Which of the following occurs when the price of a good is lower in export markets than it is in the domestic market?

It’s not illegal for businesses to have market power, or to out-compete other businesses.
It’s illegal for businesses with substantial market power to do anything that has the purpose, effect or likely effect of substantially lessening competition.
Practices that are sometimes linked to misuse of market power include refusal to deal, restricting access to an essential input, predatory pricing, margin or price squeezing, and tying or bundling. But any type of conduct can potentially breach this law.

Índice Show

Refusal to deal
Restricting access to an essential input
Predatory pricing
Loyalty rebates
Margin or price squeezing
Tying and bundling
Introduction
Barley trade will be lower, but there will be adjustments
Barley export returns would also fall
Producers will adapt, lessening potential losses
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What the ACCC does

We investigate cases of potential misuse of market power.
We enforce the law on misuse of market power and take court action against businesses that break the law.

What the ACCC can't do

We don’t intervene in or resolve disputes between businesses.

Market power is a business’s ability to insulate itself from competition.

A business with market power has more freedom to act without needing to worry how competitors, suppliers or customers will react. For example, it may be able to raise prices or lower quality without having to worry about losing customers. A market can have more than one business with substantial market power.

To work out if a business has substantial market power, we might look at:

the number and size of businesses in that market
how easy it is to set up a competing business in that market
the extent of the business’s ability to ignore what competitors, suppliers or customers do.

A business owns the only cement works in a regional town. The next closest cement works is far away, so it’s expensive to have cement brought into town from elsewhere.

With no other commercially viable suppliers of cement in the town, the business can raise its prices above competitive levels.

The business has substantial market power in the supply of cement in the regional town.

It's not illegal for a business to have or use market power. For example, a business with market power may raise its prices above competitive levels. While charging high prices may seem unfair, it's not illegal.

Learn more about what is and isn’t allowed when setting prices.

A business with substantial market power is also allowed to out-compete other businesses. For example, it can:

attract customers through promotional campaigns
use its skills and resources to develop a better product or service
drive down its prices with efficiency improvements.

Competitive practices that improve efficiency, innovation, product quality or price competitiveness are unlikely to be a misuse of market power.

Learn more about the difference between competitive and anti-competitive conduct.

It’s illegal for businesses with substantial market power to do anything with the purpose, effect or likely effect of substantially lessening competition.

Businesses with substantial market power must not do something which stops other businesses from competing on their merits. The law doesn’t label specific practices as a misuse of market power.

However, there are practices that can sometimes be a misuse of market power. Whether any particular example of these practices is a misuse of market power depends on the specific circumstances.

Our Guidelines on misuse of market power provide examples of some types of conduct that have greater potential of breaching the law.

Refusal to deal

Businesses are generally entitled to choose whether they’ll supply or deal with another business. This includes competitors. Even if a business has substantial market power, they are usually not obligated to deal with other businesses.

In some situations, a business with substantial market power that refuses to deal may contravene the law if it limits the ability of others to compete on their merits.

Restricting access to an essential input

In some situations, a business with substantial market power may prevent or restrict a competitor’s access to an essential input. This may breach the law where this conduct has the purpose, effect or likely effect of substantially lessening competition.

An ‘essential input’ is a resource that can’t be substituted and is essential for the provision of goods and services. Restricting access to an essential input may prevent competitors from competing with a business on their merits.

Predatory pricing

Businesses compete by providing more compelling offers to consumers than their competitors. This often involves businesses undercutting prices offered by rivals. Low pricing almost always benefits consumers and is part of the competitive process.

However, in rare circumstances, very low pricing by a business with substantial market power may be predatory.

Predatory pricing occurs when a business substantially reduces its prices below its own cost of supply for a sustained period:

causing competitors to exit the market
disciplining or damaging competitors for competing aggressively, or
discouraging potential competitors from entering the market.

Predatory pricing may result in a business losing money in the short to medium term. However, if the practice leads to reduced competition or the potential for competition, the business may be in a position to charge higher prices and maintain or increase its market share in the longer term.

While predatory pricing by a business with substantial market power can harm an individual competitor, the test is whether the conduct has the purpose, effect or likely effect of substantially lessening competition in a market.

Loyalty rebates

Businesses are generally free to set their own sales promotions, including rebates.

Rebates usually don’t harm competition. In many cases, rebates are an example of the benefits of the competitive process. They give retailers an incentive to promote the supplier’s products and reduce the overall price that customers pay.

However, in a small number of situations, a business with substantial market power can substantially lessen competition when they offer rebates. This is most likely to occur where a rebate is conditional on a retailer meeting certain targets. This type of rebate can result in retailers being prevented from purchasing from competing suppliers. It can breach the law if it substantially reduces competition.

Unconditional rebates, which reduce the price of an item with no extra conditions placed on the retailer, will likely only raise concerns if the reduced price amounts to predatory pricing.

Margin or price squeezing

Businesses are generally entitled to charge different prices to different buyers for the supply of goods or services along the supply chain.

However, a business with substantial market power in the supply of a key input can disadvantage its competitors in downstream markets by reducing the margin available to these competitors. It could do this, for example, by charging its competitors an input price that makes it uncommercial for them to sell at a competitive price.

As competitors in the downstream market require the input and have limited alternative sources of supply, a margin or price squeeze can prevent equally efficient competitors in the downstream market from competing with the business on their merits.

Tying and bundling

Businesses are generally entitled to supply goods or services as part of a tied or bundled arrangement.

‘Tying’ occurs when a supplier sells one good or service on the condition that the purchaser buys another good or service from the supplier. For example, a printer supplier may sell a printer on condition that the customer also acquires ongoing servicing from the supplier.

‘Bundling’ occurs when a supplier only offers two products as a package or for a lower price if the two products are bought as a package. For example, a mobile phone operator may offer bundles of handsets and mobile phone service plans where the price of the handset and plan is cheaper if consumers buy them together than if they buy each one separately.

Tying and bundling are common commercial arrangements which usually don’t harm competition and, in many situations, promote competition by offering consumers more compelling offers.

However, in limited circumstances, tying or bundling by a business with substantial market power may contravene the law. This can occur when a business with substantial market power in one market uses a tie or bundle to extend or ‘leverage’ this market power into another market.

A business can apply for authorisation for conduct related to market power that is potentially anti-competitive.

Authorisation is an exemption process and gives protection from legal action.

We assess whether the conduct is likely to substantially lessen competition and, if so, whether it's still in the public interest.

Competition and anti-competitive behaviour

Exclusive dealing

Guidelines on misuse of market power

Exemptions

Competition and Consumer Act 2010

Section 46 Misuse of market power.

Authors: Liangyue Cao and Jared Greenville

Introduction

On 19 November 2018 China initiated an anti-dumping and countervail investigation into Australian barley exported to China between 1 October 2017 and 20 September 2018. Dumping occurs when a company exports a product at a price lower than the price it normally charges on its own home market. Countervail cases examine whether dumping has occurred because a foreign government has provided subsidies or tax benefits to its producers. (For more on anti-dumping and countervailing duties, refer to World Trade Organization (2020)). After an 18 month investigation the Chinese Ministry of Commerce ruled that both dumping and subsidisation had occurred. On 19 May 2020 it imposed a combined 80.5% tariff on Australian barley, comprised of a 73.6% anti-dumping duty and a 6.9% countervailing duty.

The Australian Government does not agree with China's ruling on both dumping and subsidisation (Statement by Trade Minister, 20 May 2020). While the government has the right to contest the ruling via the WTO's Dispute Settlement process, as of June 2020 it had not announced it would do so. Until actions are taken and the tariffs are reduced or repealed, the Australian grain industry will be forced to adapt to a changed trading environment.

The immediate impact of the new tariffs on Australian barley production is likely to be minimal. Up to 19 May the major driver leading into the 2020–21 season had not been the imminent ruling on the anti-dumping case with China, but the improved seasonal conditions across south-eastern Australia. At the time the tariff was implemented, plantings were mostly complete. Area planted to barley in 2020–21 is forecast to be 8% higher than in 2019–20, with assumed improvements to yields forecast to result in a 17% increase in production (ABARES 2020).

The impact on the Australian barley industry from China's new tariff will be from the loss of trade with China, a premium market. The magnitude of China's barley tariff has effectively made Australian barley uncompetitive in that market. To mitigate losses, it is anticipated that Australian barley will be diverted away from China towards alternative, lower-value markets, including the lower-value domestic feed market.

Lower domestic and export prices resulting from forecast increased supply and weaker global demand are expected to put pressure on producers' barley margins, particularly in the short term. However, barley production is expected to remain profitable since it is a relatively low-input crop and has agronomic value as part of crop rotations.

ABARES conducted some indicative computable general equilibrium (CGE) modelling to estimate possible medium-term impacts on Australia's barley trade and, more broadly, on its agricultural sector, from China’s 80.5% tariff on Australian barley. Details of the model are set out in Cao, Thorpe & Fell (2020). The modelling examines outcomes by 2025, a timeframe which allows producers to adjust to the new trading environment.

There are three key assumptions underlying the modelled scenarios.

That China maintains the additional tariffs for the full 5-year duration of its determination.
There is no change to Australia's access to its existing markets, that is, there are no barley shipments to markets to which trade does not currently take place.
No activities that may stimulate demand for Australian barley as a preferred product in existing markets are taken into account. The reason these activities are excluded from the analysis is because the costs of undertaking such activities are unknown at this stage.

The modelled outcomes effectively reflect a worst-case scenario.

Barley trade will be lower, but there will be adjustments

ABARES modelling indicates that Australian exports of barley to China would cease under an 80.5% tariff. Trade has averaged around $1.2 billion per year between 2014–15 and 2018–19. In the short run, the costs are likely to be higher compared to those once producers, and the industry more broadly, have had time to respond. Altered planting decisions by producers and changes in the markets to which Australia exports barley will lessen the negative impact of China's punitive tariff.

In response to the lost trade in barley to China, there would be an increase in barley exports to other countries. Assuming no additional measures were taken by industry or the Australian government to stimulate demand for Australian barley in alternative markets, the modelling results indicate that in the medium term around 40% of the barley exports originally destined for China would find alternative markets.

Barley export returns would also fall

Based on current returns, the barley trade diverted to alternative markets is expected sell at a lower price compared to export unit values to China prior to 19 May (DAWE 2020). The combination of this price fall and the diversion of exports results in a modelled fall in barley export value of $750 million.

Producers will adapt, lessening potential losses

In the years after the tariff has been imposed, producers would change what they plant, shifting to the next best alternative crop where possible. This shift would help offset the potential losses to farm cash receipts and to the agricultural sector overall (Figure 1 ).

Figure 1 Production decisions lessen the impact of the new tariff by 2025

Source: ABARES

In 2025 it is estimated that the gross value of barley production would be around 30% lower than what is projected to have occurred without the tariff (around $720 million in 2019–20 dollars) due to reduced barley plantings combined with a lower expected price. However, to offset this loss, producers would increase plantings of the next best alternative crop or activity; the land currently used for barley production would not be left idle.

It is estimated that Australia’s gross value of production of wheat and other crops would increase by around $220 million by 2025 (in 2019–20 dollars). For livestock it would increase by around $250 million, as a result of cheaper feed grains and other production adjustments. Together, these increases limit the total fall in Australia’s gross value of agricultural production to around $250 million.

In terms of farm cash receipts at the industry level, losses to the cropping sector are estimated to be around $500 million by 2025, but there would be offsetting gains to the livestock sector of around $250 million (in 2019–20 dollars).

With Australia's agricultural production diverted to other activities, exports of other agricultural products in 2025 are estimated to increase. This means the value of Australia's total agricultural exports (to all countries) would fall by less than what is lost in the trade with China. Only around 30% of the value of lost barley exports to China, equivalent to around $330 million, is estimated to be lost to the total value of agricultural trade in Australia.

The estimated fall in Australian gross value of agricultural production of around $250 million in 2025 represents the ‘worst case’ outcome from the imposition of China's 80.5% tariff. This modelled outcome does not assume any new sectoral or market adjustments. These could include, for example, government or industry initiatives to raise awareness and promote Australian barley in growing markets, developing new market access, or partnering with industry bodies to increase demand for malting barley, in particular. Allowing for these adjustments would reduce the estimated fall in the gross value of agricultural production.

The imposition of the 80.5% tariff on Australian barley will also compel Chinese buyers to shift to alternative sources for malting barley. This is likely to lead to lower returns for their products compared to the returns derived from using Australian barley.

ABARES modelling shows that, as a result of the tariff, the gross value of Chinese agricultural production falls by about $3.6 billion—around three times the average value of China’s barley imports from Australia between 2014–15 and 2018–19.

The expected fall in the value of China's agricultural production occurs because it is difficult and costly for users of Australian barley to shift to other sources. Because barley is used as an input in downstream value-adding activities, the impact of the switch to alternative sources is larger than just the import value of the grain. The need to find alternative supplies of barley leads to an increase in demand for Chinese-grown barley. In response, Chinese agriculture shifts towards a less efficient production mix of coarse grains (corn and barley), which further compounds the effect of the tariff.

ABARES 2020, Australian crop report, Australian Bureau of Agricultural and Resource Economics and Sciences, Canberra, June.

Cao, L, Thorpe, S & Fell, J 2020, Simulating effects of agricultural support policies under price volatility – a China case study, ABARES Conference Paper 20.2, for the Global Trade Analysis Project (GTAP) Conference, Canberra, April.

DAWE 2020. Agricultural trade implications of COVID-19 – Australia in the global grains market. Department of Agriculture, Water and the Environment, Vol. 10, May.

Trade Minister 2020, Statement by Trade Minister, Minister for Trade, Tourism and Investment, 20 May 2020.

WTO 2020, Anti-dumping, subsidies, safeguards: contingencies, etc, World Trade Organization, Geneva, accessed 26 May 2020.