Chapter 12 Competition Law Answer Guides JN

EXERCISE 12.1 — Kerouac Street restaurant owners and discount night

The Kerouac Street restaurant owners agree that Wednesday night will be
discount night, and no discounts or half-price deals any other night. Nothing is
in writing. Are the restaurant owners in breach?

So this group has got together to put a floor under prices …. Sounds like price
fixing. Price fixing is one of the cartel offences and it is prohibited per se. So it
is prohibited regardless of what effect the cartel has on competition. It is very
serious and caries a potential term of imprisonment, as well as other
penalties.

Section 45AJ of the Competition and Consumer Act (CCA) prohibits cartel
conduct. The elements of a cartel are:
 a contract or arrangement, or understanding containing a cartel
provision
There is definitely an agreement here, so if not a contract at least an
understanding. Irrelevant that it is not in writing. A nod and a wink is
sufficient. The understanding could be evidenced by the restaurant
owners all behaving in the accordance with the understanding.

 between competitors.
Restaurants on the same street? Definitely competitors as they
compete to get the custom of consumers who are looking to eat out.

Section 45AK prohibits a business from putting a cartel provision into effect.

Section 45AD defines a cartel provision as a provision of a contract,

arrangement or understanding between two or more businesses that are or
should be in competition with each other that has the purpose or effect of:
 fixing the prices charged by the cartel members, or
 controlling outputs (controlling or limiting the quantity of goods or
services available) [usual effect will be to increase prices, decrease
consumer choice], or
 rigging bids [cartel members control the outcomes of auctions and
tenders], or
 market sharing [allocating customers, suppliers and territories amongst
the cartel members].

I would conclude there is a cartel.

Penalties include fines, damages, and imprisonment.

All of the restaurant owners who are part of the cartel should be worried
because the ACCC will give immunity from prosecution to the first member of
the group who reports the cartel.

EXERCISE 12.2 — Johnny buys all his falafel from Idoru

Idoru (I) supplies organic falafel to Johnny (J). I offers J a discount price on
falafels if he commit to buying all of his organic fruit from Burning (B) for 12
months. There is no commission involved. J is the only restaurant owner to
get this deal.

I is trying to get J to buy all his fruit (exclusively) from B. Exclusive dealing of
some sort. S 47. Which sort? Full line forcing (I will only supply you if you
don’t buy from some else) (applies also to supplying someone else). Third
line forcing (I will supply you if you also buy this other stuff from that other
business).

Exclusive dealing is in breach if it causes a SLC (substantial lessening of

competition).

(a) Is this arrangement prohibited by Part IV of the CCA?

Exclusive dealing is prohibited if it SLC. This conduct is third line forcing, a

type of exclusive dealing and so breaches s 47 if the deal SLC. See the
ACCCv Balck & White Cabs case, page 405. SLC requires expert economic
evidence as SLC depends on identifying the market (fruit supply, possibly at
the wholesale level or trade supply level), and the effect of competition in that
market by this deal. Maybe no breach as yet since J is the only one offered
the deal.

(b) Would your answer be different if the arrangement was that Johnny would
buy all of his organic fruit rom Idoru?

Still exclusive dealing, but full line forcing. See TPC (Trade Practices
Commission, the previous incarnation of the ACCC). As above, iot requires
SLC before the conduct is a breach≥

(c) If either arrangement is prohibited, could authorisation be sought from the

ACCC? How?

They could seek authorisation from the ACCC, which would require I to
provide supporting expert economic evidence about the SLC issue.

EXERCISE 12.3 — Idoru undercuts Monalisa on the price of falafels

J find a small supplier of organic falafel in Northern Territory, Monalisa (M),

who want to supply into Queensland. M’s price is $5.50 per kg. When Idoru (I)
hears about M, I announces it will sell falafel for $3 per kg. M is only small and
cannot compete at this price.

Generally, competition and lower prices is regarded as good for consumers.

But not if it is selling at a loss (which a bigger or well resourced competitor
can afford to do for a while) in order to drive a competitor out of the market
(smaller or less well resourced competitors cannot afford to sell at a loss for
long). Once competitors are driven out, the price goes back up. This is known
as predatory pricing. It could be other forms of conduct beyond pricing,
provided that it is aimed at haring competition in the market. It is a misuse of
the bigger competitor’s power in the market. It must be proved that the
business had market power first. Then that they misused that market power.
S 46.

I is clearly responding to the threat of competition from M.

Does I have power in the market? We need economic evidence about the
market and I’s power in that market. Consider factors such as whether I can
have a sustained price increase? Or would I lose customers who then choose
to buy from a competitor? WE don’t really know here.

Is I’s price reduction competition, or predatory pricing? This is a big price

decrease. I previously sold for $6 per kg. This may well be bringing I’s sale
price at or below I’s cost price, unrealistically. Which is some evidence that I is
not engaging in legitimate business competition but is predatory pricing. This
is likely to breach s 46, depending on I’s market power.

EXERCISE 12.4 — J is worried that I won’t deal with him

J is concerned that the other restaurant owners will pressure Idoru (I) not to
supply him if J does not participate in the arrangement between the restaurant
owners to limit discounting.

This is a classic boycott scenario – “we don’t like that person (for whatever
reason, e.g. they discount, they deal with that other person we don’t like) so
don’t deal with them.” Boycotts come in two forms. Primary – Our group will
not deal with the person we don’t like. Secondary – our group will pressure
other people not to deal with the person we don’t like.

The problem with boycotts is that they can have a negative effect on a
competitor ion the market, thus reducing competition.

Some conduct that is regarded as appropriate, such as a employees in a

trade union agreeing to go on strike and withhold their labor, are technically a
boycott. Note the exceptions that exclude such conduct from the boycott
provisions in the CCA. If the dominant purpose of the arrangement is
environmental or consumer protection then that is excluded from the boycott
definition. This exemption may be come up for review as some businesses do
not think consumers should be able to advocate for a boycott of business –
e.g. coal businesses do not think consumers who call for a boycott of coal
based industries on green, environmental type issues should be exempt from
prosecution for boycotts.

The conduct by the other restaurant owners may be a breach of the boycott
provisions in s 45 of the CCA.

The restaurateur group would be pressuring I (a third party) not to supply j

(the target). This would be a secondary boycott.

Boycotts have a SLC test. We would need to consider expert economic

evidence about the market, competition in the market, and the effect of this
exclusion on I supplying J and how that effected competition in the relevant
market to determine of this conduct was a breach. Subject to the SLC test,
this conduct would be a breach.

The SLC test is in place because some “ganging up” can actually be pro-
competition. For example, a group of small businesses may have no
bargaining power when dealing with a big businesses. But together they have
bargaining power. Consider if this group of restaurateurs go together to
amplify their bargaining power with the electricity company. That could reduce
their costs and thus prices.