2. The Current Regime
1. Competition describes a process where rival sellers independently strive for the patronage of buyers in order to achieve a particular business objective such as increased profits, and/or increased market share. The "competition" itself takes place in terms of factors such as price, service, or quality. This process of competition forces sellers to offer consumers a greater choice of products and services at lower prices.
2. Where the competitive process operates and price signals are free from distortions this creates incentives for firms to re-deploy resources from lower to higher value uses. This gives rise to efficiency gains critical to economic growth and economic prosperity.
3. However, offering a lower price, or better quality or service, than a rival is not the only way to gain the patronage of buyers. In the face of the competitive process firms also have incentives to obtain control over factors, such as price, which are critical to determining business transactions. Control may arise by limiting competition through the erection of barriers to market entry, or by engaging in collusive arrangements with competitors to restrict prices and output. Such arrangements can result in efficiency losses that adversely affect industry performance, economic growth and the general standard of living.
The Act's Three Key Prohibitions
4. The primary instrument employed to correct these market failures, or to safeguard competition, in New Zealand is the Commerce Act. To do this job the Act has three key prohibitions:
- section 27 which prohibits behaviour that has the purpose, effect or likely effect of substantially lessening competition in a market;
- section 36 which prohibits the use of a dominant position in a market for exclusionary purposes; and
- section 47 which prohibits business acquisitions that are likely to result in the acquisition of, or strengthening of, a dominant position in a market.
5. These three provisions of the Act are designed to promote competition indirectly through preventing certain changes in market structure (section 47) and directly through restrictions on particular conduct (sections 27 and 36).
Efficiency Override
6. While the Act's objective is "to promote competition in markets", this objective can be overridden, in certain circumstances, where efficiency advantages are considered to outweigh detriments from the loss of competition. In the case of mergers, companies may voluntarily apply to the Commerce Commission for an authorisation. An authorisation will be granted if the Commission is satisfied that the merger would be likely to result in a benefit to the public, which would outweigh any detriment from the loss of competition.
7. Similarly collective conduct that substantially lessens competition can also be authorised if there is a resulting net public benefit. However, no such authorisation is available for unilateral conduct that breaches section 36.
The Competition Thresholds
8. Each of the three key prohibitions has an associated threshold. The thresholds identify for scrutiny those changes in market structures and behaviours that are likely to result in significant economic harm, caused through the exercise of market power. The three thresholds are:
- section 27 prohibits behaviour that has the purpose, effect, or likely effect of substantially lessening competition in a market;
- section 36 prohibits the use of a dominant position in a market for exclusionary purposes; and
- section 47 prohibits the acquisition or strengthening of a dominant position in a market.
The Relationship between Sections 36 and 47
9. Sections 36 and 47 are interrelated. The current threshold level of dominance, in terms of market power, is the same in both sections of the Act. However, the relationship goes beyond that. The merger provisions seek to prevent certain changes in market structures that may be conducive to the abuse of market power. Section 36 is concerned with the behaviour of firms in a market and prohibits the use of a dominant position for exclusionary purposes.
10. Implicit in the Act, is a weighting in terms of the reliance placed on the use of structural prohibitions (i.e. merger control) versus that placed on behavioural prohibitions (i.e. mainly s 27 and s 36) to facilitate competition in New Zealand's markets. In New Zealand strong weighting is placed on behavioural rather than structural prohibitions for reasons set out in Section 3 of this document. However, in some cases it could be that reliance on merger control is more effective in achieving competitive outcomes. It is likely that detection and successful prosecution of section 36 offences will be a lot lower than 100 percent, as for example, some smaller firms are unlikely to have the resources to sustain a success challenge. There may also be concerns about the impact of litigation on the ongoing business relationship with the dominant firm.
11. In reviewing the thresholds it is critical to maintain an appropriate balance in the use of structural and behavioural controls. If, for example, the threshold for mergers is too narrow this means increased reliance on section 36 to control the conduct of dominant firms (and arguably on section 27 to control the explicit agreements of oligopolies). If there is greater reliance on the behavioural prohibitions, then these must be robust in order for the regime to be effective.
Interpretation of the Current Thresholds
Substantially Lessening Competition
12. In New Zealand there have been few cases involving the interpretation of the term "substantially lessening competition". As a consequence any conclusions about the level of this threshold are necessarily tentative. The term "substantially lessening competition" does not set an absolute threshold. Instead it compares the state of the market after the specified behaviour, with the hypothetical state of the market in the absence of the behaviour. For example, the decision in the Australian case Dandy Power Equipment Pty Ltd v Mercury Marine Pty Ltd1 in 1982 states:
To apply the concept of substantially lessening competition in a market, it is necessary to assess the nature and extent of the market, the probable nature and extent of competition which would exist therein but for the conduct in question, the way the market operates and the nature and extent of the contemplated lessening.
13. The need for such a comparative analysis was affirmed in subsequent cases in New Zealand, for example, Tru Tone Ltd v Festival Records Retail Marketing Ltd (1988)2 and in Auckland Regional Authority v Mutual Rental Cars (Auckland Airport) Ltd & Ors (1988).3
14. The expression "substantially lessens competition" as used in the Act refers to a loss of competition that is more than trivial or minimal. For example, McGechan J in Commerce Commission v Port Nelson Ltd (1995)4 stated:
Accordingly reference to section 27(1) to "substantially lessening competition" is taken as meaning "lessening competition in a way which is more than insubstantial or nominal. The mere ephemeral and minimal will not suffice. Inevitably that will involve some attention to relativity; and in the end be a question of judgement on a matter of degree.
15. The Act is intended to protect the competitive process, not individual competitors. Consequently, to demonstrate that there has been a section 27 breach of the Act, it is insufficient to show that the practice under investigation has adversely affected a competitor. It will be necessary to show that the practice substantially lessens competition in the market as a whole. This is evident from judgements such as in ARA Mutual Rental Cars.
Dominance
16. Interpretation of dominance has developed in two phases. In the first phase an economic approach to the concept of dominance was taken. In the second phase a "dictionary definition" approach was adopted.5
17. At the outset, New Zealand courts tended to rely on an economic test for "dominance" as discussed in the European Commission's decision from Re Continental Can Co Inc (1972).6 The key focus of this approach was on the entity's power to behave independently without taking into account the actions of their competitors, purchasers, or suppliers. However, the bulk of the early New Zealand case law on dominance related to mergers and acquisitions. This body of law refined this economic approach to defining dominance.7 In Re Magnum Corporation Ltd and New Zealand Breweries Ltd8 the Commission stated:
...Being in a "dominant position" is interpreted by the Commission, in essence, as having sufficient market power (economic strength) to enable the dominant party to behave to an appreciable extent in a discretionary manner without suffering detrimental effects in the relevant market(s).
18. The High Court cited with approval this view in Lion Corp Ltd v CC (1987)9. In 1991 the High Court in Telecom Corp of NZ Ltd v CC10 concluded:
- that dominance is equivalent to "a high degree of market power";
- dominance is a structural measure of the ability of a firm to exert market power: "Market structure sets real limits upon the market conduct that is possible";
- the factors to be taken into account in determining the market structure "encompass all those features of a firms external competitive environment that constrain its production and selling policies, not just...market concentration";
- the most important factor is barriers to entry; and
- dominance, or "high market power", is equivalent to a situation "when a person is in a position of economic strength such that it can behave to a large extent independently of that person's competitors".
19. However, in Telecom Corp of NZ Ltd v Commerce Commission (1992),11 the Court of Appeal appeared to move away from assessing dominance on economic principles more towards a dictionary definition. The Court stressed the need to address the basic dominance test in terms of the "dominant influence" principles in the Act.12 Cooke P stated:
It is a dangerous method of statutory interpretation to substitute words which the Legislature has not in fact chosen. Words can have overtones not quite caught by any paraphrase, and "dominant" is one of them. But so far as any paraphrase can be helpful I think that words such as "a prevailing, commanding, ascendant, governing, primary, principal, or leading influence" convey much the same idea.
...One of the expressions used by the Administrative Division was "high market power". If by this the Court meant something less than any of the foregoing paraphrases, it set too low a test.
20. The current state of the dominance test was considered in both the High Court and Court of Appeal in the Port Nelson litigation.13 In this case, the High Court accepted, in light of the Court of Appeal's decision in Telecom, that the test for dominance has evolved away from economic theory towards a definition based statutory interpretation approach. McGechan J stated:
The test for "dominance" is not a matter of prevailing economic theory, to be identified outside the statue. Nevertheless, it remains a term used in the context of a competitive structure, and inevitably, economic concepts and terminology intrude. "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...It involves a high degree of market control...There need not be a monopoly...Expression in terms of mastery is perhaps ...misaligned and needs to be read down. To be dominant the firm must be able to act, within the limits if commercial reality, without significant competitive or consumer constraints...the ability to dictate must be sustainable.
21. The Court of Appeal decision on Port Nelson supported Justice McGechan's view on dominance and denied that the 1992 Telecom v Commerce Commission judgement has changed the approach to assessing dominance. Gault J stated:
...the decision of this Court did not, in our view, shift the concept of dominant position away from that from which it had been derived....There is to be borne in mind the distinction between the concept (dominant position in a market) and the test for its existence (market share, vertical and horizontal constraints - which economists assess as elements of market power).14
Commerce Commission's Merger Guidelines
22 The Commerce Commission, in its Merger Guidelines,15 sets out the approach it takes to assessing "dominance" with respect to applications for mergers and acquisitions. The Guidelines define certain "safe harbours". These "safe harbours" reflect the Commission's view, of where a dominant position in a market is generally unlikely to be created or strengthened following a merger or acquisition. "Safe harbours" exist where:
- the merged entity (including any interconnected or associated persons) has less than in the order of a 40% share of the relevant market; or
- the merged entity (including any interconnected or associated persons) has less than in the order of a 60% share of the relevant market, and faces competition from at least one other market participant having no less than in the order of a 15% market share.
23. The Commission will not, except in unusual circumstances, seek to intervene in business acquisitions which, given the appropriate delineation of the relevant market and measurement of market shares, fall within these safe harbours.
24. In practice, a study of the Commission's decisions on business acquisitions, made over the period January 1991 to December 1996,16 suggests that:
- in assessing dominance the most important factors are: market share, barriers to entry, the constraint provided by imports and the presence of other competitors; and
- dominance was found in markets only where the share of the parties exceeded 70%, and then only in some cases.
Back to Top