Opposing Effects Tests in Competition Policy

An effects test

In their submissions to the competition policy review the ACCC, and former ACCC Chairman, Professor Allan Fels, advocate the insertion of an effects test into the competition laws relating to the misuse of market power. An effects test, as proposed, would prohibit a corporation with market power from engaging in any conduct that had the effect or likely effect of substantially lessening competition.

Competition laws should protect competition not competitors. An examination of submissions to the Government’s competition policy review reveals that around one dozen organisations want an effects test, among them business groups that also advocate restrictions on the number of stores major grocery retailers are allowed to own and other forms of market caps.

In their advocacy of an effects test, the ACCC and Professor Fels are therefore supported by business organisations with a history of arguing for anti-competitive restrictions on major retailers. Of itself, that does not make the ACCC and Professor Fels wrong, but it raises concerns that their proposed amendments are being supported by businesses seeking protection from competition.

When Wesfarmers CEO, Richard Goyder, publicly cautioned against an effects test on the basis that it could be anti-competitive, ACCC Chairman, Rod Sims, claimed Goyder had erected a straw man. A dozen business organisations with a history of advocating anti-competitive changes to the competition laws is a lot of straw and a lot of men.

But Mr Sims correctly points out that the ACCC’s preferred option for inserting an effects test differs from the approach proposed by supporters of market caps. The ACCC’s submission to the Competition Review Panel wants section 46 of the Competition and Consumer Act 2010 rewritten to simply read:

“A corporation that has a substantial degree of power in a market shall not engage in conduct that has the purpose or has, or is likely to have, the effect of substantially lessening competition in that or any other market” (p. 80).

It is this proposed amendment with which the ensuing discussion deals.

Possible effects of an effects test

A law that prohibits conduct that has the effect or likely effect of substantially lessening competition would appear to be pro-competitive. But consider some examples of behaviour by a business with substantial market power.

Example 1: A retail business achieves efficiencies in its logistics and inventory management and seeks to pass on cost savings to its customers as lower prices. Suppose these price reductions have the effect of driving one or more less efficient rivals out of a regional market. This behaviour could be said to have substantially lessened competition in that market. The ACCC claims it would not do so. Yet the ACCC includes regional markets in considering whether acquisitions of retail outlets and vacant sites substantially lessen competition under section 50 of the Competition and Consumer Act.

Example 2: A major grocery retailer starts up in-store banking services, attracting grocery customers away from rivals, including local small grocers, forcing some of them out of business. Despite increasing competition in banking, the grocery retailer’s actions may be judged to have had the effect of substantially lessening competition in a regional grocery retailing market and therefore could have breached the effects test.

Example 3: A national hardware chain sets up a store in a regional town and its low prices drive one or more local hardware stores out of business. While the purpose of setting up the store was not to substantially lessen competition, it may be judged to have had that effect.

Business management cannot know in advance what the effect of its price reductions, wider offerings, loyalty programs or store openings will have on rivals. The ACCC submission simply dismisses as “unfounded” concerns expressed in the Dawson Report of 2003 that an effects test would have a chilling effect on efficient, pro-competitive conduct. In dismissing these concerns the ACCC cites as evidence that an effect test in the section of the Competition and Consumer Act dealing with telecommunications has not chilled competition in that sector (p. 80).

The Productivity Commission is not so sanguine, arguing in its submission that:

“Changing the legislation to include an effects test would itself bring regulatory risks, particularly if the threshold to make the test were too low” (p. 26).

The Productivity Commission urges a thorough analysis of the costs and benefits to determine whether the misuse of market power provisions should be altered.

Immediate past ACCC Chairman, Professor Graeme Samuel, and former Commissioner, Professor Stephen King, describe the ACCC’s proposed effects test as “economically dangerous” (AFR, 12 August 2014). Their concerns are labelled as “scare mongering” by current Commissioners, Jill Walker and Roger Featherston (AFR, 14 August 2014).

Professor Allan Fels, a long-standing advocate of an effects test, reaffirms his support in his submission to the Competition Policy Review, but goes on to say:

“Let me be clear. I do not think adding an effects test to s 46 in one way or another would make a large difference" (p. 9).

Professor Fels is correct in concluding that an effects test would not make a large difference to the ACCC’s efforts to prevent anti-competitive conduct, but it could make a real difference to consumer prices by deterring vigorous competition. Section 46 is primarily intended to deal with competition among corporations in the same line of business. That competition among supermarket retailers appears to be alive and well, with vigorous rivalry between Coles, Woolworths, Metcash-supplied IGA stores and associated retailers, ALDI and Costco, with other international operators mooted to be entering the Australian market.

Some conclusions

The objective of competition laws should be to protect competition for the benefit of consumers, not to protect businesses from competition. The ACCC argues that, despite the very broad scope of its proposed effects test, it would not chill competition because the courts would limit its application. It appears the ACCC is seeking amendments which, when read literally, could restrict genuinely competitive behaviour, but which the ACCC says it or any successor ACCC or new regulator would not be able to misapply since the courts would not allow it to do so.

The case for the ACCC’s proposed effects test is not cut and dried when it is opposed by its immediate past Chairman, Graeme Samuel, and former Commissioner, Stephen King, who is also a Professor of Economics. Another former ACCC Chairman, Professor Allan Fels, supports an effects test but says it wouldn’t make much difference. The Productivity Commission cautions against an effects test in the misuse of market power section of the Act, arguing that any such proposal should be the subject of a thorough cost-benefit analysis.

Opposing an effects test should not be equated with opposing competition. Opponents of an effects test, and those who remain unconvinced, can have legitimate concerns that, in practice, an effects test in the misuse of market power section of the Competition and Consumer Act 2010 could deter vigorous competition and the benefits to consumers in the form of lower prices that such competition brings.