Misuse of market power
A business with a substantial degree of power in a market is not allowed to use this power for the purpose of eliminating or substantially damaging a competitor or to prevent a business from entering into a market. This behaviour is referred to as ‘misuse of market power’.
The possession of market power of itself is not unlawful.
To determine whether there has been a misuse of market power, the courts will consider three questions:
- does the company have substantial market power?
- is it taking advantage of that power?
- is it using the power for an illegal purpose?
Market power is the ability of a business to insulate itself from competition.
The market may be considered by asking three questions:
- which products are sufficiently close substitutes (the relevant product market)?
- which other businesses are sufficiently nearby to compete effectively (the relevant geographic market)?
- what is the functional level of the market (this relates to the stage(s) in the production/distribution process covered by a market)?
Within that market a business’s market power may be determined by a combination of factors such as:
- how difficult it is for competitors to enter the market
- the business’s ability to behave with little regard to what its competitors, suppliers or customers do
- the market share of the business
- the financial strength of the business
- the ability of the business to consistently restrict competition.
In determining whether, by engaging in conduct, a business has taken advantage of its substantial degree of power in a market, the court may have regard to the following factors:
- whether the conduct was materially facilitated by the business's substantial degree of power in the market
- whether the business engaged in the conduct in reliance on its substantial degree of power in the market
- whether it’s likely that the business would have engaged in the conduct if it did not have a substantial degree of power in the market
- whether the conduct is otherwise related to the business's substantial degree of power in the market.
It is not illegal to have market power or to use it. Conduct by a business with market power is only a contravention of the Competition and Consumer Act 2010 (CCA) if it is carried out for an illegal purpose.
The CCA spells out illegal purposes as follows:
- eliminating or substantially damaging a competitor
- preventing the entry of a person into that or any other market
- deterring or preventing a person from engaging in competitive conduct in any market.
The courts have established that the illegal purpose need not be the only purpose, nor even a dominant purpose, of the conduct in question. It is enough that it be one of the purposes, and a substantial one.
One way in which a business may misuse its market power is to set prices at a sufficiently low level with the purpose of substantially damaging or eliminating a competitor. This is known as predatory pricing.
s.46 — Misuse of market power