Some businesses have substantial market power. This in itself is not illegal. However, under the Commerce Act it is illegal for a business with a substantial degree of market power to engage in conduct that has the purpose, effect, or likely effect of substantially lessening competition in a market.
A business with market power may be able to damage the competitive process if it can sufficiently hinder its current rivals, restricting their ability to compete, or prevent them from competing entirely. It may also be able to deter potential rivals, impose barriers to slow down entry or expansion of current and potential rivals, or entirely prevent them from entering a market.
There are many types of behaviour that are illegal under section 36 of the Commerce Act. It is often hard to distinguish anti-competitive behaviour from aggressive, but legal, competitive behaviour that benefits consumers. For example, cutting prices to win customers is usually a sign of competition, but in some circumstances can harm competition.
We have drafted Misuse of Market Power Guidelines that explain how the Commission will assess conduct under section 36, including our approach to applying the ‘substantial lessening of competition’ test to unilateral conduct.
What is illegal under section 36 of the Commerce Act?
A business will breach section 36 if it:
Has a substantial degree of power in a market
Engages in conduct
With the purpose, effect, or likely effect of substantially lessening competition in a market in which the business supplies or acquires goods and services.
What is substantial market power?
A business has substantial market power when its actions are not constrained by competition. For example, a business with substantial market power can profitably hold prices above competitive levels for a sustained period of time. Such a price rise will only be profitable if the business does not face effective competition from rivals or entrants in the same market.
When assessing whether a business has substantial market power, we consider how much existing and potential competition the business faces. We also look at other factors such as how much power buyers have.
When would a substantial lessening of competition arise?
A substantial lessening of competition may arise where the conduct makes entry and expansion more difficult, or otherwise reduces the ability or incentive of competitors to provide a competitive constraint. Conduct does not need to force a competitor, or competitors, to exit the market to have this effect.
Conduct may affect competition even if it affects only some competitors in a market.
The ultimate question is whether the conduct has lessened, or is likely to lessen, the competitive constraints that operate on the firm with market power.
What types of behaviour may be illegal under section 36?
The types of conduct that may substantially lessen competition are potentially broad. We can, however, identify some conduct that is at increased risk of substantially lessening competition that could be prohibited by section 36 of the Commerce Act:
Refusal to supply – where a business refuses to supply a competitor a product or service that they need to compete.
Price squeeze - where a vertically integrated firm sets prices in the upstream wholesale market in a manner that prevents efficient competitors from profitably operating in the downstream retail market.
Tying and bundling - where a business only sells a product if the customer purchases it together with another product.
Predation – where a business lowers its prices below cost for a sustained period of time to drive competitors out of the market, with a view to increasing prices in the future.
Exclusive dealing – for example, where a business has contracts with retailers or distributors that only allow them to sell its products.
Loyalty rebates and conditional discounts - where a business offers customers a discount if they meet certain conditions.
Authorising anti-competitive conduct that will likely benefit New Zealand
Under the Commerce Act, the Commission can authorise conduct that is captured, or might be captured, by section 36 if we are satisfied that the benefits to the public outweigh the competitive harm of the conduct.
