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Trade Practices Compliance Manual

3. Restrictive trade practices

3.1 Background

The Competition Code or Part IV of the Trade Practices Act prohibits certain types of horizontal (eg between competitors) and vertical (eg between supplier and distributor) arrangements which are likely to have anti-competitive consequences. They also prohibit conduct by a person with substantial market power from misusing that market power.

Some trade practices are strictly prohibited regardless of their effect on competition and you should never engage in these practices. These practices are discussed in more detail below.

Other trade practices are only prohibited if they have the purpose or likely effect of substantially lessening competition. You should never engage in these practices without first obtaining advice from the Compliance Officer or the University Solicitor.

DO

  • ask the Compliance Officer or the University Solicitor if you are unsure whether specific conduct is prohibited, or whether the conduct is likely to substantially lessen competition.

3.2 Definitions of Some Commonly used Terms in Relation to Restrictive Trade Practices

Competition
In determining the level of competition the following factors should be considered:
  • the number, and size of the sellers
  • the ease with which new competitors may enter the market.
Test: if you raised prices and change nothing else would you lose sales? If the answer is yes, there is likely competition.

Agreement, Arrangement or Understanding
Agreements, arrangements or understandings need not be in writing, nor be legally enforceable. All there need be is communication with another person from which each person has an expectation of how the other will act.

A "nod and a wink" is sufficient.

Has the purpose...
The purpose need not be a sole purpose but must be a substantial purpose which will be inferred from the nature of the arrangement, the circumstances in which it was made and its likely effect.

Market
In determining the market, one question the courts ask is: If a supplier "were to give less and charge more: would there be much of a reaction? If so, from whom? If the response was a shift from one product to another, these products may be in the same market.

There are three dimensions to be taken into account when defining the market:

  • the product market:
  • the geographic market; and
  • the functional level.

Market Power
One way to determine market power is to look at the ability of a corporation to raise prices above product cost without rivals taking away customers.

Although a large market share may be evidence of market power, the ease with which competitors are able to enter the market should also be considered. When it is not rational or possible for new entrants to enter the market then a corporation may be said to have market power.

Product
Reference in this part means goods or services or both.

Substantial
The word "substantial" is used in a relative sense. It may mean "large or weighty", "considerable or big", and must be "real or of substance" and not "insubstantial or nominal".

3.3 Agreements with Competitors Restricting Dealings, Affecting Competition or in Relation to Prices, including Boycotts (Primary)

The Competition Code or Part IV of the Trade Practice Act places a prohibition on entering into, or giving effect to certain contracts, agreements, arrangements or understandings.

Arrangements or understandings do not need to be in writing, nor do they need to be legally enforceable.

The following arrangements with competitors are strictly prohibited. You must never make one of the following arrangements with a competitor:

  1. Boycotts (collective) or Exclusionary Provisions
    to exclude or limit dealings with some other person or class of persons (sometimes referred to as a primary boycott, refer to 3.8 Boycotts)
  2. Price Fixing
    to fix, control or maintain prices, rebates, discounts, allowances or credit terms.
  3. Collusive Tendering
    to agree that you will not submit a tender for a specific contract
  4. Market Sharing
    to divide or allocate the market, whether it be the geographic, product or other market.
You should avoid all contact with competitors and their employees which might amount to an agreement, arrangement or understanding, other than contact approved by senior management, and all such contact should be conducted in a formal setting.

You should record all meetings with competitors and if potentially infringing behaviour is discussed you must formally state that the University will not participate and notify the Compliance Officer.

Information regarding the University fees or prices must not be given to a competitor voluntarily. However, it is not prohibited to review or obtain lawfully copies of competitors' prices to obtain market information.

All other arrangements with competitors are prohibited if they have the purpose, or would have or be likely to have the effect of substantially lessening competition.

All arrangements with competitors have the potential to have the effect of substantially lessening competition. Therefore you should never make an arrangement with a competitor without advice from the University Solicitor.

Warning Signals

  • Any meeting, correspondence, discussion with a competitor.
  • Any communication with a competitor from which each may have an expectation of how the other will act (Remember, a "nod and wink" is enough!).
  • Any communication with a competitor regarding fees, costs, pricing.
  • Any communication with a competitor regarding other competitors.
  • Any communication with a competitor relating to dealings with third parties.
  • Any communication with a competitor relating to allocation of territory.
DO
  • act independently of competitors as a matter of preference.
  • ask the University Solicitor for advice before making arrangements with competitors. In particular, be aware of arrangements:
    • which establish particular markets (eg geographical areas, student markets) for each competitor
    • which aim at harming other competitors
    • which involve collusion of any kind.
  • you may meet with competitors. However, if issues relating to pricing, territories or boycotts arise you should object, leave the meeting immediately and publicise your leaving so that everyone will remember that you left at that point. Inform the Compliance Officer immediately.
EXAMPLES
(a) Vice-Chancellors of "A", "B" and "C" universities regularly meet to discuss educational matters. After the Government reduces funding by 20%, they commence discussions about possible efficiency savings. At one meeting, the Vice-Chancellors agree to rationalise operations. They allocate the more vocationally oriented engineering students to A University and the purely theoretical engineering students to B University. C University agrees to discontinue its engineering programs in exchange for a greater presence in the growing market for legal education.

This arrangement is unlawful. It is a market sharing agreement between competitors. An agreement has been reached that some universities will not offer certain courses and others will not cater for certain classes of students - an agreement to share the market.

It may, however, be sensible from an efficiency and effectiveness viewpoint for the universities to seek to have such an agreement legitimised by an approach to the ACCC for authorisation. Refer to 3.9 Authorisation.
(b) Universities and TAFE institutes find themselves in vigorous competition to provide computer courses. One university regularly undercuts other institutions to attract more students. Prevailing fees are insufficient to justify conducting these courses. Instead of discontinuing courses, two TAFE institutes and a university meet and agree to charge fees that will justify continuing. They agree to charge no less than $1,000 a course and not to undercut each other. These three institutions have breached the Competition Code and Part IV of the Trade Practices Act. It is an arrangement between competitors that fixes or controls prices.

In the same circumstances, these three institutions will not breach the law if one institution is the "price leader" and the other institutions simply follow the leader's price settings. It is lawful, even though all institutions arrive at the same price, because there is no agreement or understanding between competitors.

3.4 Exclusive Dealings

(i) Third Line Forcing

Exclusive dealing is strictly prohibited if it amounts to Third Line Forcing. You must never engage in this practice.

Third Line Forcing is providing goods or services to a person on the condition that the person buys another product from a third person.

It will also be Third Line Forcing if the University offers a discount or rebate on the condition that the customer or student buys another product from a third person.

You may recommend the product of a third person to a customer or student but you must not force such a product on a customer or student.

Warning Signals

  • Supplying products with conditions that restrict student/s customers from dealing with others
  • Supplying products with conditions that require students/customers to deal with others.
  • Supplying products with conditions that restrict the freedom of students/customers.
  • Any refusal to supply products.
DO
  • recognise the high danger of this prohibition. This practice is strictly prohibited.
YOU MAY
  • recommend a third person's products to students and customers where it is commercially advantageous.
DO NOT
  • supply products to students or customers on the condition that the students or customers purchase another product from a third person.
EXAMPLE
"A" University negotiates a discount on all books purchased from Academic Bookshop Pty. Ltd., which is not part of the University. The bookshop agrees to the discount only if all students at "A" University buy their books there. "A" University enrols students on the condition that they buy their books from that particular bookshop. The University, the negotiating officer and other employees who knew about the arrangement may be accused of Third Line Forcing.

(ii) Other Exclusive Dealings

Exclusive dealings (other than Third Line Forcing discussed above) are only prohibited if they have the purpose or likely effect of substantially lessening competition and include the following practices:

  • Exclusive Purchasing
    Supplying a product to a student/customer on condition that the student/customer accepts a restriction (total or partial) from buying another product from a competitor.
  • Exclusive Selling
    Acquiring a product from a supplier on condition that the supplier accepts a restriction (total or partial) from selling the same product to third parties, or in a particular geographic location
  • Tying Arrangements
    Supplying a product to a student/customer on condition that the student/customer will buy further products from the supplier
  • Resale Restrictions
    Supplying a product on condition that the customer accepts some restriction on the right to re-supply products to particular persons or in particular geographic areas.
Note: It would also be Exclusive Delivery if
  • you refuse to supply or acquire a product because the customer will not accept a restriction described above
or
  • you offer a discount or rebate if the customer will accept a restriction described above.
DO
  • seek advice from the University Solicitor to determine whether an exclusive dealing may be regarded as having the purpose or effect of substantially lessening competition.
DO NOT
  • attempt to impose conditions on other people which limit or restrict their freedom to sell to, or buy from, third parties any products (including those that are supplied) without considering the impact on competition.

3.5 Resale Price Maintenance

The following trade practices are strictly prohibited. All requirements, threats or inducements to prevent discounting by resellers are strictly prohibited.

While Resale Price Maintenance is probably of limited application in relation to universities, you must never engage in the following practices:

Threatening to withhold the supply of goods to a customer if the customer does not accept a minimum selling price.
Implying that a rebate or other benefit will be withheld if goods are discounted by a customer;
Offering a special deal to a customer to induce them not to discount goods;
Requiring a customer to display or advertise goods at the recommended retail price and no other price.

YOU MAY

  • use a recommended resale price (be cautious).
  • specify the selling price of goods which are stocked by a customer on a consignment basis, as the supplier is still the owner of goods.
DO
  • allow your customers freedom to set their own price.
DO NOT
  • set a minimum selling price
  • offer a benefit or discount to a customer to induce the customer not to discount the price of goods.
EXAMPLE
"A" University publishes a widely read journal. It supplies that journal to various booksellers, at the same time specifying that they must retail the journal for $10.00 per copy. Representatives of the University make it clear to the booksellers that it will not provide further supplies unless the booksellers maintain the suggested retail price. The University and the employees who negotiated this arrangement may be accused of resale price maintenance.

3.6 Misuse of Market Power

If the University has a substantial degree of power in a market, it is strictly prohibited from taking advantage of that power to:

  1. substantially damage or eliminate a competitor in any market;
  2. prevent a person from entering any market;
  3. prevent or deter a person from engaging in competitive conduct in any market.

High Risk Conduct

  • Predatory Pricing - aggressively setting fees to beat a Competitor, particularly where pricing is at or below cost, or to keep a competitor out of the market.
  • Refusal to Supply - refusing to deal with a customer because the customer also deals with the supplier's competition.
Warning Signals
  • Possession of market power
  • Pricing below cost
  • Unjustifiably refusing to supply
DO
  • seek advice from the Compliance Officer or the University Solicitor before introducing a trading strategy aimed at harming competitors.
  • realise that in order to breach these provisions the person must take advantage of its market power. Conduct which is solely designed to improve efficiency, or service quality, will rarely, if ever break the law - but it can.
DO NOT
  • embark on aggressive price cutting in market segments, particularly if the fees are set at an unrealistic level close to or below cost, without advice from the University Solicitor.
EXAMPLE
"A" University may try to increase its market share in the short course market by offering corporate customers computer courses at fees which do not cover the total cost of conducting the courses. Such conduct might drive other competitors out of business and may be seen as predatory pricing, even though the University maintains that it was merely "developing its relationship with industry".

3.7 Mergers

The University is prohibited from acquiring shares or assets if the acquisition would have the effect or is likely to have the effect of substantially lessening competition.

DO

  • seek advice from the University Solicitor if consideration is being given to acquiring shares in a company or assets of any person.
DO NOT
  • enter into an acquisition agreement for share capital or assets, or make a public announcement about a proposed acquisition before obtaining advice from the University Solicitor.
EXAMPLE
"A" University and two private language teaching companies compete for students. They decide that they can increase profits through rationalisation. The companies merge with the University and operate out of the University's Language Centre thereby closing the only other language teaching locations in the area. The merged operation uses a single language teaching strategy and discontinues the special corporate service previously provided by one of the companies. There is then a serious question as to whether the merger will substantially lessen competition for language centres in the region. The answer will again depend on the definition of a market - whether it is a local, metropolitan or State wide geographic market.

3.8 Boycotts (Secondary Boycotts)

The Trade Practices Act prohibits two or more persons engaging in conduct that hinders the supply of goods or services by a third person to a fourth, or acquisition of goods or services by a third from a fourth person if the conduct is for the purpose and would have the likely effect of substantially lessening competition.

Corporations, individuals, and organisations including trade unions can be caught.

3.9 Authorisation

Upon application by a University or body representing a group of Universities, such as the AVCC, the ACCC has the power to authorise some restrictive trade practices which are otherwise prohibited.

Authorisation may be sought for:

  1. provisions in contracts, arrangements or understandings or covenants affecting competition;
  2. price fixing arrangements
  3. exclusive dealing;
  4. mergers and acquisitions;
  5. exclusionary provisions (primary boycotts);
  6. boycotts (secondary);
  7. resale price maintenance.
In respect of 1, 2 or 3 above (except Third Line Forcing), the ACCC will not grant authorisation unless it is satisfied the contract or conduct would result in a benefit to the public and that the benefit would outweigh the detriment to the public constituted by a lessening of competition.

When an application is made in relation to an exclusionary provision, a boycott (secondary), resale price maintenance, third line forcing or a merger, the ACCC must be satisfied that in all circumstances the provision or proposed conduct would result in such a benefit to the public that it should be allowed.

Authorisation is not available for misuse of market power.

Any request for authorisation must be made by the Vice-Chancellor. As authorisation is expensive and difficult to obtain, such a request should be seen as an exceptional, rather than a routine, step.

3.10 Notification

A corporation may file a notice with the ACCC and obtain statutory protection in relation to trade practices which amount to Exclusive Dealing which would otherwise be in breach of the Trade Practices Act.

Upon lodging a notification, the corporation's conduct is deemed not to have a substantial lessening effect on competition for the purposes of the Trade Practices Act. However, statutory protection can be withdrawn if the ACCC is satisfied that the conduct is likely to have the effect of substantially lessening competition and either:

  1. no public benefit flows from the conduct or
  2. any resulting public benefit would not outweigh the public detriment constituted by the lessening of competition.