Australia adopts new predatory pricing prohibition
By Kathryn Edghill, Partner and Graham Maher, Partner
11 October 2007
Recent amendments to the Australian Trade Practices Act have created a separate offence of predatory pricing which is not dependent upon a corporation having a dominant position in a market or substantial market power.
Traditionally the prohibition on misuse of market power has required that three distinct, but related elements, be established:
- a substantial degree of power in a market;
- the taking advantage of that power; and
- that the taking advantage be for a proscribed purpose, for example, eliminating a competitor.
In determining whether a corporation has a substantial degree of market power a corporation’s market share is a relevant, but not determinative, factor. Rather, Australian courts will consider all relevant market dynamics to determine whether a corporation is able to act largely unconstrained by its competitors or potential competitors, for example, by increasing its price without fear of losing market share. In order to demonstrate a taking advantage of market power, it must be shown that a corporation could not have engaged in the impugned behaviour but for its market power.
The traditional prohibition remains, however the new predatory pricing provision contains neither of the above elements. To establish a breach of this new provision all that is necessary is that a corporation:
- have substantial market share;
- that it discount below its relevant cost for a sustained period; and
- that this discounting be engaged in for the purpose, among others, of substantially damaging a competitor.
Neither the terms ‘relevant cost’ nor ‘sustained period’ are defined in the amendments and the only guidance provided for determining whether a corporation has substantial market share is that a court may have regard to the respective market shares of the corporation’s competitors.
Debate surrounding the introduction of the amendments indicates that they are intended to protect small business from, what has been perceived by some to be, aggressive pricing behaviour by larger retailers, particularly grocery chains, however their potential import is much wider. For example, it is possible that more than one competitor in any particular market may have substantial market share. If one or more competitors with substantial market share were to discount below cost, might an equally substantial rival legitimately complain? Further, a new entrant to a market without substantial market share, but with substantial financial resources, would appear to be free to discount below cost, while incumbents may be restrained from following.
The terms of the amendments raise further uncertainties. While some guidance may be gained from jurisprudence in other jurisdictions as to what a firm’s ‘relevant cost’ may be, there is no precedent nor guidelines from Australia’s competition regulator, the ACCC, as to how this test is to be approached nor what may be considered to be a ‘sustained period’ of discounting. Accordingly, corporations are likely to adopt a very conservative approach to their pricing strategy.
With the increasing emphasis upon the desirability achieving harmony in the enactment and judicial interpretation of antitrust provisions in various jurisdictions in which such laws exist, these new amendments are surprising and some commentators are predicting they are likely to be revisited once the forthcoming Australian Federal elections have been determined. However, even then, a revision is likely to be some way off and in the meantime international companies with a presence in Australia need to consider tailoring their pricing strategies to take into account the new environment.