Wed Apr 10

Tougher merger laws will boost competition and improve performance and productivity

Written by Rod Sims, Professor in the practice of public policy and antitrust, Crawford School of Public Policy, Australian National University

Treasurer Jim Chalmers’ proposed changes to Australia’s merger laws ^[1] represent important public policy reform.

This is because a market economy, based on companies and individuals pursuing their own interests, only works if those companies and individuals face sufficient competition.

Increasingly over the last 20 or so years in Australia this has not been the case. Our weak merger laws have contributed to this situation.

Announcing the reforms on Wednesday, Chalmers said in recent decades the mark-ups Australian businesses apply to goods and services have grown by more than two percentage points.

He also cited recent analysis ^[2] by Treasury and the Reserve Bank that found even merely returning competition to the levels Australia experienced 20 years ago would lift GDP between 1% and 3%.

These findings are in line with numerous overseas studies ^[3]. If Treasury and the Reserve Bank are now doing analysis, this indicates they clearly understand Australia’s competition problem.

Consumers and most businesses will benefit from these reforms: consumers through lower prices, and most businesses by not having to deal with companies that have too much market power.

The increased competition that will result will drive better performance and so productivity. Those calling for measures to drive productivity may have got their wish.

What’s in the reforms?

The federal government is proposing four key changes.

First, mergers that meet a certain threshold, which is yet to be determined, will now need to notify the Australian Competition and Consumer Commission (ACCC) of their proposed transaction and not proceed with it until ACCC approval is given.

The key change is that this will allow the ACCC to be the decision-maker, not the courts.

These reforms put the experts in charge. Imagine new drugs coming onto the market and the Therapeutics Goods Administration (TGA) having to go to court to prevent this if it felt the drugs were not appropriate; the TGA is the decision-maker, as it should be.

And the ACCC should decide if a merger will substantially lessen competition. These are economic judgements that are poorly suited to first instance decision making by a court.

In the courtroom we have a legal contest over whether the law has been breached. With these reforms the ACCC will decide, after detailed analysis, whether competition is damaged. This change brings Australia’s laws into line with most other developed economies.

Second, the ACCC’s decision can be challenged, but only in the Australian Competition Tribunal, and it will be dealt with by judges that should have competition experience, and who are supported by an experienced competition economist and an experienced businessperson.

Third, and also hugely important, the reforms mean a merger cannot proceed if it creates, strengthens or entrenches substantial market power ^[5]. Many would think that in these circumstances there would be a substantial lessening of competition anyway, and so the merger would be prevented without the need for this change.

The courts have, however, struggled with the consequences of firms having substantial market power. They have wanted proof it will be used in ways that reflect inadequate competition, even though the merger has not happened yet.

Business woman shake hand with an unidentified man on the side of a desk

Under the government’s reforms mergers will not be able to proceed if they create or entrench market power. insta_photos/Shutterstock ^[6]

This change introduces an element of commercial common sense into the merger laws. It recognises that substantial market power should be prevented, and certainly not strengthened or entrenched.

Fourth, the cumulative effect on competition of all mergers within the previous three years by the merger parties may be considered as part of the assessment of the notified merger, whether or not those mergers were themselves individually notifiable.

The latest merger that triggered the investigation can be stopped, as presumably will be others that may have followed. This is a clever way to deal with so called “creeping acquisitions”.

What’s not yet in the reforms?

There is important detail to be settled such as the thresholds for compulsory notification. The reforms only work if these are set appropriately.

The treasurer has, however, indicated the thresholds will be set to capture the number of merger assessments the ACCC does now. That is a problem as many more will be caught because they hit the threshold, rather than think they should notify the ACCC as they do under the existing regime.

The ACCC’s approach to this was to be able to “call in” problematic mergers below the thresholds, but the treasurer has rejected this idea. This suggests the thresholds should be set at a lower level than seems to be envisaged.

The treasurer has, however, suggested the thresholds will also focus on share-of-supply or market-share thresholds to ensure mergers below the monetary thresholds but which otherwise present risks to competition, will be notified to the ACCC.

This could work depending on how they are set. Further, a treasury minister will be given the power to introduce additional targeted notification obligations in response to evidence-based concerns regarding certain high-risk mergers. One would imagine this applying to, for example, certain segments of the retail sector.

The government should be applauded for these reforms. They reflect a healthy approach to increased competition in our economy which will benefit consumers, most businesses, and the wider economy.