Professional Updates Competition Law
Creeping acquisitions — the
debate over market definition
By Joanne Daniels, Partner, Middletons
• Product and geographic dimensions to ACCC approach
to market definition
• Consumers’ likely reaction to small but significant price
increase (say, five to ten per cent) will indicate whether
potential competitors should be considered
• Amendments to TPA not likely to give ACCC greater
powers to oppose local acquisitions but will remove
ambiguity
In January, Dr Craig Emerson, the Minister for
Innovation, Industry, Science and Research
announced that the Federal Government will
introduce reforms to the merger provisions of
the Trade Practices Act 1974 (TPA) to deal with
‘creeping acquisitions’. The phrase, ‘creeping
acquisitions’, is used to describe the process
where a company grows through a series of
small acquisitions. The concern with regard to
creeping acquisitions is that each acquisition
by itself may be too small to give rise to a
substantial lessening of competition but that
when the acquisitions are viewed in aggregate
they may have a substantial anticompetitive
effect.
Currently, s 50 of the TPA prohibits mergers and
acquisitions which substantially lessen competition
in a substantial market for goods and services in
Australia, or a state, territory or region of Australia.
The key proposed change is that the Australian
Competition and Consumer Commission (ACCC)
will be able to oppose mergers where the merger
would substantially lessen competition in any local,
regional or national market. It is also likely that
the proposed changes will remove the current
requirement in the TPA that market must be a
‘substantial’ market.
The effectiveness of these reforms to deal with
creeping acquisitions will be determined by the
proper approach to defining ‘local’ markets. In
considering this issue it is worthwhile outlining the
current approach to market definition.
The current approach to market definition
The TPA defines a market as a market for the goods
or services in question and all goods or services
which are substitutable for those goods or services.
The Merger Guidelines issued by the ACCC in
2008 make it clear that the ACCC focuses on two
key dimensions of substitution in characterising
markets: the product dimension and the geographic
dimension.
Product dimension of market
In establishing the product dimension of the market
the main issue is to consider whether customers
would switch from one product to another product
in response to a small increase in price, usually five
to ten per cent. If the customers would switch, the
two products are likely to be in the same market but
if the customers would not switch then the products
may be in different markets.
The Merger Guidelines sets out the type of issues
which the ACCC will take into account in to
considering whether two particular products are in
the same market which include:
• whether the two products have the same
function or end use
• the physical and technical characteristics of the
two products
• the costs of switching from purchasing one of
the products to purchasing the other product (For
example, if a customer wishes to switch from one
telecommunications provider to another provider
161
Professional Updates Competition Law
would the customer have to pay a termination
fee?) and
• whether customers have switched between the
two products in the past and for what increase
in price (For example, if the price of frozen pies
in the supermarket is increased by ten per cent,
would customers switch to sausage rolls?).
Geographic dimension to market
In establishing the geographic dimension of the
market, the main issue to be considered is whether
customers in the region in question would switch to
buying the product from another region in response
to a small increase in price usually between five to
ten per cent. If the customers would respond to
the price increase by purchasing the product from
a different region then the two regions are in the
same geographic market but if the customers would
not switch then there are separate geographic
markets.
The Merger Guidelines sets out the types of
issues which the ACCC will take into account in
considering whether two particular products are in
the same market which include:
• how far can the product travel in terms of its
perishability or weight
• the transportation costs involved in moving the
product from one area to another
• the costs of the customer of obtaining supply
from an alternative area and
• any limitations on the ability of customers to
access alternative sources of supply in alternative
areas.
Case study
An interesting case study of the approach
adopted by the ACCC in defining markets was the
acquisition by A&R Whitcoulls Group Holdings Pty
Ltd (A&R) of Borders Australia Pty Ltd. A&R owned
the franchise to Angus & Robertson bookstores and
the ACCC was considering whether the merger
of Angus & Robertson and Borders would result
in a substantial lessening of competition in any
market. On 27 February 2008 the ACCC published
the reasons for its decision not to oppose the
transaction.
In defining the relevant markets, the ACCC
considered that there were two different functional
levels in the market which needed to be considered:
162
Keeping good companies
April 2010
the retail level of the market (that is, bookstores
selling books to customers) and the wholesale level
of the market (that is, publishers selling books to
bookstores).
At the retail level, the ACCC considered that the
relevant product market was the market for new
book retailing. The ACCC excluded the sale of
second-hand books from the market definition
because it formed the view that second-hand
purchases are not generally influenced by the price
(or other attributes) of new books and vice versa.
That is, the test of substitutability was not satisfied
because a customer was unlikely to switch from
buying new books to second-hand books if the
price of new books was increased by between five
to ten per cent.
Also at the retail level the ACCC considered
whether there were separate product markets for
‘frontlist titles’ and ‘backlist titles’. This issue arose
because some bookstores, particularly within the
discount department stores only carry new release
and high volume books known as ‘frontlist titles’
whereas bookstores such as A&R and Borders carry
front listtitles and older and lower volume titles
known as ‘back list titles. The ACCC found that
frontlist and backlist titles were in the same market
because:
• while some retailers focus on selling frontlist titles
only, the reverse is not true and a retailer would
rarely sell only backlist titles
• at least a proportion of consumers would be
willing to switch between frontlist titles and
backlist titles.
The ACCC considered that the geographic
dimension of the wholesale level of the market was
national because, while publishers and distributors
tended to operate out of a given region, they
supplied the books nationally and bookstores could
order books from publishers anywhere in Australia.
At the retail level, the ACCC considered that there
were a series of narrow local markets which varied
in size depending on a range of factors. The ACCC
did not form a conclusion as to how large these
markets were but noted that retailers tended only
to pay close attention to book retailers operating in
very close proximity.
A similar approach to defining narrow retail markets
was adopted by the ACCC in its decision in February
in respect of the acquisition by Caltex Australia
Limited of the retail assets of Mobil Oil Australia Pty
Ltd. In that decision, the ACCC adopted the starting
point that the retail markets were approximately
three to five kilometres from each site. The ACCC
took a case-by-case approach to defining each
market and in some cases the market was narrower
than the three to five kilometre radius and in some
cases it was broader depending on issues such as
the layout of roads.
The debate on creeping acquisitions
The debate around whether reforms are necessary
to enable the ACCC to oppose ‘creeping
acquisitions’ has been around for a decade. In
1999 the Parliamentary Joint Select Committee
on the Retailing Sector in its report Fair Market or
Market Failure found that creeping acquisitions in
the retail sector would not be caught by s 50 of
the TPA because the acquisition of any one store
would involve such a small increase in market share
that it would not have the effect on its own of
substantially lessening competition.
However, in the 2003 report Review of the
Competition Provisions of the Trade Practices Act
(known as the Dawson Report) the committee
appointed found that s 50 of the TPA was adequate
in its present form to enable the ACCC to consider
creeping acquisitions. The committee found that
the concentration of industries was not necessarily
an issue as some highly concentrated markets could
still be competitive. The committee noted that
where there was a desire to preserve the number
of competitors in a market for reasons other than
the promotion of competition that was a matter for
industry policy and not a matter to be dealt with
under the TPA.
In both the 2004 Senate Economics References
Committee in its report on The Effectiveness of
the Trade Practices Act 1974 in Protecting Small
Business and the 2008 ACCC Grocery Inquiry it
was found that s 50 was inadequate to deal with
creeping acquisitions.
Since these reports, the government has released
two discussion papers which considered two main
options for dealing with the issue of creeping
acquisitions:
• the ‘aggregation model’ which involved a
corporation being prohibited from making an
acquisition if, when combined with acquisitions
made by the corporation within a specified period
the acquisition would be likely to substantially
lessen competition in a market and
• the ‘substantial market power model’ which
involved a corporation being prohibited
from making an acquisition if it already has a
substantial degree of power in a market and
the acquisition would result in any lessening of
competition (which is a lower test than requiring
a substantial lessening of competition).
The Minister’s press release of 22 January is a clear
statement that neither of these options will be
adopted by the government and that creeping
acquisitions will be dealt with by clarifying that a
market can be defined as a narrow ‘local’ market.
In circumstances where the market is very narrowly
defined, the acquisition of one local independent
supermarket may constitute a substantial lessening
of competition.
Conclusions
The current approach to market definition by the
ACCC would allow the ACCC to deal with the issue
of creeping acquisitions in markets where there is
limited geographic substitution and the markets
can be very narrowly defined. This will tend to be
in retail areas such as books, petrol, bakeries and
supermarkets. In such markets, the reforms are
probably unnecessary but will support the approach
which is already being taken by the ACCC in terms
of making it clear that markets can be defined as
narrow local markets.
Assuming that the government removes the
reference in the TPA to markets having to be
‘substantial’, this will remove an area of uncertainty.
The courts have not provided any guidance on the
meaning of the phrase ‘substantial market’ and
it does introduce an element of uncertainty as to
whether very narrowly defined retail markets would
satisfy this requirement.
In summary, while the proposed reforms are unlikely
to significantly alter the way in which the ACCC
defines markets, they are likely to make it easier for
the ACCC to establish a breach of s 50 by making it
clear in the TPA itself that a market can be a narrow
local market.
Joanne Daniels can be contacted on (03) 9640 4380
or by email at [email protected].
163