Consistency
• International merger tests
• Public scrutiny
• Consumers

Conclusions

3.1 The underlying principle of Part IV of the Trade Practices Act is the promotion and preservation of effective competition. The cogency and character of the Act as economic law has been described by Professor Maureen Brunt in the following words:

We begin with a statute; it is to be interpreted and enforced by courts of law; necessarily we are in the hands of lawyers. Yet fundamentally the Trade Practices Act (together with its implementation, its interpretation and enforcement) is an instrument of economic policy; its subject-matter, anti-competitive conduct of business enterprises within markets, is economic; the very terms used in drafting the statute (e.g. "conduct likely to have the effect of substantially lessening competition in a market for goods or services") employ economic concepts; the statutory criterion for determining whether anti-competitive conduct is in the public interest calls for analysis of economic processes.[fn1]

3.2 Undoubtedly the Act is one directed to economic matters. Against this background, the Committee recognises that an analysis of the effectiveness of the Act must be based on an understanding of economic issues and the current economic climate. At the same time it is legislation, and where there is a dispute about its meaning it must be interpreted by the Judiciary. Further, there are proceedings under it which must be brought in the Courts. Both economists and lawyers make the Act their province and bring, different perspectives to the same issues, resulting at times in tensions, which on some occasions are creative, but on other occasions are counterproductive.

3.3 The regulation of mergers [fn2] is an integral component of competition law and policy. Mergers may have both beneficial and adverse effects. On the one hand, they may enable a well conducted firm to acquire one badly run. They may keep pressure on management so that it does not become complacent. They may offer the prospect of rewards such as increased market share. They may encourage the transfer of technologies between industries. They may assist in the redeployment of capital from inefficient to more productive uses. And they may provide a powerful force for increased operating efficiencies. However, the experience of the 1980s leads one to question whether these kinds of benefits have been achieved.

3.4 On the other hand, mergers may result in the acquisition of monopoly or duopoly power, which may lead to an absence of vigorous competition, particularly price competition, and generally be against the public interest.

The empirical evidence on mergers

3.5 Considerable research, particularly in the United States and the United Kingdom, has been undertaken into whether mergers, on average, produce efficiency gains. A submission from Treasury, [fn3] categorises this research as of two types: 'event · studies' and 'accounting studies'. Event studies measure profitability from changes in the stock market value of shares at the time mergers are proposed. Accounting studies attempt to evaluate the productivity of mergers by using accounting data on the performance of acquiring firms following the merger.

3.6 Treasury notes that· the major Australian share-based study was undertaken by Bishop, Dodd and Officer in 1987 in respect of 1442 takeover bids between 1972 and 1985. This study concluded that takeovers, on average, lead to large increases in shareholders' wealth. The study found that:

• prior to takeover, targets were average performers;
• sharemarket values of the bidding and target firm substantially increased around the time of the announcement of takeover bids; and
• the above market returns to bidding firm shareholders fell in the longer term from their (high) level around takeover. [fn4]

3.7 The methodology of 'event studies' is challenged by the TPC. Professor Johns observes that there is no simple connection between share prices and enhanced profitability - the increase in prices may indicate that competition is not working, not that greater efficiency has been achieved.[fn5] It is also questioned by Ravenscraft who states that a net gain to shareholders does not necessarily translate into a net gain to society.[fn6]

3.8 In a supplementary submission, the TPC cites the views of Carlton and Perloff in 1990:

In summary, considerable evidence from the stock market supports the view that merger activity improves efficiency and creates value. Shareholders of target firms are the primary beneficiaries of this increased value ... Additional research on profits subsequent to consolidation, not stock prices, is needed to confirm the efficiency gains. Without such research, some may argue that mergers and takeovers create illusory value that represents either the unjustified transfer of wealth from those dependent on the acquired firm (for example, employees) to its shareholders, or judgmental errors by the management of the acquiring firm.[fn7]

3.9 'Accounting studies', on the other hand, seek to assess the productivity of mergers by using accounting data on the 1post1 merger performance of acquiring firms. Taken as a whole, these studies provide mixed results on claimed performance gains.[fn8] The Committee was informed that two major American accounting studies9 concluded that 'the cash flow/sales performance of acquired units was slightly inferior to that of non-acquired units in the same line of business both before and after takeover and, on average, performance neither improved nor deteriorated significantly following takeover'.[fn10]

3.10 A more recent US study, [fn11] however, has found that the post-merger operating cash flow of merged firms did improve relative to their industries' performance, and that this improvement came from 'increased asset productivity rather than higher operating margins' suggesting that the increases in cash-flow were not due to increased prices as a result of greater market power.[fn12]

3.11 Recent Australian accounting studies include that of McDougall and Round who looked at 88 mergers between 1970 and 1981, [fn13] and a study by the Bureau of Industry Economics in 1990 dealing with mergers between leading firms in three particular industries - pastry products, roofing tiles and automotive batteries.[fn14]

3.12 The McDougall and Round study found that:

acquiring firms in horizontal takeovers were significantly more profitable than target firms, as well as experiencing lower levels of profit variability; and

after acquisition, the profitability of the merged firms deteriorated compared to previous performance and that of the control groups.[fn15]

3.13 Treasury and the TPC suggest that the BIE study found that mergers produced 'moderate benefits chiefly in the form of economies in production, distribution and administration. Expected gains were not always fully realised, because the difficulties of merging appear to have been underestimated and the impact of the merger was overshadowed by other major changes in, demand and supply conditions'[fn16] The BIE study itself concludes:

No precise measure of changes in the productive efficiency of the operations of the firms was possible because of the inadequacies of the data. The estimates that were made support the findings ... that there was a substantial lag between the merger and any apparent increases in productive efficiency and that other factors have had at least as great an impact on productive efficiency as the mergers. For example, the greatest increase in productive efficiency was in the ·automotive batteries industry but a major cause of this increase appears to have been competition from imported batteries.[fn17]

3.14 The TPC observes that, in focusing on the manufacturing sector, the BIE study dealt with industries in which mergers were most likely to produce net benefits. The TPC expresses concern that in other sectors of the economy, and most importantly in the large non-traded goods sector, there is a greater likelihood of the costs of a merger exceeding the benefits.[fn18]

3.15 In summary, the TPC considers that the empirical work carried out in the area shows there is no simple correlation between mergers and enhanced profitability'. [fn19]

3.16 A somewhat different view of the BIE study was provided by Mr Beerworth,[fn20] who draws the following conclusions:

• The relationship between concentration and competition is unclear.
• It is not at all clear that mergers make a great deal of difference to the structure of an industry in the long run or to the degree of competition faced within an industry because of other changes.
• The market power of merged firms has been, if anything, reduced principally as a result of changes in demand patterns, technology, barriers to entry and increasing import competition.
• The impact of mergers in the industries studied appear to have been relatively minor.

3.17 The Attorney-General's Department views the BIE study as indicating that mergers do not produce all the benefits in efficiency for individual firms that were forecast by their proponents. However, the study does not find that mergers are without benefits. It finds that though competition was suppressed for a period it resurfaced.[fn21]

3.18 The Australian Consumers Association acknowledges a measure· of validity in the argument that mergers bring about economic efficiency. But relying on the pattern of beer prices following the mergers of the 1980s it states that 'the evidence of gains to consumers resulting from recent mergers and takeovers in Australia is very thin'.[fn22] ACA concludes:

Where there are efficiency gains from a merger it may still not guarantee increased consumer welfare. They may be appropriated by shareholders. These gains have to be of sufficient magnitude to ensure net benefits to consumers that are stable in the long run. The long run benefit must significantly outweigh the long run detriments arising from the merger. Otherwise, any lessening of competition as a result of the merger should not be tolerated and the merger should not be allowed.[fn23]

3.19 A similar proposal is advanced by Professor Mills. Noting that mergers are frequently justified on the ground of decreasing unit costs resulting from economies of scale, Professor Mills suggests that only mergers, where the claimed reduction in unit costs is 'significant' (above 10%) and attained within a designated period (for example, 2 years or less), should be permitted. Professor Mills also suggests that the merged entity should automatically be declared a 'regulated corporation' and subject to a price control scheme administered by the Prices Surveillance Authority (PSA) to ensure that cost savings are passed on to consumers in prices charged.[fn24]

The theoretical analysis of mergers

3.20 The analytical work of Professor Michael Porter was frequently cited in evidence before the Committee. Treasury summarises Porter's analysis of what leads to international competitiveness in the following terms:

Porter questions the view that domestic firms must be large relative to the size of the domestic industry to gain economies of scale in order to be internationally competitive. In his industry studies he found that creating a dominant domestic firm rarely results in an internationally competitive advantage. He concluded that the need for economies of scale is tempered by the importance for competitive advantage of the rate of innovation. Economies of scale, he argues, are best achieved by exporting, not by dominating the domestic market. [fn25]

3.21 As a consequence, in his work The Competitive Advantage of Nations, Porter concludes:

A strong antitrust policy - especially for horizontal mergers, alliances and collusive behaviour - is fundamental to innovation. While it is fashionable today to call for mergers and alliances in the name of globalization and the creation of national champions, these often undermine the creation of competitive advantage. Real national competitiveness requires governments to disallow mergers, acquisitions and alliances that involve industry leaders ... Companies should, however, be allowed to acquire small companies in related industries when the move promotes the transfer of skills that could ultimately create competitive advantage.[fn26]

3.22 And in Upgrading New Zealand's Competitive Advantage Porter states:

It is often argued in New Zealand and elsewhere that domestic competition is undesirable, particularly in a 'small country'. The belief that competition leads to duplication of effort and prevents firms from gaining economies of scale misses the fact that competition tends to force firms to improve and upgrade. Concentration is not the best way to achieve scale in small countries, export is ...

New Zealand lacks a tradition of strong competition policy ... The alleged 'economic efficiency' of market concentration has been used to justify a policy of 'nonintervention' towards concentrations of market power. This reflects a fundamentally static view of the world that does not take into account the gains in dynamic efficiency that result from vigorous rivalry.[fn27]

3.23 Professor Porter has stressed that he is not an expert on the Australian economy.[fn28] His analysis is not based on an examination of it. In considering the relevance of his thesis for this country, Treasury makes the following observations:

• Porter sometimes refers to the existence of 'vigorous competition' when there are as few as two dominant firms in the local market;
• Some 'success stories' (for example Sweden) are not explained by the thesis - Sweden has only one significant company in many international industries, however, unlike Australia, its proximity to other markets may lead to vigorous rivalry with competitors in those markets; and
• Porter's focus is on export-oriented industries, particularly manufactured goods and some services. Australian exports on the other hand, are dominated by resource-based commodities and there are substantial non-traded and import-competing sectors.[fn29]

3.24 The BCA submits that the TPC has misinterpreted Professor Porter's work, [fn30] and that his general thesis 'requires some adaptation in applying it to Australia.'[fn31] CAI considers there to be little justification for using it as the basis for abandoning existing industry policy.[fn32]

Conclusions

3.25 The Committee finds that the empirical evidence on the effects of mergers is conflicting and not conclusive. The economic evidence that merger: actually result in productive efficiencies remains equivocal. Nor is it clear that efficiencies, where they have occurred, have improved the international competitiveness of Australian firms, or resulted in demonstrable benefits to consumers.

3.26 The Committee notes the growing body of economic theory which suggests that international competitiveness is achieved not through mergers but through the encouragement of competition. The Committee also notes, in particular, the work of Professor Porter. This work has questioned the view that domestic firms must be large relative to the size of the domestic industry to gain economies of scale in order to be internationally competitive. While Porter's work does not deal directly with Australian conditions, it nevertheless is a work of considerable importance.

3.27 Mergers in Australia are regulated under section 50 of the Trade Practices Act. This section prohibits mergers or acquisitions which would result, or be likely to result, in a corporation being in a position to dominate a market for goods or services, or which would substantially strengthen the power of a corporation already in that position.

3.28 Market in section 50 means 'a substantial market for goods and services in Australia, in a State or in a Territory' and it may be dominated by a corporation either as a supplier or an acquirer of goods or services. [fn33] The acquisition of an already dominant corporation is not prohibited if, as a result of the acquisition, the acquirer is not (or is not likely to be) in a stronger position to dominate that market.[fn34]

3.29 The Act empowers the TPC to grant authorisation for a merger.[fn35] The effect of an authorisation is to exempt from the provisions of the Act mergers which would otherwise contravene it. However, authorisation may be granted only where the TPC is satisfied the proposed merger would result, or be likely to result, in such a benefit to the public that it should be allowed to take place.[fn36]

3.30 Between 1974 and 1977, section 50 prohibited mergers or acquisitions which resulted in a substantial lessening of competition in a market for goods and services.

3.31 In 1977 the threshold was changed to prohibit mergers or acquisitions which resulted in (or substantially strengthened) a position of control or dominance in a substantial market. The rationale for these amendments was 'to achieve economies of scale and to improve international competitiveness,' and the intended effect was that 'the categories of merger to be subject to the Act should be quite limited'.[fn37]

3.32 In 1986, following the decision in TPC v Ansett Transport Industries (Operations) Pty Ltd & Ors,[fn38] the 'control or dominance' test was replaced by the current 'dominance' test. In that case, Northrop J held that, as the word 'dominate meant something less than 'control', the latter word was effectively redundant. He also construed the word 'dominate' according to its ordinary meaning of 'having c commanding influence on'.

3.33 The 1984 Green Paper The Trade Practices Act - Proposals for Change (1984 Green Paper) proposed a return to the 'substantial lessening of competition test, while retaining the proviso that the affected market constitute a substantial one. This proposal was not adopted in the 1986 amendments. In his Second Reading Speech on the Trade Practices Revision Bill 1986, the Attorney-General restated the government's commitment to the encouragement of efficient Australian industry and to increasing its competitiveness on world markets. However, the coverage of section 50 was not extended beyond those mergers which resulted in undue concentration in a market.[fn39]

3.34 The Griffiths Committee considered a number of submissions urging a return to the substantial lessening of competition test. By majority, that Committee, while recognising the potential benefit associated with that test, (ie greater exposure of proposed mergers to public benefit scrutiny) said it was 'not convinced that there is sufficient justification, at this stage, to recommend the adoption of this test.'[fn40]

3.35 Two members of the Committee in a dissenting Report recommended a prohibition on mergers resulting in a substantial lessening of competition in a substantial market. The dissenting report stated that:

Generally the vast majority of world merger' regulatory legislation focuses on competition considerations. The higher threshold, the 'dominance' test, is relatively uncommon. Most countries adopt a less free market approach than Australia and seek to preserve the advantages of a competitive environment. This shows an understanding of the fact that market dominance is not an essential precondition to abuse of market power. A corporation can be in a position to engage in anticompetitive conduct without dominating a market. The fundamental problem with the existing section 50 is that it fails to recognise this.[fn41]

3.36 Underlying some of the submissions made on section 50 is a tension in the perceived objectives of merger regulation and in how best to achieve competitiveness in international markets.

3.37 If the aim of merger policy is to enable firms to attain sufficient size to compete successfully overseas then it may be that the dominance test is to be preferred.[fn42] However, if the policy is the enhancement of competition, then, the substantial lessening of competition test is to be preferred.[fn43]

3.38 Professor Fels says that the present test does not make sense. Competition policies, if a country is going to have them, should deal with all actions that substantially lessen competition:

To limit the examination of mergers to just those that lead to .dominance is to adopt the principle of overlooking mergers which can have substantially lessening effects on competition and therefore seriously adverse economic effects including higher prices.[fn44]

The Australian legislation is different from that of quite a number of other countries in that it provides for authorisation ... the merger partners can go to the TPC and, on appeal, to the TPT for authorisation if the benefit from the merger exceeds the detriment to competition. So if they want to argue that there are economies of scale or economic efficiency benefits or that there is going to be a failing firm situation or other social factors, there is full opportunity for them ... to get authorisation. We do not see the law getting in the way of rationalisation in the internationally traded goods and services sector at all. [fn45]

Efficiency scale and international competitiveness

3.39 Economic efficiency is one of the arguments put to the Committee as relevant to a consideration of the appropriate merger threshold. Others focus on the need for business certainty, a lack of evidence of any demonstrable damage to competition under the existing test, the likelihood of excessive regulatory cos~s on business if the test is changed, the resource implications of a change for the TPC,[fn46] and the importance of closer economic relations with New Zealand.

3.40 The view that the objective of merger regulation should be the facilitation of industry efficiency and effective Australian participation in international markets is one put to the Committee by, among others, Mr Bobeff,[fn47] Mr McComas,[fn48] Dr Pengilley,[fn49] Pacific Dunlop Ltd,[fn50] the Business Council of Australia (BCA),[fn51] the Law Council of Australia (Law Council),[fn52] the Attorney-General's Department,[fn53] and Professor Baxt.[fn54]

3.41 The SCA quoting from its submission to the Griffiths inquiry observes:

The need for rationalisation and efficiency in industry and commerce is stronger than ever before. Section 50 ought not to impose any greater barrier to development and improvement than it does now.

3.42 However, Professor Clarke asserts that mergers have a detrimental effect. They reduce incentive, they lead to wealth transfers, they reduce international competitiveness and they facilitate the concentration of economic power. All these detriments would be avoided with a substantial lessening of competition test.[fn55]

3.43 Professor Clarke has observed:

the central issue ... to be determined - is what the Government thinks section 50 ought to be about. If the policy behind Part IV of the Act, and if the policy behind the merger provision in particular, is to protect and enhance competition, then it is patently obvious that section 50 does not do that. It does not even purport to do that because it establishes a higher test before it is contravened.

...

My complaint about section 50 is that it requires too high a level of public injury before it comes into operation ... if there is a substantial reduction in competition then public detriment will be suffered and ... consequently section 50 ought to try to prevent that detriment occurring by being activated once a merger substantially lessens competition. It should not need to wait until market dominance is reached.[fn56]

3.44 Professor Clarke believes that the dominance test has weakened Australian industry's capacity to compete internationally by reducing the need for it to compete domestically. He has stated:

Because of our tariff barriers, we have created dominant local firms which are not properly exposed to competition because of import barriers. Our car industry is one example of that, telecommunications has tended in the past to be another, airlines have tended to be another. As a consequence, we have allowed these national champions, as Porter calls them, to be developed which have not been exposed to international competition. Certainly if we had no tariffs, if there were negligible barriers to these firms trading into Australia ... my fear is that we would then tend to see the elimination of Australian industry ... I suspect partly because we have allowed this dominance test to exist over the last 13 years and that is going to put us in a disadvantaged position now that the Government is lowering tariff barriers. [fn57]

3.45 Professor Porter has questioned the view that domestic firms must be large relative to the size of the domestic industry to gain economies of scale in order to be internationally competitive. Professor Porter claims that his propositions apply equally to large countries and small.

3.46 Professor Clarke agrees with Professor Porter's proposition and notes that 'the countries that are successful internationally are those which have vigorous domestic competition, and they are both big and small countries'.[fn58]

3.47 The international competitiveness view is directly relevant to mergers in the traded goods and services sector of the economy. However, the TPC has raised concerns about merger activity in the non-traded goods and services sector, which has been 'shielded from competition in some respects by the comparative weakness of the merger test'. [fn59] A number of the problematic mergers considered by the TPC in recent years (including News Ltd/Herald and Weekly Times, Ansett/East West and Coles Myer discussed below) are said to have occurred in this sector, where 'the discipline of import competition is absent'.[fn60] The TPC states that mergers of such significance should be subject to public scrutiny, which is not possible under the present test.[fn61] The TPC believes that the future focus of competition policy will shift to this sector and has stated that an uncompetitive non-traded goods and services sector simply loads costs onto firms that are involved in international competition and holds back our international competitiveness.[fn62]

Damage to competition?

3.48 Mr McComas,[fn63] Dr Pengilley,[fn64] Professor Baxt [fn65] and the Attorney General's Department [fn66] hold that the existing dominance threshold has caused no demonstrable damage to competition in Australia. Mr Mccomas states that the subsequent behaviour of corporations formed by mergers which were approved under the existing threshold, but which may not have been approved under a lower threshold (highlighting Coles/Myer and News/Herald and Weekly Times) does not show a lack of competition. There is, he suggests, no evidence to indicate that any of the firms involved 'has behaved as one might expect a dominant firm to behave.'[fn67]

3.49 The TPC has provided evidence to the inquiry concerning the anticompetitive consequences of a number of recent mergers. These include Coles/Myer, News Ltd/Herald and Weekly Times, Ansett/East West, ICl/British Paints, Tubemakers/McPhersons and Ampol/Solo.

3.50 The TPC observes that the Coles/Myer merger 1resulted in a substantial increase in concentration in the market for retailing, and caused the removal of a significant competitor from that market and possibly prevented entry, (in the shorter term), by another competitor.' [fn68]

3.51 This view is supported by the Confectionary and Mixed Business Association of Australia and New Zealand which states that the Coles/Myer merger has affected both small retailers and small suppliers. CMBA contends that the buying power of Coles/Myer may seem to deliver a public benefit in reduced prices, but acts against the greater public benefit which it identifies as:

the retention of a viable small shop network which can help to ensure that market dominance by the larger retailers in the longer term does not produce permanently increased prices. [fn69]

3.52 In more general terms, Senator Boswell submits on behalf of business in rural industries; growers and primary industry organisations, independent grocery and hardware retailers and Australian manufacturers that mergers under the present test have resulted in anti-competitive consequences. Senator Boswell claims that retailing mergers have resulted in 76% of grocery sales now being controlled by three buying groups. These groups use their size to impose a range of non-negotiable extra costs such as subsidised advertising, corporate rebates, preferred supply discounts, special catalogue discounts and settlement discounts on manufacturers or processors.[fn70] In effect, Senator Boswell submits, manufacturers are forced to increase wholesale prices to meet these demands for discounts and allowances [fn71] which in turn results in higher prices to the consumer.

3.53 He concludes that prices are no longer driven by real competition 'because the competition has bought each other out'.[fn72]

3.54 On the other hand, Coles Myer states that its current market share of total retail sales is 15.7%, that its share of the grocery /food market is only 22%, that vigorous competition has led to a decline in its market share, and that barriers to entry into retailing are 'non-existent'.[fn73]

3.55 The Attorney-General's Department consider that. there is effective competition in the various retail markets in which Coles/Myer operates, and that section 46 provides appropriate controls over any misuse of Coles/Myer's buying power.

3.56 Notably, in their dissenting report to the Griffiths Committee, Mr Robert Tickner, MP and Mr Keith Wright MP questioned the reliance on s46 to prevent abuse of market power. They argued that the best way to protect against misuse of market power is to prevent its being created in the first place by preventing mergers which would substantially reduce competition.

3.57 Following the acquisition by News Ltd of Herald and Weekly Times, the TPC claims that, in spite of securing the divestment by News Ltd of afternoon newspapers in Brisbane and Adelaide, 'the Commission was unable to restore to the market the level of competition that the Herald and Weekly Times had provided as a major competitive force in the newspaper market. Competition in the newspaper market has been consequently substantially lessened as a result.'[fn74]

3.58 The Attorney-General's Department states that the Herald and Weekly Times merger is an unsuitable base on which to construct a principle of general application, both because of the special sensitivity of the print media, and because, on the facts, the TPC considered that the merger did breach the dominance threshold and acted accordingly.[fn75]

3.59 The TPC also notes that the acquisition by Ansett of East-West Airlines resulted in a reduction in competition, particularly price competition (prior to the entry into the market of Compass) and particularly on major eastern trunk routes.[fn76] The TPC suggests that a similar result would occur were Compass now to be acquired by one of the other airlines (or vice versa). The TPC quotes a PSA finding that 1the influence of increased competition is most apparent on the six routes where Compass operates'. On these routes, average revenue per passenger kilometre has fallen by 13.4%. On other routes it has fallen by only 1.3%.[fn77]

3.60 Dr Pengilley states that the Ansett/East West merger was not evidence of the failure of the dominance threshold as the TPC again found that the merger actually breached that threshold. However, rather than take proceedings in court, the TPC took 'alternative administrative remedies' [fn78] which restructured the merger. With regard to the failure of these administrative remedies, the TPC stated that:

after more than 12 months of negotiations on the sale of Skywest the Commission felt that the possibility of a viable buyer emerging was remote and the likely result of insisting on ·the sale would be the shut down of Skywest's regular public transport operations. The Commission felt that given the likely outcome, it could no longer justify the heavy drain on resources which continuing involvement would impose ... Despite some criticism of the decision, the Commission decided not to insist on the divestiture of Skywest.[fn79]

3.61 With respect to the acquisition by ICI (Dulux) of Berger and British Paints, the TPC states that 'in terms of dominance there was no breach of the Act but there was no doubt that it led to a substantial lessening of competition. Since the merger took place in early 1988, prices of architectural paint have gone up approximately 35% and prices of automotive paint have also risen substantially.'[fn80] Senator Boswell also raised these matters before Committee, and observed that, following the merger, paint retailers lost fairly significant discounts, were forced to buy in increased quantities and lost the advantage of having a number of suppliers serving the market.[fn81]

3.62 In reply, the BCA contends that the paint market has continued to be strongly competitive since the merger, that ICl's market share has fallen, that Taubmans and Wattyl have become stronger competitors both through share gain and acquisition, that all suppliers are subject to the countervailing market power of large national paint purchasers, and that while the list price of a selected line of architectural paint may have increased by 35%, its estimate of the average selling price increase is less than 15%.[fn82]

3.63 The Attorney-General's Department draws attention to the fact that merger and British Paints were unprofitable producers.[fn83] The TPC accepts this but notes the special value of these companies to Dulux as indicated in the higher price it was prepared to pay. [fn84]

3.64 The PSA notes that though the ICl/British Paints merger should help ensure less industry fragmentation and greater efficiency in the long term, and that it had not yet considered it necessary to intervene to restrict prices, [fn85] nevertheless it calculates that increases in paint prices were 50% greater than the CPI in the three years to December 1990 and that it was investigating whether these price increases were justified by cost increases. Financial data from the companies concerned revealed that their profitability was significantly greater than the all industries average.[fn86]

3.65 With regard to the acquisition by Tubemakers of McPherson's steel distribution business, the TPC observes that the effect of the purchase has been to limit the business available to Tubemakers' competitors, and that 'there is considerable evidence to indicate that Tubemakers has been engaged in a creeping acquisition of a number of distributors over the past decade with progressive anticompetitive consequences, but that it is difficult to apply the dominance test to small increments in market share.'[fn87]

3.66 In reply, Tubemakers states that its own manufactured products account for only 23% of the sales of its merchandising business and that, during the period it is alleged to have 'engaged in creeping acquisition', its principal domestic manufacturing competitor, Palmer Tube Mills, has grown to a producer of more than 100,000 tonnes per annum.[fn88]

3.67 The TPC states that mergers in the fibreboard container industry have resulted in substantial price increases to consumers,[fn89] that mergers in the bread baking industry have 'limited any sustained price competition'[fn90] and that increased concentration through mergers in industries such as tyres (Dunlop/Goodyear) and tea (Unilever/Bushells) has 'undermined' the competitiveness of those markets.[fn91]

3.68 Senator Boswell states that mergers. in the wine industry, culminating in the takeover of Penfolds Wines by SA Brewing, have caused prices to consumers to rise substantially, and the resulting· market concentration has markedly lessened the bargaining power of growers.[fn92] The TPC considers that the full effect of mergers in the wine industry has not yet been seen.[fn93]

3.69 In the North Queensland meat processing industry, in spite of the divestiture order imposed in the Australia Meat Holdings litigation, the Committee was informed that existing concentrated ownership. has meant that no meaningful competition exists in the Northern and Central Queensland cattle yards and that employment prospects and local provincial town economies have been adversely affected. [fn94]

3. 70 The TPC suggests that an agreement for the acquisition of Solo by Ampol reached in October 1989 brought to an end a period of heavy discounting and marked fluctuations in petrol prices.[fn95] When the takeover was completed in April 1990 the TPC states that 1Ampol immediately raised Solo's prices compared to the rest of the market. Solo was the price leader in the main metropolitan markets of Australia and the effect of Ampol's decision was to lift the general level of prices and also to remove a key dynamic factor contributing to competition in the market'.[fn96]

3.71 Even allowing for the effect of other factors on prices, the TPC considers that this takeover 'has been associated with a transformation in pricing behaviour ... [and] since every one cent on the price of petrol and distillate is equivalent to around $300m per annum it can be seen that even small looking takeovers can be associated with profound and far reaching effects on what consumers and business users pay'.[fn97]

3.72 The TPC also believes that the potential effect of the dominance threshold on competition should be considered. As noted above, the TPC states that the current merger threshold would enable an effective and vigorous competitor to be eliminated without a contravention of the Act.[fn98] Arguably, the dominance threshold would not prevent the acquisition of Compass Airlines by Australian Airlines or Ansett (or vice versa), and it would not prevent the acquisition of Power Brewing by either Carlton and United Brewing or National Brewing: The TPC states that while such acquisitions would have important competition implications, it is questionable whether they would be caught by the dominance test. [fn99]

3.73 This view is supported by Treasury which states that 'it appears that the dominance test could potentially permit future mergers with substantial anti-competitive impacts not fully offset - or offset at all - by public benefits. [fn100]

Certainty

3.74 Professor Baxt,[fn101] Mr Tonking,[fn102] LCA,[fn103] VECCl,[fn104] CAl [fn105] and BCA [fn106] each said that altering the dominance threshold would create a measure of business uncertainty. The dominance test, it is said, is both well-tried and has been judicially interpreted, and 'it would be a shame to lose that certainty without any compensating benefit in either policy or practical terms'. [fn107] The test has the benefit of practical guidelines laid down in the Ansett Avis case [fn108] - no similar criteria have ever been set out in relation to substantial lessening of competition test [fn109] - and it has, it is said, resulted in a moderate degree of intervention which has been both adequate and· which has enabled the business community to establish a degree of confidence in the TPC.[fn110]

3. 75 Treasury notes that changing the test might send confused signals to business. [fn111] Dr Pengilley, observing that the TPC supported the dominance test in 1988, states that it is unsatisfactory for the TPC's attitude to change with changes in its personnel. [fn112]

3.76 It was also suggested that, as the threshold applicable in New Zealand is dominance, the harmonisation of laws between the two countries would be complicated by any changes to section 50. [fn113]

3.77 It was suggested to the Committee by the SCA that business will not know what substantial lessening of competition really means.[fn114] However, as this form of words is commonly used throughout the Act, it is arguable that these words would provide no more uncertainty in section 50 than elsewhere.

3.78 Mr Mccomas in his evidence observed:

I do not know about more uncertainty. It [a substantial lessening of competition test] would certainly lead to a great deal more need for the business community to come and get a tick from the regulator or find out how the regulator is going to behave.[fn115]

3.79 The Committee notes that in Canada, which adopts a substantial lessening of competition test, to help in applying the test, the Canadian Competition Act contains statutory guidelines as follows:

In determining ... whether or not a merger or proposed merger prevents or lessens, or is likely to prevent or lessen competition substantially, the Tribunal may have regard to the following factors:

(a) the extent to which foreign products or foreign competitors provide or are likely to provide effective competition to the businesses of the parties to the merger or proposed merger:

(b) whether the business, or a part of the business of a party to the merger or proposed merger has failed or is likely to fail:

(c) the extent to which acceptable substitutes for products supplied by the parties to the merger or proposed merger are or are likely to be available:

(d) any barriers to entry into a market including

(i) tariff and non-tariff barriers to international trade

(ii) interprovincial barriers to trade, and

(iii) regulatory control over entry.

and any effect of the merger or proposed merger on such barriers:

(e) the extent to which effective competition remains or would remain in a market that is or would be affected by the merger or proposed merger:

(f) any likelihood that the merger· or proposed merger will or would result in the removal of a vigorous and effective competitor:

(g) the nature and extent of change and innovation in a relevant market: and

(h) any other factor that is relevant to competition in a market that is or would be affected by the merger or proposed merger.

3.80 Treasury, takes the view that it is a matter of judgment in any particular case whether the benefits of a merger outweigh the costs, but:

the examples so far available do not appear to amount to unequivocal evidence that the dominance test has had significant adverse consequences for the economy (emphasis added). But that is not to say that there may not be scope to improve the test.

In particular, it appears that in industries not exposed to import competition and the threat of entry of new competitors there may be, potentially at least, inadequacies with the current dominance test. The potential anti-competitive effects, which may be difficult and costly to detect and act against under current arrangements, may better be avoided by preventing mergers than by applying other sections of the TPA (and other legislation).

This suggests that some tightening of the dominance test may be desirable, for example, in the form of an appropriately interpreted substantial lessening of competition test. [fn116]

3.81 Treasury observes that any significant change in the legislation could be accompanied by uncertainty. However, Treasury observes:

If the test were to be tightened so as to better target - and in particular if a substantial lessening of competition test were to be reintroduced - it would be crucial to ensure that factors additional to the number of existing domestic competitors such as: the extent of import competition; the availability of substitutes; barriers to entry; be taken into account in applying the test. The ability profitably to increase prices as a result of the merger may also be relevant. For example, guidelines could be included in legislation or in an Explanatory Memorandum accompanying a Bill to change the Trade Practices Act.[fn117]

3.82 The Committee also notes the TPC submission that should the test be altered, certain factors should be incorporated into the Act or referred to in the Explanatory Memorandum or second reading speech to provide guidance to the Commission, the courts, and as a consequence, reduce any uncertainty that changing the test might bring. [fn118]

3.83 Thus when considering whether or not a merger would be likely to substantially lessen competition, guidelines similar to those applying in Canada should be considered, but with some changes for Australian conditions.

3.84 The TPC has also undertaken to issue detailed merger guidelines covering all aspects of its merger administration including:

• what the Commission sees as meant by substantial lessening of competition;
• the Commission's view of the various factors adapted from Canada as outlined above when it comes to substantial lessening of competition;
• the Commission's view of markets;
• the authorisation procedures;
• what the Commission sees as being public benefit issues and the information needed to sustain such a claim;
• information requirements generally. [fn119]

Regulatory and compliance costs

3.85 It has been suggested that merger control often involves the imposition of regulatory and compliance costs.

3.86 The substantial lessening of competition test w,. as used in section 50 from 1974-1977. The Griffiths Committee noted that, owing to the wide definition of market, a problem experienced with the test was the large number of mergers caught, with consequent high compliance costs and administration costs. Treasury believes this problem could be reduced if section 50 continued to be limited in its application to substantial markets, as proposed by the TPC and in contrast to the 1977 test. The number of mergers which would be caught under a 'substantial lessening of competition' test would still depend on the interpretation of those words. [fn120]

3.87 In considering the additional cost the TPC notes that it is important to distinguish between the costs attributable to the introduction of a system of prenotification and those attributable. to a change in the merger test. The TPC believes that it would be prudent to assume that a somewhat greater number of proposed mergers would be investigated or challenged if a substantial lessening of competition were introduced. The Commission has submitted to the Committee that it expects the total number of mergers would probably increase from approximately 150 to around 200 and of that number it only expects some 25 to 30 to require detailed consideration. [fn121]

3.88 With respect to compliance costs for business, the TPC has submitted that the compliance costs directly resulting from a change in the merger test are likely to be small. However, to the extent that some firms seek to challenge the Commission's decision under a changed merger test, those firms could expect to see higher legal and administrative costs. To that extent, some additional compliance costs to industry as a whole are possible as a result of the revision of the merger test. [fn122]

3.89 Section 50 operates by reference to substantial markets for goods or services in Australia, in a State or in a Territory. [fn123] This definition has enabled the court to define a market such as the North Queensland fat cattle market. [fn124] Submissions from CAA Ltd and Mr Bobeff have invited the Committee to consider a minor relaxation in the definition of the term market.

3.90 Mr Bobeff proposes that the appropriate threshold should be 'substantial market dominance in Australia as a whole', which would be achieved by deleting the words 'or in a State or Territory' from section 50(3) (a). [fn125] Applying this threshold, a merger resulting in dominance of the Northern Territory soft drink market (or, presumably, the North Queensland fat cattle market) would not be prohibited. The abuse of any resulting monopoly power would be prevented by the threat of import competition, and the activities of the PSA. [fn126]

3.91 CRA Ltd contends that the Act should explicitly recognise that, in certain significant industries, the relevant market is the international market and not the Australian market. It suggests that section 50 be amended 'so that in applying the 'dominance' test the TPC is not constrained by relating this to the Australian market where it would be appropriate to assess dominance in terms of international markets for those industries or companies that sell their commodities primarily in these markets.'[fn127]

3.92 Many of the arguments for lowering the merger threshold to 'substantial lessening of competition' have been canvassed above. These include suggestions that the '9ominance' test fails to facilitate the development of industry efficiency or scale economies, that it retards the development of true international competitiveness, and that it has resulted in damage to domestic competition.

3.93 Other arguments focus on the need for consistency between the various sections of the Act, the desirability of the public scrutiny of contentious mergers, and the adverse effect of the 'dominance' threshold on consumers.

Consistency

3.94 The need for consistency throughout the Act is articulated by the TPC in the following terms:

It seems inconsistent to the Commission that while most other conduct caught by Part IV of the Act (restrictive trade practices) is subject to a competition test, s 50 is subject to a less rigorous test. For example, if two firms agree to engage in conduct that substantially lessens competition this would contravene the Act. Yet, they can merge and unless this results in dominance or increased dominance, the acquisition would not be caught by the Act even if there is a serious diminution of competition.[fn128]

3.95 Professor Fels, on behalf of the TPC, suggests that if the Act imposes strong restrictions on behaviour and weak restrictions on mergers, people will merge in order to gain the objectives that they are barred from achieving by other conduct. [fn129]

3.96 A return to a substantial lessening of competition test for mergers would, it is said, reintroduce a degree of compatibility within the Act, would bring Australia more into line with the approach taken in major Western economies, and would leave the availability of authorisation on public benefit grounds unaffected. [fn130]

3.97 On the other hand, it has been submitted that section 50 is a provision intentionally concerned with structure and not with conduct which is dealt with elsewhere in Part IV, [fn131] that the dominance threshold is widespread overseas, and that authorisation is a time-consuming and costly process.

International merger tests

3.98 In its review of foreign merger tests, the Attorney-General's Department states that a 'substantial lessening of competition' test applies in the United States, Canada and Japan. A 'dominance' test applies in the European Community (under Article 86 of the Treaty of Rome) and in Germany, France, Spain, Switzerland and New Zealand. [fn132]

3.99 However, under the German Act Against Restraints of Competition, a rebuttable presumption exists that an enterprise dominates a market where its share is at least one third. And under the Spanish Anti-trust Act, mergers may be challenged when a share of at least 25% of a national product or service market or a substantial portion thereof is acquired or increased, or when the parties to the transaction have a combined turnover in Spain of at least 20 billion pesetas in the last preceding accounting year.[fn133]

3.100 Section 69 of the United Kingdom Fair Trading Act provides that mergers may be referred to the Monopolies and Mergers Commission for report as to whether the proposed merger operates or may be expected to operate 'against the public interest'. A primary factor considered is the likely effect on competition. [fn134]

3.101 The New Zealand Commerce Act broadly accords with the existing dominance test in section 50 of the Trade Practices Act.

3.102 Although both thresholds are in use in overseas countries, care must be taken in interpreting them in Australia. There is danger in assuming an equivalence in meaning where a similar form of words is used in different jurisdictions. Professor Johns, on behalf of the TPC, contends that 'it is quite clear in this country that, rightly or wrongly, we now have a standard of dominance test which is high by the standards of Germany or the European Community'.[fn135] On the other hand, Mr Skehill, on behalf of the Attorney-General's Department, has observed that 'the substantial lessening of competition test that applies in America, when you have regard to the environment in which it is applied, looks very much like our dominance test when you take into account the guidelines'. [fn136]

Public scrutiny

3.103 The TPC asserts as a basic principle of competition policy that 'if a merger is going to lead to a substantial lessening of competition, it should be looked at'. [fn137] It submits that under a substantial lessening of competition test, and if authorisation were sought, it would at least 'have the opportunity of balancing the public benefit resulting from such an acquisition against the detriment constituted by the lessening of competition.' [fn138] This is of considerable importance given that mergers, once consummated, cannot easily be untangled.

3.104 However, a number of submissions [fn139] point out that the authorisation test is an onerous one to fulfil. Public benefit is undefined; what is anti-competitiveness is often a matter of perception by the regulator; and it is difficult to gather reliable data such as the projected achievement of efficiencies to put to the TPC and to satisfy that body to the degree necessary. Authorisation has been described as a very resource intensive process both for those seeking authorisation and for the TPC. [fn140]

Consumers

3.105 AFCO, NCAAC, and ACA all favour a return to the 'substantial lessening of competition' threshold, [fn141] and all believe that a public interest test should apply to mergers. AFCO suggests that in determining where ·the public interest lies, the AC! should 'direct the TPC and the Court to consider consumer interest.' Companies proposing mergers or takeovers which result in a lessening of competition should be required to provide an independent 'consumer impact statement' showing that the public interest outweighs detriment. [fn142]

3.106 ACA proposes that s 50(1) and (1 A) should prohibit an acquisition if it 'would result in, or would be likely to result in, a substantial lessening of competition in a market for goods or services, or would have significant social or economic consequences.'[fn143] It further proposes that a new subsection 50(1 B) be inserted to provide that 'substantial lessening of competition' in this context means any acquisition whereby 6 or less corporations are, or are likely to t;?e, responsible for 50% or more of the turnover of goods or services within a market, or where the concentration of ownership of the supply or acquisition of goods or services in a market exceeds an amount as might be determined as appropriate for that market by the TPC or by the Minister.

3.107 AFCO proposes that 'takeovers or mergers resulting in a substantial lessening of competition should not be permitted unless public hearings establish that the anti-competitive effect of the merger or takeover will be outweighed by the public benefit,' with the onus on the merging parties to demonstrate in court proceedings that no substantial lessening of competition, or no net public detriment in authorisation proceedings will result. [fn144]

3.108 The lower threshold is also supported by Senator Boswell who states that, based on evidence of small businesses in manufacturing and primary industry, 'the recent experience of mergers has firstly not benefited consumers, which is a stated purpose of Trade Practices legislation, nor led to greater efficiencies in Australian manufacturing and primary industry'.[fn145]

3.109 The philosophy underlying Part IV of the Trade Practices Act is the · protection and enhancement of competition. Implicit in Part IV is the assumption that acts or occurrences which substantially lessen competition contravene the Act, unless authorised by the Trade Practices Commission on public benefit grounds.

3.110 While most other. conduct caught by Part IV of the Act is subject to a competition test, section 50 is subject to a less rigorous test. The existence of a dominance test in the area of merger regulation is difficult to reconcile with the essential thrust of the Act which is directed to preventing anticompetitive conduct.

3.111 The dominance test was specifically introduced to facilitate the development. of economies of scale in Australian industry, and to further its international competitiveness.

3.112 However, the economic evidence, both analytical and theoretical, concerning the effects of mergers, presented during the course of this inquiry, has not led. to absolute certainty. The economic evidence that mergers actually yield . productive efficiencies remains equivocal. Nor is it clear that such efficiencies as have occurred have in fact improved the international competitiveness of Australian firms, or resulted in demonstrable benefits to consumers.

3.113 A growing body of economic theory now suggests that international competitiveness, both in large and small nations, is achieved not by encouraging industry leaders to merge, but by encouraging them to compete. The work of Professor Michael Porter was frequently cited before the Committee. His studies of the development of national competitive advantage have questioned the view that· domestic firms must be large relative to the size of the domestic industry to gain economies of scale in order to be internationally competitive. While Porter's work does not deal directly with Australian industries it nevertheless is a work of considerable importance by an internationally recognised authority in this area.

3.114 The Committee also notes that a significant and growing number of Australian industries in the non-traded goods and services sector are not subject to international competition nor concerned with international competitiveness.

3.115 Significantly, the dominance test where applicable internationally is often accompanied by a presumption of dominance at market shares of around 25% or 33%.

3.116 The Committee considers that the essential thrust of the Trade Practices Act should be to prohibit acts which substantially injure competition, except where public benefit can be demonstrated. This principle is embraced elsewhere in Part IV of the Act, and should also be incorporated in the merger regulation provisions.

3.117 A unique aspect of the Australian trade practices regime is the availability of authorisation where acts otherwise in breach of the legislation are shown to have a net public benefit. The Committee views authorisation as. a necessary and appropriate mechanism for consideration of countervailing efficiency arguments such as the development of economies of scale and international competitiveness.

3.118 The Committee acknowledges business concerns that the law governing ,mergers should be certain and predictable: The dominance threshold has been in operation since 1977, and has accumulated a body of interpretative law. However, the alternative threshold of 'substantial lessening of competition' has operated throughout Part IV of the Act since 1974, and has similarly accumulated a body of interpretative law.

3.119 The Committee notes and adopts. the observations made in the 1984 OECD Report on Merger Policies and Recent Trends in Mergers to the effect that 'member countries should make as transparent as possible the criteria they apply [to mergers] ... Such criteria could include for instance the determination of the relevant market in merger analysis, the level of concentration in the market, barriers to entry and factors relating to the firm's conduct and performance'.[fn146]

3.120 The Committee is of the view that any uncertainty that changes to the test might bring could be reduced significantly by the incorporation into the Act of statutory guidelines, possibly along the lines of the Canadian model, to assist in applying the test.

3.121 Change should not be introduced lightly. Amendments to the Trade Practices Act may well bring about uncertainty which should not be readily risked. On the other hand, if reform is needed, it should be made unless the harm caused by it outweighs the good obtained. The Committee considers that change is needed to s.50 of the TPA and that the benefit likely to flow from it will clearly outweigh any detriment that may arise.

3.122 People and organisations whose opinions deserve to be accorded great respect differ in what they recommend as the appropriate test under section 50 of the Act. Those most qualified to advise the community how best it might deal with trade practices have given conflicting opinions to the committee. This is unfortunate as were there greater unity amongst them the committee's task would have been much easier.

3.123 The Committee does not accept that because an authority wants more power it should have it. On the other hand, where a body like the TPC says it lacks the authority to carry out its function in a way most beneficial to the community, considerable weight must be given to its statement. This is particularly so where there . is much support given to it by people learned in the relevant area. As pointed out in the previous paragraph, there are strong opinions to the contrary. The fact remains the TPC stands with strong allies when it advocates change to section 50.

3.124 There is a poor bank of available studies based on empirical research into the Australian economy. There is no work of which the Committee has been made aware which would compel it to come to a particular conclusion. However, there is material which provides it with significant help. The Competitive Advantage of Nations by Professor Michael Porter has been quoted already. Generally it was treated with considerable respect by those who made submissions to the Committee. The thrust of Professor Porter's work supports a change in section 50.

3.125 Different submissions treat certain mergers that have taken place in varying ways. However there is a substantial body of material before the Committee expressing concern about mergers and acquisitions such as that of The Herald and Weekly Times by News Limited, that of Berger and British Paints by ICI (Dulux), that of McPherson's Steel by Tubemakers, and the joining together of Coles and Myer. However, there is a significant number of responsible people and organisations with as much disquiet about mergers and acquisitions that have taken place. It seems appropriate to the Committee that ones of a similar nature should be closely examined in the future.

3.126 The thrust of the submissions the Committee received from small business and from farmers was generally in the one direction. They argued for a change in section 50.

3.127 Material put before the Committee giving a consumer's perspective on section 50 sought a change in it.

3.128 The Griffiths Report which was tabled in May 1989 was one of high standard. The majority recommended that no change be made to section 50 of the Trade Practices Act. The Senate Standing Committee on Legal and Constitutional Affairs has great respect for the Griffiths Report. However, it must decide the issues before it on the material available to it. Further, since the tabling of the Griffiths Report there has been a considerable shift towards increasing competition in the marketplace as a means of giving Australia a better economic outlook. An amendment to section 50 in the terms suggested by the Committee is seen as a means towards that end.

3.129 Those countries having most in common with Australia have legislation similar to the Trade Practices Act. A goodly proportion of them operate under the 'lessening of competition' test Australia would be bringing itself into line with them were it to adopt that test.

3.130 Section 50 deals with the structure of corporations. The rest of Part IV of the Trade Practices Act deals with conduct. The sections dealing with conduct impose more rigorous limitations on it than does section 50 on structures. There would be more consistency in the Act were structure and conduct dealt with generally in the same way.

3.131 The Committee recommends that section 50 of the Trade Practices Act 1974, be amended to prohibit mergers or acquisitions which would have the effect or likely effect of substantially lessening competition in· a substantial market for goods and services.

3.132 The Committee recommends that, to make clear the ambit of the new test, guidelines be incorporated in the Trade Practices Act 1974.

3.133 The Committee recommends that the guidelines should contain criteria including:

• the level of concentration in the market; the likely level of foreign competition in the market;
• the availability of product substitutes;
• barriers to entry;
• whether one party to the merger is a failing firm;
• the likelihood that the proposed merger would remove a vigorous and effective competitor;
• the extent to which effective competition remains or would remain in the market;
• change and innovation in the market; the ability to significantly increase prices following a merger; and
• any other factors relevant to competition in a market.

3.134 The Committee recommends that where a proposed merger fails to meet . the test including the guidelines the Trade Practices Commission should nevertheless have the power to authorise it when it is for the benefit of the public.

Download chapter 4 (PDF)

Content forthcoming - chapter breakdown as follows

Notification and clearance procedures

Previous consideration of amendments

Overseas experience

Benefits of compulsory notification

Retention of the present scheme

A proposed scheme

Conclusions

Compulsory notification and sensitive industries

Conclusions

Pre-notification, authorisation and the Trade Practices

Tribunal

Conclusions

Download chapter 5 (PDF)

Chapter contents

• The existing provision
• The previous provision
• Objectives of the section
• Retention of the existing provision
• An 'effects' test
  • In favour of an effects test
  • Against an effects test
• Other conduct
  • Excessive pricing
  • Injury to consumers
• Remedies
  • Divestiture
  • Other remedies
  • Remedies for refusal to supply
• Conclusions

5.1 Section 46 of the Act prohibits a corporation having a substantial degree of market power from taking advantage of that power for the purpose of:

• eliminating or substantially damaging a competitor,
• preventing entry into a market, or
• deterring or preventing a person from engaging in competitive conduct.

5.2 When introduced in 1974, section 46 dealt with conduct characterised as 'monopolization'. Prior to 1977, the section prohibited corporations in a position to substantially control a market from taking advantage of their market power to, in general terms, damage competitors, prevent entry into markets or deter or prevent competitive behaviour. The section was amended in 1977 to specifically incorporate a purpose test when evaluating the conduct in issue. This amendment adopted a recommendation of the Swanson Committee

5.3 Further amendments in 1986 [1] lowered the threshold and changed the character of the provision from 'monopolization' to 'misuse of market power'. The requirement 'substantially to control a market' was said by the Attorney-General to be 'of quite limited effectiveness ... principally because the section applies only to monopolists or those with overwhelming market dominance.' [2] It was therefore replaced by a requirement that the corporation have a 'substantial degree of market power.' [3] Proof of purpose was to be made easier by the insertion of subsection 46(7), enabling the court to infer purpose from conduct or from other relevant circumstances, and the substitution of a new subsection 84(1), enabling the attribution of purpose where offences were committed by bodies corporate.

5.4 In 1989, the Griffiths Committee reviewed the operation of section 46 and recommended that it be retained in its existing form. [4]

5.5 The apparently contradictory nature of the section has often been commented upon. For example, Professor Baxt has drawn attention to the 'as yet unresolved problem of whether the section is a section aimed at ensuring that competition and the competitive process is at the heart of the protection provided for by the legislation, or whether, as the words of ss 46(1)(a) and (b) (in particular) indicate, individual competitors might also be the beneficiaries of the amendments to the law'.[5]

5.6 In introducing the amended provision in 1986, the Attorney-General stated that it was 'most important to ensure that small businesses are given a measure of protection from the predatory actions of powerful.competitors'.[6]

5.7 However, in a frequently quoted passage, Mason CJ and Wilson J in their joint judgment in the Queensland Wire Case said:

the object of section 46 is to protect the interests of consumers, the operation of the section being predicated on the assumption that competition is a means to that end. 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. This competition has never been a tort ... and these injuries are an inevitable consequence of the competition s 46 is designed to foster.[7]

5.8 In a gloss on this passage, Wilcox J observed that the section:

seeks to protect traders against damage from their competitors. Yet it is one of a series of provisions designed to foster, not limit, trading competition; and it is axiomatic that effective competitive activity by one market participant inflicts damage upon other participants. The more competitive the market, the more the principles underlying Part IV are applied, the greater the damage likely to be sustained by less efficient participants.[8]

5.9 AFCO suggests that the section is generally seen as a provision 'to guarantee competition, rather than as a means of pursuing powerful corporations who deal harshly and unfairly with smaller competitors.'[9]

5.10 Yet Professor Clarke observes that, despite having a link with competition, the section 'cannot be regarded as being primarily concerned with its 'preservation or enhancement, because the section can be contravened by conduct which has no effect on competition. Notwithstanding the fact that the kinds of conduct prohibited are likely to have an adverse effect on competition, the primary purpose of s46 appears to be the protection of individuals and firms, usually small ones, against the predatory conduct of large firms, rather than of competition as such.[10]

5.11 These different perceptions of its objectives underlie many of the proposals for reform of the section.

5.12 A number of submissions oppose any change to the provision, [11] on the basis that in the absence of evidence of need, section 46 in itself is adequate for the purpose for which it was passed and no further provision is required.[12]

5.13 Under its terms of reference, the Committee has considered three specific proposals for reform of section 46: the incorporation of an 'effects' test, the addition of further conduct to that currently prohibited, and the extension of the range of remedies, and in particular the inclusion of, a remedy of divestiture.

5.14 Both the TPC and Professor Baxt point to the difficulty of proving purpose under section 46.[13] Professor Baxt says that 'the difficulty of showing purpose (as distinct from the lesser test of showing effect on competition) means that unless there is very clear evidence of a predatory purpose, or unless someone is prepared to act as a 'deep throat', it will be very difficult to prove the case'.[14]

5.15 Recognition of this problem is also evident in the Attorney-General's Second Reading speech in 1986, and in a number of recent legal cases. For example, in TPC v Carlton & United Breweries Ltd,[15] Northrop J stated:

A contravention [of section 46] may take many forms and in many cases a wink or a nod may be more effective than the written or expressed word. Proof of those aspects may be difficult to obtain.

5.16 In Eastern Express Pty Ltd v General Newspapers Pty Ltd,[16] Wilcox J, with specific reference to breaches of section 46 by predatory pricing stated:

... the outward decision to engage in predatory pricing is a lowering of prices, an action which, on its face, is procompetitive. The factor which turns mere price-cutting into predatory pricing is the purpose for which it is undertaken. That will often be difficult to prove.

5.17 And in Berlaz Pty Ltd v Fine Leather Care Products Ltd,[17] Wilcox J drew a careful distinction between purpose and consequence. While the termination of a distributorship agreement may have had the consequence of getting rid of or damaging a competitor, his Honour could find no evidence that this was the defendant's purpose.

In favour of an 'effects' test

5.18 One option that has been suggested to overcome these difficulties is the amendment of section 46 to prohibit conduct which has or is likely to have an effect on competition. It is said such an approach is consistent with the one taken in sections 45, 47, 49 and 50 of the Act. Professor Baxt states:

Most of the provisions of the statute (other than those provisions that deal with mergers and the per se offences) speak of practices, arrangements, understandings etc which have the purpose or effect or likely effect of substantially lessening competition in a relevant market. Why is not such an approach adopted in the area of misuse of market power? The business community may well want consistency of approach unless there are very strong grounds for having a special test or exemption from such an approach.[18]

5.19 Prohibiting misuse of market power by reference to its effect rather than its purpose was rejected by the Swanson Committee in 1976 and in the Blunt Report in 1979. It was suggested in the 1984 Green Paper but not adopted in the 1986 amendments. However, as noted above, amendments were made to s84(1) and s46(7} to facilitate proof of purpose by expressly permitting its inference from particular conduct and other relevant circumstances. In 1989, the Griffiths Committee considered the introduction of an effects test, butconcluded that insufficient evidence had been presented to support the need for a major redrafting of section 46.

5.20 Professor Baxt is generally in favour of the introduction of an effects test, but perhaps confined to 'deregulated industries'. In A Revival for Trade Practices Law and Competition Policy, Professor Baxt says:

Another change that might be considered to s46 so as to in effect bring it on par with the other provisions of the statute (other than the mergers provision) is to prevent the misuse of market power where the purpose or effect of the misuse is to create detriment to the competitive environment - ie to lead to a substantial lessening of competition. If an effects test was introduced (as has been suggested by the Trade Practices Commission especially in relation to the deregulated industries) other parts of the section would have to be changed, in my view, to make sure that it is the competitive process rather than competitors that will have to be shown to have been damaged to obtain the necessary relief. If we do not change the impact of the relevant conduct this may amount to swinging the pendulum too far the other way.[19]

5.21 The TPC believes that, even given the decision of the High Court in the Queensland Wire Case, establishment of 'purpose' within the meaning of section 46 will continue to require a high burden of proof.

5.22 The TPC proposes the insertion of a new provision which would, 'subject to the conduct having the purpose or effect of substantially lessening competition, prevent a corporation with a substantial degree. of market power from engaging in certain defined conduct'.[20] The new section would be directed at competition rather than competitors (which accords with Professor Baxt's views), and would provide for the conduct concerned to be authorised. The existing section 46, targeted at competitors, would remain as is.

5.23 This new section is seen as particularly relevant to ensuring access to 'essential facilities' during the initial phase of deregulation of the 'natural monopolies',[21] and is endorsed by Professor Baxt.[22]

5.24 The section could also cover conduct that substantially lessens competition but is not directed at a specific person such as:

• pre-emption of access by competitors to scarce facilities or resources;
• buying up of products to prevent the erosion of existing price levels;
• adoption of product specifications incompatible with products produced by any other person and designed to prevent entry into or eliminate competition from a market;
• impeding or preventing entry into or expansion in a market by:

  (i) squeezing, by a vertically integrated supplier, of the margin available to unintegrated competitors; or

  (ii) acquisition by a supplier of customers who would otherwise be competitors of a supplier;

• selective introduction of fighting brands;
• raising rival's cost; and
• strategic creation of entry barriers.[23]

5.25 In response, Treasury states that these new categories of conduct would, if truly anti-competitive, more likely than not be caught by the existing provision. Treasury concludes that the inadequacy of section' 46 has not been demonstrated, and adds that some of the features of the TPC's proposal would be potentially damaging to competition. For example, the proposed prohibition on product specifications might hinder the adoption of new technology, and attempts to regulate 'margin-squeezing' by vertically integrated suppliers 'could remove the incentive efficiently to vertically integrate and/or to pass such benefits on to consumers.'[24]

5.26 Acknowledging that the TPC's approach is conditioned by difficulty in the proof of purpose, Treasury suggests that 'a more direct approach would be to turn section 46 into an effects rather than purpose related provision.'[25]

Against an 'effects' test

5.27 The introduction of an 'effects' test is opposed by, among, others, the Attorney-General's Department, the Business Council of Australia, the Confederation of Australian Industry, the Law Council, CAA Ltd, Dr Pengilley and Mr McComas.

5.28 The Attorney-General's Department, CRA Ltd and BCA [26] endorse the view of the Griffiths Committee that no case has been made out for amendment of the section, and cite with approval the statements of Mason CJ and Wilson J in Queensland Wire as to the ruthlessness of competition. BCA states that 'an effects test is likely to have unintended anti-competitive results, in that companies will be concerned that they might breach such a provision and may well become somewhat conservative in their competitive behaviour.' [27]

5.29 The Attorney-General's Department does not support an 'effects' test in section 46 either by way of general application or by reference to the deregulated industries. It recognises the difficulties inherent in the proof of purpose but is of the view that these may be directly addressed by a rebuttable presumption of intent in defined circumstances.[28]

5.30 The view of the Law Council is that 'purpose is an essential element of the contravention', and that, in most cases, its proof is not difficult.[29] Further:

The critical element of section 46 should be that it operates so as to permit pro-competitive conduct, even where aggressive and having an effect on individual competitors who are perhaps marginal to the competitive process, but so as not to permit conduct which exploits a dominant position in a way which is positively harmful to the competitive process. To introduce an objective (effects) test into section 46 would destroy this distinction and, in the process, act as a strong disincentive to healthy competitive conduct. [30]

5.31 The Law Council observes that adoption of an effects test would also complicate the harmonisation of Australian and New Zealand business law.

5.32 The Attorney-General's Department accepts the 'theoretical concept' that section 46 might be amended to extend to other conduct, currently beyond its reach, but notes that no specific proposals defining such conduct have been made.[31]

5.33 However, the Department does propose one amendment. The current pcovision refers to conduct designed to eliminate or otherwise harm 'a competitor' or 'a person'. Conceivably, the Department argues, action might be taken with the purpose of eliminating competitors generally, rather than with a purpose directed at a particular rival. The Department suggests an amendment to provide that conduct engaged in for the purpose of eliminating or harming a class shall be taken to have been engaged in for the purpose of affecting each member of that class.[32]

5.34 Mr Mccomas, who approves of this proposed amendment, noted that it would enable the TPC to examine conduct aimed at frustrating competition rather than simply injury to competitors.[33]

5.35 As noted above, the TPC identifies a range of conduct indicating misuse of market power that might be covered by its proposed additional provision.[34] In essence, the response of Treasury is that this conduct is presently covered by the existing categories. [35]

Excessive pricing

5.36 The TPC also notes that section 46 does not control excessive pricing per se, and suggests that the Act may need to be amended to cover this. [36]

5.37 The PSA, however, does not believe that such an amendment would be appropriate as long as it retains its separate existence. Were the mooted merger between the PSA and the TPC to be consummated, the PSA suggests a power to control prices should not be included in section 46, but rather incorporated as a separate provision in the Act to be administered by a tribunal. Adoption of this approach would also accord with the objective of achieving greater harmonisation between the business legislation Australia and New Zealand. [37]

5.38 Dr Pengilley considers that controls over excessive pricing is 'quite wrong'. He questions how one determines what an excessive price is.[38]

Injury to consumers

5.39 AFCO believes that section 46 should also prohibit a corporation with a substantial degree of market power from engaging in conduct 'that is likely to cause significant injury to consumers, having regard to price quality and availability of products or services'. AFCO's greatest concern is that the section should define and clarify the position of firms controlling essential facilities or monopolies of supply. It also believes that the section should apply to a wider number of firms, especially those in oligopoly situations. It does not specify a means.[39]

Divestiture

5.40 The Act currently enables the Court to order divestiture only where a merger or acquisition has been undertaken in breach of s50 of the Act.[40]

5.41 A proposal to permit the TPC to seek, and the court to order, divestiture of the assets of a firm in a situation of 'intractable and continuous breach of s46' was considered by the Griffiths Committee. That Committee. concluded:

As section 46 cases do not involve acquisitions, divestiture as a remedy for contraventions of section 46 would most likely involve an arbitrary decision about which part of the offending corporation should be divested. Such a decision .may result in a corporation having to divest a part of its operations which may have had little to do with the circumstances of the contravention in question.[41]

5.42 Divestiture as a remedy for misuse of market power has the explicit support of the former Chairman of the TPC, Professor Baxt. He considers one of the major and enduring weaknesses of Australian anti-trust law to be that, in an economy which has much evidence of high concentration, unless you have a remedy of divestiture, you will not be able to get to the heart of the problem.[42] Elsewhere, Baxt has commented:

It may not be possible to stop a large corporation misusing its market power to prevent a competitive environment developing. In such circumstances, adequate discipline may only be exercised by breaking up the company (by virtue of a divestiture power) or by the court ordering the rewriting of contracts which may have given that company a significant power base.

These remedies would be used only if a misuse of market power seriously harmed competition. Such a remedy, while rarely used, exists in the United States and Canada and is a very significant discipline on larger players.[43]

5.43 Professor Baxt proposes that the power be exercised not by the TPC but by the courts. He is of the view that, although the power would be rarely used, the ability to obtain such an order in the appropriate circumstances would represent a breakthrough in the development of a mature competition law. These sentiments are echoed in submissions from AFCO.[44] and the NCAAC.[45]

5.44 The Communications Law Centre (CLC), while not ruling out the appropriateness of divestiture in some cases (instancing News Ltd), recognises the difficulties inherent in such an action, especially if not ordered promptly. As companies are fused, the potential obstacles to orderly divestiture which do not penalise parties other than the defendant become considerable.[46]

5.45 The Attorney-General's Department notes that although divestiture as a remedy for misuse of market power exists under US, UK, Canadian and EC law, it has been ordered only in the US, in a limited number of situations, including the recent break-up of AT&T.[47] New Zealand makes no provision for divestiture in these situations.

5.46 Divestiture as a remedy in the circumstances covered by section 46 is opposed by VECCl[48] and CAI, which totally rejects 'the oppressive and disruptive ' nature of this suggestion.'[49]

5.47 Mr McComas, CRA Ltd and BCA, each view the proposal as unnecessary given that there has been no indication in the cases that have arisen to justify such an order, nor that the range of remedies presently available is inadequate. [50]

5.48 The BCA views divestiture as an inappropriate remedy for provisions such as section 46 which are directed to conduct rather than structure:

Misconduct can always be restrained for the future by injunction of the court (and a business which breaches an injunction will find itself liable to be dealt with for contempt of court). Divestiture would be an unwarranted and arbitrary punishment. The fact that, by reason of the inherent complexity of a provision such as section 46, the lawfulness of particular conduct will often be debatable only adds to the objection. The threat of divestiture over a business for conduct of this kind would introduce great uncertainty and would be a disincentive to investment. [51]

5.49 Divestiture is also seen as inappropriate by Dr Pengilley in the circumstances of a refusal to supply such as applied in Queensland Wire. If divestiture were ordered simply because prices had been declared 'unreasonable' this would involve the Courts in evaluations for which they were singularly unsuited[52] and which might result in the creation of an unviable company.[53]

5.50 Dr Pengilley considers that section 46 should be redrafted in terms of its American equivalent, and should specify conduct considered to be a misuse of market power with reasonable certainty.[54]

5.51 Where there is a refusal to supply, as occurred in Queensland Wire, Professor Corones considers that a structural remedy such as divestiture would appear to be inappropriate: injunctions, damages and appropriate ancillary orders are seen as being adequate. [55]

5.52 A similar attitude is expressed by Treasury, which agrees that judicial intrusion into price-setting is undesirable, but argues that this does not justify a remedy such as divestiture:

For · breaches of section 46 not related to access to facilities, for example predatory pricing, divestiture would be difficult to apply, as there is no acquisition of separable plant to order divestiture of. Difficulties would arise in identifying which part of a business should be divested. In this case divestiture is likely to involve an arbitrary decision about which part of the corporation is to be divested and may involve divestiture of part of the business which had little to do with the actual breach of the Act. [56]

5.53 The view of the Attorney-General's Department is that no compelling case has been made for the inclusion of divestiture as a remedy for breach of section 46, 'and that intractable breaches of that section should be addressed by increases in monetary penalties. The Department considers divestiture to be a 'very blunt and frequently ineffective remedy'.[57]

Other remedies

5.54 The TPC proposes that the courts have the power to make wide discretionary orders to rectify market power abuse, including the power to 'impose market place solutions'.[58] These include an order for the divestiture of a significant shareholding in a competitor where that holding has enabled anti-competitive pressure to be placed on the competitor, or (in a situation where, for example, Australian Airlines or Ansett refused to supply Compass Airlines with space on its airport lease) an order for the provision of space or an order for a reduction in the duration of the leases held by Australian and Ansett. Other remedies noted include:

• an order for the mandatory provision of essential facilities on competitive (or even favourable) terms in the deregulated industries
• compensation orders
• severance of unjust gain
• award of damages.[59]

5.55 A number of these remedies are specifically endorsed by Professor Baxt. [60]

Remedies for refusal to supply

5.56 Most of the reported cases on section 46 have involved refusal to supply. It has been suggested that there are problems with giving the court power to order supply in these situations.

5.57 The Full Federal Court in the Pont Data case noted the reluctance of the US Courts to re-write contractual provisions as to price, but thought that the wide discretionary remedies under s 87 'may mean that this reluctance should not necessarily translate to the Australian situation ... Nevertheless the Court must be slow to impose upon the parties a regime which could not represent a bargain they would have struck between them.'[61] However, Professor Baxt doubts that under s 87 the courts are empowered to re-write contracts in the manner he views as potentially necessary.[62]

5.58 Dr Pengilley is of the view that the solution to the problem of fixing the terms of supply and price is to legislate for certainty in the area. If control of the prices charged by those having a substantial degree of market power is desired, then, he suggests, this is a task for bodies such as the PSA, not for judicial regul.ators.[63]

5.59 Professor Corones also considers that reference to th,e PSA or the TPC (rather than to the courts) would provide a less unsatisfactory basis for arriving at a supply price in cases of refusal to supply. These organisations are better qualified than the courts to set and monitor prices on an 'as if competition' basis.[64] Corones argues that the possibility of referral to them would act as a strong disincentive to misuse of market power.

5.60 In its submission the PSA makes a similar observation. Prefacing its comments'with the statement that 'in general, it seems very unlikely that the courts will have sufficient expertise and resources to determine reasonable prices' (illustrated by the decision in Queensland Wire), it suggests that if the TPC and the PSA were to be merged it would be appropriate to either:

• not include a power to control prices in section 46 but rather to incorpotate this power as a separate provision of the Act and continue with the administrative tribunal approach (which is also the New Zealand approach); or
• substantially modify section 46 to allow for consideration of cases by an administrative tribunal such as the Trade Practices Tribunal [possibly joined with the existing PSA] rather than enforcement by the courts (which is an approach akin to the UK Mergers and Monopolies Commission).

5.61 The PSA notes that taking advantage of a dominant position to impose prices or other terms of dealing that could not otherwise be imposed was one of the three instances of 'monopolisation' examinable by the Trade Practices Tribunal under the Trade Practices Act 1965, if the Commissioner of Trade Practices considered this conduct to be against the public interest.[65]

5.62 The proof of purposive conduct under section 46 clearly poses considerable difficulties for the TPC and private litigants. These difficulties were addressed in 1986 with the addition of ss46(7) and 84(1) enabling purpose to be · inferred from conduct and other relevant circumstances, and facilitating the proof of conduct where engaged in by a corporation. However, the Committee accepts that establishment of a purpose will continue to present difficulties of proof for litigants relying on section 46.

5.63 Proposals to change the section by adopting an effects test would encourage greater use of the section by litigants, and have the virtue of consistency with the Act's other restrictive trade practices provisions.

5.64 However, the Committee accepts that in a provision directed explicitly at misuse of market power it is appropriate that a distinction between purpose and consequence be retained. The Committee accepts that purpose is an essential element of the contravention. To prohibit the taking advantage of market power where this has or is likely to have the effect of, for example, preventing a person from engaging in competitive conduct would unduly widen the operation of the prohibition. It would force corporations to evaluate the potential effect of their every action on their competitors and potential competitors.

5.65 The Committee accepts that the process of effective competition involves engaging in conduct the potential effect of which is to produce the very ends proscribed in section 46, [66] and considers that prohibiting such conduct by reference to its effect may challenge the competitive process itself.

5.66 If the difficulty with section 46 is proof of purpose, the Committee considers that this would best be dealt with by requiring a corporation, once the TPC, has established that it is as likely as not that an offence has occurred, to bring forward evidence showing that.it did not have a proscribed purpose .

5.67 The Committee recommends that section 46 be amended by adding a further subsection to provide that, although the Trade Practices Commission has the overall onus of proving a breach of that section, when it has brought forward evidence which makes it as likely as not that one has occurred then one will be taken to have occurred unless the corporation in question shows otherwise.

5.68 During the Inquiry it was suggested that the section might also be amended to include other forms of conduct within the prohibition so as to deal with excessive pricing, with misuse of market power affecting consumers, and with the various forms of, conduct detailed by the Trade Practices Commission in their proposed additional section 46A.

5.69 On· the basis of the material before it, the Committee considers that excessive pricing is better dealt with under the Prices Surveillance Act.

5.70 The Committee considers . that misuse of market power affecting consumers is adequately dealt with under the existing consumer protection provisions of the Trade Practices Act.

5.71 The Committee notes that the proposed new section by the TPC was originally raised before the Griffiths Committee in 1989.[67] Before that Committee the TPC argued that it was a means of replacing a number of other provisions of the Act (specifically sections 46, 47, 49 and 93) rather than complementing them. The Committee has been provided with insufficient evidence to fully evaluate this proposal and considers that it would be better dealt with as part of a more general review of the Act.

5. 72 The Committee considers that the conduct specified in the TPC's additional section would, if it were actually anti-competitive, be caught by the existing section 46. Many of the forms of conduct specified are also somewhat vague and uncertain.

5.73 However, the Committee considers that some doubts exist as to the applicability of section 46 to conduct affecting not merely competitors of a corporation with substantial power in a market, but the competitive process.

5. 74 The Committee recommends that section 46 be amended to provide that where persons engaged in conduct for the purpose of eliminating from or harming a class of persons in a market they shall be taken to be doing so in respect of a specific member of it.

5.75 Divestiture of assets is a remedy currently available for breach of the merger provisions of the Act, but not for repetitive and serious abuses of market power.

5.76 Divestiture as a remedy for market power abuse is available under US, UK, Canadian and EC law, but has been used infrequently, if at all. It is not a remedy available In these circumstances in New Zealand.

5.77 Divestiture is essentially a structural remedy. Misuse of market power is· essentially a matter of conduct. When divestiture is applied to an established corporation, it may result in the break up of the corporation without predictable results. The resulting parts of the corporation may be made less productive, less efficient, perhaps unprofitable, perhaps even non-viable.

5.78 Were divestiture available for misuse of market power, and were a judge disposed to order it in a particular case, there may be limited evidence available to enable him or her to do so in the most appropriate manner. A court may be an awkward instrument to affect a satisfactory divestiture. Given the Constitution it is difficult to see what other body could order it. In any event, it well may be that no other body would do as well as a court.

5.79 It is one thing to order divestiture of a merger or acquisition recently affected. It is another to order it for a corporation functioning as an established unit. The risk of destruction of a company in the first instance is much less than in the second.

5.80 The Committee recommends that serious and persistent misuse of markert power be dealt with by increased monetary penalties. It recommends that divestiture not be made available as a remedy.

Content forthcoming - chapter breakdown as follows

Section 52A

Unconscionable conduct

Unconscionable conduct and commercial dealings

Unconscionable conduct and the Trade Practices Act: previous consideration

Retention of the existing provision

• Unnecessary duplication
• Uncertainty
• Confusing business and consumers
• Insufficient economic analysis
• Increase in litigation
• Ineffectiveness

Extension of the provision

Conclusions

Content forthcoming - chapter breakdown as follows

Pecuniary penalties

Conclusions

Private right to injunctive relief

Conclusions

Enforceability of undertakings

Conclusions

Other remedies

Conclusions

Content forthcoming - chapter breakdown as follows

Dissenting report by Senator S Spindler and Senator C Schacht

• Section 46 - Remedies

Dissenting report by Senator R Kemp

• Section 50 - the appropriate threshold
• Section 46 - Standard of proof

Content forthcoming - chapter breakdown as follows

Pecuniary penalties

Conclusions

Private right to injunctive relief

Conclusions

Enforceability of undertakings

Conclusions

Other remedies

Conclusions

Melbourne: 17 September 1991

Professor Robert Baxt, Partner, Arthur Robinson & Hedderwicks, Melbourne

Mr Peter Bobeff, Partner, Corrs Chambers Westgarth, Melbourne

Prof Philip Clarke, Deakin University, Melbourne

Law Council of Australia

• Mr Roger Graeme Featherston, Chairman, Trade Practices Committee
• Mr Richard Arthur St John, Deputy Chairman, Trade Practices Committee
• Mr Anthony Peter Kelly, Member, Trade Practices Committee

Commonwealth Attorney-General's Department

• Mr Stephen Skehill, Deputy Secretary
• Mr James Randall Dick, Senior Assistant Secretary, Competition Policy Branch
• Mr Anthony Charles Wing, Principal Legal Officer, Competition Policy Branch

Canberra: 26 September 1991

Trade Practices Commission

• Professor Alan Fels, Chairman
• Professor Brian Leslie Johns, Deputy Chairman
• Mr Alan Asher, Commissioner
• Mr Hank Spier, First Assistant Commissioner
• Mr John O'Neil, Senior Assistnat Commissioner
• Mr Timonthy Holland, Project Officer

Commonwealth Attorney-General's Department

• Mr Stephen Skehill, Deputy Secretary
• Mr James Randall Dick, Senior Assistant Secretary, Competition Policy Branch

Franchiser's Association of Australia

• Mr Alan Atchison, Chairman
• Mr Michael Ahrens, Solicitor, Baker and McKenzie, Sydney

Mr W R McComas, Partner, Clayton Utz, Solicitors, Sydney

Confederation of Australian Industry

• Mr Robert Charles Gardini, Regulatory Consultant, Canberra
• Mr John Martin, Director, Canberra

Business Council of Australia

• Mr Clive Randolph Speed, Assistant Director, Canberra

Canberra: 6 November 1991

Trade Practices Commission

• Professor Alan Fels, Chairman
• Professor Brian Leslie Johns, Deputy Chairman
• Mr Alan Asher, Commissioner
• Mr John O'Neil, Senior Assistnat Commissioner
• Mr Howard Hollow, Project Officer

Commonwealth Attorney-General's Department

• Mr Stephen Skehill, Deputy Secretary

Department of Treasury

• Mr Richard Murray, Assistant Secretary, Infrastructure and Resource Allocation
• Mr Rodney Shogren, First Assistant Secretary, Structural Policy Division
• Mr David Imber, Director, Communications & Public Enterprise Policy Section

Dr Warren Pengilley, Partner, Sly and Wiegall, Lawyers

Law Council of Australia

• Mr Roger Featherston, Chairman, Trade Practices Committee
  

Canberra: 2 December 1991

Senator Ron Boswell, Leader of the National Part in the Senate

[Note this appears in the preliminary pages to the report (pages xi-xii)]

Footnotes

Chapter 1 footnotes

Chapter 2 footnotes

Chapter 3 footnotes

Chapter 4 footnotes

Chapter 5 footnotes

Chapter 6 footnotes

Chapter 7 footnotes

Dissenting reports footnotes