Effects test is all about the politics

After more than two years of acrimonious debate about inserting an effects test into Section 46 of the Competition and Consumer Act relating to the misuse of market power, the chairman of the Australian Competition and Consumer Commission, Rod Sims, was reported in The Australian Financial Review ("Rod Sims wants law change to combat anti-competitive behaviour by oligopolies", January 12) as saying he has never been in favour of an effects test. Sims might have been misunderstood in that article but he has strongly advocated for an effects test in the context of the Harper report on competition policy. He wants to shift the discussion to the take-advantage limb of the current law, which is where it should have been all along.

The ACCC's original submission to the Harper review argues that while it has not lost a Section 46 case in the courts because it failed to establish an anti-competitive purpose, there have been "numerous occasions" at the investigative stage of an "anti-competitive effect", where it was unable to establish the conduct was done for a "proscribed purpose".

Yet the ACCC has given no evidence in these "numerous occasions" of being thwarted by the absence of an effects test. Despite this lack of evidence, its response to the draft Harper report states that it "strongly supports" an effects test (page 49). Sims told a Sydney competition law conference "the ACCC sees much merit in the recommendation of the Harper review to reframe Section 46 to the purpose or effect of substantially lessening competition". In this newspaper he has described an effects test as "sensible", and as "following overseas practice, which says that the effect of behaviour is what matters most".


It should be acknowledged that on each occasion, Sims has just as consistently argued there is a problem with the so-called take-advantage limb of the present law. This clause has been interpreted in the courts as allowing corporations with substantial market power to misuse that power if they have engaged in conduct in which a firm without such market power could also have engaged.

Is the ACCC's problem with the existing Section 46 the purpose test, the take-advantage limb, or both? Unless there is clarity on this fundamental question, the proposed effects test is indeed a solution in search of a problem.

On September 22, Sims expressed frustration that the competition policy debate had been "side tracked" by the argument over an effects test. That the ACCC's staunch advocacy of an effects test has drawn a sharp response from business should not be surprising.

The origins of the current debate about an effects test are political. Before the 2013 election, shadow minister Bruce Billson promised small-business organisations demanding an effects test to reduce the market share of the large supermarkets that a Coalition government would conduct a "root and branch review" of the competition laws. Small business expected an effects test from the Harper review and got one, albeit in a different form to the one it proposed.


Former chairman of the ACCC, Alan Fels, argued in his submission to the Harper review that an effects test wouldn't make much difference one way or the other, but that adopting it was essential to get small business on side politically for the other recommended competition policy reforms. Pharmacists will not agree to deregulation of their industry on the basis of being handed an effects test. Nor will small retailers agree to the deregulation of shopping hours or book publishers to the removal of import restrictions. Fels is making a political judgment, not an economic one, in advocating this quid pro quo. Indeed, the whole recent debate has been mired in politics, at the expense of rigorous policy analysis. The Productivity Commission has not backed in the Harper effects test. As an economist I have consistently opposed it, long before I did any consulting work for Wesfarmers.

If the ACCC now rates the effects test as a second-order issue, a political distraction from the take-advantage limb, it would help if it explicitly said so. The policy debate could then shift to the take-advantage limb. Another former ACCC chairman, Graeme Samuel, opposes the removal of the take-advantage limb. Sims strongly supports its removal. This is a worthy debate. The guiding principle should be that competition is good and more competition is better. For anyone wanting to participate in that debate, here's a piece of gratuitous advice from a former MP: conduct it without seeking to anticipate which way the cabinet and Senate might jump and leave the politics to the politicians. 

Source: http://www.afr.com/opinion/effects-test-is...