The end of low prices and discounting? Select Committee dismisses officials' advice and proceeds with prohibition on low prices

The Economic Development, Science and Innovation Committee ("the Committee") has published its report on the Commerce (Promoting Competition and Other Matters) Amendment Bill ("the Bill"). Although the Committee has made changes to address some of the concerns raised with the Bill, the most problematic aspect of the proposed reforms – the introduction of a brightline prohibition on below cost pricing by firms with market power ("predatory pricing prohibition") – remains untouched. This is despite MBIE officials, in its report to the Committee on submissions on the Bill, recommending that the proposed predatory pricing prohibition be removed in its entirety. In our view, the predatory pricing prohibition is not in the best interests of consumers and risks discouraging businesses in some of our most critical industries from offering discounted prices to customers.  

You can read the Committee's report here.

You can read our submission on the bill in full here.

What's in the Bill? 

As highlighted in our previous alert (see here), the Bill carries major consequences for M&A transactions, pricing competition, and collaborations between competitors. Among the Bill's principal reforms are revisions to the substantive test for anticompetitive mergers, an overhaul of the merger clearance process, a new brightline prohibition on below cost pricing by firms with market power, expanded authority for the Commerce Commission ("NZCC") to recommend pro-competitive regulatory measures, and a range of changes designed to facilitate beneficial collaborative arrangements. 

What changes have been made that reflect our submissions?

Several of the Committee's amendments align with our submission on the Bill. 

1. The Committee recommended to retain section 46 of the Act, which protects legitimate business sale and purchase agreements from being challenged under the cartel rules - a provision we argued was essential to avoid unnecessarily exposing ordinary M&A transactions to criminal and civil risk. 
2. The Committee recommended confining the proposed changes to the "substantial lessening of competition" definition to the merger regime only.  We submitted that confining this change to the merger regime was necessary to both align with the Australian position and to avoid a chilling effect on firms with market power from engaging in procompetitive innovative conduct. 
3. The Committee lowered the threshold for the Commission to be able accept behavioural undertakings when considering mergers. 
4. The Committee narrowed the creeping acquisitions lookback to prior deals involving the same or substitutable goods and services, bringing it closer to the Australian model.
5. The Committee deleted the consequential amendments that would have removed the "of a business" qualifier from the definition of assets across the Act - a change we warned risked blurring the line between mergers and ordinary commercial contracts, potentially capturing routine transactions without justification.

Per se predatory pricing prohibition remains, contrary to MBIE's advice 

Despite strong opposition from Russell McVeagh and a number of other submitters, and MBIE's recommendation to the Committee that it be removed, the Bill still contains the predatory pricing prohibition. MBIE advised the following:¹   

"On balance, we consider that without clearer definitions of relevant cost benchmarks, “sustained period”, and the scope of any safe harbour, new section 36C would increase compliance costs and litigation risk without materially improving legal certainty. Therefore, we recommend deleting clause 6 (new section 36C) and addressing predatory pricing through the existing section 36 framework, supported by updated Commission guidance. This approach will allow the Commission and courts to focus on the competitive effects of pricing conduct, drawing on established case law and economic principles, while avoiding rigid thresholds that risk false positives."

It appears that the decision to retain the prohibition may have been a last minute one, with the Labour Party and Green Party's differing view in the Committee report appearing to lament the removal of the prohibition (even though the actual text of the Bill retains the provision): ²

"…the bill has been weakened during the select committee process. Predatory pricing prohibitions are a standard feature of competition law in comparable jurisdictions. They exist to prevent dominant firms from temporarily pricing below cost in order to eliminate competitors, before later raising prices once market power is secured. The proposed use of long run average cost as an objective benchmark was consistent with established international competition practice and would have been a small step forward."

 Our concerns with the proposed predatory pricing prohibition are recapped below:

1. Predatory pricing is rare because it is widely considered an ineffective, exorbitantly expensive, and highly risky business strategy.
2. Further, predatory pricing is already covered by existing law (which was only recently amended in 2023). Cost-based tests like what is being proposed are complex and difficult to apply consistently across industries.      
3. We are concerned that the proposed changes to predatory pricing were not included in the comprehensive review or consultation undertaken by MBIE into the Commerce Act, and there has been no evidence provided that predatory pricing is a widespread or practical concern in New Zealand. Furthermore, there is no evidence that the current regime is not fit for purpose. 
4. Beyond the lack of evidential basis for change, we have three main issues with the proposed new brightline prohibition.
   1. First, brightline prohibitions are only appropriate where the relevant conduct is almost always harmful, yet consumers benefit from below cost pricing in most cases.
   2. Second, the current prohibition overreaches and risks prohibiting routine behaviour that customers benefit from, such as selling last season's models at below cost, selling perishable stock below cost to encourage consumption, selling goods below cost to charities, and employee discount schemes.
   3. Third, the prohibition relies on economic concepts susceptible to different interpretations that are not standard accounting or financial concepts businesses use to make everyday decisions. 
5. Faced with the new brightline test, businesses will err on the side of compliance, which risks leading to higher prices across the economy. This is not in the best interests of consumers, nor consistent with the Government's objective of going for growth.
6. Our strong recommendation remains to delete clause 6 from the Bill.

Proposal to elevate status of Commission guidance

As noted above, MBIE's recommendation was to address predatory pricing "through the existing section 36 framework, supported by updated Commission guidance."³ 

At present, Commission guidance has no formal legal status, the Commission is not bound by it, and courts are not required to consider it when interpreting or applying the Act. To support greater certainty over time, the MBIE report reveals that the Minister of Commerce and Consumer Affairs has asked the Finance and Expenditure Committee, in their consideration of the Commerce (Commerce Commission Reform) Amendment Bill, to explore options for elevating the status of Commission guidance for Part 2 (anticompetitive conduct) and Part 3 of the Act (business acquisitions), so that guidance plays a more formal role in promoting certainty and predictability across the Act.

We would be supportive of upgrading the status of Commission guidance to the extent that it provided effective safe harbours and gave business confidence to engage in procompetitive conduct. However, we would have serious concerns if it were proposed that the Commission write the law by the issuing of binding guidance on what it considers breaches the Commerce Act. Only a court should be able to decide if the Commerce Act is breached.  

Next steps  

The Bill is set for its second reading in Parliament which has yet to be scheduled. 

If you have any questions about the Bill, or how its proposals may affect you or your business, please reach out to one of our experts or your regular Russell McVeagh contact.

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This content is intended only to provide a summary of the subject covered. It does not purport to be comprehensive or to provide legal advice. No person should act in reliance on any statement contained in this publication without first obtaining specific professional advice. If you require any advice or further information on the subject matter, please contact a Russell McVeagh partner/solicitor.