Competition



Step 1 – What is Competition? Is there a Market?What is Competition? competition as the primary regulator of economic activitymust 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 competitorsTrade 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 principlesCompetition should be seen as a process for allocating resources, determining cost and distribution structures and fixing the price of exchangeCompetition must be fairIf UNFAIR then Misuse of market power AND/ORExclusive dealing AND/ORCollusion 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 petition is not an end in itselfObject of act is to enhance the welfare of Australians through the promotion of competition and fair trading and consumer protectionIs there a Market? (IMPORTANT!)For there be a market must recognize 3 inter-related things:market structuremarket conduct market performance market performance will inevitably follow from a more competitive market structurefirms within the market might collude thus negating the competitive structureIMPORTANT: 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 influencehow the market is performing in terms of efficiency and dynamism.S45 - price and output collusion between competitors as the worst anti-competitive evilS46 - 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:efficient allocation of resources;efficient allocation of resources requires excess profits to be eliminated over timesome markets the competition tends to centre on innovation (IMPORTANT)productive or technical efficiencyWell-performing markets should produce products at least cost. 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 possibleefficient use of economies of scaleCompetition policy should concentrate on the conduct of the oligopolist, duopolist or monopolist.dynamic efficiencies- innovationThe intensity of dynamic efficiency is reflected in expenditure on research and development.In such industries the costs of research and development are very high relative to the costs of production. Consequently, it is not uncommon in such industries to find accumulations of market power, even monopoliesDynamic markets present a real problem for competition policy. How should they be regulated? 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. 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 marketsImprove export and locally produced against importsSome studies have indicated that there is a strong link between domestic competition and export success – although not widely acceptedDeterming a Market via the lawA wrong definition of market will often lead to an incorrect analysis of the level of competition - Singapore Airlines v Taprobane ToursWhat is the concept of ‘market’?Not defined in TPA except says it includes imports s4What is the Product, Geographic and Functional aspects of a market?***MUST go through and determine these things: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 analysisMarket volatility as markets are always changingNeed to look at the LONG TERM effect on the market - CASE: Boral v ACCCThe key to markets is the notion of substitutionBest description of a market comes from a decision of the Trade Practices Tribunal (CASE: Re Queensland Co-op Milling Ass) where it was said:Look at number & size of independent sellers; barriers to entry; vertical relationships and restrictions.A market is the field of actual and potential transactions between buyers and sellers where there can be strong substitutionAt 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 Ltd2 sides: demand substitution and supply substitutionFirst, 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 multidimensional 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 productSimilarity of productare the products similar in design, construction or packaging? The more alike two products are the more likely it is that they are substitutesPromotional methoddoes the respective advertising target the same audience?Rolls Royce v HoldenDistribution methodThe greater the similarity the more likely it is that they are in the same marketWhat is Supply Substitution?Cross elasticity of supply - substitute one source of supply for anotherQueensland 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 equipmentWhat 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 regulationTransport costsFunctional level at which the productLocal demand, suitable premises and/or staffCASE: TPC v Nicholas EnterprisesRetail packaged beer market was held to include two hotels situated 10 km apart Would a price increase in beer at place X make everyone go to place YWhat about Submarkets?Submarkets are NOT defined in the TPA Submarkets are the more narrowly defined, typically registering some discontinuity in substitution possibilities - CASE: Re Queensland Cooperative Milling AssociationWhat about Brand markets? (worth a mention)Single brand markets are possibleHowever difficult to determine weather or not a separate market existsCASE: Eastman Kodak Co v Image Technical ServicesSupply of spare parts for Kodak photocopier could only use Kodak partsCASE: Hugin v Commissioner of European CommunitiesCash register parts also separate marketCASE: United Brands v E.C. CommissionBananas also in a separate market to fruitStep 2 – What is the level of competition without conduct?How do you determine the level of competition?Competition is a process rather that a petition can be determined via:CASE: Re Queensland Coop Milling AssociationThe elements of market structure which we would stress as needing to be scanned in any case are these:the number and size distribution of independent sellers, especially the degree of market concentration;the height of barriers to entry, that is the ease with which new firms may enter and secure a viable market;the extent to which the products of the industry are characterised by extreme product differentiation and sales promotion;the character of "vertical relationships" with customers and with suppliers and the extent of vertical integration; andthe 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 entryThe 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 conductHow does market structure affect competition?Market structure includes:market concentrationi.e. how saturated is the market already with products?barriers to new entryhow hard is it to get into the market?the level of vertical integrationincreased levels of vertical integration may suggest a reduction in competition, but, in fact, be an efficient response to strong competitionthe level of product differentiationProduct differentiation gives each firm within the market some market powerIMPORTANT: The competition implications of concentration, integration and product differentiation are uncertain, no such doubt exists about barriers to new entry. They must be kept as low as possibleBarriers to entry determine the threat of potential competitionA 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 costsThe threat of potential competition is probably the single most important element in determining the overall level of competition - Queensland Wire Industries v BHPThe 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.Therefore, any activity that takes pricing out of the hands of the individual firm is potentially anti-competitivei.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); orDoes 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 structuresSustained excess capacityLow levels of innovationInefficient production techniquesFailure to meet demand changesSurvival of inefficient mercial 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.Step 4 – Has Competition been Lessened?What are the Fundamental concepts?2 Steps:‘Purpose’ must be understood in the light of s 4Fthe relevant purpose may be one of a number of purposes provided that it is a substantial purposethe relevant purpose does not have to be the only or even the dominant motive behind the conduct - Hughes v WACA‘Lessening’ includes ‘preventing’ or ‘hindering’- TPA s 4GRural Press v ACCC - ‘substantial’ means substantial ‘in the sense of being meaningful or relevant to the competitive process’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 FMHas Conduct Lessened Competition? (IMPORTANT!!!!!!!!!!!!!!!!)Must prove that particular conduct is likely to have the effect of substantially lessening competition via:‘Future with, and without’ TEST? ****VERY IMPORTANT Applied in:CASE: Dandy Power Equipment v Mercury Marine andCASE: Stirling Harbour Services v Bunbury Port AuthorityDetermine market - DONEDetermine level of competition in market (look at concentration, barriers to entry level of integration, product differentiation) without the conduct - DONEDetermine level of competition in market with the conduct - DONECompare steps 2 and 3 to determine whether there is likely to be a meaningful decrease in competition.Do this by the AUTHORISATION TESTSWhat 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 ACCCAuthorisation only occurs if commission is satisfied in all the circumstances that the conduct will result in a public benefit that outweighs the public detriment. Public benefit and detriment is worked out on a fact by fact basis. CASE: QLD Wire Case; ACI OperationsWhat 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 feeWhat are the authorisation tests?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).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)0168910Only the ACT can authorise a merger (must have benefit to public) s 95AZH ****DO THE BENEFITS OUTWEIGHT LESSENING OF COMPETITION?What is public detriment?Analyzing the degree to which the conduct will lessen competition in the marketWhat is Public Detriment?Public detriment is largely determined by analyzing the degree to which the conduct will lessen competition in the marketIt is not necessary to determine whether there will be a substantial lessening of competition.The greater the lessening of competition the greater will be the public detriment.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 publicCASE: Re Queensland Coop Milling AssociationWide meaning and includes anything of value to the PUBLIC generally most importantly are the economic goals of efficiency and progressCASE: ACI OperationsA 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 benefitsAuthorisation ultimately depends on a balancing of benefits and detrimentsStep 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 $500,000Other civil orders – injunctions s80 damages s82, contract void, s87 and compliance programs s87BWhat 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:The nature and extent of the contravening conduct.The amount of loss or damage causedThe circumstances in which the conduct took place.The size of the contravening company.The degree of power it has, as evidenced by its market share and the ease of entry into the market.The deliberateness of the contravention and the period over which it extended.Whether the contravention arose out of the conduct of senior management or at a lower level.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.Whether the company has shown a disposition to co-operate with the authorities responsible for the enforcement of the Act in relation to the contraventionAdditional factors as appropriate for the court to considerCASE: ACCC v SIP AustraliaNature of the subject goods and their importance to the community; Whether the accused firm improperly obtained a financial advantage; Whether the firm came forward and revealed its own contraventions Whether the firm had offered ongoing assistance to the ACCC in its investigationOther orders (including civil remedies)Order interim and permanent injunctions: s 80Award 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))Regulatory & Tribunal BodiesAdministration of the competition lawsThere are 3 bodies are given responsibilities under the Trade Practices Act1. Australian Competition and Consumer Commission (ACCC)Primary responsibility for the competition lawsRoles: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 Act2. Australian Competition Tribunal (ACT)Hears Appeals from ACCCIts 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 ActMade up of 3 members1 president must be a judge of the Federal CourtOther 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 legislationMade 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 TerritoryReview by the TribunalIf refused authorisation may apply to ACT for a reviewEither the ACCC or the ACT may grant an interim authorisation pending hearing of the matter by the ACTRevocation of an authorisationAn authorisation may be revoked where there has been a material change of circumstances since the authorisation was granted: s 91B ................
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