Opening address 2010 competition law conference



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The Method


  1. It follows that in defining the market one looks to the contended contravening conduct and examines the extent of actual contestability in constraining the capacity of the corporation to give less and charge more; the area of potential close competition particularly having regard to barriers of entry; whether, upon an hypothesis, if the corporation were to give less and charge more would there be “much of a reaction”; and if so, what, how, where and from whom would the reaction arise? This inquiry is directed to determining whether the corporation enjoys undue market power to raise price and exclude entry which is the antithesis of competition and substitutes the values and incentives of management for the values and incentives of the market. The Tribunal in Queensland Co operative Milling expressly framed the question in this way at p 188.

  2. It follows that an examination of competitive constraints is necessarily inter connected with an analysis of market power. The essence of market power is the absence of constraint: Boral Besser Masonry Limited v ACCC (2003) 215 CLR 374 at 419 [121] per Gleeson CJ and Callinan J.

  3. The starting point in defining the market is to properly frame or define the conduct said to contravene the TPA and then examine the inter dependent (or otherwise) set of relationships relevant to the conduct to determine the constraints upon the corporation and its capacity to exercise undue market power. This applied or purposive approach derived from Queensland Wire has been applied in many cases including: Australian Competition and Consumer Commission v Universal Music Pty Ltd (2001) 115 FCR 442 at 523 and 524 [356] and [357] per Hill J; Boral (2003) 215 CLR 374 at 495 [373]; ACCC v Baxter Health Care Pty Ltd (2005) ATPR 42 066 at [498] to [502] and ACCC v Liquorland (Australia) Pty Ltd (2006) ATPR 42 123 at [437] to [445].

  4. In considering the economic evidence, Deane J in Queensland Wire, considered whether the notion that a market for raw Y bar did not exist was sustainable. He thought not and said this at p 196:

Notwithstanding some economic evidence on the hearing, I am unable to accept the proposition that the fact that AWI is a wholly owned subsidiary of BHP means that sales of Y bar by BHP to AWI must, for the purposes of market identification and definition, be treated as if they simply did not exist as sales or purchases. … Notwithstanding the economist’s tendency to see [BHP and AWI] as part of one “firm”, it would be as unreal to completely disregard the distinction between them for the purposes of market identification as it would be to treat them as independent.
[emphasis added]


  1. Dawson J accepted that the basic test for determining the boundaries of an area in which the exchange of goods or services between buyers and sellers is negotiated involves the ascertainment of the cross elasticities of both supply and demand but also said however, at p 199:

Important as they are, elasticities and the notion of substitution provide no complete solution to the definition of a market. A question of degree is involved – at what point do different goods become closely enough linked in supply or demand to be included in the one market – which precludes any dogmatic answer. The process is an inexact one …

[emphasis added]




  1. Dawson J then adopted the Tribunal’s observation that the defining feature of a market is the existence of close substitutes but said at p 200:

Too rigid an approach in defining a market is apt to lead to unrealistic results … [t]he existence or non existence of sales of a product cannot conclude whether a market exists or not. It must be sufficient to constitute a market that there is a product for exchange, regardless of whether exchange or negotiation for exchange has actually taken place. In truth, the need to define the relevant market arises only because the extent of market power cannot be assessed otherwise than by reference to a market.

[emphasis added]




  1. As to market barriers, Dawson J said this at p 201:

The existence of barriers to entry may be conclusive in determining the relevant market and the degree of market power in it. Market power follows as a natural consequence of barriers to entry which are also a prerequisite to the establishment and maintenance of a monopoly. The identification of barriers to entry helps both to define the relevant market and to establish the existence of market power. However, it is less important to arrive at a precise meaning [of a barrier to entry and the role of high cost of entry] than to recognise the assistance given by the identification of conditions, in the nature of barriers to entry, for the purpose of defining the relevant market, measuring the extent of market power and determining whether that power has been exercised.


  1. These notions of strong substitution in the long run, the presence of severe market constraints emblematic of competition, and close competition between firms within a field of rivalry, have been cited and applied many times: QIW Retailers Pty Ltd v Davids Holdings Pty Ltd; Attorney General (Commonwealth) v Davids Holdings Pty Ltd (No. 3) 1993 42 FCR 255 at 261 and 262 per Spender J; Hospitality Group Pty Ltd v Australian Rugby Union (2001) 110 FCR 157 at 173 per Hill and Finkelstein JJ; Rural Press Ltd v ACCC (2002) 118 FCR 236 at [111] per Whitlam, Sackville and Gyles JJ. In Boral, McHugh J at pp 455 and 456 [252] said this:

Thus, the market is the area of actual and potential, and not purely theoretical, interaction between producers and consumers where given the right incentive, a change in price or terms of sale – substitution will occur. That is to say, either producers will produce another similar product or consumers will purchase an alternative but similar product. Section 4E should be taken to require close substitutability because in one way most products are substitutes for one another, meaning that market power would always be understated. Professor Chamberlain stated (192) that “the only perfect monopoly conceivable would be one embracing the supply of everything, since all things are more or less imperfect substitutes for each other”. Close substitutability and competition are evident when more than a few consumers switch from one product to another on some occasions.
[emphasis added]


  1. In testing substitution possibilities the orthodox economic tool is the well known hypothetical monopolist test: Merger Guidelines; Queensland Wire and many other authorities. The principal economic tool for determining “close substitutes” is the SSNIP test to determine a change in demand or supply side market behaviour. In Boral, McHugh J at [250] put the test for cross elasticities in these terms:

The concepts of substitution and competition to which s 4E of the Act refers require an analysis of the nature and characteristics of each product alleged to compete in the one market. This analysis is a necessary step in determining whether consumers or producers can replace one product with another without a great deal of difficulty in response to price or condition changes. This is termed the cross elasticity of demand or supply respectively. A high cross elasticity of demand indicates close substitutability. Two products that are perfect substitutes would have an infinite cross elasticity of demand: an increase in the price of one would result in a total consumer shift to the other product. Products that are not interchangeable have a cross elasticity of zero: the price of one has no effect on sales of the other product.


  1. The need to focus on close substitutes in isolating the product dimension was a matter of particular emphasis in the Full Court decision in Boral (Boral [BBM] v ACCC (2001) 106 FCR 328, per Beaumont J, Merkel and Finkelstein JJ agreeing) and in the High Court decision (per Gleeson CJ and Callinan J [134]; Gaudron, Gummow and Hayne JJ [155] and McHugh J [256] to [258]). Beaumont J examined the evidence of changes in industry practice, the documents generated within BBM speaking to its view of the product market, transaction details and pricing evidence and concluded that the market was not one for “materials for use in the construction of walls and paving” (primary judgment, (1999) 166 ALR 410 at [131] and [132]) but rather a market for concrete masonry products as that was the area of close competition on the evidence. Beaumont J described the treatment by BBM itself of the relevant market as a market for the supply of concrete masonry products as a “critical factor”. Finkelstein J at [310] and [311] gave particular emphasis to the specific differentiating characteristics of each of the walling products, concluding that “a wall is not just a wall”, having regard to the technical limitations of the different materials.

  2. In the same year as Queensland Wire, the Full Court of the Federal Court (Davies, Sheppard and Pincus JJ) gave judgment in Australia Meat Holdings Pty Limited (AMH) v Trade Practices Commission (TPC) (1989) ATPR 40 932. That case concerned a contention by the TPC of a contravention by AMH of s 50 of the TPA arising out of the acquisition of shares in a company operating abattoirs at Bowen and Mackay. The acquisition was said to put AMH in a position of dominance in the North Queensland market for fat cattle having regard to AMH’s other abattoir interests in a geographical area said to be that part of Queensland which lies north of a line drawn approximately “westerly from the coast just north of Mackay to the Northern Territory border”. The trial judge found that there was a market for fat cattle; prior to the acquisition AMH had not been in a position to dominate the market because of competition from the target’s abattoir at Bowen; and AMH’s control of the Mackay abattoir assisted it to dominate the North Queensland geographical market, post acquisition.

  3. The question of interest for present purposes is the treatment of the evidence in determining the market. The trial judge determined that all but 18.7% of the northern turnoff of fat cattle were slaughtered in Northern Queensland. If the statistics in relation to feed lot cattle were excluded, fat cattle going “south” would be 12% of sales. Extensive evidence was called by the Commission from producers who said that except under extraordinary conditions producers sell fat cattle locally either in the paddock, at a local sales yard, or to the local abattoir within the North Queensland region. The trial judge determined that cattle prices tend to be lower in North Queensland than in the south.

  4. A finding was made that producers would not be willing to accept the risks of deterioration in the quality of the cattle and the transport costs of moving fat cattle to an abattoir at, for example, Brisbane. A succession of cattle producers were called by Mr Sweeney QC for the Commission to give direct evidence of their selling behaviour. The Commission contended that on the behavioural evidence, AMH was able to dominate trade in fat cattle throughout the whole of northern Queensland:

… because abattoirs from southern areas were not substitutes. The case was put that the lack of substitutability arose from transport costs, the loss in condition of fat cattle during transport, the bruising that occurred to fat cattle during transport, the producers’ aim to fatten their cattle to prime condition and to have them slaughtered as quickly as possible thereafter and finally the producers’ loyalty to local abattoirs.


  1. AMH sought to rely upon a statistical analysis of fat cattle sales. AMH said that the statistics demonstrated that a sufficient price differential would cause producers to send their fat cattle to a southern abattoir and thus the substitution possibilities meant that the market was not a separate northern Queensland market. AMH contended that if there were a sufficient, sustained price differential, there could be substitution of southern abattoirs. AMH called evidence from Professor Officer who had conducted an analysis of detailed abattoir sales statistics which demonstrated that 18.7% of sales of cattle sold in the northern Queensland geographical market represented sales to abattoirs outside the geographical area and if it was right to exclude cattle sold to feed lots for fattening, the proportion of fat cattle sales was, in any event, 12%, that is, 12 in every 100 sales was an actual sale to an abattoir outside the geographic market.

  2. As to the weight to be attached to the statistical analysis, Pincus J at p 50,105, said this:

Economics is a study of human behaviour and to determine the boundary of a market, one has to consider what people do and what they are likely to do in the market – in fact and not merely in economic theory – although the doctrines evolved by economists are likely to be of assistance in analysing behaviour in the marketplace.
In this case the problem is not one of finding a test for markets of all kinds but the narrower problem of defining the boundary of a market in which primary products are bought.

[emphasis added]




  1. At p 50,092, Davies J said this:

The existence of a market, a concept of economics and commerce, ought not to be determined by reference to theoretical possibilities. There was trade taking place in northern Queensland. A feature of that trade was that it was desirable to reduce so far as possible the distance between the production of fat cattle and the place of slaughter. The cost of transport was a factor. Another factor was the desirability of having fat cattle slaughtered whilst in prime condition. All such factors limited the practicability of competition from the south.

[emphasis added]




  1. As to the question of practicality in weighing up the evidence, the Supreme Court in Brown Shoe Co. Inc. v United States 370 US 294 (1962) had said at p 336 that “Congress prescribed a pragmatic, factual approach to the definition of the relevant market and not a formal, legalistic one. The geographic market selected must, therefore, both ‘correspond to the commercial realities’ (fn) of the industry and be economically significant”. Those references were adopted in AMH.

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