PREDATORY PRICING: by Frank ZumboNews Weekly
Defending small business and farmers
, March 15, 2008
Tougher action is needed to ensure fair competition in Australia and to defend small business and farmers from predatory pricing, says Associate Professor Frank Zumbo.The Trade Practices Act needs to be strengthened, not to protect small business and farmers from competition, but to defend competition itself from anti-competitive or unethical practices by large and powerful companies.
Australia's Trade Practices Act is severely lacking in key areas such as the prevention of cartels, the prevention of abuses of power by large and powerful companies, and the prevention of unethical conduct by large businesses towards small businesses and farmers.
There are four areas needing reform to ensure fair competition for small businesses and farmers.1) The Birdsville Amendment needs to be enforced.
It is a new law targeted at anti-competitive below-cost pricing by companies having substantial market share, and was introduced because of the ineffectiveness of Section 46 of the Trade Practices Act. The High Court had given a very restrictive interpretation to key concepts in this part of the Act. These narrow interpretations effectively gave large and powerful corporations the green light to engage in anti-competitive conduct.
To correct this, the Birdsville Amendment states that:
"A corporation that has a substantial share of a market must not supply, or offer 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 the purpose of:
a) eliminating or substantially damaging a competitor of the corporation or of a body corporate that is related to the corporation in that or any other market; or
b) preventing the entry of a person into that or any other market; or
c) deterring or preventing a person from engaging in competitive conduct in that or any other market."
Anti-competitive below-cost pricing has long been considered an evil that has been used by large and powerful companies to destroy competition and increase their stranglehold on a market. Anti-competitive below-cost pricing has long been recognised as a particular evil that should be outlawed.
Contrary to the cries of the large retail chains, the Birdsville Amendment does not prevent Christmas sales, clearance sales or other promotional activities that may be engaged in from time to time. It is only concerned to stop sustained, below-cost pricing for an anti-competitive purpose. It is not targeted at discounting or even aggressive discounting, which are legitimate competitive tactics.2) Strong laws are needed to stop anti-competitive conduct by large and powerful companies
Such anti-competitive conduct can include:(a) Creeping acquisitions: individually small-scale acquisitions may not substantially lessen competition in breach of S 50 of the Trade Practices Act, but collectively creeping acquisitions may substantially lessen competition over time. They can lead to high levels of market concentration to the detriment of competition and the consumer. A Senate inquiry has recommended changes to the Act to stop creeping acquisitions.
(b) Anti-competitive price discrimination: the US and UK have strong legislation covering this behaviour, while it remains a problem area in Australia because of the ineffectiveness of S 46 of the Trade Practices Act.
In the UK, for example, the Competition Act 1998 says an abuse of market power occurs if it consists in "directly or indirectly imposing unfair purchase or selling prices or other unfair trading conditions"; or "applying dissimilar conditions to equivalent transactions with other trading parties, thereby placing them at a competitive disadvantage".
(c) Price-flexing: also known as geographic price discrimination. This arises where, for reasons unrelated to any difference in costs of supplying the different locations, a company charges a different price in different locations depending on the level of competition in those different locations. Thus, in highly concentrated markets or low competition areas consumers may face higher prices, while consumers in more competitive areas enjoy lower prices.
The Canadian Competition Act prohibits, on threat of punishment by imprisonment, a business from engaging in "a policy of selling products in any area of Canada at prices lower than those exacted by him elsewhere in Canada, having the effect or tendency of substantially lessening competition or eliminating a competitor in that part of Canada, or designed to have that effect".
Unlike the United States, Australia does not have a general divestiture or "break up" power to deal with the most serious breaches of the Trade Practices Act.
The insertion of a general divestiture power in the Trade Practices Act in relation to serious or repeated breaches of S 46 of the Act was supported in Recommendation 13 of the majority report from the Senate Inquiry into the Effectiveness of the Trade Practices Act 1974 in Protecting Small Business (p.66). While a divestiture remedy would be one of last resort, it would provide a strong deterrent against serious or repeated breaches of S 46, by sending a clear signal that such serious or repeated breaches are unacceptable from a competition and consumer point of view and could lead to a court-imposed break-up of the offending corporation.3) Stronger laws are needed to stop unethical conduct by large and powerful companies.
Section 51AC of the Trade Practices Act was introduced a decade ago with the intention of being the benchmark of appropriate standards of ethical conduct. However, the courts have stood in the way of this happening. Indeed, their onerous interpretation has seen S 51AC largely fall into disuse. It is simply too difficult and expensive to bring S 51AC cases.
This part of the Act was to deal with unconscionable conduct in business transactions. It refers to various situations that can arise between suppliers or business consumers. For example, the courts may have regard to:
• the relative strengths of the bargaining positions of the supplier and the business consumer;
• whether, as a result of conduct engaged in by the supplier, the business consumer was required to comply with conditions that were not reasonably necessary for the protection of the legitimate interests of the supplier;
• whether the business consumer was able to understand any documents relating to the supply or possible supply of the goods or services;
• whether any undue influence or pressure was exerted on, or any unfair tactics were used against, the business consumer or a person acting on behalf of the business consumer by the supplier, or a person acting on behalf of the supplier, in relation to the supply or possible supply of the goods or services;
• the amount for which, and the circumstances under which, the business consumer could have acquired identical or equivalent goods or services from a person other than the supplier;
• the extent to which the supplier's conduct towards the business consumer was consistent with the supplier's conduct in similar transactions between the supplier and other like business consumers;
• and various other specified considerations.
Australian legislation suffers limitations. There is no statutory definition of "unconscionable conduct". Nor is there a list of factors provided defining what is "unconscionable" for the purposes of S 51AC. There is a monetary cap of $10 million on the cases that can be brought under S 51AC.
The following represent a variety of statutory alternatives to promoting ethical business conduct:
• Removing the monetary cap for cases under S 51AC.
• Inserting a statutory definition of the term "unconscionable". Such a definition would set out a non-exhaustive benchmark for assessing conduct to determine whether or not it goes beyond what is reasonably necessary to protect the legitimate interests of the parties involved.
• Enacting a statutory duty of good faith. Already, there is growing judicial attention and support given to an implied duty of good faith in commercial contracts, especially in New South Wales. Its nature and scope are being defined with an increasing degree of precision from numerous court cases. Consequently, there is a ready body of law on which a statutory duty of good faith could quite readily and usefully draw upon in seeking to promote ethical business conduct.
• Inserting a statutory list of examples of the types of conduct that would ordinarily be considered to be "unconscionable", as an alternative to a statutory definition of "unconscionable".
Examples could include: a suppler being aware and taking advantage of the business consumer's lack of understanding of any documents relating to the supply or possible supply of the goods or services; a supplier exerting undue influence or pressure on, or engaging in unfair tactics against, the business consumer or against a person acting on behalf of the business consumer; a supplier's conduct towards the business consumer being significantly inconsistent with the supplier's conduct in similar transactions between the supplier and other like business consumers, etc.
• Enacting a new legislative framework within the Trade Practices Act to deal with unfair contract terms in business-to-business contracts involving small businesses.4) Mandatory industry codes of conduct.
These can be important in setting standards of appropriate conduct by large and powerful companies towards small business and farmers.
Such codes of conduct can play a vital role in promoting transparency and alternative dispute-resolution processes in relationships where small businesses and farmers may be vulnerable to abuses of contractual power by a larger and more powerful company. All too often there are information asymmetries whereby the larger and more powerful company may possess information that is not being disclosed to the small business or farmer despite that information being critical to the ability of the small business or farmer to make an informed decision.
Similarly, mandatory industry codes of conduct can assist in setting out processes for the resolution of disputes in a timely and low-cost manner, without recourse to expensive legal action by the small business and farmer. Such processes can include mediation, arbitration or expert determination. There may also be scope to appoint an industry ombudsman.- Associate Professor Frank Zumbo, of the University of NSW School of Business, co-drafted the "Birdsville Amendment" to the Trade Practices Act, which outlaws predatory pricing. Queensland Nationals Senator Barnaby Joyce successfully put it through parliament in the dying days of the Howard Coalition Government. The above article is a summary of the key changes Dr Zumbo believes are necessary to ensure fair competition in Australia for small business and farmers, particularly in the face of the growing power of the supermarkets and processors of rural product. The full paper was recently presented to the National Civic Council's 2008 national conference.