This article first appeared in Law News Issue 2 (15 February 2015),
published by Auckland District Law Society Inc.
The New Zealand Commerce Commission (Commission) released a
report late last year giving a rare insight into how it assesses rebate schemes
under the Commerce Act 1986 (Act). Such schemes are common in
New Zealand’s concentrated markets, but can give rise to serious issues under
sections 27 and 36 of the Act.
Winstone is the only New Zealand manufacturer of plasterboard. Despite the
presence of large importers including Elephant and Knauf, Winstone is the
largest supplier in New Zealand, holding a market share of over 90%.
In late 2013, the Commission received a complaint alleging that Winstone was
acting anti-competitively, using a sophisticated system of discounts to maintain
its position in the market for the manufacture and supply of plasterboard. The
Commission carried out an in-depth investigation into the complaint.
The Commission’s investigation focused on Winstone’s alleged exclusive
agreements with merchants, the rebates it pays to those merchants, and its
alleged practice of undercutting other plasterboard suppliers on jobs.
The Commission considered first whether Winstone’s rebate scheme
substantially lessened competition in breach of section 27 by preventing other
suppliers from selling plasterboard to merchants. Although the details of the
rebate scheme were kept confidential, it apparently involved offering merchants
fixed payments that were conditional on enough merchants purchasing a stated
portion of their requirements in a given period from Winstone. Without fully
explaining its reasoning, the Commission expressed the view that a scheme of
that nature would be anti-competitive if there was evidence of merchants
retaining those payments rather than competing them away in the downstream
market. Here, there was no clear evidence either that merchants were retaining
the rebates or that they were passing them on to consumers in the form of
Further, there was no clear evidence that the rebate scheme was discouraging
merchants from “dual-stocking” i.e. stocking plasterboard from both Winstone and
a rival supplier. Rather, it was thought that merchants did not dual-stock
because they were unwilling to take on the inventory risk in the rival product
and because the rival product failed to offer a “sufficiently compelling price
point”. Importantly, that pricing issue arose independently of the rebate scheme
because there was no suggestion that a merchant would lose all of its rebate
entitlements if it chose to stock a rival product. There were also several
regulatory and commercial reasons why rival suppliers had failed to establish a
foothold in the market.
The Commission also asked itself whether Winstone had engaged in predatory
pricing in breach of section 27 or section 36, by pricing below cost. It quickly
dispensed with the latter possibility, reasoning that a firm without substantial
market power would operate a similar rebate scheme. Winstone’s conduct therefore
did not fall foul of the counterfactual test which reflects the current law
under section 36.
More analysis was required under section 27. Here, the Commission focussed on
the contestable portion of Winstone’s market share i.e. the amount of
plasterboard which a merchant could purchase from a rival supplier in the
absence of a rebate effect. The rebates were then attributed to those
contestable sales, reducing the effective price paid for those units. That means
that the larger the contestable share, the less likely it was that the rebates
would lead to below-cost pricing. The Commission then modelled several
scenarios, using a range of estimates for the contestable share, as well as an
upper bound estimate for the amount of rebate payments that would be lost if a
merchant shifted to a rival supplier and Winstone’s avoidable costs. In all but
one of those scenarios, the modelling indicated that Winstone’s effective price
exceeded its avoidable costs. The Commission therefore concluded that the rebate
scheme was unlikely to amount to predatory pricing, and so was unlikely to
foreclose entry or expansion into the market.
Although the Commission’s report offers helpful insight into its methods, the
analysis and conclusions were heavily fact dependent. Large companies
implementing rebate schemes should take care to ensure that they do not run the
risk of attracting the Commission’s attention, lest they find themselves
embroiled in a long and costly investigation process.
This publication is necessarily brief and general in nature. You should seek professional advice before taking any action in relation to the matters dealt with in this publication.