Best Way To Make Markets More Competitive Lies In Legislating To Cut Red Tape

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12 May 2017
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Competition is a natural feature of a free market. The idea that the way to increase competition is to strengthen competition laws is naive and misguided.

The debate over strengthening section 46 of the Competition and Consumer Act is about to heat up again.

The government – along with the Greens and Nick Xenophon – wants to introduce an “effects test” into the legislation. The Labor Party is opposed.

The relevant provision, entitled “misuse of market power”, prohibits a corporation with a “substantial degree of power in the market” from taking “advantage of that power in that or any other market” to eliminate or “substantially damage” a competitor, prevent entry into the market, or deter or prevent a person from engaging in “competitive conduct”.

The proposed change would remove the second and third parts of the test, and leave in place the substantial market power element. The current list of proscribed purposes would then be replaced by a more general prohibition on conduct that has the purpose or likely effect of substantially lessening competition.

This proposal grew out of Ian Harper’s Competition Policy Review. The final report of that review, released on March 31, 2015, recommended a strengthening of the misuse of market power provision by including an effects test.

Then Small Business Minister Bruce Billson was one of the strongest proponents of the change.

Prime Minister Malcolm Turnbull, in announcing the government’s intention to legislate on March 16 last year, said that the effects test would “ensure that our competition law works better to enable competition, to enable smaller businesses, emerging businesses, to be better able to compete because we know that while larger firms are often very innovative and very often very competitive, they are more innovative if the hot breath of competition is coming down their neck. So we want to have a competitive Australia.”

The shadow assistant treasurer disagrees. ALP MP Andrew Leigh made the reasonable point that “actions like cross-subsidising cheaper milk, which are not done with the purpose of lessening competition, could have the effect of lessening competition”.

This is a point that has been raised by Coles chief executive John Durkan. Durkan argued in March last year during a speech to the American Chamber of Commerce in Australia that he was “concerned that under an effects test regime, companies like Coles will be less able to bring about cost decreases and therefore lower ­prices”. And that “another less efficient business may seek to argue that their inability to offer similar prices is somehow unfair”.

These ongoing debates uncover a deeper issue with competition law. At the heart of this area of law is the idea that competition in the market can be promoted through legislation. And the rationale for the promotion of competition is that it is of benefit to the consumer.

Certainly, that’s the stated justification for the misuse of market power provision. But there’s a legitimate question about whether state intervention in fact promotes competition, or ever could.

The first High Court case that contemplated section 46 was Queensland Wire Industries v BHP almost 30 years ago. In the judgment, Chief Justice Anthony Mason and Justice Ronald Wilson made the astute observation that “competition by its very nature is deliberate and ruthless”.

“Competitors jockey for sales, the more effective competitors injuring the less effective by taking sales away. Competitors almost always try to ‘injure’ each other in this way,” the judgment says.

Although these words were uttered in the context of general support for the existence of section 46, they offer an insightful critique of competition laws on the whole.

What is the relevant difference between conduct that prevents a firm from entering the market, and being so successful that you push an existing firm out of the market? After all, a legitimate effect of competition can be the closure of competing firms.

The current test, which requires a court to consider “purpose” at least approximates a distinction between intended and unintended conduct.

The problem with the new effects test is that conduct which appears to be anti-competitive may in fact have a legitimate pro-competitive purpose. But without the requirement of purpose, evidence of a pro-competitive intention will be irrelevant.

At the end of the day, the effects test runs into the same issues that all competition law faces. It’s almost impossible to administer because it fails as a concept.

Firms are constantly battling it out for market dominance. It’s the nature of free enterprise. That’s not to say that anti-competitive practices will occur from time to time but the answer is not to tie up millions of taxpayer dollars in unsuccessful litigation.

The answer is to create an environment that makes it easier for competition to occur. Wherever it appears there is a lack of competition look first at whether there are artificial barriers to entry that governments can eliminate.

The current push to strengthen competition law should be abandoned in favour of a renewed effort to substantially cut red tape. This is the only competition policy the government needs to make it easier for new firms to enter existing markets, to allow current firms to compete, and to provide better outcomes for consumers.

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