How the effects test could thwart the competition agenda

It is already obvious that while the bulk of the Harper review of competition policy has been reasonably well received, the committee’s proposal to amend the "misuse of market power" provisions of the Competition and Consumer Act is generating real angst within business.

Despite the fact, as acknowledged by the committee, that 11 reviews of the section over nearly 40 years have all looked at and rejected the notion of an effects test, the committee has, in its draft report, proposed introducing one.

The section says that a company that has a substantial degree of power in a market cannot take advantage of that power for the purpose of eliminating or damaging a competitor or preventing a competitor from entering a market.

The committee has proposed to "re-frame" the section to prohibit a company that has a substantial degree of power in a market from engaging in conduct that has the purpose, or would have the effect to be likely to have the effect, of substantially lessening competition in that or any other market.

To "mitigate concerns about over-capture", the panel is proposing a defence if the conduct in question would be a rational business decision or strategy by a company that didn’t have substantial power in the market concerned or its effect or likely effect was to benefit the long-term interests of consumers. The onus of proof would lie with the company being accused of anti-competitive conduct.

The ramifications of the proposal, for companies and competition, are extremely serious and will inevitably continue to be argued aggressively through to the committee's final report and beyond.

The key argument that has been used (successfully so far) against the introduction of an effects test has been the risk that looking to the effect of conduct rather than its purpose would have a chilling effect on competition.

It would put companies in a position where they had to try to assess the long-term impact of their decisions and strategies on competitors and potential competitors in what might be dynamic and evolving markets. The risk is that their willingness to be competitive and innovative would be inhibited by the uncertainty and risk an effects test would introduce.

The most recent push for an effects test has come from the small business lobby -- largely in response to the aggressive competition between the two big supermarket chains -- supported by the Australian Competition and Consumer Commission.

The commission has argued that the current requirement to prove that companies were taking advantage of market power and the need to also prove that their purpose was to damage competitors is too difficult to establish. It also argued that it was at odds with the objective of protecting competition rather than competitors, even though opponents of an effects test argue that it would protect competitors and undermine competition.

There is no doubt that the burden of proof required to establish a breach of Section 46 is high. But so it should be. The Act is designed to promote competition and lowering the burden of proof would risk reducing the intensity of competition.

The nature of competition, of course, is that it does damage competitors or force them to become more competitive. The intent of competition policy is to encourage fierce competition to produce consumer and economic benefit. There are specific provisions in the existing Act to deal with anti-competitive conduct and abuses of market power. Section 46 is ultimately there to deal with obvious and egregious anti-competitive behaviour.

The Harper committee’s attempt to allay concerns about the introduction of an effects test to the section -- the creation of the two, inter-linked defences -- perhaps illustrates the problems with the proposal.

A company with market power considering some initiative that might enhance its competitive position would have to somehow put itself in the position of a competitor without market power and try to work its way through the implications of its actions and strategies on that competitor, or competitors, or potential competitors. It would do so without the benefit of knowing what counter-strategies its competitor/s might devise in the knowledge that its analysis might be tested in court.

Because there are the two inter-linked planks to the defence, it would also have to satisfy itself – and be comfortable that it would be able to satisfy a court -- that the effect or likely effect of its planned conduct would benefit the long-term interests of consumers.

Given the levels of risk-aversion within the boardrooms of large Australian companies, it would be almost inevitable that they would err on the side of caution.

It would be interesting to contemplate what the ACCC’s view would be if the onus of proof in the proposal weren’t reversed; if it faced having to establish both that the behaviour of a company with market power wouldn’t be a rational decision for a competitor without that power and that the behaviour would damage the long-term interests of consumers. One suspects it would argue against such a proposal and the difficulties of establishing both planks.

There are arguments in favour of simplifying Section 46 so that it can more readily deal with clear anti-competitive abuses of market power.

The line between pro-competitive conduct and misuse of market power is, however, fine and vague. Any changes to the provisions need to be biased in favour of competition because of the risk that it would otherwise deter competitive behaviour to the detriment of consumers and the economy.

It should also be up to the regulator to prove breaches of the Act, not for companies to try to foresee the consequences of their competitive strategies for competitors and consumers at some indeterminate point in the distant future.