Changes to Commerce Act would restrict actions of firms with substantial market power

Author:Mr Nick Crang
Profession:Duncan Cotterill

The Government is proposing to amend the Commerce Act to make illegal a lot more of the actions of a firm that has substantial power in a market. The changes will involve applying an effects test instead of the existing test, which focuses on taking advantage of market power. The proposals are up for consultation until 1 April 2019.

The proposed new test would simply ask whether the firm with substantial market power has engaged in conduct that has or is likely to have the effect of substantially lessening competition in a market. This is very similar to the test that now applies in Australia, which changed from a taking advantage test in 2017.

The existing test

The existing test, set out in section 36 of the Commerce Act, has long faced criticism for not capturing a range of actions that damage competition. It involves asking the question of whether a hypothetical firm, alike in all respects to the real firm whose actions are alleged to breach section 36, except that it doesn't actually have market power, would act in the same way as the real firm.

This test has meant that actions such as exclusive dealing, where a manufacturer will only supply to one retailer, are unlikely to be illegal. This is because a firm with no market power is likely to, and does, engage in exclusive dealing.

In the hands of the firm with no market power, however, those actions doesn't reduce competition and indeed can even enhance competition. In contrast, in the hands of a firm with substantial market power, it is claimed those actions can severely limit competition between suppliers.

Other claimed examples of the existing law giving the wrong answer are land banking and the bundling of products and/or services (e.g. Microsoft bundling its internal browser and media player with Windows).

The efficient component pricing rule

The proposed change could also see the end of the efficient component pricing rule. This rule applies where a wholesale service provider also sells those services at the retail level, competing with its wholesale customers. An example is the telecommunication sector, where some telcos provide data services at wholesale to other telcos and also compete with those other telcos customers at the retail level, using the same wholesale services.

The rule says that the wholesale supplier would sell the wholesale services at a price that would mean it would not care whether the services were sold at wholesale or retail, but no more than that price. In...

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