Professional
Updates
COMPETITION LAW
Predatory pricing — the monopoly
conduct that dare not speak
its name
By Michael Bradley, Partner, Gadens Lawyers
• ‘Birdsville amendment’ untried in court;
new government to legislate to further
refine definition of predatory pricing
• Successful prosecutions still unlikely
after proposed amendment to law
• Further refinements to draft bill likely
N
obody has ever been successfully prosecuted
for predatory pricing in Australia. It has been
illegal since 1974. It has been the subject of
speculation, lobbying, argument and amendment
throughout, and if you ask anyone whether it
happens in the real world they’ll say ‘Yes of
course!’, but still nobody has been found by law,
in the face of a denial, to have actually done it.
The predatory pricing debate exemplifies the
conflict that lies at the heart Pt IV of the Trade
Practices Act 1974 (the TPA). It is the clearest
example of the point where procompetitive and
anti-competitive conduct meet or, more precisely,
demonstrates that they are really different ways of
describing the same thing.
Predatory pricing, like price fixing, is one of
those things about which it is easy to say that you
know it when you see it. It is, in simple terms, the
act of selling things at a price below cost and
therefore making a loss on each sale, for the purpose
of driving a competitor out of business (because
they can’t sustain the same level of pricing for as
long as you can). It is precisely what you might do
to an upstart competitor if you were a monopolist.
But you won’t find the words ‘predatory
pricing’ anywhere in the TPA. It would have been
a lot easier if you could. Instead, in drafting Pt IV
(which deals with restrictive trade practices), the
legislators decided to exhaustively define each
type of conduct they deemed should be illegal.
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Thus, predatory pricing is specified in a lot of
words.
In my view, the exhaustively codified approach
adopted in Pt IV was a terrible mistake, causing a
great deal of pointless litigation and endless
tinkering amendments to the TPA to try to get it
just right. It would have been far better to just say
‘Predatory pricing is prohibited’, and leave it to the
courts to build a body of case law interpreting
exactly what that means in practice. That
proposition does sound counterintuitive, but it is
the way they did it in the US (the Sherman Act,
which is the primary anti-trust statute, was passed
in the 1890s, has seven sections and is still in pretty
much its virgin condition) and I would argue that
has worked much more effectively than our system.
However, that’s not going to change and so we
are stuck with very long sections that just get
longer.
In this article, I look at the latest attempt to
get predatory pricing right, in the sense of creating
a provision that might actually produce a
successful prosecution or two. I conclude that it
probably won’t make any difference (to spoil the
ending and possibly save you some reading time).
How it looks now
The section in question is s 46. Until late 2007, it
hadn’t been changed much. The central
prohibition in s 46(1) is that:
A corporation that has a substantial degree of
power in a market shall not take advantage of
that power in that or any other market for the
purpose of:
(a) eliminating or substantially damaging a
competitor… in that or any other market;
(b) preventing the entry of a person in that or
any other market; or
(c) deterring or preventing a person from
engaging in competitive conduct in that any
other market.
Predatory pricing has always been assumed to
be one of the two main types of conduct that might
fall foul of s 46(1) (the other is refusal to supply). So,
the idea is that if you have a substantial degree of
market power, you can’t use it to engage in belowcost pricing for the purpose of damaging your
competitors. If you don’t have substantial market
power, you can do whatever you like (on the
theory that it won’t cause as much harm).
Sounds simple, so why no successful cases? It
all came to a head in Boral Besser Masonry Ltd v
ACCC (2003) 215 CLR 374 (the Boral case), when
the High Court knocked back what the ACCC
thought was a beauty of a predatory pricing case
and sent everyone back to the drawing board.
The issue was that there had been an extended
price war in the market for concrete masonry
products in Melbourne. A number of competitors,
including Boral (which was by far the biggest
player) had engaged in the price war, selling their
products at below ‘avoidable cost’ — which is
basically the extra marginal cost incurred with the
production of each item of product. The ACCC
alleged that Boral had substantial market power
and had taken advantage of it in under-pricing for
long enough to drive several smaller competitors
out of business.
The High Court had a lot to say about this,
but the central point it made was that it is both
easy and wrong to jump straight from a finding
that substantial market power exists, to a
conclusion that it has been used. It is simple to
form the assumption that Boral’s purpose was to
damage its competitors, given that that is pretty
much always a necessary result of success in
business. You do well, your competitors don’t do
so well. But it is too much of a leap to go from
there to saying that Boral used its market power
in pursuing that purpose.
The High Court pointed out that Boral would
have done exactly what it did, whether or not it
had market power. It was faced with a competitive
threat (low pricing, which it didn’t start), and
responded in a competitive way by reducing its
own prices to maintain market share. It elected to
make a loss for long enough to ride out the supercompetitive environment, which it knew could
not last indefinitely. And, it survived. If it had had
a smaller market share, perhaps it could not have
sustained losses for so long. But that doesn’t
necessarily mean it wouldn’t have acted the same
way. Some of its competitors did, and suffered
accordingly.
The result was very frustrating for the ACCC
and those commentators who seek a predatory
pricing scalp (particularly the small business
lobby). They concluded that the High Court had
interpreted s 46 down to a point where a
successful prosecution was now impossible to
achieve. They may be right about that, it is
certainly difficult to envisage a crystal clear case
where a claim under s 46 would win. Finding the
nexus between market power, purpose and the use
of the power in achieving that power is a highwire act.
False start — the Birdsville amendment
The push for reform resulted in 2007, just before
the Federal election, in what has been called the
‘Birdsville amendment’.1 Section 46(1AA) was
shoved into the TPA, providing that a corporation
with a substantial share of a market must not
supply goods or services for a sustained period at a
price that is less than the relevant cost to the
corporation of supplying them, for any of the
same purposes as are in s 46(1).
So here was an attempt to directly define
predatory pricing, again without using those
words. The amendment was a political
compromise, and was not supported by the ACCC
or really anyone else. Nobody knows what it
means and it has not been tested at all. Basically
everyone’s been pretending it isn’t there. It’s all a
bit embarrassing really. Why does s 46(1AA) use
market share instead of market power as the
defining feature? And what does ‘relevant cost’
mean? They haven’t bothered defining it.
Another attempt
In April, the Federal Government released an
Exposure Draft of a new attempt to reform s 46
and try to make predatory pricing more than a
purely hypothetical offence.
The first piece of bad news is that the
Birdsville amendment is not quite dead. It is to be
further amended (we can call it the amended
Birdsville amendment), but only a bit. The
reference to market share goes. Instead, s 46(1AA)
will now provide that ‘a corporation with a
substantial degree of power in a market must not
take advantage of that power ...’
Sounding familiar? Yes, it is an exact copy of
s 46(1) except for the extra words about supplying
for a sustained period at below relevant cost. This
makes the predatory pricing prohibition just a
subset of the general provision in s 46(1). What it
means is that, if you infringe s 46(1AA), you will
necessarily infringe s 46(1) too, which is a sign of
really sloppy drafting.
There are two further relevant amendments.
Section 46(1AB) will now provide that a
corporation can contravene s 46(1AA) even if it
cannot recoup losses it incurs by selling below
relevant cost. There is a theory, which courts quite
like, that the true test for predatory pricing is to
see whether the subject company drops its price
below cost, then later puts it back up above its
original position when the competitive threat has
gone, so that it can recoup its losses by making
super-profits. If it can do that and not lose sales,
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obviously it is has been using its market power for
evil purposes.
The government doesn’t like that theory, so
s 46(1AB) does away with it by telling the courts
to ignore what happens after the price cutting has
ended.
There is also a new s 46(6A) which is an
attempt to solve the problem presented by the
Boral case. It provides that, in determining
whether a corporation has taken advantage of its
market power, the court can have regard to any of
these factors:
• whether the conduct was materially facilitated
by the market power
• whether the conduct was engaged in, in
reliance on the market power
• whether it is likely the corporation would
have engaged in the conduct if it didn’t have
market power
• whether the conduct is otherwise related to
the market power.
Here they are attempting to widen the scope
of inquiry when the court is looking at whether a
corporation has actually used its market power in
engaging in conduct that targets its competitors.
Rather than change the wording of the principal
prohibition, the new subsection tries to guide the
interpretation methodology.
The risk is that the High Court will continue to
read s 46(1) in exactly the same way as it did in Boral.
The extra words in s 46(6A) must be considered,
but the direct link between market power and
purpose must still be found. I suspect the court is
not likely to shift its position very much, if at all.
So where are we now?
Predatory pricing is still considered by everyone to
be inherently evil. The TPA still doesn’t mention
it by name. It has its own sub-section, but that’s
really unnecessary and in its amended form
doesn’t add anything to the general prohibition.
There may be some hope of easier paths to
prosecution with the addition of s 46(6A), because
it does give the courts a strong hint that they
should give s 46 a more expansive interpretation.
But the High Court doesn’t like hints much. So,
my guess is still no successful prosecutions for
predatory pricing any time soon.
Michael Bradley can be contacted on (02) 9931 4864
or via email at [email protected].
Note
1
See also M McCowan and B Keane (2008) ‘New
predatory pricing law raises concerns’ Keeping good
companies, Vol 60 No 3, pp 159–162 G
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