The Australian Financial Review

By Hugh Morgan
President
Business Council of Australia

Australia's commitment to free markets and the winding back of regulation that inhibits competition has been the cornerstone of our current economic success.

It is also the key to our future economic growth.

However, we now risk the re-regulation of an integral part of this success story, the Trade Practices Act .

The TPA sets the rules of engagement in competitive markets. The act must therefore draw a clear distinction between strong competition, which we want to encourage, and anti-competitive conduct, which we want to prohibit.

Unfortunately, the recent majority report of the Senate Economics Committee into the TPA has failed to maintain that distinction.

The recommendations in the report are framed under the guise of protecting small from large business.

In fact, they are about protecting inefficient businesses, and in the process seek to undermine fundamental principles of competition.

What the committee's majority report ignores is that the TPA is not there solely to regulate who wins and loses in business.

Competition delivers better services and goods to consumers, at lower prices. It also delivers improvements in business productivity and innovation.

In competitive markets it is inevitable that some companies will fail. While business failure comes at a cost, there is a greater cost in protecting those companies from competition.

The Business Council recognises the important role that small business plays in the Australian economy. Australia has more than 1 million small businesses employing over 3 million people.

The prosperity of many of these businesses, however, depends on the fortunes of Australia's largest companies. The 100 or so member companies of the Business Council of Australia generate total revenues of nearly $340 billion . To give this perspective, Australia's total economic output is just over $700 billion .

Importantly, approximately half of the revenue generated by ASX-listed BCA members is paid to suppliers in mostly small businesses. If the competitiveness of large business is harmed through short-sighted reregulation, the consequences will quickly flow across the whole of the business sector.

The Senate committee's confusion on competition is illustrated by its recommendations on predatory pricing.

There is no dispute from the BCA or its members that predatory pricing deliberately undertaken to reduce competition should be prohibited under the TPA.

The Business Council and most leading trade practices lawyers believe it already is.

Yet the Senate committee wants to tamper with a system which expert opinion has repeatedly endorsed. The question is, how does the committee distinguish between predatory and legitimate competition?

How will a large firm know, when offering discount prices to its customers, whether it will be applauded for being competitive or pilloried for being predatory?

What are the chances of getting black-letter law to define each and every nuance of genuine competitive behaviour?

According to the committee, pricing below cost is a strong indicator of predatory pricing.

What about a company which needs to discount its prices to sell perishable goods quickly? Or the company that offers discounts on a new product to build a new market? In depressed markets, it may be less costly for a firm to sell its products at a loss, than to close factories and sack workforces.

What the committee has failed to do is explain why consumers should have to pay higher prices because of its recommendations. This fundamental input has been missing in the debate of having the TPA substitute protection for competition. The clear message from the committee's recommendations is that the level of competition in a market should be no more than can be withstood by the weakest player in that market.

If the TPA effectively allows these players to set prices in the market, then the act in protecting a class of competitor, rather than encouraging robust competition will simply fail to serve its purpose.

The consequences for a company getting its pricing wrong are potentially severe. Considerable management time and expense will be wasted addressing spurious claims of predatory pricing from small businesses struggling with legitimate competition.

The committee also wants to give the ACCC powers to stop companies selling at low prices without the inconvenience of the ACCC having to prove a breach of the act in court. This is all good news for inefficient businesses, but bad news for the consumers who will have to subsidise them.