Michael Daniel and Ekaterina Zotova trace the approach to the foundational concepts of ‘Competition’ and ‘Market’ adopted by the court since its landmark decision in Re Queensland Co-Operative Milling Association Ltd and discuss the future of the principles established by that decision in modern times of the digital economy

This article draws on a more substantial article “Re Queensland Co-operative Milling Association Ltd, Defiance Holdings Ltd (Proposed Mergers with Barnes Milling Ltd) – Defining the meaning of “market” and “competition”’ published in Volume 27 Part 1 of the Australian Journal of Competition and Consumer Law

 

QCMA: In a nutshell

The facts in QCMA concerned applications made to the Trade Practices Commission by the Queensland Co-operative Milling Association and Defiance Holdings Ltd seeking clearance to merge with Barnes Milling Ltd. Following a refusal by the Commission to grant authorisation to the two companies, they appealed to the Trade Practices Tribunal (the Tribunal) for review of the Commission’s decision. The Tribunal upheld the decision of the Commission.

In making its decision, the Tribunal found that deciding whether a merger proposal was ‘likely to have the effect of substantially lessening competition in a market’ required (a) defining the structure of the market and (b) defining competition.

On the first question, defining the structure of the market, the Tribunal identified five factors, including the degree of concentration and, most importantly, the conditions of entry.^[1] On the second, defining competition, the Tribunal looked to six ‘connotations of the term’,^[2] noting (among other things) that competition was marked by rivalry across areas such as price, service and product.^[3]

 

Re Chime No 2 and Re Chime No 3: the alternative views

An alternative — though not necessarily inconsistent — approach to that provided in QCMA for defining how ‘market’ could be related to ‘competition’ emerged from Re Chime Communications Pty Ltd (No 2)^[4] in the form of a technical three-step process:

1. Identifying product type and geographic area to determine the dimensions of the market;
2. Having determined the dimensions of the market, choosing the best economic model to apply to the situation at hand; and
3. Using the conclusions drawn from steps one and two to make a final conclusion around the level of competitiveness in the market.

Ultimately, this considerably more technical approach may be too complex to accommodate the expertise of some judges, which usually lies primarily in their knowledge of the law and does not necessarily extend to detailed knowledge of economic principles and theories. Instead, it may be better suited to Tribunals deciding on merger proposals.

In Re Chime Communications Pty Ltd (No 3), the Tribunal took a view that the principles established in QCMA are not comprehensive enough to make conclusions about market behaviour^[5] and argued for adopting a ‘strategic behavioural’ approach in addition to the QCMA model.^[6] This approach looks to the strategic decisions of companies which are likely to change the structure of the market to their advantage.

 

The future of QCMA

One of the most salient questions facing the interpretation of the ‘substantially lessening competition’ test set out in QCMA is how a 40-year-old decision can respond to the new challenges raised by the digitisation of modern markets. Where media behemoths, particularly Google and Facebook, wield overwhelming market power in markets like digital advertising, the nature of the markets in which competition takes place is altogether different to those markets that prevailed when the QCMA decision was handed down. The Australian Competition and Consumer Commission’s (ACCC) ongoing inquiry into digital platforms is examining these shifts in the way competition can be understood and its findings carry significant implications for the QCMA approach.^[7]

The ACCC’s December 2018 Preliminary Report identified what can, in this context, effectively be understood as new ‘connotations’ of the terms ‘market’ and ‘competition’, at least in relation to media and advertising services markets:

• Cross-subsidisation (where usage of the platform by individuals is possible without charge, this usage is being ‘subsidised’ by advertisers);^[8]
• Same-side network effects (where there is a direct correlation between the volume of usage of a network and its usefulness to users);^[9] and
• Cross-side network effects (where there is a direct correlation between the volume of usage of a network and its usefulness to users on the other side of the platform – e.g. advertisers).^[10]

The principles that the Tribunal set out in QCMA, despite being developed for ‘analogue’ markets, are still effective in responding to the challenge of regulating possible anti-competitive behaviour in digitised markets. However, there are certain additional considerations that should be taken into account:

• The volume of ‘user data’ over which a company has control often provides it with a highly significant advantage and should be considered alongside the subjects of rivalry identified in QCMA;
• Because technology can change rapidly over short periods of time and this can have significant consequences for how competition manifests itself in a market, a single, simple formula cannot be developed to define competition; and
• Where cross-subsidisation is such that consumers often access digital platforms for free and advertisers pay a significantly larger share of the cost, and same-side and cross-side network effects operate decisively, competition regulators should look to both sides of digital platforms’ business models to determine the merit of mergers.

^[1] Ibid 512.

^[2] Ibid 511.

^[3] Ibid 512.

^[4] (2009) 234 FLR 2010.

^[5] Re Chime Communications (No 3) [2009] ACompT 4, [11].

^[6] Re Chime Communications (No 3) [2009] ACompT 4, [12].

^[7] Australian Competition and Consumer Commission, Digital Platforms Inquiry, Preliminary Report (December 2018) <https://www.accc.gov.au/system/files/ACCC%20Digital%20Platforms%20Inquiry%20-%20Preliminary%20Report.pdf>.

^[8] Australian Competition and Consumer Commission, Digital Platforms Inquiry, Preliminary Report (December 2018), 39 <https://www.accc.gov.au/system/files/ACCC%20Digital%20Platforms%20Inquiry%20-%20Preliminary%20Report.pdf>.

^[9] Ibid 42–3.

^[10] Australian Competition and Consumer Commission, Digital Platforms Inquiry, Preliminary Report (December 2018), 43 <https://www.accc.gov.au/system/files/ACCC%20Digital%20Platforms%20Inquiry%20-%20Preliminary%20Report.pdf>.

 

The authors thank Callum Davis for his assistance in writing this article.

 

Photo by Sean Pollock on Unsplash