The Commerce Commission today released its report intoTelecom's pricing of telephone services in Lower Hutt and has concluded that Telecom's actions in matchingSaturn's prices are not a breach of the Commerce Act.

Commission Chairman Peter Allport said that there is no evidence that Telecom is pricing its Hutt Valley services at below cost.

Although the Commission will continue to maintain an interest in developments in telecommunications markets, and in particular further pricing responses by Telecom to Saturn, the current investigation has been concluded.

The Commission examined Telecom's actions to see whether such regional pricing, or any other activity, breached either section 36 (use of a dominant position) or section 27(arrangements that substantially lessen competition).

The Act does not allow a dominant company to use its dominance to restrict, prevent or eliminate competition, but it does allow it to respond to competition. In general terms that means the company can respond in ways that would be available to it if it were not dominant.

In themselves, regional pricing and offering discounts or reduced prices selectively are not prohibited by the Act. These are common responses, used by businesses that are not dominant, to a new entrant or increased competition.

Regional pricing is not in itself a breach of the Act. However, a dominant firm that reduced prices below cost, only because it could cross-subsidise from areas where it was making monopoly profits, would likely breach the Act. The Commission has found no evidence that Telecom has done this.

The Act also prohibits contracts, arrangements or understandings that have the purpose, effect or likely effect of substantially lessening competition.

In this case, there is nothing to show Telecom'scontracts with its customers are anti-competitive as opposed to a legal response to competition. Telecom's prices are not below cost, it has reduced them with the stated aim of matchingSaturn's prices and there is no evidence of other behaviour that might breach the Act.

Conclusions from the Commission's public report

Conclusions from the part of the report looking at issues under section 36 of the Act. This section prohibits the use of a dominant position in a market to restrict, prevent or eliminate competition in any market.

The Commission "cannot substantiate an argument that Telecom's actions were not undertaken pursuant to its policy of being price-competitive, particularly given the fact that the evidence does not point to its pricing below the relevant cost measure.

"It is not unreasonable to assume that a firm not in a dominant position in fixed telephony, but otherwise in the same circumstances as Telecom would act in the same way as Telecom has. There does not appear to be a 'use' of a dominant position when applying the Privy Council's test.

" matching Saturn's price, where prices are still above Telecom's AIC (average incremental cost), is a pro-competitive action, and any damage to Saturn, in the absence of evidence to the contrary, is not sufficient to be able to infer anti-competitive purpose. The discounts appear to be aimed at meeting competition and protecting market share in a competitive market, not at deterring competition. An argument that Telecom is being constrained in the relevant market by a new entrant has some merit.

"By matching Saturn's prices in fixed telephony services in Lower Hutt, Telecom does not appear to be using its dominant position in the national voice telephony (fixed) market for the purpose of restricting entry or preventing the engagement of competitive conduct in the market for fixed telephony services in Wellington.

"In summary there is not sufficient evidence to show:

  • That a firm not in a dominant position but otherwise in the same circumstances as Telecom would act any differently; or
  • That Telecom has acted with a proscribed anti-competitive purpose."

Conclusions from the part of the report looking at issues under section 27 of the Act. This section prohibits contracts arrangements or understandings that substantially lessening competition.

"It is unlikely that Telecom's contracts have the purpose, or effect, or are likely to have the effect of substantially lessening competition in the market for fixed telephony services in Wellington.

"On the basis of information provided by Telecom showing that its prices are above AIC and the absence of additional related anti-competitive conduct, it is difficult to say that any lessening of competition sources from those arrangements.

"As Gault J pointed out in Port Nelson:

"The relevant inquiry is as to substantially lessening competition. That is not the same as substantially lessening the effectiveness of a particular competitor."

"Saturn argues that, if the law permits Telecom to price regionally, no one is able to take advantage of market distortions because of the cross-subsidy potential. If this is so, then this is a policy matter and not an enforcement matter."

The public report can be viewed on the Commission's web site www.comcom.govt.nz, where it is attached to this media release.

Media contact: Chairman Peter Allport

Phone work (04) 498 0962

General Manager John Feil

Phone work (04) 498 0963

Communications Officer Vincent Cholewa

Phone work (04) 498 0920

Commission media releases can be viewed on its web site www.comcom.govt.nz