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What Are the Legal Issues Behind Monopoly Companies?

What Are the Legal Issues Behind Monopoly Companies?

Governments dislike monopoly companies because the lack of competition can harm consumers and the economy. Find out the legal issues here.

19th November 2020
Reading Time: 4 minutes

Companies have a monopoly when they are the only supplier of a good or service in a particular market. In the first place, it is not necessarily illegal for companies to have a monopoly over a market. It is perfectly legal for companies to have a monopoly provided that they ended up holding the monopoly as a result of fair and open competition. However, companies that disobey the rules of fair and open competition in order to establish a monopoly may face penalties. It would be unfair to allow companies to drive out competition through an accumulation of unfair advantages from their breaches. To clarify, the Competition and Consumer Act 2010 (Cth) (CCA) sets out rules regarding business behaviour, which include:

  • cartel conduct
  • exclusive dealing
  • misuse of market power
  • other anti-competitive behaviour

Cartel conduct

To begin with, the CCA and the Australian Competition and Consumer Commission (ACCC) define cartels as agreements by two or more businesses to engage in anti-competitive behaviour. Moreover, the CCA sets out some examples of cartel conduct in section 45AA.

Firstly, price-fixing would be an easily understood example. To clarify, price-fixing occurs where the businesses agree to set the same prices for their goods and services. Additionally, the CCA prohibits market sharing as cartel conduct. This involves agreeing to divide customers and suppliers among themselves rather than vying for them through competition. Furthermore, the CCA includes bid-rigging in their definition of cartel conduct. Similarly, bid-rigging involves intentionally ensuring that a predetermined business wins a contract. In order to hide bid-rigging behaviour, cooperating businesses may submit bids that are less competitive than the bid of the predetermined winner. Supply constraints are another example of cartel behaviour. This simply involves businesses agreeing to a low supply of a good or service for a market.

Companies that use cartel conduct to establish a monopoly face fines of up to $10,000,000.

Exclusive dealing

The unfair practice of exclusive dealing could also lead to the building of a monopoly. Section 47 of the CCA prohibits exclusive dealings that:

  • have the purpose or effect, or are likely to have the effect of “substantially lessening competition”
  • or contribute to a set of practices that have the effect, or are likely to have the effect, of “substantially lessening competition”

Exclusive dealing involves actions, including:

  • supplying, offering to supply, or refusing to supply entirely, at a certain price, or with certain benefits
  • acquiring, offering to accquire, or refusing to acquire entirely, at a certain price, or with certain benefits
  • exercising or refusing to exercise rights related to real property

In essence, a company engages in exclusive dealing when they attempt to force others into complying with their wishes regarding the market by imposing conditions on, threatening, or doing one of the above actions.

These wishes may involve:

  • limiting the extent to which others acquire or resupply third parties with a competitor’s goods or services
  • controlling the resupply of their own goods or services to certain people or places
  • controlling the supply of another good or service
  • purchasing good or services from a third party

To demonstrate, the following are examples of exclusive dealing:

  • a manufacturer only supplies a shop on the condition that the shop does not buy or sell a competitor’s goods
  • a shop refuses to buy stock from a manufacturer because the manufacturer also supplied a competing shop

Evidently, powerful companies can use exclusive dealing to control the flow of business in the market in order to directly drive out competition or punish others who do not assist them in driving out competition. Indeed, this would assist them in building a monopoly to the detriment of the consumer and other businesses.

Misuse of market power

Similarly, section 46 of the CCA prohibits companies from misusing their market power.

Section 46 only applies to companies that have substantial market power. The law judges a company’s market power through its:

  • relationship with any competitors
  • bargaining power over other people or businesses in the supply chain
  • agreements with other parties

The ACCC suggests that factors such as the barriers to entry of the market, the market share, and the financial strength of the business may contribute to the assessment.

Once it has been established that a company has substantial market power, the CCA makes it illegal for them to engage in conduct that has the purpose or effect, or is likely to have the effect of “substantially lessening competition.” This involves an examination of the company’s intentions (explicit or inferred), the direct objective consequences of the actions, and the likely consequences.

Like the other rules, while this does not necessarily make it illegal companies to have a monopoly, it does prevent them from acting directly to shape the market for that endeavour.

Other anti-competitive behaviour

The CCA prohibits anti-competitive behavior generally. Section 45 of the CCA sets out practices that could be implicated, including:

Section 45 prohibits each of these practices if they have the purpose or effect, or are likely to have the effect of “substantially lessening competition.” The assessment of the effect of the behaviour on the competition includes assessing the competition in each of the markets of each business connected to the behaviour as well as the markets of any related businesses. Furthermore, the assessment within each market involves the availability of substitute products, the geographical area, level along the supply chain, and the foreseeable period of time.

Additionally, each provision is assessed in the context of its effect within the entire relationship. According to the ACCC, the courts do not require a strictly contractual relationship to penalise companies. Instead, sufficient relationships includes ones where one party deliberately induces an expectation in the other party or where the parties act under a meeting of the minds. The effect of the behaviour must have significance in the context of the market.

Conclusion

While it is not illegal to have a monopoly over a market, the above laws make it difficult for companies to act with the intention of building a monopoly.

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Author
Alex Cheng

Alex is a Legal Tech Intern at Lawpath working as a part of the content team. He is currently studying a Juris Doctor at the University of Technology Sydney. He is interested in how design and technology can help improve the experiences of legal practitioners and their clients.