A wider prohibition against the misuse of market power now applies, after amendments to section 36 of the Commerce Act 1986 (the Commerce Act) came into effect early last month.
This article sets out an overview of the amendments and a summary of conduct that is at increased risk of breaching section 36, as identified by the Commerce Commission (the Commission).
Overview of the Commerce Act and section 36
The purpose of the Commerce Act is to promote competition in markets for the long-term benefit of consumers within New Zealand. Part 2 of the Commerce Act contains rules relating to “restrictive trade practices” including the prohibition of misuse of market power, as set out in section 36.
As of 5 April 2023, section 36 prohibits businesses with a substantial degree of market power from engaging in conduct that has the purpose, effect, or likely effect of substantially lessening competition in a market. It is not unlawful to hold substantial market power, but that power cannot be misused for anti-competitive purposes.
When assessing whether a business has substantial market power, the Commission will consider factors such as the existing and potential competition faced by that business and the power of buyers in that market.
What has changed?
The amendments broaden the scope of what conduct is likely to constitute misuse of market power.
Previously a breach of section 36 occurred where a business with a substantial degree of market power took advantage of that power for particular anti-competitive purposes (e.g., restricting entry of another person into that or any market). However, under new section 36, a breach will occur if a person with a substantial degree of market power engages in conduct which has the purpose, effect or likely effect of substantially lessening competition.
Section 58 of the Commerce Act has also been amended to allow the Commission to grant an authorisation to persons who wish to engage in conduct to which they consider section 36 would or might apply. An authorisation allows firms to undertake conduct that would otherwise breach the Commerce Act and can be granted when the Commission considers the public benefits to outweigh the competitive harms.
Why the change?
When passing amendments to the Commerce Act, Parliament noted there were concerns that the previous section 36 test was unpredictable, costly and complex to enforce and wasn’t effective at deterring or penalising some forms of anti-competitive conduct.
The amended section 36 has been designed to address these concerns and better enable the Commission to take enforcement action. The amendments also bring New Zealand’s test in line with the Australian misuse of market power test.
What types of behaviour may be prohibited under section 36?
The Guidelines identify the following examples of conduct considered to be at increased risk of substantially lessening competition in the market, where the relevant business has substantial market power:
- Refusal to supply: This is where a vertically integrated firm (a business that supplies goods and services to other business but also competes in downstream markets with those other businesses) refuses to supply goods or services to those other businesses (called downstream rivals) that they need to compete in the downstream markets.
- Price squeeze: This is where a vertically integrated firm sets prices in an upstream market in a way or at a level that prevents or hinders the downstream rival from competing in the downstream markets.
- Tying and bundling: Tying occurs where a supplier sells a good or service on the condition that the purchaser buys another good or service from them. Bundling involves a supplier offering two or more products for a lower price if the products are purchased together.
- Predation: This is where a firm with a substantial degree of market power makes substantial reductions in prices over a sustained period or at strategic times with the purpose, effect or likely effect of damaging a competitor, including exit or deterring entry.
See the Guidelines for further examples of conduct considered to be at increased risk of breaching section 36.
Special thanks to Partner Nick Crang and Senior Solicitor Lauren Gillies for preparing this article. For more information on how this change may impact you, please contact a member of our Public Law team.
Disclaimer: the content of this article is general in nature and not intended as a substitute for specific professional advice on any matter and should not be relied upon for that purpose.