Key competition test needs rewrite, says Comcom head

New Zealand's competition law relies on a test of competitive behaviour that no other country uses and needs reform, a high level conference organised by the Commerce Commission has heard.

Speaking to the Competition Matters conference in Wellington, Professor Andrew Gavil from the Howard University School of Law, in Washington DC, argued the "counterfactual test" used since the mid-1990's to judge whether proposed transactions are anti-competitive does not do the job it purports to.

The counter-factual test arose from a Privy Council decision in 1994 from a challenge to Telecom from Clear Communications, which the Commerce Commission attempted to have overturned in the Supreme Court three years ago in the so-called "0867" telecommunications case, but without success.

While the Supreme Court believed it had aligned common competition tests with Australian jurisprudence, it had not achieved that, Jim Farmer QC said during the session on the challenge of getting monopoly regulation right.

Gavil argued the way the counterfactual test has developed, it is too often likely to favour existing firms with market power, to the detriment of competing new entrants.

"The counterfactual test is business-friendly for dominant firms," Gavil said, arguing the test doesn't truly look at counterfactual situations, the professor argued. Instead, it made hypothetical judgements about how a firm might act in a competitive market, without taking account of the firm having a degree of market power.

"It ignores the fact that behaviour by a party with market power will have a different impact from a party that doesn't have market power."

Gavil argued the competition provisions of the key competition section of the Commerce Act, Section 36, was an "odd duck" because it included some but not all elements of three other competition clauses, Sections 27, 29, and 47.

"The counterfactual test takes Section 36 and makes it out of whack, creating a statutory scheme that can't produce consistent results," since it was based on "a lack of real world comparisons, unreliable inferences, and unsupporting assumptions", making it "an inaccurate basis for establishing causation."

He suggested change could be achieved either a further test case "which would show the deficiencies of the counterfactual test more starkly than 0867" or a "major reconceptualization".

Commission chair Mark Berry told the seminar the issues raised "highlights the need of a policy review in this area."

"I would be inclined to stand back and say it's time for a fresh debate" for a law that was in "a very unsatisfactory state at the moment."

(BusinessDesk)