1. Executive Summary
1. The purpose of the Commerce Act is to promote competition in markets in New Zealand. The Act has this focus as a means to facilitate gains in economic efficiency across the economy. Improvements in efficiency enable the economy to produce more output with the same level of resources and thereby enhance the welfare of New Zealanders.
2. To achieve its purpose, the Act has both structural and behavioural prohibitions. At the structural end, its merger provisions seek to prevent anti-competitive conduct on the assumption that market structure affects the ability, and the incentive, to engage in anti-competitive behaviour. Working in tandem with the merger provisions, the Act has two key behavioural provisions to prohibit the misuse of market power:
- section 36 - which regulates the use of a dominant position, held by a single firm, in a market; and
- section 27 - which prohibits anti-competitive agreements among firms (i.e. contracts, arrangements or understandings that substantially lessen competition).
3. Each of the three key prohibitions has an associated threshold. The three prohibitions, with their associated thresholds identified in bold, are:
- section 27 which prohibits contracts, arrangements, or understandings between competitors that have the effect, or likely effect of substantially lessening competition in a market;
- section 36 which prohibits the unilateral use of a dominant position in a market for exclusionary purposes; and
- section 47 which prohibits the acquisition or strengthening of a dominant position in a market.
As outlined in Section 3 of this discussion document, ideally the thresholds should be triggered whenever there is a concern about a potential abuse of market power. Concerns about the potential for abusing market power may not only arise as a consequence of single-firm dominance, but may also involve explicit multi-firm collusion and joint dominance based on tacit collusion.
4. This discussion document reviews concerns about the current competition thresholds, particularly those for mergers and unilateral action. Section 4 of this document outlines the concerns about the adequacy of these thresholds.
5. In terms of the threshold for mergers, it seems that the current threshold does not allow consideration of the potential harm that may result from joint dominance in a market or whether the resultant market structure will be conducive to collusion either explicit or tacit.
6. Tacit collusion can arise in some oligopolistic industries. As the word "tacit" implies, even in the absence of direct communications (which would constitute a breach of section 27), firms can misuse market power by moving their industry in the direction of greater co-ordination. In such industries firms can co-ordinate their behaviour by doing little more than observing and anticipating the moves of their rivals. The effect of such oligopolistic co-ordination is parallel behaviour, such as parallel price movements, that approximates the results associated with explicit agreement to set prices, output levels, or other conditions of trade.
7. This is of concern because although section 27 allows market participants to address incidents of explicit collusion, the Act has no mechanism aimed at instances of tacit collusion that can arise in some oligopolistic industries. To give the Act such an ability, either section 27 could be amended to address significant instances of tacit collusion, or mergers could receive greater scrutiny as a means of preventing tacit collusion in the economy.
8. In response to this problem, Section 6 of this document outlines a possible proposal to broaden the range of mergers and acquisitions that are potentially subject to the prohibition. This could be achieved via adopting the Australian threshold, i.e. to substantially lessening competition. It also discusses a proposal that may streamline the clearance and authorisation process for mergers.
9. As discussed in Section 6, the key policy trade off associated with broadening the threshold for mergers and acquisitions will be whether the increased uncertainty and compliance and enforcement costs will be justified. In particular, it is likely that the broader threshold will increase the scrutiny of mergers occurring in the non-tradeable sector of the economy, as this sector is not subject to the pressures of international competition. The Australian experience suggests that although mergers and acquisitions will receive greater scrutiny the number of mergers actually opposed does not increase significantly.
10. Turning to section 36, the key issue is consideration of whether its scope has, through judicial interpretation, become narrower than when the Act came into effect. It discusses the judicial interpretation of the "dominance", "use" and "purpose" tests.
11. Section 6 of this document outlines two options for possible change to the section 36 threshold, either:
- Option 1 - amend the definition of dominance in section 3(8); or
- Option 2 - adopt the Australian threshold i.e. change the threshold to "substantial degree of power in a market".
There is also discussion on the possibility of adding definitions of "use" and "purpose".
12. Section 7 of this document sets out amendments proposed to the price control provisions of the Act. These proposals result from consideration of the need to allow for an up-to-date approach to price control for electricity line businesses and do not signal any change to the Government's approach to price control generally.
13.The Government, as part of its commitment to having an effective Commerce Act, wants to make decisions on the competition thresholds by the end of June. To inform its decision making, submissions are welcome on the proposals outlined in this document. Section 8 of this document outlines a list of questions that the Government is particularly interested to hear views on. The deadline for submissions is 14 May 1999.
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