Topic Overview of the CCA (Focus on competition) Welfare through competition

Hilmer – NCP Reforms Hilmer committee proposed that an effective competition policy for Australia should address the following 6 concerns: Anti-competitive conduct of firms; Unjustified regulatory restrictions on competition; Inappropriate structure of public monopolies; Denial of access to certain facilities that are essential for effective competition; Monopoly pricing; and Competitive neutrality when Government businesses compete with private firms. 2

Competition AND Consumer…. The underlying premise of the CCA is that promoting competition and the free operation of markets is the best way to promote economic efficiency in the long term interests of consumers; The CCA (and the TPA before it) were intended to be deregulatory – in the sense that intervention in the free operation of markets is only warranted where a market failure could be identified. Market failure on the supply side includes sub-optimal market structures arising from anti competitive agreements, anti competitive mergers, misuse of market power, monopolies etc Another goal of the original TPA was to promote informed decision making by consumers – recognising that market failure and consumer detriment can arise on the demand side through transaction costs or an inequality of information, bargaining power or litigious power between suppliers and consumers. Consumer protection provisions in the original TPA were seen as complements to the competition provision – recognising that consumers may need to be protected, even if markets are competitive 3

So what is the nature of the consumer detriment that the ACL is intended to remedy? Competition Supply side Structural Competition policy Market failures arising from market structures: eg monopolies oligopolies and how they limit choice and increase prices Consumer Demand side Consumer policy Market failures arising from transaction costs, inequality of information, bargaining power, litigious power etc etc and how they impact consumers 4 Focus on individual experiences of consumers. Focus on market and the firms that participate in it Competition –Supply side –Structural –Competition policy –Market failures arising from market structures: eg monopolies oligopolies and how they limit choice and increase prices –FOCUS ON THE MARKET AND THE FIRMS THAT PARTICIPATE IN IT Consumer –Demand side –Consumer policy –Market failures arising from transaction costs, inequality of information, bargaining power, litigious power etc etc and how they impact consumers –FOCUS ON INDIVIDUAL EXPERIENCES OF CONSUMERS

The importance of integrating supply and demand policies is widely accepted; “Competition involves the interaction of supply and demand. Competition policy is concerned mainly with the supply-side structure of markets, ensuring that there are no unnecessary barriers to entry, that market concentration does not lead to economic loss or unreasonable transfers form consumers to producers, and that there are effective legal sanctions against fraud, misleading conduct and collusion among suppliers…. Even when markets are structurally sound on the supply side, however, there can still be adverse consequences for consumers and therefor a misallocation of resources…. It is the behaviour of consumers that activates competition, and that behaviour can be shaped in part by public policy. Public policy, therefore, is concerned with the demand-side as well as the supply side of markets, to ensure as a basic condition that consumers are well-informed. Even well-informed consumers exhibit consistent patterns of behaviour that can lead them away from making decisions that satisfy their preferences….” OECD, Roundtable on Demand-side Economics for Consumer Policy, Summary Report (20 April 2006, OECD, Paris) at [8] See the OECD Consumer Policy Toolkit (OECD, Paris, 2010) and other materials available at 5

Information Asymmetry - the economic foundations for consumer protection laws Moral Hazard Adverse Selection 6 Moral Hazard One party can take a variety of actions, but the other can’t assess the actual action taken (eg. legal services, tradespeople etc) Adverse Selection One party doesn’t know information that the other party knows (eg. the quality of goods) One party can take a variety of actions, but the other can’t assess the actual action taken (eg. legal services, tradespeople etc) One party doesn’t know information that the other party knows (eg. the quality of goods)

Behavioural economics Classical economic theory assumes that consumers are rational –Well informed; –Will act on the basis of self interest –This allows decision making to be aggregated for the purpose of analysis and prediction Behavioural economics is a relative new field that applies insights from psychology to economic issues and analysis –August 2007 Productivity Commission convened a Roundtable on Behavioural Economics and Public Policy –Recognises that consumers aren’t always rational 7

Why legislate? Learning Guide, Exercise 1 (Week 2) Promote economic growth, freedom of trade and economic welfare By prohibiting certain conduct create an even playing field Evidence Trade liberalisation, deregulation and privatization are necessary conditions for a market economy – but they aren’t sufficient Incentives / Disincentives If we assume that individuals will always seek to profit – incentives are required to provide boundaries around profit taking activities and to promote fairness Sustainability Long term planning Even playing field 8 Promote economic growth, freedom of trade and economic welfare By prohibiting certain conduct create an even playing field Evidence Trade liberalisation, deregulation and privatization are necessary conditions for a market economy – but they aren’t sufficient Incentives / Disincentives If we assume that individuals will always seek to profit – incentives are required to provide boundaries around profit taking activities and to promote fairness Sustainability Long term planning Even playing field

Do you consider that complex political – economic considerations in price fixing, monopoly or cartel cases to be naturally beyond the limit of the common law courts? YesNo That’s the system we have The rules reflect social and political values Rules can and do evolve over time Lawyers aren’t economists! Complex and difficult to run cases 9 Yes Lawyers aren’t economists! Complex and difficult to run cases No That’s the system we have The rules reflect social and political values Rules can and do evolve over time

The CCA covers most areas of the market: the relationship between suppliers, wholesales, retailers and consumers Product safety and labelling Unfair market practices Price monitoring Industry codes Industry regulation (airports, utilities etc) Industry codes Mergers & Acquisitions 10 Product safety and labelling Unfair market practices Price monitoring Industry codes Industry regulation (airports, utilities etc) Industry codes Mergers & Acquisitions

What (competitive) conduct is prohibited? Learning Guide, (Week 2 Exercise) Cartel offences Cartel civil prohibitions Exclusionary provisions (Boycotts) Third line forcing Resale price maintenance Misuse of market power Misuse of trans- Tasman market power Below Cost Pricing Exclusive dealing and other distribution arrangements (eg. franchising) Mergers and other forms of acquisitions of shares and assets (that have the effect of substantially lessening competition) Price Signalling (by banks) 11 Cartel offences Cartel civil prohibitions Exclusionary provisions (Boycotts) Third line forcing Resale price maintenance Misuse of market power Misuse of trans- Tasman market power Below Cost Pricing Exclusive dealing and other distribution arrangements (eg. franchising) Mergers and other forms of acquisitions of shares and assets (that have the effect of substantially lessening competition) Price Signalling (by banks)

Which conduct is ‘per se’ prohibited? Learning Guide, (Week 2 Exercise) Per Se Offences “…practices which Parliament has seen as so generally offensive to the competitive goals underlying the Act that they are to be condemned without consideration fo any purpose or effect of substantially lessening competition in a market” (Rural Press – Gummow, Hayne & Heydon JJ) Cartel offences; Cartel civil prohibitions; Exclusionary provisions; Third line forcing; Resale price maintenance; Misuse of market power; Misuse of trans-Tasman market power; and Below Cost Pricing Competition prohibitions Not prohibited absolutely, but only if on the evidence it: Has the purpose of substantially lessening competition; or Has the effect of substantially lessening competition; or Is likely to have the effect of substantially lessening competition A matter for courts to work out applying the future “with” and “without” test Arrangements between competitors (other than price fixing and exclusionary provisions) – eg. Joint ventures and other forms of collaboration Exclusive dealing and distribution arrangements (eg. franchising) Mergers and other forms of acquisitions of shares and assets 12 Per Se Offences “…practices which Parliament has seen as so generally offensive to the competitive goals underlying the Act that they are to be condemned without consideration fo any purpose or effect of substantially lessening competition in a market” (Rural Press – Gummow, Hayne & Heydon JJ) –Cartel offences; –Cartel civil prohibitions; –Exclusionary provisions; –Third line forcing; –Resale price maintenance; –Misuse of market power; –Misuse of trans-Tasman market power; and –Below Cost Pricing Competition prohibitions Not prohibited absolutely, but only if on the evidence it: –Has the purpose of substantially lessening competition; or –Has the effect of substantially lessening competition; or –Is likely to have the effect of substantially lessening competition A matter for courts to work out applying the future “with” and “without” test –Arrangements between competitors (other than price fixing and exclusionary provisions) – eg. Joint ventures and other forms of collaboration –Exclusive dealing and distribution arrangements (eg. franchising) –Mergers and other forms of acquisitions of shares and assets

Rural Press Ltd v ACCC [2003] HCA 75; 216 CLR 53; 203 ALR 217; 78 ALJR Material Facts Rural Press, through a subsidiary (Bridge), published a regional newspaper (the Murray Valley Standard). The Standard was circulated in Mannum and around Murray Bridge in South Australia. In this region Rural Press was a near monopolist. Waikerie Printing published and circulated a regional paper (River News) up the river around the town of Waikerie; they also sold a few copies in Mannum. Waikerie subsequently began circulating the River News in Mannum where they competed with the Murray River Standard for customers and advertising. In response Rural Press threatened to establish a rival newspaper in River News' prime circulation area unless Waikerie withdrew from Mannum. ACCC alleged this constituted a contravention of s 45 (that Rural Press had given effect to an exclusionary provision) and s 46 (misuse of market power). Using MIRAT to summarise Material Facts Rural Press, through a subsidiary (Bridge), published a regional newspaper (the Murray Valley Standard). The Standard was circulated in Mannum and around Murray Bridge in South Australia. In this region Rural Press was a near monopolist. Waikerie Printing published and circulated a regional paper (River News) up the river around the town of Waikerie; they also sold a few copies in Mannum. Waikerie subsequently began circulating the River News in Mannum where they competed with the Murray River Standard for customers and advertising. In response Rural Press threatened to establish a rival newspaper in River News' prime circulation area unless Waikerie withdrew from Mannum. ACCC alleged this constituted a contravention of s 45 (that Rural Press had given effect to an exclusionary provision) and s 46 (misuse of market power).

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Rural Press Ltd v ACCC [2003] HCA 75; 216 CLR 53; 203 ALR 217; 78 ALJR Issue (on ultimate appeal) Was there an “arrangement or understanding”? If there was market sharing/zoning – was it an exclusionary provision? Had all the elements of the offence been committed? What was the relevant market? Had there been a contravention of s45(2)(a)(i) and (b)(i)? Did Rural Press / Bridge “take advantage of their market power” in the Murray Bridge Newspaper market? Does the use of financial and other resources constitute market power / use of market power? What powers did the court have in regards to remedies? Rule S45 – Restrictive dealings (contracts with an anti competitive purpose or effect) S46 – misuse of market power Issue (on ultimate appeal) Was there an “arrangement or understanding”? If there was market sharing/zoning – was it an exclusionary provision? Had all the elements of the offence been committed? What was the relevant market? Had there been a contravention of s45(2)(a)(i) and (b)(i)? Did Rural Press / Bridge “take advantage of their market power” in the Murray Bridge Newspaper market? Does the use of financial and other resources constitute market power / use of market power? What powers did the court have in regards to remedies? Rule S45 – Restrictive dealings (contracts with an anti competitive purpose or effect) S46 – misuse of market power

Rural Press Ltd v ACCC [2003] HCA 75; 216 CLR 53; 203 ALR 217; 78 ALJR Application (Findings) Found that there was an arrangement or understanding The provision of zoning would limit the ability of person in the area to have access to a 2 nd newspaper – but that was the effect of the arrangement rather than the purpose of the arrangement The evidence didn’t support all the elements of the provisions: no “particular class” was identified (see s4D(1) re exclusionary provision) Rural Press and Bridge had no market power in the Murray Bridge newspaper market. Financial and other resources of Rural Press / Bridge did not constitute market power or the use of market power. Application (Findings) Found that there was an arrangement or understanding The provision of zoning would limit the ability of person in the area to have access to a 2 nd newspaper – but that was the effect of the arrangement rather than the purpose of the arrangement The evidence didn’t support all the elements of the provisions: no “particular class” was identified (see s4D(1) re exclusionary provision) Rural Press and Bridge had no market power in the Murray Bridge newspaper market. Financial and other resources of Rural Press / Bridge did not constitute market power or the use of market power.

Rural Press Ltd v ACCC [2003] HCA 75; 216 CLR 53; 203 ALR 217; 78 ALJR Dissenting Judgement (Kirby J) Criticised the narrow interpretation “"In my view, the approach taken by the majority is insufficiently attentive to the object of the Act to protect and uphold market competition. It is unduly protective of the depredations of the corporations concerned. It is unrealistic, bordering on ethereal, when the corporate conduct is viewed in its commercial and practical setting. The outcome cripples the effectiveness of s 46 of the Act. It undermines this Court's earlier and more realistic decision in Queensland Wire. The victims are Australian consumers and the competitors who seek to engage in competitive conduct in a naive faith in the protection of the Act. Section 46 might just as well not have been enacted for cases like these where its operation is sorely needed to achieve the purposes of the Act. Judicial lightning strikes thrice. A novel doctrine of innocent coincidence prevails. Effective anti-competitive threats can be made without the redress which s 46 appears to promise. Once again I dissent.“” Dissenting Judgement (Kirby J) Criticised the narrow interpretation “"In my view, the approach taken by the majority is insufficiently attentive to the object of the Act to protect and uphold market competition. It is unduly protective of the depredations of the corporations concerned. It is unrealistic, bordering on ethereal, when the corporate conduct is viewed in its commercial and practical setting. The outcome cripples the effectiveness of s 46 of the Act. It undermines this Court's earlier and more realistic decision in Queensland Wire. The victims are Australian consumers and the competitors who seek to engage in competitive conduct in a naive faith in the protection of the Act. Section 46 might just as well not have been enacted for cases like these where its operation is sorely needed to achieve the purposes of the Act. Judicial lightning strikes thrice. A novel doctrine of innocent coincidence prevails. Effective anti-competitive threats can be made without the redress which s 46 appears to promise. Once again I dissent.“”

What was the point of reading Rural Press, Qantas and Universal Music? Each demonstrate the complexity of these cases and the process for deciding them Show the use of tests ‘in the wild’ – the with and without test (factual and counter factual) & the principles outlined in QCMA Competitiveness of the players in the market isn’t the same as the competitiveness of the market – the CCA seeks to foster competitiveness in markets and the courts tend to reject any suggestion of a correlation between competition in the market and individual competitive strength Should market power be inferred from a large market share? Economists would argue that the right question to ask is whether the share is maintained solely because of low prices or better products? If it is, then that’s what competition is supposed to achieve – not a monopoloy. However, if the large share would survive an attempt to charge high prices and achieve monopoly profits – then market power may be inferred. You need to take into account both potential and actual competition. 18

Summing up – 6 key points…… It’s impossible to divorce policy considerations from understanding competition & consumer law The law and its interpretation have evolved as economic thinking evolves - mostly We discussed the 3 main schools of economic thought We looked at some key cases: Rural Press, Qantas & Universal Music Protecting against Information asymmetry is a key driver behind consumer protection laws You have 2 weeks to get your research proposals done….. 19 It’s impossible to divorce policy considerations from understanding competition & consumer law The law and its interpretation have evolved as economic thinking evolves - mostly We discussed the 3 main schools of economic thought We looked at some key cases: Rural Press, Qantas & Universal Music Protecting against Information asymmetry is a key driver behind consumer protection laws You have 2 weeks to get your research proposals done…..