Public Interest in Antitrust Enforcement: An Australian Perspective

A. ACCC’s Objective When Enforcing Competition Laws

The ACCC’s broad objective in undertaking its competition, consumer, and regulatory functions is to make markets work in the interests of Australians, now and in the future. When enforcing Australia’s competition laws, the objective of the ACCC is to protect and promote competition. In most circumstances, free and open markets are the most effective way to ensure society’s resources are used to best promote economic welfare. In some cases, markets do not work effectively as they could.

The profit motive that underpins market behavior provides firms with the incentives to produce the goods and services consumers need and want. It rewards the firms that do this best and ensures they are the ones that continue to trade. It also encourages innovation and progress. Firms striving to develop and offer products that are more attractive to customers than the products offered by their rivals is the key part of the process of competition. It is important that the pursuit of profits works in favor of consumers, not producers. As Adam Smith noted, “[c]onsumption is the sole end and purpose of all production; and the interest of the producer ought to be attended to, only so far as it may be necessary for promoting that of the consumer.” ¹³

However, the pursuit of profits does not always work in favor of consumers. Firms with substantial market power have strong incentives to restrict output to keep prices artificially high. While higher profits from attaining transitory market power are often necessary to encourage innovation and risk-taking, persistent market power can reduce economic welfare. Competition plays a key role in ensuring the profit motive works in the public interest, as does the strong enforcement of competition laws. If left unchecked, some firms, particularly in concentrated markets, have strong incentives and abilities to engage in behavior that restricts competition through the formation of cartels or other collusive conduct, exclusionary conduct, and the pursuit of anticompetitive acquisitions.

B. ACCC’s Approach to Enforcing Competition Laws

Assessing whether particular conduct is likely to be anticompetitive is not necessarily straightforward. The ACCC generally focuses on two issues in assessing whether business conduct is likely to be anticompetitive. First is whether the conduct interferes with the process of competition, or is likely to do so. Business conduct could interfere with the process of competition by facilitating collusion among rivals, by removing a significant competitor (or potential competitor), or by preventing or hindering rivals from competing on their merits. Second is whether the conduct harms trading parties on the other side of the market, or is likely to do so. In most matters, the relevant trading parties are customers of the business in question (such as consumers). In some cases, the relevant trading parties sell products to the business.

The ACCC is of the view that business conduct is likely to be anticompetitive if it interferes with the process of competition and harms trading parties on the other side of the market, or is likely to do so. It is necessary to consider both issues when assessing whether conduct is likely to be anticompetitive. The first issue concerns whether the conduct interferes with the process of independent rivalry among firms to win and retain customers. The second issue plays a number of roles. First, it sheds light on whether the conduct is likely to increase, extend, or protect the market power of the firm in question, and whether that effect is likely to be substantial. This involves assessing the effect of the conduct on the firm’s ability and incentive to “give less and charge more.” Second, it assists with the assessment of the first issue. Whether or not trading parties are harmed can assist in distinguishing between conduct that is part of the competitive process and conduct that interferes with that process. Competition is about firms winning and retaining sales by making superior offers to its customers. Customers benefit from this rivalry. Anticompetitive conduct restricts rivals from making better offers to its customers and customers are ultimately harmed.

Unless there is a coherent logic about how the conduct is likely to cause harm to trading parties on the other side of the market, a competition agency, like the ACCC, should think twice before intervening. A number of issues are relevant in this regard. The first concerns the type of harm. Economic harm from a lessening of competitive rivalry is not limited to higher prices. The competitive process drives firms to meet the needs of customers in a variety of ways including price, service standards, product quality, product diversity (choice), and product development (innovation). Each of these could be adversely affected by conduct that interferes with the competitive process. The second concerns the identity of the parties likely to be directly adversely affected by any lessening of competition. This is not limited to the final consumers of the product. The following examples unpack these issues by outlining the ACCC’s approach to assessing the likely competitive effects in merger matters.

Consider a merger between two retailers in a consumer-facing market. In this circumstance, the ACCC assesses the impact of the merger on competition among retailers and, in doing so, considers the likely harm to consumers of the product (i.e., higher prices, poorer service standards, less choice, etc.). Now consider a merger between two wholesalers who supply retailers. In this case, the ACCC assesses the impact of the merger on competition among wholesalers and, in doing so, considers the likely effect of the merger on the terms and conditions on which retailers acquire products from wholesalers. To the extent the merged firm is likely to gain market power from the merger and have the ability and incentive to offer less favorable terms and conditions to retailers than they were offering pre-merger, the merger is likely to mean retailers will make poorer offers to consumers. While ultimately final consumers are harmed, the ACCC does not, in general, assess the extent of this harm in determining whether the merger is likely to substantially lessen competition. The likely effect of the merger on competition among wholesalers and the offers they make to retailers is the main focus.

Finally consider a merger in an acquisition market; for example, a market for the purchase of inputs. In 2018, the ACCC reviewed a proposed merger between two of the three major milk processors ¹⁴ in a large dairy farming region in south-east Australia. ¹⁵ The ACCC cleared the merger after the acquirer offered to divest a major milk processing plant in the region to maintain the pre-merger market structure. The ACCC’s competition concern in this matter was that the merger would substantially lessen competition in the acquisition of raw milk resulting in lower prices for dairy farmers in the region causing lower milk production. In this case, the ACCC assessed the likely impact of the merger on competition among milk processors recognizing the immediate impact of any lessening of competition was on dairy farmers as sellers of raw milk, not on consumers. ¹⁶ That is, the ACCC was concerned the merger would increase the merged firm’s monopsony power in acquiring raw milk from farmers.

The ACCC has adopted a similar approach in other matters ¹⁷ and, in general, will take action to protect competition in acquisition markets, including where the immediate beneficiaries are farmers, small businesses, or large businesses.

The ACCC is of the view that focusing on the two questions above improves the assessment of the likely competitive effects of conduct in a number of ways. First, it allows for a transparent analytical approach to be adopted and assists in making clear the types of evidence that will be valuable in assessing whether conduct is likely to have the effect of substantially lessening competition. Second, it enhances consistency, and in turn, predictability in decision making. Third, it makes enforcement decisions more credible and reduces the scope for under and over enforcement.

It is worth emphasizing that focusing on the two questions described above does not mean the ACCC is of the view that market power is mostly rare or transitory. Quite the contrary. Market power when established can be long-lasting and can be used to restrict competition.

C. The ACCC’s Approach and the Consumer Welfare Standard

The ACCC’s approach to assessing whether conduct is likely to have the effect of lessening competition is similar to the approach used by many other competition agencies. The approach adopted by competition agencies is often characterized by whether or not they apply a consumer welfare standard.

A number of commentators have noted that there is no well-accepted definition of the consumer welfare standard and that competition agencies apply the standard differently. ¹⁸ The definition of a consumer welfare standard can differ in a number of ways. One concerns the type of effects that are considered. In particular, whether consumer harm is limited to higher prices, or extends to harm caused by poorer service standards, poorer product quality, or poorer product choice. Another concerns the interpretation of the term “consumer.” In particular, whether consumers are final consumers of the product or whether the term captures intermediaries and even sellers of products (such as farmers in the example above). Given the different possible interpretations of the consumer welfare standard, it seems preferable to describe how the ACCC enforces competition laws in practice, rather than to focus on terminology. As noted above, the ACCC is of the view that business conduct is likely to be anticompetitive if it interferes with the process of competition and harms the trading parties on the other side of the market, or is likely to do so.

The ACCC’s approach seems broadly consistent with that used by the Federal Trade Commission (FTC) in the United States. FTC Commissioner Christine Wilson recently noted that the FTC regularly considers price and nonprice factors, including innovation, when assessing the likely competitive effects of a merger. ¹⁹ Furthermore, in a recent merger between office supply distributors Staples and Essendant, the FTC staff assessed whether the merged firm would be able to exercise monopsony power against office supply product manufacturers. ²⁰ The U.S. Department of Justice Antitrust Division has adopted a similar approach in assessing the competitive effects of mergers in acquisition markets. ²¹

D. Quantifying the Economic Harm

Characterizing and assessing the economic harm to parties on the other side of the market assists in distinguishing between conduct that interferes with the competitive process and conduct that is part of the competitive process.

Competition is a dynamic process. It enhances welfare in a variety of ways (price, product variety and quality, product innovation, etc.). Some of the adverse effects of a lessening of competition may not be evident for some time. As a result, quantifying the full consequences of a substantial lessening of competition on welfare is difficult, subject to false precision and prone to underestimation. While the likely economic harm must be meaningful, demonstrating that the detriment exceeds a specific quantitative threshold is, in the ACCC’s view, not necessary and, moreover, is likely to allow anticompetitive conduct to “slip through the net.”

A. Current Debate Concerning the Enforcement of Competition Laws in Australia

In Australia, there is broad support for the view that Australian competition laws are about making markets work for the welfare of Australians. For instance, in a major inquiry into Australia’s competition policies, laws and institutions in 2014–15 (the Harper Review), ²⁸ the Panel stated that “[c]ompetition policy is aimed at improving the economic welfare of Australians. It is about meeting their needs and preferences by making markets work properly.” ²⁹ In the Panel’s view, competition policy should, among other things, “make markets work in the long-term interests of consumers.” ³⁰

Some have expressed concerns about whether Australia’s competition laws are achieving this objective. For example, a prominent Australian journalist recently lamented: “Some would argue antitrust rules promote corporate welfare but not consumer welfare. The question to be answered is whether the present Australian rules are providing a sustainable economic future for the country.” ³¹

Further, in a speech addressing the relationship between competition and inequality, the then Shadow Minister for Competition, ³² Dr Andrew Leigh MP announced that a future Labor government ³³ would use the enforcement of competition laws to target growth in inequality, noting “a future Labor government will ensure that competition policy does more to ameliorate the growing economic gap in our society.” ³⁴ Dr. Leigh proposed explicit measures to promote this objective including adding a “requirement in the Competition and Consumer Act that the ACCC prioritise investigations of conduct that targets or disproportionately impacts disadvantaged Australians. The growth of inequality makes it vital to enact an explicit legislative requirement for the competition regulator to put the most vulnerable first.” ³⁵

There have also been regular calls in Australia for competition laws to be used as an arm of industry policy; to enable domestic firms to develop the scale to compete more effectively in international markets. As noted by the Panel in the Harper Review, “[f]rom time to time, there are calls for competition policy to be changed to allow the formation of ‘national champions’—national firms that are large enough to compete globally.” ³⁶

These calls are not surprising in a small open economy like Australia’s. A desire for Australian firms to be successful globally does not mean that they should be protected from competition at home. If firms are protected from competition in their home markets, they will be less likely to succeed in overseas markets. Australia already has relatively high levels of market concentration in many sectors, so great caution needs to be exercised to prevent further consolidation for the wrong reasons.

B. Enforcing Competition Laws to Promote Total Welfare

There are many who argue that competition agencies such as the ACCC should adopt a total welfare standard. ³⁷ That is, to seek to promote total economic surplus, the sum of producers’ surplus, and consumers’ surplus when enforcing competition laws. According to this view, the ACCC and the Courts should be making decisions about whether a merger or a particular business practice is likely to substantially lessen competition based on whether the behavior interferes with the competitive process and reduces total economic welfare or economic efficiency.

The concept of total economic welfare or total economic surplus is strongly grounded in economic theory and is widely used in public policy. The difference between the approach adopted by the ACCC and the use of a total welfare standard is clear when considering efficiencies in assessing whether mergers are likely to substantially lessen competition. The desire to achieve efficiencies, including cost savings, is often mentioned as a motivation for mergers. The ACCC takes merger-specific efficiencies (such as greater economies of scale) into account in its assessments of whether a merger is likely to substantially lessen competition, but only so long as the efficiencies are likely to reduce prices or increase quality, production, or innovation. ³⁸ The ACCC notes, “If efficiencies are likely to result in lower (or not significantly higher) prices, increased output and/or higher quality goods or services, the merger may not substantially lessen competition.” ³⁹

Merger-specific efficiencies that are not likely to be passed on by the merged firm in the form of lower prices or improved product quality are not taken into consideration by the ACCC in the assessment of the likely competitive effects of mergers. For example, a merger may reduce overhead costs (e.g., by reducing the number of CEOs from two to one) but may not affect the cost of producing additional output. Under these circumstances, the efficiencies (overhead cost savings) are more likely to be retained by the firm and are unlikely to affect the level of competition. ⁴⁰ The ACCC would not take these efficiencies into account in its competition analysis. This is in contrast to applying a total welfare standard, where the benefits of all merger-specific efficiencies would be taken into account, including those that are retained by the owners of the merged firm.

C. Authorization of Anticompetitive Conduct

While the ACCC does not use a total welfare standard in assessing whether conduct is likely to substantially lessen competition, Australian competition laws provide for broader considerations (including producer welfare) to be taken into account under the authorization provisions.

The ACCC may grant authorization for conduct that would or might breach the competition provisions of the Act. If the conduct is authorized, ⁴¹ the party can engage in the conduct without risk of the ACCC, or third parties, taking legal action against them for a contravention of the relevant competition provisions of the Act. ⁴² Determinations made by the ACCC in regard to authorization applications are subject to review by the Australian Competition Tribunal (the Tribunal). ⁴³ Authorization can be granted for a range of conduct that may otherwise have the effect, or be likely to have the effect, of substantially lessening competition. This includes mergers, misuse of market power, exclusive dealing, and a range of multilateral conduct including concerted practices. ⁴⁴ The ACCC may grant authorization for conduct if it is satisfied in all the circumstances that:

the conduct would not have the effect, or would not be likely to have the effect, of substantially lessening competition; or

The ACCC has the power to grant authorization where it is satisfied that at least one limb of the test is met. The second limb is sometimes referred to as the “net public benefit” test. The terms public benefit and public detriment are not defined in the Act. The Tribunal interprets these terms broadly. According to the Tribunal, a public benefit is:

[A]nything of value to the community generally, any contribution to the aims pursued by the society including as one of its principal elements (in the context of trade practices legislation) the achievement of the economic goals of efficiency and progress. Plainly the assessment of efficiency and progress must be from the perspective of society as a whole: the best use of society’s resources. We bear in mind that (in the language of economics today) efficiency is a concept that is usually taken to encompass “progress”; and that commonly efficiency is said to encompass allocative efficiency, production efficiency and dynamic efficiency. ⁴⁶

The ACCC applies the same definitions, although the focus is predominately on those public detriments which may be caused by any lessening of competition. As the definitions outlined above make clear, economic efficiency is often central to the application of the “net public benefit” test. ⁴⁸ In general, the ACCC focuses on whether the conduct for which authorization is sought will improve the use of society’s resources by addressing a market failure or market distortion. ⁴⁹ This lends itself to applying a total welfare standard, as the ACCC notes in its authorization guidelines:

The ACCC considers that cost savings accruing to one or few firms arising from increases in productive efficiency can constitute public benefits and it is not necessary for the savings to be passed on to end consumers in the form of lower prices. The community at large has an interest in resource savings because these resources are released for use elsewhere in the economy. ⁵⁰

In an influential decision by the Tribunal, ⁵² it described its reasoning in identifying and assessing the public benefit from the conduct as a “form of the total welfare standard” where the weight accorded to any likely benefits “may vary depending on who takes advantage of them and the time period over which the benefits are received.” ⁵³ In particular, the Tribunal noted that “whilst the Tribunal does not require that efficiencies generated by a merger or set of arrangements necessarily be passed on to consumers, it may be that, in some circumstances, gains that flow through only to a limited number of members in the community will carry less weight.” ⁵⁴ This enables greater weight to be placed on the effect of the conduct on the welfare of consumers than on the welfare of producers.

While the ACCC regularly grants authorizations, this is mostly for conduct that is unlikely to have a substantial adverse effect on competition. In ACCC’s experience, there are substantial risks to the operation of a market economy of giving significant weight to potential efficiencies or the potential for broader public benefits in circumstances where the conduct is likely to significantly restrict competition.

The ACCC also considers that it is important when assessing the impact of a merger or a business practice on economic efficiency to look beyond the short-term or static effects. For example, say a number of dairy farmers make substantial investments in upgrading their milking equipment. Now suppose that all of the milk processing firms within a reasonable distance of these dairy farms merge into one. The merging parties might argue that they will not lower the farm gate price of milk so much as to force the farmers to switch out of dairying. Even though the farm gate milk prices will be lower as a result of the merger, and processing margins will rise, the merging parties might demonstrate that the farmers will in the short term go on milking as many cows as before.

A short-term focus may lead one to say that since there is no immediate reduction in economic activity, the merger should be allowed. But this ignores the longer-term consequences of allowing the merger. If such mergers are permitted, farmers may be reluctant to invest in the first place, or to reinvest, and the economy would forego valuable investment and future milk production.

A. Competition and Consumer Laws and Fairness

As noted above, the foundations of competition laws are being called into question with some commentators calling for the objective of competition laws to be broadened to take into account public policy issues, including general fairness. In enforcing competition laws, the ACCC is not solving for fairness. However, strong enforcement of competition laws will, as a by-product, usually achieve fairer outcomes for consumers and small businesses. But it is possible that consumer laws in Australia could play a greater role here.

Consumer laws in Australia prohibit unconscionable conduct. Conduct may be unconscionable if it is particularly harsh or oppressive. It is more than conduct that is simply unfair. There is currently a debate in Australia as to whether consumer laws should be expanded to include a general prohibition on unfair trading practices. ⁵⁶

While many other jurisdictions ⁵⁷ have prohibitions against unfair practices, Australia’s consumer laws do not presently extend this far. The ACCC in its Digital Platforms Inquiry recommended an amendment to the Act to include a prohibition on certain unfair trading practices which “address conduct not currently caught by the consumer protection laws but which has the potential for significant consumer harm.” ⁵⁸ The Digital Platforms Inquiry report made clear the link between fairness, consumer protection, and promoting competition, noting:

[C]onsumer transactions with digital platforms often feature acute information asymmetries and bargaining power imbalances and the existing regulatory framework does not effectively deter data practices that exploit these characteristics. Promoting competition relies on consumers being able to make free and informed choices regarding products and services that best meet their interests. As such, it is critical that the [Australian Consumer Law] is able to protect consumers from any conduct that deprives them of a real and meaningful choice, such as a monopolist’s conduct in imposing extortionate take-it-or-leave-it terms to consumers who are in need of a service. ⁵⁹

B. ACCC’s Approach to Enforcing Competition and Consumer Laws

Enforcing competition and consumer laws requires judgment. Resources available to agencies such as the ACCC are limited and must be used in a way to maximize their impact on enforcement and compliance with the Act. Difficult choices are made about which matters to investigate, which matters to litigate, and which matters to seek a speedy administrative resolution. The ACCC finds a number of things contribute to the effectiveness of its activities as an agency enforcing competition and consumer laws.

First, the ACCC takes a holistic approach to promoting the welfare of Australians through enforcing competition and consumer laws. As noted above, the ACCC endeavors to use competition and consumer laws as complementary tools to make markets work better in the interests of Australians.

Second, the ACCC employs a proactive approach to enforcement. Each year, the ACCC publicly announces its priorities in enforcing competition and consumer laws. ⁶⁰ This covers the types of conduct and business activities it will focus on over the coming twelve months.

Third, the ACCC uses market studies to better understand how markets work and to identify and, where possible, to address sources of underperformance (e.g., market failures). By close examination of market behavior through a competition and consumer lens, these studies enable the ACCC to uncover a range of impediments to the efficient and effective operation of markets. Market studies are consequently vital tools that enhance the ACCC’s effectiveness.

Fourth, the ACCC strongly enforces merger law. Market structure affects outcomes. It is preferable to prevent the accumulation of market power through acquisitions rather than deal with the adverse consequences after the fact.

Fifth, the ACCC consistently seeks substantial penalties from the Courts for breaches of competition and consumer laws. Penalties can act as a significant deterrent to inappropriate behavior by businesses. Maximum penalties imposed by Australian Courts for breaches of competition laws are considerably lower than comparable jurisdictions for similar conduct ⁶¹ although this is starting to change. This is, in part, the result of the ACCC seeking higher penalties before the Courts for breaches of competition laws.