Protecting Consumers

By Prof Allan Fels AO  

Outline: Consumer protection

The best form of consumer protection is competition.

Under competition, consumers are in charge. They choose what they want, at the best prices, quality, and service. They enjoy ‘consumer sovereignty’.

Facing competition, producers have to supply at their best prices, quality and service, and they have to operate at minimum cost.

Contrast that with monopolies.

They face no price competition. Their prices typically exploit consumers. They are under little pressure to minimise costs. They can relax about quality and service.

The ‘best of all monopoly profits is a quiet life’ according JR Hicks the Oxford economist.

As to innovation the old claim that monopolists invest their profits in R and D and innovate the most has been discredited. Think of Google, Facebook, Apple, Amazon, Microsoft, Tesla, Uber, and the new AI businesses. None of them was funded by monopoly profits. And think of the old monopolists e.g. Telstra (then Telecom Australia), and the American counterpart AT&T. Innovation in telecommunications only began when they were deregulated in the late 80s and early 90s. In general, it is the pressure on a competitor to equal or surpass their competitors that leads to innovation.

Case Study: TNT / Mayne Nickless Cartel

This is an old case, the first I was involved in, but good to illustrate what competition law is about. It involved:

• Price fixing
• A merger proposal
• Abuse of market power
• Misleading conduct
• (And hypothetically) entry barriers by legislation
• ACCC action

Case study

Price fixing and anti-competitive agreements

For many years, TNT and Mayne Nickless dominated the freight express industry (that is delivering packages and parcels all around Australia).

They had a secret agreement to share the market.

Some customers were allocated exclusively to Mayne Nickless, and some exclusively to TNT. It’s as if in this room, the left side belonged to Mayne, and the right side to TNT, and they agreed not to compete for the other’s customers. Customers were called ‘pets’.

The then CEO of Mayne Nickless was caught saying that ‘the customer is our enemy, the competitor is our friend’.

Suppose, however, a customer from Mayne asked TNT for a quote – TNT would make sure the quote was well above whatever Mayne’s price was.

Suppose, despite this, the customer switched, then the winner had a problem – they had to balance the gain by getting rid of/or ‘burning’ an equivalent customer. So, if say NAB switched, then the Commonwealth Bank would be informed that due to trade unions and oil prices, their price had gone up thirty per cent overnight.

They would be told that possibly their competitor might not have experienced the same cost increases and be able to offer better prices.

If that didn’t work, then an attempt would be made to ‘burn’ a customer. That is, their urgent overnight parcels from Sydney to Melbourne would arrive in Darwin and stay there for a few weeks.

This cartel arrangement, of course, enabled each firm to set high prices, provide poor service, and no incentive to cut costs.

Thanks to some whistleblowing the then Trade Practices Commission, now the Australian Competition and Consumer Commission (the ACCC), investigated and took over a year to get 150 witnesses ready for what was expected to be a very tough case. In the end the matter was not contested in court, and record fines were imposed on TNT and Mayne Nickless, and the door left open for some to get damages.

Such agreements between competitors to fix prices, to share customers, and so on, are illegal automatically under the competition law. These days there are criminal sanctions i.e. possible jail terms.

Egg prices are a current example of an alleged cartel. Australians buy on average 250 eggs a year per person or $7 billion in total. If the alleged cartel raised prices by ten per cent the harm to consumers would be perhaps $200 million or more a year over the alleged four years of the cartel.

Mergers

Soon after the case, there was an outbreak of competition. But the two firms approached the ACCC and said that massive costs of duplication could be saved if they merged. There’d be major efficiencies, they could achieve scale economies and become a national champion. They could then compete internationally. This is not untypical claim for some mergers. The reasons given don’t always match the real reason: to eliminate competition. Anticompetitive mergers are prohibited under our competition law.

Abuse of market power

Some players decided to enter the lucrative market and compete. The two firms employ private detectives to track these new players and their potential customers.

Having identified the customers, they then made very low price offers. Say it cost $50 for a parcel to come from Sydney to Melbourne, they’d offer a price of $20 to eliminate the competitor. That’s also illegal: predatory pricing, pricing well below cost simply to eliminate a competitor.

There are other things that monopolists can do to keep out new competitors in breach of the abuse of market power provisions of the Act and that can attract fines and penalties and damages.

There is a difficult line to draw between legitimate and illegitimate price competition. In my time we lost a case on predatory behaviour against Boral in the High Court and won against Safeway/Woolworths and also against the record companies.

Misleading behaviour

Competition between the firms spurred more competitive activity. In those days delivery was by truck, or train. One firm decided to publicise air-speeded quick delivery especially by plane from Sydney to Melbourne. We were suspicious. We decided to avail ourselves of the service. We had several packages for delivery.

Included in them was an altimeter, which measured how far off the ground the packages got. On delivery, it became apparent that the firms in question were using very low-flying aircraft indeed that never got more 20 feet above ground level. That’s misleading and deceptive conduct, and we took action there. Misleading and deceptive conduct can hinder the operation of competitive markets, as well as being unethical and unfair, especially to honest competitors.

Government entry restrictions

Let’s suppose that the firms, feeling the heat, went to the government, said too many jobs were being lost they’d have to leave the industry because of lack of profits. The only solution was for the government to introduce a licensing program under which firms could only operate if they met certain pre-qualifications, which would be determined by industry board and experts. This would have stopped competition from new players – and is clearly anti-competitive. It is an example of how government actions can restrict competition. Licensing can protect consumers but harm competition.

Import Competition

It is worth mentioning that import competition can be tremendously important. Sometimes people say that there are only one or two suppliers in Australia and therefore there is a lack of competition. However, in some of those cases import competition plays a key role. It needs to be factored into any discussion of competition.

Role of the ACCC

The role of the ACCC is to apply without fear or favour the competition and consumer laws regarding price fixing and other agreements between competitors, anticompetitive mergers and abuse of market power. It has a kind of policing role. It has grown to be quite a large organisation with about 1800 people. Its current head is Gina Cass-Gottlieb.

It combines competition law, consumer law, regulation of some infrastructure monopolies especially in the field of telecommunications e.g. the NBN and some regulation in the fields of energy and transport.

It also deals with laws involving codes of conduct that protect vulnerable consumers and small business e.g. laws about unconscionable conduct and unfair contracts and also matters involving codes of the conduct. It is sometimes said that it’s a group of unelected people now answerable to anyone. It is true that it is a powerful body, however, it cannot affect anyone’s legal rights involuntarily – that is without a court decision and a court order. So, its scope is limited to what parliament prescribes in legislation – it can’t go further. And frankly that’s a good way of dealing of very contentious issues and not leaving matters in the hands of politicians.

The ACCC has an extremely high media profile by any regulator standards whether in Australia or globally. Although business people do not like it, it is justifiable in terms of accountability to the public as to how it exercises its power. Publicity and education helps achieve much better compliance by business and better understanding by the public. It educates business, consumers and the public about law and about what can and cannot be done lawfully and it is also makes it more powerful and able to resist directly and indirectly to business pressures against it.

Competition Policy (NCP and Hilmer)

Governments can seriously restrict competition in many, many ways.

These include entry restrictions, licensing restrictions, minimum prices, and standards designed to keep out new players, and so on.

This was the subject of the National Competition Policy, inspired by the Hilmer Report, and is an important part of competition policy.

Recently, it has been revived, but it is not terribly strong.

Consumer Protection Policy

Competition does not work if consumers are misinformed.

Coles and Woolies in a recent case study – most of you would know about that – Coles false discounts case. In essence if either of those businesses were to raise prices say from five dollars to six dollars, they would effectively raise the price briefly to seven dollars – sometimes just for three or four weeks – and then they would reduce the price back from seven dollars to six dollars and then claim that there was a big discount on the price fall.

The court has recently concluded that this is misleading and deceptive. The fact that it’s literally true that they were reducing prices from seven dollars to six dollars does not mean it was not misleading. An interesting issue is how long the higher price of seven dollars must be charged before it is not misleading to cut the price to six dollars. The court seemed to think that twelve weeks at a high price of seven dollars was enough but in fact the case was triggered because they changed from twelve weeks to four weeks’ notice.

Unconscionable Conduct

Unconscionable conduct is a protection for vulnerable consumers and for small business. The original High Court case involved a Greek grandmother in her mid 80s. She was persuaded by the bank to give an unconditional guarantee so that the bank would invest in her son’s business. The sons business collapsed and the bank required her to pay up. She won the unconscionable conduct case because the bank in accepting her guarantee failed to tell her that it was their assessment at the time that her son was certain to fail in business.

There have also been unconscionable conduct cases when a big franchisor inappropriately handles one of its small franchisees e.g. by terminating its franchise without any notice.

A key test if whether the victim had some special features that made them vulnerable e.g. very old, intellectual disability, lack of English, and in addition have no choice. They couldn’t really shop around to go to a competitor.

Unfair trading practices

A new law is about to appear relating to unfair contracts. This relates to unreasonable provisions in those very large, long contracts that you sign when you are purchasing from a major seller. The contract might be thirty pages and buried in it might be some unreasonable provisions. The law now strikes them down.

Competition and monopoly

Some general issues

However, there is no law against monopoly as such. Monopoly may be the product of a firm being more efficient or innovative than any competitor.

Competition law tolerates monopolies, but it does prohibit them from engaging in anticompetitive behaviour that keeps new players out.

Interestingly in Australia there is not a divestiture power – a power to break up established monopolies. This is the tool readily used in the United States and many other countries. It’s used to great effect in the United States to break up the old oil, tobacco and chemical companies’ monopolies and in more recent times the telecommunications and AT&T monopoly with great effect and great value. In the USA the power is used only occasionally and only when multiple pre-conditions have been established such that as a firm actually broke the competition law – it cannot be broken up without their being some prior offence and it must make economic sense to do so and the courts in American have said a long list of conditions or pre-conditions that must apply before it will even think about divestiture.

Interestingly, competition law does not restrict high prices. In fact, the only prices it restricts are very low prices – predatory prices aimed at eliminating competitors.

Competition law and business regulation

Competition law differs from most business regulation.

Most business regulation prescribes in a detailed manner prices, quantities, qualities, and entry requirements through licensing, behavioural controls and the like.

Competition law, by contrast, is very pro-market. It strongly encourages competition – uninhibited competition – which it believes is good for customers. It does not regulate in a detailed manner it just says there are some ‘no no’s – no anticompetitive agreements, no anticompetitive mergers, not defined abuse of market power – subject to that business is encouraged to engage in vigorous competition.

As I mentioned the competition has no restrictions on the prices that may be charged giving freedom to exploit its market power.

Digital platforms and artificial intelligence

In my comments, I have not talked about digital platforms like Meta, Amazon, Apple, Google, Facebook, Tesla, Uber and the like, nor artificial intelligence.

These are in some cases the new monopolies in the economy. For example, Google has something like ninety per cent of the search market although conceivably it will be knocked off its pedestal in a few years by the AI businesses even though it has one of its own.

Something needs to be done about them, but the answers are not very clear.

One issue, for example, is ex ante versus ex post regulation. Under ex ante regulation, regulations are imposed aiming to stop certain types of business behaviour. This is different from ex post regulation, which looks at events as they have happened and have happened in recent times and then imposes fines, injunctions, restrictions, damages and the like, essentially after the event.

Europe has the digital markets Act, an ex-ante approach. However, it is clear that the understanding of what to do about digital platforms is at an infant stage and it is quite likely that ex ante decisions will prove to be misguided in the medium term.

So, what about ex post decisions. The trouble is rapid development of technology and new business models; there is scope for immediate exploitation of consumers and business customers and there is case for regulation in advance. The regulator gets their too late under ex post regulation.

America is not regulating its tech monopolies, subject to minor ex post outcomes.

China’s approach is very much linked with its surveillance state.

It would be great if there were a global solution, but with such large differences between the US, Europe and China, I don’t see that happening.

Artificial intelligence and competition

AI is a recent arrival.

It’s difficult to predict its technological development. We do not even know which business models will prevail, nor do we fully understand the economics of competition in relation to artificial intelligence.

But life is getting more complex for regulators.

For example instead of fairly free global trade we now have multiple restrictions, new tariffs from Donald Trump, exports, foreign investment restrictions, vulnerabilities leading to the idea that we should become self-sufficient in a number of important areas, especially in the Australian case for fuel and especially diesel fuel and also for some medical products. To the extent that we want to build our own, this is called ‘sovereign capability’ and it does change how you look at some competition issues. As does the emerging set of restrictions on foreign ownership.

Long live competition law as the world changes.