Misuse of market power Law Reporter

Courts can find that a firm has a substantial degree of power in the market – even where market share is low and the firm cannot influence prices.

Two recent Federal Court cases have examined the meaning of market power in section 46 of the Trade Practices Act 1974. Section 46 provides that a corporation with a substantial degree of market power shall not take advantage of that power for the purpose of:

• eliminating or substantially damaging a competitor in that or any other market;

• preventing or deterring entry of a person into that or any other market; or

• deterring or preventing a person from engaging in competitive conduct in that or any other market.

The cases, ACCC v Universal Music Australia Pty Ltd ([2001] FCA 1800) and ACCC v Australian Safeway Stores Pty Limited ([2001] FCA 1861) expand the circumstances in which a corporation may be found to have market power. In both cases, a relatively low market share (eg 16 percent), when combined with a number of other factors, was found to be sufficient to give rise to market power. In Universal, the ACCC brought proceedings against Universal Music Australia and Warner Music Australia (the defendants) for breaches of sections 45, 46 and 47 of the TPA.

The defendants are each part of a worldwide group of companies which manufacture and distribute compact discs. They each had, at any time, some catalogue music in the charts, that is, music that is highly popular – although usually for a relatively short period in, say, the Top 40 list. The allegations concerned the conduct of the defendants following amendments to the Copyright Act 1968 (Cth) in 1998 to allow parallel importation. Before these amendments, the parallel importation of CDs, that is, the importation into Australia of CDs lawfully manufactured overseas without the licence of the Australian copyright owner, was an infringement of copyright and was therefore prohibited. The amendments, however, made parallel importation lawful and the defendants were no longer the sole source of supply in Australia for chart music from their respective catalogues. The ACCC alleged that the defendants took steps to deter importers and music retailers from parallel importing. It claimed, among other things, that the defendants reserved the right to cease trading or alter existing terms of trade with retailers who stocked parallel imported CDs. It also alleged that in some cases the defendants actually ceased supplying to a number of retailers because the retailers had acquired parallel imported CDs from a competitor of the defendants.

The ACCC argued that the defendants each took advantage of their market power by refusing to supply retailers who dealt in parallel imported CDs for the purpose of preventing the entry of persons wishing to parallel import CDs. The parties agreed that the relevant markets were the wholesale and retail markets for recorded music of which CDs made up by far the greatest part.

Market power

Justice Hill examined the definition of market power and the question of whether the defendants had market power. Despite finding that the defendants each had market shares of 15-17 percent and were unable to set prices in the overall market above the competitive level, he held that the defendants each had a substantial degree of market power. Thus, while market share is a relevant consideration when considering market power, it is not determinative. His Honour found that a particular product might give a firm temporary monopolies on a frequent basis, even if the firm might not have a large percentage of market share overall. Such temporary monopolies enable the firm to behave independently of competition or competitive forces in the market. In this regard, he held that: "Chart music in particular has a significance in the market which cannot be ignored. It is this significance which would empower the participant in the market such as [the defendants] to take steps to prevent the entry of a person seeking to [parallel] import into the market."

Justice Hill concluded that the expression "market power" includes more than the power to increase prices beyond the competitive level. He referred to the High Court decisions in Melway Publishing Pty Ltd v Robert Hicks Pty Ltd (2001) 178 ALR 253 and Queensland Wire Industries Pty Ltd v Broken Hill Proprietary Co Ltd (1989) 167 CLR 177 and held that "there is nothing in [those decisions] that makes power over prices the sole test of market power". While Justice Hill acknowledged large retailers could constrain the defendants' ability to act independently of competitive forces in some circumstances, small retailers lacked the equivalent countervailing power. They required access to chart music and did not have the ability to import competitively. In addition to this, parallel importation could not provide a satisfactory substitute in all cases to supply from the defendants. Some of the problems identified by Justice Hill were:

• significant transport delays which could result in some important titles not being available for sale as soon as they were released in Australia;

• import costs would be affected by exchange rate fluctuations;

• some Australian releases are never released overseas and could not be imported; and

• sourcing or funding warehousing and distribution facilities may cause inconvenience and expense.

Taking advantage of market power

Justice Hill held that the defendants each took advantage of their market power by refusing to supply to retailers who parallel imported CDs from the defendants' catalogues. He considered that the words "take advantage" mean use or exercise the relevant market power, based on the Queensland Wire decision. They do not suggest that any reprehensive conduct is required. His Honour noted the decision in Melway, and stated that the refusal to supply even where a firm has market power will not necessarily mean that market power has been exercised. In this case, however, he held that "no other conclusion is open but that [the defendants] exercised [their] market power". His Honour also found that the refusal by the defendants to supply was motivated by their intention to prevent the entry of other persons wishing to parallel import CDs. He rejected the defendants' submissions that their actions were aimed at minimising piracy and preventing free riding.

In Safeway, Justice Goldberg found that, despite a low market share, the respondent had a substantial degree of market power. His Honour held, however, that Safeway did not take advantage of that market power. The case concerned a bread policy (Policy) developed by Safeway and implemented during 1994 and 1995. The ACCC brought proceedings against Safeway for breaches of sections 45, 46 and 47 of the TPA in relation to the Policy. Safeway claimed that the Policy was aimed at ensuring it was competitive with independent stores on the price of bread at all times. The Policy involved Safeway monitoring the price of bread at independent stores and requesting a "case deal" from the wholesale bread baker (plant baker) where it was found that the plant baker was supplying an independent store with bread for a better price than it was supplying a Safeway store in a nearby location (the competing Safeway store). A case deal is an arrangement whereby the plant baker would supply Safeway with bread at the same cost price as it was being supplied to the independent store. If the plant baker refused to supply a case deal, Safeway would delete the plant bakers bread products from the competing Safeway store. Safeway would then introduce a "price fighting" bread to compete with the discounted bread on offer at the independent store.

The ACCC claimed that it was not part of the Policy to request a case deal, or if it was, that Safeway made the request knowing that such a request would be refused by the plant bakers. Moreover, according to the ACCC, under the Policy, Safeway would delete a wide range of the plant baker's bread products and not just those products which the independent store was selling for less than Safeway.

The ACCC alleged that the purpose of the Policy was to:

• punish plant bakers for supplying bread to independent stores at prices which allowed the independent stores to sell the bread for less than the competing Safeway store;

• to prevent or deter the plant bakers from supplying independent stores with cheap bread; and

• to prevent or deter the independent stores from engaging in competitive behaviour.

In implementing the Policy, the ACCC claimed that Safeway had misused its market power for the purpose of:

• substantially damaging the independent stores: (s46(a)); and

• deterring or preventing the independent stores from engaging in competitive conduct: (s46(c)).

Justice Goldberg rejected the ACCC allegation that the purpose of the Policy was to punish the plant bakers or deter the independent stores from engaging in competitive conduct. He accepted Safeway's submission that the purpose of the Policy was for Safeway to remain competitive with the independent stores on the price of bread and as a result he did not consider the allegation in relation to section 46(c). His Honour did, however, consider whether Safeway had taken advantage of its market power for the purpose of substantially damaging the independent stores under section 46(a). He found that the relevant market was the wholesale market for the acquisition of bread in Victoria.

Market Power

Justice Goldberg considered whether Safeway had market power in detail. As in Universal, Safeway was found to have a substantial degree of market power despite a relatively low market share of approximately 16 percent. His Honour considered that, while Safeway was not able to determine the price in the market, it was able to determine the terms of trade on which it dealt with the plant bakers. He held that it was sufficient to show that Safeway was able to influence the terms of trade to a greater extent than it would in a competitive market. His Honour held that the inability of the plant bakers to resist the terms of trade imposed by Safeway was due to a number of factors including:

• the fact that all plant bakers had significant excess capacity and there were no alternative purchasers to whom the plant bakers could supply deleted bread; and

• there was no product differentiation and little customer loyalty to a particular brand. Safeway was able to delete the bread products of one plant baker while maintaining the level of retail sales of its bread products.

In addition, Justice Goldberg held that Safeway would only be constrained by the entry into the market by a competitor of a comparable size with a similar storage capacity to that of Safeway. Safeway had the ability to negotiate statewide terms of trade as a result of the overall purchases it was prepared to make on a statewide basis. If a plant baker was not prepared to accept any terms of trade required by Safeway it could only replace Safeway's purchases by going to a large number of individual retail outlets. Thus the relevant barriers to entry were those facing an entrant of this size and scope.

Taking advantage of Market Power

While Justice Goldberg acknowledged that the words "take advantage" in the context of section 46 meant "use", he sought to rely on the test applied in Melway and held that the question of whether Safeway took advantage of its market power was to be determined by asking whether Safeway would have acted in the same way if it operated in a competitive environment where it was constrained by its competitors in relation to the terms of trade it could impose on its suppliers.

He concluded that even if Safeway was not able to impose trading terms on its suppliers, it would have adopted and implemented the Policy. He held that in a competitive market there would be no commercial imperative for Safeway to act any differently. It would appear that there are problems in applying the Melway decision to the facts of this case. In Melway, the court had the benefit of knowing what the situation was before Melway had market power as Melway had adopted the disputed distribution system when it started its business. It was therefore an easy comparison to make. In this case, however, such a comparison was not available and Justice Goldberg did not discuss how the test is to be applied in these circumstances. As a result, many questions are left unanswered. For example, which of the factors giving rise to Safeway's market power would not be present in a competitive market? If the plant bakers did not have excess capacity, would Safeway still have been able to implement the Policy? How would Safeway have behaved if there was another acquirer of similar size and scope in the market? Justice Goldberg did not address these questions.

He simply stated that in a competitive market Safeway would not have been able to impose terms on its suppliers, and found that, absent market power, Safeway would have acted in the same way.

Comment

The findings in relation to market power in both cases are significant as the percentage market share of the defendants in each case was relatively low and they did not have the ability to dictate prices. Nevertheless, there were several factors in the markets identified which gave rise to a finding of market power.

In Safeway these were:

• the fact that the relevant product was undifferentiated and there was little brand loyalty, such that Safeway did not need to sell a particular brand of bread – it could maintain its sales by acquiring the product of any plant baker;

• there was no comparable purchaser and there was excess capacity in the market; and

• the plant bakers depended on sales to Safeway thus allowing Safeway to impose terms on them.

In Universal, the factors were:

• that there was a significant degree of product differentiation which meant that the defendants had a temporary monopoly over a limited number of products in the market on a frequent basis; and

• parallel importation did not provide a complete alternative source of supply of the relevant product.

It is likely that the decisions in Universal and Safeway will have implications for all major purchasers and suppliers in markets where courts can identify non-price factors that give rise to an inference of market power. In both cases, the second reading speech of the Trade Practices Amendment Act 1986 was cited as support for the position that section 46 is intended to apply not only to monopolists but to "major participants in an oligopolistic market and in some cases, to a leading firm in a less concentrated market." This would appear to indicate a willingness by the courts to find that a firm has a substantial degree of power in the market – even where the market share is low and the firm in question cannot influence prices in the market.

Disclaimer

The purpose of this database is to provide a full-text record of all articles that have appeared in the CDJ since February 1997. It is aimed to assist in the research and reference process. The database has a full-text index and will enable articles to be easily retrieved.It should be noted that information contained in this database is in pre-publication format only - IT IS NOT THE FINAL PRINTED VERSION OF THE CDJ - therefore there might be slight discrepancies between the contents of this database and the printed CDJ.