Predatory Pricing in Australia

The United States Department of Justice has recently released a report on section 2 of the Sherman Act. It emphasises (at p 11) that the role of competition law is protection of competition not competitors (a philosophy espoused by our Government but not reflected in our new predatory pricing laws). In the context of predatory pricing it highlighted that a recoupment requirement ‘serves as a valuable screening device to identify implausible predatory-pricing claims’ (p 69) (an element not required by our targeted predatory pricing laws and that soon will (expressly) not be required by our core misuse of market power provision) and that it does not consider a ‘meeting competition’ defence should apply to such claims (p 71) (it’s widely thought this would apply to defeat the ‘purpose’ element of our predatory pricing laws). The DOJ also urges that it is ‘important to develop sound, clear, objective, effective, and administrable predatory-pricing rules that enable firms to know in advance whether their price cutting will result in antitrust liability’.

The EU is also currently conducting an review of its abuse of dominance provision (Article 82 Review) and is expected to release its report shortly – the report is expected to focus on an increasingly effects-based application of abuse of power provisions (see speech by Neelie Kroes to Fordham Conference, September 2008). Kroes notes that the guidance she proposes for Article 82 will ‘focus on those cases that clearly lead to anti competitive effects’

Australia, on the other hand, is increasingly focussing on the purpose, rather than the effect, of dominant firm conduct to determine its legality. The primary misuse of market power provision (s 46(1)) prohibits firms with a substantial degree of market power from taking advantage of that power for a prohibited purpose. A number of calls to replace or supplement the purpose element with an effects-based test have failed. This provision has been interpreted restrictively. Proposed changes to the law (Trade Practices Legislation Amendment Bill 2008 (awaiting assent)) may broaden its operation by providing some definitional assistance for the ‘taking advantage’ element. In relation to predatory pricing conduct it will also insert a new provision (s 46(1AAA)) which will expressly provide that “If a corporation supplies goods or services for a sustained period at a price that is less than the relevant cost to the corporation of supplying the goods or services, the corporation may contravene subsection (1) even if the corporation cannot, and might not ever be able to, recoup losses incurred by supplying the goods or services.”

In addition to the general abuse of power provision in s 46(1) Australia recently (2007) adopted the ‘Birdsville Amendment’ – s 46(1AA) – which prohibits a corporation with substantial market share from engaging in sustained below cost pricing (the relevant cost for this purpose is not defined) for a prohibited purpose (broadly defined). There is no necessity for the below cost pricing to be linked to the market share. A recent attempt by the current government to amend this provision to replace market share with market power and to insert a ‘taking advantage’ element (to ensure there was at least a causal nexus between market share and the prohibited conduct) failed to pass through the Senate. Consequently, in relation to predatory pricing conduct in Australia there remains an emphasis on purpose over effect; there is no attempt to target that pricing conduct likely to be genuinely harmful to competition (as opposed to competitors), no defence and no possibility of having the conduct authorised in advance. Large firms should, therefore, be very wary before engaging in any sort of sustained (whatever that means) below cost pricing.

The Birdsville Amendment is flawed in many ways. It clearly fails the US DOJ’s principle of focusing on competitive effects over effects on competition, of being ‘clear’ and allowing predictability for business. It also fails any sort of common sense test; prohibitions on abuse of power generally must be treated with caution, given the recognised difficulty in distinguishing between vigorously competitive and efficient dominant firm conduct and anti-competitive dominant firm conduct; this difficulty is more pronounced with predatory pricing conduct given the clear desirability (for consumers) of low cost pricing in most cases.

We can only hope that the Birdsville Amendment will be short lived – unfortunately, it appears the former government (regardless of its true feelings about this law) will continue to thwart any attempt to discard it, at least for the foreseeable future.

For more detail on Australia’s new predatory pricing law see my article: Clarke, ‘Australia’s Radical Predatory Pricing Reforms: What business must know’ (2008) 1 Deakin Business Review 6.

For more see the misuse of market power page on my Australian Competition Law web site.

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