HIGH COURT OF AUSTRALIA
GLEESON CJ,
GAUDRON, McHUGH, GUMMOW, KIRBY, HAYNE AND CALLINAN JJBORAL BESSER MASONRY LIMITED
(now Boral Masonry Ltd) APPELLANTAND
AUSTRALIAN COMPETITION AND
CONSUMER COMMISSION RESPONDENTBoral Besser Masonry Limited (now Boral Masonry Ltd) v Australian Competition and Consumer Commission
[2003] HCA 5
7 February 2003
M1/2002ORDER
1. Appeal allowed with costs.
2. Set aside the orders of the Full Court of the Federal Court dated 27 February 2001, and in place thereof order that the appeal to that Court be dismissed with costs.
On appeal from the Federal Court of Australia
Representation:
A C Archibald QC with C M Maxwell QC and I B Stewart for the appellant (instructed by Blake Dawson Waldron)
N J Young QC with D Shavin QC, M J Crennan SC and P M Tate for the respondent (instructed by Australian Government Solicitor)
Notice: This copy of the Court's Reasons for Judgment is subject to formal revision prior to publication in the Commonwealth Law Reports.
CATCHWORDS
Boral Besser Masonry Limited (now Boral Masonry Ltd) v Australian Competition and Consumer Commission
Trade practices – Restrictive trade practices – Misuse of market power – Predatory pricing – Market definition – Concrete masonry products market – Close substitutability – Whether appellant had substantial degree of market power – Recoupment of losses – Analysis of market structure – Market share – Barriers to entry – Whether barriers to entry created by practices and policies of incumbent firms – Pricing behaviour – Increase in supply capacity – Whether taking advantage of a substantial degree of market power for a proscribed purpose – Legislative purpose of Trade Practices Act 1974 (Cth) – Relevance of market economic conditions – Relevance of purpose of damaging a competitor – Trade Practices Act 1974 (Cth), s 46(1), (3).
Words and phrases – "market power", "predatory pricing", "barriers to entry".
Trade Practices Act 1974 (Cth), s 46(1), (3).
GLEESON CJ AND CALLINAN J. This appeal concerns the application of s 46 of the Trade Practices Act 1974 (Cth) ("the Act") to the conduct of the appellant in relation to the supply of concrete masonry products ("CMP") in Melbourne between April 1994 and October 1996. The central issues are whether the appellant had a substantial degree of power in a market, and whether it took advantage of that power in contravention of s 46.
Section 46 provides, so far as is relevant:
"(1)A corporation that has a substantial degree of power in a market shall not take advantage of that power for the purpose of:
(a)eliminating or substantially damaging a competitor of the corporation or of a body corporate that is related to the corporation in that or any other market;
(b)preventing the entry of a person into that or any other market; or
(c)deterring or preventing a person from engaging in competitive conduct in that or any other market.
…
(3)In determining for the purposes of this section the degree of power that a body corporate or bodies corporate has or have in a market, the Court shall have regard to the extent to which the conduct of the body corporate or of any of those bodies corporate in that market is constrained by the conduct of:
(a)competitors, or potential competitors, of the body corporate or of any of those bodies corporate in that market; or
(b)persons to whom or from whom the body corporate or any of those bodies corporate supplies or acquires goods or services in that market.
(4)In this section:
(a)a reference to power is a reference to market power;
(b)a reference to a market is a reference to a market for goods or services; and
(c)a reference to power in relation to, or to conduct in, a market is a reference to power, or to conduct, in that market either as a supplier or as an acquirer of goods or services in that market."
The provisions of ss 4E and 4F(1)(b) should also be noted. They are as follows:
"4EFor the purposes of this Act, unless the contrary intention appears, 'market' means a market in Australia and, when used in relation to any goods or services, includes a market for those goods or services and other goods or services that are substitutable for, or otherwise competitive with, the first-mentioned goods or services.
4F (1) For the purposes of this Act:
…
(b)a person shall be deemed to have engaged or to engage in conduct for a particular purpose or a particular reason if:
(i)the person engaged or engages in the conduct for purposes that included or include that purpose or for reasons that included or include that reason, as the case may be; and
(ii)that purpose or reason was or is a substantial purpose or reason."
The appellant was formerly named Boral Besser Masonry Limited, and has been referred to throughout the proceedings as BBM. It is a subsidiary of Boral Concrete Products Pty Ltd, which in turn is a subsidiary of Boral Limited ("Boral"). Boral was the holding company of a large group operating in the areas of building and construction materials, and energy. Group revenue for the year ended 30 June 1995 was $4.9 billion. BBM operated in New South Wales and Western Australia, as well as Victoria.
The respondent, the Australian Competition and Consumer Commission ("the ACCC"), took proceedings in the Federal Court of Australia against Boral and BBM. The proceedings were heard before Heerey J, who found in favour of both Boral and BBM, and dismissed the application[1]. There was an appeal to the Full Court of the Federal Court, but ultimately the appeal was pressed only in relation to BBM. The Full Court (Beaumont, Merkel and Finkelstein JJ) allowed the appeal, found that BBM had contravened s 46, and ordered that the matter be remitted to the trial judge for further hearing on the question of relief[2]. BBM now appeals to this Court against that decision.
[1]Australian Competition and Consumer Commission v Boral Ltd (1999) 166 ALR 410.
[2]Australian Competition and Consumer Commission v Boral Ltd (2001) 106 FCR 328.
Since the case is about market power, and alleged illegal use of that power, it is necessary to begin by examining the nature of the market, and the detail of the conduct of BBM which is said to have contravened the Act.
Concrete masonry products
The concrete masonry products of present relevance are blocks, bricks and pavers. Such products are manufactured from cement, sand, stone aggregate, and water; all raw materials that are readily available in Melbourne. The process of manufacture is relatively simple, and the products are not the subject of patent, copyright, or any other form of intellectual property. With limited exceptions, they are not sold under trade marks or brand names. Heerey J described them as being, in essence, a commodity.
Masonry blocks come in a range of sizes, the most common being referred to as 10.01, 15.01, and 20.01. Such blocks are used as a building material for the construction of walls in commercial buildings, or where aesthetic appearance is not important. It was found convenient to take the 15.01 block as a standard basis of comparison of prices.
Masonry bricks are made in one size only, which is the same size as a standard clay house brick. Bricks are primarily used as a material for the construction of walls, particularly in residential housing.
Pavers are made in a range of sizes. They are designed for use as an external pavement, and are commonly used around domestic residences and commercial buildings.
There are also retaining wall products which are used for landscaping external areas around residences, commercial buildings, public parks, and along roadways for retaining earth and stopping erosion.
The evidence showed that there were a number of alternative products available to the building and construction industry for use instead of CMP. They included tilt-up and precast panels, plasterboard, and clay bricks. There were also paving alternatives. Heerey J found that BBM and other concrete masonry manufacturers regularly monitored products which threatened to take sales away from CMP, and formulated strategies to capture sales from other products. BBM strategic business plans showed an awareness of a constant threat from such competing products. The availability of those products was a significant factor in the pressure which customers for CMP were able to apply to suppliers, as evidenced in the price war referred to below.
Suppliers of concrete masonry products
Other significant suppliers of CMP in Melbourne were as follows.
Besser Pioneer Pty Ltd ("Pioneer") was a subsidiary of Pioneer International Limited, the holding company of another large Australian group. Pioneer manufactured concrete masonry blocks, bricks and pavers in Victoria at a plant in Melbourne.
C & M Brick (Bendigo) Pty Ltd, and a related company, (collectively called "C & M") had for many years manufactured CMP at Bendigo. In 1993, C & M established a concrete masonry plant at Campbellfield on the northern outskirts of Melbourne. It commenced full-scale production of concrete bricks and pavers at Campbellfield in February 1994. It commenced the production of concrete blocks later. C & M was a highly efficient producer, partly because it had a new Hess machine which was said to be state of the art. The commencement by C & M of production at Melbourne was regarded by its competitors (rightly, as things turned out) as a serious threat.
Rocla was the trading name of Amatek Ltd, which was part of the large BTR Nylex group. Partly as a result of the price war to which reference will be made below, Rocla ceased to manufacture concrete blocks in Victoria in September 1993 (several months before the commencement of the allegedly contravening conduct of BBM). It ceased the manufacture in Victoria of its remaining concrete masonry products in August 1995.
Budget Bricks & Pavers Pty Ltd ("Budget") was a private company which operated a plant for the manufacture of CMP at Springvale. It ceased operations in June 1996.
Before 1992, BBM's share of concrete masonry sales had been more than 30 per cent. Heerey J found that in January 1992 BBM's share had fallen to 12 per cent, but by 1993 it had risen again to 30 per cent. From 1994 to 1996 (the period of the alleged contravention) it stayed consistently at 25 to 30 per cent. BBM did not increase its market share over the period of its alleged predatory pricing.
Over the whole of the relevant period, Pioneer's share of sales of CMP in Melbourne was assessed by BBM at about 25 per cent. Rocla's share, until it left the market in 1995, was assessed at about 22 per cent. Budget's share at the time it left the market in June 1996 was about 7 per cent. It had been at or below that level for 3 years.
The new entrant, C & M built up its market share substantially. Heerey J found that, by late 1995, C & M accounted for about 40 per cent of all Victorian sales. He made no precise finding about Melbourne sales, but, in another part of his reasons, he observed that the population of Melbourne was 3.3 million and the next largest population centre in Victoria had a population of 186,000. His finding as to the consequences for C & M of the activities in the market from 1994 to 1996 was that "it survived and prospered". C & M's success is significant. It was part of the respondent's case that BBM engaged in price-cutting for the purpose of forcing C & M out of the market. If that purpose existed, it was not achieved.
There was no evidence, and no finding, of any collusion between BBM and any other firm in the market. In particular, not only was there no collusion between BBM and Pioneer, there was evidence of personal hostility between executives of those companies. Heerey J said that "the competition between BBM and Pioneer was throughout the relevant period, and had been previously, ferocious and relentless."
Customers for concrete masonry products
Customers for CMP were mainly blocklayers, builders, and retailers. In most major projects for which concrete blocks were specified, the builder would call for tenders from blocklayers on a supply and lay basis. Blocklayers in turn would call for tenders from concrete masonry manufacturers. Heerey J found that blocklayers were critically important customers for manufacturers.
In the domestic segment of the market, large builders often purchased concrete bricks and blocks direct from manufacturers. Retailers of hardware and building products also purchased concrete paving products. Retailers, typically, would display the products of rival paving manufacturers.
The evidence showed that BBM attached particular importance to large volume jobs to maintain production volumes and recover fixed costs, and that major projects had an important effect on the market because prices obtained on them became, at least temporarily, a benchmark.
Economic conditions
In the early 1990s, the Victorian economy went into a severe recession. The commercial building industry was particularly affected. Building activity was depressed until about 1994, although significant improvements did not become apparent until 1996 or 1997. This decline in building activity had a serious impact on the level of demand for CMP over the whole of the period the subject of these proceedings. Heerey J found that there was substantial excess production capacity throughout the first half of the 1990s, which exacerbated the effect of the low level of demand. He also found that customer acceptance of CMP was at a very low level. Developers and builders were very responsive to the possibility of substituting alternative products and building systems. Over the period, concrete masonry products were competing with, and often losing sales to, other products.
Heerey J accepted the following evidence of a senior BBM executive:
"I believe that the aggressive competition between BBM, Pioneer and Rocla for sales of concrete masonry blocks had started well before C & M Melbourne started production at Campbellfield, although unknown to [BBM] C & M may have already made the decision to set up the new plant. As far as I am aware, the price war between Pioneer, Rocla and BBM Victoria had nothing to do with C & M Melbourne or C & M Bendigo and its commencement of production of masonry products in the Melbourne metropolitan area. Rather, the price war was a product of extreme competition for sales of concrete masonry blocks between the three existing major players in a depressed market, and the combined struggle for market share."
That evidence is inconsistent with the proposition that the price war was started by BBM for the purpose of deterring C & M's entry into the market. In fact, the price war began before the period of the allegedly illegal conduct of BBM.
The Full Court did not reverse that finding of primary fact. Nor was there any basis upon which it could properly have done so. It was the conduct of BBM during part of the price war that was alleged to be predatory, and in contravention of s 46. It will be necessary to examine in detail the pricing behaviour of BBM, bearing in mind that, although the price war started earlier, the alleged contravening conduct is said to have occurred between April 1994 and October 1996. Before that is done, one other matter of importance in relation to market power should be noted.
Barriers to entry
Although Heerey J ultimately concluded that the market was wider than a market for CMP in Melbourne, he also found that, even if there was a market for CMP, barriers to entry were "quite low". There were no relevant intellectual property rights. Product differentiation was minimal (as noted above, he described the product as "a commodity"). Apart from a few specially developed value-added products, CMP were not sold by reference to brand names, and such customer loyalty as existed turned on personal factors, such as reliability of supply. Price was by far the major consideration. There was a relatively low level of technology involved in the manufacture of the product, and there was no shortage of labour with the requisite skills. Raw materials were readily available. Manufacturing plant and equipment was available from manufacturers in the United States or Europe. A capital investment of about $8 million was required to establish a viable plant. Commercial information was readily available. Sales representatives regularly changed from one firm to another.
The Full Court did not disagree with any of those primary findings, but added a qualification to the proposition that barriers to entry were low. Finkelstein J, while acknowledging that structural barriers were low, observed that "the strategic behaviour of incumbent firms" may be a deterrent to new entrants. He then pointed to the pricing behaviour of the firms in the market, and postulated that a firm might set out to cultivate a reputation for predatory behaviour as a method of deterring entry. However, even if one were to accept the potential significance of such a "strategic barrier to entry", it needs to be kept in mind that the period in question saw a substantial and successful entrant to the market.
The price war
Price competition between the manufacturers of CMP in Melbourne was manifested most clearly in the evidence concerning tendering for major projects. The significance of such projects was explained by the evidence. Heerey J made the following finding, which was not challenged on appeal:
"The operation of this highly competitive market can be seen in the history of major projects. Blocklayers and builders were able to force masonry manufacturers down and down."
The unchallenged finding that customers were "able to force" the price of masonry products "down and down" is of major importance in considering whether BBM, or any other supplier, had, and took advantage of, a substantial degree of power in the market; yet it appears to have played no part in the reasoning of the Full Court. The finding reflects the antithesis of market power on the part of an individual supplier. It is important, therefore, to examine the detail of the facts upon which Heerey J based his conclusion. He considered each of the major building projects over a period commencing some months before the time when BBM allegedly first engaged in its contravening conduct, and extending for some months after that time. The wider economic context in which the events described below took place has already been mentioned. It includes the economic downturn in the building and construction industry in Victoria, the ready availability of substitute products, and the aggressiveness of blocklayers and builders in playing suppliers off against one another. The evidence was accepted both by Heerey J and by the Full Court.
The events were considered by Heerey J in the light of the evidence of a quantity surveyor who said:
"In 1991, the Victorian building industry suffered a downturn in activity from a peak in early 1990 which was caused by the general economic recession in Victoria at the time, high interest rates, surplus office space and high vacancy rates which drove rental revenue down. The downturn continued for approximately three to four years with overall prices remaining below 1990 levels until about 1998 when the combination of low inflation and interest rates created a favourable climate for investment in building construction. Vacancy rates for premium and secondary commercial space have reduced and there is now ongoing demand for regional retail space. There has also been an increase in construction in the education and health sectors.
During periods of high building activity, a number of factors impact on tender prices. Demand for available skilled labour resources increases and competition for market share between suppliers of materials diminishes. The net result is that building contractors are often prepared to pay a premium for trade labour and materials prices increase. Contractors have a wider range of projects to tender on and so can recover a higher profit margin. In lean times, however, in my experience there is a tendency for contractors to win a tender at or below cost, on the hope that they will recover their overheads, even if no profit is made. The result of this sort of discounting is that many contracting and sub-contracting businesses fail financially, with their losses flowing back through the system to the suppliers of materials."
The conduct of BBM the subject of the present proceedings occurred in the middle of the period between 1990 and 1998 referred to by that witness. It is impossible to evaluate that conduct without paying regard to the context in which it occurred.
The price war broke out in mid-1993, about nine months before the commencement of the alleged contravention by BBM. In July 1993, a firm of blocklayers won the blocklaying contract for three major projects: the Royal Melbourne Hospital; St Vincent's Hospital; and Eastland Shopping Centre. BBM was invited to quote. Its quote for 15.01 blocks was: Royal Melbourne – 85 cents; St Vincent's – 86 cents; Eastland – 90 cents. The Eastland price was higher because the site was further from BBM's plant. The blocklayers then requested BBM to put in a revised quote. This time, BBM quoted: Royal Melbourne – 76 cents; St Vincent's – 77 cents; Eastland – 81 cents. The Royal Melbourne project was awarded to Pioneer. In August 1993, an executive of the blocklayers had a meeting with senior executives of BBM, and informed them that BBM's prices were higher than any of the other suppliers. He verified this by producing the Rocla quote. BBM then agreed to match the Rocla prices on the St Vincent's and Eastland project, which were 71.2 cents each. A Rocla witness told Heerey J that Rocla had tendered on a marginal cost basis as a test of the market and, having failed to win contracts on that basis, decided to withdraw from block manufacturing in Victoria. BBM's response, on the other hand, was that it would stay in the market and do what was necessary to preserve and, if possible, increase its market share. It will be necessary to examine later the commercial considerations underlying that decision.
Block prices stayed at about the same level for a few months, and BBM continued to quote at that level. However, in October 1993, Pioneer issued a block price list which contained further reduced prices for most block products, and offered to keep prices at that level for six months to customers who would commit to Pioneer for that period. The price for 15.01 was 70 cents. Several blocklayers contacted BBM and said that if it did not match the prices quoted on the Pioneer price list they would commit to Pioneer. BBM was very concerned about the Pioneer prices, but agreed to match them. BBM gave further consideration to the possibility of withdrawing from the Victorian market, but decided to remain.
In January 1994, tenders were called for the Greensborough Shopping Centre. The builders sought tenders from blocklayers. One of the blocklayers proposed to BBM that if it dropped its price by $50,000 that blocklayer would give all its upcoming work to BBM. This proposal was accepted, but another blocklayer won the tender. The CMP contract was awarded to BBM. The average price for 15.01 blocks supplied was 63 cents.
In February 1994, C & M's Campbellfield plant commenced full-scale manufacture of bricks and pavers, but not blocks. C & M sold blocks into the Melbourne market from its Bendigo plant. Between February and July 1994 there were negotiations between BBM and C & M for the possible acquisition of C & M's Campbellfield plant. It will be necessary to return to that subject. Over the same period, C & M were also in negotiation with Pioneer.
In April 1994, a blocklayer selected for the Western Metropolitan College of TAFE project called for tenders. BBM quoted 68 cents for 15.01, but was told that Pioneer had quoted a considerably lower price. BBM refused to match Pioneer's price, and Pioneer won the job. This event is about the time of the commencement of the allegedly contravening conduct.
In May 1994, BBM quoted for the supply of blocks to the Dandenong Shopping Centre and Carpark. The quote for the carpark was unsuccessful, but later the quote for the shopping centre was successful. The price for 15.01 blocks was 63 cents.
In June 1994, BBM quoted for the supply of blocks to the Melbourne Exhibition Centre. It quoted a price of 62 cents for 15.01. The quote was unsuccessful. Pioneer won the contract. Pioneer's price is not known.
In December 1994, BBM quoted to a number of blocklayers who were tendering for the Epping Plaza project. The blocklayer who was selected by the builders contacted BBM and asked for a revised quote. BBM reduced its price because it had developed some other special products also to be supplied for which it was able to charge a higher price. The price for 15.01 was 79 cents. This was substantially higher than the price it had quoted unsuccessfully on the Melbourne Exhibition Centre, when the business went to Pioneer.
Between December 1994 and July 1995, BBM was involved in quoting for the Crown Casino project. BBM had a good relationship with the builder, and quoted prices higher than current market prices. It was requested to revise its quotes, and then quoted 80 cents for 15.01. This was significantly higher than the current market price. BBM was awarded the job, and began to supply block. The builder said that for the next stage of the project it intended to contract out to blocklayers. BBM recommended a blocklayer with whom it had a good relationship. That blocklayer was selected by the builder. However, the blocklayer then told BBM that Pioneer had offered to supply at much lower prices. Pioneer quoted 71 cents for 15.01. BBM did not believe that assertion, but was pressed by the blocklayer, who said he would have no choice but to buy the product from Pioneer unless BBM reduced its prices. The builder said it would prefer to use BBM product, and that if BBM would match the Pioneer prices the builder would make sure that BBM product was used. BBM agreed to match Pioneer prices. BBM won the business. It was also found necessary to pay confidential rebates.
At about this time, further consideration was given by BBM to withdrawing from the Victorian market, but it was decided to remain. Heerey J accepted the following evidence from a senior executive of BBM as to its process of reasoning at the time:
"[M]y own view, and my perception of the view of national management was that any closure would suggest that Boral [M]asonry and other Boral companies would give [in] in the face of stiff competition. Further, Boral Masonry was the only national masonry operator. This gave us an advantage in the eyes of our major customers, many of whom preferred dealing with national operators like themselves.
More importantly though, closure would simply give up to our competitors the production volume and market share that we had fought so hard to restore. In my view, it had to be worthwhile to hang [on] for some time even in the face of some big losses, to see which of our competitors would 'break first' and depart from the industry. I thought this was the only possible solution as we had already examined all of the possible options ourselves and did not believe that any of our competitors, except perhaps C & M with its lower costs of production for concrete brick and concrete pavers, would come to a different conclusion than we had. It had been a struggle to re-establish our credibility with customers and I did not believe that it would be possible to re-establish it a second time. My view was that we needed to take a long term decision rather than being unduly concerned about short term losses as I believed that the industry had a bright future with the introduction of new and innovative products which were potentially a source of profitable activity for BBM Victoria."
BBM's expansion of its production capacity in Victoria needs to be considered in the light of that evidence. Heerey J's acceptance of the evidence was not questioned by the Full Court. To "hang on" in the expectation that one or more of the other suppliers would "break first" may have been a rational commercial response in what was hoped to be a period of severe, but temporary, difficulty. It is different from forcing prices down in order to damage or eliminate some competitors.
From April 1995 to May 1996, there was a major building project called Beacon Cove, a large residential development at Port Melbourne, which was constructed in two stages. For the first stage, BBM quoted to the developer 72 cents for the supply of 10.01 (there was no 15.01). C & M quoted 4 cents lower and won the contract. The second stage was the construction of high rise residential apartments. BBM won this job over Pioneer because its product had been specified by the architect.
In May 1995, tenders were called for the BHP Global Leadership Building. The blocklayer who successfully tendered for the project worked with BBM to produce specially shaped products, and BBM quoted successfully for the job, supplying 15.301 fire rated block at an average price of 71 cents.
The next major project provides an example of blocklayers playing suppliers off against one another, and of the intense rivalry between BBM and Pioneer. In June 1995, blocklayers were tendering for the Rockman's Regency Building. BBM gave each of the blocklayers an indicative quote for two of the major block products, 78 cents for 10.31 and 80 cents for 15.83. The blocklayer who was ultimately successful contacted BBM and said that Pioneer had offered much lower prices. He invited BBM to submit another quote. He told BBM what prices had been quoted by Pioneer. BBM decided to reduce its prices to a level at or slightly below Pioneer's prices to win the job. A revised quote was sent in. The quote included 71 cents for 15.01. The blocklayer again contacted BBM and said that Pioneer had offered a further price, and asked whether BBM would be prepared to reduce its prices further in order to win the job. The executives of BBM had heard rumours in the industry that, if Pioneer did not win the project, two of its senior executives would lose their jobs. This was seen as a good thing. BBM then offered the blocklayer a 41 per cent rebate in order to win the project. The net price after rebate for 15.01 was 42 cents.
In June 1995, BBM submitted quotes to each of the eight builders who had tendered for the Monash Sports Centre. BBM quoted 84 cents for 15.01. Pioneer won the contract.
A prison for women was being constructed on a site very near BBM's production facility. BBM was anxious to supply the job. It quoted prices to three competing builders, which included 15.01 at 88 cents. The builder who tendered successfully told BBM that Pioneer had quoted substantially lower than BBM, and BBM agreed to reduce its prices to match the quotes of Pioneer. BBM supplied 15.01 at 71 cents.
At this stage Rocla closed down its remaining Victorian masonry operations, concluding that there was substantial over-capacity in the market.
Activity in relation to the next major project, which was the men's prison at Laverton, dragged on over a period of a year. In September 1995, BBM submitted a quote to the builder, quoting for 15.01 at 88 cents. A year passed, and BBM was asked to submit quotes to the tendering blocklayers. BBM quoted, for 15.01, between 92 cents and a dollar, the price varying between blocklayers. In September 1996, one of the blocklayers contacted BBM and said that Pioneer was quoting about five or ten cents less than BBM, and that C & M were quoting less than BBM in respect of some products. BBM did not reduce its prices but it won the job, partly because of a good relationship with the blocklayer, and partly because it had already allowed the blocklayer a rebate in respect of another project.
In October 1995, Kraft called for tenders in relation to a plant being constructed near Albury. BBM quoted 88 cents for 15.83. Pioneer won the job.
Another project that became active in October 1995 was Smorgons at Laverton. This was near a BBM production plant. BBM quoted 72 cents for 15.01. The response was that Pioneer was quoting a lower price, 66 cents. BBM decided to meet the prices quoted by Pioneer in order to win the project. The proximity to BBM's plant made it attractive. BBM quoted what it understood to be the same price as Pioneer, and won the job.
In November 1995, BBM tendered unsuccessfully for a large paving job at Swanston Dock. The successful tenderer was C & M, which had quoted a lower price.
In December 1995, BBM quoted to blocklayers tendering for the Park Central St Kilda Road project. BBM's price was higher than Pioneer, but it won the contract because a special product was involved.
Tenders were also called for the Deer Park Shopping Centre in December 1995. This was another project close to BBM's production facility, and thus attractive owing to lower transport costs. After BBM tendered, one of the blocklayers asked if BBM would reduce its quotes to match Pioneer's prices, which were considerably less than BBM's. BBM refused. Pioneer won the contract. (Some years later the blocklayer showed BBM Pioneer's invoices, which included a price of 69 cents for 15.01.)
In February 1996, BBM tendered for the Flagstaff Gardens project. The blocklayers told BBM that its prices were higher than Pioneer, which was quoting 77 cents for 15.01, as against BBM's 78 cents. BBM declined to reduce its quote.
In June 1996, Budget ceased to manufacture CMP because of losses it had sustained over the last five years (ie since 1991).
The last of the major projects referred to in the reasons of Heerey J was the Museum of Victoria. BBM bid for this project on 22 October 1996, quoting 90 cents for 15.01. After a lapse of some months, when no response had been received, BBM submitted a revised quote which was generally higher. By this time BBM had increased its prices. In about mid-1997 a blocklayer told BBM that it had been underquoted by C & M. BBM was not prepared to submit a revised quote.
Although the above evidence was recorded in the decision of the Full Court, the Full Court appears to have concentrated, in its reasoning, on the supply side of the market, and failed to take account of the dynamics resulting from the powerful position in which customers for CMP found themselves, partly in consequence of the availability of substitute products. There was no reason given as to why the conclusion of Heerey J that "[b]locklayers and builders were able to force masonry manufacturers down and down", should not be accepted. That fact, once accepted, must be taken into account in considering whether BBM, or any other supplier, at the relevant time, had a substantial degree of power in the market.
Heerey J recorded the facts set out above, without attributing to any of the suppliers of CMP credit, or blame, for the intensive price-cutting. He explained what had occurred by reference to the downturn in the building industry, over-capacity among the producers of CMP, the ready availability of substitute products, and aggressive bargaining by blocklayers and builders. In the Full Court, Beaumont J recorded, without expressing agreement, a submission by the ACCC seeking to attribute the price war to BBM's "aggressive marketing campaign, substantially based on price reductions, clawing back what it regarded as its rightful share of sales of CMP in Melbourne". The submission alleged that, as a result, BBM's share of sales increased from 18 per cent in December 1992 to more than 30 per cent in December 1993.
The following points may be made as to those submissions. First, the alleged contravention of s 46 was said in the pleadings to have covered a period from April 1994 to October 1996. Over the whole of that period, BBM's market share remained relatively constant. Secondly, there was no finding of Heerey J to support a proposition, if such a proposition be relevant, that the price war that was well under way by April 1994 was begun by BBM. Thirdly, Heerey J found, and his finding is amply supported by the evidence, that the intense competition in the market resulted from a combination of circumstances which were outside the control of any individual supplier, and reflected, not an exercise of market power by suppliers, but a lack of market power.
The suggestion that the events described above could be explained by an "aggressive marketing campaign" on the part of BBM is not only unsupported by any findings of Heerey J; it is impossible to reconcile with the established facts. It seems to involve an assumption that at least one of the suppliers of CMP must have had a substantial degree of power in the market, and then it seeks to account for what occurred as an exercise of that power. But that inverts the proper process of consideration. The issue is whether, between April 1994 and October 1996, BBM had a substantial degree of power in the market. Heerey J found it did not. He found that, over the period, no supplier had a substantial degree of market power. The correct approach is to examine the objective facts and consider what light they throw on the question; not to begin with an assumption that some supplier must have had a substantial degree of market power, and then to ask which supplier was to blame for the price war.
Reference will be made below to the strategy BBM was pursuing over the period, and, in particular, to its increases in production capacity, and the alternatives that were open to it. It is established that, on a number of occasions between April 1994 and October 1996, BBM and its parent company gave serious consideration to ceasing to supply CMP in Victoria. An examination, project by project, of BBM's conduct in quoting prices suggests that it was responding to competitive pressures exerted on it by other suppliers and by customers.
The selection of the period from April 1994 to October 1996 as that during which BBM's pricing conduct contravened s 46 is tied up with the allegation that, during that period, prices quoted by BBM were often below "avoidable costs". Before turning to that subject, it is important to note the manner and circumstances in which prices were set. The evidence reveals many examples of BBM's prices being undercut by one or other of its competitors. The evidence does not show whether the competitors were pricing below their avoidable or variable costs. But what is shown is that there were numerous examples of BBM tendering unsuccessfully on major projects. And it also shows numerous examples of BBM winning contracts only after lowering its initially quoted prices in response to pressure from customers who could get better prices from other suppliers.
The ACCC tendered several graphs, which compared average invoice prices of BBM and other suppliers, and which compared BBM's average prices with BBM's variable costs. Those graphs were prepared on the basis of average prices for all contracts won or supplies made. They do not record quotes from BBM or its competitors that were unsuccessful. It is to the detail of the evidence set out above that it is necessary to turn in order to obtain that information. Furthermore, average prices reflect higher prices charged on small jobs. Heerey J summarised the effect of a number of graphs, in relation to the spread of invoice prices of BBM and Pioneer, as follows:
"While more often than not the lowest BBM invoice was below the lowest Pioneer invoices, they were fairly close together. But, generally speaking, the Pioneer invoices had a wider spread from lowest to highest. This is consistent with Pioneer having more smaller customers to whom it could charge higher prices."
Heerey J regarded the evidence of pricing on major projects as the best evidence of BBM's pricing behaviour between April 1994 and October 1996, and the Full Court did not disagree with that. When the detail of that evidence is considered, it is difficult to reconcile with the case the ACCC seeks to establish.
Pricing below avoidable cost
There was an argument of principle at the trial as to the method to be employed in comparing prices and costs. Heerey J was urged by BBM, in considering a contention that its behaviour was predatory, (a contention that required some refinement in order to relate it to the terms of s 46), to take account of the commercial context, including BBM's relationship with the wider Boral group. For example, BBM argued that, in assessing its costs, the transfer prices of raw materials that it purchased from other companies in the group should be adjusted by removing the profit element recovered by those other companies. There is merit in such an argument, although it needs to be considered in the wider context of the significance, for purposes of s 46, of so-called predatory pricing. The evidence made it clear that the decisions that BBM would remain in the business of manufacturing CMP in Victoria were made on a group basis, and short-term losses to BBM were regarded as being offset by longer-term benefits to the group as a whole. Even so, Heerey J was prepared to approach the price/cost analysis on the narrower basis urged by the ACCC.
Heerey J explained what he meant by avoidable or variable costs, by giving the following example. If a producer of an article incurs fixed costs of $4 and has to pay $6 for raw materials, the amount of $6 is a cost that could be avoided by not making the article. The term variable cost was used by Heerey J as a synonym for avoidable cost. A sale at $8 would result in a loss; but would make some contribution to fixed costs. A sale at less than $6 might suggest that the firm would be better off not making the article.
That, it should be observed, involves a considerable risk of over-simplification. To conclude that, in the example just given, BBM would be better off not to make the article than to supply it at $6, may leave out of account many legitimate business considerations. First, as already noted, there were benefits to the wider Boral group, both tangible and intangible, from BBM continuing to supply CMP. Secondly, even limiting consideration to BBM, it could make business sense to bear short-term losses in the hope that market conditions would improve. Thirdly, the alternative considered in BBM's strategic planning, as will appear, was to withdraw from the market. The costs involved in that are not taken into account in the comparison urged by the ACCC. The appropriate method of paying regard to so-called sunk or historic costs of investment is a fourth matter which does not here, but may, at some future time, call for consideration.
Heerey J made the following findings:
"(1)The monthly sales revenue from sales of all [CMP] by BBM exceeded the variable costs of manufacture and supply for all months during the relevant period (April 1994 - October 1996) except for May, July, August, September and December 1994, January and November 1995 and October 1996.
(2)The total sales revenue exceeded variable costs of manufacture and supply by about $1.3 million and by the following amounts in the following respective years:
1993-1994 $732,220
1994-1995 $124,413
1995-1996 $373,0861996-1997 $770,420"
It may be noted that the first and fourth of those years were mostly outside the relevant period. It is the second and third years that are of particular significance.
Production capacity
BBM produced CMP at Deer Park, using a Besser machine. The plant adjoined a quarry operated by a related company. BBM also had a production plant at Sunshine, but it did not produce CMP except for a period of brick production from 1994 to 1996.
Reference has earlier been made to C & M's construction of a new plant at Campbellfield commencing in 1992. The Hess machine used at this plant was recognised in the industry as more efficient than BBM's machine. It was anticipated by BBM that C & M would be a lower-cost producer. In February 1994, BBM and C & M entered negotiations with a view to the possible acquisition by BBM of C & M's Campbellfield plant, or, perhaps, of all the shares in C & M. Ultimately, BBM offered to purchase the Hess machine for $3.8 million. It had cost C & M around $760,000. The negotiations came to nothing.
In late 1994, senior executives of BBM and Boral considered whether to close down BBM's Victorian operations. They decided to stay in business. BBM was making substantial contributions to Boral by its purchases of supplies from Boral. Furthermore, Boral wanted to retain a national presence and did not want its competitors to think it could be forced out of a market. The chief executive of Boral instructed BBM to shut down its inefficient Sunshine plant and duplicate the plant at the Deer Park production facility. He told BBM he knew this would lead to further capacity in the industry, but that if BBM was to remain in business it had to reduce its costs by producing more efficiently. His aim was to reduce BBM's costs of production to the same level as C & M. In January 1995, BBM began the first stage of upgrading its Deer Park plant, replacing the existing equipment with more efficient equipment brought in from interstate. The Sunshine plant was closed.
In December 1995, C & M again approached both BBM and Pioneer about the possibility of a sale of the Campbellfield plant, but nothing resulted.
In June 1996, BBM commissioned the first stage of the new plant at Deer Park. Heerey J found that the Deer Park upgrade was an understandable business decision that would reduce overall costs of production and signal BBM's intention to remain in the market as a long-term participant.
Business strategy
There were tendered in evidence internal BBM and Boral documents, including reports from BBM executives to Boral, and "strategic business plans".
The major decision that had to be faced was whether BBM would close down its CMP operations in Victoria. As to that, Heerey J made the following finding:
"BBM gave active consideration in late 1993, and again some twelve months later, as to whether it should quit concrete manufacturing in Victoria. It decided to stay in, cut prices to win business, and upgrade its plant to improve efficiency, all in the hope of better times to come. Pioneer also decided to stay in. Rocla decided to quit. All these were firms with deep pockets. C & M decided to stay in. It did not have a particularly deep pocket, but nevertheless it survived and prospered. Budget did not have a deep pocket at all. It failed and its proprietor Mr Coghill lost his home, lost everything.
All these competitors were faced with the same hard conditions as BBM and also had to make hard decisions. What BBM did was to make legitimate business decisions, consistent with it being in a very competitive market and consistent with it not having any degree of market power or taking advantage of such power.
The alternative of closing down temporarily was not seen as a realistic alternative by BBM (or by Budget). It was not an option Pioneer took, notwithstanding that it also was making heavy losses."
An implication of a decision not to withdraw from the market was that BBM would compete vigorously in pricing, attempt to win business from its competitors, and seek to reduce its production costs. Market conditions were such that failure to compete on prices would be tantamount to withdrawal.
There are repeated references in the business plans to the entry of C & M, the efficiency of its plant, and the negotiations for possible purchase of the plant, the business, or the company. There are also surveys of market conditions and close consideration of the position of competitors. Reference is made to the high level of threat from substitute products. It is clear that, in the economic circumstances applying, BBM could only hope to increase its sales at the expense of its competitors, and that it hoped that one or more of its competitors would be forced to withdraw from the market.
In one internal assessment of the price war it was said:
"The long term solution to the market decline in Melbourne is for C & M to fail as a producer and one of the major producers to pick up the assets."
In a strategic plan, the following reference was made to the withdrawal of Rocla (which began in 1993, and was completed in 1995):
"Part of our plan has been realised with Rocla and BTR Nylex withdrawing from the market by the end of September 1995."
In March 1995, an update of BBM's strategic business plan was prepared upon the following assumptions:
"1.We will buy honing and polishing equipment to gain a competitive advantage and increase the average selling price of blocks. (Cost allowed $500K)
2.We will buy the Besser equipment at Moss Vale and install at Deer Park at a total cost of $4M.
3.We believe our current share of the total market is 30%, which will increase to 50% on installation of new plant.
Our ability to supply the market has been constrained in recent months by our lack of capacity.
Our marketing efforts have been successful to the extent that our customers are prepared to buy from us even though our prices may be slightly higher.
Our aim through 1996/97 and 1997/98 is to drive at least one competitor out of the market. The new plant gives us the ability to do this."
After referring to the new Besser plant, the update continued:
"From a long term view this development presents the opportunity to break out of the cycle which has prevailed in Victoria over many years. Boral Masonry needs the capacity to supply the market through highs & lows (at a high market share 40%+) to remove the ability of minor players to survive when the market turns up thus allowing them to play another day always at the expense of gross margins and market share. The coup-de-grace could have been delivered to 2 minor players in 1994 had Boral had sufficient productive capacity.
…
At the present time no Victorian masonry manufacturer is believed to be trading profitably.
Because we have reached the limit of productive capacity we have had to reduce the level of discounting which we had been using to build market share and weaken the opposition. Our projections are that the market will downturn slightly in 95/96 & 96/97 and then recover strongly.
To take advantage of the downturn which will put pricing and volume pressure on the market prior to the recovery is the rationale for additional production capacity.
When the market turns down our volume capability will enable us to apply pressure to our competition.
Feedback from the market indicates that C & M and Budget are awed at the prospect of Boral doubling its capacity.
This is vindicated by recent evidence of vicious price cutting and intense customer targeting by C & M including attempted exclusivity supply arrangements.
In addition we believe that Budget is in a precarious financial position only alleviated by our recent decision to increase prices and [Pioneer] and Rocla have tenuous commitment to the Victoria market …".
As will appear, Heerey J concluded, on the basis of the above material, that BBM acted with one or more of the purposes set out in s 46. He did not find it necessary to be more specific. Presumably he had principally in mind s 46(1)(a). But he rejected the argument that BBM had a substantial degree of power in a market, or was taking advantage of that power. Over the whole of the period from April 1994 to October 1996, BBM was engaged in price competition so intense that it was called a price war. BBM gave serious and repeated consideration to surrendering. But it decided, for what Heerey J regarded as sound business reasons, to stay in and fight. That one or more of its competitors would be damaged was obvious: that is the necessary consequence of intensive price competition. The point of price competition is to win customers from a competitor. In that sense, the purpose of competitive conduct is to damage a competitor. That one or more of its competitors would respond to the damage by leaving the market was likely. That is what BBM itself considered doing. It is also important to keep in mind, particularly with respect to businesses which operate in a cyclical industry such as the building industry, that they may have to weather periodic storms, and cannot take a short-term view of their activities.
The purpose of the Act is to promote competition, not to protect the private interests of particular persons or corporations[3]. Competition damages competitors. If the damage is sufficiently serious, competition may eliminate a competitor. The critical question in the present case is whether BBM's behaviour involved the taking advantage of a substantial degree of power in a market. If it did, then acting with one or more of the purposes set out in s 46(1) was illegal. If it did not, then BBM's conduct amounted to lawful, vigorous, competitive behaviour.
[3]Queensland Wire Industries Pty Ltd v Broken Hill Proprietary Co Ltd (1989) 167 CLR 177 at 191; Melway Publishing Pty Ltd v Robert Hicks Pty Ltd (2001) 205 CLR 1 at 13 [17].
The danger of confusing aggressive intent with anti-competitive behaviour, in the context of alleged predatory pricing behaviour, was pointed out by the United States Court of Appeals, Seventh Circuit, in AA Poultry Farms Inc v Rose Acre Farms Inc[4]. The Court said:
"Firms 'intend' to do all the business they can, to crush their rivals if they can … Entrepreneurs who work hardest to cut their prices will do the most damage to their rivals, and they will see good in it …
Almost all evidence bearing on 'intent' tends to show both greed-driven desire to succeed and glee at a rival's predicament … [T]ake [a witness's] statement that [his firm's] prices were unrelated to its costs. Plaintiffs treat this as a smoking gun. Far from it, such a statement reveals [the firm] to be a price taker. In perfect competition, firms must sell at the going price, no matter what their own costs are. High costs do not translate to the ability to collect a high price; someone else will sell for less. Monopolists set price by reference to their costs …; competitors set price by reference to the market."
[4]881 F 2d 1396 at 1401-1402 (1989).
It emerges clearly from the evidence in the present case that BBM set its prices by reference to the market.
The case against BBM
In its Statement of Claim the ACCC alleged that both Boral and BBM had contravened s 46. By the time argument in the Full Court was completed, the case against Boral was no longer pursued. Argument in this Court has been confined to the case against BBM.
The relevant market was identified in the Statement of Claim as the market for concrete masonry products in Melbourne. There was an issue concerning market definition. The ACCC alleged that BBM had a substantial degree of power in the market so defined.
In asserting that BBM illegally took advantage of its alleged market power, the ACCC appeared to suggest, amongst other things, that there was collusion, or at least conscious parallelism, between BBM and Pioneer. In its pleading it referred to "an ability for Boral/BBM to communicate with Pioneer by market signals". Heerey J recorded that, at the beginning of the hearing, senior counsel for the ACCC disavowed any suggestion of collusion between BBM and Pioneer, but in final address contended that BBM "believed that once the market had been [rationalised] by the removal of two or three competitors during the price war, Pioneer would not prevent prices then rising to profitable levels". Heerey J was prepared to accept that BBM hoped and expected that, at the end of the price war, it could operate at a profitable level, but he rejected any hope or expectation of either collusion or conscious parallelism; and he found that, throughout the relevant period, the competition between both firms was "ferocious and relentless". Those findings were not challenged on appeal.
Another allegation that was rejected by Heerey J, and not pursued on appeal, was that there was something sinister about BBM's attempts to purchase C & M's Hess plant. The Statement of Claim alleged that the price offered by BBM was a price that would not recoup C & M's costs. However, Heerey J found that the offer was made in good faith for sound business reasons and that no adverse inference or conclusion could be drawn from it.
Putting those two allegations to one side, the central allegations against BBM came down to the following:
"11(a) between at least in or about April 1994 and at least in or about October 1996 [BBM] reduced the prices at which it offered to supply and supplied concrete masonry products in Melbourne, generally, alternatively to current or identified potential customers of C & M Bricks, Rocla and Budget Bricks, to levels at or below its cost of the manufacture and supply of those products.
…
(c)in or about May 1995 to October 1996 increased substantially the production capacity of the plant owned and operated by it at Deer Park in Melbourne for the manufacture of concrete masonry products by installing an older surplus plant acquired in Moss Vale, New South Wales."
Paragraphs 16 and 17 of the Statement of Claim alleged that the conduct of BBM described in par 11 constituted the use of power in the Melbourne market for the purpose of eliminating or substantially damaging C & M and other competitors including Rocla and Budget, preventing the entry of C & M and others into the market, or deterring or preventing C & M and others including Rocla and Budget from engaging in competitive conduct in the market or other CMP markets in Australia. This was said to be in contravention of s 46.
The reference to other markets in Australia dropped out of the case, and it was agreed in this Court that the only aspect of s 46 with which we are concerned is taking advantage of power in a market for a proscribed purpose relating to that same market.
Thus, the case with which the Full Court had to deal, and which confronts this Court, is one stripped of any allegation of illegal conduct on the part of Boral, and of any allegation of collusion or conscious parallelism, past or anticipated, between BBM and Pioneer, and of any suggestion that BBM's offer to buy C & M's plant was other than in good faith. It is based mainly upon BBM's pricing behaviour between April 1994 and October 1996, and also upon its upgrade of its Deer Park plant.
Fundamental to the case, and strongly contested, is the proposition that, at the time of the conduct in question, BBM had a substantial degree of power in a market, and that the conduct complained of constituted a taking advantage of that power.
The reasons of Heerey J
Heerey J commenced his consideration of the critical questions of market definition and market power by quoting from the reasons of the Trade Practices Tribunal in Re Queensland Co-operative Milling Association Ltd[5]:
"We take the concept of a market to be basically a very simple idea. A market is the area of close competition between firms or, putting it a little differently, the field of rivalry between them. (If there is no close competition there is of course a monopolistic market.) Within the bounds of a market there is substitution – substitution between one product and another, and between one source of supply and another, in response to changing prices. So a market is the field of actual and potential transactions between buyers and sellers amongst whom there can be strong substitution, at least in the long run, if given a sufficient price incentive. Let us suppose that the price of one supplier goes up. Then on the demand side buyers may switch their patronage from this firm's product to another, or from this geographic source of supply to another. As well, on the supply side, sellers can adjust their production plans, substituting one product for another in their output mix, or substituting one geographic source of supply for another. Whether such substitution is feasible or likely depends ultimately on customer attitudes, technology, distance, and cost and price incentives.
It is the possibilities of such substitution which set the limits upon a firm's ability to 'give less and charge more'. Accordingly, in determining the outer boundaries of the market we ask a quite simple but fundamental question: If the firm were to 'give less and charge more' would there be, to put the matter colloquially, much of a reaction? And if so, from whom? In the language of economics the question is this: From which products and which activities could we expect a relatively high demand or supply response to price change, ie a relatively high cross-elasticity of demand or cross-elasticity of supply?"
[5](1976) 25 FLR 169 at 190.
The reference in that passage to "a firm's ability to 'give less and charge more'" is an expression of the central idea involved in the concept of market power. An aspect of the explanation of the concept of a market to which it will be necessary to return is the need to pay attention to the demand side as well as to the supply side.
The ACCC contended that there was a market for CMP in Melbourne. BBM contended that the market was wider, and embraced walling and paving products generally. It was accepted, at least by implication, that, if BBM's contention was correct, then that was an end of the matter: no one suggested BBM had a substantial degree of power in the wider market.
Although Heerey J accepted that geographically the market was limited to Melbourne, he agreed with BBM as to the product market. He found that the evidence as to substitution was all one way. There was abundant evidence of actual substitution between CMP and other walling and paving products, rising and falling with the influence of factors such as price, labour costs, aesthetics and building fashions. BBM and other CMP suppliers closely monitored other walling and paving products and developed strategies to take sales away from them or to avoid losing sales to them. For example, there was specific evidence that Pioneer's October 1993 price list was designed to win back sales from tilt-up. He asked himself whether manufacturers of concrete masonry block could have significantly increased prices without fear of a reaction from tilt-up. He answered: plainly not.
Although that finding decided the case, Heerey J went on to consider the question whether BBM, at the time of its allegedly contravening conduct, had a substantial degree of market power either in the market for which the ACCC contended or in the wider market. He answered that question in the negative. He referred to the matter of barriers to entry, the shares of CMP sales of BBM and other suppliers, and what he described as competition dynamics, including the economic conditions affecting the building industry, over-capacity, and the conduct of customers, with their ability "to force masonry manufacturers down and down". He expressed his conclusion by saying:
"The low barriers to entry and the existence of strong competitors, in particular Pioneer and, as time passed, C & M meant that BBM did not have power to behave independently of competition and of competitive forces, either in the market I have found or in the narrower market for which the Commission contended. BBM did not have market power in these markets, and certainly not a substantial degree of market power."
The findings of Heerey J as to market power, if correct, meant that the case against BBM must fail. However, he went on to express his views on the question whether the conduct on the part of BBM complained of by the ACCC (pricing behaviour and increasing production capacity at Deer Park) amounted to "taking advantage" of market power. The discussion of those subjects bears upon the question of the existence of market power. The ACCC argued that BBM's pricing behaviour, in particular, was an exercise or manifestation of market power, especially when regard was had to the purpose for which it was undertaken. Although both parties recognised that the term "predatory pricing" should be used with some caution, because it may carry overtones imported from other legislative contexts that are not directly comparable, it was treated as a convenient expression to use as a focus for part of the argument. Conscious of the different legislative framework in the United States, Heerey J nevertheless examined the American authorities on the subject, with particular reference to the concept of recoupment, in the medium or long term, of losses incurred in short-term pricing "below an appropriate measure of cost for the purpose of eliminating competitors in the short run and reducing competition in the long run"[6]. Both sides called, as witnesses, economists who dealt with the concept. Heerey J made the following finding:
"Whether or not BBM charged below avoidable cost, it had no prospect of being able to recoup its losses by charging supra-competitive prices. And, importantly, it never thought that it could … Certainly BBM hoped one day to return to profitable operations; there would be no point in it staying in business if that were not so. Yet all it hoped for, or could hope for, was profit in a competitive market."
[6]Cargill Inc v Monfort of Colorado Inc 479 US 104 at 117 (1986) per Brennan J.
He also found that, in BBM's case, selling below avoidable cost, even for a prolonged period, was a rational business decision, for reasons already discussed, without any hope of ultimately being in a position to charge supra-competitive prices.
As to the complaint about the Deer Park upgrade, Heerey J found:
"The Deer Park upgrade was an understandable decision, especially in the light of the closure of Sunshine. The upgrade would enable the production of more value added products and reduce overall costs of production. The availability of the Moss Vale plant was a fortuitous opportunity.
In part the Deer Park upgrade was a signal of BBM's commitment to be a long term manufacturer of concrete masonry in Melbourne. This is not inconsistent with BBM being a participant in a competitive market. But at bottom BBM's motive in upgrading Deer Park was to achieve efficiency, just as efficiency drove C & M's decision to enter the market with the Hess machine."
Having found that BBM did not have a substantial degree of power in a market, and that its pricing behaviour and expansion of production capacity did not involve a taking advantage of market power, but constituted a rational and legitimate business response to conditions of intense competition, it was unnecessary for Heerey J to consider purpose. He did so only briefly. Plainly, he thought, BBM at least intended to damage its competitors and, if possible, eliminate one or more of them. This appeared from the internal company documents to which reference has already been made. But without a finding of taking advantage of a substantial degree of power in a market, such a competitive purpose was lawful.
The reasons of the Full Court
The Full Court did not reject any of the findings of primary fact made by Heerey J. There was, however, one finding, of central importance to the case against BBM, that was not dealt with in the reasons of the Full Court. It was the finding that the purchasers of CMP in Melbourne, throughout the period in question, were "able to force" the prices charged by suppliers of CMP "down and down". The case against BBM was that its behaviour, and in particular its pricing behaviour, was an exercise of market power. The finding suggests the opposite.
On the subject of market definition, Beaumont J (with whose reasoning on the point Merkel and Finkelstein JJ agreed) made a careful examination of the detail of the evidence concerning CMP and potentially substitutable products, including the evidence of architects and builders, details of prices and sales, changes in industry fashion, and the way in which BBM itself viewed the area of rivalry as shown by its internal documents. He concluded, contrary to the opinion of Heerey J, that it was only in respect of the supply of CMP that there was an area of close competition. He found[7]:
"It is true that there were, to a degree, alternative products available, and that, on occasions, some measure of substitution occurred. But given the discontinuities of substitution previously mentioned, and the price differentials involved, it ought not, in my view, to be inferred that the relevant market was the wider walling products market advocated by BBM. A critical factor, I think, is that BBM itself treated the relevant market as that for the supply of CMP, as its own planning documents stated. The distinction drawn between competition, on the one hand, and close competition on the other, is crucial in the present context."
[7](2001) 106 FCR 328 at 377.
As to market power, Beaumont J reasoned as follows[8]. He said that BBM's strategy achieved an increase in its market share to more than 30 per cent by December 1993 and this was maintained through to 1996, at the end of the relevant period. (In this regard, it may be noted that the relevant period began in April 1994. Another way of looking at what Beaumont J said is that, over the whole of the relevant period, BBM's strategy failed to achieve any increase in market share.) He said that, during the relevant period, BBM had some degree of market power. This he inferred from its significant share of the market, its standing as part of a large well-funded national operation, and its reputation for good service and loyalty to its customers. However, it was not "a monopolist or near monopolist". He acknowledged that structural barriers to entry were low, as illustrated by the relative ease with which C & M entered the market. But there were disincentives to remaining in the market, as the departure of Rocla and Budget showed. BBM was pricing below avoidable cost and it was to be inferred that it was "prepared to use its power in the market so as to provide a disincentive to other competitors … to remain in the market". Beaumont J concluded that BBM had market power which was "considerable or large, that is to say, 'substantial'". (The meaning of "substantial" was not in contest[9].)
[8](2001) 106 FCR 328 at 377-378.
[9]See Eastern Express Pty Ltd v General Newspapers Pty Ltd (1992) 35 FCR 43 at 62-63.
Beaumont J dealt briefly with the issues of taking advantage, and purpose, which he resolved in favour of the ACCC.
Merkel J, after reviewing the history of s 46, and noting that it was amended in 1986 by replacing the concept of being in a position substantially to control a market with that of having a substantial degree of power in a market, began by criticising Heerey J's acceptance of United States notions of recoupment in relation to the application of s 46 to predatory pricing. He agreed with Beaumont J on market definition, and then turned to the question whether BBM's conduct involved use of a substantial degree of power in a market.
He began his consideration of this question by considering BBM's purpose – to eliminate or damage one or more of its competitors[10]. It will be necessary to return to the appropriateness of this as a starting point for analysis of the issue. He pointed out that BBM achieved the objective, stated in its strategic plan, of placing pressure on its competition, by low pricing and expansion of production capacity, and that two rivals (Rocla and Budget) were forced out of the market. BBM had the financial capacity to last out a price war, and used it. Merkel J referred to BBM's "power" to engage in below cost pricing to exclude competition, which he said resulted from four related elements:
1.BBM's financial and production strength which, he said, enabled it to more than double its market share. (In fact, its market share remained constant from April 1994 to October 1996; the "doubling", which was a recovery of previously lost market share, occurred before the start of the allegedly contravening conduct, and before C & M became established in the Melbourne market.)
2.The upgrade of Deer Park and the pressure that exerted on rivals.
3.BBM's capacity, as a member of a vertically integrated group, to sell at less than cost while the group made a profit. (This appears to be an aspect of 1 above.)
4.BBM's election to price lower in the expectation that there would be some recoupment later as the market became less highly competitive.
[10](2001) 106 FCR 328 at 388.
Merkel J also considered that, while structural barriers to entry were low, there were strategic barriers. This was a point taken further by Finkelstein J.
Merkel J considered that BBM's strategic objectives of damaging or eliminating one or more competitors, that is to say, its exclusionary purpose, and the actual departure of two competitors, revealed the substantiality of its market power. He did not express a view about what was revealed by the entry and success of C & M.
Finkelstein J examined the United States learning on predatory pricing. Like Merkel J, for reasons he explained in detail, he rejected the idea that predatory pricing could contravene s 46 only if there was a likelihood, at the end of the price-cutting, of recoupment of losses by supra-competitive pricing. In this connection, he also examined authorities on European legislation.
On market definition, he analysed the evidence, and came to the same conclusion as Beaumont J. He then turned to the question whether, in the market for CMP in Melbourne, BBM had a substantial degree of power. Such power, he said, does not necessarily involve a capacity to raise prices above a competitive level without losing sales. It can also exist when a firm has power to exclude competition. He cited a holding of the Supreme Court of the United States that "[m]onopoly power is the power to control prices or exclude competition"[11].
[11]United States v E I du Pont de Nemours & Co 351 US 377 at 391 (1956).
Referring to the relevant form of market power in this case as the ability to exclude competition, Finkelstein J said that the questions of taking advantage of market power and exclusionary purpose are not two questions, but one. The evaluation of market power and the abuse of that power is part of the one analysis. In considering exclusionary behaviour, he examined barriers to entry, and emphasised strategic barriers, in the form of the behaviour of incumbent firms. Such behaviour might include the creation of excess capacity, as with the upgrading of Deer Park.
Finkelstein J concluded that BBM had substantial power in the CMP market "and it misused that power for a relevant purpose when it engaged in a predatory pricing scheme".
Section 46
It was pointed out by this Court in Melway Publishing Pty Ltd v Robert Hicks Pty Ltd[12] that s 46 requires, not merely the co-existence of market power, conduct, and proscribed purpose, but a connection such that the firm whose conduct is in question can be said to be taking advantage of its power. It was also observed that an absence of a substantial degree of market power only requires a sufficient level of competition to deny a substantial degree of power to any competitor in the market.
[12](2001) 205 CLR 1 at 21 [44].
The essence of power is absence of constraint. Market power in a supplier is absence of constraint from the conduct of competitors or customers. This is reflected in the terms of s 46(3). Matters of degree are involved, but when a question of the degree of market power enjoyed by a supplier arises, the statute directs attention to the extent to which the conduct of the firm is constrained by the conduct of its competitors or its customers. The main aspect of the conduct of BBM in question in the present case was its pricing behaviour. Therefore, the Federal Court was required by the statute to have regard to the extent to which BBM's pricing behaviour was constrained by the conduct of other CMP suppliers, or by purchasers of CMP. The reasoning of Heerey J followed that statutory direction.
The purposes proscribed by s 46 include the purpose of eliminating or damaging a competitor. Where the conduct that is alleged to contravene s 46 is price-cutting, the objective will ordinarily be to take business away from competitors. If the objective is achieved, competitors will necessarily be damaged. If it is achieved to a sufficient extent, one or more of them may be eliminated. That is inherent in the competitive process. The purpose of the statute is to promote competition; and successful competition is bound to cause damage to some competitors.
It follows that, where the conduct alleged to contravene s 46 is competitive pricing, it is especially dangerous to proceed too quickly from a finding about purpose to a conclusion about taking advantage of market power[13]. Indeed, in such a case, a process of reasoning that commences with a finding of a purpose of eliminating or damaging a competitor, and then draws the inference that a firm with that objective must have, and be exercising, a substantial degree of power in a market, is likely to be flawed. Firms do not need market power in order to put their prices down; and firms that engage in price-cutting, with or without market power, cause damage to their competitors. Where, as in the present case, a firm accused of contravening s 46 asserts that it is operating in an intensely competitive market, and that its pricing behaviour is explained by its response to the competitive environment, including the conduct of its customers, an observation that it intends to damage its competitors, and to do so to such a degree that one or more of them may leave the market, is not helpful in deciding whether the firm has, and is taking advantage of, a substantial degree of market power.
[13]Melway Publishing Pty Ltd v Robert Hicks Pty Ltd (2001) 205 CLR 1 at 18-19 [31]; Telecom Corporation of New Zealand Ltd v Clear Communications Ltd [1995] 1 NZLR 385 at 402.
Section 46 does not refer specifically to predatory pricing, or recoupment, or selling below variable or avoidable cost. These are concepts that may, or may not, be useful tools of analysis in a particular case where pricing behaviour is alleged to contravene s 46. Care needs to be exercised in their importation from different legislative contexts. In the United States, for example, predatory pricing is often discussed in the context of monopolisation, or attempts to monopolise, in contravention of the Sherman Act 1890. In Europe, Art 86 of the Treaty of Rome prohibits conduct which amounts to an abuse of a dominant position in a market. We are concerned with the language of s 46. We are principally concerned with whether BBM had a substantial degree of power in a market, and whether, in its pricing behaviour, and its upgrading of its production facilities, it took advantage of that power.
Predatory pricing is a concept that was examined in the evidence of economists, and in the judgments in the Federal Court. Ultimately, however, it is the language of the Act that must be construed and applied. The expression was used by Dawson J in Queensland Wire Industries Pty Ltd v Broken Hill Proprietary Co Ltd[14] as an example of a practice that may manifest market power, but his Honour had no occasion to explain what he meant by it. One of the most important features of the decision in that case was a rejection of the argument that the concept of "taking advantage" in s 46 involves some form of predatory behaviour or abuse of power going beyond that which follows from the terms of the statute itself.
[14](1989) 167 CLR 177 at 200.
There is a danger that a term such as predatory pricing may take on a life of its own, independent of the statute, and distract attention from the language of s 46. There is also a danger that principles relevant to the laws of other countries may be adopted uncritically and without regard to the context in which they were developed.
Finkelstein J, in his reasons for judgment, pointed out that the context in which predatory pricing has been considered in the United States is materially different from that of s 46, and that an expectation of recoupment of monopoly prices at the end of a period of illegal pricing behaviour is not a statutory requirement for the application of s 46.
It may equally be said that there is nothing in s 46 that, as a matter of law, requires a distinction to be drawn between pricing below or above variable or avoidable costs. As has already been observed, the distinction is in some respects unsatisfactory. Furthermore, in the present case it is of limited utility. For some, but not all, of the relevant period, prices charged by BBM were below BBM's variable costs if no adjustment or allowance is made for the position of the wider Boral group. But we are not in a position to compare BBM's prices with Pioneer's variable costs; and, because C & M were substantially more efficient, it may be inferred that their variable costs were significantly lower than BBM's costs and they may well have been lower than BBM's prices. The process, outlined in the evidence as to pricing on major projects, by which BBM set its prices, clearly involved competitive pressure from Pioneer and C & M, and pressure from customers. In none of those cases is there any evidence that BBM set its prices lower than was necessary to win the business it was seeking. In some cases, BBM refused to reduce its quotes to match its competitors. To observe, as a matter of objective fact, that BBM's prices were often lower than BBM's variable costs is inconclusive if the prices were fixed as a result of competitive market pressure.
In the present case, each of the foregoing recoupment hypotheses was plausible, according to the evidence. The market for CMP in Melbourne during the relevant time was already highly concentrated. There was an attempted entry by a more efficient corporation. This, as well as a prior downturn in demand, put pressure on prices. A number of corporations already in the market then joined in a price war. This tended to indicate that the prices previously charged were probably set at levels significantly higher than costs. In such a context, it is not implausible to suggest that one of the key players in the market, such as BBM, might engage in predatory pricing in order to achieve one, or more, of the foregoing objectives as a longer-term strategy.
The internal documents of BBM, referred to in detail by members of the Full Court, confirmed that this indeed was what BBM intended. Those documents do not merely contain generalised statements about the "crushing", "destroying" or "wiping out" of competitors. Sometimes, such statements may indeed be viewed as hyperbole, having only limited evidentiary value. However, BBM's plans are consistent, in their detail, with an economically rational strategy of predation engaged in by a major player in a market characterised by a small number of rivals.
What is the alternative hypothesis, advanced by BBM and its expert witnesses to meet the inferences that speak so powerfully from the internal documents of BBM? As I have indicated, BBM argued that the documents represented no more than corporate "boasting"[271]. But that explanation was rejected by the Full Court, correctly in my view, for the reasons stated above. Then it was argued that BBM's behaviour could be explained as an orderly competitive adjustment to changed conditions of demand for CMP. This argument proceeded on the basis that a decline in demand leads to excess of productive capacity in the industry, which results in a fall in prices. That fall leads, in turn, to the exit of some producers. This alteration in the number of participants in the market reduces industry capacity in line with consumer demand. This, in due course, produces some rise in prices.
[271]Boral (2001) 106 FCR 328 at 379 [181].
However, the problem with this "innocent" explanation of BBM's conduct in relation to the market forces in question, so far as this case is concerned, is that it is not consistent with BBM's actual behaviour during and following the price war. In particular, BBM's internal documents indicate that BBM itself expected the downturn in demand to be reversed[272]. Indeed, this was one of the reasons for BBM's decision to invest in further capacity at that critical time[273].
[272]Boral (2001) 106 FCR 328 at 372 [165].
[273]Boral (2001) 106 FCR 328 at 373-374 [172]-[174].
Most participants in the applicable market for CMP expected the downturn to be temporary. In such circumstances, one rational or logical response would have been for participants to use their capacity less intensively. They would have done this until some degree of recovery occurred. In particular, this would have been the preferred outcome for a stronger, vertically integrated corporation such as BBM. It had the access to financial resources to withstand the downturn without forcing prices down in the short term. But the attempt of some incumbents to maintain their respective sales as well as the entry of a new competitor (C & M), led to the price war that ensued. This is what created the appearance of competition that impressed the primary judge and now the majority of this Court. Respectfully, I regard it as a mirage.
According to the evidence, BBM did not at first respond in a "competitive manner" to the foregoing developments[274]. Instead, it maintained high prices. It was only when BBM began to lose a considerable part of its market share that it decided not only to regain that share but to retaliate against, and punish, those competitors that had instigated the price war and to force the exit of some of them. BBM's desire, unhidden in its internal documents, was not only the creation of a market that would be reduced to fewer (and mainly larger) players once the downturn was reversed. It was also to prevent future aggressive price wars of the kind that had necessitated its response. In this context, the references to a "stable" and "orderly" market mean a market in which there is no vigorous price-undercutting[275]. In other words no (or less) price competition.
[274]Australian Competition and Consumer Commission v Boral Ltd (1999) 166 ALR 410 at 421 [50]-[52]. See also at 421 [54] with reference to BBM's concern about the competitive pricing of other rivals.
[275]Boral (2001) 106 FCR 328 at 372 [164], [166]-[167].
In the Full Court, Beaumont J referred to a strategic planning document prepared in 1995 which described BBM's tactic to put pressure on the Melbourne market during a downturn "in order to precipitate a shake-out and subsequently consolidate our position" and the view expressed in that document that[276]:
"From a long term view this development presents the opportunity to break out of the cycle which has prevailed in Victoria over many years. [BBM] needs the capacity to supply the market through highs & lows (at a high market share 40 per cent +) to remove the ability of minor players to survive when the market turns up thus allowing them to play another day always at the expense of gross margins and market share. The coup-de-grace could have been delivered to 2 minor players in 1994 had [BBM] had sufficient productive capacity."
[276]Boral (2001) 106 FCR 328 at 373 [173] (emphasis added).
As I have pointed out, BBM's strategy of using the downturn in the market to impose discipline on the other (minor) participants, in order to deter competitive pricing, deter entry and return to a more "orderly" or coordinated market once the downturn was reversed, was entirely consistent with economically rational corporate behaviour by a "big" player in a concentrated market. It just happens to be behaviour that is proscribed by s 46 of the Act once the necessary statutory conditions, laid down by that section, are met by the corporation impugned as being in breach.
This conclusion is reinforced if one looks at the features of the relevant market. It was characterised by a small number of fairly large producers. The product was homogeneous, rather than differentiated. There were few non-price aspects upon which the rivals could compete. The prices offered and charged by the various corporate rivals were widely known in the market. There would be some, but comparatively small, brand loyalty and service considerations. Accordingly, trying to enforce disciplined or "orderly" pricing was one of the few ways by which a large player in the market could hope, in due course, to be able to earn supra-competitive profits. If this were attempted explicitly (as by horizontal agreements between the remaining market participants) it would be forbidden by other provisions of the Act[277]. However, properly advised corporations are scarcely likely today to fall into the mistake of such overt agreements. On the other hand, economic literature has long recognised that, in some markets, there is no necessity for explicit agreements between rivals in markets that seek to achieve such outcomes[278]. The fewer, and more similar, are the residual rivals in a concentrated market, the easier will it be for unexpressed coordination between them to exist, without the hint of any breach of those provisions of the Act that forbid overt agreements[279].
[277]The Act, ss 45, 45A, 45EA.
[278]See Posner, Antitrust Law, 2nd ed (2001) at 94.
[279]Hay, "Facilitating Practices: The Ethyl Case (1984)", in Kwoka and White, The Antitrust Revolution: Economics, Competition, and Policy, 3rd ed (1999) 182 at 189.
The foregoing reasons explain why the merger control provisions of the Act[280] are addressed, at least in part, to the avoidance of highly concentrated oligopolistic markets. Presumably, this is also a reason why the requirement to establish a breach of s 46 of the Act was altered in 1986, to delete the confinement of the application of the section to corporations that were "in a position substantially to control a market" and, instead, to apply it to corporations that have "a substantial degree of power" in the market. Viewing s 46 of the Act in the context of its place in the overall legislative strategy to respond to restrictive trade practices in Australia, and considering it in the light of its history, the application of s 46 to a case such as the present becomes clear.
[280]The Act, ss 50, 88, 90.
The build-up of capacity: Whatever may be the difficulties in markets such as that for CMP in Melbourne at the relevant time, in seeking to pursue a strategy of predatory pricing in order to oust, or deter the entry of, a competitor, there is no doubt that a "big" player, at least, could reinforce a "credible threat" to current and potential competitors by stepping up investment in capacity. A build-up of capacity might commit a corporation to produce an enhanced volume of output because it can do so, with its new capacity, at a low marginal cost[281]. This, in turn, would have the effect of indicating to actual, and potential, competitors that the corporation concerned will persist with its strategy. It would signal that, by its investment, the corporation is raising its own "barrier to exit" from the market[282]. Yet, at the same time, it is also signalling a new and greater determination to outlast existing competitors who choose to undercut prices and to deter any potential competitors who might be contemplating entry to that market. As the ACCC submitted in this Court, this is why BBM made sure that its decision to step-up capacity was widely known in the industry.
[281]Geroski, Gilbert and Jacquemin, Barriers to Entry and Strategic Competition, (1990) at 27-29; Tirole, The Theory of Industrial Organization, (1988) at 314-316. See also Dixit, "The Role of Investment in Entry-Deterrence", (1980) 90 Economic Journal 95 at 95-96 with reference to Spence, "Entry, Investment and Oligopolistic Pricing", (1977) 8 Bell Journal of Economics 534.
[282]Geroski, Gilbert and Jacquemin, Barriers to Entry and Strategic Competition, (1990) at 60-62.
The investment of a big market player in new equipment, of itself, may be perfectly innocent behaviour. Indeed, it could be rational conduct, appropriate to changing technology and market circumstances. The courts would hesitate to adopt any principle that would discourage such investment. It will commonly be to the advantage of consumers and the public more generally. They will normally benefit from the reduction in prices that typically follows the introduction of cost savings brought about by new technology.
Nevertheless, this is another example of apparently innocent corporate behaviour that may, in particular evidentiary circumstances, be consistent with predatory conduct of the kind that s 46 of the Act is designed to prevent and sanction[283]. The terms of s 46(5) of the Act reinforce this conclusion. In the present case, the ACCC did not complain, as such, about the build-up of capacity by BBM. Its complaint related, rather, to the timing of the decision in a period of excess capacity, coupled with the below cost pricing found and the evidence of other conduct on the part of BBM that strengthened the inference that it had made its decision when it did to "take advantage" of its market power for the proscribed purposes that the primary judge accepted BBM to have.
[283]Tirole, The Theory of Industrial Organization, (1988) at 323.
BBM's purposes and likelihood of recoupment: It is true, as the reasons of Gleeson CJ and Callinan J point out[284], that before this Court, the ACCC did not allege any violation of the Act based on actual collusion or tacit coordination ("conscious parallelism") between BBM and any other participant(s) in the market[285]. But in considering the economic rationality of corporate conduct, including ultimate or long-term recoupment (without which predatory pricing makes little sense), it is impossible to ignore entirely the potentiality of the market in which BBM operated to lend itself to such outcomes. Indeed, BBM's desire to avoid future price wars can only really be rationalised in terms of its expectation that the dynamics of this particular market would produce that consequence, if only BBM could rid itself (as it did) of a number of less resilient or price-cutting competitors.
[284]Reasons of Gleeson CJ and Callinan J at [97].
[285]See Trade Practices Commission v Email Ltd (1980) 31 ALR 53 at 61. In the United States context see Theatre Enterprises Inc v Paramount Film Distributing Corp 346 US 537 at 541 (1954).
In Brooke Group[286], after accepting that there may be other forms of recoupment which would be just as harmful to consumers as a monopolisation of the market, Kennedy J, writing for the Supreme Court of the United States, commented that the duty of the decision-maker was to look at the evidence adduced in the case in order to assess whether the alleged conduct had a reasonable prospect or likelihood of leading to such recoupment in the form of supra-competitive pricing. This was to be judged by reference to the realities of the market.
[286]509 US 209 at 230-232 (1993).
This citation brings me to an area illustrative of the mistake that can attend the unconsidered application of anti-trust analysis from other jurisdictions without attention to the difference in emphasis of the relevant legislative provisions. The United States provisions that would apply to conduct commonly described as "predatory pricing" include §2 of the Sherman Act (which is directed to a "person who shall monopolize, or attempt to monopolize"[287]) and §2 of the Clayton Act as amended by the Robinson-Patman Act (prohibiting price discrimination "where the effect of such discrimination may be substantially to lessen competition or tend to create a monopoly … or to injure, destroy, or prevent competition"[288]). As such, each of these provisions directs attention to the outcomes or effects of particular conduct. By way of contrast, the provision of the Act under consideration in the present proceedings, s 46, as presently framed, prohibits conduct on the part of a particular kind of corporation with specified anti-competitive purposes[289]. No reference is made to the effect, or likely effect, of such conduct either in the form of monopolisation or a substantial lessening of competition in the market. Such considerations, so far as they exist, are left to inferences that must be compatible with the statutory text.
[287]15 USC §2.
[288]15 USC §13(a) (emphasis added).
[289]Queensland Wire (1989) 167 CLR 177 at 205 per Toohey J. See also Corones, "The Characterisation of Conduct under Section 46 of the Trade Practices Act", (2002) 30 Australian Business Law Review 409 at 412.
The primary judge did not explain this difference in emphasis in adopting the United States approach to recoupment. Instead, his Honour made two comments relating to BBM's prospects for recoupment. First, he held that BBM persisted in selling its product below avoidable or variable costs for an extended period and "never thought that it could"[290] be in a position to charge supra-competitive prices. This presumably was a reference to BBM's subjective expectations. As such, it was a conclusion that appears glaringly improbable and directly inconsistent with the overwhelming and uncontested evidence contained in BBM's documentation. In modern litigation of this type electronic data, copies of emails, company records required by statute and other such objective materials combine to displace past dependence upon judicial impressions of particular witnesses, particularly in cases of this kind where the task of the decision-maker is that of deriving a purpose that can be attributed to a corporation made up of many actors.
[290]Australian Competition and Consumer Commission v Boral Ltd (1999) 166 ALR 410 at 442 [169].
For instance, the primary judge's conclusion is inconsistent with the repeated references in BBM's strategic documents to the expectation that once some of the rivals that engaged in price-undercutting were forced to exit, prices would drift up and profitability would increase[291]. It is also inconsistent with the finding that on a number of occasions BBM itself attempted to engineer such a rise in prices[292]. It is worth noting that once its objective of driving some of its rivals out of the market was accomplished, with Rocla and Budget ceasing operations by June 1996, BBM proceeded to raise its own prices and refused to match lower quotes in order to win major projects[293].
[291]Boral (2001) 106 FCR 328 at 372 [166], 374 [176], 375 [177].
[292]Australian Competition and Consumer Commission v Boral Ltd (1999) 166 ALR 410 at 425 [68], [72], 428 [86]-[87], 430 [98].
[293]Australian Competition and Consumer Commission v Boral Ltd (1999) 166 ALR 410 at 431 [103].
The primary judge also paid insufficient attention to the economic realities of concentrated markets supplying a homogeneous product. This is, at least to some extent, an objective inquiry. The fact that price competition had occurred between BBM and Pioneer during the price war and some personal hostility had surfaced between the officers of the two corporations[294] was by no means conclusive of the issue whether prices would have drifted up to supra-competitive levels if BBM's plan to rid the market of most of the other rivals had succeeded. Further, the primary judge made no reference to the vertical integration of the Boral group, which was one of the sources of BBM's power in the CMP market. From the evidence accepted by the primary judge it is clear that BBM's decisions were affected by the concern of the Boral group about its reputation in other markets in which it participated[295]. This may have made it possible for BBM to embark on an exclusionary strategy injurious to competition without assessing the likelihood of recoupment in the CMP market in Melbourne.
[294]Australian Competition and Consumer Commission v Boral Ltd (1999) 166 ALR 410 at 439 [154].
[295]Australian Competition and Consumer Commission v Boral Ltd (1999) 166 ALR 410 at 426 [75].
Secondly, the primary judge found that BBM "had no prospect of being able to recoup its losses by charging supra-competitive prices"[296]. Given the wording of s 46, it is not necessary to establish that as a result of the impugned conduct, recoupment in the form of supra-competitive prices was certain. Nor is it necessary to establish that there was a dangerous or high probability of such an outcome[297]. To require that would involve judges writing a provision about the effects of conduct into the section.
[296]Australian Competition and Consumer Commission v Boral Ltd (1999) 166 ALR 410 at 442 [169].
[297]cf Brooke Group 509 US 209 at 251-252 (1993) per Stevens J.
The primary judge made a further error, with respect, in his discussion of the relevance of recoupment. His Honour[298] adopted the following analysis[299]:
"A firm with a substantial degree of market power can move above the market price and not suffer a significant diminution in sales. If it chooses to sell below market price, or at a loss, or below avoidable cost, there are two possibilities: (i) legitimate non-proscribed business purpose or (ii) anti-competitive proscribed purpose. It will be anti-competitive if the firm has engaged in the conduct so that competitors will exit the market so that in due course it will more readily enjoy the advantages of market power and recoup its losses."
[298]Australian Competition and Consumer Commission v Boral Ltd (1999) 166 ALR 410 at 442 [167].
[299]Australian Competition and Consumer Commission v Boral Ltd (1999) 166 ALR 410 at 442 [166].
A number of criticisms may be made of this passage. First, as I have pointed out, in the United States jurisprudence, recoupment is treated as a preliminary issue. That is, if the structure of the market is such that recoupment is unlikely, then no inquiry needs to be entered upon into whether or not prices are below cost or otherwise too low. Secondly, in the present case, the primary judge found that BBM priced below variable cost for an extended period[300]. In such circumstances, Professors Areeda and Turner would infer both an anti-competitive purpose and a prima facie violation. Thirdly, if recoupment was relevant to discriminating between purposes that were prohibited under s 46 and those that were not, the primary judge expressly found that in formulating its pricing conduct, BBM had acted with a proscribed anti-competitive purpose[301]. In that context, given the structure and characteristics of the relevant market, the findings of the primary judge that BBM priced selectively and below avoidable cost for an extended period, and did so with a proscribed purpose, are a significant hurdle in the way of a conclusion that s 46 was not violated.
[300]Australian Competition and Consumer Commission v Boral Ltd (1999) 166 ALR 410 at 434 [119].
[301]Australian Competition and Consumer Commission v Boral Ltd (1999) 166 ALR 410 at 445 [189].
The members of the Full Court did not find it necessary to review the findings of the primary judge on the recoupment issue, as their Honours held that recoupment analysis formed no part of the application of s 46[302]. Before this Court, the ACCC similarly submitted that it was unnecessary for any reference to be made to the plausibility of recoupment in the form of supra-competitive prices in a claim under s 46 based on "predatory pricing". That submission has been rejected. As such, it does not present a bar to this Court's reviewing the recoupment analysis of the primary judge.
[302]Although Merkel J made reference to "an expectation of some recoupment by reason of higher prices and better profitability with fewer rivals": Boral (2001) 106 FCR 328 at 389 [226].
Despite the absence of a reference to recoupment in s 46, the question whether the impugned conduct could result in a market structure more conducive to supra-competitive pricing may be useful in the context of its application where the alleged violation involves low pricing, for the reasons outlined earlier[303]. It serves the purpose of distinguishing harm to competitors which is a result of the ordinary vicissitudes of market rivalry from the kind of harm that the statutory provision is concerned with. That concern is harm to the competitive process ultimately affecting the welfare of consumers. The issue of whether or not there is a plausible medium- to long-term recoupment scenario will therefore largely be tied up with the determination of market power in the context of the structure and characteristics of the market[304]. The capacity to engage persistently in exclusionary conduct, such as below cost pricing, which would be ruinous for a corporation subject to competitive constraints, will be a relevant indicator of the presence of market power.
[303]See these reasons at [408]-[413].
[304]AA Poultry Farms 881 F 2d 1396 at 1401 (1989).
Prospective application of s 46: The clear conclusion from the uncontested primary evidence, reinforced by the primary judge's findings about BBM's pricing and "purposes", is that BBM engaged in a variety of exclusionary or predatory conduct. This involved pricing below avoidable costs in terms that were selective and discriminatory. It involved pursuit of a market strategy designed, among other things, to put some of BBM's rivals out of business. In the events that occurred, it was a strategy that, in part, succeeded.
Yet, the rules against exclusionary conduct, of the kind with which s 46(1) of the Act is concerned, should obviously be capable of application before events later impugned by the ACCC have been fully played out[305]. This is so because the Act contemplates that corporations and their officers, and the ACCC, should be aware in advance of the kind of conduct that is prohibited and sanctioned by the section. It would not be satisfactory to suggest that a corporation, or the ACCC, must wait to see how things pan out. Otherwise, whether a breach of the section has occurred or not would depend upon whether, as a matter of evidence, one or more competitors had decided to leave the market or one or more had successfully entered the market. That would hardly represent an acceptable interpretation of s 46.
[305]Melway (2001) 205 CLR 1 at 10-11 [8].
The ultimate outcomes of exclusionary conduct will often be uncertain[306]. They will depend upon too many imponderables. In some circumstances, after the event, the results may not coincide with the original expectations and objectives[307]. Yet such conduct can, of itself, damage the interests of consumers. It can do so:
. by forcing the exit of equally or more efficient competitors; or
.by increasing the concentration of the market and making it more conducive to anti-competitive practices and outcomes; or
.by making the entry of new competitors into the market less attractive; or
.by strengthening the predatory reputation of the corporation engaging in such conduct.
Those were the reasons for the legislative prohibition of such conduct in s 46. The section should not be whittled away. Yet that, in my respectful view, is what the approach now taken by this Court will produce.
[306]Joskow and Klevorick, "A Framework for Analyzing Predatory Pricing Policy", (1979) 89 Yale Law Journal 213 at 217.
[307]Adams and Brock, "Predation, 'Rationality,' and Judicial Somnambulance", (1996) 64 University of Cincinnati Law Review 811 at 860-862.
Breach of s 46 was shown: BBM's conduct in the designated market during the period the subject of these proceedings was a clear response to the price wars and the unpleasant necessities of price-undercutting that had, for a time, been forced upon BBM by its rivals until it asserted its muscle in the market.
BBM set out, by its pricing strategy, to "drive … competitor[s] out of the market"[308]; to "reduce the number of masonry manufacturers"[309]; and to "make it more difficult for new entrants to gain a foothold"[310] – all in order to achieve "stability" and avoid the "merry go round of pricing"[311].
[308]Australian Competition and Consumer Commission v Boral Ltd (1999) 166 ALR 410 at 446 [190].
[309]Boral (2001) 106 FCR 328 at 376 [177].
[310]Australian Competition and Consumer Commission v Boral Ltd (1999) 166 ALR 410 at 446 [192].
[311]Boral (2001) 106 FCR 328 at 372 [166]-[167].
This was anti-competitive conduct. It was engaged in by a corporation. That corporation was clearly a big player in the particular market. It had a substantial degree of economic power in that market. It deliberately set out to act as it did. In doing so, it took advantage of its substantial power. As the primary judge found, at the time BBM had one or more of the purposes proscribed by s 46 of the Act. As the Full Court found, in acting as it did, BBM was in breach of s 46.
Conclusion and orders
When all the peripheral facts and sophisticated legal and economic analysis in this appeal are stripped away, what is the outcome that now follows from the approach of the majority of this Court?
The conclusion unanimously reached by three appellate judges in the Full Court of the Federal Court is set aside. The impugned "big" player, as its own records disclosed and the primary judge found, had the express purpose of deterring entry and eliminating certain competitors from the market, in part as a response to their earlier price-undercutting that had endangered a relatively placid market. By inference, the corporation was concerned that more such uncongenial competition would otherwise ensue. Its conduct reduced the number of market players effectively to three. The corporation's purpose was fulfilled to that extent. With the number of rivals reduced and the appellant's market share correspondingly increased, its market power was further consolidated. Short-term pricing sacrifices were made for long-term economic rewards. Inevitably, these would come at a probable cost to consumers. This is precisely the type of market conduct that s 46 of the Act forbids. Despite that, the corporation is now absolved because, it is said, it did not possess, and take advantage of, the requisite degree of power in the relevant market. Respectfully, I regard that conclusion as contrary to the reasonable inferences arising from the evidence. No error on the part of the Full Court is shown. I therefore dissent.
The appeal against the judgment of the Full Court of the Federal Court of Australia should be dismissed with costs.