The Kiwi Share Obligation #26

  1. Saturn argues that Telecom's pricing is simply a "transparent attempt to defend discriminatory pricing designed to ensure that Saturn never becomes a national competitor". Saturn says the KSO for universal line rentals is being eroded. It argues that there are social, economic and political ramifications as New Zealand becomes a patchwork of line rental prices where urban areas are favoured over rural areas.
  2. The issue for determination by the Commission is whether the discounting by Telecom in Lower Hutt breaches sections 27 and 36 of the Act. In determining whether such a breach has been made out, there is no statutory accounting under those sections of the Act for social or political matters which do not impinge upon the competitiveness of the relevant market. #27
  3. Telecom has previously argued that the KSO necessitates some cross-subsidy: until Telecom took advice from American economists in Telecom v Clear, #28 it had largely based its demand for an access levy to its network on the ground that it was entitled to a contribution to the cross-subsidy required by the KSO. The Privy Council in that case considered that the provision and maintenance of rural lines must involve greater expense than those of urban lines. However, some cross-subsidy is not necessarily limited to rural services. The Privy Council noted that local calls from residential users must involve Telecom in costs which cannot be recouped by any increase in real terms in residential rent charges. It was considered common ground that, at the time of that litigation, the residential local access service did not cover its costs. #29
  4. Taken in isolation, and as a direct consequence of the KSO, it is likely that Telecom [                ] its LRAIC of providing a bare access service across New Zealand, which is [              ] than that for providing the service to [                          ] Telecom argues that [

    ]

  5. The KSO requires Telecom to provide residential access service to both low-cost and high-cost users. Telecom argues that, if it is not entitled to compete for low-cost, high-value customers, its ability to meet the cost of nationwide residential access service will be further eroded. While the KSO caps the standard residential rental nationwide (principally to prevent Telecom raising prices in high-cost areas), it does not prohibit price reductions in other areas. [

    ]

  6. Under its interconnection agreement with Telecom, Saturn [

    ] Telecom has, however, included in the cost information provided, the foregone KSO contribution that Telecom would receive from the average Saturn customer's interconnection.

The Impact of Telecom's Pricing on Saturn

  1. To date, approximately [          ] has been invested in Saturn [

    ] Saturn's business plan provides [

    ]

  2. While Saturn [

    ]

  3. Saturn's research has indicated that [

    ] Its market research indicated that [

    ]

  4. [

    ]

  5. In summary, [

    ]

  6. Saturn has stated that [

    ] Together with the existing barriers to entry (namely, significant capital costs, asymmetrical interconnection rates, and lack of number portability), [

    ]

The Scope of the Commission's Analysis

  1. Saturn argues that Telecom's pricing in Lower Hutt must not be seen in the abstract, but in the context of Telecom's overall market positioning and strategies. Saturn claims any legal analysis should be less focused on a narrowly defined cost analysis and more toward a consideration of the overall impact on a competitive market. Saturn argues that new technology is not going to overcome issues like asymmetrical interconnect charges, lack of number portability and discriminatory cross-subsidised pricing by which Telecom imposes barriers to Saturn's entry and expansion. [

    ].

  2. Saturn says that when it entered the market, it took account of [

    ]

  3. A cost-based analysis will provide guidance on the question as to whether the Act has been breached in this case. However, staff are less convinced of the appropriateness of considering the allegation of predatory pricing within the broader context of other issues raised against Telecom, except to the extent that they impact upon the competitiveness of the relevant markets (eg. by raising entry barriers). There appear to be lesser synergies between the issues raised in this case. Where particular issues may raise competition concerns they will be duly considered by the Commission. For instance, the issue of number portability is closely monitored and in appropriate cases investigated by the Commission, given its importance for the development of competition in the telecommunications sector.
  4. It could be argued that the aggregate of various courses of conduct that Telecom is taking in relation to a number of competitors in the telecommunications sector is in itself a use of a dominant position. That is, Telecom might be undertaking a concerted array of actions which are dependent on each other to reduce the competitiveness of the various markets in which it acts. While other issues may impinge upon the competitiveness of markets, their legality or illegality under the Act is not at issue here. Any claim that Telecom's discounting is simply part of a wider course of action that is in breach of the Act is not considered to fall within the parameters of this investigation.
  5. However, it should be noted that the likelihood of success of actions under sections 27 and 36 of the Commerce Act will depend ultimately upon the competitiveness of the relevant markets. Thus, to that extent, any broader issues pertaining to the competitiveness of the relevant telecommunications markets will be taken into account in an assessment of the specific conduct under investigation here. As will be observed, strategic behavioural elements are not ignored in the Commission's analysis of predatory pricing conduct, as they assist in the determination of a practice's impact on competition.
  6. Further, behaviour by a firm that increases the likelihood that predation will succeed forms a part of that evidence that may prove anti-competitive purpose. One such issue [

    ] will be examined below in relation to the discussion on anti-competitive purpose.

COMPETITION ANALYSIS

  1. In assessing the conduct at issue in relation to section 36 of the Commerce Act staff considered:

whether Telecom has used its dominant position in the national market for voice telephony (fixed) services for the purpose of restricting the entry of Saturn into the market for fixed telephony in Wellington, eliminating Saturn from that market, or otherwise deterring Saturn from engaging in competitive conduct in that market.

  1. In assessing the conduct at issue in relation to section 27 of the Act, staff considered:

whether Telecom's aggregated contracts with Lower Hutt customers accepting its new prices, including regionally discounted line rentals, have the purpose or effect, or are likely to have the effect of substantially lessening competition in the market for fixed telephony in Wellington.

SECTION 36

  1. Section 36 provides that:

(1) No person who has a dominant position in a market shall use that position for the purpose of -

  1. Restricting the entry of any person into that or any other market; or
  2. Preventing or deterring any person from engaging in competitive conduct in that or in any other market; or
  3. Eliminating any person from that or any other market.

Relevant Markets

  1. Section 3 (1A) of the Act provides that: "the term 'market' is a reference to a market in New Zealand for goods and services that, as a matter of fact and commercial common sense, are substitutable for them."
  2. Establishing market boundaries can be viewed as a process of identifying that area of product, geographic and functional space within which a hypothetical monopolist could exercise a significant degree of market power. Market boundaries should be drawn by reference to the conduct at issue, the terms of the relevant section and the policy of the statute. #30
  3. Previously Courts have found there to be "a market within New Zealand for standard switched telecommunications services (excluding mobile telephone services)". #31 Similarly, the Federal Communications Commission, in its determination of Telecom's application to it seeking authority to provide international services between the United States and New Zealand, found that Telecom "  controlled the only ubiquitous local network in New Zealand".#32
  4. The Commission refers to this national market as the voice telephony (fixed) market.
  5. In this case, it has been alleged that, as a result of its ability to cross-subsidise from more profitable operations, Telecom is able to cut its prices below cost for its local services in Lower Hutt, with the purpose of affecting the competitiveness of local fixed telephony in Lower Hutt and Wellington. It is alleged that this is a use of a dominant position, for the purposes of section 36, stemming from Telecom's dominance in the voice telephony (fixed) market.
  6. Less debate is likely over the parameters of the market in which Telecom is alleged to be dominant (ie. the voice telephony (fixed) market) than that in which it is using that dominance for an anti-competitive purpose.
  7. Predation can occur in any market and need not occur in the market in which the predator has a dominant position. #33 Thus section 36 is equipped to deal with instances of cross-subsidisation, which is a means of financing a predatory campaign.
  8. In the present case, the process of establishing the market boundaries starts with the product and geographic area of the supply covered by Saturn. It is then extended in all its dimensions to include all other sources, and potential sources, of close substitutes which would otherwise make it non profit-maximising for a hypothetical monopolist to impose a small but significant non-transitory increase in price (SSNIP) or otherwise exercise a significant degree of market power. #34
  9. It has been put to the Commission that, as a result of Telecom's own analysis, there is a separate market for tolls, and a separate national lines rental market. That is, since Telecom distinguishes between the rebate for toll loyalty and lines rental (which Telecom insists has not changed), this can be taken as support for separate markets. It has also been put to the Commission that there is a national market for the provision of residential lines, and in this market there is a single price as a result of the KSO. It follows that pricing in Lower Hutt below the national price must be below cost pricing given prior general acknowledgment #35 that pricing for residential local access operates generally at a loss.
  10. Saturn has issued a media release dated 7 May 1998 (see Annexure 2) where it is stated that "Telecom has claimed in the past it loses $200 million by providing local call service in New Zealand. Taking that at face value, its initiative in Lower Hutt must be, by definition, predatory pricing." In addition, it was reported in the media on 8 May 1998 (see Annexure 3) that Telecom had claimed in 1995 that it lost $150 million a year on residential phone services.
  11. Telecom has said that this report is not accurate. [

    ] Nonetheless, there was a measure of agreement at the time, recognised in a statement by Gault J in the Court of Appeal in that case, that the residential local access service did not cover its costs. #36

  12. In staff's view, the fact a rebate is linked to tolls does not warrant a finding of different product/service markets for tolls and line rental. It would seem artificial to separate those services, particularly since the field of rivalry between Telecom and Saturn encompasses a range of telephony services, namely access (ie. line rental), local, national and international toll calls, and enhanced services (eg. "Call-Waiting"). These together comprise the range of telephony services available to residential customers across which Telecom is matching Saturn's prices.
  13. It is contended that the relevant product/service dimension of the market is the provision of fixed telephony services. A further issue arises as to the geographical dimensions of this market.
  14. Saturn has put to the Commission that the relevant market in which to assess whether Saturn has been prevented from competing is the national market, on the grounds that Telecom's competitors offer national services, and that Telecom's services are available and priced on the basis of a national market. In response, Telecom would argue that this incorrectly presupposes that Telecom's costs of providing residential local service nationwide are identical region-by-region. Telecom has said that the relevant costs are those that relate to the area in which Saturn has chosen to compete (ie. Lower Hutt).
  15. Saturn further argues that Telecom has consistently maintained that the provision of residential lines is unprofitable. While this loss may be partly attributable to the cost of providing a rural service, Saturn claims it would be extremely unlikely, on proper analysis, that the costs of providing and maintaining services in Lower Hutt will be substantially below $35.66. Telecom's response is that this confuses consideration of profitability across the entire residential network with the relevant costs in Lower Hutt. Telecom has taken account of its profitability of all services (including packages) offered in Lower Hutt, and says the profitability (or otherwise) of the local access services across the whole of New Zealand is not relevant.
  16. The outer limits (including geographical confines) of any particular market are likely to be blurred. However, it is a good starting point that, in determining the geographical boundaries of the market, one must account for the overlap between the operations of both Saturn and Telecom. This points to a market, the boundaries of which do not extend beyond Wellington, if they extend beyond Lower Hutt at all. As Gault J said in Port Nelson: #37

Generally a market will be identified by reference to the activities of those engaged in commerce, the structures underlying their activities and the perceived susceptibility to change in the medium-term future. In other words what competitors are doing or might reasonably be expected to do indicates the market in which they are participants.

  1. Saturn has reportedly planned to expand to Auckland and Christchurch. [

    ] Saturn currently provides local fixed telephony services only in Lower Hutt (see Annexure 4 for a map of Saturn's exchange boundaries), with plans to extend its network to cover all 135,000 homes in Wellington. It has been reported in the media that Saturn will be providing telephony services in Johnsonville and Khandallah soon, and in the Upper Hutt by early 1999. [

    ]

  2. It might be argued that the implications of Telecom's conduct are national: if Saturn can not compete in Wellington as a result of regional pricing by Telecom, no one will be able to compete regionally against Telecom anywhere in New Zealand. Only a player that has the resources to set up a network parallel to Telecom across New Zealand or sufficient parts of it would make it unattractive for Telecom to price regionally.
  3. The implications of the conduct are not so narrowly confined to Lower Hutt, but nor can they be said to be (in the near term) national either. Given the alleged conduct at issue, it appears that the conduct may arguably be considered within the context of at least two different geographical markets - that for fixed telephony in Lower Hutt, and that for fixed telephony in Wellington.
  4. In the case of Lower Hutt, there is room to argue that the actions by Telecom constitute a use of its dominant position for the purpose of (1) preventing Saturn from engaging in competitive conduct in the market for fixed telephony in Lower Hutt, and/or (2) eliminating Saturn from that market. [

    ]

  5. While Saturn does not yet compete in greater Wellington, [

    ]. Wellington is the relevant geographic area for considering the allegation that Telecom has used its dominant position with the purpose of (1) restricting the entry of Saturn into the market for fixed telephony in the greater Wellington area, and/or (2) deterring Saturn from engaging in competitive conduct in that market.

  6. Of course, a market can exist for competition law purposes if there is the potential for close competition even though none in fact exists. #38 Given the response of Telecom to Saturn's entry into Lower Hutt [

    ], #39 it would not be unreasonable to expect that Telecom would continue to offer to match Saturn's prices as it expands into greater Wellington. [

    ]

  7. A question arises as to whether it is necessary to consider the conduct independently in separate markets for Lower Hutt and Wellington. On the one hand it could be argued that certain issues need to be considered in the context of a market in Lower Hutt, and other issues in the context of that part of greater Wellington in which Saturn is not yet a competitor. [

    ] in greater Wellington for the purposes of considering all the conduct at issue in the context of that broader market.

  8. On the other hand, in the medium term, Saturn is expected to compete in greater Wellington; it is continuing to expand beyond Lower Hutt [

    ] and similar supply and demand characteristics are likely to be displayed across this network after the expansion takes place. Cost and revenue figures [

    ]

  9. Most importantly, it seems that the conduct is most meaningfully examined within the broader Wellington market. Given the apparent repercussions of the conduct for the Wellington area, it is not appropriate to limit the analysis simply to the Lower Hutt area. However, it seems artificial to consider the same conduct in separate Lower Hutt and Wellington markets when there is no likely difference to the analysis should the conduct be assessed in the Wellington market on its own.
  10. If Saturn is prevented or eliminated from competing in Lower Hutt, its entry into Wellington will, ipso facto, be restricted or deterred. [

    ] Thus there is no danger that Telecom's conduct would not be caught (if it is indeed anti-competitive) by analysing the conduct within a broader Wellington market, should it be considered that Lower Hutt is not the appropriate geographic market in which to assess the conduct. Thus, whether in fact the geographical boundaries are drawn around Wellington or Lower Hutt, there would appear to be no difference in assessing the conduct for the purposes of an analysis under the relevant sections of the Act.

  11. For these reasons, the Wellington market will be considered the relevant geographical market in which to consider whether Telecom has used its dominant position for an anti-competitive purpose.
  12. The relevant market for assessing the competition impact is therefore the market for the provision of fixed telephony services in Wellington (as bounded by Saturn's target 135,000 homes).

Dominant Position

  1. The leading exposition on "dominant position" is the High Court's discussion in Commerce Commission v Port Nelson (approved by the Court of Appeal). There McGechan J held: #40

'Dominance' includes a qualitative assessment of market power. It involves more than 'high' market power; more than mere ability to behave 'largely' independently of competitors; and more than power to effect 'appreciable changes' in terms of trading. It involves a high degree of market control.

How high? Clearly, not absolute control. There need not be monopoly. There need not be ability to act totally without regard to competitors, suppliers or customers. Expression of the required degree of control in terms of mastery - eg as 'commanding', 'ruling', or 'governing' - is perhaps to that extent misaligned, and needs to be read down.

  1. The focus is on the extent to which there may be constraints which prevent a firm from exercising a dominant influence in a market. Telecom must be able to set prices or conditions without significant constraint by competitor or consumer reaction. This is predicated on some degree of background commercial realism: it allows some regard to be had by Telecom to competition. Telecom may have some assessment of probable competitive responses and yet still be found to be dominant in the national market for voice telephony (fixed). The continued presence of competition does not preclude a finding of dominance. #41
  2. Section 3(8) of the Act prescribes a non-exhaustive list of factors to which "regard shall be had" for the purposes of determining dominance: the share of the market, the technical knowledge, and the access to materials and capital; the extent of competition from competitors or potential competitors; and the extent of the constraint from suppliers and acquirers of goods or services in the market. In this case, the structure of the market is to a large extent determinative of the issue of dominance. Telecom's ownership of the PSTN and its control of access to the numbers place it in a position to exercise a dominant influence over the supply of services in that market.
  3. It is recognised that the dynamics of the market affect the determination of dominance, as can the behaviour of participants and potential entrants. It could be argued that the entry of facilities-based local service competition by Saturn (albeit in a limited regional sense), and developments in technology (such as innovation in wireless technology) suggest against Telecom being found to be dominant in the relevant market. It might similarly be argued that markets are converging so that the voice telephony (fixed) market is too narrowly defined. #42 However, it is submitted that, although there is the prospect of increased competition in the long term, Telecom remains dominant in the relevant market.
  4. Consistent with previous decisions of the Courts and Commission #43, staff contend that, for the purposes of the present analysis, Telecom should be regarded as having a dominant position in the national market for voice telephony (fixed), using the standard for "dominant position" set down by the High Court in Commerce Commission v Port Nelson. #44

Using a Dominant Position for a Prohibited Purpose

  1. The crucial element of the present analysis is whether Telecom used its dominant position in the national voice telephony (fixed) market for the anti-competitive purpose of restricting the entry of Saturn into the market for fixed telephony in Wellington, eliminating Saturn from that Wellington market, or otherwise deterring Saturn from engaging in competitive conduct in that Wellington market.
  2. The use of a dominant position otherwise than for one of the proscribed purposes will not constitute a breach of section 36. Further, even if Telecom has acted to achieve one of those proscribed purposes, it will not be in breach of the Act unless it has used its dominant position to achieve one of those purposes.
  3. Merely incurring losses will not be sufficient to show that dominance has been used: it must be shown that predation was possible only by virtue of the defendant's dominant position (and not by something else).#45 Any person with sufficient resources can sustain losses. In this case, from the figures provided by Telecom, it appears that it is not sustaining losses from any of the packages it is marketing in competition with Saturn.
  4. It might be open to question whether it is only Telecom's market power which makes its conduct possible. Telecom's claim that it is not pricing below cost supports the contention that it is not using its dominant position for an anti-competitive purpose. However, given that the cost information provided may fall within the "grey" area between AIC and ATC, one needs to consider the surrounding circumstances before coming to any conclusion.
  5. The view of the Privy Council in Telecom v Clear #46 and the accepted test for "use of a dominant position" is that a person cannot be using his or her dominant position if he or she acts in a way which a person not in a dominant position, but otherwise in the same circumstances, would have acted.
  6. The "use of a dominant position" is intertwined with the issue of purpose. The Privy Council considered it legitimate to infer "purpose" from a person's use of a dominant position producing an anti-competitive effect.$47 Notwithstanding that the Privy Council placed considerable importance on "use", it is helpful to bear in mind that there will be some difficulty in conducting a separate analysis of use and purpose, and as such, there is a need for that conduct to be considered in its commercial context together with its purpose. $48
  7. It could be argued that the test outlined by the Privy Council is problematic in predatory pricing cases: there may often be many reasons for non-dominant firms to price below cost. Indeed, in Port Nelson, the case for predatory pricing was successful under section 27 (a section not designed to accommodate unilateral actions such as predatory pricing) since it was found that there was no "use" of a dominant position for the purposes of section 36. Telecom's conduct in this instance is reviewed under both sections 36 and 27.

Anti-competitive Purpose

  1. In examining purpose, it is necessary to distinguish between the mere purpose of defeating a rival in competition, however vividly expressed, and, for instance, a plan to eliminate rivals. A legitimate business purpose consists of a plausible and good faith belief that the conduct will enable a firm to meet competition and protect market share, or increase profit for reasons other than the exclusion or disciplining of a rival or potential rival. #49
  2. The Court of Appeal in Port Nelson observed that in most cases there will be little difference in result between subjectively and objectively establishing (or negativing) anti-competitive purpose. #50 In terms of section 36, it noted that there appeared to be no reason why it should not be open to establish it by either method. The distinction is often academic.#51 In terms of section 27, where the subject of the purpose is the provision of a contract, arrangement or understanding itself, rather than one or more of the parties to it, the Court observed that it is difficult to see how it could be ascertained subjectively.
  3. In the present circumstances, staff have found both methods to be of assistance. Anti-competitive purpose can be negatived both from evidence of what was said and done (ie. objectively) and by inference from what was said and done (ie. subjectively).
  4. The proscribed purpose(s) does not need to be the sole purpose - it suffices under section 2(5)(b) of the Act if it is a "substantial" purpose. Purpose may be inferred from the conduct of a dominant person and the particular circumstances surrounding it.
  5. Telecom claims that, in meeting the prices of Saturn in the Lower Hutt, it is doing no more than acting pursuant to its policy of being price-competitive.

Temporal Issues

  1. What price cut effect is sufficient to warrant the inference that it was undertaken for a proscribed purpose? One issue to consider is the temporal nature of the arrangements. The essence of predatory pricing is that it is impermanent. In this case, the period of Telecom's packages is until 31 March 1999, or about 11 months from when the package was first offered. The period was chosen to terminate on the date of termination of Saturn's packages, which Saturn has indicated in its rate card are guaranteed for a 12 month period from 1 April 1998.
  2. Telecom does not seem to have chosen the period for the reason that it might be sufficiently short for a predatory pricing strategy to be effective. In any event, it might be argued that 11 months in a dynamic and innovative market like telephony is longer than necessary for predatory pricing to be a successful strategy, and of a sufficiently long term nature to reflect not a predatory purpose but a pro-competitive purpose of retaining market share in the long term.
  3. The choice of time frame in fact seems to support Telecom's position that it will respond to market developments in relation to price. In any event, in examining the potential existence of anti-competitive purpose, no great weight should be attributed to the period of the contracts. The view that it is essential for predatory pricing to have a sporadic nature should be treated with caution. #52 Other factors will always need to be regarded.

Additional Issues

  1. Below-cost pricing is a means by which an anti-competitive purpose may be inferred. While it is not absolutely necessary to show below-cost pricing to establish a breach of the Act, #53 a price-cost comparison is likely to be the best means of inferring whether a price cutter is engaging in predatory conduct or competitive conduct.
  2. However, there are other means besides below-cost pricing by which a dominant incumbent firm may achieve strategic objectives of restricting entry or otherwise deterring the engagement of competitive conduct. Two principal methods are through reputational and signalling behaviour.

Below-Cost Pricing

  1. In the previous discussion on costs, it has been identified that Telecom appears to be pricing above AIC but possibly below ATC (however that might be defined) in the relevant market. While pricing below AIC may have added weight to the claim that Telecom is acting with a proscribed purpose, this does not seem to be the case in the present circumstances. Something further needs to be shown for anti-competitive purpose to be established.
  2. An issue in some predatory pricing cases is whether a rational firm would have been unlikely to lower its prices similarly unless it desired to damage a competitor and recoup the losses after competition was removed. Or put another way, would a firm not in a dominant position, but otherwise in the same circumstances as Telecom, act in the same way as Telecom has. Telecom is entitled to behave as would a non-dominant firm in the same circumstances. It may not, however, go further; utilising its dominance. #54
  3. While probable recoupment is not necessary to establish a breach of section 36, #55 its likelihood may assist in drawing an inference of anti-competitive purpose. Only if certain structural and other factors are present, will there be a reasonable likelihood of recouping predatory losses. An important factor for probable recoupment is the presence of high barriers to entry. In this case, Saturn has stated that asymmetrical interconnection rates and number portability issues raise barriers to entry to the market. Saturn has pointed to the fact that it has taken 11 years for a competitor in local telephony to enter the market. Where entry has to be gradual, in a geographic sense, and where a relatively quick build-up of market share is needed to spread costs, an entrant may be "picked off" by targeted price cutting.
  4. On the other hand, if Saturn should be driven from the market, there is arguably the prospect of potential entry, given that the infrastructure is already in place and fixed costs would be lower for such an entrant. A new entrant may avoid many of the sunk costs (already incurred by Saturn) associated with building a new network.
  5. In the circumstances of Port Nelson, #56 the Court considered that to look for an intention or ability to recoup in the future would be to overlook the potential for cross-subsidisation from non-contestable services. However, Telecom argues that there is little scope for cross-subsidisation to low-cost, high-value services [                          ], particularly when its other operations are now contestable. Those that are not are argued by Telecom to be predominantly high-cost, low-value services as a result of the KSO. This claim might be viewed with some scepticism given that it is only Lower Hutt that has been exposed to vigorous price competition in local fixed telephony.
  6. On the basis of the cost information provided by Telecom, there is no apparent pricing below AIC in Lower Hutt, and it cannot be concluded that cross-subsidisation is occurring.

Reputational Predation

  1. Given Telecom is not pricing below cost, it is appropriate to review other means by which Telecom may be using a dominant position for a proscribed purpose. Reputational and signalling strategies can create barriers to entry that facilitate recoupment even if structural barriers are low. One could argue that Telecom is engaging in strategic recoupment - the recovery of predatory investment (ie. any losses or lost profits) through deterrence of aggressive pricing in other markets. Its pricing conduct could be considered to deter future attempts to engage in competitive price cutting, whether by existing firms or new entrants.
  2. By establishing a reputation as a predator, a dominant incumbent firm can make entry less likely in the future. That is, a firm's reputation for predatory behaviour can be an effective entry barrier. As Brooks notes: #57

The fear of losses which would be imposed by a predatory rival would serve as an obstacle to the entry of new firms   Furthermore, there would be no need for the firm actually to suffer the losses of predation except on those occasions in which it was necessary to demonstrate the willingness to do so. The more certain the use of the predatory policy appeared to prospective entrants, the fewer the cases in which it would have to be carried out, and the lower the cost to the predator.

  1. Telecom could be, arguably, engaging in reputational predation through behaviour which is designed to restrict entry, or deter the engagement of competitive conduct by an established rival, Saturn, as well as inhibiting entry by other potential rivals.

Signalling

  1. It could also be argued that Telecom, by matching Saturn's prices, is seeking to influence the expectations of Saturn (or any other potential rival) that expansion/entry into Wellington (or other regional markets in New Zealand) will be unprofitable. Saturn may be left with various courses of action, all of which may benefit Telecom: it may decide not to expand as it has planned in other markets; it may choose to withdraw from the Lower Hutt market, or indeed the fixed telephony industry; and it may be dissuaded from making further investments in, or developing new products and services. It might be argued that Telecom is undertaking a signalling strategy, by which potential entrants are made to recognise that their economic return will be lower because the incumbent is likely to reduce price following entry. Other firms may therefore be deterred from entering the market.
  2. The basis for the argument that a dominant incumbent firm may be engaging in signalling predation is asymmetric information. The subject of predation is not likely to be able to determine whether the dominant firm's price-cutting is below its costs, and possibly subject to cross-subsidy, or not. By engaging in a strategy of price-cutting, a dominant incumbent firm can send a signal to the market that it has a cost advantage (whether this is true or not), inducing rivals to exit or restrict their activities and potential rivals not to enter. Predation will still be profitable even though it delays entry of a potential rival, or causes an existing rival to delay or curtail plans for expansion or production.

Summary

  1. Ultimately it is difficult to say that Telecom is acting with a proscribed purpose. Further direct evidence of anti-competitive purpose is needed to establish the likelihood of a breach.
  2. It should be reme

    mbered that a dominant firm has no duty to extend a helping hand to new entrants, whether by holding a price umbrella over their heads or by otherwise pulling its competitive punches. #58 Courts have recognised that it is difficult to distinguish between what is predatory behaviour and what is vigorous competitive behaviour. Without an anti-competitive purpose, damage to a competitor is only a manifestation of the competitive process. Cutting prices in order to increase sales is the very essence of competition. The factor which turns mere price-cutting into predatory pricing is the purpose for which it is undertaken. #59

  3. Telecom claims that the rationale behind its decision to match Saturn's prices is simple: it is following its CEO's stated position that the company be price competitive. Telecom points to its practice of price competitiveness in the areas of national and international tolls, where it says it has habitually met the market.
  4. Saturn says there is nothing to stop Telecom undercutting it, and that by not challenging its conduct under the Commerce Act, the Commission would be sending a signal that Telecom is free to stifle competition by

    undercutting new competitors. However, Telecom would argue that it is not undercutting Saturn: it is simply meeting Saturn's prices. Nor does it appear that Telecom is pricing below the relevant cost measure, leaving little scope for a legal challenge to succeed under section 36 in the absence of other evidence of use of a dominant position for an anti-competitive purpose. Nor should the Commission's decision not to challenge such conduct under the section be read as a signal that it would permit below-cost pricing in similar circumstances to go unchallenged. #60

  5. As McGechan J noted in Port Nelson, #61

The purpose of the Commerce Act is to encourage competition, including vigorous competition on the part of all firms. It is only when the dominant firm oversteps that mark, and "uses" its dominant position for anti-competitive purposes (specified in s36(1)(a)(b)(c)), that the law steps in.

[                  ]

  1. [

    ]

  2. [

    ]

Conclusion

  1. Staff cannot substantiate an argument that Telecom's actions are 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.
  2. 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.
  3. It is staff's view that matching Saturn's pricing, where prices are still above Telecom's AIC, is a pro-competitive action, and that 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.
  4. 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.
  5. 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.
  1. Staff conclude that no breach of section 36 is disclosed.