Commerce Commission details how it's going to work out who is abusing their market power

A competition barrister says the Commerce Commission’s new draft guidelines for how it will police how big players flex market power has a new likely effects test which is surprisingly low and flexible.

Competition lawyers are this week getting a first look at a big change to the Commerce Act.

The Commerce Amendment Act 2022 tweaked section 36 of the Commerce Act 1986, replacing the existing “purpose” rules with an “effects based test”, which means those with substantial market power will be prohibited from engaging in conduct that has, or is likely to have, the effect of substantially lessening competition in a market.

The old competition rules under section 36 looked at whether a business had acted with an anti-competitive purpose, rather than what the outcome of the actions had been on competition.

Barrister Gary Hughes says it is a meaningful change to the law when you look at the “likely effects” test outlined in the draft guidance. The commission will assess whether a firm’s conduct has substantially lessened competition, or is likely to do so.

“Likely doesn’t have to be a high degree of probability, or more than 50% likelihood. In competition law, a likely effect means nothing more than a real chance or a possibility, something that is more than remote.”

He says many lawyers and commentators, and small firms who feel themselves beaten up by large players, are pinning a lot of hope on this law change.

But Hughes says it remains to be seen how the Commerce Commission – and the NZ courts – would build the needed institutional experience, and memory, of how these dominance cases should play out.

“The reality is we may be waiting possibly years, not months, for some precedent or ruling from the courts that interprets the new law and confirms whether it really does have more teeth now. That doesn’t help some anti-competitive situations in the short-term.”

He says the amendment is “getting us back to the 1990s”, when section 36 of the Commerce Act was still relevant. 

“And that's a somewhat sad state of affairs, but it is cause for optimism.”

Commerce Minister David Clark said in announcing the Commerce Act amendments, that section 36 had been difficult to enforce and insufficient to deter some anti-competitive conduct.

“The Commerce Commission has been unsuccessful in three of its five cases before the courts. The last of these cases concerned conduct in the early 2000s. It is not sustainable to have a law that the competition authority is not able to enforce effectively.”

The commission’s guidelines say the old market power test was costly and complex to enforce, unpredictable, and failed to deter or penalise some forms of anti-competitive conduct.

“The amended prohibition is therefore likely to capture anti-competitive conduct that was not previously prohibited,” it says.

Russell McVeagh partner Troy Pilkington says given the new prohibition will include an "effects based" limb, it's helpful the draft guidelines state the commission considers it unlikely that genuine innovation, conduct that improves efficiency, or firms responding to competitive offerings, would have the effect of substantially lessening competition.

“We think that those statements are some of the most valuable aspects of the guidelines – that is, to make clear that the commission would not take enforcement action for pro-competitive conduct (such as the development of new innovations) that had the result of taking customers and market share from competitors.”

He says it would also be helpful for the commission to provide more detail and examples of the types of pro-competitive conduct it would not expect to be problematic to give New Zealand's larger businesses comfort they can take those steps without fear of commission action.

Pilkington says he remains concerned that in the absence of a statutory exception for conduct with a legitimate business justification, there is a risk businesses with market power could face allegations for conduct that has an adverse impact on competitors' businesses, even though that conduct reflects genuine competitive initiatives or well-intentioned conduct. 

"That is not a criticism of the commission's guidelines, but rather a criticism of the broad way that the legislation itself could be interpreted – in particular, by third parties that wish to make allegations about initiatives of their competitors."

Breaches of the incoming new market power test may see firms who flex their market muscle too hard facing a $10 million fine, court injunctions to stop anti-competitive behvaviour, or even see them forced to stop supplying.

Hughes says the commission has been very reluctant to "go there" with injunctions.

"That has risks and specific costs if they get those applications wrong."

A wide range of organisations will fall under the new regime including private businesses.

Trade and professional bodies, and non-profit organisations can also hold substantial market power, as can companies and local authorities, the commission draft says. Crown and crown entities engaged in trade will also be captured.

The commission’s draft guidelines outline how it will assess who has substantial market power, and how it will test whether conduct has substantially decreased competition.

The commission has detailed the kind of conduct that might fall foul of the new test, including margin and price squeezing, loyalty rebates, refusal to supply, exclusive dealing and tying and bundling (selling one thing on the basis that another thing will also be purchased).

In assessing whether a loyalty rebate might be breaking the rules, the commission draft says it would look at the type of rebate (does the rebate make it hard for a purchaser to change suppliers), the size of the rebate, how targeted rebates are to specific customers’ needs, and how many other distribution options rivals have.

The Commerce Commission’s draft building supplies report identified industry rebates are an issue, and adding to competition problems.

Predatory pricing, a competitor reducing prices for sustained periods or for “strategic” periods, is also highlighted in the guidelines.

The draft gives an example of a new entrant firm offering discounted prices, which is then countered by an existing competitor who offers a steeper discount that the new firm can’t beat, including to existing customers. The new firm might try to offer discounts a few times, each time being undercut by the existing firm.

In this case, the commission draft says it would look into the existing player and look at whether its pricing had halted expansion of its rival. 

It would also consider whether the deep discounting by the incumbent may have had the effect of signalling to other potential competitors that attempts to enter, and win market share, will be met with similar deep discounts. 

“This may discourage entry, which may substantially lessen competition. The commission would consider the conditions of entry and whether there were likely additional entrants absent the discounts.”

The commission also says a refusal to supply may substantially lessen competition.

“For example, a refusal to supply might raise rivals’ costs significantly because the rival must use a more costly alternative, thus reducing their competitive constraint and enabling a firm with substantial market power to increase its prices or reduce quality and innovation.”

The commission says it will determine whether a firm has substantial market power by considering the market share of the firm, and how much existing and potential competitive constraint the firm faces. 

“This will include looking at the conditions for entry and expansion. We also look at other factors such as how much countervailing power buyers (or suppliers, in purchasing markets) have.”

It says whether a firm has market power will be considered on a case-by-case basis, and it won’t draw a line of when a firm has reached a threshold where it’s considered to have substantial power.

The guidelines say other factors that may influence whether a firm has substantial market power could include whether there is variety in the products and sales promotions offered by the industry, and “the character of vertical relationships with customers and with suppliers”, and the extent of vertical integration and vertical restraints.

Vertical integration (where a firm controls multiple parts of the supply process like electricity generating and then retailing) has been a hot topic for the commission as it undertakes its market studies. 

In its most recent draft market study into residential building supplies, critics pointed out Carter Holt Harvey is both a maker and a supplier and that gives it an advantage, with rival ITM saying it believed vertically-integrated suppliers could be a threat to supply, and could manipulate competition at the merchant level. 

Submissions on the draft guidelines will be accepted until November 18, and the amendment comes into effect on April 5, 2023.

“There's no immediate, magical changing of the guard from April,” Hughes says. “The toolkit is back where it probably should be."

The section 36 change is one of a few legislative changes in competition. In 2021 cartel conduct became a criminal office under the Commerce Act – meaning imprisonment is now on the table for those found guilty.

In 2018 legislation was passed to give the Commerce Commission the power to conduct market studies.