A lurking competition threat in the Harper review

The Harper review has taken a broad pro-competition stance in its inquiry, but one of its recommendations is likely to concern companies with substantial market power.

The Harper review of competition policy was given a remarkably open and economy-wide brief, so it isn’t a surprise that the committee’s draft report covers a wide and varied range of issues, nor that its draft recommendations will take some time to digest.

Its approach, however, was broadly predictable.

It was inevitable that the committee would seek to build on the competition policy foundations sunk by the Hilmer committee in 1993, extending and deepening the reach of competition policy within the economy.

Whether applying pro-competitive approaches to the delivery of government services, deregulating retail trading hours or the pharmacy and the taxi sectors, reducing the limitations on parallel imports or considering the balance between intellectual property rights and competition, the panel could have been expected to adopt a pro-competition stance. And it has.

The review was commissioned against the backdrop of significant controversy and debate about the power of the major supermarket chains and banks and was expected to make recommendations designed to curtail their dominance.

While there is a potential major threat latent within the recommendations in the form of the panel’s advocacy for an 'effects' test within the misuse of market power provisions of the competition laws, there are also some measures the supermarket chains and major banks will like.

Further deregulation of retail trading hours, the removal of restrictions on pharmacy ownership and location, relaxation of the restrictions on parallel importing, simplifying planning and zoning requirements, a 'no action' stance on 'shopper docket' petrol discount schemes and the abolition of the ridiculous bank-specific 'anti-signalling' law are largely positive for the chains, the banks and consumers.

What will concern the chains and the banks (and any other company with substantial market power) will be the panel’s musings on the misuse of market power provisions of the Competition and Consumer Act.

For nearly four decades there have been reviews (11 of them) of the question of whether or not the section that deals with misuse of market power should be amended to include an 'effects' test.

At present the section, Section 46 of the Act, prohibits companies which have a substantial degree of power in a market from taking advantage of that power for the purposes of eliminating or substantially damaging a competitor, preventing the entry of a person to a market or preventing them from engaging in competitive conduct.

All of the previous reviews have argued against introducing an effects test because of the risk that assessing conduct in terms of its effects would damage competition in order to protect competitors. The nature of competition means it inevitably has deleterious effects on some competitors.

If companies with substantial power had to consider the effects of their competitive behaviour on existing and/or prospective competitors in a market (or any other market), it could have a chilling impact on their behaviour, on innovation and on the intensity of competition.

The Harper committee advocates the introduction of an effects test but to remove concerns about 'over-capture', it has proposed a defence for pro-competitive conduct.

The prohibition on engaging in conduct that might have the effect of lessening competition in a market wouldn’t apply if the conduct would be a rational business decision by a company that didn’t have a substantial degree of market power and would be likely to advance the long-term interest of consumers. The onus of proof would rest with the company accused of engaging in the prohibited conduct.

Apart from placing the responsibility on companies to try to determine whether or not their actions might have the effect of damaging a competitor (which tends to be, if not the point then the outcome of robust competition), the introduction of an effects test is at odds with the dynamic nature of markets and with innovation.

The supermarket chains and major banks might be dominant today. But, in an open economy and a digital environment, there is no certainty that that they will forever be dominant.

There is also the issue -- most obvious in the deflationary impact of the competition between Woolworths and Coles on grocery prices -- of the large-scale consumer benefit that competition between large businesses with substantial market power can generate, even if that competition creates challenges for smaller competitors.

There is a significant risk that the introduction of an effects test would inhibit the competitive aggression of those companies with the ability to drive the largest amounts of consumer benefit.

The Australian Competition and Consumer Commission has lobbied hard for an effects test and will be pleased with that recommendation.

It might also be pleased (although large businesses probably won’t be) that the committee recommends the establishment of a new national competition institution, the Australian Council for Competition Policy to oversee implementation of the new agenda.

The ACCC has sought mandatory information-gathering powers to enable it to conduct 'market studies', something large businesses have been concerned about because of the intrusiveness, time and costs involved. The committee wants the ACCP to be given those new powers.

It also wants to create a new body to be the single national access and pricing regulator, absorbing power currently held by the National Competition Council, the ACCC and the Australian Energy Regulator over access and pricing relation to the infrastructure, energy and telecommunications sectors.

The committee wants to change the structure of the ACCC. It wants to replace the current commission with a board or add an advisory board, it wants to make it more accountable to parliament, to prevent from publicly advocating changes to competition policy and to develop a media code of conduct to strengthen perceptions of its impartiality. 

The ACCC has often been very 'noisy' and aggressive in its use of the media, which is not necessarily best practice for a government agency charged with impartially administering and enforcing laws.