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Focus: Competition Law – September 2007

Predatory pricing: last-minute changes to Trade Practices Legislation Amendment Bill

In brief: On 11 September 2007, the Federal Government introduced into parliament further amendments to the Trade Practices Act 1974 (Cth). The further amendments introduce a new prohibition that applies specifically to below-cost pricing for anti-competitive purposes (also known as 'predatory pricing'). Partner Wendy Peter (view CV) and Lawyer Alistair Newton report on the implications of these changes for business.

How does it affect you?

  • Section 46 of the Trade Practices Act 1974 (Cth) prohibits a corporation with a substantial degree of power from taking advantage of its market power for an anti-competitive purpose.
  • In June 2007, the Federal Government introduced the Trade Practices Legislation Amendment Bill (No.1) 2007, which contains amendments to s46, introducing new provisions dealing with substantial market power. At this time, the 'Birdsville Amendment' proposed by Senator Barnaby Joyce to introduce a prohibition on sustained below cost pricing by corporations with substantial market share or substantial financial power was not accepted.
  • Senator Joyce has been able to secure last-minute changes to the Bill, which introduce amendments to s46 that prohibit sustained below-cost pricing by corporations with substantial share of a market for an anti-competitive purpose.
  • Because this new prohibition focuses on market share and does not require evidence of intended recoupment of losses, it significantly extends the application of s46 to – and increases the legal risks associated with – below-cost discounting by large corporations.

The existing prohibition

Section 46 of the Trade Practices Act 1974 (Cth) (the TPA) prohibits corporations that have a 'substantial degree of market power' from taking advantage of their market power for specified anti-competitive purposes. This prohibition extends to predatory pricing behaviour by a corporation with substantial market power. However, the application in practice of s46 to below-cost pricing has been difficult, and there has been debate about whether it is necessary to establish that the corporation is likely to recoup the losses it incurs by this conduct in order for there to be a misuse of market power in breach of the section.  

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Proposed amendments to s46

In response to small business concerns that s46 of the TPA was not effective in preventing large corporations from misusing their market power, the Federal Government introduced the Trade Practices Legislation Amendment Bill (No. 1) 2007 (the Bill) on 20 June 2007. The Bill introduced a number of changes to s46 aimed at making it easier to establish market power by providing that:

  • more than one corporation can have the requisite degree of market power; and
  • a corporation may have the requisite degree of power in a market, even though it does not substantially control the market or does not have absolute freedom from constraint by the conduct of competitors, customers or suppliers. 

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The 'Birdsville Amendment'

When these changes to s46 were announced, Senator Joyce indicated that they might not 'go far enough' to protect small business and, on 28 June 2007, he proposed the 'Birdsville Amendment' to the Bill (so-called because it was formulated by Senator Joyce in the Western Queensland town of Birdsville). Originally, the Birdsville Amendment provided for an entirely new prohibition, separate from the misuse of market power prohibition, against sustained below-cost pricing by corporations with 'substantial market share' or 'substantial financial power' for anti-competitive purposes.

Following negotiations between Senator Joyce and the Federal Treasurer's Office, a revised Birdsville Amendment has been accepted and introduced into Federal Parliament. The revised amendment does not include reference to 'substantial financial power', but applies to corporations with a 'substantial share of a market'.

New sub-sections 46(1AA) and (1AB) contain a prohibition on corporations with a substantial share of a market supplying goods or services for a sustained period at a price that is less than the cost to the corporation for the purpose of:

  • eliminating or substantially damaging a competitor;
  • preventing entry by another person into any market; or
  • deterring or preventing a person from engaging in competitive conduct in any market.

In the media release issued by Senator Joyce, he notes that this amendment will 'put to rest the conjecture with regard to the recoupment test'. The explanatory memorandum and second reading speech make it clear that recoupment of losses (or an intention to do so) does not have to be proved for a breach of this predatory pricing prohibition to be established.

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Substantial market share

If the Bill is passed in its amended form, corporations with substantial market share will be prohibited from supplying, or offering to supply, goods or services for a sustained period at a price that is less than the relevant cost to the corporation of supplying such goods or services for one of the three proscribed anti-competitive purposes.

The effect of these amendments is that it will no longer be necessary to prove that a corporation has 'substantial market power' to establish the threshold for the application of s46 to below-cost pricing. Under the new predatory pricing prohibition in s46(1AA), it will be sufficient to show that the corporation has a 'substantial share of a market'. In the past, high market share has not been sufficient to conclusively establish a substantial degree of power in a market, and courts have looked at other factors, including barriers to entry, to determine whether market power exists. Under the new amendments, a large market share of itself will be sufficient to attract the application of the predatory pricing provision, even where that market share does not equate to market power because there are low barriers to entry and a number of other competing firms with large market shares.

The application of the predatory pricing prohibition to corporations with a substantial market share, rather than market power, means that there will be an increased focus on the purpose element in the new predatory pricing prohibition. Corporations with a significant market share contemplating below-cost pricing will need to carefully consider the purpose, or purposes, behind the adoption of this strategy before implementing it. Purpose may be established by inference (s46(7)) or by direct evidence, and it is sufficient if the anti-competitive purpose is a substantial and operative one, even if the corporation has acted for a number of different purposes. There is frequently a fine line between competitive conduct and conduct that is intended to achieve one of the proscribed purposes of damaging or eliminating competitors, or preventing or deterring new entry into the market, which means that there will be some uncertainty for corporations considering whether to engage in sustained discounting. This is especially the case since recoupment of losses will not need to be established in order to show a breach of this new predatory pricing prohibition where there is sustained discounting.

In summary, as a consequence of the Birdsville Amendment to s46, there will be increased risk exposure for corporations with medium to large market shares proposing to discount below cost, especially those competing in markets where there is new entry or a number of smaller competitors. 

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