"Take advantage of" does mean "use" - but still very difficult for the Commerce Commission to prove a misuse of market power

On 19 May 2006 the Commerce Commission formally warned Baycorp that its practice of charging independent debt collectors $5 to load credit default information on Baycorp's consumer credit database was a "potential breach" of section 36 of the Commerce Act. This is the first public warning on section 36 that the Commission has given under the amended section 36 (amended in 2001) and since the Privy Council's decision in Carter Holt Harvey v Commerce Commission. 1

Counterfactual analysis remains in place

Section 36 of the Act prohibits a person that has a substantial degree of power in a market from taking advantage of that power for one of three, proscribed, anti-competitive purposes.

The 2001 amendments to section 36 reduced the threshold at which section 36 applies from firms with dominance to firms with substantial market power. This change increased the number of firms to which the section applies. However, until the Commission published its investigation report into the Baycorp case there had been little discussion from the Commission or New Zealand courts on what would be required to establish that a firm with market power had taken advantage of that power. The Commission's approach in the Baycorp case (and previously in its investigation into an alleged breach of section 36 by Air New Zealand) confirms that use and taking advantage are synonymous and, therefore, that the counterfactual analysis established prior to the 2001 amendments in Telecom v Clear (and used by the Australian courts in a number of cases) remains appropriate.

Accordingly, while section 36 might apply to more firms now, it appears no easier for the Commission to establish the necessary link between the market power and the conduct at issue (the Baycorp case notwithstanding).

Background to the report

Baycorp operates both a debt collection business and a credit reporting database in which negative information on consumers' and businesses' credit history is recorded. When debt collectors are engaged to collect a debt they load default information on the database. Because retailers and financiers use this database to conduct credit checks, the loading of default information has two effects:

• it increases the accuracy of the database and, hence, the value of the database to retailers and financiers; and



• it greatly increases the debt collector's chance of returning the debt to his or her financier or retailer client because another retailer is unlikely to advance further credit.

The investigation arose from Baycorp's move in 2001 to charge independent (i.e. non Baycorp) debt collectors $5 to load default information on its database.

Substantial degree of market power

At the relevant time (2001) Baycorp did not face any competition from other consumer credit database suppliers. Accordingly, the key issue was whether Baycorp was constrained by the potential for new entry, which the Commission assessed by applying the same LET test that it applies in its merger clearance analysis. The Commission concluded that entry did not satisfy the LET test because a new entrant would need a comparable consumer credit database in order to be able to effectively compete with Baycorp.

Taking advantage of market power

The Commission stated that Baycorp would be said to have "taken advantage of" its market power if it would not have imposed the $5 fee in the manner it did if it had faced competition from another comparable database provider. This is the counterfactual test reaffirmed by the Privy Council in Carter Holt under the old "use" of a dominant position test. 2

The Commission's analysis proceeded in two stages.

• The Commission concluded that Baycorp would want independent debt collectors to use its system in a competitive market because the most complete and accurate database would have a competitive advantage.
  
  
• Given that, would Baycorp charge independent debt collectors $5 if there was another comparable database available? The Commission concluded that in a competitive market the $5 fee would not be sustainable and in fact no fee would be charged.

The basis for the Commission's conclusion that in a competitive market the $5 would not be charged was that some debt collectors had been deterred from loading default information and that the $5 fee was far in excess of the marginal cost of loading default information.

We are not convinced by this logic: the fact that some debt collectors were deterred from loading default information by the $5 fee does not mean that in a competitive market a $5 fee is not justified. 3

Furthermore, as recognised by the Commission itself, consumer credit databases have many characteristics of a two-sided market. In that situation it is not self evident that Baycorp would not charge a loading fee greater than the marginal cost of loading default information in a competitive market.

Unfortunately, this decision creates considerable uncertainties for vertically integrated firms who supply products to their downstream competitors, given the Commission's focus on the level of charge imposed and the comparison of that charge to, seemingly, a perfectly competitive benchmark (i.e. price equal to marginal cost). Our view is that the correct comparator is what might be described as a workably competitive market (i.e. where a firm has slightly less than a substantial degree of market power) and what price could be sustained in that market.

 

1 The Commission terminated another investigation into an alleged breach of section 36 by Air New Zealand following its entry onto certain provincial New Zealand air routes in competition with Origin Pacific Airways with a finding that Air New Zealand was at all times acting competitively and lawfully.

2 And cited by Australian courts as relevant to determining a taking advantage under section 46 of the Trade Practices Act.

3 Such a conclusion appears to implicitly assume that the loading of each individual default information is of equal value (i.e. there are constant returns to loading default information). If there were diminishing returns, then the $5 might be justified if only an immaterial number of debt collectors were deterred from loading default information, so long as that an immaterial number did not undermine the integrity of the database.

Enquiries and information

For more information on any of the cases, articles and features in Competition Update, please contact one of our team:

Phil Taylor, Partner; Jenny Stevens, Senior Associate; Torrin Crowther, Senior Associate; David Blacktop, Senior Associate