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 take advantage of that power for an anti-competitive purpose.
A business with market power can take advantage of its market dominance to drive a competitor out of business or to prevent new competitors from starting up. This can reduce or eliminate competition from a market, harming consumers and the wider economy by increasing prices, and reducing choice and quality.
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.
Likewise, aggressive rivalry by large businesses may not be illegal as large businesses also have a right to compete. However, they are not allowed to take advantage of their market power to prevent others from competing effectively.
Charging high prices to consumers is not illegal under section 36 of the Commerce Act.
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.
What does “taking advantage of” market power mean?
To decide if a business is taking advantage of its market power, we ask whether the business would have behaved the same way if it did not have substantial market power, but was otherwise in similar circumstances. This is how we test whether the behaviour is the direct result of the market power the business has. It is sometimes called the “counterfactual test”.
In other words, a business with a substantial degree of market power can compete in the same way as a business which does not have market power. Applying this test in practice can be complex and is usually the element of section 36 that requires the most analysis.
What does "anti-competitive purpose" mean?
Behaviour is illegal under section 36 if it has one of the following anti-competitive purposes:
to restrict the entry of another business into any market
to prevent or deter a business from being able to compete effectively
to eliminate a business from any market.
Even if a business has other legitimate reasons for certain behaviour, if it also has one of these anti-competitive purposes, the behaviour will breach section 36.
However, section 36 does not protect individual businesses from facing vigorous, or even aggressive, competition.
Examples of misuse of market power
The following are examples of the types of behaviour that could be prohibited by section 36 of the Commerce Act:
Predatory pricing – 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
Refusal to supply – where a business refuses to supply a competitor
High access pricing – where a business operating at more than one level of the supply chain charges a competitor higher prices for an input or access to the infrastructure needed to compete in downstream markets where the supplying business also operates
Exclusive dealing – where a business has contracts with retailers or distributors that only allow them to sell its products
Tying - where a business only sells a product if the customer purchases it together with another product
Conditional discounts - where a business offers customers a discount if they meet certain conditions.