The Independent Consumer and Competition Commission is a statutory organization tasked to

regulate the levels of competition in markets within PNG and to protect consumers from businesses
charging exorbitant rates and prices for goods and services supplied. In recent years, many mergers
and acquisitions have taken place in Papua New Guinea prompting the ICCC to conduct
investigations into these acquisitions in order to determine whether they have the effect of
substantially lessening competition in a market. This article looks at the mechanics of section 69 of the
Independent Consumer and Competition Act 2002 (the ICCC Act) and a brief discussion on its application.

First, Section 69 of the ICCC act imposes a prohibition against acquisitions that would have or likely to
have effect of substantially lessening competition in a market and is reproduced here as follows:

(1) A person shall not acquire assets of a business or shares if the acquisition would have,
or would be likely to have, the effect of substantially lessening competition in a market.

(2) For the purposes of this section, a reference to a person includes two or more persons
that are related corporations or are associated.

(3) For the purposes of this section, a person is associated with another person if that
person is able, whether directly or indirectly, to exert a substantial degree of influence
over the activities of the other.

Upon analysis, there are 3 elements that must be established for there to be a contravention of s. 69 (1).
1. A firm has to acquire assets of a business or shares either:
a. In Papua New Guinea or outside of Papua New Guinea
s. 69 of the Act prohibits also transactions made outside Papua New Guinea so long as the
transaction has the effect of having of likely effect of substantially lessening competition in a
market in Papua New Guinea. This extraterritorial application of section 69 and finds footing
in s. 47 which reads:

47. APPLICATION OF PART TO CONDUCT OUTSIDE PAPUA NEW

GUINEA.

….

(2) Without limiting Subsection (1), Section 69 extends to the acquisition

outside Papua New Guinea by a person (whether or not the person is resident or carries
on business in Papua New Guinea) of the assets of a business or shares to the extent
that the acquisition affects a market in Papua New Guinea.

b. Directly; or Indirectly;

By virtue of s. 69 (2), a transaction can be made indirectly if a subsidiary acquires assets or

shares as an agent of the parent entity. Alternatively, in light of s. 69 (3), a transaction can be made
indirectly if a person acquires assets or shares at the behest of an associated person. For

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 ICCC - Steamships Contravention of s.69

instance, by application of the organic theory1, it may be established that a company can acquire
assets or shares upon the direction of those individuals or corporations who control it. A
relationship of agency or an extension of the law of agency, the organic theory can be
established by establishing the mind of the body corporate at the time of acquisition. This
contention is made pursuant to s. 102 which reads:

102. CONDUCT BY EMPLOYEES OR AGENTS.

(1) Where, in proceedings under this Division in respect of any conduct engaged
in by a body corporate, being conduct in relation to which any of the provisions of this
Part applies, it is necessary to establish the state of mind of the body corporate, it is
sufficient to show that a director, employee or agent of the body corporate, acting
within the scope of his actual or apparent authority, had that state of mind.

(2) Any conduct engaged in on behalf of a body corporate –

(a) by a director, employee or agent of the body corporate, acting within the scope of
his actual or apparent authority; or

(b) by any other person at the direction or with the consent or agreement (whether
express or implied) of a director, employee or agent of the body corporate,
given within the scope of the actual or apparent authority of the
director, employee or agent,

is deemed, for the purposes of this Part, to have been engaged in also by the body
corporate.

(3) Where, in a proceedings under this Division in respect of any conduct

engaged in by a person other than a body corporate, being conduct in relation to which a
provision of this Part applies, it is necessary to establish the state of mind of the
person, it is sufficient to show that an employee or agent of the person, acting within
the scope of his actual or apparent authority, had that state of mind.

(4) Any conduct engaged in on behalf of a person other than a body corporate –

(a) by an employee or agent of the person acting within the scope of his actual or
apparent authority; or

(b) by any other person at the direction or with the consent or agreement (whether
express or implied) of an employee or agent of the first-mentioned
person, given within the scope of the actual or apparent authority of
the servant or agent,

is deemed, for the purposes of this Part, to have been engaged in also by the first-
mentioned person.
1
Lennard’s Carrying Co Ltd v Asiatic Petroleum Co Ltd [1915] AC 705, 713-714. The organic theory is an
extension of the law of agency and is a legal fiction that allows a company to be identified with the individuals
who control it.

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(5) A reference in this section to the state of mind of a person includes a reference
to the knowledge, intention, opinion, belief or purpose of the person and the person’s
reasons for that intention, opinion, belief or purpose.

2. The acquisition must be shown to have either the effect or the likely effect of substantially
lessening competition;

3. The effect, or likely effect must be in a market in Papua New Guinea.

Competition Law - Fundamental Concepts

At the outset, we would like to stress that the Competition law rests on the foundations of three
fundamental concepts: market, competition: and substantial lessening of competition. Having sufficient
understanding and sound application of these three concepts is vital in assessing whether a firm
acquiring has breached s. 69 of the Act.

A market can be described as the ‘field of rivalry’ between competing firms and takes many
dimensions. Competition is the state of affairs that exist between firms in a market especially in
relation to the power and influence held by firms in affecting prices and ultimately consumers (market
power).

The concept of ‘substantial lessening of competition’ is not peculiar to Papua New Guinea.
Internationally, there are two main standards used for the purposes of regulating mergers and
acquisitions by firms. The dominance test and the substantial lessening of competition (SLC) test. In Papua
New Guinea, the standard test is the SLC, as is the case in Australia, India 2, Japan3, New Zealand4,
Singapore5, South Korea6 and the Philippines7. The language of the statute though not always
uniform, may differ, but the essence of the test is focused on the query of whether a firm conduct will
have or is likely to have substantially lessened competition.

In assessing whether a firm is in breach of s. 69, the first step is to define the market and ascertain the
level of competition and query whether the firms conduct can have or would be likely to have
substantially lessened competition.

DEFINING THE MARKET

Statutory Definitions of Market

2
Competition Act 2002 (India), s 6. The relevant standard is “cause an appreciable adverse effect on
competition”.
3
Antimonopoly Act 1947 (Japan), Ch 4. The Japanese law applies where a merger or other
combination “creates a business combination that may be substantially to restrain competition in
any particular field of trade, or where a business combination is created through an unfair trade
practice”.
4
Commerce Act 1986 (NZ), s 47.
5
Competition Act 2007 (Singapore), s 54.
6
Monopoly Regulation and Fair Trade Act 1980 (Republic of Korea), Art 7 ”substantially restricts
competition”.
7
Competition Act 2014 (Philippines), s 20.

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Respectfully, many lawyers fall into error by trying to restrict the term ‘market’ to its strict statutory
definitions. In my view, the ICCC Act does not attempt to exhaustively define the term market.
Markets are defined in accordance with competition law and policy. When looking s. 34 (8) and s. 45
of the ICCC act, one must not that the Act does not expressly define what a market is. Section 35 (8)
stipulates that a ‘market’ means a market and s 45. (2) stipulates that a ‘market’ is a reference to a
market. Both provisions provide that the term market means a market or a reference to a market that is
within PNG. The term market has been left undefined by the Act. Parliament never intended to
create a rigid definition of the term market and, respectfully in my view, the true meaning of s. 35 )8)
and s. 45 (2) is that the term ‘market’ means or is a reference to any market of substitutable goods and
services that are be found or located in Papua New Guinea.

1. Purposive Exercise

In competition law, markets are defined for a specific purpose, that purpose being to facilitate an
assessment of competition and the existence of market power. As a starting point, defining a market is
a process, and in defining a market we discover:

a. The relevant product market;

b. the acquiring firm’s market power; and

c. the state of competition in the market.

A market is defined according to two very important principles: according to its ‘multi-dimensional’
aspects; and in relevance with the concept of substitution.

2. Basic Principles of Market Definition

a. Dimensions of Market

Markets usually are comprised of four dimensions. A market identified by its:

a. product dimension – a market is usually described in terms of products or services supplied;

b. geographic dimension – a market is usually described by the physical area within which those
products or services are supplied)
c. functional dimension – the level within a supply chain at which those services are supplied
(Distribution or Retailing etc.)
d. temporal dimension – a market might be defined in relation to the period of time within which
the supplies occur.
The extent of these dimensions will give shape to the boundaries of the market in which conduct is
taking place. The dimensions of the market are determined by the concept of substitution.

b. Substitution

The concept of substitution is found in s. 45 (2) of the ICCC Act which reads:

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(2) A reference in this Part to the term “market” is a reference to a market in the whole of
Papua New Guinea for goods or services as well as other goods and services that, as a matter of
fact and commercial common sense, are substitutable for them, including imports.

In Competition law, a market is a ‘field of rivalry’ between firms in which there is ‘substitution between
one product and another, and between one source of supply and another, in response to changing prices’.
Generally, if one product is substitutable for another, that product is said to be included in the market.
For instance, if Firm A provides the service of moving a bag of potatoes for K 10. 00 per bag and Firm
B provides the same service for a different price, the services offered are similar and can be
substituted. But what about pens and pencils: are they substitutable?

Cross elasticities of Supply & Demand

For our purposes, substitution, involves identifying ‘cross-elasticities of supply and demand’. Whether
two or more products are part of the same product market depends on the degree to which they are
considered to be substitutes for each other or in other words, whether consumers or producers can
replace one product with another without a great deal of difficulty in response to price or condition
changes. This is termed the cross-elasticity of demand or supply respectively. A high cross-elasticity of
demand indicates close substitutability. Two products that are perfect substitutes would have an
infinite cross-elasticity of demand; an increase in the price of one would result in a total consumer
shift to the other product. Products that are not interchangeable have a cross-elasticity of zero: the
price of one has no effect on sales of the other product.

For example, coming back to the question of pens and pencils, assume company A makes pencils and
then attempts to ‘give less and charge more’ for them. Would there be much of a reaction? If, in
response, customers stopped buying pencils and started buying pens, then it could be said that pens
and pencils are part of the same product market. Following the reasoning there is evidence of cross-
elasticities of demand between pencils and pens.

3. Method of Defining the Market

In identifying substitute products how do we know whether two or more goods or services are close
substitutes for each other and are therefore in the same product market? Exactly how do you evaluate
‘cross-elasticities of supply and demand’?

i. Product Dimension

The ‘hypothetical monopolist’ test or the SSNIP test

In evaluating the product dimension of the market is the SSNIP test is applied which asks whether a
hypothetical monopolist supplier of goods or services could initiate a ‘small but significant and non-
transitory increase in the price’ (SSNIP) of its goods or services. Because the test measures the ability of a

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hypothetical monopolist to instigate a SSNIP, the test is also referred to as the ‘hypothetical monopolist’
test.

An example will help clarify the process. Assume firm A makes pizzas and is the monopolist supplier
of pizza and ask the question: ‘If firm A were to initiate a small but significant and non-transitory
increase (of say between 5–10%) in the price of pizza, what would the reaction be?’ Assume that the
reaction to the price rise is that consumers start buying burgers. Therefore, burgers are included in
the same product market.

We then assume that firm A is the monopoly supplier of both pizzas and burgers and ask the same
question again. This time, we find that consumers start buying fried chicken. Therefore, fried chicken
is included in the same product market as pizzas and burgers. We then assume that firm A is the
monopoly supplier of pizza, burgers and fried chicken and ask the same question once again.

Eventually, we run out of products that consumers would be willing to substitute for the collection of
products that we have identified. That collection of products is, therefore, the RELEVANT PRODUCT
MARKET. The collection of products after the SSNIP test is the relevant product market. It follows
that we would have to first identify the products and services supplied by Firm A and apply the
SSNIP test. The similar services offered by competitors like Firm B and Firm C would be included in
as the being part of the relevant market.

ii. Geographical Dimension

The geographic dimension of the market is revealed when the product dimension of the market is
determined. The application of the SSNIP test reveals a certain bundle of goods or services to
constitute the relevant product market. The products that form that group originate from some
geographical space. What is that space? Where do those goods or services come from?

This area — which, on the demand side, represents the location of those goods or services that
consumers regard as good substitutes, and which, on the supply side, represents the location from
which producers actually or potentially supply substitutable goods or services — is the geographic
dimension of the market. Another way of asking is ‘Where do constraints on the exercise of market
power actually or potentially come from?

Take the hypothetical example of the Pizza Firm A. The relevant product market consists of Pizza,
Burgers and Fired Chicken in Port Moresby. However, what if the Burgers are sold by a Firm B in
Lae. The relevant market for Firm A would be only for Pizza and Fired Chicken in Port Moresby. The
Burger supplied by Firm B in Lae is not a close substitute for Firm A’s pizza as its not easily
substitutable for Pizza in Port Moresby.

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For the present purposes, after ascertaining the collection of products and where are they. By so we
can determine the relevant markets that a firm is involved in different geographical locations. Lae,
Port Moresby, Rabaul etc.

iii. Functional Dimension

Turning to the functional dimension, products and services may not be substitutable even when they
are identical. It is necessary to consider the function the relevant product and its suppliers or buyers
perform. For instance, manufacturers of carbonated soft drinks or fruit juices and retailers of those
products all deal in the one type of product, soft drinks, as does the carrier that delivers the product to
the retailer. However, each performs a different function. Although they may all deal in the same
product, the manufacturer, retailer and carrier each participate in separate markets.

iv. Temporal Dimension

The temporal dimension involves looking at how long will it take for a substitute product or service to
be included as part of the market. The question is whether a product may be substituted in the long-
run or in the short-run. If a product may be substituted in the short term, it is clear that the market
includes that substitute, but for longer term substitution, the question is: how long is it likely to take
for substitution to occur and in what circumstances? The question of what is the appropriate time
frame for a new firm to enter the market and offer a substitute, will depend on the particular market
under consideration. For example, in the acquisition by a firm of another competitor in a relevant
market, a study must be undertaken to determine what would be the appropriate timeframe for a new
firm to be able to enter into the market.

MARKET POWER & COMPETITION

Discovering the existence and influence of market power is the purpose of undertaking the process of
market definition. Market power refers to the ability of a firm to engage in discretionary behaviour.
Discretionary behaviour means the ability to behave in ways that are unconstrained by competitors.

In my view, effective competition requires both that prices should be flexible, reflecting the forces of
demand and supply, and that there should be independent rivalry in all dimensions of the price
product- service packages offered to consumers and customers. In short, competition involves rival
firms actively competing with each other, rather than colluding on price, dividing territories or
adopting other practices that avoid the need to compete with each other.

Market power is the antithesis of competition and an inverse relationship exists between competition
and market power. The more competitive a market, the less market power that any one firm enjoys.
The less competitive a market, the greater the likelihood that one or more firms enjoy market power.

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SUBSTANTIAL LESSENING OF COMPETITION

So How do you evaluate whether the conduct has the effect of substantially lessening competition in a
market?’. Let’s explore this process.

We apply what is known as the ‘future with and the future without test’ in evaluating whether conduct
has the effect or likely effect of substantially lessening competition in a market.

a. Future with and future without test

Essentially, the ICCC and the courts would have to look to the future and engage in an evaluative
exercise: what would the state of future competition in the market with the conduct be like when
evaluated against the state of future competition in the market without the conduct. Hence, it is a
future with and future without test.

It is important to note that it is not a ‘before and after’ test. We cannot consider the state of
competition in the market before the conduct and then consider the state of competition in the market

The ICCC or the Courts for that matter has to:

• consider the likely state of future competition in the market ‘with and without’ the impugned
conduct; and

• on the basis of such consideration, conclude whether the conduct has the proscribed anti-
competitive purpose or effect

b. Acquisition Factors

The merger or acquisition factors are listed in s. 69 (5). The factors must be evaluated according to the
two potential states of the market:

a. one in the future with the conduct, and

b. one in the future without the conduct.

Each of the factors in s 69 (5) therefore work together to ‘paint a picture’ of these alternative future
states of the market, in order to determine:

• whether the conduct in question will substantially lessen competition in the

market in the future, or whether competition in the market in the future can act as a
constraint on the conduct so that the conduct will not substantially lessen
competition (the future with); and

• what the state of competition in the market in the future without the conduct
would be.

i. Actual and potential level of import competition - s.69 (5) (a)

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Anti-competitive conduct is unlikely to have the effect of substantially lessening competition in a

market if there is direct or potential effective competition being offered by imported goods or services
in that market. If a firm attempts to raise the prices for its goods or services above the competitive
level, customers can substitute by purchasing the imported goods or services.

ii. Height of Barriers to entry - s. 69 (5) (b)

Barriers to entry represent obstacles that prevent a firm entering a market and offering effective
competition to the incumbent firms. Anti-competitive conduct is unlikely to have the effect of
substantially lessening competition in a market where new firms can enter the market in response to
existing firms engaging in the allegedly anti-competitive conduct

iii. The level of concentration in the market - s. 69 (5) (c)

A market is concentrated when there are few firms offering goods or services. Competition in a
market might be substantially lessened if the anti-competitive conduct by a firm is not constrained.
The conduct is unlikely to be constrained if there are few firms offering substitutable goods or services
that consumers can switch to.

iv. The degree of countervailing power in the market – s. 69 (5) (d)

Countervailing power exists where the ‘other’ party to a transaction — such as a customer in relation
to a retailer, a retailer in relation to a wholesaler or a wholesaler in relation to a supplier — has
sufficient power to constrain any attempt by the other party to engage in anti-competitive conduct.
Where there is significant countervailing power, competition in the market is unlikely to be
substantially lessened

v. Ability to significantly and sustainably increase price and/or profit margins- s. 69 (5) (e)

We have seen that market power is the ability to engage in discretionary behaviour; that is, for a firm
to ‘give less and charge more’ without the constraining influence of competitors. More specifically, if a
firm can instigate a small, sustained and non-transitory increase in price (SSNIP), then it has some
degree of market power.

Anti-competitive conduct that enables a firm to significantly and sustainably raise its prices and profit
margins without the constraints offered by competitors may lead to a substantial lessening of
competition

vi. Extent to which substitutes are available- s. 69 (5) (f)

The existence of substitutable products in a market potentially constrains anti-competitive conduct by

a firm. If the firm attempts to exercise market power by raising the prices for its goods or services,
then consumers can swap over to those substitutable goods or services. In this way, the existence of
the substitutes constrains the exercise of market power by the merged firm, and is therefore unlikely
to substantially lessen competition.

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vii. the dynamic characteristics of the market- s. 69 (5) (g)

Markets in which there is healthy growth and change tend to prevent individual firms from
accumulating market power. This is because new firms enter the market in response to changes,
especially where there are low barriers to entry. In these circumstances, anti-competitive conduct by
existing firms is unlikely to substantially lessen competition where the market is dynamic and where
actual or threatened entry by rival firms is possible

viii. the removal of a vigorous and effective competitor- s. 69 (5) (h)

Vigorous and effective competitors ensure a competitive market. Through their ability to quickly and
effectively respond to price rises by existing firms, such competitors constrain attempts to exercise
market power. A future market in which such competitors were absent might enable the anti-
competitive conduct to substantially lessen competition.

ix. The nature and extent of vertical integration- s. 69 (5) (i)

Firms that are integrated in a market exert an influence at several functional levels. For example, a
firm may exercise both wholesaling and retailing functions, or it may be both manufacturer and
distributor of products. Anti-competitive conduct by such firms may substantially lessen competition,
especially if there are no other constraining influences

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