‘Effects test’ risks damaging competition and innovation

STEPHEN BARTHOLOMEUSZ
16 MAR, 2016
Spectator
So, finally the Turnbull Government has succumbed to the continuing pressure from the small business lobby, the Australian Competition and Consumer Commission and its Coalition partners and decided to legislate a solution to a problem that has yet to be established.
Moreover, as former Australian Competition and Consumer Commission Graeme Samuel said last year, the proposed changes to the “misuse of market power” provisions of the Competition and Consumer Act actually have nothing to do with the conduct they are supposedly targeting.
Nearly a year after the Harper review of competition policy law produced its final report recommending changes to those provisions in Section 46 of the Act – recommendations that the Abbott Government had effectively binned — the Turnbull Government has decided to implement them.
It says the changes will place competition law on the right footing to encourage economic growth and innovation, even though a quarter of a century of unbroken economic growth might suggest the existing regime hasn’t exactly discouraged growth.
What Harper proposed and the government plans to legislate is the replacement of the existing Section 46 with a new provision.
The existing law says that companies with a substantial degree of power in a market are prohibited from taking advantage of that power for the purpose of eliminating or substantially damaging a competitor, preventing the entry of a person to a market or preventing them from engaging in competitive conduct.
The proposed new test for anti-competitive conduct by companies with substantial market power would prevent a company from engaging in conduct that has the purpose, effect or likely effect of substantially lessening competition.
In other words, a company wouldn’t have to have any intention of damaging competition or a competitor but if the effect of something it did were to adversely impact competition or a competitor it would be in breach of the Act.
Shifting the emphasis in the abuse of market power provisions of the Act from “purpose” to “effect” has been a long debated issue and has been subjected to 12 reviews (including Harper) over four decades. Only Harper and a green paper actually recommended the change, with a conclusion from almost all the previous reviews that the introduction of an effects test would risk inhibiting competition.
Despite what the government said today — it said the change was deliberately designed to reduce the uncertainty associated with amending a law — the proposed “reform” would introduce real uncertainty for businesses with substantial market power.
They would have to try to predict the potential impacts on competition and competitors of any significant decision they might take before they took it.
The Harper review recommended that Parliament give legislative guidance to the courts to weigh up any pro-competitive effects of the conduct against the anti-competitive behaviour complained of, but that introduces another layer of uncertainty. It would mean that businesses would not only have to foresee any and all of the consequences its actions might have — or might be likely to have — on competition and competitors but also second-guess how the courts might weigh up the perceived pro-competitive and anti-competitive balance.
The proposed changes are more likely to damage competition and innovation than encourage them because of the potential for the uncertainty and additional costs to stop big businesses from competing and innovating.
The Turnbull Government presents the case for change in terms of supporting small businesses and consumers, saying it is “just one of the many actions the Government is taking to support small business”.
It was the small business versus big business debate, focused on the supermarket chains and major banks, which initially reignited the debate about Section 46.
The ACCC has been using other sections of the Act, namely the unconscionable conduct provisions and its own definitions of markets to discipline the chains relationships with suppliers and restrict their growth through acquisitions, while the Australian Securities and Investments Commission is cracking down on the banks’ unfair treatment of customers and other transgressions.
The particular and fierce targeting of the two big supermarket chains by small business and proponents of the effects tests as an impediment to competition and innovation is ironic, given that for something now approaching a decade the fierce competition between Coles and Woolworths has continually driven grocery price deflation and consumer benefit, while also driving productivity gains across an entire (and sometimes very reluctant) supply chain.
The size and “market power” of the two big chains hasn’t prevented the successful entry and rapid expansion of either Aldi or Costco to the market, with innovative models, nor would it stop Amazon if it decides to go ahead and compete in their space.
The major banks do have market power, disciplined at the margin by their smaller rivals. They are, however, trying to innovate furiously because they understand that the threats to their position come from new technology-based competitors.
If the proposed new provision is supposed to deal with misuse of market power, as the Government says it does, then as Samuel pointed out last year, it is mis-labelled. It doesn’t actually cover only abuses of market power (which only a court can determine) but applies to the conduct of all businesses with substantial market power, regardless of whether they are misusing it or not.
That’s why the purpose test provides a degree of certainty. Businesses that deliberately and knowingly set out to take advantage of their market power to damage competitors or reduce competitive intensity know, or at least ought to know, that they are breaching the Act.
Under the proposed changes, they’d be in trouble regardless of their initial expectation or intention and would be trouble even if the adverse effect on a competitor or competitors hadn’t been established but was assessed by a court as “likely” to affect them.
The cliche often used in relation to Section 46 (it actually stems from a High Court judgment) is that it should be directed to protecting competition and the interests of the public-at-large, not poor competitors. The court, incidentally, also recognised that competition can be brutal and ruthless and an effective competitor might eliminate rivals and become dominant without misusing its market power.
The overall benefits of strong and fair competition to the economy and consumers outweigh the negative impacts on particular businesses and have been a factor in the performance of the Australian economy over the past 25 years. It certainly hasn’t been worth the risk of chilling competition and innovation to try to protect particular businesses or groups of businesses from the effects of competition.
That’s the reason promoters of the effects test have, until now, always failed to have it introduced and why, not just the big business lobby, but the Labor Party as well have opposed the change.