Henry Ergas, 14 March 2016

It’s rare that we’re on the same side as Chris Bowen. But he’s right: section 46 of the Competition and Consumer Act should remain unchanged.

That section, which prohibits the abuse of market power, may seem arcane. And it is hardly obvious that its future ought to be a priority.

But unlike previous reviews of our competition laws, which largely endorsed the current section, the Harper review recommended far-reaching amendments, claiming that section 46 is both ineffective and out of line with international practice.

Since the review was released there has been a flurry of activity, with supporters of the Harper recommendations contending that consumers need to be protected from cheap milk and discounted petrol. And as the dust mounts, so does the pressure for motion. An initial decision could be taken this week by cabinet.

Were the Harper review’s claims correct, that decision would be straightforward. Competitive markets are plainly in the public interest: they benefit consumers, reward efficiency and stimulate innovation. If, instead of promoting competition, the current provision allows it to be stymied, reforming section 46 would be well worthwhile.

Yet the arguments for change are far from compelling. Much as one admires his resolve, Australian Competition & Consumer Commission chairman Rod Sims is no Will Kane, forced, like the sheriff Gary Cooper plays in High Noon, to face a gang of desperadoes with little more than a peashooter and a prayer. Rather, endowed with an extensive armoury — which ranges from section 46 to a battery of special protections for small business — the ACCC is neither shy about deploying its heavy weapons nor ineffective when it does so.

Data compiled by the Law Council makes that apparent: over the past 25 years, the ACCC has brought twice as many cases as the US Department of Justice, and won almost two-thirds of the cases that have gone to court.

But that doesn’t satisfy the section’s critics. Pointing to differences between section 46 and comparable provisions overseas, they argue that our test is unduly narrow, as conduct will only be found to be anti-competitive if it “takes advantage” of the firm’s market power and does so for a proscribed purpose.

In contrast, section 2 of America’s Sherman act prohibits any conduct that monopolises, attempts or conspires to monopolise a market, seemingly without regard to its nature.

It would, however, be foolish to assess statutes by comparing their wording: what matters is how the courts interpret them. For instance, although the Sherman act does not specifically mention purpose, the Supreme Court has long held that the impugned conduct must be “wilful”, which requires careful examination of why the firm acted as it did. And although American courts place less emphasis on “wrongful intent” than they once did, it is obvious from the Microsoft case that evidence of the firm’s purpose was crucial to the finding that Microsoft breached the law.

Equally, even though section 46 is framed in terms of purpose, the Australian courts do not consider the firm’s conduct in isolation from its actual or likely effects. And recognising that even a powerful firm may quite properly act in ways that damage rivals (for example, by cutting prices), our courts look at whether its conduct would undermine the competitive process, rather than just injure competitors. The section’s lack of an explicit “effects test” could therefore be said to have had little effect.

Nor is it correct to claim that the “take advantage” clause imposes a burden on the ACCC that its foreign counterparts do not bear. That clause simply means that the impugned conduct must rely on the firm’s market power: to be an abuse of market power, the conduct must at least be a use of that power.

Our “take advantage” test is consequently similar to the requirement in US law that the conduct differ from “mere competition on the merits”, or in European law that it involve “recourse to methods other than normal competition”.

That all three jurisdictions impose such a test is unsurprising: it would, in the words of the US Supreme Court, be perverse “to chill the very conduct the antitrust laws are designed to protect” by forbidding behaviour, such as aggressive innovation, that is “the very essence of competition”.

But let us nonetheless stipulate that the American or European alternatives are indeed better phrased than our current goulash. Even then, change would have substantial costs.

There is, after all, a large body of precedent about the section that guides firms in their decision-making. Undermining that precedent by altering section 46 would make the section “a cage in search of a bird”, as Kafka once described the law. Far from invigorating competition, that heightened likelihood of inadvertent infringement would dampen it. And since the firms at issue have high market shares and account for much of our economic activity, the damage to consumers and to efficiency would be far-reaching.

Obviously, those problems won’t mollify small business, which has pressed for change. But its concerns are best met by less government interference, not more. From industrial relations through to taxation, there is still vast scope to reduce regulatory burdens that weigh small (and large) business down.

That is what we should focus on, not playing with words. With the case for altering section 46 thinner than topsoil and not as rich, it would be paradoxical if Bowen understood that, and Malcolm Turnbull did not.

Extracted in full from The Australian.