How worried should we be about predatory pricing by big business?

Competition: healthy. Pricing policies designed to drive rivals out of the market: not so much.

Three experts discuss the risk predatory pricing poses to smaller players in business.

While competition is healthy for the economy and good for consumers, pricing policies designed to drive rivals out of the market can have the opposite effect.

Michael McCormack

Federal minister for small business

Michael McCormackIn March this year, the Coalition government announced it would amend section 46 of the Competition and Consumer Act, protecting genuine competition in Australian markets in the long-term interests of Australian consumers.

Amending section 46 in this way was one of the recommendations of the Harper Review of competition policy last year.

Predatory pricing is where a large, powerful firm deliberately reduces its prices below the supply cost, with the purpose of hurting a competitor or even driving them out of the market.

It is not just aggressive discounting – which is actually good for consumers. It is a deliberate strategy to keep prices below cost long enough to undermine competition, and then put up prices later on to recover the costs. 

The misuse of market power provision of the competition law, otherwise known as section 46, is designed to catch out predatory pricing, but many people have questioned how effective it really is. For example, it requires proof that a large firm has “taken advantage” of its market power, which doesn’t distinguish pro-competitive from anti-competitive conduct in a useful or predictable way.

The Australian Competition and Consumer Commission (ACCC) takes predatory pricing very seriously and encourages people to come forward if they think it’s going on. 

The government takes it very seriously, too, and that’s why we’re strengthening and better targeting the law. 

"The government takes it very seriously, and that’s why we’re strengthening and better targeting the law." Michael McCormack

With a more effective section 46, big, powerful firms won’t get away with behaviour designed to harm competition in Australian markets, which ultimately hurts consumers.

Kate Carnell

Australian small business and family enterprise ombudsman

Kate CarnellIt’s no secret that bigger players – whether it be in the retail, farm, manufacturing, construction, transport or grocery sector – have the ability to use their market dominance to artificially lower the price of goods or services and destabilise the marketplace. 

Ultimately, smaller businesses – who are often already struggling to maintain market share – are squeezed out, which of course leads to less choice, less competition and potentially a return to higher prices down the track.

So it’s not only small businesses that should be concerned about predatory pricing; consumers, too, should be worried about this sort of behaviour and the impact it will have on their household budget.

More than 97 per cent of businesses in Australia are small businesses; they employ more than 4.5 million people and are fundamental to the health of the overall economy.

Importantly, small businesses are critical drivers of competition and diversity, so it’s vital Australia has a strong legal framework that allows smaller operators to compete on their merits and on a more level playing field.

The Australian Competition and Consumer Commission, therefore, needs effective tools to be able to deal with unilateral anti-competitive conduct, such as predatory pricing. 

"Consumers should be worried about this sort of behaviour and the impact it will have on their budget." Kate Carnell

The reforms promised by the Turnbull Government in relation to misuse of market power are critical in this respect. I’ll certainly continue to work closely with the government to advocate for policy and legislation that allows small businesses to grow, thrive and employ well into the future.

Professor Graeme Samuel

Fellow at the Monash Business School

Professor Graeme SamuelPredatory pricing is one of the more commonly misunderstood or misinterpreted principles of competition policy. Predatory pricing occurs when a business with substantial market power prices its products at a level designed to drive competitors out of the market. 

Where the concept is misunderstood is in the context of small businesses and their role in a market dominated by a few large businesses that, by the application of economies of scale, are able to price products at a level that makes it difficult or impossible for smaller businesses to compete.

Supermarkets retailing home-brand milk at $1 a litre is often described as predatory pricing, because it contributes to lower prices being paid to dairy farmers – it is not. 

Selling products at low prices is a clear immediate benefit to consumers. And if it is part of the normal competitive process reflecting efficiencies and economies of scale, it has a real consumer benefit.

But if it constitutes pricing policies designed to drive competitors out of the market, the longer-term consequences may be significantly anti-competitive and thus contrary to the interests of consumers. 

"We need to be cautious in attacking the pricing policies of large businesses as predatory." Graeme Samuel

We need to be cautious in attacking the pricing policies of large businesses as predatory. Actions taken to limit or prevent competitive pricing by large business may well advantage small business but act to the detriment of consumers – for whom competition is intended to benefit.

On the other hand, deliberate predatory pricing designed to drive competitors out of a market may have short-term advantages for consumers, but longer term may reduce the competitive dynamic and thus cause considerable harm to consumers.

Professional Development: CPA Q&A. Access a handpicked selection of resources each month and complete a short monthly assessment to earn CPD hours. Exclusively available to CPA Australia members.

Michael McCormack
Michael McCormack was appointed minister for small business after the July federal election. He worked as a journalist and newspaper editor for 21 years before launching his own media and publishing business in his New South Wales home town of Wagga Wagga.

McCormack entered parliament in 2010 as a member of the National Party and served as parliamentary secretary to the finance minister after the 2013 election. He also served as assistant minister to the deputy prime minister, and earlier this year was appointed assistant minister of defence.

Kate Carnell
Kate Carnell was appointed the inaugural Australian small business and family enterprise ombudsman in early 2016 after serving as CEO of a number of organisations, including the Australian Chamber of Commerce and Industry, beyondblue, the Australian Food and Grocery Council, the Australian General Practice Network and the National Association of Forest Industries

Carnell ran her own small businesses for 15 years before becoming ACT chief minister in 1995 for five years. She was appointed an Officer of the Order of Australia in 2006.

Professor Graeme Samuel

Graeme Samuel is a fellow at Monash University’s Business School, chair of the Monash Business School Business Advisory Board and co-director of the Monash Business Policy Forum. He has held a number of roles in public life, including former chairman of the Australian Competition and Consumer Commission. He was appointed an Officer of the Order of Australia in 1998 and elevated in 2010 to Companion of the Order of Australia.

Like what you're reading? Enter your email to receive the INTHEBLACK e-newsletter.
September 2016
September 2016

Read the September issue

Each month we select the must-reads from the current issue of INTHEBLACK. Read more now.