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Background

51. Section 69A(1) allows the Commission to accept a written undertaking to dispose of assets or shares as a condition of granting a clearance or authorisation. This provision ensures that the Act does not unnecessarily impede mergers. Where an application would otherwise be declined, a divestment undertaking can preserve competition if it is likely to have a lasting effect on the structure of a market.

The issue

52. Section 69A(2) states that the Commission is unable to accept other types of undertakings. It has been suggested to the Ministry that applicants should also be able to offer behavioural undertakings to overcome problems associated with mergers that would otherwise substantially lessen competition or be of benefit to the public.

53. Some other jurisdictions allow their competition authorities to consider behavioral undertakings. However, it appears that they are rarely used and usually only in ways to support structural undertakings. The ACCC's merger guidelines state that the ACCC is unlikely to favour behavioural undertakings such as price, output, quality and/or service guarantees and obligations. Such undertakings may well interfere with the ongoing competitive process through their inflexibility and unresponsiveness to market changes. The duration of such undertakings is also highly problematic.¹⁸ Last year the ACCC indicated that it was prepared to consider the use of behavioural undertakings more frequently to support structural undertakings. A senior manager of the ACCC stated that "well formulated behavioural undertakings can provide additional and potentially valuable safeguards to deal with competition concerns that have been primarily dealt with by means of structural undertakings."¹⁹

54. This speech came shortly after the ACCC's decision in 2006 to allow Toll Holdings to acquire Patrick Corporation Ltd subject to various divestments along with four behavioural requirements as follows:

• All dealings between Toll and Pacific National are to be on an arms-length basis;
• Toll will not have access to confidential customer information provided to Pacific National;
• Toll will not involve itself in the commercial operations of Pacific National; and
• The shareholders of Pacific National will ensure that Pacific National does not discriminate in favour of Toll's downstream freight forwarding interests. Auditing provisions are included to measure compliance.²⁰

55. The United Kingdom Competition Commission also uses behavioural remedies to support structural undertakings. Its Guidelines state that "in certain circumstances, it may also be necessary to add behavioural undertakings to a structural remedy in order to provide an effective and comprehensive solution."²¹

Options

56. Two options for change would be to amend section 69A(2):

1. To allow the Commission full discretion to accept any type of undertakings as it sees fit; or
2. To allow the Commission to accept behavioural undertakings in support of undertakings to divest shares or assets.

Analysis

The quality of outcomes

57. The major benefit of allowing behavioural undertakings to be accepted is that it would facilitate the consummation of mergers that have net benefits and would not otherwise obtain an authorisation. However, allowing behavioural undertakings could reduce the quality of outcomes for the following reasons:

1. The effect of approving a merger subject to behavioural undertakings is to forgo competition and replace it with what is regulation by another name. Regulated monopolies generally do not perform as well as firms that are subject to workable or effective competition;
2. Market circumstances change over time. What might be a well-targeted behavioural undertaking at the time of the merger may later turn out to be ineffective or counterproductive;
3. Behavioural undertakings may not be fully effective. Firms with high market power usually have a range of anticompetitive tools available to them;²²
4. Behavioural undertakings can not deal with mergers that are likely to facilitate firms coordinating their pricing and output decisions without communicating (i.e. "tacit collusion" or "conscious parallelism"); and
5. The damage to the economy will be irreversible if a merged firm were to breach a behavioural undertaking.

Clear and consistent legislation

58. There are issues in relation to the way that behavioural undertakings would relate to Parts 2 and 4 of the Act.

59. If conduct is anticompetitive then it will be prohibited by Part 2 of the Act. Therefore, it is difficult to imagine why it would be necessary to design a behavioural undertaking that would require a firm to refrain from activity that is already prohibited. If the conduct is not caught by Part 2 (i.e. the conduct is not anticompetitive) it may be inappropriate to accept a behavioural undertaking that would require a business to refrain from activities that would otherwise not contravene the Act.

60. In some cases the behavioural undertakings would need to address the risks of price gouging in relation to monopolistic mergers. However, Part 4 is designed to deal with monopoly pricing issues. It sets down the process for imposing regulatory control and it divides the functions between the Commission and the Responsible Minister. The Minister is responsible for deciding whether regulatory control will be imposed. Allowing the Commission to make behavioural undertakings to counter the risks of price gouging under Part 3 would bypass many of the Part 4 processes and exclude the Minister from the decision-making process.

Cost effectiveness

61. The Commission would need to monitor merged firms' compliance with the behavioural undertakings. It would also be necessary to empower the Commission to enforce the undertakings in the High Court. Unlike structural undertakings, cases involving behavioural undertakings would be likely to involve a considerable amount of subjectivity. It could be as difficult to take a case to enforce a behavioural undertaking as it is to take a case under section 36. The undertakings given in the Toll/Patrick decision illustrate these points:

1. Analysis of price discrimination requires an assessment of price relative to costs. This analysis can be complex particularly where common costs need to be allocated;
2. The assessment of whether product discrimination is occurring could require monitoring of a range of performance factors that contribute to the quality of service provided to different customers; and
3. The undertakings by a company to not involve itself in the commercial operations of a subsidiary or associate company could require monitoring of a wide range and large volume of formal and informal communication, including informal private conversations that might never be documented. Monitoring the undertaking to not allow Toll to have access to confidential customer information provided to Pacific National might also require a significant resource commitment for similar reasons.

62. Overall, there is considerable potential for large ongoing regulatory, monitoring and enforcement costs.

Conclusion

63. Providing the Commission with the discretion to accept behavioural undertakings, could allow some mergers that are currently declined to proceed. However, even if the Commission were limited to only accepting behavioural undertakings in support of offers to divest assets or shares there are also some very significant downsides. Our view at this stage is that the Commission should not be able to accept behavioural undertakings.