Tertiary education program

Conditional supply

A business that attaches any of the following conditions to the supply of goods or services, or refuses to offer a discount, may be engaging in exclusive dealing:

  • a condition that prevents the customer from acquiring goods or services from one of the business's competitors
  • a condition that prevents the customer from re-supplying the goods or services generally or to particular people
  • a condition that prevents the customer from re-supplying the goods or services in certain places
  • a condition that obliges the customer to acquire goods or services from another unrelated business (third line forcing).

A business also engages in exclusive dealing if it refuses to supply goods or services, or refuses to offer a discount, because the potential customer has not accepted one of the conditions set out above.

The competition test

Whether the imposition of such a condition, or the refusal to supply, will have an anti-competitive effect depends on a range of factors. The most important factors are:

  • the number and range of alternative sources of supply or substitutable (similar) products
  • the degree of market power held by the supplier
  • the number and range of alternative distribution channels available.

Where there is a range of alternative sources of supply, customers have a greater ability to resist the imposition of conditions. However, the conditional supply of goods or services may have an anti-competitive effect if, as a result, it is difficult for suppliers of similar goods or services to efficiently distribute their goods.

The imposition of such conditions may also breach the prohibition against the misuse of market power (for further information, see Module 3).

Example 1

As a result of a competitive tender process, Telco Ltd will be the only Australian retailer able to sell the latest version of the Pear Q-Phone. The Q-Phone is the most popular smartphone in Australia. Many of the features that make it so popular are protected by intellectual property rights; making it difficult for other phone manufacturers to produce a comparable product in the eyes of consumers.

Telco plans to sell the Q-Phone on the condition that customers sign up to its premium call plan for 24 months. Such a condition falls within the definition of exclusive dealing as it would limit the ability of customers to acquire telecommunications services from other providers. Owing to the popularity of the Q-Phone, it is likely that Telco's plan would be illegal as it will make it difficult for other telecommunications providers to compete in the mobile phone market as they are unable to supply the Q-Phone.

Example 2

Sunita runs a small office supplies wholesale business. Sunita offers a 20 per cent discount to customers that agree to acquire all of their office supplies from her business. Sunita's business faces intense competition from numerous similar wholesalers as well as large megastore office supplies retailers. Sunita's conduct is not illegal as it will not have the effect or likely effect of substantially lessening competition due to the intense competition in the office supplies wholesale market. There is nothing to prevent Sunita's competitors from competing by countering her offer.