Producers and their distributors – When are they in competition?

Australian Competition and Consumer Commission v Australia and New Zealand Banking Group Ltd [2015] FCAFC 103; and

Flight Centre Limited v Australian Competition and Consumer Commission [2015] FCAFC 104

In two similar cases, the Full Court of the Federal Court has clarified the analysis of competition between a producer who retails its own product and brokers or agents who retail that product and the products of the firm’s competitors.

Each case concerned allegations by the Australian Competition and Consumer Commission that the firms engaged in conduct with the purpose, or effect or likely effect of fixing, controlling or maintaining a discount, allowance, rebate or credit (known as price-fixing) under s 45A of the Trade Practices Act 1974 (Cth).  That Act is now referred to as the Competition and Consumer Act 2010 (Cth) and s 45A is repealed, replaced by the cartel conduct provisions in Part IV, Division 1.  The Court’s analysis of whether firms are competitive with each other is equally relevant under the cartel conduct provisions.

In Australian Competition and Consumer Commission v Australia and New Zealand Banking Group Ltd [2015] FCAFC 103, the critical issue was whether a bank, when providing advice and assistance to consumers concerning loans made through its branches, was in competition with mortgage brokers in the supply of loan arrangement services.  The bank had sought to cap the refund that a mortgage broker could offer to its customers.

In Flight Centre Limited v Australian Competition and Consumer Commission [2015] FCAFC 104, the critical issue was whether an airline, when selling flights directly to consumers, was in competition with a travel agent in the supply of distribution and booking services.  The travel agent had sought to stop airlines from offering flights to consumers at prices that were less than the nett fair that the airlines made the flights available to the travel agent plus the travel agent’s commission or margin.

In each case, the Court held that the firms were not competitive with each other and therefore they had not contravened the price fixing provisions.

It is only when the relevant products or services are properly identified that it is possible to determine or define the relevant market or markets in which allegedly competitive firms operate.  The Court emphasised the importance of properly characterising of the relevant services by reference to their economic and commercial reality rather than artificial economic analysis.

Market definition is simply an analytical tool for determining whether the relevant conduct was anti-competitive in contravention of the Act.  It must be based on findings of fact and not merely economic opinion.  It must accurately and realistically describe and reflect the interactions between, and perceptions and actions of, the relevant commercial community.

In that context, the Court explored the role of economic expert evidence.  An expert may assist the Court by expressing what the facts reveal to him or her as an economist and what it reflects to him or her about underlying economic theory and its application.  The economist may also have a role in ordering, categorising and explaining the primary assumed facts if that is based on the use of the economist’s specialised technique of thinking.

In ACCC v ANZ Group, the Court found that it was artificial to characterise the provision of advice and assistance by bank officers in relation to loan products as the provision of services in a market separate and distinct from the market for the supply of the loan products themselves.  Those services were no more than conduct ancillary to the sale and distribution of the bank’s loan products.  It was significant that any such services provided by the bank to consumers could only relate to its own loans, while similar services provided by mortgage brokers could concern loans available from other banks and financial institutions.

In Flight Centre v ACCC, it was critical that there was an agency agreement between the travel agent and the airline, under which the travel agent supplied its booking services to the airline, even though the consumer received the benefit of them.  The Court found it was artificial to characterise the activities of an airline in selling a flight directly to a consumer as the provision of a booking service to itself, in competition with a travel agent providing booking services to the airline under the agency agreement.

There was also no evidence that the airline had chosen to sell flights directly to consumers in response to any “price” charged by the travel agent and so there was no evidence of substitutability of the airline’s and travel agent’s respective booking services.  And, similarly to the ANZ Group case, it was significant that booking services provided by the airline to consumers could only relate to its own flights, while booking services provided by the travel agent could concern flights available from other airlines.

Neither of these decisions was a rejection of any aspect of economic theory involving functional analysis, separate economic units or vertical and horizontal relationships.  There was no suggestion, in principle, that a vertically integrated firm cannot compete with non-integrated firms or that a producer that distributes directly to consumers cannot compete with other firms engaged in alternative distribution paths for its products.  Rather, each case was determined by findings of fact concerning the proper characterisation of the relevant activities of the firms.

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