AFR: There Are Ill-Effects in an Effects Test

Philosophically the Harper review's interim report on competition reforms heads in the right direction: competition policy should protect competition not competitors. But its recommended effects test is likely to do the opposite, deterring major businesses from engaging in vigorous competition to deliver lower prices and new offerings to consumers.

 Numerous submissions to the review from organisations representing small businesses argue for an effects test with the real objective of protecting their members from competition. These organisations assert that by cutting their prices and entering into new lines of business, big corporations are driving small businesses out of markets. Thereafter, so the story goes, the big players will have the market to themselves, free to put up their prices again. If it's a strategy, it’s a bad one: the large corporations haven’t actually gotten around to hiking their prices. Apparently it’s just around the corner.

 These small business organisations gained from the Harper review what they wanted – an effects test. Protecting small businesses from competition is what small business minister, Bruce Billson, advocated when he told Alan Jones earlier this year he wanted to legislate "where there’s behaviour that drives efficient competitors out of the economy and risks damaging consumers in the longer term."

 Conflating the long-term interests of consumers with the protection of small businesses is bad economics. Professor Harper is a good economist. He wants to protect competition. But his report concedes the effects test could have "unintended impacts ... including the possibility of inadvertently capturing pro-competitive conduct." Pro-competitive strategies can result in the exit of competitors from local markets, giving rise to allegations of substantially lessening competition in breach of the effects test.

 To mitigate this risk, the report further recommends an onus be placed on businesses with substantial market power to prove their behaviour would be a rational decision of a business without such power and be in the long-term interests of consumers.

 Proving how another business would behave in a hypothetical situation is a big task. More realistically, prudent managers of major corporations might need to include legal counsel in their discussions about cutting prices and introducing new products, for fear of the ACCC judging their behaviour to have the effect or likely effect of substantially lessening competition.

 Senior management of large, listed companies is not generally cavalier about breaking the law. Managers are likely to seek informal clearances from the ACCC of any proposals that their legal counsel advises are at risk of being caught by the effects test. Confronted with a mountainous workload, the ACCC would probably refuse to provide such clearances. Without an informal clearance, management will face disincentives to vigorous competition.

 The Harper review has acknowledged the potential costs of an effects test. What about the benefits? At no stage has the ACCC bothered to identify actual cases of misusing market power that it could not pursue under the existing purpose test but could pursue under an effects test. Nor has the ACCC identified the industries in which this misuse of market power is prevalent. A government committed to deregulation appears attracted to a regulation with definite costs but whose only obvious benefits are political.

 In advocating a new wave of competition policy reform, the Harper report points to fresh competitive pressures emanating from the emergence of international online competitors without the bricks and mortar costs of conventional businesses. As large corporations respond to the online challenge by pursuing greater efficiencies, the effects might well include those that Minister Billson has publicly stated he wants to prevent: driving efficient small competitors out of markets. These small operators might be working as hard and as efficiently as possible, given their lack of scale. As legislator, the Minister would consider the departure of such small businesses a substantial lessening of competition. If the parliament enacts the proposed effects test, the ACCC and the courts would be obliged to agree.