The prohibition against the misuse of market power only applies to businesses that have substantial market power. This is because such businesses have the power to negatively affect the competitive dynamics of a market.
A business has substantial market power when it has little or no constraints from its competitors or its customers for a sustained period. These businesses are effectively insulated against competition and are able to operate largely independently of market forces.
A number of factors can determine its degree of market power, such as:
- financial strength
- how difficult it is for competitors to enter the market
- whether the business can act with little regard to what its competitors, suppliers or customers do.
For example, a business with substantial market power may be able to raise prices or lower the quality of the goods or services they supply without the fear of losing a significant number of customers.
Other factors are also relevant. For example, a business will not have substantial market power, even if it has a large share of the market, if it is relatively easy for a competing business to enter that market. The threat of market entry acts as a constraint on the business's decision making.
Frozen Fruitbats operates Australia's first chain of frozen beverages made from freshly squeezed fruit juice. In its first year of operation, it was the only company that sold these products in the Australian marketplace. The equipment required to operate a frozen beverage business is widely available and relatively inexpensive. It is also quite easy to find appropriate retail sites from which to operate such a business. Since Frozen Fruitbats commenced operations, several other businesses selling frozen fruit-based beverages have established themselves in the market.
Even in its first year when it was the only supplier of frozen beverages made from freshly squeezed fruit, Frozen Fruitbats did not have substantial market power. Frozen Fruitbats could not dramatically raise its prices without suffering the negative consequence of losing customers. Firstly, sellers of other cool beverages are likely to pose a competitive constraint. Secondly, the ease with which a potential competitor can set up a frozen beverage business also constrains Frozen Fruitbats.
A business with a large market share may also deal with powerful suppliers or customers that constrain the degree of power it has in the market.
Food in a Tin is Australia's largest manufacturer of canned food goods. It owns 50 per cent of the canned food market in Australia and its products are well known amongst Australian consumers. Food in a Tin sells most of its products to the two major supermarket chains. This gives the chains strong bargaining power. The chains also have the power to bypass Food in a Tin and increase the amount of store-branded tinned foods they carry on their shelves. As a result, Food in a Tin does not have market power despite its large market share and strong reputation.