Appendix A - Compliance with the Commerce Act

This Appendix has been written by the Commerce Commission for the purpose of supplying information to the passenger transport industry on compliance with the Commerce Act. It is a guide only and in cases of doubt parties should refer to their professional advisers.

A.1 Introduction

The purpose of the Commerce Act is to promote competition, in markets within New Zealand, and to ensure that as government regulations are removed, participants in the marketplace do not impose new restraints on competition.

The Commerce Commission investigates alleged breaches of the Act, and where appropriate seeks Court action. Penalties of up to $500,000 (for individuals), and $5,000,000 (for companies), may be imposed by the Court where breaches of the Commerce Act occur.

A.2 Restrictive Trade Practices

Although the prohibitions set out in the Act are both comprehensive and complex, the golden rule to be observed is:

A company cannot combine with competitors to raise or fix prices, to exclude or restrict competition in a market, and secondly, a person in a dominant position cannot use that position to deter, restrict or eliminate competition.

Practices which may breach the Act include:

1. ENTERING INTO CONTRACTS, ARRANGEMENTS OR UNDERSTANDINGS THAT HAVE THE PURPOSE OF EFFECT OF SUBSTANTIALLY LESSENING COMPETITION (SECTION 27).

Practices that may be subject to scrutiny under this section include:

1. Output arrangements between competitors, including arrangements to promote, or advertise, terms or conditions of sale, product quality, servicing, hours of business and the like

   Any formal, or informal arrangement between competitors is likely to breach the Act, for example, servicing arrangements of equipment/vehicles, between persons in competition would be considered under this section.

2. Territory allocation agreements between competitors

   Any formal, or informal arrangements between competitors regarding, for example, timetables or areas of operation (ie two bus companies cannot decide between themselves, where they will each operate).

3. Price fixing between competitors (including collusive tendering)
   Persons in competition with each other may NOT come to any formal or informal arrangements to set a uniform price for a product or service, nor must they arrange between themselves to submit a common tender price for a contract.

To avoid actions being construed as price fixing arrangement the following should be avoided:

• Meeting with competitors and discussing prices. "Secret" meetings are never quite as secret as one might suppose. If competitors indicate plans concerning competition, avoid agreeing with them, or doing what is indicated. In fact, it is probably better to excuse yourself and leave the room;
• Sending your price lists to a competitor;
• Co-operative schemes with a competitor (unless the exemptions to the Act have been checked out very thoroughly);
• Discussing the activities of a competitor (eg its price cutting) with other competitors;
• Deliberately following the prices of another competitor, unless good commercial reasons exist for so doing.

2.  RESALE PRICE MAINTENANCE, WHEREBY SUPPLIERS, ASSOCIATIONS OR OTHER THIRD PARTIES SPECIFY AND ENFORCE RESALE PRICES.

Resale price maintenance or (RPM) is prohibited by sections 37 and 38 of the Act. RPM is a practice that operates between one level of the market and another eg manufacturer to retailer. The basic thrust of RPM is to prevent a reseller discounting.

The legislation prohibits various conduct which is aimed at thwarting sales by a supplied party below the supplier's "specified price".

The specified price is critical to RPM. Without a specified price there is no RPM. This means that you should consider the desirability of abolishing "recommended price" lists. "Recommended" prices can easily become "specified" prices.

3. THE ACT ALSO PROHIBITS A PERSON OR ORGANISATION WHICH HAS A DOMINANT POSITION IN A MARKET FROM USING THAT POSITION FOR ANTI-COMPETITIVE PURPOSES, SUCH AS RESTRICTING ENTRY INTO A MARKET, PREVENTING OR DETERRING COMPETITIVE CONDUCT, OR ELIMINATING PERSONS FROM A MARKET.

A dominant position in a market is defined as one in which a company is in a position to exercise a dominant influence over production, acquisition, supply or price in a market. In assessing whether a company is in a dominant position the Commission considers:

1.  market share, technical knowledge and access to materials or capital of the company;
2.  the extent of any constraint on a company's actions from competitors or potential competitors; and
3.  the extent to which a company is constrained by the conduct of its customers or suppliers.

A full market analysis is required to establish the existence of market power. All persons in a market will have some degree of influence upon it.

Some actions that may breach the Act, in terms of abuse of a dominant position include:

1.  predatory pricing, whereby the company or person in the "dominant" position exploits that position by cutting the price of goods or services in the short term, thereby foregoing profits for the specific purpose of deterring competitive conduct by inflicting losses on or preventing entry to the market by rivals.
2.  refusal to deal, whereby a person in a dominant position refuses to deal, or more specifically refuses to supply another person.
3.  foreclosure of supply or outlets by buying up supplies in excess of need, to deprive competitors of essential materials.

For a breach of the Act to be proven, it is necessary to show that the action was taken for a specific purpose.

The purpose may be to:

1.  put a competitor out of business.
2.  discipline fringe companies, who may be a threat,
3.  warn off any possible new entrants.

Some contracts, arrangements or understandings may be authorised by the Commerce Commission before they are entered into or are given effect to. If the Commission is satisfied that the particular practice would have public benefit which would outweigh any detriments from the resulting lessening of competition, the practice may be authorised. Practices within this category are:

• Contracts, arrangements or understandings which substantially lessen competition if public benefit can be shown.
• Exclusionary provisions, which are arrangements between competitors which prevent or restrict trade with another person or persons.
• Price fixing, this is deemed to substantially lessen competition unless in the nature of a joint venture, a joint buying and promotion arrangement or price recommendations to group of more than 50 persons.

Practices which may not be authorised are:

• Use of a dominant position in a market to restrict entry, prevent competitive conduct or eliminate others.

For authorisation to be granted, applicants must apply to the Commission. The investigation of an application for authorisation involves several steps, including a market analysis, to establish whether substantial lessening of competition is outweighed by public benefit.

More information on the Commerce Act may be obtained from:

Commerce Commission Telephone (04) 471 0180 Fax (04) 471 0771

or

P O Box 2351 Wellington