One recommended change in Australia's recently released Competition Policy Review has led to heated debate in the retail sector.
This change touches on the misuse of market power provisions of the Competition and Consumer Act 2010 (CCA). If adopted, the recommended measures could directly affect the home improvement retail industry.
In brief, the recommendation seeks to widen the definition of what constitutes misuse of market power. Instead of basing the test for misuse on the intent behind actions, as the current CCA legislation does, it suggests basing the test on the actual effects the actions have caused or would cause.
This new definition would tend to inhibit the expansion of large retailers into under-serviced ex-urban and semi-rural regions.
HNN believes much of the public debate about this change has not engaged with the its central point.
The debate has dealt for the most part with issues of "big" versus "little" retail. HNN's research indicates that the recommended change is less concerned with "big" and "little", and more concerned with "new".
The recommended change seems to look ahead to developing services that could enter retail markets. It is designed to assist with the rapid development of these services, largely through ensuring that barriers to entry in these markets remain low.
To explore this possibility, it is necessary to look more closely at the context around the Competition Policy Review. The external factors that affect this context include the previous competition review, the Australian economy's progress from being restrictive and highly protected to liberal and less protected, as well as international market protection legislation, especially in the US.
The internal context of the review itself includes its core intent, what it sees as the main drivers of change in competition, and its focus on the development of the future economy.
The Competition Policy Review was commissioned in late 2013, and the final report was released to the public on 31 March 2015. It has come to be called "The Harper Review", after its chair, Professor Ian Harper.
Holding the review has fulfilled one of the election promises of the current Australian Federal Government, headed by Prime Minister Tony Abbott.
A good starting point in understanding this review is to see how it contrasts with the previous review into competition, the National Competition Policy Review, which published its final report on 25 August 1993. This has come to be known as the Hilmer report, after its chairman, Professor Frederick Hilmer.
The Hilmer report states its purpose in its Preface like this:
It is recognised that Australia, for all practical purposes, is now a single integrated market, increasingly exposed to domestic and international competition. A national competition policy aims to promote and maintain competitive forces to increase efficiency and community welfare, while recognising other social goals.
The Harper Review states its purpose in its initial "Message from the Panel" like this:
Taken together, our recommendations comprise an agenda of reinvigorated microeconomic reform that will require sustained effort from all jurisdictions. We believe this commitment is necessary if Australia is to boost productivity, secure fiscal sustainability and position our economy to meet the challenges and opportunities of a rapidly changing world.
Though similar, there are also marked differences in the approaches outlined here. The Hilmer Report is concerned with increasing "efficiency and community welfare", while the Harper Review is geared towards "an agenda of reinvigorated microeconomic reform".
You could say that Hilmer is concerned with a socially ethical approach to competition that is inflected by economics, and Harper is an economic approach that is inflected by ethics.
Points on the arc
This might make it seem as though the two are in some ways opposed, but this is not actually the case. They both represent points along the same developmental arc.
The first, foundational points on that arc were really made by what the journalist Paul Kelly was to characterise as "The Australian Settlement". Instituted early in the 20th Century, this was marked by high rates of tariffs, to protect both primary producers and industry, and a series of centralised governmental controls over industry and employers.
Post World War II, this regime was carried over and intensified by the government of Sir Robert Menzies, with his Trade Minister, John McEwan, particularly vigorous in enforcing the tariff regime.
The first noticeable breach in the tariff wall occurred in the Labor Party government led by Gough Whitlam, which instituted an across-the-board tariff cut of 25% in 1974. Many of these reductions were later reversed or blunted by the subsequent Coalition Party government led by Malcolm Fraser.
The most recent phase of reforms is described by Geoffrey Brennan and Jonathan Pincus in their essay "From the Australian Settlement to Microeconomic Reform: the Change in Twentieth Century Policy Regimes" like this:
Wide-ranging micro-economic reforms began under the Hawke and Keating Labor governments, 1983 to 1996, and continued under the Howard Coalition governments that followed. The old developmental strategy was largely overthrown. In its place was a set of policies that encouraged competition in product markets and in capital markets. The change was dominated by the Commonwealth's decisions to reduce and almost eliminate tariff protection.From the Australian Settlement to Microeconomic Reform (p18)
As the Hilmer report came towards the end of this transformation, its primary concern is, given the rapid liberalisation of the Australian economy, how could the past patterns of social justice and ethical competition be enabled to continue?
The Harper Review takes place in a very different context. There are three primary drivers described by the report, which are:Rise of Asian economies
The rise of Asia and other emerging economies provides significant opportunities for Australian businesses and consumers but also poses some challenges. A heightened capacity for agility and innovation will be needed to match changing tastes and preferences in emerging economies with our capacity to deliver commodities, goods, services and capital.Ageing population
Our ageing population will give rise to a wider array of needs and preferences among older Australians and their families.New technologies
New technologies are 'digitally disrupting' the way many markets operate, the way business is done and the way consumers engage with markets. The challenge for policymakers and regulators is to capture the benefits of digital disruption by ensuring that competition policy, laws and institutions do not unduly obstruct its impact yet still preserve expected safeguards for consumers.
What is clearly common to both reviews is that they deal not with the endpoints of certain developments, but rather with the transition from a familiar set of circumstances to a less familiar set.
Section 46: Misuse of market power
While it sees room for simplification through much of the CCA, there is one area where the Harper Review seeks change. This is in Section 46 of the CCA, which has to do with misuse of market power.
The suggested changes would widen the definition of what constitutes misuse. The changes are detailed in the report's Recommendation 30 (R30).
The Harper Review recommends that the test applied to determine if an abuse of market power will occur should not be based on the intent of a competitor, but rather on the effect the competitor will have on the market.
The statement of the recommendation is presented like this:
The primary prohibition in section 46 of the CCA should be re-framed to prohibit a corporation that has a substantial degree of power in a market from engaging in conduct if the proposed conduct has the purpose, or would have or be likely to have the effect, of substantially lessening competition in that or any other market.
One reason for this suggested change by the Harper Review is that it believes international views on this subject have shifted substantially over the past 20 years.
This contrasts sharply with the Hilmer report, which supported the intent test in part because it saw international law as not providing a clear direction:
A consideration of international experience indicates that there is no universally accepted method of dealing with misuse of market power, although many nations have adopted a purpose-based approach.
The Harper Review disagrees, and sees the laws of other countries as broadly supporting an effects-based regime. It cites section 2 of the US Sherman Act, and quotes the American Bar Association as stating:
Modern US decisions hold that it is not subjective intent but objective intent that is relevant, and that intent can be inferred from conduct and effect. The focus of the US courts is on evidence of monopoly power and proof of exclusionary conduct. Harper also sees a similar pattern in both Canadian and EU legislation.
This seems more than a little disingenuous. There is in fact a very active and vibrant debate in the US over the provisions of the Sherman Act, and it is a debate that is quite far from reaching a real resolution.
The push for change
The question that needs to be asked is why Harper seeks to shift competition policy in this way. Most commentary has focused on situational analysis - the threat of a big company supermarket moving into a small country town and eliminating one or two smaller supermarkets.
However, there really has not been all that much change in that kind of situation in the 20 years from the Hilmer period to the Harper period. If the specifics of that kind of competitive situation have been stable, what exactly has changed to trigger this new regard for misuse of market power?
If we refer back to Harper's statement about the important new forces at work on the Australian economy - the rise of Asia, technological change and an ageing population - it might at first seem that none of these apply to this situation.
However, one of them actually does apply: technological change.
One path to understanding this is a very interesting paper prepared by Katherine Mereand-Sinha, Howard Bergman, and Donald I. Baker for the 2013 Kiev conference of The International League of Competition Law. The paper constitutes the US Report on Antitrust Efficacy in the Grocery Retail Market for that conference.
Regarding the potential for large US companies such as Wal-mart to dominate regional areas in the US, the authors write:
More certain than any of the other factors likely to affect this sector in the short term is an industry transformation - fed by technological growth and permitted by light regulations - that could have painful short term effects but dynamic long term outcomes.
Wal-Mart's natural growth has been fast, and it may come to dominate food and non-perishable channels in some local or regional markets. Many onlookers are concerned that Wal-Mart will or already has gained effective monopolies in poor, rural communities and has exhibited monopsony power in many products. We believe that such control will be offset in the long term through the entrance of major players like Amazon that do not conform to traditional geographic markets and can and do provide a platform for small batch and niche products. Nonetheless the speed of such change in the communities most dominated by Wal-Mart today may be slow, as infrastructure like high-speed wireless and home amenities like computers lags...It remains too early to predict, however, how the layers of infrastructure will develop.Academia.edu (requires free membership) p10.
In this vision, large companies such as Wal-Mart may dominate regional, under-serviced areas in the short-term, but in the longer-term will likely find their monopoly advantages undermined by more efficient and effective internet-based services.
What the authors of this paper suggest is that this means Wal-Mart's current domination of both consumer and supplier markets ("monopsony" is effectively a form of supply-side monopolisation), while not welcome, is a temporary market state that will be soon be rebalanced by additional competitive forces.
It is possible this will hold true for Australia's regional areas as well, though the circumstances are quite different. Infrastructure is even more of an issue, and, unlike with Amazon in the US, there is as yet not established, mammoth online alternative to established retailers.
It is those differences that may be influencing the Harper Review's tilt towards effect over intention.
Expansion by larger retailers into vulnerable areas will be more difficult to disrupt given the obstacles to online commerce in the Australian market. Through inhibiting this kind of expansion by current market participants, the Harper Review may be hoping e-commerce will have more of a chance to take hold in these under-serviced areas over the next five years.
If this seems a touch far-fetched, it is worth noting that the Harper Review is explicit about its preference for technology driven solutions:
The information revolution is just one facet of a rapidly evolving technology landscape. New techniques and applications utilising information are fostering new ideas and ways of doing business.
New entry exerts a positive discipline on existing market players, encouraging them to be more innovative and responsive to consumer needs. By contrast, locking in long-term preferment risks Australia falling behind other countries, as potential new approaches and innovations pass us by.
Harper is particularly explicit about this when it comes to the taxi industry:
Technological change is also disrupting the taxi industry, with ride-sharing apps, such as Uber, connecting passengers with private drivers. Traditional booking methods are also being challenged by the emergence of apps such as GoCatch and ingogo.
A number of state and territory governments have determined that Uber is acting outside current industry regulations and issued fines to Uber drivers.
Although taxi reform is not expected to make a major contribution to national productivity, the sector is an important component of metropolitan transport and can be particularly important for the mobility of the elderly and those with a disability. More affordable and convenient taxi services give consumers options. Significantly, reduced barriers to entry could see more services operate at peak times, without needing to operate at off-peak times.
The Panel considers that the longstanding failure to reform taxi regulation has undermined the credibility of governments' commitment to competition policy more broadly, making it harder to argue the case for reform in other areas. The Victorian example demonstrates that change is possible and technological disruption suggests that consumer-driven change is inevitable.
The home improvement industry
Supermarkets are a good test case to examine, due to the vitality of that market and its place as one of life's essentials.
Home improvement has a slightly different place in the economy and people's day-to-day lives. The products are also quite physically different. While some degree of online disruption can be expected in the future, this is largely going to be disruption in certain specific segments.
If the thesis stated here is correct, that there is a concern to leave some markets more open to future disruptions, this should mean that the smaller chance of such disruption in home improvement will mean a less strict application of market controls. A changed regime is most likely going to be felt in an additional sensitivity to exactly where new big-box hardware retailers locate their outlets.
On the other side of the equation, smaller independent retailers seeking to build more of a buffer zone around their own stores might consider starting up some form, however minor, of e-commerce themselves. Being able to demonstrate that the "intrusion" of a big-box store would shatter the chances of such an enterprise growing and succeeding could be a compelling argument in the future.