Market definition - The need to engage with "commercial reality"

In the recent Flight Centre case (see Competition Law in Australia in Full Flight (5 March 2017)), the High Court also made a number of observations about market definition.  It held (at [69]) that, although based on value judgments, markets are to be determined in their commercial context – purposively, instrumentally and functionally.

The following criticism was made by Kiefel and Gageler JJ of the ACCC’s primary (and unsuccessful) case:

“There is no want of realism in describing Flight Centre as having provided distribution services to an airline when selling that airline's ticket to a customer in accordance with the Agency Agreement. It is quite artificial, however, to describe the same airline as having provided those services (or any other services) to the airline itself when selling a ticket directly to a customer. Booking the flight, issuing the ticket and collecting the fare were part and parcel of the airline making the sale. They were inseparable concomitants of that sale.

Conversely, what a customer acquired when purchasing an international airline ticket could not realistically be described as more than the ticket. That was so whether the customer purchased from Flight Centre or directly from an airline. No doubt, an element of customer service was involved in making the sale. But that element of service was inseparable from the sale transaction. It was no different in kind, and little different in degree, from the attention to the requirements of the individual customer typically involved in the retail sale of a motor vehicle or of a pair of shoes.

Whatever other difficulties the ACCC's primary case might encounter, it was unsustainable because it rested on attributing to Flight Centre and to the airlines the making of supplies of services of a description which did not accord with commercial reality.” (at [73-75])

Nettle J also held that the market for the provision of booking and distribution services was an “artificial construct that does not truly engage the commercial reality of the relevant commercial relationship and dealings”. (at [123])

To avoid such a criticism, requires a detailed understanding of the markets, the relevant evidence (including lay and expert evidence), the pleadings (and potential for pleading alternative markets).  So to in commercial transactions e.g. involving mergers and acquisitions, the proper identification of markets is critical in relation to substantial lessening of competition considerations.  The Flight Centre observations about market definition emphasise the practical, real-world considerations and an emphasis upon the competition law regime, rather than pure economic theory.  These observations are not new, but the reminder is timely.  As the Full Federal Court held in Universal Music Case in 2003:

“....[S]omething should be said about the use of expert economic evidence in cases such as the present. The primary judge referred to the evidence of witnesses called in the case, to writings on the topic by economists and lawyers, and to the discussion of economic theory in other judgments. The primary task of the Court, however, is to apply the words of the Act to the facts found on the evidence before it. These words involve some economic concepts and the application of the Act to the facts of a particular case may be informed by economic evidence and argument. But it is the language of the Act which defines the task that the legislature has set for the Court. To the extent that the statutory language conflicts with economic theory, the Court is bound to apply the Act.” (Universal Music Australia Pty Ltd v ACCC [2003] FCAFC 193 at [163])