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Competition

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Step 1 – What is Competition? Is there a Market?
What is Competition?
   competition as the primary regulator of economic activity
   must be protected if it is to do its job properly
   there must be a legal regime to protect competition itself as opposed to laws
      which are designed to protect the competitors
   Trade Practices Act provides no definition, except to say that it includes imports:
      s 4. It is clear, however, that competition is an economic concept and is to be
      understood according to economic principles
   Competition should be seen as a process for allocating resources, determining cost
      and distribution structures and fixing the price of exchange
   Competition must be fair
                   If UNFAIR then
                   Misuse of market power AND/OR
                   Exclusive dealing AND/OR
                   Collusion

What are the objectives of Competition policy?
Policies include;
    Restricting anti-competitive trade practices;
    Providing firms with fair access to essential facilities, such as the national power
       grid;
    Restructuring public monopolies, such as the energy authorities;
    Monitoring the prices and practices of monopolies and other dominant firms;
    Fostering ‘competitive neutrality’ between government businesses and private
       firms.

What is the Object of Part IV Trade Practices Act?
   Philosophy that market competition is better than market power in that it
       promotes consumer welfare.
   Competition is not an end in itself
   Object of act is to enhance the welfare of Australians through the promotion of
       competition and fair trading and consumer protection

Is there a Market? (IMPORTANT!)
For there be a market must recognize 3 inter-related things:
    market structure
    market conduct
    market performance
           o market performance will inevitably follow from a more competitive
               market structure
           o firms within the market might collude thus negating the competitive
               structure
IMPORTANT:
    The number of sellers and buyers, product differentiation and barriers to entry -
       will influence and be influenced by;
    how the firms in the market conduct themselves, and in turn this will influence
    how the market is performing in terms of efficiency and dynamism.
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S45 - price and output collusion between competitors as the worst anti-competitive evil
S46 - Most difficult and most controversial area is the regulation of unilateral conduct (ie
monopolists and quasi monopolists)
What is the nature of well-performing markets?
DISCUSS WHETHER THESE POINTS ARE IMBALANCED – UNFAIR MARKET!
Ideally, well-performing markets will include 5 main parts:
    1. efficient allocation of resources;
            a. efficient allocation of resources requires excess profits to be eliminated
               over time
            b. some markets the competition tends to centre on innovation
               (IMPORTANT)
    2. productive or technical efficiency
            a. Well-performing markets should produce products at least cost.
            b. This is best achieved by a vigorously competitive environment where the
               profitability, growth and ultimately survival of firms depends on their
               ability to utilise capital, raw materials and labour in the most efficient
               manner possible
    3. efficient use of economies of scale
            a. Competition policy should concentrate on the conduct of the oligopolist,
               duopolist or monopolist.
    4. dynamic efficiencies- innovation
            a. The intensity of dynamic efficiency is reflected in expenditure on research
               and development.
            b. In such industries the costs of research and development are very high
               relative to the costs of production.
            c. Consequently, it is not uncommon in such industries to find accumulations
               of market power, even monopolies
            d. Dynamic markets present a real problem for competition policy. How
               should they be regulated?
            e. Over-regulated - a lot of valuable innovation may be lost as innovators
               and venture capitalists assess the returns as not being worth the risk.
               Investment will go to less dynamic (and less socially useful) industries or
               overseas.
            f. Under – regulated - (ie the monopolist is left free to do what it wants),
               innovation may be lost as the monopolist chokes off potential rivals, and
               perhaps extends its power into complementary markets
    5. Improve export and locally produced against imports
            a. Some studies have indicated that there is a strong link between domestic
               competition and export success – although not widely accepted

Determing a Market via the law
A wrong definition of market will often lead to an incorrect analysis of the level of
competition - Singapore Airlines v Taprobane Tours

What is the concept of ‘market’?
Not defined in TPA except says it includes imports s4

What is the Product, Geographic and Functional aspects of a market?
***MUST go through and determine these things:
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A market has the following components:
 Product element (what is the product which is being sold?)
 Geographic element (where is the co situated? Location etc)
 Functional element (what type of function does the co. perform)

Time is also important in market analysis
    Market volatility as markets are always changing
    Need to look at the LONG TERM effect on the market - CASE: Boral v ACCC

The key to markets is the notion of substitution
Best description of a market comes from a decision of the Trade Practices Tribunal
(CASE: Re Queensland Co-op Milling Ass) where it was said:
   1. Look at number & size of independent sellers; barriers to entry; vertical
       relationships and restrictions.
   2. A market is the field of actual and potential transactions between buyers and
       sellers where there can be strong substitution
   3. At least in the long run, if given a sufficient price incentive.

The Test for a Market is one of Substitution (IMPORTANT)
CASE: Re Tooth & Co Ltd
2 sides: demand substitution and supply substitution
 First, in identifying the market it must be remembered that a market is an area of
   close competition.
 Second, close competition occurs where there are real possibilities of substituting one
   product for another (‘substitution in demand’) or one source of supply for another in
   production or distribution (‘substitution in supply’).
 Third, substitution should be judged not from the short term perspective but in the
   longer run.
 Fourth, market boundaries are not precise. Generally speaking a market consists of
   those firms which collectively possess substantial market power, that is, those firms
   which, if they were to join forces as a cartel, ‘would be able to raise prices or offer a
   poorer deal without their market being substantially undermined by the incursions of
   rivals.’
 Fifth, a market may contain segments (or sub-markets) where, because of product
   similarity, competition may be particularly strong. Identifying segments within the
   market can sometimes be important in clarifying how competition works.
 Finally, the market is a multi-dimensional concept with dimensions of product,
   functional level, geography and time.

What is Demand Substitution?
Demand substitution focuses on the reaction of consumers to price and quality changes

Factors include:
    Uses of product
    Similarity of product
           o are the products similar in design, construction or packaging? The more
               alike two products are the more likely it is that they are substitutes
    Promotional method
           o does the respective advertising target the same audience?
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             o Rolls Royce v Holden
         Distribution method
             o The greater the similarity the more likely it is that they are in the same
                 market

What is Supply Substitution?
   Cross elasticity of supply - substitute one source of supply for another

                       Firm A                                                        Firm B
                     Aluminium                                                     Aluminium
                    window frames                                                   guttering


          Can Firm B switch production in the relatively short term to making window frames?
          Is this a real rather than a remote possibility? If so, then A and B are in the same market.


Queensland Wire Industries v BHP - One firm can only be regarded as a supply substitute
for another firm if it is able to switch production without the need to invest in entirely
new capacity such as plant and equipment

What are Geographic features?
Determined by applying the principles of demand and supply substitution.
Factors:
    Nature of product – Is it perishable? Does it need to be consumed quickly?
    Are there regulatory constraints? i.e. government regulation
    Transport costs
    Functional level at which the product
    Local demand, suitable premises and/or staff

CASE: TPC v Nicholas Enterprises
  1. Retail packaged beer market was held to include two hotels situated 10 km apart
  2. Would a price increase in beer at place X make everyone go to place Y

What about Submarkets?
  1. Submarkets are NOT defined in the TPA
  2. Submarkets are the more narrowly defined, typically registering some
      discontinuity in substitution possibilities - CASE: Re Queensland Co-operative
      Milling Association

What about Brand markets? (worth a mention)
  1. Single brand markets are possible
  2. However difficult to determine weather or not a separate market exists

CASE: Eastman Kodak Co v Image Technical Services
Supply of spare parts for Kodak photocopier could only use Kodak parts

CASE: Hugin v Commissioner of European Communities
Cash register parts also separate market

CASE: United Brands v E.C. Commission
Bananas also in a separate market to fruit
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Step 2 – What is the level of competition without conduct?
How do you determine the level of competition?
Competition is a process rather that a situation.

Competition can be determined via:
  1. CASE: Re Queensland Co-op Milling Association
          a. The elements of market structure which we would stress as needing to be
              scanned in any case are these:
          b. the number and size distribution of independent sellers, especially the
              degree of market concentration;
          c. the height of barriers to entry, that is the ease with which new firms may
              enter and secure a viable market;
          d. the extent to which the products of the industry are characterised by
              extreme product differentiation and sales promotion;
          e. the character of "vertical relationships" with customers and with suppliers
              and the extent of vertical integration; and
          f. the nature of any formal, stable and fundamental arrangements between
              firms which restrict their ability to function as independent entities.

*** Number 2 is the MOST important - the condition of entry
The ease with which firms may enter establishes the possibilities of market concentration
over time; and it is the threat of the entry of a new firm or a new plant into a market
which operates as the ultimate regulator of competitive conduct

How does market structure affect competition?
Market structure includes:
    market concentration
           o i.e. how saturated is the market already with products?
    barriers to new entry
           o how hard is it to get into the market?
    the level of vertical integration
           o increased levels of vertical integration may suggest a reduction in
              competition, but, in fact, be an efficient response to strong competition
    the level of product differentiation
           o Product differentiation gives each firm within the market some market
              power

IMPORTANT: The competition implications of concentration, integration and product
differentiation are uncertain, no such doubt exists about barriers to new entry.

     1. They must be kept as low as possible
     2. Barriers to entry determine the threat of potential competition
           a. A barrier may be anything which deters new entrants to the market
               including start-up costs; access to suppliers, buyers, technology, skilled
               employees; entrenched brand loyalties; excessive advertising costs; large
               research and development costs


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     3. The threat of potential competition is probably the single most important element
        in determining the overall level of competition - Queensland Wire Industries v
        BHP
     4. The higher the barriers to entry the less competition one would expect, all other
        factors being equal.


Step 3 – What is the level of competition with conduct?
What is the Market Conduct?
Competition requires that each firm in the market sets its own price according to its
perception of the prevailing market forces.
    1. Therefore, any activity that takes pricing out of the hands of the individual firm
       is potentially anti-competitive
           a. i.e. agreeing to set the same price.

Therefore, an agreement that is likely to substantially lessen competition is:
    Does it significantly alter the structure of market to make it less competitive?
     (for example, a joint venture between the only two bauxite producers, who were
     previously competitors, is going to have a major effect on the structure of the
     market for the supply of bauxite); or
    Does it leads to significantly less aggressive pricing in the market, or substantially
     reduces the options available to buyers?

How do you measure market performance?
Market structure and market conduct are important only in so far as they affect the
performance of the market Sustained excess profits:
    Prices unrelated to cost structures
    Sustained excess capacity
    Low levels of innovation
    Inefficient production techniques
    Failure to meet demand changes
    Survival of inefficient firms.

Commercial activities that are prohibited:
        – s 45 collusion boycotts, price fixing and anti-competitive agreements
        – s46 mis-use market power
        – s47 exclusive dealings third line forcing
        – s 48 resale price maintenance
        – s50 mergers.




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Step 4 – Has Competition been Lessened?
What are the Fundamental concepts?
2 Steps:

     1. ‘Purpose’ must be understood in the light of s 4F
           a. the relevant purpose may be one of a number of purposes provided that it
              is a substantial purpose
           b. the relevant purpose does not have to be the only or even the dominant
              motive behind the conduct - Hughes v WACA

     2. ‘Lessening’ includes ‘preventing’ or ‘hindering’- TPA s 4G
           a. Rural Press v ACCC - ‘substantial’ means substantial ‘in the sense of
               being meaningful or relevant to the competitive process’
           b. The likelihood of competition being lessened must be more than a mere
               possibility. It must be a real possibility - Radio 2UE Sydney Pty Ltd v
               Stereo FM

Has Conduct Lessened Competition? (IMPORTANT!!!!!!!!!!!!!!!!)
Must prove that particular conduct is likely to have the effect of substantially lessening
competition via:
   1. ‘Future with, and without’ TEST? ****VERY IMPORTANT
                                   Applied in:
          a. CASE: Dandy Power Equipment v Mercury Marine
                                       and
          b. CASE: Stirling Harbour Services v Bunbury Port Authority

1.      Determine market - DONE
2.      Determine level of competition in market (look at concentration, barriers to
        entry level of integration, product differentiation) without the conduct -
        DONE
3.      Determine level of competition in market with the conduct - DONE
4.      Compare steps 2 and 3 to determine whether there is likely to be a meaningful
        decrease in competition.
             a. Do this by the AUTHORISATION TESTS

What is Authorisation?
Conduct from s 45-s50 (other than s 46) which might otherwise be in breach of Part IV of
the Act may be authorised: s 88 (1) to (9). Authorisations are dealt with by the ACCC

     1. Authorisation only occurs if commission is satisfied in all the circumstances that
        the conduct will result in a public benefit that outweighs the public detriment.
     2. Public benefit and detriment is worked out on a fact by fact basis.
            a. CASE: QLD Wire Case; ACI Operations

What is Notification?
Notification applies to all types of exclusive dealing conduct under s 47, but not to other
types of anti-competitive conduct: s 93(1).
No hearing, must advise ACCC, must pay prescribed fee

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What are the authorisation tests?
  1. If benefits to the public outweigh the detriment to the public constituted by the
      lessening of competition – then the courts will rule a breach - s 90(6)+(7).
  2. In relation to conduct which is not subject to a test of substantially lessening
      competition, a test of substantially lessening competition will be authorised if the
      benefit to the public that the conduct ought to be allowed: s 90(8)


                                                             Only the ACT can authorise a merger (must
                                                             have benefit to public) s 95AZH
                                          Lessening
         Public                               of
        Benefits                         Competition         ****DO THE BENEFITS OUTWEIGHT
                                                             LESSENING OF COMPETITION?
                                                             What is public detriment?

Analyzing the degree to which the conduct will lessen competition in the market

What is Public Detriment?
  1. Public detriment is largely determined by analyzing the degree to which the
      conduct will lessen competition in the market
          a. It is not necessary to determine whether there will be a substantial
              lessening of competition.
  2. The greater the lessening of competition the greater will be the public detriment.
  3. The larger the public detriment the larger must the public benefits be to permit
      authorisation.

What are public benefits?
NOT defined in act BUT is defined in Common Law:
There must be a benefit to the public

CASE: Re Queensland Co-op Milling Association
Wide meaning and includes anything of value to the PUBLIC generally most importantly
are the economic goals of efficiency and progress

CASE: ACI Operations
A number of items which it considered to be of public benefit depending on the
circumstances:
 economic development, eg in natural resources, encouragement of exploration,
   research and capital investment;
 improvement in the quality and safety of goods and expansion of consumer choice;
 supply of better info to consumers & buss to permit informed choices in their dealings;
 promotion of equitable dealings in the market;
 promotion of cost savings resulting lower prices at all levels in the supply chain;
 development of import replacements;
 growth in export markets;
 steps to protect the environment.

Balancing detriment and benefits
Authorisation ultimately depends on a balancing of benefits and detriments
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Step 5 – What are the Penalties and Remedies?
What are the Penalties and remedies?
   S76(1A) corporations $10 million or three times the benefit (benefit can be 10 per
      cent of the corporations annual turnover)
   S76(1B) individuals $500,000
   Other civil orders – injunctions s80 damages s82, contract void, s87 and
      compliance programs s87B

What are the factors the courts will consider in handing down penalties?
The court will take into account a number of factors in setting the level of the penalty.
CASE: TPC v CSR include the following:

1.      The nature and extent of the contravening conduct.
2.      The amount of loss or damage caused
3.      The circumstances in which the conduct took place.
4.      The size of the contravening company.
5.      The degree of power it has, as evidenced by its market share and the ease of entry
        into the market.
6.      The deliberateness of the contravention and the period over which it extended.
7.      Whether the contravention arose out of the conduct of senior management or at a
        lower level.
8.      Whether the company has a corporate culture conducive to compliance with the
        Act, as evidenced by educational programs and disciplinary or other corrective
        measures in response to an acknowledged contravention.
9.      Whether the company has shown a disposition to co-operate with the authorities
        responsible for the enforcement of the Act in relation to the contravention

Additional factors as appropriate for the court to consider
CASE: ACCC v SIP Australia
  1. Nature of the subject goods and their importance to the community;
  2. Whether the accused firm improperly obtained a financial advantage;
  3. Whether the firm came forward and revealed its own contraventions
  4. Whether the firm had offered ongoing assistance to the ACCC in its investigation

Other orders (including civil remedies)
 Order interim and permanent injunctions: s 80
 Award damages for any losses caused by a contravention of the Act: s 82.
 Declare a contract void or vary a contract: s 87.
 Order a person to refund money or return property, to arrange for the repair of goods,
   to provide services or to sign a document: s 87. Section 87 gives the court the
   ultimate power to impose terms of trading upon commercial parties should they fail to
   agree.
 Enforce undertakings: s 87B(4). The ACCC has the power to accept undertakings
   from firms as to their future conduct (s 87B). The court has the power to enforce
   these undertakings.
 Order compliance programs (may be part of enforced undertaking s 87B) or (part of a
   probation order made under s 86C(2))

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Regulatory & Tribunal Bodies
Administration of the competition laws
There are 3 bodies are given responsibilities under the Trade Practices Act

1. Australian Competition and Consumer Commission (ACCC)
Primary responsibility for the competition laws

Roles:
 enforcement of the provisions of the Trade Practices Act;
 conducting authorisation hearings;
 providing information and guidance on the Trade Practices Act to the business world
  and to consumers;
 conducting research into matters affecting consumers or matters which are referred to
  the Commission by the Minister or the National Competition Council;
 making determinations under the access regime in Part IIIA of the Act

2. Australian Competition Tribunal (ACT)
Hears Appeals from ACCC
Its functions are:
       to conduct authorisation applications in respect of mergers;
       to review authorisation applications on appeal from the ACCC;
       to review notifications that have been withdrawn by the ACCC; and
       to hear appeals from decisions in access matters under Part IIIA of the Act

Made up of 3 members
1 president must be a judge of the Federal Court
Other 2 are not judges (appointed b/c of their expertise in buss, eco or public admin)

3. National Competition Council (NCC)
Policy review and research body also reviews state fair trading legislation

Made up of a president and up to 4 other Councillors.
Its function is to research and advise on matters referred to it by the Minister and to carry
out any other function conferred on it by a law of a State or Territory

Review by the Tribunal
If refused authorisation may apply to ACT for a review
Either the ACCC or the ACT may grant an interim authorisation pending hearing of the
matter by the ACT

Revocation of an authorisation
An authorisation may be revoked where there has been a material change of
circumstances since the authorisation was granted: s 91B




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