Privy Council determines that Carter Holt did not engage in predatory pricing

The Privy Council’s decision in Carter Holt Harvey Building Products Group Limited v Commerce Commission1 acknowledges that businesses may respond to competition in a market where they hold a dominant position by decreasing prices, provided they do not engage in price cutting and later recoup losses by increasing prices.

By a 3:2 majority the Privy Council recently overturned both High Court2 and Court of Appeal3 decisions that Carter Holt Harvey Building Products Group Limited had, in 1994, used its dominant position in the South Island building insulation materials market in contravention of section 36 of the Commerce Act 1986 (the Act).

Section 36 of the Act prohibits use of a dominant position in a market for the purpose of restricting entry into a market, preventing or deterring any person from engaging in competitive conduct in a market or eliminating any person from a market.

Background

In the early 1990s, a division of Carter Holt Harvey faced competition from the introduction of wool insulation by another New Zealand producer and the entry into the insulation market by a subsidiary of an Australian company.

This increased competition meant that the division’s flag ship product, Pink Batts, was losing market share in the Nelson insulation market. As a response the division introduced a new wool/polyester blend insulation product, designed to compete with the other New Zealand producer’s wool insulation product.

The introduction initially had very little effect on the other New Zealand producer’s market share because the new product was priced at a premium. To overcome this, the Carter Holt Harvey division introduced a time-limited “2-for-1” offer.

High Court and Court of Appeal decisions

The Commerce Commission viewed the “2-for-1” offer as a predatory pricing strategy with the purpose of preventing or eliminating the other New Zealand producer from engaging in competitive conduct. The High Court agreed with the Commission and fined Carter Holt $525,000, which was upheld by the Court of Appeal.

Privy Council decision

The sole issue before the Privy Council was whether Carter Holt Harvey’s division had used its dominant position for an anti-competitive purpose. The High Court’s findings that it was in a dominant position in the South Island building insulation materials market and that the “2-for-1” offer was introduced for the purpose of preventing or deterring the other New Zealand producer from competing in, or eliminating them from, the market were not in dispute.

The Privy Council emphasised the need to apply the counterfactual test to determine whether a dominant firm has used its position of dominance. The counterfactual test for section 36 cases requires a court to consider “whether a hypothetical firm which was not in a dominant position but was otherwise similarly placed could rationally have acted as the dominant firm did”4. In the Privy Council’s view, the High Court and the Court of Appeal had failed to apply the test adequately in this case.

The Privy Council determined that a dominant company is able to cut prices provided that it does not use its position of dominance to engage in price-cutting with a view to recouping its losses by later raising its prices without fear of reprisals afterwards.

As there was no evidence that the Carter Holt Harvey division introduced the “2-for-1” offer with the view of increasing its prices at a later date, its offer was merely a response to competition in a market which it dominated, and was not the use of its dominant position for a purpose that was anti-competitive.

The Privy Council’s decision effectively aligns New Zealand competition law with that of Australia as outlined by the High Court of Australia in Boral Besser Masonry Limited v Australian Competition and Consumer Commission5.

1 [2004] UKPC 37 (PC)

2 Commerce Commission v Carter Holt Harvey Building Products Group Limited [2000] 9 TCLR 535 (HC)

3 Carter Holt Harvey Building Products Group Limited v Commerce Commission [2001] 10 TCLR 247 (CA)

4 Carter Holt Harvey Building Products Group Limited v Commerce Commission [2004] UKPC 37 at 49 (PC)

5 [2003] 195 ALR 609

Enquiries and information

For more information on any of the cases, articles and features in Commercial Quarterly, please email Rachel Gowing or call on 64 9 916 8825.