A paper commissioned by the Australian National Retailers’ Association (ANRA) and submitted to government ministers in face-to-face meetings by the big retailer representatives is claiming that proposed reforms in the Federal government’s Draft Competition Policy Review Report may have a “chilling effect on competition”.

ANRA appears to be concerned with government policy-makers being influenced by Small business to limit the scope for large retailer groups expanding their businesses or improving supply chain efficiencies if the government seeks to protect smaller businesses or suppliers against unwanted commercial pressures coming from large retailers.

Australia’s largest retailers presented the paper to the Competition Policy Review Panel, Minister for Small Business the Hon. Bruce Billson, ACCC Chair Rod Sims and the Hon. Josh Frydenberg during a series of meetings held in Canberra on Monday 27 October 2014. This is part of the consultation that the Competition Policy Review Panel has conducted every day since the draft report was released in September.

ANRA members include Woolworths, Coles, David Jones, Bunnings, Harvey Norman, Best & Less, Just Group, Big W, Luxottica, Forty Winks, Super Retail Group, Dymocks, Costco and Petbarn.

ANRA CEO Anna McPhee said it was important for the Panel to strike the right balance between prohibiting anti-competitive conduct and not interfering with efficiency, innovation and entrepreneurship that is pro-competitive and job creating.

“Competition can be bruising, any change to competition law should be directed towards protecting the competitive process rather than individual competitors,” Ms McPhee said. “The report found little or no evidence has been presented to demonstrate that the existing provision in Section 46 is deficient in some way and there is not a strong case for new regulation,” she said.

“The report also stated the proposed reform would require organisations to demonstrate a causal connection between its market power and its conduct,” Ms McPhee said. “This would require companies to exhibit near perfect foresight on the effect of competition when considering opening a new enterprise in a particular jurisdiction,” she said.

“This is an example of lawyers drafting reforms with no insight into the reality of business decision making,” Ms McPhee said.

Retailers concerned changes will ‘increase likelihood of regulatory failure’

The authors of the paper wrote that they were concerned the amendments recommended by the Panel “significantly increase the likelihood of regulatory failure” as well as “radically change the nature of section 46”, and have been put forward without much evidence that a problem or even gap exists in relation to the existing provision.

The authors said they were concerned the amendments to section 46 recommended by the Panel would “undermine the purpose test and remove the taking advantage test altogether that in turn will increase the risk of false positives and regulatory failure”.

Concerns about ‘false positives’

The ANRA said ‘false positives’ occur “when pro-competitive business practices that are beneficial to consumers are wrongly condemned by decision makers”. It said ‘false negatives’ occur “when decision makers wrongly exonerate conduct that is anti-competitive and harmful to consumers”.

The authors of the paper wrote that “the balance of opinion is that the social costs arising from false positives in abuse of market power type cases is far greater than with false negatives”. In order to ameliorate the risk of false positives, the authors said it was “absolutely critical there are appropriate filters to help separate pro-competitive conduct from anti-competitive conduct”. The authors said that three elements of section 46 – substantial market power, taking advantage and purpose – currently served as filters that protect against false positives that mitigate the risk of regulatory failure.

According to the authors of the paper, the removal of the reference to the three proscribed purposes (or even effects or likely effects under the Panel’s proposal for the introduction of an effects test) and its replacement with a substantial lessening of competition (SLC) test “fundamentally expands the scope of section 46 beyond unilateral exclusionary conduct”.

The authors of the paper said this risked turning section 46 into “a catch-all provision of the market conduct of firms deemed to exercise a substantial degree of market power”.

‘No evidence’ that gap in law identified by ACCC exists

In its submission recommending the inclusion of an SLC test, the Australian Competition and Consumer Commission (ACCC) (2014, p. 77) said it was seeking to fundamentally expand the scope of section 46 beyond exclusionary conduct.

The authors of the ANRA paper said the problem with the ACCC submission was that it provided “absolutely no evidence of the existence of a gap in the law that it has supposedly identified but is now seeking to have closed”.

While the authors said they believed the representations made by the ACCC as to the existence of a gap in the law had been made in good faith, they said they did believe the veracity of such claims did “warrant external scrutiny as the literature suggests there are institutional factors predisposing competition regulators towards over-enforcement (finding pro-competitive conduct as liable of violating unilateral conduct laws)”.

The authors said they believed the inclusion of an effects test would “irredeemably undermine the crucial role currently served by the purpose test in distinguishing anti-competitive conduct from pro-competitive”.

The problem arises because the effect of exclusionary conduct looks very similar to the effect of competition with both ruinous of competitors. In this case, the authors said it was “extremely difficult” to distinguish between conduct that is pro-competitive and that which is anti-competitive.

Concern about removal of ‘taking advantage’ element of section 46

The authors of the ANRA paper said the taking advantage element of section 46 played “an important role in ameliorating the risk of false positives”. They said the taking advantage element enables economic efficiency to be used to distinguish between conduct that is predatory and unfair from conduct that is based on skill and efficiency.

The authors of the paper said their major concern with the Panel’s recommended amendment of removing the taking advantage element was that it would “remove the causal link between the exercise of market power and the conduct in question as well as any consideration of efficiency from the application of section 46”. According to the authors of the paper, without the taking advantage element, a firm with substantial market power would have an “unreasonably high risk profile” under section 46 in the usual case where the firm’s market power enables the firm to deter a person from engaging in competitive conduct.

The ANRA will make a formal submission to respond to all of the draft report’s recommendations in November 2014.