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Misuse of Market Power – s46

Step 1 – What is Misuse of Market Power?What is this topic about?‘Object of s 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’ - Queensland Wire Industries v BHP

Purpose of s461. It’s emphasis is on consumers.2. Section 46 is NOT designed to protect competitors3. Its purpose is simply to prevent conduct by powerful firms that harms consumers

by undermining the competitive processa. Higher prices, poor products, poor services etc

4. The High Court confirms s 46 is more concerned with economic efficiency than with ensuring numbers of competitors.

5. Section 46 is concerned with an individual firm’s power, not cartel power oligopolies - see Dowling v Dalgetty Australia Ltd

Difference between s45 and s46Whereas s 45 is mainly concerned with the activities of two or more firms acting collectively, s 46 is concerned with the activities of a firm acting alone.

What is s 46’s AIM?s 46 concentrates on abuses of power rather than accumulations of power.s 46 is concerned with the activities of a firm acting alone

What are some acts which may be deemed a Misuse of Market Power?The TPA makes no attempt to list the types of activities that may breach s 46.The following might be a misuse of market power in appropriate circumstances: refusals to supply (or purchase) goods or services; persistent below cost pricing (predatory pricing); exclusive dealing; product tying or bundling (‘If you want product A, you must also buy product B’); charging discriminatory prices between buyers; and imposing customer or territorial resale restraints on buyers (eg ‘You are not

permitted to resell the product over the Internet’).

What are Commercial activities that do not breach s 46 ? Not unlawful for a monopolist to make monopoly profits The acquisition of market share by ruthless & aggressive competitive tactics s 46

does not prohibit accumulations of power s 46 is designed to protect the competitive process so as to benefit consumers, in

the main s 46 is unlikely to catch conduct which is demonstrably efficient.

Notes by All Things Law – http://law.timdavis.com.au - A Law Forum to discuss everything about Studying Law - from Law Subjects, Notes and Questions to Law Clerkships and Jobs.

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Step 2 – Is there evidence of Substantial Market Power?

Elements of s 46 Section 46(1) prohibits a corporation with a substantial degree of market power

from taking advantage of that power for 1 or more of 3 prescribed purposes

IMPORTANTThere are 3 steps to analyze when determining whether a breach of s 46 has occurred:

1. Did the firm have a substantial degree of power in the relevant market?2. Did the firm take advantage of that market power?3. Did the firm have one of the three unlawful purposes?

(a) Eliminating or substantially damaging a competitor [s 46(1)(a)], or(b) Preventing a firm from entering a market [s 46(1)(b)], or(c) Deterring or preventing a person from engaging in competitive conduct in

any market [s 46(1)(c)].

When does a firm have a substantial degree of market power? *IMPORTANT Apply THRESHOLD test - (2 questions)

1. What is the relevant market?2. Does the corporation have a substantial degree of power in that market?

a. What is a substantial degree of market power?b. Proving a substantial degree of market powerc. s 46(4)(a)) - Power means market power, as opposed to financial power

What is A Relevant market? (Part 1 of THRESHOLD TEST)1. Relevant market will always be the market from which the alleged abuse

emanates2. Determining the nature of the market is a matter of applying the demand and

supply substitution tests – REFER COMPETITION STEP 1a. i.e. A wrong definition of market will often lead to an incorrect analysis

of the level of competition – Singapore Airlines v Taprobane Tours

CASE: Singapore Airlines v Taprobane ToursOutline:

1. Singapore Airlines enjoyed preferential landing rights in Maldives2. Held about 80-90% of sales ex-Oz & controled the sale of airline seats to

Maldives.3. Taprobane Tours was a successful wholesaler of package tours.4. SA refused to supply seats to Taprobane Tours at competitive prices5. Taprobane Tours brought an action against Singapore Airlines for a breach of s

46 (misuse of market power)First Decision:

1. Lee J held the relevant market was the supply of airline services from Australia to persons engaged in providing wholesale tours to the Maldives

2. SA appealed that Lee J had misconstrued the market3. SA argued that other island holiday destinations were in competition with the

Maldives


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Appeal to Federal Court:1. Market WAS wider than the Maldives2. At consumer level there were other island holiday destinations which were

substitutes i.e. Fiji, Tahiti3. Singapore did not have a substantial degree of power in this wider market. 4. Therefore, Singapore Airlines could NOT be in breach of s 46.

What is Substantial degree of power? (Part 2 (a) of Threshold TEST)s 46(3) - Must examine the extent to which that firm is constrained in its competitive activities by its competitors, its potential competitors, its buyers and its suppliers:

IMPORTANT – 3 steps:1. A firm has substantial market power when it is largely able to dictate its market

activities and strategies (such as pricing and distribution) without being restricted by the activities of its competitors, its suppliers or its customers

2. A firm with a substantial degree of market power will most often be recognisable as the market leader. That is, market shares will be the first indicator of market power

3. If the barriers to new entrants are very low then it will be difficult to prove that any firm, even a firm with significant market share, has a substantial degree of market power.

CASE: Queensland Wire Industries v BHP1. “Market power can be defined as the ability of a firm to raise prices above the

supply cost without rivals taking away customers in due time, supply cost being the minimum cost an efficient firm would incur in producing the product…”

2. The ability to engage persistently in these practices may be as indicative of market power as the ability to influence prices

IMPORTANT1. Market power means competitive power2. Anything which gives a competitive edge is market power3. Natural monopolies are clear examples of ultimate market power.4. One of the keys to substantial market power is the ability to act persistently in an

uncompetitive manner. 5. The essence of market power is the ability to avoid being punished in the longer

term for non-competitive activity.

Proving substantial degree of market power? (Part 2 (b) of Threshold TEST)Of all the factors that determine market power the most important is the

existence of barriers to entry - Queensland Wire Industries v BHP

Structural factors Conduct factors Firm’s market share Market share of the next largest

competitor Existence of any patents or other

legal rights that confer power on the firm

Degree (if any) of vertical

Is access to suppliers and buyers relatively equal among competitors?

Is the firm seen as an ‘unavoidable trading partner’?

Is there evidence that the firm has set its prices without regard to its competitors?

Is there any evidence the firm is able to


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integration compared to rivals [Queensland Wire Industries v BHP]

Degree of product differentiation Countervailing forces such as a

dominant supplier of inputs or a dominant buyer

State of production capacity — does the firm have excess capacity not available to its rivals?

charge a premium? Is the firm able to cross-subsidise its

operations from other activities? Does long-standing presence in the market

place confer substantial benefits on the firm vis-a-vis its newer rivals?

CASE: Eastern Express Pty Ltd v General NewspapersOutline:

1. General Newspapers operated a monopoly newspaper2. Most of its revenue came from ads by local real estate agents3. These agents formed their own newspaper, the Eastern Express4. Courier slashed the price of a full page advertisement to $995 as against the

Eastern Express price of $12955. Eastern Express alleged that the price cutting was predatory and a breach of s

46(1)(a).Decision:

1. Relevant market was the market for the supply of advertising space by the local/suburban newspapers in the eastern suburbs of Sydney.

2. The most important determinant of market power is barriers to new entrants3. Eastern Express had been able to enter the market4. And also been able to capture a reasonable share of the available advertising $s5. They did this because they were General Newspaper’s largest customers6. Therefore, General Newspaper’s DID NOT have a substantial degree of market

power at the relevant time

What about Oligopoly (few firms owning most of market) Cases?1. It is not permissible to simply aggregate their power2. Section 46 is concerned with an individual firm’s power, not cartel power: see

Dowling v Dalgetty Australia Ltd

CASE: Boral case1. Alleged boral was driving out small competitors or prevent new competitors

entering the market2. It was too difficult to establish that they had a substantial degree of power

compared to rest of market.

CASE: Dowling v Dalgetty AustraliaSection 46 is concerned with an individual firm’s power, not cartel power:

What about aggregating power of related corporations?1. Power may be aggregated if 2 or more corporations are related: s 46(2) 2. 2 corporations are related if 1 is the subsidiary of the other OR 1 is a subsidiary

of the other's holding company: s 4A3. 1 company (A) is a subsidiary of another company (B) where:

B controls the composition of A's board of directors; or


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B controls more than half of the votes that can be cast at a general meeting of A; or

B holds more than one half of the share capital of A.

Is a substantial degree of power is a threshold requirement?Proving that the firm had a substantial degree of power is a threshold test must be proved before the other elements of s 46 become relevant

REMEMBER *Substantial = considerable or large but not dominant or controlling

CASE: ACCC v Universal Music AustraliaOutline:

1. Court applied Boral casea. Universal Music with 18%b. Warner Music with 17%c. Sony with 25%.

2. Was there a substantial degree of power???Decision:

1. NEITHER Universal or Warner had much influence over the large retailers2. Barriers to entry were generally LOW;3. New recording companies HAD successfully come into the business and

prospered; Manufacturing and distribution costs were NOT high;4. Marketing costs WERE the most significant cost

Although both Universal and Warner may individually have some degree of power over the smaller retailers, that DID NOT satisfy the test for power under s 46


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Step 3 – Has the Firm taken Advantage of the Power? When has a firm taken advantage of its power? For the purpose of:

a) 46(1)(a) - eliminating or substantially damaging a competitor etcb) 46(1)(b) - preventing the entry of a person into a mktc) 46(1)(c) - preventing a person from engaging in competitive conduct in a market

Meaning from Queensland Wire Industries v BHP - 1. ‘taking advantage of’ market power means simply ‘using’ market power in the

sense of doing something that the less powerful competitor would not be able to do

2. A firm with a substantial degree of market power is said to have taken advantage of its power if it has acted in a manner that was economically possible only because it had market power

Melway case decided 2 steps:2 steps -

1. Counterfactual Test - a. Was the impugned conduct materially facilitated or assisted by the firm’s

possession of a substantial degree of market power? This is the 2. Was there a rational business justification for the firm’s conduct?

IMPORTANT LINK WITH COMPETITION1. It must be stressed that a firm only takes advantage of its power if it acts in an

anti-competitive manner2. means that firms are permitted to be aggressively competitive in using the skills

and economies available to them to win market share3. it would be difficult to prove that a firm has taken advantage of its market power

if the firm is able to demonstrate that its activities were designed to make it more efficient

a. CASE : General Newspapers v Telstra Corporationb. TPA is not concerned with competition HOWEVER!!!!!!!!!

BHP & MELWAYS CASES NEXT 2 PAGES – IMPORTANT!!!!!!!!!!!


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QLD WIRE INDUSTRIES v BHP CASE IMPORTANTOutline:

1. BHP produces 97% of steel and steel products in Australia2. Rural steel fencing uses Y bar feed3. BHP sold Y-Bar exclusively to its fully owned subsidiary AWI4. QWI also supplied wire to distributors of rural fencing5. BHP offered to supply Y-Bar at an UNCOMPETITIVE high price

Decision:What was the relevant market?

1. Court applied threshold test2. Correct market is the market for the production and sale of steel products coming

off the steel rolling mills.

Did BHP have a substantial degree of power in that market?1. BHP clearly had a substantial degree of market power

Did BHP take advantage of its power?Apply the counterfactual test? (CASE: Melway)

1. Could the defendant (BHP) have acted in the same way if it did not have a substantial degree of market power?

2. In a competitive market BHP COULD NOT have afforded to refuse supply to QWI because someone else would have made the sale anyway?

a. ‘If BHP lacked that market power — in other words, if it was operating in a competitive market — it is highly unlikely that it would stand by, without any effort to compete, and allow the appellant to secure its supply of Y-bar from a competitor.’

Did BHP have an illegal purpose?1. BHP's purpose in refusing supply was to benefit its subsidiary AWI by insulating

it against competition in the supply of star pickets2. This was preventing QWI from engaging in competitive activity.3. Hence it was a breach of s 46(1)(c)4. It COULD NOT be explained as aggressive competition. It was designed to

inhibit competition. The court accepted that s 46(1)(b) could also apply.


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THE MELWAY’s CASECASE: Melway Publishing v Robert Hicks Outline:

1. Melway accounts for 80% - 90% of sales of all Melbourne street directories2. UBL directories account for about 5%.3. Reverse in SYD (melway small UBL massive)4. Melway controls the distribution process and excludes competition at the

wholesale level as Melway distributes its Melbourne directory through independent wholesalers who are assigned retailers with whom they may deal

5. Price was completely dictated by Melway6. Melway refused to supply Auto Fashions which then sued for a breach of s 46.7. Auto Fashions was one of the Melway wholesalers. It was operated by Pawsey

and Nagel. Following a dispute Nagel left Auto Fashions and started his own business. Melway terminated Auto Fashions' distributorship and gave it to Nagel

Decision:1. No doubt that Melway had a substantial degree of market power 2. The market was for the supply of Melbourne street directories3. Also accepted that Melway had the purpose of preventing Auto Fashions from

engaging in competitive conduct. The real issue was whether Melway HAD taken advantage of its market power

Apply the counterfactual test1. What was in issue was not so much Melway’s refusal to supply Auto Fashions

but rather its insistence on maintaining its distribution system2. Evidence showed Melway created its distributorship system BEFORE it had

market power3. No evidence to show that it would operate any differently in a more competitive

market4. No evidence that M was depriving itself of sales by sticking to its exclusive

system.5. Insufficient evidence to conclude that Melway had taken advantage of its power.

Melway had NOT breached s 46.


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Step 4 – Did conduct have an unlawful purpose? Did the conduct have an unlawful purpose?

1. Only a breach of s 46 if the firm (in taking advantage of its market power) has one of the purposes set out in s 46.

2. Purpose means the actual purpose of the firm.

The test is subjective. The unlawful purposes are: eliminating or substantially damaging a competitorof the corporation — or of a body

corporate that is related to the corporation — in that or any other market: s 46(1)(a); preventing a person from entering any market: s 46(1)(b); deterring or preventing a person from engaging in competitive conduct in any market:

s 46(1)(c).

IMPORTANT1. s 46 is designed to foster competition and not to protect individuals from the

consequences of their failure to compete efficientlya. Trader MUST to show that the corporation's purpose is more than

ill-considered competition or aggressive competition. b. Trader MUST show that the purpose was to undermine competition.

How do you prove purpose?1. Not necessary to test relevant purpose was the only purpose or even the main

purpose.2. Sufficient that the relevant purpose was a substantial purpose

Does proving purpose prove motive?1. Does NOT involve proving ‘motive’2. It does involve proving a state of mind

Proving State of mind (relevant purpose)1. s 84(1)- A corporation is said to have a particular state of mind (relevant

purpose) when a director, servant or agent of the corporation acting within actual or apparent authority has that state of mind:

a. i.e. if the decision to REFUSE supply is made by the managing director the relevant purpose for s 46 is the managing director’s purpose.

2. s 46(7) provides that the purpose may be proved as a matter of inference as purpose or state of mind is often difficult to prove

a. Necessary where there is no direct evidence such as verbal or written statements attributable to the corporation.


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Step 5 – Are there any possible s46 Breaches? Predatory pricing

1. Economically speaking predatory pricing occurs where a firm is able to cut prices to such an extent that rivals are driven out of the market.

2. Firm is then in a position to raise prices above competitive price levels

Competitive pricing vs Predatory pricing1. Examine the firm’s cost structure2. If the price is set at or above marginal cost the price is NOT be regarded as

predatory

The leading decision on predatory pricing in AustraliaCASE: Boral v ACCC

1. Cutting prices per se is not a use of market power.2. Market power means the ability to operate without being constrained by

competitors or customers3. The ACCC’s case failed because ultimately it was unable to establish that

Boral had a substantial degree of power4. The ACCC failed to establish the threshold requirement for s 46.5. Price cutting by itself cannot be a use of market power

Boral Masonary Ltd v ACCCOutline:

1. During 1991 Vic went into a recession and price of building products fell corporate strategy was to tough it out

2. Increased investment in its plant to drive competitors out of the market and to make it difficult for new competitors to enter.

3. ACCC brought action again Boral under s 46Decision:

1. Market power means the ability to operate without being constrained by competitors or customers.

2. While strategic barriers could exist, the evidence did not suggest that Boral was using price discounting as a strategic weapon.

3. Rather, the evidence suggested that BBM was acting in response to market pressures

4. Boral DIDN’T have a substantial degree of market power, it couldn’t have breached s 46.

When is there a refusals to supply ? 1. NO rule that a corp must supply everyone who requests supply2. CASE : Melway - Generally a corporation WILL escape liability if it can show

that it acted for efficiency or other valid commercial reasons - DEFENCE

Refusal to provide access to facilities 1. Only possible in limited circumstances


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2. Normally compulsory access should only be ordered where there is clear evidence that the facility owner is using its power to extract a monopoly benefit in a downstream mkt.

CASE: NT Power Generation v Power & Water AuthorityOutline:

1. NT Power wished to enter the market for the supply of electricity to consumers, but to do so it NEEDED access to Power & Water Authority distribution infrastructure.

2. Argued that the NT was in the process of developing an electricity transmission access regime and granting NT Power access WAS premature

3. NT Power argued that PAWA's refusal was a breach of s 46Decision:

PAWA argued in its defence (1) that as it was a statutory corporation of the NT, it was protected by crown immunity; (2) that, even if it wasn’t protected by crown immunity, there was no relevant market for

the supply of electricity trans services b/c PAWA had NOT granted access to any1;

AND

(3) that, even if it had a substantial degree of mkt power, it DIDNT have an anti-competitive purpose (rather, so it argued, it was maintaining the status quo until the government put into place a recognised access scheme).

Attaching restrictive conditions to the licensing of intellectual property

CASE: ASX Operations Pty Ltd v Pont Data Australia Had a virtual monopoly over the supply of info concerning the trading in securities

(part div of ASX) (Competitor)

Decision: ASX clearly had a substantial degree of power. It had taken advantage of its power to protect its subsidiary JECNET from competition by buyers such as Pont data. This was a breach of s 46(1)(b) and 46(1)(c)

When does Exclusive dealing occur? REFER EXCLUSIVE DEALING s 47 - Exclusive dealing occurs where the supplier restricts the buyer’s freedom to deal

a manufacturer of car windscreens may offer an extra discount to any retailer who agrees to acquire substantially all its requirements from the manufacturer


Customers

Stock Exchange

Pont DataJECNET

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When is there Product tying or bundling ? 1. Where a supplier requires a buyer to take not only (product A) but also (product

B) there may be a breach of s 462. Where the supplier requires the buyer to obtain (product B) from a third party it

is called third line forcing3. These types of activities also come under s 47

a. ACCC v Fila Sport Oceania Pty Ltd – REFER EXCLUSIVE DEALING

What about customer and territorial restraints? – REFER EXCLUSIVE DEALING1. A customer restraint occurs where the supplier dictates to whom the buyer can

resell the supplier’s product.

2. A territorial restraint occurs where the supplier dictates where the buyer can resell the supplier’s product

CASE: Mark Lyons Pty Ltd v Bursill Sportsgear1. Supplier attempted to impose restrictions upon where the supplier’s in-line ski

boots could be resold. 2. Retailer was told that supply of the ski boots depended on the retailer agreeing

NOT to resell the ski boots in town halls3. A territorial restraint occurs where the supplier dictates where the buyer CAN

resell the supplier’s product

What about Refusals to purchase? – BUYER POWER EXCLUSIVE DEALING A buyer with substantial market power may breach s 46 by using that power over suppliers

CASE: ACCC v Australian Safeway StoresOutline:

1. Safeway heard that one of its bakery suppliers was selling bread to independent retailers in a particular area cheaper than it was selling the same bread to Safeway

2. Safeway responded by cutting the baker’s products from its shelves in that area until the discounting stopped

Decision:1. Safeway breached s46 by using buyer refusal power over supplies

CASE: TPC v Carlton & United Breweries1. CUB largest brewer in Australia2. It purchased 70% of its requirements of beer cans from Gadsden which was

owned by SA Brewing, one of CUB’s competitors.3. SA Brewing supplied Payless, the owner of a chain of supermarkets with

unbranded beer.4. CUB concerned about this cheap beer coming on to the market.

Decision1. The Commission brought an action against CUB for a breach of s 46(1)(c).2. CUB pleaded guilty and was fined $175,000


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Step 6 – Did Firm have Prohibited Purpose? Prohibited purposes:

S46(1)(a) eliminating or substantially damaging a competitor or related company in that or any other market;

S46(1)(b)preventing a person entering any market; or S46 (1) (c) deterring or preventing a person from engaging in competitive

conduct in any market; (ACCC v Safeway Stores)

Does it have Purpose?Must be one of the purposes but does not have to be the sole or dominant purpose: s 4F- ACCC v Safeway Stores-

• Purpose may be proved as a matter of inference: s 46(7)– BHP case; Mark Lyons case;

• ACCC wanted a test based on ‘purpose’ or ‘likely effects’. – Dawson Report recommended against such a change

Examples Exclusive dealing & refusals to deal [see BHP case; Mark Lyons case;

contrast Melways case] Predatory pricing [Boral case] Price discrimination [Pont Data case] Dictating resale prices [covered by s 48]

Resale Price Maintenance s 481. Resale price maintenance is the effect of rules imposed by a manufacturer on

wholesale or retail resellers of its own products, to prevent them from competing too fiercely on price and thus driving profits down from the reselling activity.

2. Prohibited outright because it eliminates price competition; choice & increases inefficiency and overcharging.

1. Has supplier specified a price? a. All forms caught provided reseller is required no to sell at a price less

than the suppliers specified price. Includes where price is t be determined by a formulae.

2. Is the price specified or used by supplier a minimum price? a. Exceptions that are allowed are recommended retail prices s97 (so long

as is genuine) or if it is a maximum above which not to sell.3. Has the supplier taken action to ensure that a stipulated price is

maintained?a. S 96 (3);

a. making it known that goods or services will not be supplied;b. 2-4 inducing or attempting to induce;or agreeing or offering to agree; c. or using statements of price;d. on a reseller to prevent them from selling at that price; BP Australia v

TPC : b. 5. withholding supply.

a. Exceptions genuine seasonal/clearance sales or sale that is with consent of suppliers s98 (3) loss leader defence s98(2)


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Step 7 – Are there Defences possible to s46 Breaches? What was the purpose of the Breach?Generally a corporation WILL escape liability if it can show that it acted for efficiency or other valid commercial reasons - CASE: Melway -

Was it acting in an uncompetitive manner?Even if a firm had a substantial degree of market power, if it DIDNT have an anti-competitive purpose then there is no breach.

Was there evidence of monopoly pricing?1. The making of monopoly profits is not regarded as an abuse because it does not

fit any of the unlawful purposes2. The law does not prohibit a monopolist earning monopoly profits and this should

be taken into account in setting a pricea. ASX Operations Pty Ltd v Pont Data (Australia) Pty Ltd

Defences to Aggressive Competition1. Acquisition of market share by ruthless and aggressive competitive tactics is not

a breach of s 462. No one would bother with competition if there were no rewards for success.

Resale Price Maintenance s 48Resale price maintenance can be authorised if for public benefit s 88 & s90 very hard to satisfy.


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