This is the first in a five-part series exploring the key aspects of the Commerce Amendment (Promoting Competition and Other Matters) Bill (Bill). This article explores the proposed introduction of a specific prohibition on predatory pricing.
When the Ministry of Business Innovation and Employment (MBIE) launched its consultation on potential amendments to the Commerce Act in December last year it put a smorgasbord of options on the table. A prohibition on below-cost predatory pricing by firms with a substantial degree of market power (SDMP) was not among them. Nevertheless, to the surprise of many, in September this year it announced a specific prohibition on this conduct and it is included in the Bill.
Predatory pricing has long been a controversial topic in competition/antitrust circles. Those from the Chicago School of economics argue that it is irrational and should therefore not be prohibited (if a firm is dominant and can act largely unconstrained by competitive forces, why would it engage in a risky strategy of short-term profit-sacrifice when it could do other things with its market power?), while others posit that such behaviour can be rational eg to prevent a nascent competitor achieving minimum efficient scale and establishing itself as a significant competitor.
Problem definition
Predatory pricing by firms with SDMP – whether below- or above-cost – is captured under section 36 of the Commerce Act (Act), the prohibition on persons with SDMP engaging in conduct that has the purpose, effect or likely effect of substantially lessening competition. It can also often be assessed under the general prohibition on agreements that substantially lessen competition in section 27.
Section 36 in its current form has only been in effect since April 2023, following years of debate, and campaigning by the Commerce Commission (Commission) to have it amended (though not, to my knowledge, on the basis that predatory pricing was an issue that needed to be better addressed). The courts have yet to issue a substantive judgment in a case involving the ’new’ section 36.
Nevertheless, despite the current test being less than three years old, and with the courts yet to fully consider its application, the Government has decided that (a) predatory pricing is a problem that needs fixing and (b) the section 36 is not up to the task.
Predatory pricing is a problem that needs fixing
The regulatory impact statement (RIS) to the Amendment Bill refers (without citations) to allegations that have been made in recent consultations by MBIE in the airline and grocery sectors. It also notes that concerns about ”pricing behaviour” in the Commission’s 2022 Market Study into the retail groceries industry. Building supplies is also singled out as an area where concerns have been raised. However, as the RIS ultimately concedes, ”explicit allegations remain limited”.
Section 36 is not up to the task
The relevant Cabinet Paper, for its part, suggests that enforcement of predatory pricing is ”challenging”. Part of the challenge, it suggests, is the lack of clarity around the circumstances when prices are so low that they breach competition law. The fact that the Commission has taken just two cases (in 1994 and 2006), it says, reflects this difficulty.
The proposed amendments
To address these concerns and issues, the Bill would introduce a new section 36C into the Act, which provides as follows:
- a person with SDMP that engages in ”predatory pricing” will be deemed to have the purpose, effect or likely effect of substantially lessening competition;
- predatory pricing is either or both of the following for a sustained period in the relevant market:
- pricing below Average Variable Cost (AVC) or Average Avoidable Cost (AAC) or
- pricing above AVC or AAC but below Long-run Average Incremental Cost (LRAIC) or Average Total Cost (ATC) if it is done for an exclusionary purpose;
- it is not necessary to prove recoupment;
- short term promotional pricing and other short-term pricing such as one-off specials or discounts are not predatory pricing; and
- pricing not falling within the definition of predatory pricing remains subject to the general prohibition on misuse of market power (section 36) and the general prohibition on anticompetitive agreements (section 27).
Assessing the proposed amendments
There is a bit to chew on here. Let’s start with whether predatory pricing is a problem that needs fixing. As the materials accompanying the Bill concede, there is not a lot of solid evidence that it is. At most, ”concerns” have been raised in several industries. Some observations on a couple of these concerns:
- in May the Commission announced that, while concerns had been raised about pricing and competition, it would not be self-initiating a market study into domestic air travel. These concerns do not seem to have been that prices were too low, though, with the Commission acknowledging concerns that airline prices had increased significantly in the past five years; and
- while the Cabinet Paper mentions the Commission reported on potentially problematic pricing conduct in its retail groceries market study, no allegations of predatory pricing were cited in the final report. (It is also interesting that in Australia, which is facing similar issues in this sector, the Government has announced plans to introduce a law prohibiting price gouging ie pricing that is too high.)
So, it is not clear that the case for change has been made out insofar that there is a problem in need of a better solution. This notwithstanding, would a specific prohibition bring the ”clarity” that the Government says is needed?
Section 36 as it is currently drafted says that a person with SDMP must not engage in conduct that has the purpose, effect or likely effect of substantially lessening competition. This is a very broadly drafted provision that is (in my view) capable of adequately dealing with predatory conduct, whether below cost or not.
Moreover, I do not think that the Commission would feel inhibited in bringing an action for predatory pricing under this section. Indeed, it currently has a pricing case before the High Court under the ’old’ section 36 (and section 27). The Commission alleges that Winstone Wallboards took advantage of its SDMP through the use of retroactive tiered rebates in its agreements with builders’ merchants, which it says had an exclusionary purpose. That sounds a lot like an allegation of predatory conduct to me (whether above or below cost), and the Commission clearly did not feel even the ’old’ section 36 was a bar to it taking action.
Finally, the drafting of the new provision also raises issues of its own, and introduces various new definitions and terms into the Act that have the potential to actually increase uncertainty rather than reduce it. For example:
- what constitutes a ”sustained period” of below-cost pricing?;
- what is the time period over which the ”average” is calculated in each one of the cost tests?; and
- what constitutes ”long-run” in LRAIC?
It will be very interesting to see how this plays out, and whether the Government holds the line, makes amendments or abandons this proposal altogether. Please fee to reach out if you would like to discuss.
