New misuse of market power provisions take effect on 5 April 2023
Significant changes to the prohibition on the misuse of market power, in section 36 of the Commerce Act, take effect next week on 5 April 2023. These changes introduce what has been described as an effects test, so the Commerce Commission and entities with market power will have to consider the effect of particular unilateral conduct on the market.
There has been some concern expressed that this increases uncertainty for those firms who have market power, with concerns in particular about how the Commerce Commission will apply the new test.
The Commerce Commission has developed some guidelines that were published this week.
The changes to section 36 mean that conduct by entities with substantial market power are now subject to a competition test that considers both the purpose and the effect of the conduct and aligns New Zealand with Australia. This represents a major change from the current test, which only looked at whether an entity took advantage of its market power for a prohibited anti-competitive purpose. Therefore, entities with substantive market power now need to assess the potential competitive effects of their unilateral conduct, rather than just focusing on the rationale or aim of their conduct.
The Commerce Commission has been pushing for this change for some time, as it considers the current provision complicated and difficult to enforce. The changes remove the need to apply a hypothetical test and would significantly lower the threshold for enforcement against firms with market power.
This means that entities that may have market power will have to carefully consider a range of commercial conduct (such as competitors' access to key inputs and rebate and discount arrangements). This may increase compliance and other costs for these firms. It also may be difficult to ascertain whether there would be a substantial lessening of competition because this can often hinge on the definition of the relevant “market" at issue. Whereas under the current test a firm has to ask itself whether it would do the same thing in a competitive market.
However, the competition assessment is not a test that should be unfamiliar to entities with market power, because it is currently used in other provisions of the Commerce Act, and all contracts, arrangements and understandings have to be assessed through the same lens.
The changes also bring New Zealand back in line with Australia, who have had an effects test since 2017.
Commerce Commission Guidelines
In anticipation of these changes, the Commerce Commission has released its Misuse of Market Power Guidelines this week. The Guidelines set out the Commission's proposed approach to assessing conduct under section 36, including applying the "substantial lessening of competition" test to unilateral conduct. The Guidelines include a discussion on the Commission's proposed approach to assessing conduct such as refusal to supply an input, price/margin squeezing, typing/bundling, and predatory pricing. They also set out the types of the conduct that the Commission considers are unlikely to be an issue under the new section 36, including genuine innovation or conduct that improves efficiency, or responds to competitive offerings by sustainably improving the quality or price of their product.
The Guidelines are a useful tool for understanding the Commission's likely approach to section 36 and provide some clarity on the types of behaviour that will likely receive greater scrutiny. However, the analysis of whether particular conduct amounts to a misuse of market power will continue to be very fact specific, a point that has been emphasised by the Commission.
If you have any questions about the matters raised in this article or would like our assistance complying with or assessing your risks in light of the new changes, please contact us.