Competition: Best in Products, Worst in People

The American radio businessman David Sarnoff once said:

Competition brings out the best in products and the worst in people.

In my view, that nicely sums up the dilemma that we have in harnessing competition to deliver good outcomes without damaging our own ethics and morals. Competition is a means to an end. As consumers, we want cheap, affordable and high-quality products. The best way to ensure that is to have choice and competition. If there is no threat that I could change my custom from one business to another, there will be no desire for others to go to great efforts to deliver what I want. Competition ensures that businesses never forget that the customer is always right, and David Sarnoff was right in saying that competition brings out the best in products.

The other part of the quote is true too—competition can bring out the worst in people, especially when some businesses seek to stifle the competition that makes life hard. David Sarnoff himself, as President of RCA, had a large AM radio network in the 1920s and 1930s. The emergence FM radio, invented by Edward Armstrong, was a clear threat to Sarnoff, so he lobbied the Federal Communications Commission to make changes to the FM band, which rendered many FM radios at the time useless. He tied Armstrong up in endless litigation, contributing to Edward Armstrong's suicide in 1951. Not only that, the actions of RCA at the time put back the widespread adoption of FM radio for 20 or 30 years.

Although undesirable, the desire to damage a competitor is a perfectly rational response, and some element of it is simply the competitive process. I cannot compete vigorously without risking damage to some individual competitors. Where there are winners, there will always be losers, too. However, what we should not allow is businesses that seek to damage the competitive process as a whole rather than just individual competitors.

That is why I welcome the Harper review's draft report which was released on Monday. This has been the first comprehensive, root-and-branch review of our competition law for more than 20 years, and the review has made some recommendations to strengthen our competition laws, especially those concerning the misuse of market power is laws under section 46 of the Competition and Consumer Act. Their recommendations would prohibit a corporation that has a substantial degree of market power from engaging in conduct if the proposed conduct has the purpose, or would have, or be likely to have the effect of substantially lessening competition in that or any other market.

The Harper review's proposed wording differs from the current wording of section 46. Under our current laws to prove the misuse of market power three things must be proved: first, that the corporation must have a substantial degree of market power; second, the corporation must have taken advantage of that power; and, third, the corporation must have acted for the purpose of damaging a competitor, preventing the entry of a person to a market or preventing a person from engaging in competitive conduct. The last two of these tests have become problematic and the Harper review's recommendations essentially seek to alter these tests. As the ACCC said in its submission to the Harper review:

... as currently drafted and interpreted, the provision is of limited utility in prohibiting conduct by firms with substantial market power which has a detrimental impact on competition.

The most stark of these limitations is that for an action under section 46 to be successful the complainant must prove that the action has been taken for an anticompetitive purpose. The keyword there is 'purpose'. Because proving why I act is an incredibly high hurdle for people to meet in our courts. Proving that I did not go for a run this morning is a pretty simple matter—I didn't do it—but proving why I didn't do it would take lengthy debate. I would argue that it is simply because I was busy preparing this very important speech this morning, but my wife would probably say it is just because I'm lazy.

Senator Sterle: Which one is right?

Senator CANAVAN: She is right, Senator Sterle. The current wording of section 46 is the competition law equivalent proving intent in criminal law—it is a much harder thing to do. The Harper review has recommended that the purpose test should be supplemented by an effects test. This would mean that corporations with substantial market power must not engage in conduct that has the effect of damaging competition.

It is important to note here that there are two changes being proposed. The first is to make large firms with significant market power responsible for the effects of their decisions. Those that seek to oppose such a change must answer the question as to whether big businesses should take into account the effects of their decisions. Do large companies in our retail, financial and utility industries believe they have an obligation to act in ways that promote competition rather than detract from it?

The second change is that corporations will only be liable for the impact of their decisions on the competitive process, not on individual competitors. It is clear that the effect of some perfectly reasonable—indeed, socially beneficial—business decisions will harm competitors. The very act of opening up a business will take custom from one business to another, thus causing harm. What we do not want, however, is damage to the competitive process as a whole. It is one thing to open up a store and compete; it is another thing completely to engage in conduct that is exclusionary, predatory or deters others from opening up a business lest they risk being subject to such behaviour.

The Harper review's changes will also remove the 'take advantage' test. The take advantage test has become too obtuse and hard to interpret. The test that requires that the advantage be taken in respect of the market power a business might have is in effect another quasi-purpose test within section 46. You have to prove that a business acted in a way that gave them an advantage and they did so with the purpose of using that in their market power. The take advantage test has become one of great dispute in for recent competition law cases, including in Melway, Boral, Rural Press and Cement Australia. These cases have involved the courts launching into long, hypothetical deliberations about the conduct of a corporation in a hypothetical world in which it does not enjoy market power. After two of these cases, the parliament made additions to section 46 to clarify the take advantage test. As the Harper review has succinctly summed up, however:

It is doubtful that the amendments assisted.

It is probably clear now that we simply need to remove such a test to remove any such ambiguity that remains, and that is what the Harper review has recommended.

The broader case that the Harper review makes for change is strong and it is supported by both logic and evidence. The first point to make is that the introduction of an effects test would not simply end up protecting inefficient companies to the detriment of consumers. Out-competing your rivals by competing on merit would not amount to conduct that significantly lessens competition under the proposed changes. ACCC Chairman Rod Sims reiterated this in a recent letter to the Harper review, saying that section 46 should protect and promote the competitive process:

… not by protecting the losers, but by preventing conduct by firms in a position of substantial market power that excludes efficient and innovative competition which would otherwise benefit consumers.

I recognise that there are some that disagree with this view but I think we can all agree on one thing: this debate should be informed by evidence, not speculation, and we can use evidence in this case because an effects test exists here in Australia and there are examples of effects tests overseas in other competition law regimes.

Here in Australia, an effects test already exists in regards to the telecommunication sector. Part XIB of the Competition and Consumer Act specifically prohibits a telecommunication company with a substantial degree of market power taking advantage of that power, '… with the effect, or likely effect, of substantially lessening competition ...'.

Overseas an effects test is the predominant way that competition laws are enforced. The law in the United States prohibits conduct that unreasonably restrains competition by creating or maintaining monopoly power. The courts have largely interpreted this prohibition to only capture firms with substantial market power. The Federal Trade Commission stated in their submission to the Harper review:

In recent cases, intent is rarely, if ever, the focus of the analysis … A subjective intent test risks attributing too much weight to hyperbole or unrealistic speculation or too little weight to the harm from objectively anticompetitive acts.

Over the past century, US courts have moved from using intent to an expressly objective effects test.

This view was also summed up recently by the US Court of Appeals for the District of Columbia Circuit in the famous case—the US v Microsoft. They said in that case:

… to be condemned as exclusionary, a monopolist's act must have an "anticompetitive effect"—

and they use the word 'effect'—

That is, it must harm the competitive process and thereby harm consumers.

That is a very nice summary of exactly what the Harper review has recommended.

The US Federal Trade Commission also notes that the US courts apply the effects test pragmatically and that the test permits flexibility of proof based on the context and best available evidence. Similarly, in Europe they have provisions in their competition law relating to an 'abuse of dominance' test. Under the EU competition law—as well as in a number of European countries, including the UK and France—determining whether an arrangement is anticompetitive is assessed on the basis of its objective—like our test, the purpose test—or its effect on competition in the marketplace.

There is a simple effects test right here for the opponents of an effects test. If the effects test is to wreak such havoc on our economy, then people should be able to point to the effect of the effects test in other countries and here in our telecommunications sector. Surely, if the effects test is so detrimental to competition and if it is to have a chilling effect on the marketplace, that would have become apparent in the US and Europe, who have had decades of experience of such laws.

In a recent unpublished paper on New Zealand's competition law, a competition law expert from Howard University, Professor Andrew Gavil, noted that the omission of an effects text is inconsistent with trends in competition law internationally. He was highly critical of what he termed 'the counterfactual test'. That is the test that I described earlier that our courts have applied in trying to work out if corporations have taken advantage of their market power. Professor Gavil noted:

The counterfactual test substitutes a hypothetical inquiry into the conduct’s possible efficiencies for the more important question of its actual effects, both pro- and anti-competitive, when practised by a specific, dominant firm in a market with specific characteristics.

Professor Gavil gets to the heart of the issue when he says that the problem with the counterfactual test is that:

It never asks whether the anticompetitive effects are far more substantial than any realized efficiencies.

That is any efficiency associated with promoting competition or not regulating competition. I will put it in plainer English—mainly because my parents and children are in the gallery today, if they are still awake. The whole point of competition laws is to stop the negative effects of anticompetitive conduct and to promote the positive effects of pro-competitive conduct. We cannot achieve this unless we are actually looking at the effects of that conduct, not just their purpose.

As a legislator I am not interested in the state of mind of a big business and I am not concerned about the intent or purpose of their actions; I am interested in their effects. That is why we should have an effects test. We should have a competition law that is firmly focused on promoting the great benefits of competition, not on whether people are intending to act in a competitive way. If competition is a means to an end, why would we focus on the intent of actions and not their effect? I agree that competition is only a means to an end. It is a process to provide good things. With that in mind, competition laws should be firmly focused on those ends that are actually achieved by businesses, not what their hypothetical objectives or ends might be.

I agree with the ACCC: the proposed effects test is neither novel nor anticompetitive. I know that the recommendations the Harper review has made are now going out to consultation and there will be further submissions made on this. I certainly support the direction of the changes, but I too have some reservations about some of the proposals they have made. The Harper review has provided some defences to an effects test. First, the Harper review has said that a business could defend itself from a successful claim of misuse of market power by arguing that a rational business without market power would have acted in that same way. I am concerned that this would simply put us in the same hypothetical hyperspace that marks current section 46 cases. Although I note that the change that they have proposed would put the onus of proof on the business or on the defendant to prove that hypothetical situation rather than putting the onus of proof on the plaintiff or ACCC.

Second, the Harper review has provided an additional defence that the anticompetitive effect is in the long-term interests of consumers. I worry that that phrase is not well-defined enough in our current laws, although it has been used in the context of access pricing regulation. Even so, more work would have to be done to clarify exactly what that would mean in this context. Overall, however, I applaud the Harper review for suggesting these changes. Clarifying and strengthening our anticompetitive laws will be a shot in the arm for small businesses and farmers that are suffering under the yoke of too much market dominance. We should never put people in the position where they can basically be threatened or blackmailed into providing more and more every time. Business relationships are just like other relationships: they thrive best when there is give and take.

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