Misuse of market power (s46)

The Competition and Consumer Act 2010 has specific provisions prohibiting powerful players from abusing their market power. These prohibitions are contained in s. 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:

  1. What products are sufficiently close substitutes (the relevant product market)?
  2. What firms are sufficiently proximate to compete effectively (the relevant geographic market)?
  3. 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.

The firm may have a substantial degree of power in a market even though:

  1. the body corporate does not substantially control the market; or
  2. the body corporate does not have absolute freedom from constraint by the conduct of:
    1. competitors, or potential competitors, of the body corporate in that market; or
    2. persons to whom or from whom the body corporate supplies or acquires goods or services in that market.

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.

In determining whether, by engaging in conduct, a corporation has taken advantage of its substantial degree of power in a market, the court may have regard to any or all of the following non-exhaustive factors:

  1. whether the conduct was materially facilitated by the corporation's substantial degree of power in the market;
  2. whether the corporation engaged in the conduct in reliance on its substantial degree of power in the market;
  3. whether it is likely that the corporation would have engaged in the conduct if it did not have a substantial degree of power in the market;
  4. whether the conduct is otherwise related to the corporation's substantial degree of power in the market.

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 s. 46(1AA).