Why Labor should come to the party on the competition review’s effects test

The Harper Competition Review, published in March, provided a large number of recommendations that may seem small in isolation but that collectively can help facilitate Australia’s transition from mining dependence.

Australia has a small, resource-rich and open economy. This means US and European monetary policies, and what happens to the Chinese economy, are likely to have a much larger influence than pursuing further micro-economic reform or industrial relations changes.

But there is a role for reform that increases the economy’s flexibility – facilitating the transition to lower terms of trade and reducing the cost to society, such as temporary unemployment, as much as possible. The competition review ought to be seen in this context.

The Abbott government seemed to be ignoring the report after debate focused on only one of its recommendations. Discussion has centred on Section 46 of the Competition and Consumer Act (CCA), which aims to prevent businesses that have market power from misusing it.

Media reports suggest the Turnbull government is ready to tackle the substantial opposition to the proposed changes by big business but also by the Labor party.

Section 46 currently states that a corporation with a substantial degree of power in a market cannot take advantage of that power for the purpose of eliminating or substantially damaging a competitor. As explained in the Harper Review, and also in the ACCC’s submissions to the review, there are several issues with this section.

First, the courts and legislators have found it difficult to come to terms with what it means to “take advantage”. The challenge is determining whether specific business conduct – for example, predatory pricing (pricing below cost) – involves taking advantage of market power. This challenge makes it difficult, if not impossible, for the ACCC to prosecute cases under Section 46.

Second, the focus on the damage to a competitor is unusual and inconsistent with modern competition economics. The focus should instead be on the competition process itself.

Finally, Section 46 requires a purpose rather than an effects test. Once again, this is inconsistent with international practice and with other sections of the CCA.

The Harper review proposes reframing Sections 46 to prohibit a corporation with a substantial degree of market power from engaging in conduct if the conduct has the “purpose, effect or likely effect” of substantially lessening competition in that or any other market. This proposal addresses the three concerns raised above. It eliminates the “take advantage” test, replaces the concerns with damages to a competitor with an appropriate concern about the competition process, and it adds an effects test, which is consistent with other parts of the CCA.

There has been vocal opposition. The Business Council of Australia, representing big business, opposes the proposed change, arguing it will create uncertainty and discourage competition. It says businesses (with substantial market power) will be cautious about pursuing conduct that enhances competition for fear of being prosecuted by the ACCC. This view has also been expressed by, among others, some former ACCC commissioners and the Labor party.

While it is undoubtedly the case that the change would increase uncertainty, the real issue is that there may be too little uncertainty now. Given the current difficulties with Section 46, businesses with substantial market power may face very little prospect of being caught when misusing this market power. While it is understandable that businesses with substantial market power may oppose this change – after all greater uncertainty typically translates into smaller expected profits, it is difficult to understand why the Labor party would oppose the proposed change.

The argument that it will chill competition is difficult to reconcile with the operation of the other sections of the CCA that have relied for many years on the substantial lessening of competition test. It’s difficult to conceive that a business with substantive market power would be hesitant to pursue R&D or economies of scale, which would give it a business edge over competitors, for fear that it would be investigated under the proposed Section 46.

While such activities may indeed lead to rivals exiting the market, the competitive process is unlikely to be adversely affected as long as there are not artificial restrictions to other firms pursuing similar strategies. In any event, the Harper review also recommended two additional safeguards. First, as with other Sections of the CCA, the Harper review recommends authorisation be available to exempt conduct from the prohibition in Section 46. It also recommends the ACCC issue guidelines for enforcing Section 46 in a similar fashion to the merger guidelines.

The proposed changes to Section 46 make a great deal of sense. While it’s clear why big business would oppose such changes, the rationale for Labor’s opposition is less clear. Its concern with chilling competition seems misplaced especially given the two additional safeguards proposed in the Harper review.

Flavio Menezes is Professor of Economics at The University of Queensland

This article was originally published on The Conversation. Read the original article.