On 25 September 2007, the Trade Practices Act (Act) was amended to help overcome perceived difficulties faced by the Australian Competition and Consumer Commission (ACC) and others, in regulating below-cost pricing or anti-competitive behaviour, known as the “Birdsville Amendment”.
Section 46 of the Act prohibits the misuse of market power, which has in the past, been used to regulate predatory pricing behaviour. Prior to the Birdsville Amendment, section 46 required proof of:
(i) substantial market power;
(ii) that the conduct is taking advantage of that power; and
(iii) a proscribed purpose.
The former section 46 provisions have been narrowly interpreted by the High Court, holding that to have market power, a company must be able to recoup losses from below-cost pricing by raising prices after damaging its competitors.
Following the Birdsville Amendment, the requirement for market power has been replaced with the new criterion of “substantial market share”. The concept of below-cost pricing has been introduced with reference to a price less than the “relevant cost” and conduct for a “sustained period”, however the new terminology has not been defined in the Act.
The proscribed purposes are the same, namely:
(i) eliminating or substantially damaging a competitor;
(ii) preventing the entry of a person into a market; or
(iii) deterring or preventing a person from engaging in competitive conduct.
The significance of the difference between market share and market power has yet to be tested. However, criticisms of the new amendments have prompted the Rudd Government to plan for further section 46 amendments.
The proposed changes are said to include a determination of market power of a company even if there is no proof that such a company can recoup its losses. How this will be translated into the legislation is yet to be seen.
In the interim, the prospect of further section 46 changes may have the unintended consequence of diminishing competitive activity to the extent that it imposes costs on businesses.
While we await the Government’s intended further amendments to section 46, we suggest that businesses should not be deterred from exercising the practices it should already have in place. That is, identifying a sound business rationale for your business conduct and engaging in vigorous competitive practice.