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Law and economics of vertical restraints in Australia.

[Vertical restraints can be efficient and pro-competitive. The Theory of the Firm analysis suggests vertical co-ordination can reduce transaction costs and opportunism. In assessing the legality of vertical co-ordination, pro-competitive efficiencies should be balanced against reductions in competition. This emphasises the importance of considering the effects of vertical co-ordination on inter-brand competition. In Australian competition law, decisions are often based on an observation that concentrated markets exacerbate anti-competitive effects of vertical co-ordination at an intra-brand level. Developments in the analysis of markets with multiple functional levels increase the significance of inter-brand competition and other pro-competitive efficiencies in vertical coordination. The recent decision of the High Court in Melway Publishing Pty Ltd v Robert Hicks Pty Ltd is a case in point.]

I INTRODUCTION

Vertical restraints are conditions placed on the supply or acquisition of goods or services that limit in particular ways any of the parties' ability to trade freely in the market. They can be distinguished from horizontal restraints on the basis that the latter are arrangements between competitors or potential competitors. It is uncontroversial that horizontal restraints generally have unambiguous detrimental effects on competition and the wealth of society. The same cannot be said with regard to vertical restraints. Over the last two or three decades, there has been an increase in academic and judicial recognition of the beneficial effects of vertical restraints as methods of efficient organisation of chains of production and distribution.

Australian competition law, as set out in Part IV of the Trade Practices Act 1974 (Cth) (`TPA'), prohibits vertical restraints under the generic heading `Exclusive Dealing' if they have the purpose, effect or likely effect of substantially lessening competition. (1) Particular types of vertical restraints -- resale price maintenance (2) and third-line forcing (3) -- are prohibited per se. However, under the Australian dual adjudication system, if the public benefits of the vertical restraints outweigh the anti-competitive detriments, the Australian Competition and Consumer Commission (`Commission'), (4) once notified, can authorise the conduct or allow it to stand immune from contravention of the TPA. (5) This authorisation is subject to review by the Australian Competition Tribunal (`Tribunal'). (6)

The Tribunal is wary of generalisations that vertical restraints are not anti-competitive or that they give rise to overwhelming efficiencies:
   In the Tribunal's view ... a generalisation [that vertical contracts are
   innocent of anti-competitive effects in almost all circumstances] may be
   defensible for wide and open markets, as they occur in the US, but cannot
   be applied generally in Australian conditions. For small markets,
   containing very few contestants (as in the present matter), and with large
   capital investments in relation to the size of the markets concerned,
   vertical agreements can have a market foreclosing effect. (7)


Anti-competitive behaviour is conduct which gives rise to power -- that is, market power -- to increase price or decrease quality without immediate threat of losing sales to competitors. Market power is the antithesis of competition. In a market system, competition generally maximises the wealth of society. This article seeks to explore the effects of vertical restraints on competition and the circumstances in which they are likely to give rise to an overall improvement in the wealth of society. In this light, it aims to explain the treatment of vertical restraints by the Commission, the Tribunal and Australian courts.

This article will argue that vertical restraints, as a mode of vertical integration by contract, are an element of market structure that can result in technically efficient production and distribution. (8) With technical efficiencies, and the consequent reductions in costs of production, comes the potential for some combination of lower prices and higher quality, increasing the wealth of society, which is the aggregate of consumer and producer welfare. Even if the benefits of lower production costs are retained entirely by producers, the benefits remain reflected in an increase in the welfare of society, albeit in the form of producer, rather than consumer, welfare. Indirectly, however, consumers as a group may benefit from such gains merely by virtue of being a member of a more wealthy society. Throughout this article, reference to `collective welfare' is a reference to the wealth of society as a whole, including consumers and producers collectively. On the other hand, in this article the term `consumer welfare' refers to the wealth of consumers as a specific group in society.

Despite the existence of technical efficiencies, there are circumstances in which vertical restraints raise barriers to entry, often with the effect of foreclosing competition. This article will consider these circumstances with a view to demonstrating how, in Australia, the balance is struck between the anti-competitive detriment and the public benefits of the efficiencies.

This article will also explain how, in markets in which efficiencies in vertical co-ordination of resources exist, the relevant area of competition may be between chains of producers and distributors across a number of functional levels (that is, inter-brand competition), rather than competition between particular legal entities at a single functional level (that is, intra-brand competition). Vertical restraints can be pro-competitive on the broader, inter-brand level. The article will discuss how this is recognised in Australia in the Tribunal's treatment of the functional element of market definition. Despite the clarity of legal and economic analysis in the decisions of the Tribunal, various important judgments in the courts appear to have been excessively concerned with the plight of individual legal entities. They have concerned themselves more with this than with the reality of competition between vertical structures of a number of entities formed in a regime of vertical restraints. With regard to the definition of relevant markets, it is submitted that further recognition should be given to the functional aspect of markets, so as to focus analysis of the effects of vertical restraints on competition between efficient vertical structures, rather than between legal entities.

In assessing the treatment of vertical restraints in Australia, it is necessary to be aware of its dual adjudication system. This limits the courts to the analysis of the competitive effects of conduct, precluding them from identifying and analysing accompanying public benefits, such as technical efficiencies in production. These public benefits are taken into consideration by the Commission and the Tribunal in the separate analysis required for notification and authorisation in determining whether anti-competitive vertical restraints ought to be left to stand. (9) It would lessen the need for this explicit balancing of public benefit and public detriment -- one step removed, as it were, from the assessment of the effect of vertical restraints on competition -- if less emphasis were to be placed on competition between legal entities and more on competition between `vertically' or `internally' efficient vertical structures. In other words, the efficiency of a vertical structure of a number of legal entities is fundamental to the analysis of competition, and is not merely a public benefit to be balanced (at the level of administrative adjudication) against detriment to competition between legal entities.

The costs and benefits of vertical restraints cannot be assessed meaningfully until the goals of competition law are made clear. It will be seen that the goals of competition law in Australia are consistent with the proposition that competition can be subordinated to technical efficiency -- that is, the least-cost use of inputs in the production and distribution chain. This is the case if the balance achieves either maximum collective welfare or, alternatively, maximum consumer welfare. Great importance is placed on maintaining `workable competition' in Australia's comparatively small markets. (10) Thus, the balance of efficiency and competition must clearly favour the vertical restraint in question before it will be allowed to limit competition.

II CONCEPTS OF EFFICIENCY AND MARKET POWER

In the analysis of vertical restraints, it is essential to understand the various concepts of efficiency and competition in order to assess the effects of any conflict between them. The structure of a perfectly competitive market is such that: it has no producers or consumers who have individual impact; (11) profit-maximising producers (12) are fully aware of relevant prices and combinations for inputs and outputs; (13) all producers have equal access to input markets and there are no artificial barriers (14) to the production of any product; (15) and consumers (16) register their subjective preferences among various goods and services through market transactions at fully known market prices. (17) Such a market will be efficient in so far as it achieves an equilibrium in which no alternative combination of inputs, outputs and distribution is possible that would make someone better off without making someone else worse off. (18)

An efficient market is technically efficient if the organisation of production and distribution within firms combines inputs with maximum effect and with minimum wastage or cost. (19) More specifically, each firm uses the technology and mix of inputs that minimise its cost and utilise available economies of scale and scope. An efficient market is allocatively efficient if resources are allocated across industries so that maximum goods and services are produced to meet consumer preferences as closely as possible. (20) That is, no resource transfers can increase the aggregate value of output.

Technical efficiency is a necessary, but not sufficient, condition for allocative efficiency. Assuming that production and distribution are technically efficient, the maximum collective welfare is obtained with the best possible range of goods and services. This is achieved through the allocation of resources among alternative uses, such that consumers are prepared to pay more for what is actually produced than for that which would be produced by an alternative allocation.

An efficient market is also dynamically efficient, in the sense that it may take time for the market to equilibrate in response to change. The market demonstrates dynamic efficiency in its ability to achieve technical and allocative efficiency over time in response to change. (21) This may involve investment in technological innovation that short-term competition may not foster and which an analysis based on a short-term approach to competition may not take into account. (22)

In a perfectly competitive market, there is no market power. In other words, perfect competition between market participants ensures that no unilateral increase in price or decrease in quality can be sustained without losing business in totality. (23) Producers cannot increase profits by raising price above cost (24) and consumers purchase according to their preferences. Such conduct results in optimal welfare for consumers in a state of technical and allocative efficiency. If the structure of the market is imperfect, such as if there are barriers to entry leading to concentration of economic power, externalities (25) or imperfect information, it will allow anti-competitive conduct which may be technically or allocatively inefficient. (26)

At an extreme, if the market comprises one monopolist producer and many consumers, the economically rational monopolist will charge a price above its marginal cost. (27) Sub-optimal quantities are produced, and consumers have the incentive to purchase substitutes that require more resources to produce, so that consumer demands are satisfied at a higher cost than would be the case under competition. Thus, the wealth of society -- collective welfare -- is reduced, particularly for consumers as a class. (28) It can be argued that this welfare loss results not only from the loss in value derived from substitution against the monopolised product, but also from the resources expended by producers to obtain monopoly profits (that is, `rent-seeking') and by consumers to avoid paying monopoly prices. (29)

The graph below illustrates the welfare losses associated with monopoly. It also indicates the welfare gains associated with increased technical efficiency. In essence, it demonstrates that monopolisation (absence of competition) is not unambiguously detrimental to society if it also gives rise to technical efficiencies.

[FIGURE 1 OMITTED]

As the graph demonstrates, if the market demand curve is DC and the supply curve is SC1, and if the market is perfectly competitive, then quantity Q1 will be produced at price P1. Each individual competitor faces a horizontal demand curve because no producer can raise its price without being competed out of business. The price obtained for each unit sold is therefore the same, so marginal revenue is constant at the market price. The downward sloping demand curve DC represents the accumulated demand in the market. The outcome is allocatively efficient if the quantity produced is where the market supply curve meets the market demand curve and so the amount produced exactly satisfies market demand, given the technically efficient cost of production.

In the case of a monopoly, the demand curve faced by the monopolist is the demand curve for the entire market DC. The monopolist thus has discretion over price. Assume that the market supply curve, which is the monopolist's supply curve, is SC2. The monopolist will produce until the marginal cost of producing an extra unit exceeds the marginal revenue from the sale of that unit, namely at Q2, for price P2. The price received by the monopolist for the last unit sold decreases as the monopolist produces more units and satisfies market demand, represented by the market demand curve DC. The marginal revenue curve MR has a steeper slope than DC because, for each unit sold, the lower price obtained by the monopolist on the marginal unit applies to all units sold, not just the last one, so the marginal revenue on the last must take into account the reduced revenue obtained on each infra-marginal unit. Because the monopolist is able to achieve profits above cost without them being competed away, it maximises profit at the production of a quantity less than would be produced where the market is perfectly competitive. Thus, despite consumer preferences for more production of Q3 goods, the monopolist only produces Q2, and consumers who would have preferred to consume more than Q2 have had to substitute other less preferred goods for those produced by the monopolist. The darker shaded triangle BDE represents the loss to collective welfare that results from the monopolist's failure to supply in accordance with consumer preferences, namely at the point where SC2 and DC intersect, at D. It thus represents the failure of the market to achieve allocative efficiency.

However, combine these two scenarios, and assume that the initial state of the market is equilibrium at C in perfectly competitive conditions, where SC1 and DC intersect, and thus marginal revenue (the common market price faced by every producer) equals marginal cost, as represented by the supply curve. If conduct occurs that combines all producers into a monopoly, but the monopolisation results in improvements in technical efficiency, then a greater quantity can be produced using the same inputs and therefore at the same cost. Thus the market supply curve shifts to the right from SC1 to SC2. The new equilibrium point is at D, and the newly formed monopolist produces the quantity Q2, where marginal revenue equals marginal cost. Collective welfare reduces by the area of the darker triangle. However, the improvements in technical efficiency result in an increase in collective welfare represented by the lighter oblong GMEI, where producers obtain an increase in wealth of HLEI (representing revenue exceeding price for each unit from 0 to Q2). This change also results in consumers obtaining an increase in wealth of GMLH (representing consumer satisfaction exceeding price for each unit 0 to Q2). Thus the increase in collective welfare resulting from this technically efficient, but anti-competitive, conduct is measured by the sum of the increase of producer surplus and consumer surplus.

In the example above, it is clear from simple examination of the graph that the size of the lighter shaded area, representing the increase in collective welfare resulting from the monopolising conduct, exceeds the size of the darker shaded area, representing the loss in collective welfare resulting from the same conduct. In such a case, notwithstanding the detriment to competition, collective welfare is increased. (30) It is proposed that conduct which results in a lessening of competition -- that is, an increased capacity to charge price above cost up to the extreme case of the power of the monopolist -- should not contravene competition laws if the improvements in technical efficiency outweigh the allocative inefficiency stemming from the increased market power. However, if the goals of competition law are solely to preserve competition between firms, rather than to achieve outcomes that maximise collective welfare, then such conduct will be illegal.

III THE ECONOMICS OF VERTICAL RESTRAINTS

The dual adjudication system in Australian competition law requires analysis of conduct in light of a balancing of public detriment against public benefit. Public detriment includes any reduction in allocative efficiency resulting from the effect of the conduct in reducing the competitiveness of the structure of the market. Public benefits include increased technical efficiency in the production and distribution chain. In this part, I will explain, by reference to the economic literature, the circumstances in which, and the extent to which, the various vertical restraints are technically efficient. The anti-competitive effects of vertical restraints under the categories of restraints on purchase and restraints on resale are analysed below. There follows an assessment of the pro-competitive effects of vertical restraints, applying a `Theory of the Firm' analysis (31) to explain how vertical restraints can improve competition between firms, which are defined in an economic, rather than legal, sense.

Examination of the effects of vertical restraints on competition between distributors (32) is effectively an analysis of intra-brand competition. Analysis of inter-brand competition involves examination of the effect on competition between producers (33) stemming from vertical restraints that limit distributors' patronage of other producers' products. A particular vertical restraint can enhance efficiency or reduce competition, depending on the context of the restraint and, in particular, the existing level of competition at both the production and distribution levels. There is growing acceptance of the proposition that the focus of competition policy should be on the strength of inter-brand, rather than intra-brand, competition. (34)

The Chicago School position is that vertical restraints, particularly restraints on resale, ought only be illegal if they reduce output. (35) Vertical restraints are considered to be beneficial to society if they increase output. (36) A producer's lack of control over distribution variables, such as the number of retailers, their locations or their selling efforts, may give rise to horizontal or vertical externalities which vertical restraints may rectify to improve collective welfare. (37) In the absence of increased market power resulting from horizontal collusion, the Chicago School considers that a producer will not find it profitable to impose vertical restraints unless the additional services that they encourage are valued by consumers more than the incremental cost of the restraints. (38) Thus, it is argued that many vertical restraints ought to be lawful. In the case of vertical restraints on resale, the Chicago School position is that `every vertical restraint should be completely lawful'. (39) In other words, intra-brand competition may be sacrificed in favour of inter-brand competition except where the vertical restraints are used as a tool to encourage or strengthen horizontal restraints. In such cases, the Chicago School characterises the restraints as being essentially horizontal. (40)

Contrary to the Chicago School view, it has been argued that vertical restraints of either type can raise significant barriers to entry. It has been maintained, in general, that vertical restraints (depending on type) can: decrease the number of available dealers; reduce product accessibility; create higher prices for inframarginal purchasers; frustrate retailer innovation; concentrate both economic and decision-making power in the hands of fewer individuals; delay the effects of corrective market forces; reduce the range of consumer options; and place primary emphasis on stimulating demand rather than increasing capacity for supply. (41) Thus, the detriment to intra-brand competition may not be so easily dismissed.

The debate over vertical restraints has been characterised as a contest between the Chicago School and the rest of the world. (42) However, the efficiencies made available through the use of vertical restraints are becoming increasingly recognised. By way of illustration, the European Commission's Green Paper on Vertical Restraints in EC Competition Policy (43) states that:
   The heated debate among economists concerning vertical restraints has
   calmed somewhat and a consensus is emerging. Vertical restraints are no
   longer regarded as per se suspicious or per se pro-competitive. Economists
   are less willing to make sweeping statements. Rather, they rely more on the
   analysis of the facts of a case in question. However, one element stands
   out: the importance of market structure in determining the impact of
   vertical restraints. The fiercer is inter-brand competition, the more
   likely are the pro-competitive and efficiency effects to outweigh any
   anti-competitive effects of vertical restraints. Anti-competitive effects
   are only likely where inter-brand competition is weak and there are
   barriers to entry at either producer or distributor level. In addition it
   is recognised that contracts in the distribution chain reduce transaction
   costs, and can allow the potential efficiencies in distribution to be
   realised. In contrast, there are cases where vertical restraints raise
   barriers to entry or further dampen horizontal competition in oligopolistic
   markets. (44)


While acknowledging the efficiencies associated with vertical restraints, the European Commission considers that an underlying assumption of the Chicago School approach is that competition is perfect at the level of distribution and that such a condition does not exist in practice in the EC. (45)

Barriers to entry raised by vertical restraints ought to remain an important consideration, particularly in Australia where markets are relatively small and concentrated. Even so, where a market is characterised by vertically integrated firms or groups of firms that are integrated by vertical restraints, the meaningful forces of competition occur between these vertical structures and not between the individual legal entities. Treating these vertical structures as `firms', in the sense to which they are referred in the `Theory of the Firm' analysis, discussed below, emphasises the role of vertical restraints in enhancing the technical efficiency of these vertical structures and the fact that these restraints can thereby be pro-competitive.

As suggested by the European Commission, it is preferable not to make `sweeping statements' regarding the analysis of vertical restraints. The analysis of vertical restraints should recognise that they can have pro-competitive effects at the inter-brand level and, even if they do not, the analysis should be open to an economically accurate balance of efficiency gains and welfare losses that inevitably accompany vertical restraints in less than perfect markets.

A Anti-Competitive and Efficiency Aspects of Vertical Restraints

Explanation of the operation of the various types of vertical restraints involves the identification not only of their anti-competitive aspects, but also of the efficiencies and other public benefits that they facilitate. It has been explained previously that Australian competition law strikes a balance between these effects.

Vertical restraints on purchase include tying, also known as `bundling', which refers to the supply of a product on condition that the purchaser also take a second product from the manufacturer. Restraints on purchase also include requirements contracts, which occur where a product is supplied on condition that the purchaser will obtain some or all of its requirements of one or more products exclusively from a particular producer. (46) Full-line forcing occurs where the purchaser must obtain all its requirements from the producer. Another variant, third-line forcing, occurs where a product is supplied on condition that the buyer will obtain some or all of its requirements from a third party. Requirements contracts also encompass agreements for supply where the purchaser imposes conditions on the producer that restrict the producer's ability to deal with other purchasers.

Vertical restraints on resale include resale price maintenance (`RPM'), which is a requirement by producers on distributors that products not be sold below a particular price. Minimum RPM is prohibited (47) in the United States, (48) the EC (49) and Australia. (50) Vertical restraints on resale also include territory or customer restraints that confine or concentrate a distributor's sales within a specified geographic region or to a particular class of customer. They are therefore generally limitations on intra-brand competition.

While vertical restraints may foreclose markets, in the sense that another firm is denied access to the market, this generally only occurs if one of the restraining firms is a monopolist. (51) Similarly, while vertical restraints may enhance market power through raising barriers to entry, to the extent that an entrant must enter at both functional levels simultaneously in order to be viable, real barriers are only raised where the restraining firms have significant market power. However, both effects on competition may be the result of significant efficiency gains making the vertically restrained firm a more efficient unit than a chain of production coordinated on the basis of market transactions would be. (52)

1 Vertical Restraints on Purchase

Vertical restraints on purchase are arrangements between producers and purchasers along the chain of production which restrain one party from dealing with competitors of the other. They preclude other market participants from having the opportunity to be included in the transaction. In this sense, market participants are foreclosed from the transaction due to the effect of the restraint as a barrier to entry. The effect of foreclosure on competition will depend on the number of alternative opportunities available to foreclosed market participants, which will reflect the existing market power of the producer imposing the restraint. Thus, it is more likely that foreclosure will lead to significant allocative inefficiency in small markets. (53)

(a) Foreclosure

Without market power, it is arguable that a producer cannot restrain inter-brand competition through the use of a vertical restraint, as consumers will switch to another brand if the `package' that the restriction produces is not desirable. (54) So ties, for example, will only lessen competition if the producer imposing the tie has market power in the tying product, such as in cases of natural monopoly, price regulation or high information costs, (55) and competition will only be affected significantly where an appreciable share of the market in the tied product is foreclosed. (56) In other words, tying will raise sustained barriers to entry by removing from competitors of the producer the ability to sell substitutes for the tied product to purchasers who have bought the tying product. If these competing producers are not readily able to produce a product that is substitutable for the tying product -- in other words, if the producer of the tying product has market power -- then they will be foreclosed from the market for the tied product to the extent that the tied product is purchased in conjunction with the tying product.

Often it is the case that distributors hold a number of different product lines. (57) This makes it difficult for producers of a single product to foreclose other producers from key distributors of other products or of the same products. If incumbent producers have market power, however, they may be in a position to tie distributors with exclusive distribution arrangements and thus foreclose the distribution level from potential competing producers by increasing the requisite scale of entry required of new entrants and, commensurately, the level of investment required to enter the market. (58) Thus, provided incumbent producers are able to tie multi-product distributors, barriers to entry at the distribution level raised by vertical restraints on purchase can result in a particularly high level of foreclosure where there are substantial economies of scale or scope at the level of distribution. (59)

Where market power exists in the hands of multi-product distributors -- that is, where distributors have monopsony (60) power--vertical restraints such as exclusive distribution arrangements may be the result of pressure placed on producers by distributors. This may cause allocative inefficiency to the extent that the restraints allow distribution margins which include super-normal profits above those required to deal with externality problems such as free-riding. (61) However, vertical restraints might be technically efficient if they allow distributors to achieve greater economies of scale or scope. Where these efficiencies exist, competition will create the incentive to achieve them by the most effective means. For example, an exclusive distribution arrangement may save on costs involved in negotiating terms and conditions of sale and may allow the producer to reduce delivery costs.

Even if market power exists in the hands of a producer imposing vertical restraints on purchase, it is arguable that foreclosure may merely transfer surplus from consumers to producers, rather than have a detrimental effect on collective welfare as a whole. Using a tie to `leverage' market power from the tying product to the tied product may merely use existing market power to obtain monopoly profits. Provided that the tie does not leverage market power in order to create new power, the vertical restraint is not anti-competitive. (62) The question becomes: in what circumstances can the monopolisation of the market for the tied goods be merely a shift of existing power rather than the creation of new market power?

The answer requires reference to the degree to which there is correlation in the demand for each good. (63) If consumers place value on a bundle of the tying good and the tied good, then bundling will constrain the profits available on both goods as much as it would if monopoly profits were only sought on the tying good. (64) This will be the case where the tying product and the tied product are complementary, such that the price of one depends upon the price of the other. However, bundling goods which are complementary in variable proportions will result in monopolisation of both products. (65) In such a case, tying secures revenue from the sale of the tied product that could not be realised if it were not connected to the sale of the tying product. (66) In other words, market power is increased by tying only where output of the tied product is less than it would be if the profits in the tying product were maximised under competitive conditions. (67) If proportions are technically fixed between the tying product and the tied product, no revenue can be derived from setting a higher price for the tied product that could not have been made merely by setting the optimum price for the tying product. (68)

Requirements contracts are similar to tying arrangements, but, because they involve a less direct correlation between the purchase of one brand and the purchase of another, they have fewer direct effects on competition. (69) Like ties, they may be anti-competitive to the extent that they raise barriers to entry by foreclosing competitors of the producer from having access to distribution outlets or other purchasers. (70)

(b) Price Discrimination and Meter-Pricing

Ties are used to facilitate price discrimination through meter-pricing. Tying allows the producer to price the tying product on a per-usage basis by incorporating the price of the tied product into the price of the tying product. This allows the producer to maximise revenue by automatically obtaining a price that reflects strength of demand, or elasticity, as indicated by intensity of use of the tying product. However, tying cannot facilitate price discrimination where the amount of the tied product purchased does not vary with intensity of use. (71)

Where price discrimination allows lower prices in more elastic markets, thus increasing output, it enhances allocative efficiency and the welfare of those consumers with lower reservation prices. (72) The effect of price discrimination on allocative efficiency may be preferable to that of non-discriminatory monopoly pricing if the price discrimination is effective in obtaining buyers' reservation prices. (73) This is because it allows a manufacturer to produce more output for consumers with more elastic demand without having to offer the same lower price to consumers with less elastic demand. (74) Thus price discrimination can increase collective welfare. It allows the producer to appropriate consumer surplus; it need not increase market power. Bork states that if the manufacturer `could charge the monopoly price to all who would pay it, and a series of lower prices to others, he would produce the same amount as a competitive industry.' (75) Thus, producing the amount that would be produced in a competitive market can avoid the deadweight losses to community welfare that are associated with market power.

Price discrimination may also have ambiguous effects on competition and consumer welfare. (76) While price discrimination schemes can increase output by enabling a producer with market power to sell more than it would if it were compelled to charge its non-discriminatory profit-maximising price, (77) it is detrimental to purchasers with higher reservation prices. Assessing whether this is desirable depends upon whether the goals of competition law are the maximisation of consumer welfare rather than the more general goal of maximising collective welfare. Another complicating factor is that the resources expended in segregating customers and preventing arbitrage (which can only occur if the producer has market power) may represent a detriment to collective welfare larger than the improvement that might result from higher output. (78)

Requirements contracts are less direct in their ability to leverage market power from the market of one product with the market for another where there is no necessary correlation between the quantities purchased of one product and the quantities purchased of another. In such circumstances, they are less effective than ties in price discrimination.

(c) Equivocal Effects on Collective Welfare

Even if ties have an anti-competitive effect, the net effect on efficiency may be equivocal, depending on whether or not they reduce the costs of selling strategies that are themselves allocatively efficient. Such strategies would encourage quality control through the use of two substitutable inputs -- one substitutable input and another used in fixed proportion to output -- or two substitutable final products, in so far as they encourage use of products in efficient proportions. These strategies contrast with ties which merely increase transaction costs or reduce information. (79) They may allow the protection of the reputation of the producer, the distributor, or the product itself, by ensuring that only quality raw materials or parts are used in conjunction with the product. (80) Ties can also be used to achieve economies of scale, non-discriminatory measurement of use (perhaps to recover maintenance costs, for example), and efficient technological interdependence of the bundled products where one operates more effectively with the assistance of the other. (81) Through these improvements in efficiency, tying can increase collective welfare, as well as maximising monopoly profits in the tying product. (82)

On a more anecdotal level, ties may provide a method of cheating on prohibitions on direct price competition imposed by a cartelised oligopoly, (83) in the sense that the tied product can be sold at a discount in order to cut the price of the bundled goods. (84) To this extent, they may have a behavioural benefit in encouraging competitive conduct.

Overall, ties and, to a lesser extent, requirements contracts, can reduce the cost of controlling the quality of complements, reduce the costs of price discrimination and reduce the incentives for purchasers to engage in arbitrage. (85) Where the cost of producing and selling a combination of products is less than the cost of producing and selling the products separately, vertical restraints may give rise to savings in transaction costs and production costs. (86) The net effect on consumer welfare will depend upon comparison of the benefits that consumers obtain from the efficiencies in distribution of a combined product in the form it is commonly purchased, with the detriment suffered by consumers who are required to purchase the combined product when they might only value parts of it. (87) So, if the distributor has market power, the reduction in its costs will motivate increased output, albeit potentially at the expense of a reduction in variety. Yet it can be argued that exclusivity may merely replace variety with a more efficient distribution system. (88)

(d) Summary

Vertical restraints on purchase are unlikely to have a significant anti-competitive effect unless: the party imposing the restraint has substantial market power; there exist meaningful economies of scale or scope in distribution (while not giving rise to monopsony power in multi-product distributors); or where bundling occurs between goods that are complementary in variable proportions.

On the other hand, vertical restraints on purchase are likely to give rise to significant technical efficiencies where there exist meaningful economies of scale or scope, high transaction costs in the bundling of products, and differentials in demand for the produce among consumers.

2 Vertical Restraints on Resale

As opposed to vertical restraints on purchase, vertical restraints on resale do not generally foreclose competitors of producers. Rather, they inhibit intra-brand competition between distributors either by direct price control, namely RPM, or by raising non-price barriers to entry at the distribution level.

In broad terms, Areeda and Kaplow identify the following motivations for RPM which are also relevant in explaining the motivation for non-price vertical restraints on resale:

(a) achieving goodwill for distributors or the producer itself in maintaining the image and services associated with the product;

(b) reducing free-riding so as to encourage provision of services by distributors, such as safety advice and promotion;

(c) avoiding distributor concentration to limit distributors' countervailing force;

(d) facilitating extensive availability of the product;

(e) facilitating efficient territorial size for distributors;

(f) facilitating specialisation of distributors to enhance product quality, price discrimination and associated market penetration;

(g) facilitating distributors' entry into a market by providing certainty that the investment will be recovered;

(h) promoting inter-brand competition by increasing the efficiency of distribution;

(i) quid pro quo for other restraints foreclosing rival manufacturers;

(j) facilitating co-ordination among producers by reducing distributor incentive to bargain for lower wholesale prices, removing the incentive on producers to cut prices and making manufacturer price decisions more visible;

(k) facilitating actual horizontal restraint among distributors;

(l) impairing distributors' freedom; and

(m) allowing a less restrictive form of vertical integration. (89)

Non-price vertical restraints on resale, such as the imposition of exclusive territories or customers, can limit both price and non-price competition. (90) They can impair dealer autonomy and limit the expansion of efficient dealers.

There is no necessary distinction between price and non-price vertical restraints. (91) However, RPM differs from non-price restraints as it is more directly effective where demand is uncertain in limiting the risk of reduced profits from lost sales. Non-price restraints tend to enable more efficient use of decentralised information, such as the expertise of local distributors. (92)

(a) Facilitation of Horizontal Agreements

Price and non-price vertical restraints on resale may facilitate horizontal collusion between distributors or between producers. (93) The existence of vertical restraints such as territorial restrictions and exclusive distribution arrangements can provide the producer with a haven of demand that may reduce the competitive pressure exerted horizontally by other producers. (94)

In the absence of horizontal collusion, vertical restraints injure intra-brand competition only when they permit a distributor to set and keep its prices above the competitive level, which will not occur if the producer imposing the restriction has no market power in the inter-brand market. (95) Without horizontal collusion, a producer lacking market power cannot create or increase it by making territorial restrictions because these restrictions will not prevent distributors from selling competing products. (96)

Vertical restraints on resale can facilitate market allocation among producers if distributors are prevented from selling to customers who are to be served by distributors or producers of another brand. (97) The argument only follows if the members of the cartel collectively have monopoly power and thus can enforce the cartel without the threat of undercutting by new entrants. (98) For horizontal collusion between producers to be facilitated by use of vertical restraints, the restraints must be in widespread use by at least most of the producers in the market.

Vertical restraints on resale can also assist in the creation or enforcement of price collusion in this manner or merely by making non-conforming price and output decisions more transparent through common pricing. (99) In highly competitive markets, producer cartels are more likely to be unstable or detectable. (100) While vertical restraints may enable producers to discover defections from their own horizontal cartels, in competitive markets such restraints are likely to provide only marginal means of detection and would give rise to other forms of retail competition. (101) Due to the relative complexity and difficulty in monitoring, territorial or customer restraints are likely to be less effective than RPM as a mechanism for co-ordination among rival producers.

The presence of vertical restraints can also be consistent with competition. Hovenkamp states:
   If vertical restrictions enhance efficiency by either lowering the
   manufacturer's distribution costs or making its product more attractive to
   customers, then competition alone will force manufacturers to employ the
   restrictions or else lose the market to rivals who do employ them. (102)


Therefore, non-price vertical restraints can be consistent both with tacit collusion and intense competition. In order to prove anti-competitive conduct, it must be shown that there exists the widespread use of other collusion-facilitating devices (103) that are less consistent with competition. (104)

Vertical restraints may be imposed on producers by a distributor cartel in order to assist in the enforcement of the cartel at the distribution level. As is the situation with regard to facilitation of producer controls, the policing of a distributor cartel by producers can only be effective if the cartel has sufficient market power to extract RPM or non-price restraints from all producers. This will be difficult in any case, because, while distributors might benefit from the producer policing the cartel's price-fixing or market-sharing arrangements, it is contrary to a producer's incentives as it would reduce output below the producer's profit-maximising level. Rather than allowing distributors to obtain the monopoly profits from the product, the producer could choose distributors who behave competitively, or simply vertically integrate into the distribution level. The likelihood that a producer will facilitate the enforcement of a distributor cartel by imposing vertical restraints on resale can depend on the extent to which economies of scale in distribution require the sale of a number of brands, as this will affect the relative bargaining power of a producer of a single product. (105)

Acting unilaterally, distributors cannot raise product prices to monopoly levels unless the producer itself is a monopolist. At the distribution level, the producer is always at least potentially a competitor. Even if competition between distributors is diminished as a result of vertical restraints, in competitive markets the monopoly profits that result may be competed away at a different functional level. (106) Vertical restraints on resale are more likely to restrain price-chiselling of the producer's profits by distributors than to increase the sum of monopoly profits available at the accumulated stages of the production and distribution chain. (107)

(b) Producers' Incentives

In the absence of the potential for horizontal monopolisation between producers, or pressure exerted by an existing distributor cartel with aggregate market power, it is not in the interests of a producer to facilitate collusion among distributors.

A monopolist is in a position to obtain all monopoly profits in a fully owned distribution chain, so the strengthening of restraints between functional levels, thereby lessening intra-brand competition, will not increase monopoly profits without a reduction in inter-brand competition. (108) Thus, profits within a particular production and distribution chain, or in other words within a particular brand, are constant in the absence of an increase in market power in at least one functional level or more, perhaps resulting from horizontal collusion. Comanor characterises the `conventional wisdom' as follows:
   In any well-defined vertical stream of production, where the product is
   transferred from manufacturer to processor to distributor to consumer,
   there is only a single volume of monopoly profits. These profits can be
   earned by a profit-maximizing firm that is integrated across all stages of
   production, and depend on the structure of consumer demand for the final
   product, as well as on the costs at each stage. Moreover, under certain
   conditions, the same monopoly profits can be earned by a firm that
   dominates the market at only a single stage of production. If the expansion
   of market control from one stage to the entire vertical stream does not
   increase monopoly profits ... there would be no further restrictions of
   output, and no exacerbation of existing degrees of monopoly power. The
   vertical expansion of market dominance is benign, and therefore vertical
   arrangements are inappropriate targets for antitrust action. (109)


This statement presupposes a constant state of inter-brand competition, which may not be the case in smaller markets where the vertical restraints raise significant barriers to entry, thus inhibiting competition between vertical streams of production. The statement also presupposes that the split of producer surplus between producer and distributor is irrelevant to allocative efficiency and collective welfare.

Characteristic of the Chicago School approach to vertical restrictions is the belief that there is less reason to limit conduct by producers to eliminate rivalry among distributors than there is to prohibit distributors from eliminating rivalry among themselves, because distributors agreeing among themselves are likely to reduce output and earn monopoly profits. On the other hand, a producer has an interest in increasing its own sales in accordance with its own inter-brand competitive position. (110) Thus, it is said, the producer's motive must be to create technical efficiency rather than restrict output. (111) The distributor's mark-up can be characterised as the price that a producer pays to have its product distributed. Similarly, the imposition of a vertical restraint on a distributor to facilitate collusion between producers may require the producer to compensate the distributor by an amount that could dissipate all or most of the potential monopoly profits to be gained by increasing barriers to entry. (112) Distributor profit in excess of that which would be expected in a competitive market reduces sales and therefore reduces the producer's profits. There is little incentive for the producer to allow those sales to be lost in the absence of either a correlative increase in market power, or reduced costs resulting from improved technical efficiency, or both.

Generally, then, producers have an incentive to maximise competition among distributors. (113) Producers might find that vertical restraints on resale contribute to the effective distribution of the product. (114) It can also be in the producer's best interests to prevent competition driving out high-cost distributors, so as to maximise the number of distributors selling the product. (115) For example, the stability that vertical restraints on resale engender might encourage investment necessary to develop the market by facilitating entry by new distributors. (116) However, vertical restraints on resale can inhibit the expansion of distributors with efficient scale and methods in favour of more numerous, smaller-scale distributors with higher costs, who have little ability to exert countervailing market power against the producer. (117)

Even where the producer distributes its own products in parallel with other distributors -- a situation commonly referred to as `dual distribution'--it does not necessarily increase the producer's economic motivations to use vertical restraints to minimise competition between distributors. The restraints imposed by dual-distributing producers ordinarily have the same function as those imposed by producers generally, provided that the motivation behind the restraint is to benefit the producer directly, rather than the producer's distribution arm. (118) The relevant issue is not the existence of vertical restraints, but rather the existence of a stable horizontal collusion. (119) The existence of dual distribution is just as likely to indicate a producer's attempt to avoid sharing monopoly profits with members of a distribution cartel or to provide necessary product-related services in circumstances where free-riding among distributors is so prevalent that the market fails to provide those services. (120) Direct supply by a distributor owned by the producer internalises such externalities.

(c) Free-Riding

Producers have the incentive to encourage distributors to invest capital and labour in marketing new products and to provide product-enhancing services. (121) The producer also has the incentive to protect and enhance goodwill in its products. (122) Because both producers and distributors benefit from sales of the product, distributors will share the incentive to provide these services, unless their investment and efforts can be appropriated by a competing distributor at less cost. In such a case, those distributors providing services are producing positive externalities on which other distributors can free-ride. Vertical restraints on resale can make it more difficult for free-riding distributors to avoid the costs of the services provided by other distributors. (123) The incentive for the producer is to empower distributors who supply services, provided that those services stimulate demand for the product. The end result, in terms of whether there is an increase in output associated with the provision of product-related services, depends on the elasticity of demand with respect to the service compared with the elasticity of demand with respect to price. (124)

If the services are valued by consumers as economic outputs, producers increase output and create a composite product in combination with the goods or services with which they are associated. (125) The imposition of vertical restraints on resale may reflect a producer's belief that the output of valuable services is best achieved by non-price competition rather than through competition by price. (126) Encouragement of the provision of services by the use of vertical restraints on resale can also protect specialised distributors in particular. (127)

The provision of product-enhancing services is likely to be particularly important for products which suffer short-lived saleability, perhaps because they are based on transient innovation, and so vertical restraints on resale can help such products become established. However, the benefits fade as the product matures into a price-competitive stage. (128)

In other circumstances, the value of product-enhancing services to consumers may be questionable. Increased services may increase costs more than any associated increase in demand, thus decreasing allocative efficiency. For example, excessive provision of services by distributors can give rise to artificial product differentiation with little inherent value, leading to allocative inefficiency as rivals' efforts at differentiation merely offset each other. (129) The services may also be valued more by some consumers than by others. If demand increases more by extra service to those with low reservation prices (that is, those with high elasticity of demand), then a uniform increase in price to encourage the provision of these services makes infra-marginal consumers (that is, those with more inelastic demand) pay more for services of less value to them. Such might be the case where the services are in the form of information and promotion of the product, and the demand-elastic, marginal customers know less about the product than might consumers who value the product more highly and who might therefore have acquired more information about it, perhaps through regular use. In such circumstances, the incentives of a producer diverge from those of the customer. Customers may therefore benefit more from a wide range of distributors providing different services and selling different quality products, reflected in a wide range of prices. (130) Therefore, the use of vertical restraints on resale to limit free-riding and encourage provision of product-enhancing services has an equivocal effect on consumer welfare, even if providing the services is profitable at the margin, particularly with regard to well-known, established products. (131)

A free-rider problem need not exist where it is feasible to charge separately for the service and the product, as consumers can purchase services as required. (132) The corollary is that free-rider problems are more likely to restrict the supply of information -- an intangible item which is difficult to sell as a discrete commodity -- than they are with regard to other kinds of services. (133)

An extension of the `provision of services' argument is that a distributor may invest resources in obtaining a reputation for holding products of a certain quality. If a competitor can pass itself off under another's reputation, it reduces the incentive for investment in obtaining such a reputation by free-riding on that positive externality. It also creates a negative externality by increasing a consumer's transaction costs due to the creation of uncertainty in the reliability of information in the market regarding the quality of product sold by a particular producer or distributor.

Scherer identifies some rules of thumb. First, vertical restraints are more likely to be efficiency-reducing the more competitors' service efforts simply cancel each other out. Second, vertical restraints are also more likely to reduce efficiency if high prices and high distribution margins are more ubiquitous and hence, the less choice consumers have between low prices and service on the one hand and high prices and service on the other. Third, vertical restrictions are more likely to reduce efficiency the more the high prices attract new entrants into the industry without a commensurate expansion of volume, thereby squeezing the size of existing distributors and causing the loss of scale economies. Finally, where there is a free-rider problem, the more likely it is to cause a loss of valuable service functions, and the more probable it is that efficiency will be increased by the imposition of vertical restraints. In particular, free-riding is more likely to have a detrimental effect on incentives to provide necessary services on complex items. Consumers will also be attracted to distributors not only because they provide pre-sale service but also because it is anticipated that they will provide post-sale service. (134)

(d) Price Discrimination -- Preventing Arbitrage

Vertical restraints on resale to particular territories or particular customers can facilitate price discrimination. (135) The equivocal but potentially welfare-enhancing effects of price discrimination have been discussed above. (136) `Perfect' price discrimination occurs where products are sold at the price each consumer is individually willing to pay -- each individual's reserve price -- but usually the best that a producer can do is to identify two or more groups of consumers that have different reservation prices. (137) Vertical restrictions on resale provide one of the main preconditions of price discrimination, that is, the inhibition of arbitrage by consumers charged different prices according to their different elasticities of demand.

(e) Summary

Vertical restraints on resale are unlikely to have a significant anti-competitive effect unless the party imposing the restraint has substantial market power, or there exists horizontal collusion or a likelihood of it, which depends on the widespread use of vertical restraints in the market. On the other hand, vertical restraints on resale are likely to give rise to significant technical efficiencies where there are costs to be saved in co-ordination of distribution. Similar efficiencies exist where: there are economies of scale or scope in distribution; products and associated skills and knowledge are complex and specialised; and there are positive externalities in services provided by distributors which may be appropriated by other distributors.

3 Pro-Competitive Effects of Vertical Restraints

There is an incentive to employ vertical relationships, including vertical integration by ownership and control, where longer-term co-ordination of manufacture and distribution transactions results in technical efficiencies, particularly reductions in transaction costs, that would not be available if all such transactions were obtained in the market on a spot-transaction basis. The optimum degree of co-ordination will depend on the structure of the particular market. Indeed, vertical structures may compete or share profits, which may stimulate entry by similar structures. (138) In this latter context, vertical restraints may be pro-competitive, in the usual sense that they reduce market power, but on an inter-brand level. The relevant source of competition becomes competition between vertical structures, making less important the barriers to entry limiting the competitiveness of a firm not so integrated.

Any novelty in this inter-brand perspective on vertical restraints lies in the expanded definition of the `firm' that underlies it, rather than the concept that the relevant area of competition could be between vertical structures operating across a number of functional levels, instead of merely between individual firms as defined by law. For example, competition law does not inquire into arrangements made internal to a firm that is vertically integrated by ownership. Transactions within a vertically integrated firm are presumptively legal and occur in the absence of intra-brand competition. A reason for this approach is that it would be impractical to supervise transactions on the huge scale that would be required were competition law to apply to intra-firm organisation. (139) It may also be anticipated that, as the `Theory of the Firm' suggests, competition will provide the incentive to integrate production and distribution arrangements in order to achieve technical efficiencies, including, for example, improvements in the productive use of inputs, economies of scale and scope, and reductions in transaction costs. In such a case, there is little relevance in an inquiry into the internal operations of a firm since the relevant constraints on price emanate from competition from other vertical structures, that is, brands, rather than competition from other legally defined firms at the same functional level. In this sense, achieving technical efficiency by internalising vertical arrangements within an integrated firm can lead to a net increase in collective welfare on balance, despite a reduction in competition, in the manner explained above, as a balance of improvements in technical efficiency as against any anti-competitive effects. The relevance of these issues to an analysis of vertical restraints is that vertical `integration', as such, is a concept concerning vertical control, whether it be by ownership or some other form of vertical restraint. Achieving the above-mentioned efficiencies within vertically integrated `firms', defined in the broadest sense, may even have a pro-competitive effect by enabling the `firm' to compete more effectively with other vertical structures on an inter-brand level, unequivocally improving allocative efficiency and collective welfare.

To this extent, the `Theory of the Firm' can be applied to treatment of vertical restraints in assessing their effects on collective welfare. Where legally defined firms are vertically integrated by ownership or some other form of control, the issue is whether the conduct giving rise to that integration or contractual restraint has the effect of creating or increasing market power. If this is so, the question is then whether the net effect on allocative efficiency is greater with the benefit of increased technical efficiency. Where the structure of the market is such that efficiencies are available in vertical integration, competition will result in the formation of vertical structures of control. Legally defined firms which do not compete on a particular functional level may be constrained by competition at other functional levels. The assessment of market power must therefore cross functional boundaries and firms must be considered from a broader economic `inter-brand' perspective, rather than in a strictly legal context, at a particular functional level. It is therefore relevant to consider the circumstances in which an economic `firm' might be said to exist in order to determine whether the strengthening of vertical restraints might strengthen competition between brands.

(a) Theory of the Firm and Transaction Costs As a Rationale for Vertical Co-ordination

Vertical restraints are arrangements between parties at different functional levels in a market which restrict those parties in relation to how, or with whom, they may deal in purchasing, on the one hand, or in reselling, on the other. They are distinguishable from vertical integration only as a matter of degree and only in so far as the chain of production and distribution occurs within the structure of what is, legally speaking, a single entity. Vertical integration can be defined as the situation where a firm `performs for itself some function that could otherwise be purchased on the market'. (140) Vertical restraints are market transactions, but involve longer-term relationships than individual transactions. In this sense, the transactions may be described as `ex-market', to the extent that they are internal to such relationships.

There has come to be recognised a generic concept of vertical control that includes a variety of intermediate vertical strategies and outright legal ownership. (141) Broadly, a regime of vertical restraints is directly comparable with centralised control within a vertically integrated firm. Both are vertical structures where co-ordination of resources between functional levels occurs `ex-market'. In the case of vertical integration, the co-ordination occurs within a firm, legally defined. In the case of a regime of vertical restraints, the co-ordination occurs within a `firm', economically defined. The issue for analysis of the approach of competition law to vertical restraints is the extent to which competition along the chain of distribution is desirable. (142)

According to what has become known as Coase's Theory of the Firm, profit-maximising firms will undertake activities internally rather than in the market if it minimises transaction, co-ordination and contracting costs. (143) Williamson proposes that, in the Theory of the Firm, the fundamental unit of analysis is the transaction and the central behavioural assumptions are a tendency for human beings to be opportunistic and subject to bounded rationality -- that latter concept meaning the capability to process only limited information. (144) He characterises the presence of firms in markets as an evolution of a complementary form of organisation that economises on transaction costs, assuming the absence of strategic purposes -- or, in other words, conduct designed to increase market power that is not justifiable due to superior efficiency. (145) He considers that vertical restraints are justifiable to safeguard against opportunism and to economise on bounded rationality. (146) Thus, with regard to vertical restraints, competition law should arguably make a presumption of efficiency and restrict its attention to cases in which strategic effects arguably appear. (147) While competition may be impaired by foreclosure of rivals when a firm integrates vertically by contract, vertical restraints (such as exclusive dealing) as a form of vertical integration can create efficiencies and need not restrict output. (148) This will more likely be the case if, upon examination of the market structure, the market is characterised by a dominant firm or tight oligopoly. (149) In other words, strategic behaviour is more likely where there is pre-existing market power.

Transactions may be characterised by their degree of uncertainty and frequency, and by the extent to which durable transaction-specific investment is required -- that is, idiosyncrasy of investment. It may be said that the means that we use to facilitate transactions, the governance structures and the institutional matrices within which transactions are negotiated and executed, are adapted to and therefore vary with the nature of the transaction. Thus, complex transactions require appropriately complex governance structures. (150) Such complexities exist, for example, where distribution requires longer-term relationships involving division of tasks in selling and promotion activities and the transfer of intangibles such as goodwill and know-how. (151) In particular, in the context of bounded rationality and opportunism, efficiencies arise in the assurance of continuing relationships. Where that is the case, dynamic efficiency requires a governance structure that allows adaptations to changing market circumstances. (152) Such governance structures will `supplant standard market-cum-classical contract exchange when transaction-specific values are great'. (153)

As transactions become progressively more idiosyncratic, greater specialisation is required, making assets less transferable to other uses. The most efficient mode of organisation is therefore the one with superior adaptive properties, which, particularly as uncertainty increases, may be vertical integration (by ownership or by agreement), rather than through transactions in the spot-market from time to time between independent participants in the market. (154)

For the distributor, vertical restraints can assure supply, afford protection against rises in price, enable long-term planning on the basis of known costs, and reduce storage costs. For the producer, they reduce selling expenses, provide protection against price fluctuations, and offer the possibility of a predictable market both for inputs and outputs, particularly for a new entrant. (155) Vertical control of the production and distribution chain can save costs expended in the marketplace with regard to negotiation of contracts, difficulties and associated opportunism in adaptation of contracts to changed circumstances, dilution of performance incentives to minimise risk, externalities that cannot be appropriated by trading property rights and inefficient input combinations. Information exchange can be facilitated, resulting in lower costs associated with information search and supervision of performance. Gains can also be made from the convergence of expectations, where vertical control leads to interdependence among successive stages of production and the co-ordination of responses to changed circumstances.

Inherent to the exclusion of market co-ordination from transactions taking place within a specialised, vertically controlled governance structure is that vertical control also can be a mechanism by which barriers to entry can be heightened by increasing financial requirements for entry. (156) A new entrant may need to offer vertical restraints to attract the required distributors, in the sense that independent distributors will be looking for the transaction cost savings and other benefits of vertical control within a chain of distribution to enable them to compete with other vertically controlled distributors. (157)

(b) Treatment of Vertically Co-ordinated Governance Structures

Choice of distribution method depends on such things as the degree of control required to be exercised over the distribution system; the capital required to be committed; the comparative advantage enjoyed by the owner in the administration of the vertically integrated functions; and the relative cost of employees compared with independent contractors. (158) The theory is that a firm efficiently expands until the costs of organising an extra transaction within the firm becomes equal to the costs of carrying out the same transaction by means of the open market or in another firm. (159) Thus, vertical integration may be characterised as `rationalization of the firm into an optimum economic unit'. (160)

The existence of technical efficiencies in `ex-market' vertical control of the allocation of resources among various functional levels depends on the market structure in which the particular distribution system operates. (161) The more the market is characterised by high degrees of vertical governance, the more it can be said that the relevant area of competition is at an inter-brand level between vertically integrated structures, (162) and the less relevant is the anti-competitive effect of a particular vertical restraint on a particular legal entity.

The existence of prevalent vertical control in a market is itself likely to be reflective of there being technical efficiencies in such governance structures. Even if it is not, allowing the formation of other competitive vertically controlled structures may be pro-competitive, pushing prices down to cost, leading to the survival of the most technically efficient governance structure. If incumbent vertical control has raised barriers to the entry or formation of competing vertical structures, then the incumbent entities ought to be constrained by law in how they may use the market power derived from those barriers to entry. The main point is that the degree of vertical control present in the structure of the market ought to be a relevant consideration in assessing the likely competitive effects of a particular vertical restraint.

Take, for example, the franchise contract. As a structure characterised by vertical restraints that approximate full vertical integration, it `lies between anonymous price-mediated exchange and centralized intra-firm employment'. (163) Thus, the definition of the franchisee as a separate firm, rather than as part of the franchisor, is a legal and not an economic distinction and, like the economic concept of the `firm', does not have clear boundaries. (164)

It is not so important to distinguish competition at different functional levels within a franchise structure if the brands closely substitutable for the franchise brand are also supplied by integrated systems and each uses its own separate distribution operations. In other words, the number and size of competing suppliers would be essentially the same at each functional level. The OECD Secretariat states that `if markets are really competitive, inefficient franchise systems, those that make inefficient choices, should be pushed out of the market by other, more efficient brands and distribution systems', thereby emphasising that the focus of inquiry should be on competition between vertical structures, rather than on the internal organisation, or mode of control, of the structures themselves. (165)

In analysing the way in which OECD competition policy treats franchise agreements and the vertical restraints that they contain, the Secretariat observes that, while franchisor and franchisee may remain legally independent, economically they are part of a structure of `external integration' that may function like a vertically integrated firm. (166) The Secretariat states that:
   It follows from the integrating function of franchise contracts that a
   franchise system should be treated as a single integrated structure in
   evaluating its position in the market and its ability to exercise market
   power. In other words, the economic position and role of a franchise system
   can be seen as close to that of a single integrated entity, rather than as
   a collection of individual firms, regardless of the legal status of
   franchisees and franchisors. (167)


It concludes that:
   [I]n analysing vertical restraints, competition policy should focus on the
   extent of competition in the market from other brands and from other retail
   distribution systems, rather than only on intrabrand competition. Vertical
   restraints may reduce intrabrand competition without harming economic
   efficiency. With sufficient competition from other brands and retailers,
   the franchisor will be unable to reduce economic efficiency by exercising
   market power over pricing or the choice of quality in a properly defined
   market even if intrabrand competition is completely eliminated. (168)


Specifically with regard to the franchise contract, the vertical restraint can be seen as an attempt to give property rights to the parties to the transaction in those areas they can efficiently control. (169) Free-riding by franchisees, either vertical or horizontal, is controlled by vertical restrictions. (170) For example, tying contracts can be efficient `policing' devices to ensure the quality of inputs and thus the protection of the franchisor's reputation. (171) It is also likely that the franchise contract gives rise to incentives that reduce supervision and monitoring costs. (172) Franchisor opportunism -- that is, appropriation of the franchisee's investments by threat of termination -- is controlled by the likelihood that the costs associated with the damage to the reputation of the franchisor, and the increased costs of running the chain as a vertically integrated structure rather than as a franchised system, would be higher than the benefits of behaving opportunistically. (173)

Where vertical restraints so efficiently integrate the chain of production that the use of the market for co-ordinating the chain of production is no longer feasible or relevant, there exists a situation of `vertical integration by dependency or by contract'. (174) In that case, it is unclear whether vertical restraints should be treated differently from decisions made internal to the firm within a structure integrated vertically by ownership, rather than dependency or contract. In other words, it is questionable whether efficient vertical restraints ought to be treated as restraints in the market at all, as opposed to being treated as aspects of an efficient, non-ownership form of vertical integration. Brunt queries:
   Under what circumstances ... would the potential for transactions not
   exist? Answer: when there are such efficiencies of vertical integration ...
   that market co-ordination between buyers and sellers is superseded by
   in-house coordination. There would, in such a case, be no functional split
   to create market transactions between stages of production. (175)


She goes on to say that the issue of whether the courts will `break into the vertical structure' is essentially a question of the appropriate boundary to be drawn on policy grounds between market and non-market co-ordination of economic activity. (176)

Brunt was discussing the issue of determining an appropriate market definition as a tool of analysis for assessing the effects of conduct on competition. (177) It will be explained that market definition in Australia includes a functional element. In effect, if there is no significant potential for market transactions to exist between functional levels, then there is no relevant functional split and the market should be defined as encompassing those functional levels. In such a market, the conduct of a legal entity at a particular functional level is insignificant relative to the conduct of the vertically co-ordinated governance structure -- or economic firm, or brand -- within which the legal entity operates. A vertical restraint coordinating that legal entity is, similarly, likely to be insignificant. In effect, this is the same as treating the vertically co-ordinated governance structure as a vertically integrated firm, and treating the vertical restraints forming the governance structure as being intra-firm (or intra-brand) and outside the ambit of competition law -- not per se as a matter of policy (as is the case with intra-firm conduct), but by analogy after determining the net effect of the vertical restraints on collective welfare. This net effect is derived through an analysis of the gains in technical efficiency compared with the detriment to allocative efficiency resulting from any lessening of competition, with particular reference to inter-brand competition.

This nexus between market definitions where there are significant, vertically co-ordinated links between functional levels and the treatment of vertical restraints is relevant to the recognition of the importance of inter-brand competition over intra-brand competition in Australia. This issue will be discussed further in Part IV by reference to the Australian case law.

4 General Comments on the Economics of Vertical Restraints

Rather than treating vertical restraints as anti-competitive on their face, any anti-competitive effects should be balanced against improvements in technical efficiencies.

In some markets, the technical efficiencies in vertical co-ordination are so strong that competition will tend to result in the creation of a variety of vertical structures designed to achieve those efficiencies. In such cases, it is more appropriate to recognise a regime of vertical restraints as being an alternative system of integration. In light of the Theory of the Firm analysis, this should lead to an awareness not only that these vertical structures might be technically efficient, but also that the relevant focus of competition analysis may be best performed at an inter-brand level, between competing vertical structures. This will reduce the relevance of individual vertical restraints in a market structure characterised by vertical integration by contract or by ownership.

IV AUSTRALIAN JURISPRUDENCE REGARDING VERTICAL RESTRAINTS

In Australia, markets are relatively small and concentrated. This may justify particular importance being placed on the protection of the competitive process, as opposed to the approach of the Chicago School, which would generally look first to the outcome of allocative efficiency rather than the means by which it is achieved. Australian competition law appears to focus on promotion of a competitive market structure on the assumption that such a structure will result in maximum allocative efficiency, if only perhaps for the benefit of consumers rather than society as a whole. The primary importance placed on competitive markets is reflected in the dual adjudication system (178) in which vertical restraints are assessed by the courts to determine whether they are per se prohibited or substantially lessen competition, and then by the Commission and the Tribunal to see whether there are public benefits associated with the restraints that outweigh any anti-competitive detriment.

The small and concentrated nature of Australia's markets also influences the factors that are considered to be relevant public benefits. The efficiency analysis of vertical restraints has not generally been on the top of the Commission's agenda in its determinations. (179) The Tribunal has expressly referred to the importance of technical efficiency as a public benefit, particularly in its more recent decisions. However, it is rare to see a discussion of the broader economic literature. Certainly, it is rare to see the analysis in the particular terms of the economic concepts developed in that literature. Nonetheless, there is a growing recognition of efficiency as a public benefit, not merely in the analysis of particular conduct, but also in the definition of markets characterised by `economic' firms that are made up of structures of vertical control comprising a number of `legal' firms operating at different functional levels.

Concepts of technical efficiency are treated separately from the assessment of the effects of the restraints on the competitive process. Ideally, the dual adjudication system, taken to its conclusion through the authorisation and notification process, should allow vertical restraints to stand if their net effect is an improvement in allocative efficiency, taking into account reductions in collective welfare due to the occurrence of vertical transactions outside the arena of the competitive market, balanced against increased collective welfare due to improvements in technical efficiency.

In Australia's markets, one would expect vertical restraints to have a higher anti-competitive detriment, requiring a commensurately higher improvement in technical efficiency if they are to have an overall positive effect on collective welfare. However, if the market is defined correctly, vertical restraints may be more readily acknowledged to be not only technically efficient but also pro-competitive.

In some of the Tribunal's determinations concerning market definition -- particularly in markets characterised by incumbent vertical integration -- there is some indication that the broad transactions approach is supported in so far as the market, as a meaningful area of close competition, is defined to include a number of functional levels where it is clear that the degree of vertical integration in the market reflects circumstances where inter-brand competition is overwhelmingly more significant than intra-brand competition, in the sense quoted from Brunt above. (180) In effect, defining the market that widely -- to include multiple functional levels -- can be seen as a recognition that the various modes of vertical organisation referred to above internalise transactions that have minimal effect on competition, despite the fact that they are removed from the market. It also recognises the usefulness of vertical restraints as being actually pro-competitive in markets where allocative efficiency is achieved by competition between `brands', or governance structures defined economically as `firms', within which transactions are conducted technically efficiently between firms, as legally defined, but effectively ex-market.

A Market Definition in Functionally Integrated Markets

With the exception of RPM and third-line forcing, vertical restraints are only contrary to competition law if they have the purpose, effect or likely effect of substantially lessening competition. Competition is the converse of market power. Market definition is a formal and necessary part of the process of assessing market power and, hence, competition.

If market definition does not contain a functional element, competitive force exerted in a particular product market from upstream or downstream product markets can be taken into account as a factor external to the analysis of market definition in identifying market power at that particular product level. However, a theme in this article is the importance of the functional element of market definition in identifying the most significant sources of competition. An approach which merely treats competitive forces at different functional levels as an external circumstance is more arbitrary, as it lacks a consistent theoretical approach and tends to overemphasise the effect on competition at the particular functional level by reference to which the relevant market is defined. The very reason why market definition has a functional element is to give meaning to the concept of the market as an aid to identifying market power where there exists vertical interdependence. Thus, the definition of the market should include competitive constraints from other functional levels, rather than leave such influences merely as external circumstances to be taken into account when assessing the effect of conduct in a particular product market.

Queensland Wire (181) is a case of particular importance as it has until recently been the only instance in which the High Court has considered these issues of market power. (182) In this case, it was made clear that the purpose of identifying the appropriate market is to discover the degree of the market power of the relevant entity. (183) It was said that, if the defendant is vertically integrated, the market for determining the degree of market power is at the product level which is the source of that power. (184) The market, an area of close competition or strong demand or supply substitution, is determined by reference to geography, product substitutability, functional level and time. (185)

Market power is the ability to behave persistently in a manner different from what would be expected of a firm facing similar cost and demand conditions in a competitive market, (186) such as the raising of price above the minimum efficient cost of production without rivals taking away customers in due time. (187) It needs to be assessed in light of the level of competition in the market, as the concepts of market power and the level of competition are interchangeable. These concepts are determined on analysis of the structure of the market, specifically as stated by the Tribunal in QCMA. (188)

Of interest in the present context is the recognition of vertical restraints and integration as an element of market structure in determining the level of competition present in the relevant market. In Queensland Wire, it was observed that while vertical integration sometimes accompanies substantial market power, its presence does not necessarily mean that it raises barriers to entry or that the power exists. (189) Furthermore, it was recognised that vertical integration could be pursued for legitimate reasons, such as quality control. (190)

If the market is defined so narrowly as to exclude integrated functional levels, then it will result in an over-emphasis on the foreclosure of individual firms at one functional level. In other words, an unduly narrow definition of the market will place too much emphasis on intra-brand competition and not enough on inter-brand competition in circumstances where functional levels are so interconnected that it is the performance of vertically integrated groups of firms that places competitive constraints on the individual firms.

It is not determinative of the issue of market definition that the vertical relationships present in the market are historically the result of monopolisation, in the sense of the pursuit of market power, rather than the achievement of technical efficiencies. The mere existence of those vertical structures may make it necessary to enter the market at all relevant functional levels in order to compete with those structures. In this way, vertical restraints will be pro-competitive in facilitating effective entry. In such a case, the vertical restraint by the entrant may be pro-competitive without being justified on the basis of efficiencies. In the longer term, however, it would be expected that, as inter-brand competition improves in this manner, the pressure for greater efficiencies would increase and thus vertical agreements that were put in place to achieve monopoly rents rather than technical efficiencies would become absent from the market over time.

In Australia in recent years, there has been increasing recognition of the merit in defining markets to include those functional levels that are integrated to a sufficient extent. In such cases, the relevant public benefits and detriment are considered on an inter-brand level, rather than with a focus on the effects at a particular functional level. The following determinations illustrate this approach to market definition.

In Re Tooth & Co Ltd and Tooheys Ltd, (191) the Tribunal reviewed the Commission's determination regarding the various ties restricting lessees and freehold hoteliers from supplying liquor other than that purchased from the particular brewer. In doing so, the Tribunal set out fundamental economic principles for analysing competition. The Tribunal considered that definition of the market was essential in order to assess the significance of the ties as barriers to entry. (192) It found that inherent to this analysis is an examination of the market's total structure, both actual and potential, and the likely competitive conduct of its participants. (193) Notably, the Tribunal was also of the view that `the specification and analysis of the market has significance not just for the identification of detriment but also for the establishment of benefit.' (194) Thus, it found that
   the implication of the ties for both benefit and detriment needs to be
   considered by reference to the structure of the market in which they are
   embedded, the processes of competition with which they are associated, and
   the prospects for change. (195)


The Tribunal's approach to market definition was broad. In seeking to identify the relevant area of close competition, it took into account the maximum range of business activities and the widest geographical area in which substantial demand and supply substitutability would occur in the long term. (196) The Tribunal acknowledged that competition is a matter of degree, and that the field of substitution is not necessarily homogenous but may contain sub-markets of especially immediate competition. (197) As is now widely recognised in Australian competition law, (198) the Tribunal determined that the market incorporates these various dimensions of product, functional level, space and time, without going so far as to be `too broad and vague a conception'. (199) With this expansive view of the ambit of close competition in order to define the relevant market, the Tribunal in effect emphasised the need for substantial market power to be associated with the ties for them to contravene the prohibition. On the basis of that point, the Tribunal made an apt observation:
   [I]f the ties are to be seen in context, we should make the point ... that
   the covenants are an instrument of vertical integration; and that there are
   other instruments of vertical integration which are used in conjunction
   with, or as substitutes for, the covenants.... In fact, there are really
   three kinds of vertical integration between brewing and distribution to be
   found in this industry: (a) integration by ownership plus managerial
   control; (b) integration by ownership plus contract (lease and related
   covenants); (c) integration by contract alone (long term covenants with
   privately owned hotels). (200)


The Tribunal noted that the majority of transactions between suppliers and distributors as a whole were at arm's length, but that there was a highly integrated wedge of market around which the ties revolved. (201) Furthermore, it considered that the tied sector was vertically integrated `not just by structure (ownership and contract) but also by competitive practice and attitude.' (202)

In Broken Hill Pty Co Ltd; Re Koppers Pty Ltd, (203) the Tribunal reviewed the Commission's determination regarding a contract for the acquisition by Koppers of the whole of the coal tar and naphthalene oils produced by BHP steel operations. The Tribunal took a broad approach to characterising areas of close competition, accepting the applicant's testimony that `monopolistic price exploitation at the primary level will be subject to strict limits because of indirect competition against the rival product stream'. (204) Thus, competition at different functional levels was considered to be of high importance in judging the proper field of competition. The vertical restraints were held to be a form of vertical integration and were described as `an admirable vehicle for promoting harmony of interests and for securing an appropriate set of incentives to maximise each participant's contribution to achieving the most productive use of the pooled resources.' (205)

The decision of the Tribunal in Re Queensland Independent Wholesalers Ltd (206) provides further insight into the definition of a market characterised by vertical structures. The case did not involve the legality of vertical restraints. Rather, the main issue was the identification of the relevant market in determining whether a merger between independent wholesale grocery companies had the effect of substantially lessening competition. (207) Nonetheless, the statements made by the Tribunal with regard to definition of markets with multiple functional levels are of general application. The Tribunal's characterisation of the vertical relationships between the wholesale and retail functional levels is consistent with its statement quoted above from Tooth that the strength of vertical relationships is a spectrum ranging from loose production and distribution arrangements to total vertical integration, such as might characterise a supermarket chain or a franchise regime. In response to the argument that there was `de facto integration' between the independent wholesalers and independent distributors driven by the strength of competition at the retail level, the Tribunal held that:
   It was not possible to argue that the independent wholesalers and
   independent retailers are tightly bound by legal means, ie ownership or
   contract. The evidence is that this kind of integration is limited....
   There are various contracts in place, the more inclusive relating to
   franchise agreements.... For the most part, however, the evidence is that
   the current vertical `links' are largely a matter of commercial practices
   in operation between the independent wholesalers and the individual banner
   groups.

   We do not accept the contention regarding de facto integration. It is our
   view that wherever there are market transactions of significance there is a
   need to distinguish a separate functional level. In this case there is, in
   fact, significant market activity at the wholesale level. (208)


The Tribunal noted the necessity for the wholesalers to attract distributors with inducements and the continual danger of a distributor `breaking away' from a wholesale `stable'. (209) The Tribunal also had regard to the fact that the terms and conditions of agreements between wholesalers and distributors were subject to negotiation and had a discretionary element, and that pricing, stocking and service decisions were not totally constrained by the supplier. (210) However, it held that the functional split between wholesale and retail comprised merely submarkets, in light of the `pervasive competition with the national integrated chains' with operations at both functional levels. (211)

It is apparent the Tribunal considered that the test for determining whether there exist distinct functional levels in a market is whether there is `significant market activity' between the levels. (212) It is worth reiterating that the Tribunal's comments in QIW were in the context of identifying whether the merger of independent wholesalers -- in a market comprising major vertically integrated chains and significant constraints on manufacturers imposed by competition at the retail level -- would give rise to such market power that it would substantially lessen competition. The efficiencies obtained from the contractual vertical relationships between independent wholesalers and retailers enabled them to compete more effectively, on the same terms and in the same market as the vertically integrated chains.

Similarly, in Re Review of Freight Handling Services at Sydney International Airport, the Tribunal considered that, while perfect complementarity between products, even on a one-for-one basis, is suggestive of there being no functional distinction between the markets in which the products are produced, it is relevant to consider whether the complementarities `appear to give rise to economies of joint consumption or joint production that dictate the services must be performed within the same economic entity'. (213)

In terms of the conceptual approach to market definition, however, in light of these determinations of the Tribunal, it seems a small conceptual step to propose that, where vertical restraints exist to the exclusion of the market, there is no meaningful functional distinction to be made between those particular links in the chain of production. In essence, it may be argued that the vertical restraints are `intra-firm' in the economic, Coasean, sense and can be attributed with the same technical efficiencies as are commonly associated with transactions occurring within a firm.

The conceptual justification for a definition of a market to encompass a number of functional levels is assisted by the recognition that a `firm', which is integrated in an economic sense by a regime of vertical restraints, is interchangeable with a vertically integrated firm in the legal sense. It has already been suggested that the Tribunal took this approach in Tooth. The interchangeability of contractual rights and property rights was also noted by the Tribunal in AGL Cooper Basin in its observation of the social value in the preservation of contractual commitments and the statement that:
   The institution of contract goes hand in hand with the institution of
   property rights which, in turn, gives rise to appropriate incentives for
   behaviour that will be both efficient and fair. It is part of the web of
   interconnectedness that characterizes society as a whole. (214)


The Commission's decision in DuPont (Australia) Ltd, (215) while involving consideration of a horizontal arrangement in the form of a joint venture, serves as a good example of many aspects of the Commission's approach to market definition involving multiple functional levels. In that case, the Commission considered authorisation for a joint venture between oligopolistic manufacturers of sodium cyanide, including DuPont, with the effect that manufacturing capacity would be increased and DuPont would have exclusive rights to market the product. The Commission observed that the industry is characterised by vertical integration of the production and marketing segments at both domestic and international levels. (216) That fact led the Commission to define the relevant market to include both functional levels (217) and to recognise that `[a]uthorisation of the joint venture and its marketing arrangements would formally integrate those functions for the new joint venture company', (218) which would bring its structure closer to the vertically integrated manufacturing and supply functions of the two other major competitors. However, their market shares would remain the same at approximately 30 per cent each. (219) The Commission placed importance on a number of public benefits, including increased capacity for import substitution in a dynamically expanding market, technical efficiency due to the introduction of new techniques and technology, and environmental benefits. (220)

On the other hand, consider the decision of the Commission in Victorian Egg Industry Co-operative Ltd. (221) This authorisation application was for a franchise and marketing agreement between the Victorian Egg Industry Co-operative (`VEIC'), a collective of egg producers, and its franchisees. The Commission divided the relevant markets into what appear to be incorrect functional categories based predominantly on the size of the purchasers rather than the functions they performed, such as production, wholesaling or retailing. (222) These unduly narrow market definitions -- namely, the small chain store market, the trolley market and the box market -- significantly affected the analysis of the effect of the vertical restraints on competition. (223) The Commission considered that the vertical restraints would have a greater anti-competitive effect amongst small chain stores than among supermarkets, which were sufficiently powerful to pass on increased prices to consumers, while small retailers in the box market, as defined by the Commission, were subject to high degrees of competition. (224) The Commission clearly stated that participants in the box and middle markets were competitive alternatives to sales of eggs from the main supermarket chains, (225) a statement which of itself would suggest that a functional delineation between those three sectors was actually better described as a horizontal delineation on a product basis. Not only does this erroneously narrow market definition magnify any anti-competitive effects of the vertical restraints but, conversely, it also leads the Commission to the difficult argument that countervailing market power at a different functional level diminishes the anti-competitive effect of the restraints. In fact, such a situation simply makes it more probable that monopoly profits will be spread more evenly within the vertical governance structure, but they are no less likely to be borne ultimately by consumers.

This determination of the Commission therefore illustrates, first, the importance of market definition -- and particularly the functional element -- in the analysis of the effect of vertical restraints on competition. Second, the determination illustrates the dangers in focusing the analysis of the competitive effects of vertical restraints on the characteristics of particular legal entities bound within the vertical governance regime. Such an ill-founded focus tends to protect competitors, rather than the process of competition, thus failing to acknowledge the role of the market as an instrument giving rise to the most efficient form of organisation of production and distribution. This focus also lacks any express acknowledgment of a goal to protect the interests of certain members of society -- in particular, small businesses in the form of single chain stores, among others.

These determinations indicate recognition of vertical restraints as a mode of vertical integration. They also indicate an approach to market definition that expressly takes into account whether the market structure is characterised by vertical integration in this broader sense. The effective result is that in a market structure characterised by vertical control, barriers to entry can be exacerbated at a particular functional level by a vertical restraint without a detrimental effect on competition, which is manifest more in competition between vertical governance structures than between individual firms.

The extent to which the functional aspect of market definition has had a significant impact on the courts' analysis of whether vertical restraints have substantially lessened competition is questionable. For example, in ASX Operations Pty Ltd v Pont Data Australia Pty Ltd, (226) the Full Federal Court considered the situation where ASX Operations Pty Ltd (`ASXO') had monopoly control over certain raw stock exchange data. It sold that data to Pont Data and other firms, which relayed the information to various subscribers. ASXO also competed with Pont Data in relaying the information to subscribers through a distribution arm known as JECNET. The terms of supply of data from ASXO to Pont Data included a requirement that Pont Data refrain from wholesaling, that it inform ASXO of the identity of its customers and that it pay a higher price for keeping the data stored. The Court accepted the trial judge's finding that the relevant markets were the stock exchange market and the information market. (227) In particular, the information market encompassed the dissemination, wholesaling and retailing of stock exchange data. (228) Yet despite the vertical scope of the market definition, the wholesaling activities were held to be an important feature of the market as a whole and their prohibition was likely to have the effect of substantially lessening competition. (229)

On one view, the decision appears to place great importance on a lessening of competition at one functional level, that is, wholesaling, notwithstanding that the market was much broader than that, including dissemination and retail functions. However, on another view, the decision is an example of a focus on inter-brand competition. In the context of the discussion of Queensland Wire in this part, it was argued that, in a market characterised by numerous functional levels, the real issue of competitive analysis will be at a level where there exists market power. (230) In Pont Data, ASXO had monopoly control of the dissemination of information, and by its vertical restraints prohibiting wholesaling, requiring identification of customers and charging an excessive price for information storage, it was able to raise barriers to entry against wholesalers -- or, indeed, other stock exchanges -- wishing to compete against it in the dissemination of information under other brands. (231) Thus, the Court's treatment of the vertical restraints was consistent with a characterisation of the relevant area of close competition as being between vertical governance structures as, even at this inter-brand level, the vertical restraints had a significant detrimental effect on competition.

Similarly, in Mark Lyons, Wilcox J of the Federal Court defined the relevant market in that case as the Australian ski-boot market, including both manufacture (in this case importation) and distribution at a wholesale and retail level. (232) Competition was characterised as occurring between different brands of ski-boots. (233) However, the refusal to supply a particular distributor who refused to agree not to sell the goods at discount warehouses was found to have substantially lessened competition. (234) It is unlikely that this would have been the result if the competition analysis had truly been conducted on an inter-brand level.

On the other hand, consider the decision of Nicholson J of the Federal Court in Regents Pty Ltd v Subaru (Aust) Pty Ltd, (235) in which his Honour considered whether it was a misuse of market power in contravention of s 46 of the TPA for the sole Australian distributor and wholesaler of Subaru spare parts to refuse to supply a dealer whose franchise had been terminated previously. His Honour identified separate functional levels, being manufacture, wholesale and retail, but found a market for motor vehicles, parts and ancillary services. (236) While the spare parts of one brand of car were not directly competitive with the spare parts of another brand, their prices were constrained by the potential for substitution of one brand of car for another, such that there was an interconnection and complementarity of parts and the cars themselves at wholesale and retail levels. (237) In this manner, his Honour's definition of the market was consistent with the determinations of the Tribunal described above, particularly in QIW. With the market defined sufficiently broadly to recognise competition at the inter-brand level, his Honour considered that the distributor did not have substantial market power for the purposes of s 46. (238)

As is explained in Part IV(B) below, many of the Australian decisions concerning whether vertical restraints are in contravention of s 47 due to their anti-competitive effects do not expressly take into account the inter-brand effects of the restraints or the functional scope of the market. One reason for this may be that s 47(13)(b) can be read as defining vertical restraints by reference to two separate markets: a market in which the legal entity imposing the restraint conducts business, and a market in which the legal entity which is restricted conducts business. In Outboard Marine Australia Pty Ltd v Hecar Investments No 6 Pty Ltd, Fitzgerald J, sitting as a member of the Full Federal Court, referred to this issue and to the effect of s 47(10)(a), which arguably confines consideration of the vertical restraint in question to an isolated instance rather than as part of the aggregate of a number of similar restraints. (239) In light of these limitations, his Honour was of the view that it is not relevant `that the purpose or effect of a respondent's conduct may be to enhance competition in some other market or markets or even overall, or that the respondent's conduct may be in the public interest'. (240)

However, s 47(13)(b) merely identifies separate markets to ensure that the effect of the vertical restraint on competition affecting either party is taken into account. There is nothing which requires that the relevant market be defined merely by reference to the party -- such a result would run contrary to the principles of market definition already discussed. Rather, the provision ensures that, should it be found that one party conducts business in a market that is functionally distinct from the market in which the other conducts business, then the effects of the restraint in both should be considered. Thus, it is arguable that there are no words preventing both parties from being taken to conduct business in the same market. Otherwise it would seem impossible in Australian competition law to acknowledge the existence of an inter-brand market. While this argument may preclude a more useful basis of analysis, it is unlikely that it has a major practical impact on the analysis. The circumstances existing at one functional level can still be taken into account in assessing the effect on competition of conduct at another functional level.

B Vertical Restraints Substantially Lessening Competition

The Commission's determinations are a factual inquiry and have little precedential value. However, a determination is useful as an example of the Commission's approach. (241) In clearance, (242) authorisation and notification determinations regarding the competitive effects of vertical restraints -- as opposed to their net public benefits -- the Commission has had regard to the duration of the restraints (often to facilitate market transition) (243) and, in particular, the market power of the manufacturer (244) (often as reflected in the number of alternative distributors). (245) The Commission has also tended to view geographical restraints at the retail level as being anti-competitive, while being less so at the wholesale level. (246)

This part focuses on the decisions of courts and the Tribunal regarding the treatment of the anti-competitive effects of vertical restraints, rather than on the determinations of the Commission, except in order to illustrate the Commission's treatment of inter-brand competition. The Commission's determinations regarding public benefit are of greater use given that the dual adjudication system effectively relegates issues of economic efficiency to the authorisation and notification analysis.

In the significant determinations of the Tribunal regarding the anti-competitive effects of vertical restraints, it has focused on barriers to entry being raised to foreclose competition or restrict consumer choice and flexible reaction to market dynamics; for example, in the context of maintaining horizontal arrangements, (247) preventing opportunities for additional enterprise for the longer term or indefinitely in markets expanding or in transition, (248) or obtaining competitive advantage from economies of scale not available to smaller producers. (249) One of the most prominent examples is the decision of the Tribunal in Tooth. Ties were imposed by the two major brewers in the relevant geographical area in exchange for leases, mortgages and licences with respect to the retail sale of beer in hotels. These ties were extensive, lasting for periods of a few years to well over 50 or 100 years. The Tribunal considered that the ties limited competition in a number of ways. (250) First, they denied access by one brewer to the hotels tied by the other, in the absence of competition by the brewers in the ties themselves. Second, they heightened barriers to entry and thus impeded the market penetration of interstate or new brewers, and the entry of new hoteliers. Third, they contributed to an unduly narrow range of competitive instruments. Fourth, they limited the ability of hoteliers to bargain with the tying brewer, or to obtain supplies of beer elsewhere at times when the tying brewer was short. Fifth, they restricted the range of brands available to consumers at a particular hotel. Finally, over time, they constrained the responsiveness of the market to changing demands and conditions of supply within an important segment of the beer industry. The Tribunal considered that various barriers to entry, including scale economies, made entry difficult, but not impossible, making the ties `a substitute for marketing' and creating a `captive market'. (251)

The Commission and the Tribunal have demonstrated a preparedness to consider vertical restraints on purchase in the context of inter-brand competition. Shell Co of Australia Ltd and Neptune Oil Co Pty Ltd (252) was a test case brought by the petroleum industry in order to settle the legality of standard agreements between refineries and service station operators which required the operators to purchase exclusively from the refinery all petroleum products sold or supplied from the outlet or used or consumed in the course of business at the outlet. (253) The Commission considered the competitive effects of the agreements, stating that the basis for analysis was `workable competition', an `elastic and variable concept' with imprecise criteria necessarily calling for subjective judgment. (254)

In examining the competitive context of the arrangements, the Commission noted the interdependent structure of the industry, and its integration of the functions of supply, manufacturing, distribution and disposal through outlets as `interlocking for efficiency purposes'. (255) It observed that competition was `between the total operation of one company and another, and it is felt in the market only at the point of ultimate sale', and that there was little room for competition by other than the major refiners. (256) It considered that the whole system eased the pressure on the major refiners as suppliers, reduced the opportunity for entry or growth of an independent wholesaler, and directly affected competition in the retail market. (257) This was especially because government planning controls gave service stations a scarcity that added to the degree of concern caused by the exclusive dealing arrangements. (258) The Commission' characterised the tied dealers as `conduits' of the branded products and each site as an advertisement for the brand, strategically placed so as to compete with other brands, and supplying products under much the same control as would be expected by the manufacturer selling directly itself, but without `the disadvantages of an employer-employee relationship'. (259) It is possible that if the product had been less homogenous the Commission might have considered that intra-brand competition was more important. (260) The Commission's determination here illustrates the value in analysing the effects of vertical restraints on competition in light of the extent to which functional levels are vertically interrelated and, specifically, interlocked for efficiency purposes. The Commission identified that the relevant area of competition existed at an inter-brand level. Thus, reductions in intra-brand competition were given less weight by characterising downstream distributors as conduits of the branded products, rather than as victims of anti-competitive conduct. This approach allowed the Commission to focus on the main risks arising out of the standard vertical restraints imposed on service station owners, namely the effect of foreclosure of other brands on competition at the retail level.

In Ralph McKay Ltd, the Commission considered whether to grant clearance in relation to a system of distribution agreements concerning a number of tiers of selling outlets. (261) Distributors were at the head of the chain, with their own ordinary dealer outlets. In New South Wales, the manufacturer had its own Area Main Dealers, which distributed products to ordinary dealers. Ordinary dealers were franchised or independent dealers selling directly to end users. Local garages, hardware stores and general stores resold some items. The sole restriction was on the manufacturer not to appoint other dealers or distributors within certain territories. (262) The Commission found that the arrangements did not substantially lessen competition. (263) It observed that, as distributors were able to sell competing products, it was up to them to determine how actively they competed with different brands. (264) The Commission was not concerned that the distributors and the manufacturer agreed the territories in which they and the Area Main Dealers would operate. (265) The absence of market power and the fact that the restraints did not foreclose competition at an inter-brand level significantly distinguish this decision from that of the Tribunal in Ford Motor Co of Australia Ltd and Ford Sales Co of Australia Ltd. (266)

In Ford, the Tribunal denied authorisation of conduct whereby Ford restricted its dealers and distributors from dealing in products, including cars and spare parts, of other manufacturers. (267) The Tribunal considered that Ford had a degree of market power due to a relatively high level of supplier concentration, substantial regulatory and scale barriers to entry, significant product differentiation and the importance of dealer networks, with only Ford dealers subject to mandatory solo franchising. (268) The Tribunal observed that dealers competed in price, product range, sales promotion and service. (269) The structure, geographic distribution and efficiency of Ford's dealer network were considered to be `all weapons of competition between Ford and other vehicle builders and importers'. (270) The Tribunal was of the view that the restraints inhibited the countervailing power that could be exercised by dealers against the manufacturer and foreclosed new entry at the manufacturing level by restricting access to dealer outlets. The Tribunal stated:
   We reject the argument that an enhancement of competitive strength of a
   major participant in a market necessarily increases competition. To assess
   the effect on competition it is essential to examine whether that
   enhancement has resulted from the imposition of a restraint on potential or
   existing competitors.

   Ford's system of mandatory solo franchising, with its effect of pre-empting
   retail outlets, restricts competition between builders and importers of
   vehicles, restricts competition between vehicle dealers and restrains the
   interaction between these two levels of the new vehicle market. (271)


It concluded that the resultant lessening of competition was substantial, given Ford's size in the market. (272) Issues of efficiency were dealt with in the analysis of public benefit, and the Tribunal doubted whether any efficiencies resulting from supply to dealership networks relied on the existence of the restrictive provision. (273)

In many cases, the decisions of the courts, as opposed to those of the Commission and the Tribunal, reflect a legalism that pays little attention to economic concepts, not merely in the analysis of the competitive effects of vertical restraints but also in the interpretation of the concept of competition itself. However, in those cases where the economic effects of vertical restraints on competition are squarely examined, there appears to be a general recognition, if not an entirely consistent application, of the concept that market power is required at some level of the market for the vertical restraint to be a substantial barrier to entry and, hence, that there must be a limitation of competition between `brands'. Nonetheless, there is little or no express recognition of an inter-brand analysis, as such.

In Dandy Power Equipment Pty Ltd v Mercury Marine Pty Ltd, (274) a manufacturer terminated a franchise on the grounds that the franchisor had obtained a franchise from a rival manufacturer. In the Federal Court, Smithers J characterised the competition analysis as being to identify a substantial lessening of competition, in the sense of there being `a lessening in a significant section of the market'. (275) To the extent that the `significant section of the market' is a functional level where there exists market power, there may be in that approach a de facto recognition of the importance of inter-brand competition in a larger vertically integrated market in the sense described previously. It is also interesting that, in considering the alternative `purpose' element in s 47, Smithers J considered that the purpose of the termination of the franchise was to avoid commercial abuse of the reputation of the product. (276) By objective inference from the conduct in all the circumstances, it could not be said that the purpose of the termination was to lessen competition. (277) His Honour's decision is consistent with the free-rider rationale for vertical restraints and suggests that, at least where the vertical restraints have no anti-competitive effect, the question of purpose may be determined by reference to whether the restraints were put in place to achieve efficiency gains.

What is perhaps an excessively legalistic approach is demonstrated by Franki J of the Federal Court in Hecar Investments No 6 Pty Ltd v Outboard Marine Australia Pty Ltd. (278) Franki J considered that the TPA is directed to business situations. Thus, the concept of `competition' in a business sense should be preferred to a concept of `competition' in an economic sense. (279) The test for whether the conduct in question lessened or hindered competition, in his Honour's view, should be what an `ordinary purchaser' would think, on `a practical and somewhat superficial view of the position' with regard to competition, which he defined simply as the `supplying of alternatives to satisfy a market'. (280) Therefore, his Honour held that the refusal of a manufacturer of outboard motors to supply a distributor for the reason that the distributor had acquired motors from a rival manufacturer had the effect of substantially lessening competition because it hindered the opportunity of a purchaser to view competing products side by side. (281) On appeal to the Full Court, (282) a more sophisticated economic analysis was undertaken. Bowen CJ and Fisher J considered that `[t]he economic meaning [of competition] must be applied in a practical way to accommodate the concern of the Act with business and commerce', (283) but that the analysis of the processes of the market required detailed evaluation of the market structure. (284) Their Honours rejected the argument that the convenience of consumers was an important feature of the market structure for the purposes of determining the state of competition in a particular market. (285) In light of the likelihood that the dealer would be replaced with another, their Honours found no evidence that the structure of the market would be altered such that barriers to entry would be raised or price competition reduced. (286) Fitzgerald J, in a separate, concurring judgment, commented that it would be unusual and exceptional for competition in a generally competitive market to be substantially lessened by a refusal to supply a particular dealer among a number of competitive retailers in the market with a product otherwise freely available and competitively marketed. (287)

This judgment is consistent with the economic rationale for emphasising the importance of subsisting market power at an inter-brand level underpinning a vertical restraint before it can be said to have an anti-competitive effect. The same principle is manifest in Broderbund Software Inc v Computermate Products (Australia) Pty Ltd, (288) in which Beaumont J of the Federal Court considered that the manufacturer's grant of exclusive distribution rights for computer software in Australia did not substantially lessen competition, in particular because the manufacturer did not have substantial market power. (289) However, even where market power is found to exist, the analysis will be on competition, rather than economic efficiency. In O'Brien Glass Industries Ltd v Cool & Sons Pty Ltd, (290) where a dominant manufacturer offered larger discounts to distributors who agreed to purchase the majority of their supplies of windscreens from that particular manufacturer, Fox J, with whom Sheppard J agreed on this point, considered that the prohibition on exclusive dealing was not directed at the position of particular competitors. (291) Nor was the object `to look for what is best for society or for the economy. The legislative assumption, presumably, is that competition is what is best although, ironically, success in competition by a trader may lessen it'. (292) Here the concept of competition is divorced from the concept of efficiency, particularly if it is considered that a successful trader, who may be achieving an efficient outcome in the market, is thereby threatening the competitive process and allocative efficiency. (293) In the absence of the dual adjudication system in which the Commission and the Tribunal take public benefits such as economic efficiency expressly into account, this approach would focus excessively on structure without a view to outcome in the analysis of competition by making the balance with gains in technical efficiency, illustrated graphically above. (294) The emphasis on market power has a good economic basis, but is not determinative of lessening competition unless it is perpetuated or increased in conjunction with vertical restraints. Yet his Honour appeared to consider that the dominance of the manufacturer itself gave rise to an inference of purpose to reduce the capacity of retailers to choose between sources of supply, to weaken the trading position of competitors and to inhibit the entry of other competitors. (295)

In Mark Lyons, Wilcox J held that the refusal of a monopolist importer to supply up-market ski-boots to a discount distributor had the likely effect of substantially lessening competition in contravention of s 47. (296) The importer argued that its decision was based on the desire to protect the image of the product and to ensure that adequate services were provided at the point of sale to ensure that the ski-boots were correctly fitted. (297) These objectives are to be expected in a competitive market. However, his Honour found that merely the removal of the discounter, who was a particularly vigorous competitor in the brand, was itself sufficient to amount to a contravention of s 47. (298) On the question of whether the conduct had the `likely effect' of substantially lessening competition in a market, his Honour distinguished this case from the decision of the Full Court in Outboard Marine, on the basis that in that case there were a number of similar distributors competing in the market. (299)

At an inter-brand level, vertical restraints can be pro-competitive, as between brands or `firms' in a broader economic sense, comprising a number of individual firms in a vertically co-ordinated structure. This has been recognised by the Tribunal to an extent by its approach to the functional element of market definition. However, at an intra-brand level -- that is, at the level of the individual firm in its legally defined sense -- vertical restraints can, by their very nature, be anti-competitive. They replace co-ordination of resource allocation by competition within the marketplace with co-ordination by vertical control. This is demonstrated in the cases discussed above.

These cases also demonstrate that the decisions of the courts have not applied economic theory consistently and are often excessively legalistic. Even where markets are defined to include a number of integrated functional levels, recognition of the importance of inter-brand competition in such markets tends to occur de facto by reference to the functional level at which market power occurs rather than expressly by reference to competition between brands as vertical structures. The decisions also strongly demonstrate the importance of the effect of vertical restraints on the competitive structure of the market, to the exclusion of economic efficiency and the competitive motivations of the manufacturer. This is a result of the dual adjudication system in Australia which confines the courts to an examination of whether vertical restraints have the purpose, effect or likely effect of substantially lessening competition. However, even in the consideration of the effects of vertical restraints on competition, there is little recognition of the pro-competitive effects of vertical restraints.

C The Balance of Public Benefit and Anti-Competitive Detriment

In the second stage of the dual adjudication process -- that is, the authorisation and notification process -- the anti-competitive detriment associated with particular conduct is balanced against its public benefit.

Besides its treatment of the functional element in market definition, the Tribunal has recognised that, where conduct is actually perceived to lessen competition, it does not necessarily constitute anti-competitive detriment for the purposes of authorisation. In Re Media Council of Australia [No 2], it stated that `[i]t is erroneous to equate anti-competitiveness with detriment. Anti-competitive behaviour may in certain circumstances be a positive benefit.' (300)

A vertical restraint which is anti-competitive at a particular functional level in an intra-brand sense may be pro-competitive at an inter-brand level. Even where vertical restraints have a significant effect on competition and where that effect is not actually pro-competitive at an inter-brand level, and so does not outweigh the importance of any anti-competitive detriment at an intra-brand level, those vertical restraints might have only a minimal anti-competitive detriment depending on the degree of market power enjoyed by the firm imposing the restraints and its incentives in doing so. (301) The following discussion demonstrates the approach of the Commission and the Tribunal to the balance of public benefits and detriments associated with vertical restraints. It will be seen that the particular economic considerations explained above are rarely, if ever, expressly acknowledged, and that economic efficiency -- in general and specifically in the context of Australia's small and concentrated markets -- is considered to be a major public benefit.

1 Public Benefit in Vertical Restraints on Purchase

The effects of vertical restraints in foreclosing entry by competing brands are treated as a significant issue by the Commission and the Tribunal. However, the public benefit in the use of vertical restraints to enhance the efficient operation of the market has been acknowledged, particularly where it is to encourage investment and market activity which would not otherwise occur.

The pre-eminent Australian case regarding vertical restraints on purchase is the Tribunal's determination in Tooth. After the analysis of the competitive effects of the ties, the Tribunal expressly examined the question of whether the ties created efficiency in the market as a matter of public benefit. It considered that,
   in some circumstances, cost savings may constitute a legitimate basis for
   the establishment of public benefit. But in others, the `savings' may be
   associated with a suppression of public demand for greater product variety
   or enhanced service, or with a static approach to product development and
   market penetration. (302)


Overall, the Tribunal considered that general competitive endeavours would achieve the same efficiencies without the tie system, particularly as the brewer, as well as the hotelier, would have an interest in securing and maintaining a reputation for a quality product. (303) Implicit in this is a perception that the integration of the functions of manufacture and retail distribution were less efficient than a market nexus between those functional levels. Presumably, acquisition by the breweries of the hotels themselves would be considered to be anti-competitive on the same basis, if it is accepted that the mode of integration ought to be irrelevant to the issue of competition and efficiency.

With regard to long-term (304) ties in the supply of finished products to distributors, the Commission appears to have taken a hard line. In Carlton and United Breweries, (305) the brewery provided refrigerated cabinets for use only for storage of goods packaged by Carlton and United Breweries (`CUB'). The Commission considered that, in light of increasing competition at the retail level, the restriction on retail outlets in the display of competitive beers was likely to result in a substantial lessening of competition because it would inhibit bargaining with CUB and other competing wholesalers. (306) The Commission held that even without the ties in place a new entrant would find it difficult to survive against such an entrenched competitor as CUB. (307) It found little public benefit due to the relatively low costs involved in obtaining refrigerated cabinets elsewhere. (308) In Cadbury Schweppes Pty Ltd, (309) the Commission considered that the same conduct with regard to soft drinks effectively made the provision of leased refrigerator cabinets a necessity, with the potential to increase capital costs to the detriment of smaller manufacturers. (310) The Commission made an exception for post-mix dispensing equipment in a later determination, on the basis that it was more technically efficient to dispense the products of only one manufacturer through the particular unit. (311) The Commission expressly made the observation that post-mix was only a segment of a wider soft drink market and thus the anti-competitive detriment was relatively small. (312) In Carlton & United Breweries (Qld) Ltd, (313) the Commission refused to allow notification of a similar arrangement to stand. While acknowledging that the ties were `at least a partial substitute for effective marketing, promotion and servicing of products -- all of which are necessary for consumer acceptance and, in this case, to meet competition from a well-established local competitor', (314) the Commission considered that CUB was large enough for it not to require those vertical restraints in order to compete effectively. (315)

The efficiencies engendered by vertical restraints, particularly in the form of minimisation of transaction costs, can be ephemeral in the long term. In a country like Australia, there is often insufficient certainty of demand to support new enterprise immediately, particularly in major infrastructure. However, once an industry or major enterprise has become established, market allocation of resources between functional levels can become a more efficient form of transacting. In other words, the allocative efficiency in competition can gradually outweigh the technical efficiency available in the certainty that comes from internal co-ordination and fixed conduits of supply, ultimately resulting in a narrower market definition which is stratified into functional levels. In such circumstances, as a competitive market at a particular functional level becomes relevant over time, it becomes more likely that a vertical restraint that heightens barriers to entry at that functional level will have a net detrimental effect. This is partially a reflection of the fact that, in such circumstances, the structure of the market is not characterised by technical efficiency in high degrees of vertical control, whether by agreement or by integration, which tends to raise an inference that vertical restraints are not necessary to support new investment or to compete against other integrated or closely organised chains.

In the case of long-term contracts involving large sunk investments (for example in specific infrastructure, as is often the situation in energy, telecommunications and transport industries), the Tribunal has held that in circumstances where the market is expanding, leaving `ample room for new sources of supply to enter', the public detriment associated with foreclosure by such a significant vertical restraint is commensurately reduced. (316) Such long-term vertical restraints may also be justifiable in providing necessary stability and technical efficiency.

In Koppers, in addition to economies in continuous throughput of materials and in physical co-ordination of bulk-handled materials in the exclusive distribution arrangements between Koppers and BHP, the Tribunal noted that
   there are some less obvious but nevertheless extremely important sources of
   economic efficiency stemming from the very existence of the Joint Venture
   agreement. First, there are economies in transaction costs (or bargaining
   economies). The market is a curious one. It is not a `wide and open market'
   with many participants which is a feature of the economics textbooks and
   within which transactions can be settled on the basis of everyday dealings.
   Rather, there is an essentially bilateral character to the relationship
   between supplier and customer (one to one, or at most and hypothetically
   one to a few). The very existence of the Joint Venture secures a
   significant economy in removing the necessity to be forever bargaining
   about terms. In this context, even the `exclusivity' requirement and the
   long-term nature of the Supply agreement generate certain economies
   although there may be offsetting inefficiencies in the establishment of an
   arrangement unresponsive to market forces. (317)


The Tribunal was of the view that vertical restraints between Koppers and BHP minimised uncertainty, resulting in `certain economies which contribute to the efficient functioning of the economy.' (318) The Tribunal was satisfied that
   the present spectrum of up-graded products, associated with requirements
   for both horizontal and vertical scale which the Joint Venture is capable
   of fulfilling, is far more valuable to society than some alternative
   spectrum which would be associated with the existence of a set of small
   scale producers. (319)


When balanced against the anti-competitive detriment, however, the Tribunal considered that, while the joint venture had made a positive contribution to efficiency in the past and present, with regard to the future the very provisions which aided the establishment of the enterprise detracted from the contribution it was capable of making to the evolving economy. (320) The vertical restraints served to buttress the barriers to entry that gave rise to Koppers' market power -- due to its established capacity, scale economies and ongoing know-how -- beyond the requirements of efficiency. In the opinion of the Tribunal, the efficiencies originally associated with security of supply no longer required the restrictions, particularly given the restrictions' open-ended character. (321)

Broken Hill Associated Smelters Pty Ltd (322) involved the splitting up of two competitive vertically integrated structures, allowing each party to obtain a monopoly, one upstream and the other downstream. Broken Hill Associated Smelters (`BHAS') notified the Commission of its partnership with Simsmetal Pty Ltd, involving 50 per cent ownership of Simsmetal's secondary lead smelters. Under the agreement, Simsmetal had the exclusive right to acquire and supply lead scrap to the partnership and BHAS withdrew its competitive operations. Pirie Alloys, a wholly owned subsidiary of BHAS, had the exclusive right to market the output and Simsmetal withdrew from its competitive operations in that respect. The manufacture of most of the alloys that Pirie Alloys sold to the Australian market were transferred to Simsmetal's facility, freeing capacity for BHAS to manufacture additional amounts of primary lead or lead alloy for export. BHAS paid Simsmetal for capital and working capital, and additional capital works were undertaken and costs shared on an equal basis. The Commission considered that the partnership would substantially lessen competition in respect of the acquisition of scrap lead, the scrap metal market generally and the supply of lead alloys. (323) The Commission acknowledged that the effect of the partnership enabled BHAS to purchase Simsmetal's facilities on a joint basis so as to utilise those facilities more efficiently, thus avoiding the duplication of capital involved in expanding its own facilities. (324) With regard to other efficiencies, the Commission stated:
   The other claimed efficiencies, improved technical bases, efficiencies in
   the acquisition of scrap, efficiency in having a sole seller, must be seen
   in the context of the emerging monopoly. The Commission believes that
   competition is usually the best aid to efficiency. Furthermore, each of the
   parties is (or is part of) a large company with good technical resources
   and adequate financial capacity. Each of the parties should be in a
   position to meet evolving technical challenges. (325)


The increase in international competitiveness was not given separate weight. (326) The Commission concluded that the public benefit in the efficiencies arising from the partnership was outweighed by the creation of monopolies at these different functional levels, even though the more efficient utilisation of Simsmetal's capacity would not automatically proceed without the partnership, even in a competitive market. (327)

In AGL Cooper Basin, the Tribunal considered whether authorisation should stand with regard to long-term supply contracts between the producers of natural gas from Cooper Basin and the Australian Gaslight Company (`AGL'), which purchased gas for distribution to customers in Sydney and Adelaide. (328) The supply contract contained two provisions of particular relevance. First, the `take or pay' provision required AGL to take or pay for a minimum amount of gas per year. Gas that was not taken in a particular year, and yet was paid for, was `banked' and could be drawn upon in future years when the gas required by AGL exceeded the minimum `take or pay' quantity. (329) The Tribunal was told that, at the time the supply contract was entered into, these types of provisions were common worldwide and were used to allocate risk of revenue fluctuations between the parties, as a means of dividing the risks of demand fluctuations in the market, and to encourage the investment of large amounts of capital up-front in the development of the project. (330) The second relevant provision prohibited AGL from purchasing natural gas from any supplier other than the producers except to the extent that its requirements exceeded a maximum amount. (131)

The Commission had granted authorisation at an earlier point in time. The Tribunal was faced with the question of whether there had been a material change in circumstances sufficient to warrant revocation of the authorisation. (332) In deciding that the authorisation should stand, the Tribunal took into account that the contract performed two functions: (1) it created a mechanism for sharing and apportioning risks; and (2) it protected each side from opportunistic behaviour by the other. (333) The Tribunal accepted that it was beneficial to the public that the mutual interests of the producer and the wholesaler were linked to avoid opportunism, and that an economically efficient contract will share project risk between the contracting parties so that each party bears the risk it is best able to influence and minimise. (334) These criteria are in direct parallel with the underlying criteria of the transaction costs explanation of the Theory of the Firm, namely use of an economic `firm' to control uncertainty and opportunism. The Tribunal accepted that the contract had facilitated the creation of a natural gas industry in New South Wales. It stated that:
   In the beginning, at least, there was the necessity for a long term
   contract that might be characterized as `integration by contract'. There
   was formed a vertical partnership between buyer and seller that contained,
   it must have been hoped, balanced terms directed to the maintenance of a
   long-term profitable relationship with division of the proceeds in an
   `equitable' manner. (335)


The question for the Tribunal was then whether changing market circumstances, with a variety of alternative suppliers and increased demand, removed the justification for the contract. It considered that the market was expanding and evolving towards increased competition. (336) However, it held that authorisation should not be revoked, on the basis that
   [a] distinction can be drawn between those long term contracts that are
   necessary to sustain substantial, long-lived, sunk investments, as in this
   matter, and those long-term contracts that create no such social utility
   but are, rather, an instrument of foreclosure. (337)


The Tribunal considered that the contracts that created the brewery ties in Tooth were examples of the latter, while the AGL Cooper Basin contract was an example of the former, in that the contract was an `instrument of benefit, at least to a significant extent, and its long-term character is intrinsic to the creation of benefit to the public'. (338) In Tooth, on the other hand, the Tribunal considered the various benefits raised to justify the system of ties in question: encouragement of the granting of leases, mortgages and licences to entrepreneurial hoteliers with a competitive edge over the alternative of a downstream manager of a wholly owned distribution outlet; (339) efficiencies leading to minimisation of production, marketing and distribution costs, (340) and maximising the quality of amenities and products. (341) It found that these benefits would be available, even in the absence of the ties. (342) Thus the system of ties foreclosed development of a competitive market in the long term, rather than encouraging and sustaining it, as was the situation in AGL Cooper Basin.

As an illustration of positions falling between these two scenarios, take the decision of the Commission in Amalgamated Casket Company Pty Ltd, (343) in which a casket manufacturer required its shareholders (who were all funeral directors and collectively comprised a substantial share of the market) to purchase their caskets substantially from the Amalgamated Casket Company (`ACC') and to refrain from accepting a better price from a competitor of ACC. (344) While it was argued in favour of authorisation that the arrangement allowed ACC to enter the market and alter its structure such that it was no longer dominated by any one manufacturer, the Commission discounted this argument in light of the severe restraint on competitive pressures. (345) Furthermore, the protection of ACC's market share was held by the Commission to be a benefit only to the individuals involved, accordingly to be discounted as a benefit to the broader public. (346)

Another instance in which the Commission's decision to authorise vertical restraints was seemingly based on the transitional efficiencies available in the encouragement of new entry is its determination in BHP Petroleum Pty Ltd. (347) In that application, BHP sought authorisation for exclusive dealing arrangements with the two largest Australian consumers of methanol at advantageous prices for 10 years, in order to provide BHP with the certainty of a minimum acceptable revenue stream for methanol produced by an expensive pilot plant. (348) The agreement also provided that BHP would not sell methanol to other consumers. (349) BHP argued that, without the exclusivity arrangements, the project would not be viable. The plant was to use new technology that would enable BHP to utilise Australia's major natural gas reserves to produce a product, methanol, that was wholly imported at the time. The Commission considered that, with the small size of the Australian market, the foreclosure of potential alternative suppliers of methanol was not a realistic possibility, and export markets remained open. (350) Finally, it considered that the detriment that would be suffered by other consumers of methanol were heavily outweighed by the advantages of the project. (351)

In Marbon Chemicals Ltd, Revinex Australia Ltd and Revertex Industries (Aust) Pty Ltd, the Commission authorised arrangements for the purchase of a specified minimum percentage of total requirements of raw materials and for the restriction of the manufacturer from supplying competitive products to anyone other than the distributor. (352) The Commission considered that better economic use of resources and greater efficiency of firms were relevant public benefits. (353) It held that the arrangement allowed expansion of capacity to realise technical efficiencies in anticipation of growth in the market. (354) The Commission viewed such an arrangement as leading to a more competitive situation downstream in the long term, as it would result in competition with vertically integrated competitors, taking into account the fact that the distributor was operating at near capacity alongside a competitor with considerable surplus capacity, while the manufacturer, without access to technology that the distributor could provide, was likely to withdraw from the market. (355)

These decisions illustrate that the Commission and the Tribunal have acknowledged the importance of vertical restraints in minimising opportunism, in achieving certainty, and in the stabilisation of supply and information, thus minimising risks that might deter sunk investment in major infrastructure in undeveloped, small markets. The drawback of such an approach is a certain degree of arbitrariness in assessing the development of the market from time to time in order to determine for how long such restraints are to be allowed to continue. The Commission and the Tribunal have, on occasion, recognised public benefits in vertical restraints on purchase that are concerned with assisting the efficient functioning of the market, (356) but which are not confined to a transitionary period.

The Commission's emphasis on efficiency with regard to preferred insurance providers dates back more than two decades. (357) It has made a multitude of determinations regarding the requirements that borrowers obtain insurance from particular insurance providers, brokers (358) or preferred lists. On the whole, the Commission's response has been uniform. One of the most recent determinations of the Commission on this point, The Burwood Nos 8 and 9 Starr-Bowkett Co-operative Building Societies, (359) is reflective of the general approach. The Commission broadly endorsed the principle that there is substantial public benefit in insurance requirements that protect a mortgagee's interest in a mortgaged security with a reputable insurance company and by means of an administratively efficient system, particularly as it keeps interest rates and charges down. Thus authorisation is available in respect of requirements that restrict the borrower's choice of insurer to companies that operate with the authority of the Insurance Commissioner and are prepared to enter into a concessions agreement with the mortgagee. The Commission has favoured arrangements where the mortgagee provides borrowers with a choice of a significant number of insurance companies, as it is assumed that the larger the choice of suppliers, the more limited are the anti-competitive effects of the conduct. (360)

The existence of technical efficiencies in distribution systems was relevant in Shell, where the Commission acknowledged that the exclusive dealing system was more efficient than the multi-brand system that it had replaced. (361) However, the Commission did not consider that the exclusive dealing was necessary to preserve efficiency and continue industry development:
   What Shell fears is that there will be some degree of multi-brand trading
   or changing from one company to another ... as some dealers look to their
   suppliers to compete more for their custom. Shell's task is to satisfy the
   Commission that multi-brand trading will be of a sufficient scale to cause
   inefficiencies and lack of investment from which the public will suffer.
   (362)


The Commission concluded that the efficiencies in solo trading would persist without exclusive dealing. (363)

Similarly, in BMW Australia Ltd, (364) the Commission considered the requirement imposed by BMW on its prospective dealers that they enter into a dealership agreement with Rover and sell its vehicles. The Commission considered the requirement to be anti-competitive, in so far as it would impact adversely on dealers' demand for competing vehicle franchises, in the limits it imposed on dealers' capital resources and their ability to achieve an optimum mix of vehicle franchises. (365) The Commission was not convinced that there were synergies or cost efficiencies in operating dual distributorships that would improve economic viability to any significant extent. (366) In any case, the Commission was of the view that if the efficiencies existed they would have come about in the course of competition. (367) The Commission noted that better product placement was a private commercial goal rather than a public benefit. (368)

In the balance of anti-competitive detriment and public benefit associated with vertical restraints on purchase, the Commission and the Tribunal have often found that resultant improvements in technical efficiency have been sufficient to outweigh the allocative inefficiency associated with foreclosure of competitors by heightened barriers to entry. In particular, this has been so where there have been: clear synergies in the vertical governance of the distribution of a product or in the rationalisation of an existing structure; relatively short-term restraints in the context of a small, but developing market where large sunk costs are required for entry; and clear benefits in enhancing the stability and certainty of a complex, risky and concentrated market where large long-term investment is required. This has also been the case when maintaining the quality of complementary goods or services where the market is failing to do so.

The determinations of the Commission and the Tribunal are generally consistent with the economic analysis discussed above, but the emphasis placed on the anti-competitive effects of foreclosure on the one hand and the promotion of developing industries on the other suggests that there exists a perception that markets in Australia are particularly subject to imperfections such as high concentration of economic power and high barriers to entry, exacerbating the effect of foreclosure and uncertainties in demand more than might be expected in a market that more closely approximates the perfectly competitive model.

2 Public Benefit in Vertical Restraints on Resale

The Commission and the Tribunal balance the manufacturer's incentive to increase efficiency in production against the facilitation of horizontal arrangements between brands. In general, if the most technically efficient distribution arrangement has been put in place by manufacturers, the decision will tend to place more emphasis on the former rather than the latter. The Commission and the Tribunal have not adhered to the Chicago School view that all vertical restraints on resale ought to be legal. However, consistently with the Chicago School, often the vertical restraints disallowed by the Commission and the Tribunal were associated with horizontal arrangements.

In 7-Eleven Stores [No 1], the Tribunal considered a structure of horizontal and vertical restraints in the newsagency industry, whereby newspaper publishers agreed in effect not to compete in the distribution function and employed a highly rigid and integrated distribution system. (369) Thus, like the regime of mortgage and lease arrangements in Tooth, the industry was characterised by `the substitution of rules, regulations and committee processes for market incentives', leading to few opportunities for independent innovation. (370) The vertical restraints included ties of home delivery to other newsagency services, territorial restrictions in distribution, limitations on the numbers of distribution outlets that newsagents could own and requirements that competing sub-agents be supplied. Similarly, sub-agents were restricted to obtaining supply from newsagents, who were effectively their competitors. Direct supply from the publishers was unavailable. The Tribunal concluded that some vertical restraints imposed by the publishers, including in particular the territorial restraints for the avoidance of duplicated costs, could be defensible `if they were not designed, implemented and enforced by ... horizontal agreements'. (371) The Tribunal was concerned by the deeply entrenched relationships between the publishers and the undesirable situation that any retailer be dependent on a competitor for supply or that a retailer be forced to supply a direct competitor. (372) The Tribunal considered that the efficiency gains cited by the publishers -- namely strong control over physical distribution and simplification of administration -- did not translate into efficiency in the sense of obtaining the best use of society's resources, particularly in the sense of dynamic efficiency in being flexible to be able to adapt to modern distribution structures. (373) This very lack of flexibility was sufficient to dispose of the publishers' argument that the publishers' profit motive could be relied upon to design an efficient system and to adapt it to changing circumstances. There was nothing to motivate the publishers, who, as the Tribunal concluded, had considerable market power due to high concentration and the stability of the system and the barriers to entry these raised, (374) to compete in the distribution of their product. (375)

In a later determination concerning the same industry, the Tribunal came to essentially the same conclusions:
   [I]f the wholesaling arrangements were efficient, they would be efficient
   on an individual basis without any need for horizontal or collective action
   between the publishers. An individual publisher could independently write
   vertical contracts with chosen wholesalers, and `could survive competition
   from another publisher who perhaps chose not to do that.' (376)


There is a strong sense in these determinations regarding the newsagency industry that the Tribunal was more concerned with horizontal arrangements between publishers with market power (in the commitment to one particular type of method of distribution) than with the existence of vertical restraints. The Tribunal considered that the preferable state of the industry would be for competitive incentives to give rise to the most efficient methods of distribution -- the most efficient structures of vertical restraints. (377)

The Tribunal has recognised that vertical restraints will not usually increase market power in the absence of some degree of associated horizontal monopolisation. The Locksmiths Case is an example of a case involving vertical restraints resulting from horizontal arrangements. (378) The vertical restraints were imposed on members by a trade association of those members. The Tribunal reviewed the Commission's determination to grant authorisation to the Master Locksmiths' Association to restrict the supply of special key-blanks and lock components to members or certified non-members. The Tribunal stated that:
   The conduct the subject of application for authorization has both vertical
   and horizontal elements. The mere existence of a vertical agreement between
   [a member] and the [Master Locksmiths' Association] will not necessarily
   create market power. The extent to which it does must be determined by
   reference to the scope of the arrangements horizontally considered and its
   restrictive features assessed against the background of the structure of
   the relevant markets. (379)


The Tribunal acknowledged the distinctiveness of the system, its success in the market, the scale requirements for the manufacturing of the componentry to be viable, and the balance to be struck between security of the system, giving rise to a lack of `competitive zeal' amongst a small number of relatively homogenous locksmiths and giving access to the economies in the system to a greater number and diversity of participants. (380)

The Tribunal considered that, in the absence of the restricted system, the operation of competition could result in an alternative system that would entail a close liaison between a manufacturer and a defined group of locksmiths and would involve some restrictions on their competitive conduct. (381) However, the Tribunal determined that the qualifications for certified non-membership should relate to what was necessary to preserve the benefits of security and economy which the system provided. (382)

The interplay of horizontal arrangements and resulting vertical restraints was also relevant in the decision of the Commission in A F Harding. (383) In that determination, the Commission perceived that territorial restrictions on distributors resembled horizontal boycott procedures among the distributors and so denied clearance for requirements on dealers that they not stock competitors' products. Yet it considered that even facilitation of horizontal arrangements may be beneficial if they involve scale economies and are necessary for the efficiencies available in achieving `vertical scale' through the use of vertical restraints. (384)

In VEIC, the Commission granted authorisation in relation to a franchise and marketing agreement which provided a licensing system for franchisees to obtain exclusive use of registered brand names and marketing strategies, subject to requirements that franchisees sell eggs in accordance with one of four systems: (1) direct supply to bannered stores; (2) direct supply on behalf of the franchisor to non-bannered stores; (3)direct supply of branded eggs to anywhere; or (4) supply of eggs to the franchisor, which would then sell them in its own right. (385) Franchisees were also entitled to sell unbranded eggs to non-bannered stores, provided it was not detrimental to the franchisor. (386) Producers were required to adhere to various standards and guidelines in order to supply branded eggs. (387) The Commission considered that the agreement had anti-competitive effects, particularly in limiting the smaller franchisees in competing with the franchisor and other franchisees. (388) However, it considered that for a period of two years this public detriment would be outweighed by the public benefit of the agreement facilitating the industry's adjustment to deregulation. (389) Among these transitional efficiencies were the benefits in minimisation of transaction costs, especially in the gathering of information and in the context of a phased reduction of regulation across the industry. (390) The Commission found that there were three distinct functional markets. (391) First, it identified a market for large quantities of eggs to be sold on trolleys to major chain supermarkets. Second, there was the supply of smaller quantities of eggs to smaller, often independent, chain stores. Sales to these smaller stores were either from the supermarkets or from VEIC directly. Third, the Commission believed that sales of minor quantities of eggs to a variety of small retail outlets constituted a market. Sales to these outlets were from VEIC directly or from wholesalers. In this case, the vertical restraints were plainly associated with a horizontal agreement between egg producers to form a co-operative. (392)

There are very few determinations of any significance regarding the balance of anti-competitive detriment and public benefit associated with vertical restraints on resale. However, it seems that the Commission and the Tribunal tend to associate anti-competitive detriment stemming from such restraints as being essentially associated with horizontal arrangements between competitors. It is apparent that the Commission and the Tribunal have been far more prepared to let vertical restraints stand than they are to allow collective organisations to continue, even when it is argued that the horizontal arrangements facilitate the efficiencies available from the vertical restraints, such as was the case in 7-Eleven Stores [No 2.]. (393)

The technical efficiencies have been recognised in effect -- if not by direct reference -- particularly in the development of scale and scope in distribution in Australia's small and concentrated markets. This may also explain the prevalence of co-operatives and other forms of horizontal arrangements which have been formed more with a view to facilitating efficient distribution systems in newly deregulated markets or markets in development, such as in VEIC, than to increasing collective market power.

D Misuse of Market Power -- Distribution Arrangements

In the context of an analysis of vertical restraints, the imposition of a vertical restraint can amount to a misuse of market power if it is inconsistent with an efficiency rationale that might characterise other vertical regimes in the market. (394) In such a case, the anti-competitive effect of the vertical restraint outweighs technical efficiencies even at an inter-brand level. There are cases in Australia in which the legality of a regime of distribution arrangements involving parties with market power has been dealt with under the misuse of market power provisions of s 46 of the TPA rather than the exclusive dealing provisions in s 47. However, conduct in contravention of s 47 which has been authorised is immune from s 46. (395) Conduct in contravention of s 46 alone cannot be authorised. (396) Section 46(1) provides:
   A corporation that has a substantial degree of market power in a market
   shall not take advantage of that power for the purpose off

   (a) eliminating or substantially damaging a competitor of the corporation
   or of a body corporate that is related to the corporation in that or any
   other market;

   (b) preventing the entry of a person into that or any other market; or

   (c) deterring or preventing a person from engaging in competitive conduct
   in that or any other market.


In Queensland Wire, it was held that the words `take advantage' merely refer to the use of market power rather than pejoratively to conduct that is inconsistent with some concept of social acceptability. (397) The importance of the issue for present purposes is whether the employment of vertical restraints in the pursuit of technical efficiency is considered to be an exercise of market power. In Mark Lyons, (398) Wilcox J considered whether the refusal to supply ski-boots to a discounter amounted to misuse of market power. His Honour held that the importer, Bursill, had market power and stated, somewhat blandly, that: `There is no doubt that, in denying the supply of in-line boots to Mark Lyons, Bursill took advantage of its market power. It was able to deny supply in the knowledge that no other source of supply was available to Mark Lyons.' (399) His Honour's analysis of the necessity for services to be supplied with the sale of the boots, the preservation of the goodwill in the brand, and the efficiency costs in the free-riding behaviour of the discounter, occurred in the context of determining Bursill's subjective purpose in withholding supply. (400) His Honour held that Bursill's purpose to protect its established retailers from competition from discounters was a purpose of deterring or preventing the discounter from engaging in competitive conduct, within the terms of s 46. (401) Thus the claim under s 46 for misuse of market power was made out. (402)

The difficulty with the decision of Wilcox J in this case is that, in determining whether the importer took advantage of its market power, his Honour went no further than to identify the refusal to supply. Considering the arguments raised by the importer as to the economic costs associated with the discounter's free-riding behaviour and the damage to the reputation of the product and the satisfaction of customers, it can be argued that the importer would have refused to supply Mark Lyons even in the presence of any number of alternative suppliers. This case illustrates a common theme in many of the courts' decisions in these cases, which is the absence of acknowledgment that conduct associated with the implementation and maintenance of an efficient distribution system is consistent with conduct in a competitive market, even if it is to the detriment of a particular would-be distributor.

In Pont Data, the Court considered vertical limitations imposed by Australian Stock Exchange Operations (`ASXO') in connection with the supply of `Signal C' -- certain electronically transmitted stock market information -- to Pont Data, which competed with ASXO downstream in the provision of retail information. ASXO supplied Signal C on condition that Pont Data would inform it of the names and addresses of Pont Data's customers and the number of computer terminals receiving the signal, that Pont Data would not wholesale, (403) and that Pont Data would pay certain discriminatory fees. As to the question of whether these limitations amounted to a misuse of market power in contravention of s 46, the Full Federal Court upheld the finding of the trial judge that ASXO had a substantial degree of market power, and appeared to assume that ASXO had taken advantage of its market power to impose the restrictions on Pont Data merely by the act of having imposed them. (404) The Court then addressed the element of purpose. The question became whether there was proven an independent purpose to damage, eliminate or deter competitors rather than merely to extract maximum profits. (405) The purpose element in s 46 is directed solely to the intention behind the conduct as it relates to its effects on competitors. The Court found that the restrictions on Pont Data were, at least in part, intended to inhibit Pont Data from competing in the downstream distribution of the data. (406) The Court did not consider whether the achievement of efficiencies might lead to the conclusion that use had not been made of market power or, in other words, that the conduct would have occurred even under competitive conditions. Unlike the situation in Mark Lyons, it is not clear from the Court's decision in Pont Data that the restrictions obtained technical efficiencies in distribution. However, ASXO's restrictions on distribution could be seen as necessary to prevent free-riding on its investment in gathering the information, given its relatively non-rivalrous nature. (407)

It is apparent from both Mark Lyons and Pont Data that little attention was given to the concept of taking advantage of market power and that arguments regarding the technical efficiencies justifying the conduct were dealt with, if at all, in the purpose test. Yet this article proposes that the purpose test is an inappropriate stage at which to examine these issues. The wording of the purpose test in s 46(1)(a)-(c) contemplates conduct designed to eliminate, prevent or deter competitors from engaging in competitive conduct. There are no words which will allow a court to find that such an intention can also be pro-competitive at an inter-brand level. Nor are there words which will allow a court to find an intention to achieve technical efficiencies greater than the detriment to allocative efficiency resulting from increased market power, as demonstrated graphically in Part II, despite the possible result of an increase in collective wealth. Both these types of conduct would occur in competitive conditions. As is clear from the decision of the High Court in Queensland Wire, it is this very issue that is relevant in the question of whether advantage was taken of market power.

The problem was perpetuated in Robert Hicks Pty Ltd (t/as Auto Fashions Australia) v Melway Publishing Pty Ltd. (408) In that case, Merkel J, of the Federal Court, considered whether the refusal of a manufacturer of street directories to supply a particular distributor in order to prevent competition with an existing wholesale distribution network contravened s 46. His Honour found that Melway had substantial market power. (409) It distributed almost exclusively through a network of independent wholesalers with rights of exclusive distributorship within their allocated market segment. Wholesalers were left free to determine prices and the market was characterised by strong competition at retail level which occasionally fed into lower prices offered by wholesalers to retailers in its segment in order to promote the success of its segment against competition from retailers in other segments. (410) Consistently with this high degree of interrelationship between wholesalers and retailers, his Honour defined the functional element of the market to include both wholesale and retail functional levels. (411) Melway terminated Auto Fashions' wholesale distributorship, purportedly on grounds of poor performance, but in circumstances in which there was an alternative distributor who was considered to be more reliable. In essence, one distributor was replaced by another and Melway subsequently refused to supply the former distributor on the basis that Auto Fashions refused to agree not to duplicate Melway's existing distribution network and not to make sales in competition with the new distributor. His Honour found that Melway believed that its wholesale distribution system provided for `an appropriately regulated, orderly marketing and distribution of Melway street directories.' (412) He held that the appointment of exclusive distributors in particular market segments enabled Melway to maximise sales, both through freedom of competition in each allocated sector (to offer the incentive for distributors to exploit the segment) and through the expertise of the distributors in their segment. (413) Of greatest interest in this case is his Honour's comments with regard to the question of whether Melway took advantage of its market power. Merkel J stated:
   In Queensland Wire Industries BHP's ultimate objective of preserving its
   sales and business did not immunise it from liability for anti-competitive
   conduct under s 46(1) when it refused supply. In that context, all members
   of the High Court in Queensland Wire Industries concluded that a refusal to
   supply can be a taking advantage of market power. Accordingly, if the
   refusal to supply by Melway is for a commercial reason (eg to preserve its
   distributorship system and the sales it derives from that system) that will
   be to no avail to Melway if the refusal constitutes a taking advantage of
   market power for a proscribed purpose.

   The theme running through the judgments in Queensland Wire Industries is
   that taking advantage of market power involves a corporation using power in
   a manner made possible by the absence of competitive conditions ... (414)


The difficulty with the argument that even a `commercial reason' for refusal to supply can amount to taking advantage of market power is that it assumes that the relevant `capability' of the refusal is shown merely by the existence of market power in conjunction with the refusal. It does not acknowledge that the exclusion of a particular firm to protect an efficient vertical structure may be necessary for survival in the market in the longer term. In other words, the commercial reason for the refusal to supply may be essential to the survival of the manufacturer and, in that sense, the manufacturer is not rendered capable of refusing supply by the fact of its market power.

This is a difficulty that arises almost perpetually and fundamentally with regard to vertical restraints and is also evident in Mark Lyons and Pont Data. An application of the problem that is particularly relevant to the themes in this article is that the relevant competitive pressure is likely to be inter-brand rather than intra-brand in a market structure that is characterised by various degrees of vertical integration. The structure of the market and the technical efficiencies in vertical scope create a competitive imperative to form vertical governance structures in competition with other similar structures. Individual firms at only one functional level within the market are not likely to be able to make a competitive impact on such a vertical structure and so their exclusion is consistent with competitive behaviour. In other words, it does not follow that conduct creating and maintaining efficient vertical structures occurs due to the absence of competitive pressure. In such circumstances, the opposite is the case. The structure of the market and the technical efficiencies available in vertical integration by ownership or a regime of vertical restraints by agreement is a competitive response to the rise of existing competitors or the entry of new competitors as they form similar vertical structures in order to compete across those relevant functional levels. To talk of the imposition and maintenance of vertical restraints in such a market structure as being an exercise of market power that would not occur in competitive conditions is to misconstrue what those competitive conditions actually are. Furthermore, it renders otiose a market definition that is inclusive of a number of functional levels -- a definition that reflects the prevalence and importance of a vertical structure of distribution requiring exclusive wholesale and retail functions.

In Melway, the market definition included the wholesale and retail levels, yet the decision of Merkel J can be seen as a clear example of the reason as to why there is an unnecessary aversion to vertical restraints -- the reason being that there exists a misplaced focus on the individual competitor either at an intra-brand level or at the level of only one function, rather than on the more apt analysis of inter-brand competition or of competition between `firms', integrated by ownership or vertical restraint, which operate across a number of functional levels. His Honour's focus was, with respect, misplaced, and it is not surprising that he found that it would be highly unlikely in a competitive market that Melway would refuse to supply a major order from Auto Fashions. (415) If the relative importance of inter-brand competition had been acknowledged, by viewing a `firm' in its economic sense as a broader entity with variously integrated functions rather than a single company defined by law, the greater likelihood is that Melway would have refused to supply Auto Fashions in order to protect the integrity of its distribution network, so as to better compete with the distribution network of other brands, or to obtain technical efficiencies that outweighed the detriment to allocative efficiency resulting from the exclusion of Auto Fashions. Melway's argument was that the distribution system of allocated segments provided the necessary incentive to distributors to exploit the segment and maximise sales. (416) However, in his Honour's judgment, it followed almost necessarily that Melway had refused to supply for a prohibited purpose, namely that it had intended to prevent Auto Fashions from engaging in competitive conduct, albeit to protect the Melway distribution system. (417)

It seems that, once the decision had been made that the refusal to supply in protection of the distribution system was conduct that would not have occurred in competitive conditions, the additional finding of an anti-competitive purpose is effectively redundant. Merkel J appositely states that `it is of no significance for the purposes of a claim under s 46(1)(c) that BHP's purpose [in Queensland Wire] was to prevent competitive conduct against it rather than, as in the present case, with distributors.' (418) However, the incentive of the manufacturer to limit intra-brand competition among its distributors is to increase output. On the other hand, the incentive of the manufacturer to limit competitive conduct against itself (namely inter-brand competition) is horizontally, rather than vertically, directed and is much more likely to increase market power and reduce output. The upshot of the decision of Merkel J in Melway is, then, that issues of technical efficiency in distribution will be dealt with under the purpose test, (419) and it is unlikely that a refusal to supply an order on the basis that it would merely be a substitute for sales by authorised distributors will be legal if the order would have been accepted when the firm was in the process of entering the market and developing its distribution system.

The ramifications of this view are that the concept of taking advantage of market power does not involve consideration of a broader competition between vertical structures, and the question of purpose does not contemplate that an important feature of an efficient and pro-competitive distribution system can be the limitation of intra-brand competition, particularly at the wholesale level, in order to compete on an inter-brand level.

The decision of Merkel J was appealed to the Full Federal Court. (420) Sundberg J made a distinction between the implementation of a distribution system and the actual refusal to supply. (421) His Honour found no evidence to support the proposition that, prior to obtaining substantial market power, Melway would have refused to supply Auto Fashion's order, notwithstanding the existence of its distribution system. (422) His Honour thus inferred that the refusal to supply occurred due to the taking advantage of substantial market power and did not discuss the efficiency aspects of the distribution system nor the actual refusal to supply itself. Similarly, Finkelstein J considered that it would have been irrational for Melway not to have supplied Auto Fashions but for the absence of an effective competitor. His Honour did not consider the efficiencies in the distribution system, nor in the refusal itself, but considered that the intention to achieve efficiencies could amount to a legitimate business purpose for consideration under the purpose test. (423)

It is proposed, with respect, that the dissenting judgment of Heerey J is the better approach. His Honour considered that the fact that the distribution system had been in place at a time in which Melway did not have substantial market power indicated that the foreclosure of firms from participating in the system was consistent with conduct in a competitive market. (424) His Honour also noted that Melway had adopted the same distribution system in Sydney -- an entirely different geographical and product market, where it did not have a substantial degree of market power -- because it considered that the system was an efficient way of distributing its product. (425) His Honour also took into account the fact that Melway's sales would have been the same regardless of whether it sold directories to Auto Fashions, as Auto Fashions would merely be competing with existing distributors. (426) Therefore Melway was not attempting to limit output. His Honour considered that `[i]f the conduct complained of would have been engaged in irrespective of the degree of market power but rather to conduct the corporation's business more efficiently, there will be no taking advantage of market power.' (427)

With regard to the element of purpose in the test for misuse of market power, his Honour was of the view that, if the conduct was considered to be `taking advantage of market power', then he agreed with the majority that the issue would have to be resolved against Melway, because the maintenance of any distribution system necessarily involves an intention to achieve deterrence or prevention of competition at an intra-brand level.

On appeal to the High Court in Melway Publishing Pty Ltd v Robert Hicks Pty Ltd, (428) the majority considered the relevance of inter-brand competition in determining whether Melway's distribution system involved a misuse of market power. As the majority's approach represents the law in Australia at present, and as it expressly applies the inter-brand and intra-brand distinction in the approach to vertical restraints as referred to in this article, it is valuable to set out the majority's comments in full:
   To describe the conduct of Melway simply as a refusal to supply the
   respondent involves an element of over-simplification. Section 46 aims to
   promote competition, not the private interests of particular persons or
   corporations. If Melway was otherwise entitled to maintain its distribution
   system without contravention of the Act, it is not the purpose of s 46 to
   dictate to Melway how to choose its distributors.

   What was said in Burdett Sound Inc v Altec Corporation by the United States
   Fifth Circuit Court of Appeals in relation to United States legislation is
   in point:

      [W]e reiterate that it is simply not an antitrust violation for a
      manufacturer to contract with a new distributor, and as a consequence,
      to terminate his relationship with a former distributor, even if the
      effect of the new contract is to seriously damage the former
      distributor's business. (429)

   There was no legal obligation upon Melway to have any wholesale
   distributors at all. If it had chosen to do so, it could have supplied
   retailers directly itself, or it could have supplied the retail market
   through a single wholesale distributor. Distributorship arrangements may
   restrict intrabrand competition but promote interbrand competition.

   The distinction between interbrand and intrabrand competition has been
   examined by the United States courts in considering the application of that
   country's antitrust legislation to vertical restraints imposed by
   manufacturers on distributors. Such restraints typically include limiting,
   geographically or otherwise, the customers to whom a particular distributor
   may sell. The overall effect on competition of such restraints is not
   necessarily negative; it may be positive. Although the legislative context
   is different, it is of interest to note what was said on this subject by
   the Supreme Court of the United States in Continental TV Inc v GTE Sylvania
   Inc (430) and by the United States Eleventh Circuit Court of Appeals in
   Graphic Products Distributors Inc v Itek Corp. (431) In the latter case the
   Court said: (432)

      We note first that a vertical restraint on trade, almost by definition,
      involves some reduction in intrabrand competition. When a manufacturer
      restricts a dealer to selling only within a certain territory, or only
      to certain customers, or only from certain locations, it is necessarily
      restraining intrabrand competition. However, this may or may not have a
      negative effect on the welfare of the consumer.... The effects of a
      restraint of intrabrand competition on consumer welfare cannot be viewed
      in isolation from the interbrand market structure. A restriction of
      intrabrand competition may -- depending on the interbrand market
      structure -- either enhance or diminish overall competition, and hence
      consumer welfare. (433)


In terms of the separate test of purpose, the majority also expressly considered the legality of the distribution system itself, in the context of the market conditions as a whole, rather than Melway's specific conduct in refusing to deal with Auto Fashions. (434) They stated:
   It is not the case that the adoption by a manufacturer, whether with or
   without a substantial degree of market power, of a system of distribution
   involving what are sometimes called vertical restraints necessarily
   manifests an anticompetitive purpose of the kind referred to in s 46. When
   regard is had to the state of competition in the relevant market, the
   purpose may be procompetitive. (435)


The majority considered that it may be consistent with maximising sales to refuse to deal with particular wholesalers in circumstances where the firm's rivals have competing distribution systems. (436) As such, and as indicated in the passage quoted above, the relevant area of competition was seen to be at the inter-brand level rather than the intra-brand level. The majority considered that Merkel J had focused on too narrow a question in considering whether Melway would have supplied the order in competitive conditions. (437) Rather, the majority considered that his Honour should have considered whether the distribution system as a whole amounted to a taking advantage of market power. (438) In that context, the majority considered that the relevant question, in determining whether a firm has `taken advantage' of its market power, is whether it would have engaged the system of vertical restraints if it had lacked that power, in the context of the actual market conditions in question. (439) In other words, it is useful to enquire whether the `business advantages' would be available in a competitive environment. (440) By this, it might be assumed that the majority was identifying efficiencies (productive and, to the extent that inter-brand competition was enhanced, allocative) that were inherent in the vertical restraints as being greater than the allocative inefficiencies arising out of the use of market power to reduce competition at an intra-brand level. It is no surprise that the majority expressly preferred the reasoning of Heerey J. (441)

V CONCLUSION

The technical efficiencies of vertical restraints often increase collective welfare more than any anti-competitive effects decrease it. Vertical restraints can also be pro-competitive on an inter-brand level. Issues of technical efficiency are dealt with by the Commission and the Tribunal as public benefits under the dual adjudication process. Their analysis occasionally shows lack of clarity and consistency in the identification of the goals of competition law and the application of an economic analysis of vertical restraints. There is also an awareness of the small and concentrated nature of markets in Australia. However, the Tribunal and, to a lesser extent, the courts and the Commission recognise the importance of vertical restraints in facilitating inter-brand competition by defining such markets as including multiple functional levels, thus recognising that a number of legal entities can be integrated into a vertical governance structure -- or a `firm' in a broader economic sense -- and hence compete effectively with other brands across a range of functional levels.

It is consistent with economic theory and the broader goal of competition law -- that is, the maximisation of collective welfare -- to consider vertical restraints to be capable of benign, efficient and pro-competitive effects. Australian competition law is in need of a cohesive statement of goals, express acknowledgment of the body of economic theory, and greater recognition of the significance of inter-brand competition over intra-brand competition, particularly in complex markets.

Market definition is concerned with identifying relevant areas of competition. It is therefore appropriate that the analysis of inter-brand competition be reflected in a broader definition of the relevant market in light of its functional aspect, in which it is clear that the market structure involves competition between vertical governance structures as a matter of fact. It can be expected that market forces will result in the survival of the most efficient market structure in the longer tenn.

That is not to say that all vertical restraints should be considered legal by definition. Primarily, a balance should be struck between the welfare losses attributable to decreased competition and welfare gains attributable to increased technical efficiency. However, as part of that balance, it should be recognised that competition may not be the most efficient mechanism for the allocation of resources and that there need not be a decrease in output resulting from the replacement of competition at various functional levels with vertical governance within a brand.

Markets in Australia are characterised by too much complexity, uncertainty and imperfection for a clinical Chicago School approach to be adopted consistently. This further emphasises the need for clarity in goals, economic analysis and recognition of the importance of inter-brand competition and technical efficiency in the balance of anti-competitive detriment and public benefit, in order to obtain the most allocatively efficient system of production and distribution -- for the maximisation of collective welfare and, ultimately, for the benefit of consumers.

(1) Section 47.

(2) TPA s 48 and pt VIII.

(3) TPA s 47(6).

(4) Until the enactment of the Competition Policy Reform Act 1995 (Cth) s 39, the Commission was known as the Trade Practices Commission.

(5) TPA pt VII.

(6) Until the enactment of the Competition Policy Reform Act 1995 (Cth) s 56, the Tribunal was known as the Trade Practices Tribunal.

(7) Re AGL Cooper Basin Natural Gas Supply Arrangements [1997] ATPR [paragraph] 41-593, 44,217 (Lockhart J, Brunt and Aldrich) (`AGL Cooper Basin').

(8) For a discussion of technical, allocative and dynamic efficiency, see below Part II.

(9) See TPA pt VII.

(10) See, eg, Re Queensland Co-operative Milling Association Ltd (1976) 8 ALR 481, 515 (Woodward J, Shipton and Brunt) (`QCMA'); Trade Practices Commission v TNT Management Ltd (1978) 6 FCR 1, 79-80 (Franki J); Austereo Ltd v Trade Practices Commission (1993) 115 ALR 14, 43-4 (French and Beazley JJ); David Holdings Pty Ltd v A-G (Cth) (1994) 49 FCR 211, 232-3 (von Doussa J); Stirling Harbour Services Pty Ltd v Bunbury Port Authority [2000] FCA 1381 (Unreported, Burchett, Carr and Hely JJ, 29 September 2000) [95] (Carr J).

(11) In other words, there are sufficiently large numbers of buyers and sellers to ensure that none of them influences price and that none of them colludes. See, eg, Robert Cooter and Thomas Ulen, Law and Economics (3rd ed, 2000) 29.

(12) This is based on an assumption that all firms seek to maximise profits: see, eg, ibid 11-12, 26-9.

(13) All firms have free information in the sense that they have free and instantaneous access to all necessary information so that they can assess transactions that will be profit-maximising: see, eg, ibid 209-10; Richard Posner, Economic Analysis of Law (4th ed, 1992) 12-16, 111-12, 373.

(14) This includes transaction costs in labour and capital markets. See generally Cooter and Ulen, above n 11, 87-91, 96, 97.

(15) Such a product is assumed to be a homogeneous product.

(16) Consumers in this sense are assumed to act rationally to maximise their utility, fully aware of their preferences: see generally Cooter and Ulen, above n 11, 11-12, 16-21; Posner, Economic Analysis of Law, above n 13, 12-16.

(17) In other words, all consumers have free information in the sense that they have free and instantaneous access to all necessary information, so that they can assess which transactions will maximise their utility: see generally Cooter and Ulen, above n 11, 97, 209-10.

(18) This efficient equilibrium is known as `Pareto optimality' and any change that moves towards this point is a `Pareto efficient' change: see ibid 12; Posner, Economic Analysis of Law, above n 13, 13-14. This criterion may be contrasted with the Kaldor-Hicks efficiency criterion, where a transaction is efficient if its result is a net benefit to the community as a whole, notwithstanding that some members of the community are made worse off: see generally ibid 43-4; Posner, Economic Analysis of Law, above n 13, 12-16. This Kaldor-Hicks efficiency is often called `potential Pareto optimality'.

(19) See, eg, F M Scherer and David Ross, Industrial Market Structure and Economic Performance (3rd ed, 1990) 668-72.

(20) See, eg, ibid 28.

(21) QCMA (1976) 8 ALR 481, 515 (Shipton JA, Woodward J and Brunt).

(22) See, eg, Richard Posner, Antitrust Law: An Economic Perspective (1976) 15; Robert Bork, The Antitrust Paradox: A Policy at War with Itself (1978) 129-130.

(23) This is because individual firms in perfect competition face a flat demand curve.

(24) Costs include a normal rate of return for the producer, comprising the opportunity cost of its labour and capital in light of risk and risk preferences: see generally Cooter and Ulen, above n 11, 20-4, 30.

(25) Externalities are flow-on effects of conduct that benefit or harm society, but which are not appropriated by producers in the price that they receive. They are therefore ignored in production decisions and, hence, in the allocation of resources: see ibid 40-2; Posner, Economic Analysis of Law, above n 13, 71.

(26) See generally Cooter and Ulen, above n 11, 29-33.

(27) Producers will continue to produce additional units until the cost of producing the last, or marginal, unit exceeds the revenue that can be obtained by them for that unit. See generally ibid 31-3.

(28) For a general exposition of the economics of monopoly, see William Landes, `An Introduction to the Economics of Antitrust' in Richard Posner and Frank Easterbrook (eds), Antitrust: Cases, Economic Notes, and Other Materials (2nd ed, 1981) 1055-69; Scherer and Ross, above n 19, 15-55; Posner, Antitrust Law, above n 22, 8-22.

(29) Posner, Antitrust Law, above n 22, 10-11. This assumes that rent-seeking costs such as non-price competition -- including higher quality, better service, advertising and so on -- are of less value to the consumer than is their cost: see at 11-12.

(30) The situation is even more clearly in favour of allowing the conduct if the market is already monopolised such that quantity K is produced at price F. The improvement in technical efficiency results in an additional increase in societal wealth of JABM: see generally Cooter and Ulen, above n 11, 31-3, 277.

(31) See below Part III(A)(3)(a).

(32) `Distributors' is a generic term used here to describe downstream purchasers and resellers.

(33) `Producers' is a generic term used here to describe upstream suppliers.

(34) See, eg, Organisation for Economic Co-operation and Development (`OECD'), Competition Policy and Vertical Restraints: Franchising Agreements (1994) 192-3. The European Commission considers that the degree of inter-brand competition is a crucial indicator of workable competition: European Commission, Green Paper on Vertical Restraints in EC Competition Policy, COM(96)721, 20.

(35) See, eg, Bork, above n 22, 288.

(36) Ibid.

(37) Patrick Rey and Jean Tirole, `The Logic of Vertical Restraints' (1986) 76 American Economic Review 921, 921.

(38) Bork, above n 22, 288.

(39) Ibid 288-91, 298. See also William Comanor, `Vertical Market Restrictions' (1985) 98 Harvard Law Review 983.

(40) It is arguable that it is meaningless to speak of a reduction in intra-brand competition if consumers are better off, considering that it is consumers' interests that are central to the analysis. See George Hay, `Vertical Restraints after Monsanto' (1985) 66 Cornell Law Review 418.

(41) Mark Roszkowski, `State Oil Company v Khan and the Rule of Reason: The End of Intrabrand Competition?' (1998) 66 Antitrust Law Journal 613, 635. See also Wesley Cann, `Vertical Restraints and the "Efficiency" Influence -- Does Any Room Remain for More Traditional Antitrust Values and More Innovative Antitrust Policies?' (1987) 24 American Business Law Journal 483, 535.

(42) Scherer and Ross, above n 19, 541.

(43) The express and unique goal of integrating the common market has specific implications for competition policy in the European Community (`EC') that do not necessarily apply elsewhere. See European Commission, above n 34, 24-6.

(44) Ibid iii.

(45) Ibid v, vi, 17, fn 11, 19, 26. The erstwhile approach of the European Commission in making block exemptions for exclusive, but not absolute, distribution in a territory (Commission Regulation 1983/83, 1983 OJ (L 371) 1 (no longer in force)), exclusive purchasing (Commission Regulation 1984/83, 1983 OJ (L 371) 5 (no longer in force)), and franchises where a franchisee sells standardised products in an exclusive territory in order to exploit the know-how and intellectual property rights of the franchisor, provided they are not effectively horizontal (see Commission Regulation 4087/88, 1988 OJ (L 359) 46 (no longer in force)), implicitly rejects the Chicago School's tendency to treat vertical restraints as being generally pro-competitive. The current and much broader approach of the European Commission clears vertical agreements, depending on the market share of the firm and subject to specific `black listed' exceptions (Commission Regulation 2790/99, 1999 OJ (L 336) 21, art 2). This is implicitly based on a policy position that is more clearly aligned with the Chicago School. For an overview of the European Commission Regulations, see Mark Griffiths, `A Glorification of De Minimis -- The Regulation on Vertical Agreements' (2000) 21 European Competition Law Review 241.

(46) See, eg, Scherer and Ross, above n 19, ch 15.

(47) Maximum RPM is not prohibited in Australia and so it is not separately discussed here. As a consequence, the use of maximum RPM as a proxy for horizontal price collusion or to limit double-marginalisation is not considered. Double-marginalisation occurs where firms in a chain of production and distribution all have some market power and charge prices that include monopoly profits -- a negative externality where the impact of the conduct on other firms in the chain is not taken into account -- with the result that the retail price is above the level that would maximise the profits of a monopolist, were the chain to be fully integrated: see OECD, above n 34, 35 and European Commission, above n 34, 18-19.

(48) Monsanto Co v Spray-Rite Service Corp, 465 US 752 (1984).

(49) In the EC, minimum RPM is prohibited under the Treaty Establishing the European Economic Community, opened for signature 25 March 1957, 298 UNTS 11, art 85(1) (entered into force 1 January 1958). See also European Commission, above n 34, vi.

(50) TPA s 48.

(51) Eg, when the firm in the input market has monopoly power, the result of vertical integration from a net social welfare point of view depends upon the elasticity of demand substitution in the downstream market: see David Kaserman, `Theories of Vertical Integration: Implications for Antitrust Policy' (1978) 23 Antitrust Bulletin 483. Vertical integration -- that is, vertical control by ownership -- can be treated as analogous to control by contractual vertical restraint.

(52) Herbert Hovenkamp, Economics and Federal Antitrust Law (1985) 204-7.

(53) See generally Frances Hanks and Philip L Williams, `The Treatment of Vertical Restraints under the Australian Trade Practices Act' (1987) 15 Australian Business Law Review 147.

(54) See the references collected in Jean Burns, `Vertical Restraints, Efficiency and the Real World' (1993) 62 Fordham Law Review 597.

(55) Hovenkamp, Economics and Federal Antitrust Law, above n 52, 226. See also Eastman Kodak Co v Image Technical Services, Inc, 504 US 451, 477-8 (1992), holding that imperfect information can make a market uncompetitive, despite its being otherwise structurally competitive; Robert Lande, `Chicago Takes It on the Chin: Imperfect Information Could Play a Crucial Role in the Post-Kodak World' (1993) 62 Antitrust Law Journal 193, 197.

(56) See Lawrence Sullivan, Handbook on the Law of Antitrust (1977) 445-6.

(57) Ibid 412-14.

(58) European Commission, above n 34, 20.

(59) William Comanor, `Vertical Arrangements and Antitrust Analysis' (1987) 62 New York University Law Review 1153, 1161.

(60) This may be defined as `a market situation where there is a single buyer of a product or service from a large number of sellers': A Delbridge et al (eds), The Macquarie Dictionary (3rd ed, 1997) 1391.

(61) See generally William Comanor, `The Two Economics of Vertical Restraints' (1992) 21 Southwestern University Law Review 1265. See also below Part III(A)(2)(c).

(62) Ward Bowman Jr, `Tying Arrangements and the Leverage Problem' (1957) 67 Yale Law Journal 19, 19-20.

(63) Scherer and Ross, above n 19, 565-6.

(64) Hovenkamp, Economics and Federal Antitrust Law, above n 52, 223.

(65) Bowman, above n 62, 29.

(66) Ibid 27.

(67) Ibid 20.

(68) Ibid 22-3.

(69) Sullivan, above n 56, 471.

(70) Phillip Areeda and Louis Kaplow, Antitrust Analysis: Problems, Text, Cases (1988) 774-5.

(71) Posner, Antitrust Law, above n 22, 183.

(72) Ibid 206-7.

(73) Hovenkamp, Economics and Federal Antitrust Law, above n 52, 231.

(74) See Bork, above n 22, 295.

(75) Ibid 375.

(76) Phillip Areeda, Antitrust Law: An Analysis of Antitrust Principles and Their Application (1989) vol 8, 78-91.

(77) Herbert Hovenkamp, `Vertical Restrictions and Monopoly Power' (1984) 64 Boston University Law Review 521, 557.

(78) Ibid 558.

(79) Richard Markovits, `The Functions, Allocative Efficiency and Legality of Tie-Ins: A Comment' (1985) 28 Journal of Law and Economics 387, 401.

(80) Bowman, above n 62, 28.

(81) Bork, above n 22, 381.

(82) Ibid 375, 381.

(83) See Scherer and Ross, above n 19, 235-74; 565-9.

(84) Sullivan, above n 56, 454-4.

(85) See generally Markovits, above n 79. See also Hovenkamp, Economics and Federal Antitrust Law, above n 52, 222.

(86) Hovenkamp, Economics and Federal Antitrust Law, above n 52, 234.

(87) Ibid 216. See also Sullivan, above n 56, 449.

(88) Bork, above n 22, 306-7.

(89) Areeda and Kaplow, above n 70, 629-41.

(90) Comanor, `Vertical Arrangements', above n 59, 1161.

(91) Bork, above n 22, 280. See also Hovenkamp, `Vertical Restrictions', above n 77; Comanor, `Vertical Market Restrictions', above n 39, 984.

(92) Rey and Tirole, above n 37, 921.

(93) See Hovenkamp, `Vertical Restrictions', above n 77, 529.

(94) European Commission, above n 34, 20.

(95) Hovenkamp, `Vertical Restrictions', above n 77, 528.

(96) Hovenkamp, Economics and Federal Antitrust Law, above n 52, 268.

(97) Areeda, above n 76, 550-1.

(98) Hovenkamp, Economics and Federal Antitrust Law, above n 52, 252. See also ibid 366-7.

(99) European Commission, above n 34, 19.

(100) Bork, above n 22, 292-3.

(101) Ibid.

(102) Hovenkamp, `Vertical Restrictions', above n 77, 536.

(103) Examples of these are basing-point pricing, `most-favoured nation' clauses, advance announcement of price and output changes, and vertical restrictions, which can make the market more conducive to tacit oligopolistic behaviour: ibid 537.

(104) Ibid 539.

(105) Hovenkamp, Economics and Federal Antitrust Law, above n 52, 248-52.

(106) Scherer and Ross, above n 19, 550.

(107) Ibid.

(108) With the exception of situations where vertical integration facilitates the increase of profits through price discrimination: see below Part III(A)(2)(d); Hovenkamp, Economics and Federal Antitrust Law, above n 52, 199.

(109) Comanor, `Vertical Arrangements', above n 59, 1153-4.

(110) Hay, above n 40, 437.

(111) In other words, `manufacturers should not be prevented from instituting vertical restraints because the manufacturer's interests in this area coincide with those of consumers': ibid.

(112) Posner, Antitrust Law, above n 22, 204.

(113) Areeda, above n 76, 23, 33, 35.

(114) Areeda and Kaplow, above n 70, 629.

(115) Areeda, above n 76, 351.

(116) Ibid 353.

(117) Ibid 365-6.

(118) See Val Ricks and R Chet Loftis, `Seeing the Diagonal Clearly: Telling Vertical from Horizontal in Antitrust Law' (1996) 28 University of Toledo Law Review 151, 169-70.

(119) Hovenkamp, `Vertical Restrictions', above n 77, 533-4.

(120) Ibid 546-8.

(121) Hovenkamp, Economics and Federal Antitrust Law, above n 52, 244. See also Areeda and Kaplow, above n 70, 773-4.

(122) Areeda and Kaplow, above n 70, 630.

(123) Hovenkamp, `Vertical Restrictions', above n 77, 526. See also Lester Telser, `Why Should Manufacturers Want Fair Trade?' (1960) 3 Journal of Law and Economics 86.

(124) F M Scherer, `The Economics of Vertical Restraints' (1983) 52 Antitrust Law Journal 687, 693.

(125) Bork, above n 22, 295-7; Scherer and Ross, above n 19, 550-1; Hovenkamp, Economics and Federal Antitrust Law, above n 52, 252-7.

(126) See State Oil Co v Khan, 118 US 275 (1997) for discussion of these motivations in the context of maximum RPM.

(127) Areeda, above n 76, 214-15.

(128) Scherer and Ross, above n 19, 553.

(129) Areeda, above n 76, 364. See also Hay, above n 40, 439.

(130) Comanor, `Two Economics', above n 61, 1276.

(131) Scherer and Ross, above n 19, 546-8. See also Comanor, `Vertical Market Restrictions', above n 39; Areeda, above n 76, 354.

(132) Comanor, `Two Economics', above n 61, 1269. See also Scherer and Ross, above n 19, 555.

(133) Comanor, `Two Economics', above n 61, 1270.

(134) See generally Scherer, above n 124.

(135) Hovenkamp, Economics and Federal Antitrust Law, above n 52, 257-8.

(136) See above Part III(A)(1)(b).

(137) Hovenkamp, `Vertical Restrictions', above n 77, 549-50, 553.

(138) European Commission, above n 34, 20.

(139) Areeda, above n 76, 21-2.

(140) Hovenkamp, Economics and Federal Antitrust Law, above n 52, 191.

(141) Henry Butler and Barry Baysinger, `Vertical Restraints of Trade As Contractual Integration: A Synthesis of Relational Contracting Theory, Transaction-Cost Economics, and Organization Theory' (1983) 32 Emory Law Journal 1009, 1045.

(142) Areeda and Kaplow, above n 70, 627. In 1976, the Trade Practices Act Review Committee rejected calls to recommend the removal of s 47 of the TPA (exclusive dealing). It considered that to concentrate solely on horizontal restrictions would ignore the importance of competitive pressures along the chain of distribution: Trade Practices Act Review Committee, Report to the Minister for Business and Consumer Affairs (1976) 17.

(143) See Ronald Coase, `The Nature of the Firm' (1937) 4 Economica 386.

(144) Oliver Williamson, Antitrust Economics: Mergers, Contracting, and Strategic Behaviour (1987) 124.

(145) Ibid 32.

(146) Ibid 126-7.

(147) Ibid 124.

(148) Bork, above n 22, 303.

(149) Williamson, Antitrust Economics, above n 144, 137, 160.

(150) Oliver Williamson, `Transaction-Cost Economics: The Governance of Contractual Relations' (1979) 22 Journal of Law and Economics 233, 239.

(151) European Commission, above n 34, 18.

(152) Williamson, `Transaction-Cost Economics', above n 150, 239.

(153) Ibid 244-5.

(154) Ibid 252-3.

(155) See Sullivan, above n 56, 481.

(156) Williamson, Antitrust Economics, above n 144, 25.

(157) Areeda, above n 76, 555.

(158) Ibid 2-3.

(159) See Williamson, Antitrust Economics, above n 144, 21.

(160) Ibid 22.

(161) In the EC, distinctions are made between seven types of distribution arrangements or agreements, in various orders of vertical control. Generally, the greater the degree of vertical control between manufacturer and distributor, the less rigorously the rules protecting competition have to be applied: OECD, above n 34, 84-5.

(162) They are vertically integrated not merely by ownership, but also by other forms of vertical governance, such as by vertical restraints imposed by contract.

(163) G Frank Mathewson and Ralph Winter, `The Economics of Franchise Contracts' (1985) 28 Journal of Law and Economics 503, 503.

(164) Paul Rubin, `The Theory of the Firm and the Structure of the Franchise Contract' (1978) 21 Journal of Law and Economics 223, 225.

(165) OECD, above n 34, 51.

(166) Ibid 27.

(167) Ibid 50.

(168) Ibid 14-15. See also at 11-12, 16.

(169) Rubin, above n 164, 228-9.

(170) Mathewson and Winter, above n 163, 506.

(171) Benjamin Klein and Lester Saft, `The Law and Economics of Franchise Tying Contracts' (1985) 28 Journal of Law and Economics 345, 349.

(172) Patrick Kaufmann and Francine LaFontaine, `Costs of Control: The Source of Economic Rents for McDonald's Franchisees' (1994) 37 Journal of Law and Economics 417, 448.

(173) Klein and Saft, above n 171, 356. See also William Gremes, `Market Definition in Franchise Antitrust Claims: Relational Market Power and the Franchisee's Conflict of Interest' (1999) 67 Antitrust Law Journal 243; Benjamin Klein, `Market Power in Franchise Cases in the Wake of Kodak: Applying Post-Contract Hold-Up Analysis to Vertical Relationships' (1999) 67 Antitrust Law Journal 283.

(174) Areeda and Kaplow, above n 70, 625.

(175) Maureen Brunt, `"Market Definition" Issues in Australian and New Zealand Trade Practices Litigation' (1990) 18 Australian Business Law Review 86, 122.

(176) Ibid.

(177) Ibid 122-3. See, eg, Queensland Wire Industries Pty Ltd v Broken Hill Pty Co Ltd (1989) 167 CLR 177, 187 (Mason CJ and Wilson J) (`Queensland Wire').

(178) Non-price vertical restraints are covered under the exclusive dealing provisions in s 47 of the TPA and price vertical restraints are dealt with in s 48 and pt VIII. Third-line forcing and RPM are prohibited per se. Other forms of vertical restraints contravene the TPA if they have the purpose, effect or likely effect of substantially lessening competition: see, eg, TPA s 47(10). Public benefits, such as improvements in technical efficiency, are not taken into account at this stage. They are taken into account by the Commission and, on appeal, by the Tribunal, in the analysis of whether conduct which would otherwise contravene the TPA should be authorised (or alternatively that notification should be allowed to stand): see TPA s 90(6)-(7). Conduct involving vertical restraints that does not fall within ss 47 or 48 may fall within s 45 as an anti-competitive agreement in general, or, if a party has a substantial degree of market power, a misuse of market power under s 46.

(179) See generally Hanks and Williams, `Treatment of Vertical Restraints', above n 53.

(180) See text accompanying above n 175.

(181) (1989) 167 CLR 177.

(182) See Melway Publishing Pty Ltd v Robert Hicks Pty Ltd (2001) 178 ALR 253, discussed in below Part IV(D).

(183) Queensland Wire (1989) 167 CLR 177, 187 (Mason CJ and Wilson J).

(184) Ibid.

(185) QCMA (1976) 8 ALR 481.

(186) Queensland Wire (1989) 167 CLR 177, 200 (Dawson J).

(187) Ibid 188 (Mason CJ and Wilson J).

(188) (1976) 8 ALR 481, approved in Queensland Wire (1989) 167 CLR 177, 188 (Mason CJ and Wilson J), 199-200 (Dawson J), 210 (Toohey J).

(189) (1989) 167 CLR 177, 190 (Mason CJ and Wilson J).

(190) Ibid. Quality control of raw materials was cited as an example of a legitimate reason for vertically integrating.

(191) (1979) 39 FLR 1 (`Tooth').

(192) Ibid 34-43 (Keely J, Brunt and Shipton).

(193) Ibid 40.

(194) Ibid 35.

(195) Ibid.

(196) Ibid 38-9.

(197) Ibid 40.

(198) See, eg, Mark Lyons Pty Ltd v Burshill Sportsgear Pty Ltd (1987) 75 ALR 581, 590 (`Mark Lyons'); AGL Cooper Basin [1997] ATPR [paragraph] 41-593, 44,209-12.

(199) Tooth (1979) 39 FLR 1, 40.

(200) Ibid 65-6.

(201) Ibid 66.

(202) Ibid 77.

(203) [1981] ATPR [paragraph] 40-203 (`Koppers').

(204) Ibid 42,825 (Lockhart J, Brunt and Shipton).

(205) Ibid 42,829.

(206) (1995) 132 ALR 225 (`QIW').

(207) Ibid 262 (Lockhart J, Brunt and Aldrich).

(208) Ibid 265.

(209) Ibid.

(210) Ibid.

(211) Ibid 266. See also Re Media Council of Australia [1996] ATPR [paragraph] 41-497, 42,263 (Lockhart J, Brunt and Aldrich).

(212) Cf text accompanying above n 175.

(213) [2000] ATPR [paragraph] 41-754, 40,772 (Goldberg J, Aldrich and Waller).

(214) [1997] ATPR [paragraph] 41-593, 44,216 (Lockhart J, Brunt and Aldrich).

(215) [1996] ATPR (Com) [paragraph] 50-231.

(216) Ibid 56,524.

(217) Ibid 56,518.

(218) Ibid 56,524.

(219) Ibid 56,528.

(220) Ibid 56,532-4.

(221) [1995] ATPR (Com) [paragraph] 50-198 (`VEIC').

(222) Ibid 56,126.

(223) Ibid 56,129-30.

(224) Ibid.

(225) Ibid.

(226) (1990) 27 FCR 460 (`Pont Data').

(227) Ibid 481 (Lockhart, Gummow and von Doussa JJ).

(228) Ibid 479-81.

(229) Ibid 481.

(230) See text accompanying above n 184.

(231) Pont Data (1990) 27 FCR 460, 480.

(232) (1987) 75 ALR 581, 591.

(233) Ibid 590-1.

(234) Ibid 598.

(235) (1982) 44 ALR 667.

(236) Ibid 668.

(237) Ibid 670.

(238) Ibid 672.

(239) (1982) 44 ALR 667, 674 (`Outboard Marine').

(240) Ibid.

(241) Trade Practices Commission, Annual Report 1977 (1977) 82.

(242) This was a transitionary power to declare conduct to be not in contravention of the TPA. The power was repealed by the Trade Practices Amendment Act 1977 (Cth) s 60. See Trade Practices Commission, Annual Report 1975 (1975) 6:
   [C]learance is generally of conduct that would not be illegal in any event
   (because it is not significantly anti-competitive) ... Authorisation is
   generally of conduct that would be illegal (because it is significantly
   anti-competitive) but which on public benefit grounds deserves
   authorisation that will make it legal.


Clearance involved purely a competitive analysis without regard to public benefit: ibid 73.

(243) See, eg, Queensland Rugby Football League Inc [1977] ATPR (Com) [paragraph] 35-100, 15,666, 15,677 (a five-year exclusive broadcast right refused clearance); Caltex Oil (Aust) Pty Ltd [1977] ATPR (Com) [paragraph] 35-120, 15,605 (exclusive supply contracts foreclosed competition for the duration of the contracts so it was considered that there should be an opportunity for competition to exist between contracts); Amalgamated Television Services [1980] ATPR (Com) [paragraph] 50-400, 55,006 (a four-year option after a four-year term for exclusive broadcast rights -- it was considered that the longer the period, the less likelihood of change, the less the parties have to struggle to maintain their position, and the more the effect on competition is likely to crystallise); Australian Cricket Board, PBL Marketing Pty Ltd, World Series Cricket Pty Ltd and Publishing & Broadcasting Ltd [1979] ATPR (Com) [paragraph] 35-300, 17,067 (notification was allowed to stand for 10-year exclusive production rights, due to the unlikelihood that two codes of cricket could survive in Australia); Amalgamated Television Services Pty Ltd and the New South Wales Rugby Football League [1980] ATPR (Com) [paragraph] 35-300, 17,088 (exclusivity for four years was considered to be justified where it took into account various start-up costs during the transition period). See also Val Morgan & Co (Australia) Pty Ltd [1975] ATPR (Com) [paragraph] 13-900, 8,690; David Koffel Pty Ltd [1976] ATPR (Com) [paragraph] 35-100, 16,701; Joseph Lucas (Australia) Pty Ltd [1975] ATPR (Com) [paragraph] 13-925, 8,706. See also Hanks and Williams, `Treatment of Vertical Restraints', above n 53, 153.

(244) See, eg, Hoover (Aust) Pty Ltd [1976] ATPR (Com) [paragraph] 35-100, 15,652-4; Pioneer Concrete (Vic) Pty Ltd [1976] ATPR (Com) [paragraph] 35-120, 15,901; Nixon Blayney Pty Ltd [1976] ATPR (Com) [paragraph] 35-100, 15,562; Australian Posters Pty Ltd [1975] ATPR (Com) [paragraph] 13-900, 8,684; Electronics Engineering (Communications) Pty Ltd [1976] ATPR (Com) [paragraph] 35-100, 15,598; A F Harding & Co Pty Ltd [1977] ATPR (Com) [paragraph] 35-120, 15,921 (`A F Harding'); Gilbert Lodge & Co Ltd [1975] ATPR (Com) [paragraph] 13-925, 8,703; Rhonrae Productions Pty Ltd [1975] ATPR (Com) [paragraph] 13-925, 8,718. See also Hanks and Williams, `Treatment of Vertical Restraints', above n 53, 152-3.

(245) Val Morgan & Co (Australia) Pty Ltd [1975] ATPR (Com) [paragraph] 13-925, 8,703. See also Ralph McKay Ltd [1976] ATPR (Com) [paragraph] 35-100, 15,654.

(246) See Hanks and Williams, `Treatment of Vertical Restraints', above n 53, 150.

(247) Application by Obadiah Pty Ltd [1980] ATPR [paragraph] 40-176, 42,440-1 (Deane J, Shipton and Brunt) (`The Locksmiths Case'); Re 7-Eleven Stores Pty Ltd, Independent Newsagents Association [1998] ATPR [paragraph] 41-666, 41,476-7 (von Doussa J, Aldrich and Round) (`7-Eleven Stores [No 2]').

(248) Koppers [1981] ATPR [paragraph] 40-203, 42,846-7 (Lockhart J, Brunt and Shipton); AGL Cooper Basin [1997] ATPR [paragraph] 41-593, 44,219-20 (Lockhart J, Brunt and Aldrich).

(249) Re Southern Cross Beverages Pty Ltd (1981) 50 FLR 176, 211 (Deane J, Grant and Johnson).

(250) Tooth (1979) 39 FLR 1, 79 (Keely J, Brunt and Shipton).

(251) Ibid 75-6.

(252) [1975] ATPR (Com) [paragraph] 35-220, 16,701 (`Shell').

(253) Ibid.

(254) Ibid 16,746.

(255) Ibid.

(256) Ibid.

(257) Ibid 16,749.

(258) Ibid.

(259) Ibid.

(260) See, eg, A F Harding [1977] ATPR (Com) [paragraph] 35-120, 15,921.

(261) [1976] ATPR (Com) [paragraph] 35-100, 15,654.

(262) Ibid. 15,657.

(263) Ibid 15,658.

(264) Ibid.

(265) Ibid.

(266) [1977] ATPR [paragraph] 40-043 (`Ford').

(267) Ibid 17,507 (Keely J, Walker and Grant).

(268) Ibid 17,490-1.

(269) Ibid 17,494.

(270) Ibid 17,495.

(271) Ibid 17,498-9.

(272) Ibid 17,500.

(273) Ibid 17,501.

(274) (1982) 44 ALR 173.

(275) Ibid 192.

(276) Ibid 206.

(277) Ibid 216.

(278) (1982) 41 ALR 697.

(279) Ibid 702.

(280) Ibid 703.

(281) Ibid.

(282) Outboard Marine (1982) 44 ALR 667.

(283) Ibid 669.

(284) Ibid 669-70.

(285) Ibid 670-1.

(286) Ibid 671.

(287) Ibid 679.

(288) (1991) 22 IPR 215.

(289) Ibid 241.

(290) (1983) 48 ALR 625 (`O'Brien').

(291) Ibid 631.

(292) Ibid 632.

(293) Ibid 632-3.

(294) See above Part II.

(295) O'Brien (1983) 48 ALR 625, 632.

(296) (1987) 75 ALR 581, 598.

(297) Ibid 593.

(298) Ibid 598.

(299) Ibid.

(300) [1987] ATPR [paragraph] 40-774, 48,419 (Lockhart J, Brunt and Aldrich). See also Re 7-Eleven Stores Pty Ltd [1994] ATPR [paragraph] 41-357, 42,654 (Lockhart J, Brunt and Aldrich) (`7-Eleven Stores [No 1]').

(301) In the context of an analysis of the Australian case law, Hanks and Williams, `Treatment of Vertical Restraints', above n 53, 167 state that `in order for restraints to raise barriers to entry to manufacturing, it is necessary: (i) that the manufacturer imposing the restraint have some monopoly power; (ii) that there be barriers to entry to dealing; and (iii) that the restraint be of long duration.'

(302) Tooth (1979) 39 FLR 1, 98 (Keely J, Brunt and Shipton).

(303) Ibid 102.

(304) At the outset, it should be stated that, in the Tribunal's view, the `long term' is likely to be determined by reference to the concept of a dynamic market expanding over time, taking into account the operational time required for organising and implementing a redeployment of existing capacity, rather than the traditional approach of assuming the gestation period of substitute-fixed equipment to be one year: see AGL Cooper Basin [1997] ATPR [paragraph] 41-593, 44,210 (Lockhart J, Brunt and Aldrich). See also Telecom Corporation of NZ Ltd v Commerce Commission (1991) 3 NZBLC [paragraph] 99-239, 102,363.

(305) [1985] ATPR (Com) [paragraph] 52-007.

(306) Ibid 56,514. See also Streets Ice Cream Pty Ltd [1975] ATPR (Com) [paragraph] 13-900, 8,609 (with regard to an application for clearance of contracts providing for the hire of ice cream refrigeration cabinets to retailers on condition that they store only the ice cream products of the supplier in those cabinets); Re Southern Cross Beverages Pty Ltd (1981) 50 FLR 176.

(307) Carlton and United Breweries [1985] ATPR (Com) [paragraph] 52-007, 56,512-13.

(308) Ibid 56,515.

(309) [1979] ATPR (Com) [paragraph] 35-300, 17,109.

(310) Ibid.

(311) Cadbury Schweppes Pty Ltd [1980] ATPR (Com) [paragraph] 50-400, 55,002, 55,004.

(312) Ibid.

(313) [1981] ATPR (Com) [paragraph] 52-001, 56,501.

(314) Ibid 56,503.

(315) Ibid.

(316) AGL Cooper Basin [1997] ATPR [paragraph] 41-593, 44,217 (Lockhart J, Brunt and Aldrich).

(317) [1981] ATPR [paragraph] 40-203, 42,831 (Lockhart J, Brunt and Shipton).

(318) Ibid 42,829.

(319) Ibid 42,845.

(320) Ibid.

(321) Ibid 42,846.

(322) [1983] ATPR (Com) [paragraph] 50-060.

(323) Ibid 55,262-3.

(324) Ibid 55,266.

(325) Ibid 55,265.

(326) Ibid 55,266.

(327) Ibid 55,268.

(328) [1997] ATPR [paragraph] 41-593, 44,163 (Lockhart J, Brunt and Aldrich).

(329) Ibid 44,168.

(330) Ibid 44,168-9.

(331) Ibid 44,169.

(332) Ibid 44,174.

(333) Ibid 44,212.

(334) Ibid 44,213.

(335) Ibid 44,214.

(336) Ibid 44,215.

(337) Ibid 44,216.

(338) Ibid.

(339) (1979) 39 FLR 1, 86-98 (Keely J, Brunt and Shipton).

(340) Ibid 98-100.

(341) Ibid 100-1.

(342) Ibid 104-5.

(343) [1976] ATPR (Com) [paragraph] 35-220, 16,705.

(344) Ibid.

(345) Ibid 16,707.

(346) Ibid 16,708.

(347) [1994] ATPR (Com) [paragraph] 50-116.

(348) Ibid 56,213.

(349) Ibid.

(350) Ibid 56,225.

(351) Ibid 56,223-6.

(352) [1978] ATPR (Com) [paragraph] 35-220, 16,784-5.

(353) Ibid 16,784.

(354) Ibid.

(355) Ibid.

(356) See, eg, Australian Stock Exchange Ltd and Options Clearing House Pty Ltd [1997] ATPR (Com) [paragraph] 50-251, 57,362 (requirement to obtain membership of quality assurance body to ensure secure operation of the market and public confidence in it); Sydney Futures Exchange Ltd [1986] ATPR (Com) [paragraph] 50-115, 55,398-9 (economies of scale and transactional efficiency). But see Australian Associated Stock Exchanges [1982] ATPR (Com) [paragraph] 50-049 (rules restricting approaches to non-clients and unsolicited communications detrimentally affected the quality of information on the market and therefore increased information search costs); Nashua Australia Pty Ltd [1976] ATPR (Com) [paragraph] 35-220, 16,782 (meter-pricing no more effective than competition in making expensive hardware available to consumers or enhancing the operation of the machine).

(357) For an earlier treatment of the issue by the Commission, see, eg, Terminating Building Societies [1977] ATPR (Com) [paragraph] 35-220, 16,730.

(358) See, eg, Trustee Executors and Agency Co Ltd [1980] ATPR (Com) [paragraph] 50-200.

(359) [1995] ATPR (Com) [paragraph] 50-175. The authorisations were revoked for technical reasons unrelated to this point.

(360) See, eg, Bass & Equitable Building Society Ltd [1994] ATPR (Com) [paragraph] 50-157, 55,376. See also a large number of other similar determinations reported in that volume.

(361) [1975] ATPR (Com) [paragraph] 35-220, 16,752.

(362) Ibid 16,752-3.

(363) Ibid 16,753.

(364) [1998] ATPR (Com) [paragraph] 55-001.

(365) Ibid 58,012-13.

(366) Ibid 58,012.

(367) Ibid.

(368) Ibid.

(369) [1994] ATPR [paragraph] 41-357, 42,647 (Lockhart J, Brunt and Aldrich). See also the analyses of the Commission in Newsagency Council of Victoria Ltd [1993] ATPR (Com) [paragraph] 50-134; Advertiser Newspapers Ltd [1988] ATPR (Com) [paragraph] 50-071; Advertiser Newspapers Ltd [1988] ATPR (Com) [paragraph] 50-083; New South Wales and Australian Capital Territory Newsagency System [1984] ATPR (Com) [paragraph] 50-070.

(370) [1994] ATPR [paragraph] 41-357, 42,683 (Keely J, Brunt and Shipton).

(371) Ibid 42,685.

(372) Ibid 42,674.

(373) Ibid.

(374) Ibid 42,673.

(375) Ibid 42,687.

(376) 7-Eleven Stores [No 2] [1998] ATPR [paragraph] 41-666, 41,477 (von Doussa J, Aldrich and Round), citing expert evidence given by Professor Philip Williams.

(377) Ibid.

(378) [1994] ATPR [paragraph] 41-357, 42,437, 42,440-1 (Deane J, Shipton and Brunt).

(379) Ibid 42,437.

(380) Ibid 42,442.

(381) Ibid 42,444.

(382) Ibid 42,445.

(383) [1977] ATPR (Com) [paragraph] 35-120, 15,921.

(384) See Koppers [1981] ATPR [paragraph] 40-203, 42,831 (Lockhart J, Brunt and Shipton).

(385) Ibid 56,121.

(386) [1995] ATPR (Com) [paragraph] 50-198.

(387) Ibid 56,122.

(388) Ibid 56,134.

(389) Ibid.

(390) Ibid 56,133.

(391) Ibid 56,126.

(392) See also Southern Farmers Co-operative [1986] ATPR (Com) [paragraph] 50-116; Dairy Farmers Cooperative Ltd [1987] ATPR (Com) [paragraph] 50-063.

(393) [1998] ATPR [paragraph] 41-666, 41,477.

(394) See generally Frances Hanks and Philip Williams, `Implications of the Decision of the High Court in Queensland Wire' (1990) 17 Melbourne University Law Review 437.

(395) TPA s 46(6).

(396) TPA s 88.

(397) (1989) 167 CLR 177, 191 (Mason CJ and Wilson J), 194 (Deane J), 202 (Dawson J), 213-14 (Toohey J).

(398) Mark Lyons (1987) 75 ALR 581.

(399) Ibid 592.

(400) Ibid 593.

(401) Ibid 595.

(402) Ibid.

(403) Subscribers could on-supply the data in Signal C only to customers who had signed an agreement with ASXO not to resupply that data themselves.

(404) Pont Data (1990) 27 FCR 460, 481, 485 (Lockhart, Gummow and von Doussa JJ).

(405) Ibid 486-7.

(406) Ibid 487.

(407) See Michael O'Bryan, `Section 46: Law or Economics?' (1993) 1 Competition and Consumer Law Journal 64, 70.

(408) (1998) 42 IPR 627 (`Melway').

(409) Ibid 639.

(410) Ibid.

(411) Ibid 638.

(412) Ibid 634.

(413) Ibid 635.

(414) Ibid 640.

(415) Ibid 636.

(416) Ibid 635.

(417) Ibid 636.

(418) Ibid 643.

(419) Ibid.

(420) Melway Publishing Pty Ltd v Robert Hicks Pty Ltd (1999) 90 FCR 128 (Heerey, Sundberg and Finkelstein JJ).

(421) Ibid 141.

(422) Ibid.

(423) Ibid 147.

(424) Ibid 134.

(425) Ibid.

(426) Ibid.

(427) Ibid 135, paraphrasing Hanks and Williams, `Queensland Wire', above n 394.

(428) (2001) 178 ALR 253.

(429) 515 F 2d 1245, 1249 (1975) (Morgan J).

(430) 433 US 36 (1977).

(431) 717 F 2d 1560 (1983).

(432) Ibid 1571 (Tjoflat J).

(433) Melway Publishing Pty Ltd v Robert Hicks Pty Ltd (2001) 178 ALR 253, 258-9 (Gleeson CJ, Gummow, Hayne and Callinan JJ, Kirby J dissenting) (citations added; original citations omitted).

(434) Ibid 262.

(435) Ibid 263.

(436) Ibid 267.

(437) Ibid.

(438) Ibid.

(439) Ibid 269.

(440) Ibid.

(441) Ibid 268.

DANIEL CLOUGH, BEc (Hons), LLB (Monash), LLM (Melb); Senior Associate, Allens Arthur Robinson, Melbourne. I am greatly indebted to Frances Hanks for her comments in the preparation of this article. I am also grateful to Jacqui Bos.
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