Competition Policy and Law in Australia

Introduction

In January 2011, Coles and Woolworth started discounting the price of milk in an ongoing price war that led to the establishment of a state inquiry into the price of milk.¹ Consequently, farmers found themselves at the mercy of these supermarket chains because they had to sell their milk through them (because both supermarket chains control a huge market). The strong control that the two retail giants have on the market therefore locked out any dairy supplier from the market because they would have no access to the market if they did not sell their dairy products through Coles or Woolworth. The strong market control that these supermarkets have was further strengthened by their continual discount of milk prices, which further locked out other supermarket chains that did not reflect the same prices. In the spirit of fair competition and the overall well-being of dairy farmers, Coles and Woolworth were criticised intensely for their discounted prices. Indeed, Coles and Woolworths found themselves at the centre of a controversy, which captured national attention when politicians and farmers protested at their internal price wars, which threatened the future prospects of the Australian milk industry in general.²

The controversy surrounding the milk wars led to an industry outcry, which prompted further investigations into the circumstances surrounding Coles and Woolworth’s trade practices. On one hand, farmers and industry players believed that the discounted milk prices were detrimental to the dairy industry because it eroded its profitability, and on the other hand, Coles and Woolworth argued that their pricing strategies benefitted the customers and improved the demand of milk (thereby improving the wellbeing of the industry and the farmers).

This report focuses on the legal dynamics surrounding the two supermarkets’ price wars by analysing Australia’s anti-competition laws. Based on past accusations that suggest Coles and Woolworth’s price wars are anti-competitive, this submission ascertains that this accusation is true. From the findings of this analysis, this report recommends that the competitive provisions of the 2010 Competition and Consumer Act need to be amended to accommodate future legal and economic problems that may be caused by future price wars. The entire analysis is done from the farmers’ point of view.

Anticompetitive Conduct

Anti-competition is perceived to work negatively to the spirit of fair trade. The Australian Justice system has heard many cases of companies engaged in anticompetitive conduct. Coles and Woolworth are among the latest companies to be accused of practicing anticompetitive conduct. There have been many arguments advanced to defend or criticise Coles and Woolworth’s price wars. This section of the report demonstrates that the arguments meant to protect Coles and Woolworth’s milk wars are misguiding because both retailers were engaged in anticompetitive conduct.

From the dominance of the two retail chains in the Australian retail market; their price wars have largely assumed cartel-like tendencies. Collectively, Coles and Woolworth command a market dominance of about 80%.³ When the two retail giants were engaged in a milk price war, their high resource capability to sustain the low prices constituted cartel-like practices (because it was difficult for other small retailers to compete with their discounted prices). In division 1 part 4 of Australia’s competition and consumer act, cartel-like conduct is prohibited as a criminal offence and an act of civility. Within the same legal provision, any cartel-like trade acts (whether deliberate or not) constitute an act of civil contravention. This legal infringement is pursuant to section 45 of the CCA.

Part 4 of the 2010, competition and consumer act (CCA) defines the nature of allowable competition among Australian companies.⁴ This act is however specific on prohibiting pricing strategies that are designed to limit or prevent competition. Coles and Woolworth’s pricing strategies amount to cartel-like market domination, which is defined by the CCA act as anticompetitive. Subsequent sections of this report will show that Coles and Woolworth designed their pricing strategies to lock out new competition and based on this assumption; both retail giants denied consumers the diversity of choice in price and quality of dairy products. Part 4 of CCA defines such actions as anticompetitive.⁵ Apart from the prohibition of cartel-like conduct and the lessening of competition (in the CCA), part 4 of the CCA act also prohibits price fixing, anticompetitive price signalling, withholding information for competitive gains, anti-competitive agreements, misuse of market powers, predatory pricing, exclusive dealing and resale price maintenance.⁶ The following case study demonstrates the anticompetitive nature of Coles and Woolworth’s pricing strategies.

Case Study

This report advances the argument that Coles and Woolworth’s pricing decisions were not aimed at improving the overall wellbeing of the industry; instead, the two retail giants were motivated by commercial gains to lock out competition (with disregard to the wellbeing of dairy farmers or even the industry at large). Evidence is given of the huge market dominance that the two retail giants have on the market as the main muscle used by the two retail giants to lock out competition and retain their market dominance. Based on this background, a comparison can be drawn to the 2011 case pitting the Australian Competition and Consumer Commission ACCC v Ticketeck Pty Ltd. In the case, Ticketeck was found guilty of unfairly using its market dominance to lock out potential new entrants in the industry.

The Court found Ticketeck guilty of ‘deterring or preventing a competitor, Lasttix, from engaging in competitive conduct in the Ticketing Related Services Market’⁷ Ticketeck used its market dominance within a six-month period to prevent Lasttix (a rival) from establishing any meaningful foothold in the ticketing market by exclusively retaining the rights to print, prepare, sell, and distribute tickets. Ticketeck also refused to allow a discounted pricing structure, which was to be published by Lastix, thereby engaging in anticompetitive trade tactics to lock out the competition. The Court therefore found Ticketeck to be in contravention of section 46(1) (c) which prohibited Ticketeck from engaging in anticompetitive practices for the sole purpose of locking out another competitor from the market. Section 46 (1) states that

A corporation that has a substantial degree of power in a market shall not take advantage of that power in that or any other market for the purpose of eliminating or substantially damaging a competitor of the corporation (or of a body corporate that is related to the corporation in that or any other market), preventing the entry of a person into that or any other market, deterring or preventing a person from engaging in competitive conduct in that or any other market⁸

Ticketeck was therefore found to have contravened the last clause of the law that prohibits companies from ‘deterring or preventing a person from engaging in competitive conduct in the market’⁹ Ticketeck’s actions are similar to Coles and Woolworth’s actions because both groups of companies engaged in anticompetitive practices to lock out their competition. The modalities for doing so are different because Ticketeck used its exclusive rights to sell, produce, and distribute tickets to lock out its competition while Coles and Woolworth used discounted pricing to lock out new market entrants. Therefore, similar to the way Ticketeck was found guilty of contravening section 46 of the competition and consumer act, Coles and Woolworth is guilty of the same offence. More importantly, their practices should be summed to be anticompetitive.

Exclusive Dealing

Coles and Woolworth’s milk pricing wars amount to exclusive dealing. Two types of exclusive dealing practices are captured in section 47 of the CCA. The first type is the conditional supply of goods and services to specific retailers, such that, companies enjoy the monotony of trade with suppliers, at the expense of the competition. The second type is the refusal to supply goods to a specific trading party because of a specified reason. Coles and Woolworth have been very crafty at practicing exclusive dealing because they did not do so explicitly. Instead, both companies, established unfair market conditions that gave then the power to exclusively deal with dairy farmers. The market conditions are explained by the unsustainably low prices that both retailers set in the market. The discounted low prices guaranteed them exclusive access to the dairy market. Therefore, dairy farmers had no option but to trade with the retail giants at the expense of the competitor’s (otherwise, they would have no access to the market).

Section 47(10) stipulates that companies are only liable to exclusive dealing whenever it is established that their practices lessen the competition. In Coles and Woolworth’s case, this condition is established because when both companies decided to discount milk prices, they lessened the competition to only a few retailers who could set low prices. They had the resources to do so, but retailers who did not have such resources lost the market to them.

Abuse of Market Dominance

Coles and Woolworth’s anticompetitive practices stem for their market dominance. As noted in earlier sections of this paper, both retail giants command a huge market share. From this market share, they have strong market dominance. Both retail chains abused their market positions to lessen the competition and maintain their strong foothold in the dairy industry. Subsequent sections of this report detail how Coles and Woolworths prevented the entry of other market entrants in the dairy industry. Section 46(1) prohibits the misuse of market power to lessen competition. In detail, this legislative provision prohibits the elimination or substantial damage of competition, entry of new market players and the prevention of a person from engaging in competitive conduct. As will be seen in subsequent sections of this report, Coles and Woolworth contravened section 46(1) of the CCA by preventing the entry of new market players and damaging the competition by maintaining discounted milk prices (which could not be sustained by the competition). Establishing whether a company has contravened existing sections of the CCA has been marred by implementation obstacles, which centre on determining the market dominance of a company (or a group of companies) and establishing what constitutes ‘taking advantage” of a company. However, in Coles and Woolworth’s case, their market dominance is undisputed because both companies command a huge market share.

Coles and Woolworth’s milk price wars are also considered to be predatory because they contravene section 46(1AA) of the CCA which prohibits companies from setting prices which are below the industry standards. The categories of prohibition are also related to the ones discussed above in section 46(1). Section 46(1AA) was introduced four years before Coles and Woolworth’s milk price wars but it is surprising that no case has been brought forward in this regard. Largely, section 46(1) remains highly controversial.

Competition and Consumer Act (CCA)

The CCA directly relates to the Australian dairy industry because it prohibits mergers and acquisitions that limit competition in the market. However, this legislative provision has failed in its mandate to protect farmers in the dairy industry. For example, the trade practices act failed to prevent the takeover of farmers by National foods (in the Tasmanian dairy industry) and subsequently, the competitive structure of the industry collapsed.¹⁰ The greatest failure of CCA’s anti-competition policies lies in the weaknesses of the Courts to determine the level of infringement or competition within the market. The common threshold for determining whether a merger or acquisition interferes with the competitive structure of the market is determined when a business entity is able to raise prices without losing substantial business to the rivals (a strategy that Coles and Woolworth employed). Based on the difficulty of determining the competition threshold, many mergers have been approved in the dairy industry – a situation that endangers the overall well-being of the industry.

Regardless of the shortcomings of CCA, it should be able to prevent a hostile takeover or dominance of Coles and Woolworth in the retail of dairy milk products in Australia.¹¹ However, the inadequate competition in the dairy industry has mutilated the powers of CCA and from the intense competition that was witnessed between Coles and Woolworth, additional policy measures need to be formulated.

The price wars between Coles and Woolworth therefore persisted because of the shortcomings of the competition and consumer act 2010. This policy provision was formulated to protect the Australian market against restrictive trade practices and more importantly, against anti-competitive price discrimination, but it failed to do so. Harrison explains that the competitive price wars practiced by Coles and Woolworth were aimed at locking out new competition such as Aldi and Costco because the latter was a threat to their market dominance.¹² By any legal standard, the 2010 competition and consumer act was supposed to protect the industry against such bullish market tendencies but it failed to do so. Instead, Coles and Woolworth started a protracted price war, which limited supplier power and left milk suppliers at their mercy. Indeed, Coles and Woolworth tried to ensure that the Australian dairy consumers thought about them as low-priced retailers (instead of their competition) but at the expense of the producers and the industry at large. By locking out emerging retailers in the market, Coles and Woolworth lessened the competition, but from the weakness of the law to substantiate lessened competition, the two retail giants were able to get away with their anticompetitive practices.

Subsection 49(2) of the 2010 consumer and protection act stipulates that companies may claim defence for practicing discriminatory practices if their pricing differentials reflect varying costs in the cost of manufacture, distribution or sale of products.¹³ However, because there were no changes in any of the above costs, Coles and Woolworth cannot claim this defence. Another defence that could be used to protect Coles and Woolworth’s price wars still lie in subsection 49(2) of the consumer and protection act, which stipulate that companies can practice discriminatory pricing when they act in good faith. However, Coles and Woolworth did not practice discriminatory pricing because they acted in good faith – their motives were mainly motivated by commercial gains and market dominance.

The failure of the 2010 consumer and protection act do not however end at their implementation weaknesses; subsection 47 and 49 overlap because a breach of subsection 47 may still amount to a breach of subsection 49. In detail, subsection 47 prohibits exclusive dealing in products (which Coles and Woolworth practiced) while subsection 49 prohibits discriminatory pricing.¹⁴ Substantially, the provision of milk discounts by Coles and Woolworth potentially contravenes subsection 47 and 49 because it can be summed as product dealing (which eventually leads to price discrimination). The double contravention of Coles and Woolworth’s pricing wars further increase the anticompetitive effects of their actions on the farmers and the industry at large.

Weaknesses of the Law

When focusing on the implementation of the 2010 consumer and protection act, it is crucial to single out the limitations of implementing section 49 of the act (which bears strong significance to Coles and Woolworth’s price wars). The first limitation lies in the determination of the degree of similarity when the act defines identical goods. Indeed, section 49 stipulates that identical goods should not be priced differently.¹⁵ However, it is difficult to establish what rightly constitutes the basis of difference, not only in product definition but also in pricing. For instance, for section 49 to be fully functional, a substantial level of reasonability needs to be established to analyse differences in costs. Similarly, from the same ambiguity of section 49, it is difficult to establish whether the strategy to meet a competitor’s price needs to also be reflected in meeting the same degree of similarity of the competitor’s products. Practically, it is therefore difficult to establish correctly what the phrase of like grade and quality means. The above limitation of section 49 of the 2010 consumer and protection act limitation has been highlighted in an earlier report analysing its efficiency (Hilmer report).¹⁶

Another major weakness of section 49 is its stipulation that price differentials are prohibited when there is a subsequent decrease in competition. The weakness with this statement is the attached exclusions which tend to include price discrimination again because the same law allows companies to pursue price differentials so that they can match up to the competition. The entire exclusionary clause of the law amounts to the weakening of competition, but the failure to include all types of pricing leave the opportunity for including only a narrow scope of pricing.

Recommendations

Recommendation One

Based on the anticompetitive pricing strategies practiced by Coles and Woolworth, there is a strong need to ensure that legislative amendments are made to the 2010 CCA act. The first amendment should be focused on ensuring there is a proper implementation framework to sort any ambiguous areas in the implementation of the act. Part of the reason identified in this report for the protection of Coles and Woolworth is the difficulty in determining the levels of substantial decrease in competition or price. From the ambiguity in defining the degree of competition weaknesses and price differentials, it has been difficult to pin-down Coles and Woolworth for their anticompetitive pricing strategies. There is therefore a strong need to clear this ambiguity.

Recommendation Two

The contravention of the legal provisions in section 49 of CCA also needs to be amended to prevent the overlap of legal provisions found in the same clause. This report identifies that companies can claim defence for practicing price differentials to match their competition, but such a provision provides a window for existing companies to practice the same price differentials (discriminately). It is therefore crucial to eliminate any legal overlaps in the legal provisions of section 49.

Conclusion

The Australian dairy industry has undergone several changes that have exposed it to intense deregulation and the acceptance of diverse trade practices. However, over the past few years, widespread consolidation in the industry has proved problematic. From this consolidation, cartel-like trade practices have emerged in the industry. Indeed, this report affirms that Coles and Woolworth’s trade practices are bullish and they conform to the cartel-like characteristics, which are prohibited in the CCA. In detail, this report finds Coles and Woolworth’s pricing strategies to contravene section 46 of the CCA, which prevents anticompetitive practices in the industry. Based on this finding, this report shows that Woolworth and Coles’ price wars were anticompetitive. This report also shows that the ambiguities in section 49 of CCA need to be amended to protect farmers against the extremes of retail conglomerates in the industry. More importantly, the weaknesses of implementing the law and the ambiguities in establishing whether a company has contravened the law (or not) should be sorted. These are the main weaknesses identified in this report that have made it difficult to prosecute Coles and Woolworth for the anticompetitive trade practices and more importantly, prevented the establishment of the same offence in the first place. The recommendations to improve the CCA however need to be done with extreme caution because amendments to the law should be done after considering their implications on other industries as well (not only the milk industry).

References

Books

Cch, Australian Competition, and Consumer Legislation 2011 (CCH Australia Limited, 2011).

Corones, Stephen, The Australian Consumer Law (Thomson Reuters Australia, 2011).

Miller, Russell, Miller’s Australian Competition and Consumer Law (Thomson Lawbook Company, 2011).

OECD, OECD Communications Outlook 2011 (OECD Publishing, 2011).

Thomson Reuters Australia Limited, Competition and Consumer Act Advance Consolidation 2010 (Thomson Reuters Australia Limited, 2010).

Wadlow Christopher, The Law of Passing-off: Unfair Competition by Misrepresentation (Sweet & Maxwell, 2011).

Cases

ACCC v Ticketek Pty Ltd (2011) 5 ACTR 1.

Online Sources

ACCC, Anti-competitive conduct (2012). Web.

Harrison, Paul, Milk wars: pointing the finger at Coless and Woolworths (2011). Web.

Parliament of Australia, The impacts of supermarket price decisions on the dairy industry (2011). Web.

Footnotes

1. Parliament of Australia, The impacts of supermarket price decisions on the dairy industry (2011). Web.
2. P Harrison, Milk wars: pointing the finger at Coles and Woolworths (2011). Web.
3. Ibid.
4. ACCC, Anti-competitive conduct (2012). Web.
5. OECD, OECD Communications Outlook 2011 (OECD Publishing, 2011).
6. Ibid.
7. ACCC v Ticketek Pty Ltd (2011) 5 ACTR 1.
8. Ibid 1.
9. Ibid 1.
10. Cch, Australian Competition, and Consumer Legislation 2011 (CCH Australia Limited, 2011).
11. W Christopher, The Law of Passing-off: Unfair Competition by Misrepresentation (Sweet & Maxwell, 2011).
12. P Harrison, Milk wars: pointing the finger at Coles and Woolworths (2011). Web.
13. S Corones, The Australian Consumer Law (Thomson Reuters Australia, 2011).
14. Ibid.
15. Thomson Reuters Australia Limited, Competition and Consumer Act Advance Consolidation 2010 (Thomson Reuters Australia Limited, 2010).
16. R Miller, Miller’s Australian Competition and Consumer Law (Thomson Lawbook Company, 2011).