The new Commerce Act test for misuse of market power is now in force and non-compliant businesses risk severe penalties and reputational damage.

After a one-year grace period, the amended section 36 test for misuse of market power came into force earlier this month. This test is central to how unilateral market power is regulated in New Zealand.

This change is particularly notable because the former section 36 test was widely considered to be unfit for purpose, and was seldom enforced by the New Zealand Commerce Commission (NZCC).

In this FYI we explain the new section 36, and break down the type of conduct that risks breaching the Commerce Act.

 

 

New section 36 test

Under the new section 36 test, a business will be in breach of the Act if it has a substantial degree of market power, and engages in conduct which has the purpose or (likely) effect of substantially lessening competition in any market that business supplies or acquires goods / services in.

This test mirrors other prohibitions in the Act, in that it emphasises both the purpose and effects of conduct.

By contrast, section 36 previously focused on whether a business with substantial market power had taken advantage of that power for an anti-competitive purpose. Under this test, businesses with substantial market power were able to argue that, if their conduct had a clear commercial rationale, there was no breach of section 36.

The main impact of the new test is that businesses will have to ensure their conduct has no anti-competitive effects, regardless of the purpose of the conduct.

Does your business have substantial market power?

Contrary to common belief, a business does not need to be a monopoly or have the highest market share in order to have substantial market power. More than one business competing in the same market can have market power.

The NZCC views any party which can profitably hold prices above competitive levels for a sustained period without losing customers to have substantial market power. This is because any ability to do so indicates that the business is not constrained by its competitors.

What kind of conduct may breach the new test?

Going forward, businesses which consider themselves to potentially have substantial market power should be applying a section 36 lens to any conduct that may impact their competitors. Key questions to ask prior to engaging in any conduct include:

• To what extent does this conduct raise costs for my competitors?

• To what extent does this conduct cut off my competitors from potential customers / essential inputs?

• To what extent does this conduct make it harder for my current competitors or potential new competitors to compete against me?

Businesses should ensure they have a clear commercial rationale for any conduct.

The NZCC has identified conduct that is more likely to substantially lessen competition based on New Zealand and overseas experiences. The types of conduct include:

• Refusals to supply, where doing so cuts off a competitor from an essential input of some kind – particularly where few alternatives are available. This conduct is more likely to risk breaching section 36 where the business with substantial market power is vertically integrated in some way.

• Margin/price squeezing, which generally occurs where a vertically integrated business is able to increase its competitors’ costs.

• Exclusive dealing, for example where a business with substantial market power demands exclusivity from an upstream supplier or a downstream customer – thus blocking its competitors’ access to that supplier / customer.

• Tying and bundling, which occurs where a business with market power supplies goods / services on the condition that the customer acquires an additional good / service (or where two goods / services are supplied together at a lower price). While such offers may benefit consumers, they can harm competition where a tying / bundling strategy inhibits the ability of competitors to compete.

These categories of conduct frequently overlap - it is the combined actual or potential effect on competition that is most important, as opposed to how the conduct is categorised.

For the avoidance of doubt, section 36 of the Act does not prohibit a business from having substantial market power, nor does it prevent any such business from competing strongly – particularly where the conduct involves genuine innovation, improved efficiency (eg lower costs) or improvements in quality / price.

Do you have any questions about how the new section 36 may impact your business?

The NZCC has published the Misuse of Market Power Guidelines and a Fact Sheet to provide an overview of the NZCC’s approach to the amended section 36 prohibition.

While the NZCC guidance is helpful in understanding the application of the amended section 36 of the Act, we recommend that businesses get in touch with one of the contacts listed on this page to check that their conduct is compliant with the new section 36.

Special thanks to Achi Simhony for her assistance in writing this article.