About market power
Market power is a business’s ability to insulate itself from competition.
A business with market power has more freedom to act without needing to worry how competitors, suppliers or customers will react. For example, it may be able to raise prices or lower quality without having to worry about losing customers.
To work out if a business has
substantial market power, we may look at:
- the number and size of businesses in that market
- how easy it is to set up a competing business in that market
- the extent of the business’s ability to ignore what competitors, suppliers or customers do.
market can have more than one business with
substantial market power.
Example of a business with substantial market power
A business owns the only cement works in a regional town. The next closest cement works is far away, so it’s expensive to have cement brought into town from elsewhere.
With no other commercially viable suppliers of cement in the town, the business can raise its prices above competitive levels.
The business has substantial market power in the supply of cement in the regional town.
Practices that are allowed
It's not illegal for a business to have or use market power.
For example, a business with market power may raise its prices above competitive levels. While charging high prices may seem unfair, it's not illegal. Learn more about what is and isn’t allowed when setting prices.
A business with substantial market power is also allowed to out-compete other businesses. For example, it can:
- attract customers through promotional campaigns
- use its skills and resources to develop a better product or service
- drive down its prices with efficiency improvements.
Competitive practices that improve efficiency, innovation, product quality or price competitiveness are unlikely to be a misuse of market power.
Learn more about the difference between competitive and anti-competitive conduct.
Practices that may be misuse of market power
It’s illegal for businesses with
substantial market power to do anything with the purpose, effect or likely effect of
substantially lessening competition.
Businesses with substantial market power must not do something which stops other businesses from competing on their merits. The law doesn’t label specific practices as a misuse of market power.
However, there are practices that can sometimes be a misuse of market power. Whether any particular example of these practices is a misuse of market power depends on the specific circumstances.
Refusal to deal
Businesses are generally entitled to choose whether they’ll supply or deal with another business. This includes competitors. Even if a business has substantial market power, they are usually not obligated to deal with other businesses.
In some situations, a business with substantial market power that refuses to deal may contravene the law if it limits the ability of others to compete on their merits.
Restricting access to an essential input
In some situations, a business with substantial market power may prevent or restrict a competitor’s access to an essential input. This may breach the law where this conduct has the purpose, effect or likely effect of substantially lessening competition.
An ‘essential input’ is a resource that can’t be substituted and is essential for the provision of goods and services. Restricting access to an essential input may prevent competitors from competing with a business on their merits.
Businesses compete by providing more compelling offers to consumers than their competitors. This often involves businesses undercutting prices offered by rivals. Low pricing almost always benefits consumers and is part of the competitive process.
However, in rare circumstances, very low pricing by a business with substantial market power may be predatory.
Predatory pricing occurs when a business substantially reduces its prices below its own cost of supply for a sustained period:
- causing competitors to exit the market
- disciplining or damaging competitors for competing aggressively, or
- discouraging potential competitors from entering the market.
Predatory pricing may result in a business losing money in the short to medium term. However, if the practice leads to reduced competition or the potential for competition, the business may be in a position to charge higher prices and maintain or increase its market share in the longer term.
While predatory pricing by a business with substantial market power can harm an individual competitor, the test is whether the conduct has the purpose, effect or likely effect of substantially lessening competition in a market.
Businesses are generally free to set their own sales promotions, including rebates.
Rebates usually don’t harm competition. In many cases, rebates are an example of the benefits of the competitive process. They give retailers an incentive to promote the supplier’s products and reduce the overall price that customers pay.
However, in a small number of situations, a business with substantial market power can substantially lessen competition when they offer rebates. This is most likely to occur where a rebate is conditional on a retailer meeting certain targets. This type of rebate can result in retailers being prevented from purchasing from competing suppliers. It can breach the law if it substantially reduces competition.
Unconditional rebates, which reduce the price of an item with no extra conditions placed on the retailer, will likely only raise concerns if the reduced price amounts to predatory pricing.
Margin or price squeezing
Businesses are generally entitled to charge different prices to different buyers for the supply of goods or services along the supply chain.
However, a business with substantial market power in the supply of a key input can disadvantage its competitors in downstream markets by reducing the margin available to these competitors. It could do this, for example, by charging its competitors an input price that makes it uncommercial for them to sell at a competitive price.
As competitors in the downstream market require the input and have limited alternative sources of supply, a margin or price squeeze can prevent equally efficient competitors in the downstream market from competing with the business on their merits.
Tying and bundling
Businesses are generally entitled to supply goods or services as part of a tied or bundled arrangement.
‘Tying’ occurs when a supplier sells one good or service on the condition that the purchaser buys another good or service from the supplier. For example, a printer supplier may sell a printer on condition that the customer also acquires ongoing servicing from the supplier.
‘Bundling’ occurs when a supplier only offers two products as a package or for a lower price if the two products are bought as a package. For example, a mobile phone operator may offer bundles of handsets and mobile phone service plans where the price of the handset and plan is cheaper if consumers buy them together than if they buy each one separately.
Tying and bundling are common commercial arrangements which usually don’t harm competition and, in many situations, promote competition by offering consumers more compelling offers.
However, in limited circumstances, tying or bundling by a business with substantial market power may contravene the law. This can occur when a business with substantial market power in one market uses a tie or bundle to extend or ‘leverage’ this market power into another market.