Information for small and medium businesses

What is illegal under the Misuse of Market Power law, section 36?

A business with substantial market power must not engage in conduct that has the purpose, effect, or likely effect of substantially lessening competition in a market in which the business supplies, or acquires, goods and services.

Example

Medigas is a supplier of a wide variety of medical products. It is also the only manufacturer of medical gas in New Zealand. Medigas sells medical gas directly to hospitals, and also to rival medical supply companies that on-sell it to hospitals.

Recently, Medigas stopped supplying medical gas to rival medical supply companies.

Hospitals want medical supply companies to provide a ‘one stop shop’ for all medical supplies, including medical gas. Hospitals do not want to have to arrange for the supply of medical gas separately.

Without access to medical gas, rivals struggle to compete for hospital contracts.

Medigas’s refusal to supply medical gas to rivals could breach the Misuse of Market Power law, particularly if there are no other ways for rival companies to access medical gas (for example, through imports). If rivals go out of business, Medigas may be able to increase the price of medical supply services in the long term.

Example

SweetTooth is the only manufacturer of sugar in New Zealand. SweetTooth packages and sells sugar to retailers such as supermarkets. It also sells wholesale sugar to competitors who package and sell the sugar to retailers under different brands.

SweetTooth increases the price for wholesale sugar to its competitors. The higher costs mean competitors can’t compete with SweetTooth on price and make enough profit to remain in business. It is not cost effective for competitors to manufacture sugar themselves, or to import it from overseas.

SweetTooth’s pricing could breach the Misuse of Market Power law, particularly if it causes one or more competitors to exit the market and SweetTooth is free to increase the price of sugar to retailers.

Example (Tying)

Manufacturer A develops a new pesticide that is very effective at controlling fungus and pests without harmful effects on bee populations. The new pesticide is patented and is the most effective product on the market that is bee-friendly. Manufacturer A is also a supplier of fertilisers and offers a range of these.

Manufacturer A will only supply its pesticide to customers if they purchase it together with its fertiliser products.

Manufacturer B is a rival manufacturer of fertilisers. As a consequence of Manufacturer A’s tied offering, it is losing business rapidly. In response to increasing regulation, farmers are increasingly looking to purchase ‘green’ pesticides, and many have switched to purchasing fertilizer from Manufacturer A in order to buy its bee-friendly pesticide.

Manufacturer A’s tied offering could breach the Misuse of Market power law. Rivals cannot match the offering due to the pesticide patent, and there is no way that customers can replicate the bundle at the same price by purchasing the products separately. This may harm competition if it allows Manufacturer A to charge higher prices to customers for fertiliser.

Example (Bundling)

DrugMaker is a pharmaceutical manufacturer. It develops a new, patented drug (MagicCure) that is very effective at treating a serious condition. Because it is under patent, DrugMaker is the only supplier of this drug.

DrugMaker sells MagicCure at a very high price, or at a much lower price if bought together with other non-patented drugs that treat other conditions.

CheapPills is a manufacturer of low-cost, off-patent (“generic”) drugs. However, it finds itself unable to sell products that compete with drugs in the MagicCure bundle, because customers must purchase generic drugs from DrugMaker in order to receive MagicCure at a reasonable price.

DrugMaker’s bundled offering could breach the Misuse of Market power law, since it effectively compels customers to purchase the bundle in order to purchase MagicCure. Rivals cannot match the bundle due to the patent on MagicCure, and there is no way that customers can replicate the bundle at the same price by purchasing the products separately.

While the bundle delivers lower prices for MagicCure, it may harm competition, particularly if it allows DrugMaker to increase the price of the generic products to customers, who must pay the higher prices if they wish to access MagicCure.

Example

Airline A transports passengers between two regional destinations in New Zealand. It has been the only airline on this route for some time.

Airline B, a new company, enters the market and starts offering flights on the same route. If it is successful on this route, it will look to start offering flights on other regional routes.

When Airline B opens bookings, Airline A drops its prices significantly below the cost of operating and maintains those prices for six months. To compete with Airline A, Airline B matches its prices. However, Airline B can’t keep prices below cost for long and will need to close its service if things do not change.

Airline A’s below-cost pricing may breach the Misuse of Market Power law. While below-cost pricing can have short term benefits for consumers, if competitors exit the market because of below cost pricing, in the long run customers may end up paying higher prices due to the lack of competition

Example one

Steel is the key ingredient needed to manufacture steel roofing.

Roofing Manufacturer A enters an exclusive contract to purchase steel with the only manufacturer of steel in New Zealand (Steel Manufacturer).

Roofing Manufacturer B previously had a supply arrangement with Steel Manufacturer. However, the exclusive arrangement between A and Steel Manufacturer means B’s contract is not renewed when it expires.

Roofing Manufacturer B cannot buy suitable steel elsewhere. Importing it is much more expensive than purchasing in New Zealand.

Without steel, Roofing Manufacturer B struggles to compete, and so do other rivals.

The exclusive contract between Roofing Manufacturer A and Steel Manufacturer could breach the Misuse of Market Power law.

This is more likely to happen if Roofing Manufacturer A can increase the price, or reduce the quality, of steel roofing without losing customers due to a lack of competition.

Example two

Refrigerator Manufacturer A manufactures whiteware such as refrigerators. It is the largest supplier of refrigerators in New Zealand.

Refrigerator Manufacturer A enters into exclusive three-year contracts to supply refrigerators to all of the main homeware retailers in New Zealand. Eighty percent of new refrigerators sold in New Zealand are sold through these retailers.

Refrigerator Manufacturer B has recently entered the market, selling low-cost refrigerators. However, because of A’s exclusive contracts with large homeware retailers, B is struggling to find retailers to sell its refrigerators.

B is only able to sell to customers online or through very small retailers. B is struggling to grow its market share in New Zealand. It is not profitable and, without an increase in sales, will have to close down.

These exclusive contracts could breach the Misuse of Market Power law if, as a result of the contracts, B and other manufacturers like B are unable to get large enough to start offering prices that would keep the prices of A low, and A is able to increase the price of its refrigerators as a result.

This is more likely to happen if the exclusive contracts with large retailers are in place for a long time.

Example

Manufacturer A sells wound dressings / sticking plasters to all pharmacies and supermarkets in New Zealand. It offers tiered rebates (discounts) to retailers, based on the amount sold to the retailer as follows:

• For the first 500 boxes of plasters, the rebate is 5%
• from 501-1000 boxes the rate is 10%
• from 1001-1500 boxes the rate is 15%
• above 1500 boxes the rate is 20%.

Manufacturer A calculates and pays rebates to retailers retrospectively at the end of each year based on the retailer’s total sales.

Plaster Manufacturer B is a new business competing with Manufacturer A. It matches the prices of Manufacturer A but finds that customers of Manufacturer A are unwilling to switch their orders to Manufacturer B, because doing so would reduce the rebates retrospectively paid by Manufacturer A for previous orders.

Plaster Manufacturer B struggles to win any customers.

Plaster Manufacturer A’s rebate scheme could breach the Misuse of Market Power law. While rebates schemes generally lead to lower prices for end consumers, if they lock customers into using one supplier, causing rivals to exit the market, in the long run customers may end up paying higher prices for plasters due to the lack of competition.