Opening address 2010 competition law conference

Separate Functional Market

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Separate Functional Market

  1. Seven contended that entry by a pay television platform or a free to air broadcaster to a contended wholesale market to acquire either the AFL or NRL rights was not a relevant inquiry in determining a separate functional market. The relevant inquiry was said to be whether the dynamics of the market such as strong economies of joint production have the consequence that, in the long run, vertical integration is very likely because firms cannot compete effectively if they confine themselves to one level of functional activity.

  2. The relevance of that inquiry was said to derive from the Full Court’s acceptance in Application by Services Sydney Pty Ltd [2006] ATPR 42 099 at 44, 784 of Professor Brunt’s observation that a market is a network of actual and potential transactions between buyers and sellers of goods or services which are or could be close substitutes and the answer to the question of when would potential transactions not exist is, “when there are such efficiencies of vertical integration … that market co ordination between buyers and sellers is superseded by in house co ordination” with the result that there is “no functional split to create transactions between stages of production”.

  3. That view was said to be supported by the evidence of Dr Smith and Professor Noll, observations of the Tribunal in Re Queensland Independent Wholesalers Ltd [1995] ATPR 41 438 at 40,951 and the observations of Deane J in Queensland Wire Industries (1989) 167 CLR 177 at 196.

  4. Seven says that there was a demonstrated demand for “wholesale sports channels” and significant wholesale transactions suggesting the existence of a separate functional market with no evidence of any efficiencies to be gained from vertical integration and evidence of failed attempts at some degree of integration. Seven contended that the primary judge’s analysis of ease of entry was simply a surrogate analysis of barriers to entry leading the primary judge to infer a wider market which confused issues relating to barriers to entry with issues of market existence. One question might be whether the possibility of integration places a constraint upon the entity whose conduct is at issue and whether the question of integration is measured by reference to the SSNIP test.

Substitutability and Section 4E of the TPA

  1. Section 4E refers to goods or services being “substitutable for, or otherwise competitive with” other goods or services which might suggest that substitutes, in the sense contemplated by s 4E are not the sole test for the purpose of identifying the market. Do the words “or otherwise competitive with” add anything to the notion of substitution for the purposes of s 4E.

  2. The Explanatory Memorandum accompanying the Trade Practices Amendment Bill 1977 (Cth) merely said, as to the proposed s 4E, that a market for goods or services has been defined to include “substitutable or competitive goods or services”. In Queensland Co operative Milling, the Tribunal formulated the well known views mentioned earlier concerning the nature and characteristics of a market and the process of competition as rivalrous market behaviour in all dimensions of the price product service offered to consumers and customers.

  3. In particular, the Tribunal said that the “usefulness of the ‘market’ concept [extends] to the identification of rivalrous relationships between sellers” within an “area of close competition between firms or, putting it a little differently, the field of rivalry between them” and within the bounds of a market there is “substitution – substitution between one product and another, and between one source of supply and another, in response to changing prices”: Queensland Co operative Milling (1976) 25 FLR 169 at pp 189 and 190. It followed therefore, for the Tribunal, that a market is “the field of actual and potential transactions between buyers and sellers amongst whom there can be strong substitution, at least in the long run, if given a sufficient price incentive” assuming substitution is “feasible or likely” having regard to the factors identified by the Tribunal at p 190.

  4. The introduction of s 4E seems to be an attempt to expressly capture within the language of the Act the substitution notion expounded by the Tribunal comprehensively in its reasons in Queensland Co operative Milling. It may be that the adoption of the reference to goods or services being “substitutable for” other goods or services is intended to be a reference to an area of close competition within which there can be strong substitution at least in the long run consistent with the central formulation of the Tribunal’s notion of a market.

  5. It may also be that the words of extension “or otherwise competitive with” other goods or services are intended to bring within the notion of a market, substitution possibilities which are actual or potential transactions between buyers and sellers which represent substitution possibilities within a field of rivalry but not necessarily strong substitution emblematic of close competition. Such substitution possibilities might render a good or service “otherwise competitive with” other goods, taking account of degrees of feasibility or likelihood as explained by the Tribunal at p 190, having regard to customer attitudes, technology, distance, cost and other price incentives.

  6. At [621], the Full Court said this:

In the present case the parties do not submit that the words “or otherwise competitive with” should be construed as significantly undermining the principle of substitutability. The better view is that s 4E addresses constraints upon the supply or acquisition of the relevant goods or services. In that context the word “substitutable” is used in a narrow sense whilst the words “or otherwise competitive with” include degrees of substitutability. We accept that the section addresses “close” competition and that “closeness” is a matter of degree. We adopt the approach taken by Gyles J to the question of substitutability of major sports. That approach may not necessarily lead to the conclusion that sports channels featuring marquee sports are not substitutable.

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