Trade Practices Legislation Amendment Bill 2008: Second Reading
Mon, 15 Sep 2008
8:52 PM - Senator David Bushby
I rise to speak on the Trade Practices Legislation Amendment Bill 2008. The bill amends sections 46, 51 and 155 of the Trade Practices Act 1974 and seeks to clarify a number of terms relating to predatory pricing and unconscionable conduct. The amendments to sections 51 and 155 can be described as little more than procedural changes and will make little difference to the underlying substantive flaws and gaps in key sections of the Trade Practices Act dealing with abuses of market power and unconscionable conduct by large and powerful entities. As such, I seriously doubt they can deliver the benefits that the majority report of the Senate Standing Committee on Economics inquiry claims that they will.
However, the amendment to section 46 will have far greater effect than will the lukewarm amendments to sections 51 and 155. This amendment will actually impose a further disadvantage for small business by making it much more difficult to obtain the protection against predatory pricing that the section is intended to deliver. Predatory pricing is the practice of firms deliberately setting prices at an unsustainably low level with the intent of driving competitors out of the market. Section 46 prohibits the misuse of market power and provides the legislative framework under which a court may rule on the degree of power that a corporation has in a market. Subsection (4A), recommended by the Senate economics committee in 2007 and passed into law later that year, allowed the courts to take into account ‘a sustained period’ of selling goods and services at a price ‘less than the relevant cost to the corporation of supplying such goods and services’ and the corporation’s reasons for engaging in this practice. Subsection (1AA), known as the Birdsville amendment, regulates predatory pricing on the basis of providing proof of ‘market share’, as opposed to market power, as it had been prior to the 2007 amendment. It also introduced such concepts as ‘relevant cost’ and ‘sustained period’. It is interesting to note that the Birdsville amendment was supported by the then opposition, who are now in government.
Why do we have a section of the TPA to address predatory pricing? Surely it can be argued that a business looking to sell its goods at a price less than the relevant cost to the corporation of supplying such goods is a good thing for consumers—even more so if it does it for a sustained period. Surely the bottom line is that the more of this below-cost selling that goes on the better served are the consumers. It all sounds like very effective competition. The problem is that predatory pricing is anticompetitive. The practice removes efficient competitors, usually small businesses, from the market, allowing for prices to be increased in the absence of competition. This ends up reducing the efficiency of the economy as a whole and, as such, presents negative medium- and long-term consequences that far outweigh the positive short-term benefits of cheaper prices
The result is that the efficiency and effectiveness of the Australian small business sector in supplying goods to the Australian consumer is undermined, and Australians, especially Australian working families, will be left to wear the costs of less choice, higher prices, loss of the convenience of local shops, lower levels of service and shopping in less friendly and welcoming environments. Given all that, it is surprising that a newly elected government that was elected on the promise of doing something about rising grocery prices would seek to so quickly revoke the effect of an amendment that was intended to eliminate anticompetitive practices—practices with real and detrimental consequences for consumers—and that they supported in opposition.
This bill, combined with what is universally accepted as a gross waste of taxpayers’ money in what can probably be described as one of Australia’s most unbelievably useless pieces of public policy delivery—certainly the most useless in recent years—GROCERYchoice, appears to be about the extent of the government’s delivery on grocery prices. The Prime Minister’s comment that ‘the government has done all it can’ in respect of grocery prices has often been quoted. But, with respect, that is not good enough when his government was elected on the promise that it would make a real difference in this area.
Despite all that, I doubt that there are many who would argue that the section as amended in 2007 is the perfect solution to the problem of predatory pricing. The reality is that it is difficult to create a legislative prohibition that prohibits anticompetitive behaviour in a manner that can be effectively and efficiently proven, but what is clear is that the section as it stood prior to the 2007 amendments did not work. The 2003 Boral case proved that clearly, when the High Court, presented with factual circumstances that any reasonable person in Australia would accept as unreasonable, found that a breach of section 46 was not proven. The High Court took a very narrow view of substantial market power in the Boral case, essentially defining it as the ability to raise prices without losing business. It is a very high threshold and ultimately only applies to monopolists or near monopolists, and, during the time since 2003, the ACCC has not mounted any section 46 cases—most likely as a result of that High Court decision and a handful of other decisions by the High Court and the consequent cost of mounting cases with little prospect of success.
I doubt anyone would suggest that this is evidence that predatory pricing is not a practice that has been employed in this nation since that time, because there is no shortage of cases, as acknowledged by Senator Hurley just a few minutes ago, where allegations of this practice are evident. But the chances of proving it under the legislation in place prior to the 2007 amendments were slim to none, and the potential costs of taking on a corporation which had the resources to engage in such practices in the first place are way beyond the capacity of small businesses that may find themselves the victims of predatory pricing and are, it would seem, of little attraction to the ACCC post Boral. The 2007 amendments were designed to overcome some of these practical challenges in making out a predatory pricing case.
However, evidence was received at the hearing into this bill suggesting that, if enacted, the changes proposed in the bill will remove vital aspects of the 2007 amendments that were designed to address these practical challenges and will provide no new redress in that respect. The evidence received by the economics committee inquiry stated that the proposed changes to section 46 fail to deal with the problems of defining and proving market power, and thereby fail to overcome the practical near impossibility of proving a predatory pricing case.
For example, Associate Professor Frank Zumbo stated:
Because those changes to market power do not change that underlying definition and interpretation by the High Court, it is clear that the market power threshold remains a very high threshold. Reinstating that threshold to the Birdsville amendment would render the Birdsville amendment useless.
… … …
… reinstatement of these two hurdles—
market power and take advantage—
will make it next to impossible to bring section 46 cases … That High Court definition of market power … will not be changed by amendments that this government is proposing.
The amended sections have been in place now for less than a year. They are yet to be tested in court. And, yes, they do contain new terms that are also yet to be tested. If left in the hands of courts, their effectiveness will ultimately be determined and opportunities for further improvements will be highlighted if and when needed. But to simply say, ‘These terms aren’t well enough defined, so let’s take things back to the days when we knew what all the terms meant because it will give small business greater protection,’ is intellectually dishonest, as we know that the way things were effectively provided no protection from predatory pricing behaviour.
The facts are that the proposed amendments to section 46 of the Trade Practices Act in relation to predatory pricing will reinstate the problematic and almost impossible-to-prove concept of market share, and the previous additional hurdle of ‘take advantage’ will have no positive effect and can only lead to the complete neutering of the section as it applies to predatory pricing. The market share test stated in section 46(1AA), the Birdsville amendment, however, is intended to provide access to what, if given a chance to be tested, is likely to be an effective legal remedy against predatory pricing. It is intended to target the particular evil of anticompetitive below-cost pricing and does so without creating any unusual levels of uncertainty or acting in a manner that undermines legitimate competitive practices.
It is important to note that these 2007 amendments include sufficient safeguards to ensure that legitimate competition is not and will not be diminished, and there is no evidence that the 2007 amendments undermine competition. The bottom line is, as quoted over and again by my colleague Senator Joyce, that the market share test is only the door into the court. Proving a substantial market share does not in itself prove predatory pricing.
Interjection
Senator Brandis—It is only one of the doors you need to go into.
Continue
Senator BUSHBY—Exactly, that is right. The other elements of the section also need to be made out. As Senator Brandis has pointed out, there are a number of other doors that you need to go through to get in there. These include a sustained period of selling goods at a price less than the relevant cost to the corporation of supplying goods and, importantly, doing so with the intention of putting competitors out of business. As such, a business with a large market share selling goods at clearance prices will not be caught by the provision—not unless it is able to be proven that it was doing so for a sustained period and with the specific intention of putting competitors out of business.
Coles gave evidence to the ACCC price inquiry that their pricing behaviour had not been changed as a result of the 2007 amendments. They gave no evidence that those amendments frightened them into not discounting but, on the contrary, said their pricing practices had not changed. Similarly, the experience of the ACCC itself since the 2007 amendments were introduced backs the claim that there has been no resultant dampening of competition or any apparent unintended consequences. Earlier this year the ACCC noted that it had received 75 complaints alleging predatory pricing under section 46(1AA) but that of those 75 complaints it considered none represented a provable breach of that section. We heard earlier from Senator Joyce that the number of those complaints is probably now around 100, and still none has presented as a provable breach of that section. That suggests to me quite strongly that the 2007 amendments have not opened the floodgates to litigation and prosecution of corporations which hold substantial market share and which also choose to discount.
The 2007 amendments had the support of small business groups and continue to enjoy that support. For example, the Senate Standing Committee on Economics inquiry into the bill received a submission from the Fair Trading Coalition, which is an informal coalition of small business groups, stating their support for the section as it currently stands and their belief that most of the problems identified by the ACCC in relation to the 2007 amendments will still exist following the passing of this bill’s proposed amendments—problems such as: what is below the relevant cost, what is a sustained period and what is purpose? In addition to having to prove market power, the government, through this bill, is placing a further obstacle in front of small business in the form of the take advantage test. The take advantage test will add extra complications to the process of having to prove predatory pricing. The government has put forward the argument that having both a market power and a market share test in the same act creates uncertainty but, at the same time, it acknowledges that having separate predatory pricing offences is on balance a good thing.
Market share is a well understood concept, and the government’s claim that the test will lead to uncertainty has not taken into consideration the fact that the ACCC will closely review the market share of the entity alleged to have engaged in predatory pricing when assessing pricing claims. The government has also argued that having both market share and market power tests in section 46 means that there is a dual track process under section 46. This may or may not be the case, but I fail to see the problem if each of the tracks presents an opportunity to limit what are ultimately uncompetitive practices that present detrimental outcomes to consumers. In any event, this is nothing new, as dual track processes are contained within other competition law sections of the Trade Practices Act.
It is often argued in relation to the Trade Practices Act that it is there to protect competition and not competitors. That is very true, and I agree. However, if the regulatory scheme designed to do just that fails to stop practices which lead to increased opportunities for the development of oligopolistic and monopolistic markets, then it is not doing its job. The key is not the protection of businesses per se but the protection of efficient, healthy, competitive markets in which consumers are provided with a real choice based on price, service, quality and environment. Failing to ensure we have adequate protection in that regulatory regime against predatory pricing is a failure to protect competition. Rolling back the 2007 amendments and replacing them with the complications and difficulties of the market power and take advantage tests will only serve to exacerbate the problems of making out a case and will ultimately fail in the stated aim of protecting competition. And, in the end, it will be the Australian consumer who wears the cost.
Click on this button to bookmark & share.