The Trade Practices Act 1974 (the Act) has specific provisions prohibiting powerful players from abusing their market power. These prohibitions are contained in Section 46 of the Act, which prohibits the misuse of market power.
The tests for misuse of market power
To determine whether there has been a misuse of market power, three questions have to be answered.
1. Does the company have substantial market power?
2. Is it taking advantage of that power?
3. Is it using the power for an illegal purpose?
Substantial market power
Market power is the ability of a firm to insulate itself from competition. The market has to be defined by asking three questions:
(a) what products are sufficiently close substitutes (the relevant product market)?
(b) what firms are sufficiently proximate to compete effectively (the relevant geographic market)?
(c) what is the functional level of the market?
Within that market a firm’s market power will be determined by a combination of factors including:
how difficult it is for competitors to enter the market
the firm’s ability to behave with little regard to what its competitors, suppliers or customers do
the firm’s market share
the firm’s financial strength
the firm’s ability to consistently restrict competition.
Taking advantage of market power
To take advantage of substantial market power requires only that the power be used: Queensland Wire Industries Pty Ltd v BHP (1989) ATPR 40-925.
The question is essentially whether the action could be taken if the firm did not possess market power. In the example case, taken from TPC v CSR Ltd (1991) ATPR 41-076, the action taken by CSR would have been useless if the plasterworks rarely sold CSR products.
In Melway Publishing Pty Ltd v Robert Hicks Pty Ltd [2001] HCA 13, the High Court said that it is sufficient to establish that the existence of market power made it easier to act in a prohibited way.
Illegal purpose
It is not illegal to have market power or to use it. Only if the conduct is engaged in for an illegal purpose is there a contravention. The Act 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: Mark Lyons Pty Ltd v Bursill Sportsgear Pty Ltd (1987) 75 ALR 581. It is enough that it be one of the purposes, and a substantial one.
For more information about 'predatory pricing', please see the discussion on s46(1AA).
