Australian Competition & Consumer Commission v Boral Ltd

(28) "Negotiations" between C & M and BBM and Pioneer (December 1995)... 21 (29) Flagstaff Gardens Project (February 1996).................................................. 21 (30) Budget ceases operation (June 1996)............................................................. 21 (31) BBM's upgrade of Deer Park (August - October 1996)................................ 21 (32) Museum of Victoria Project (October 1996)................................................. 21 (g) BBM's pricing - questions of principle.......................................................................... 22 (1) The concept of "avoidable" or "variable" cost............................................ 22 (2) Treatment of cost of upstream inputs............................................................ 22 (3) Price/cost analysis - "whole of business" treatment..................................... 22 (h) BBM's pricing - the details.......................................................................................... 23 (1) The relationship between sales revenue and variable cost............................ 23 (2) Major projects................................................................................................ 24 (3) BBM's pricing policy...................................................................................... 24

THE FINDINGS AND REASONING AT FIRST INSTANCE - THE ULTIMATE ISSUES25

(a) The relevant market - market definition......................................................................... 25 (b) BBM did not have substantial market power................................................................. 26 (c)....... Even if BBM had a substantial degree of market power, it did not take advantage of it... 26

(d) BBM did, however, act with one of s 46's proscribed purposes.................................... 27

THE ACCC'S GROUNDS OF APPEAL............................................................................... 27

THE ACCC'S CHALLENGE TO HIS HONOUR'S IDENTIFICATION OF THE RELEVANT MARKET................................................................................................................................................ 28

THE ACCC'S CHALLENGE TO HIS HONOUR'S CONCLUSIONS THAT BBM DID NOT HAVE A SUBSTANTIAL DEGREE OF MARKET POWER............................................................... 39

THE ACCC'S CHALLENGE TO HIS HONOUR'S CONCLUSION THAT BBM DID NOT "TAKE ADVANTAGE" OF ANY MARKET POWER IT POSSESSED........................................... 44

BBM'S CHALLENGE TO HIS HONOUR'S FINDING OF THE EXISTENCE OF A PROSCRIBED PURPOSE.............................................................................................................................. 48

CONCLUSIONS ON ACCC'S APPEAL AND BBM'S CONTENTION............................ 51 (a) The meaning and operation of s 46............................................................................... 52 (b) The uncontested primary facts...................................................................................... 58 (c) The proper inferences to be drawn from the uncontentious primary facts........................ 67

CONCLUSION - CONTRAVENTION BY BBM ESTABLISHED...................................... 70

ORDERS PROPOSED........................................................................................................... 70

ON APPEAL FROM A SINGLE JUDGE OF THE FEDERAL COURT OF AUSTRALIA

BETWEEN: AUSTRALIAN COMPETITION AND CONSUMER COMMISSION

INTRODUCTION 1 The appellant, the Australian Competition and Consumer Commission ("the ACCC") instituted a proceeding in this Court against the first respondent, Boral Limited ("Boral"), and its subsidiary, Boral Besser Masonry Ltd ("BBM"), the second respondent, for the recovery of pecuniary penalties pursuant to ss 76 and 77 of the Trade Practices Act 1974 (Cth) ("the Act"), for injunctions pursuant to s 80 of the Act and for other relief. The ACCC claimed that BBM had contravened s 46(1) of the Act. 2 Section 46(1) relevantly provides: "46(1)A corporation that has a substantial degree of power in a market shall not take advantage of that power for the purpose of: (a) eliminating or substantially damaging a competitor of the corporation … in that … market; (b) preventing the entry of a person into that … market; or (c) deterring or preventing a person from engaging in competitive conduct in that … market." 3 By s 4F(1)(b) it is provided that a person shall be deemed to have engaged in conduct for a particular purpose if the person engaged in the conduct for purposes that included that purpose and that purpose was or is a substantial purpose. 4 According to the ACCC's statement of claim, the case sought to be made against BBM was as follows: · In the relevant period (i.e. between April 1994 and October 1996), BBM carried on business as a manufacturer and supplier of concrete masonry products ("CMP"), being concrete blocks, concrete pavers and concrete retaining wall products. · BBM, Pioneer International Limited ("Pioneer"), C & M Bricks Melb Pty Ltd and Eramosa Pty Ltd (collectively "C & M") and G Boscato competed with each other, and also with others (including Amatek Limited (trading as Rocla ("Rocla")) until Rocla ceased operations in the greater Melbourne metropolitan area ("Melbourne") in August 1995 and Budget Bricks and Pavers ("Budget") until Budget ceased operations in August 1996), in relation to the manufacture and supply of CMP in Melbourne. The approximate shares of the supply of CMP in 1994 were: BBM 33%; Pioneer 24%; Rocla 24%; C & M 8%; Budget 4%; others (including G Boscato and some limited activity in Melbourne by country suppliers) 7%. The volume of CMP produced in Melbourne between 1993 and 1995 was in the range of 175,000 to 353,000 tonnes per annum. · In 1993 C & M built a modern highly efficient plant (a "Hess" plant) for the manufacture of CMP in Melbourne, commencing the supply of products in October 1993. · From October 1993 (a) BBM recognised, and believed that Pioneer also recognised, their interdependence in relation to the manufacture and supply of CMP in Melbourne; (b) there was excess capacity to produce CMP in Melbourne, and the demand was from a large number of customers who individually accounted for a comparatively small proportion of the total demand; and (c) the excessive capacity, BBM's substantial degree of power in the Melbourne CMP market, significant sunk cost requirements and the conduct of BBM (i) in reducing prices between April 1994 and October 1996; (ii) in offering to acquire C & M's plant; and (iii) in increasing the capacity of its Deer Park plant; all of which resulted in the existence of significant barriers to entry to the Melbourne CMP market. · BBM had substantial power in the Melbourne CMP market by reason of (a) its ready access to (i) the natural resources necessary to compete in relation to the manufacture and supply of CMP; and (ii) substantial financial resources; (b) its share of the Melbourne market; (c) its recognition of, or its belief in, its interdependence with Pioneer in relation to that supply in the Melbourne market and, consequently, the limited gains that either it, or Pioneer, could expect to gain from vigorous competition with each other in the Melbourne market or elsewhere; (d) its ownership and operation of substantial businesses and assets in all areas of commerce involving building products in Australia, including CMP, the economies of scale and/or scope which derive therefrom and the contact it thereby achieved with competitors including Pioneer; (e) the fact that in the Melbourne market each of the persons supplying CMP in competition with BBM (other than Pioneer) was significantly smaller than, and susceptible to the use by BBM of its market power; (f) its vertically integrated business structure from the winning of raw materials to the delivery of finished building products and economies of scale; and (g) its ability to engage in the conduct of price-cutting and of increasing Deer Park capacity. · BBM's conduct constituted the use of power in the Melbourne CMP market for the purpose, or substantially for the purpose of (a) eliminating or substantially damaging C & M and other competitors including Rocla and Budget; (b) preventing the entry of C & M, and others, into the market; or (c) deterring or preventing C & M (and others including Rocla and Budget) from engaging in competitive conduct in the market. 5 The primary Judge dismissed the application. His Honour held that the relevant market was not for CMP, but was the wider market for walling and paving products; and that BBM did not have a substantial degree of power in the walling and paving products market. It followed, his Honour held, that the application should be dismissed. His Honour went on to consider two further matters, upon assumptions (made contrary to his own earlier conclusions) (a) that the relevant market was that alleged by the ACCC; and (b) that BBM had a substantial degree of market power in that market. The primary Judge held that, even if those assumptions were to be made, BBM did not take advantage of that power. Secondly, however, the trial Judge held that BBM did have one or other of the purposes proscribed by s 46(1)(a), (b) and (c). 6 The ACCC now appeals from the order dismissing the application against BBM. For its part, BBM has filed a notice of contention, contending that there was not sufficient evidence to justify the finding of the proscribed purpose mentioned. 7 The arguments advanced on behalf of the parties were extensive in their scope. They encompassed a range of factual as well as legal issues. Consequently, it will first be necessary to explain some of the detail of his Honour's findings and conclusions.

THE FINDINGS AND REASONING AT FIRST INSTANCE - THE BACKGROUND FACTS 8 In his reasons, the trial Judge first described the identity of key "participants and customers", the nature of the "concrete masonry products", the nature of the "alternative products", the history of "concrete masonry events in Melbourne 1992 - 1996" and the history of "BBM pricing" to the following effect:

(a) CMP participants (1) BBM 9 BBM was a member of the Boral Group, a large group operating throughout Australia and overseas. The group's core businesses were the supply of building and construction materials and energy products. Group revenues for the year ended 30 June 1995 were $4.9 billion. (2) Pioneer 10 Besser Pioneer Pty Ltd was a subsidiary of Pioneer International Limited, the holding company of another large Australian group. Pioneer manufactured concrete masonry blocks, bricks and pavers in Victoria. (3) Rocla 11 Amatek Limited, part of another large Australian group, BTR Nylex, trading as Rocla, manufactured bricks and CMP in Victoria. It ceased manufacture of blocks in Victoria in September 1993 and of the remaining CMP in August 1995. (4) Budget 12 Budget, a private company, manufactured CMP in Victoria until June 1996. (5) C & M 13 For many years, C & M, a private company, manufactured CMP at Bendigo. In 1993, it established a CMP plant at Campbellfield, near Melbourne, using a highly efficient "Hess" machine. Full scale production of concrete bricks and pavers at Campbellfield commenced in February 1994. Production of blocks commenced much later. (6) Other 14 Other, relatively small, firms manufactured CMP in Melbourne, including Boscato. (b) CMP customers (1) Blocklayers 15 In most major projects, where concrete blocks were specified, the builder would call for tenders from blocklayers on a supply and lay basis. In turn, blocklayers would call for tenders from CMP manufacturers. Leading blocklayers included A & J Brady Pty Ltd ("Bradys"), Mulgrave Bricklaying & Building Contractors Pty Ltd ("Mulgrave"), Deca Constructions Pty Ltd ("Deca"), Glover Contractors Pty Ltd ("Glover") and Stertern-Gill & Byrne Bricklayers Pty Ltd ("Stertern"). (2) Builders 16 Large domestic builders who often purchased concrete bricks and blocks direct from manufacturers included Henley Arch Pty Ltd ("Henley Arch"), Glenvill Pty Ltd ("Glenvill") and Mirvac Constructions Pty Ltd ("Mirvac"). (3) Retailers 17 Hardware and building products retailers who purchased concrete paving products would typically present displays of rival paving manufacturers. (c) CMP

18 Cement, sand, stone aggregate, water, and (sometimes) a colour ingredient, are mixed and injected into a mould in the form of a block, a brick or a paver. After compression, the product is moved to a kiln for drying, then placed on a pallet and wrapped in plastic covering. Because the process is not continuous, the more units a machine can produce in one batch, and the more quickly this can be done, the more efficient the process. The machines were manufactured in Europe and the United States. The local industry believed that the American machines were better suited for blocks, and the European machines for bricks and pavers.

(2) Raw materials 19 The raw materials for CMP were readily available to concrete manufacturers in Melbourne. Both BBM and Pioneer obtained some of their raw materials from upstream suppliers within their own corporate group, but, by and large, at market prices. (3) Blocks 20 Masonry blocks, which were mostly used in the construction of walls, both internal and external, were either solid or with two or three hollow centres. Blocks came in a range of fractional sizes, described as "10.01", "15.01" and "20.01", reflecting the nominal width of each product (in centimetres). The 10.01, 15.01 and 20.01 blocks were most commonly used for commercial buildings, or where aesthetic appearance was not important. The hollow centres could be filled with concrete and reinforcing rod, which made a wall structurally stronger (ideal where the wall is weight-bearing), and would also enable a longer and higher wall to be constructed. (4) Bricks 21 Masonry bricks, made in the same size as a standard clay house brick (230mm x 76mm x 110mm) and of standard grey or coloured, were principally used for the construction of walls, particularly in residences. Render bricks were a masonry brick in the natural grey colour of the concrete. Render bricks were used as a construction material where the exposed face of the brick was to be covered over with a thin film of render, either cement or acrylic based, applied on completion of construction. The render could have a colouring agent added to it, or the rendered wall could be painted. (5) Pavers 22 Pavers, designed for use as an external pavement, usually around residences and commercial buildings, were made in a range of sizes (from 230mm x 115mm x 40mm to 400mm x 400mm x 60mm) for either light or heavy duty applications. The types of product sold by C & M in the largest quantities were 400mm x 400mm x 60mm stepstone pavers and the heavy duty interlocking paver. Heavy duty pavers were designed to bear a heavy load for e.g., roadways and wharves. They were a minimum of 80mm thick and of high compressive strength, having higher proportions of cement and stone in their make-up, and thus a higher abrasive resistance. (6) Retaining wall products 23 These were used for landscaping external areas around residences, commercial buildings, public parks and along roadways for retaining earth and stopping erosion. (7) CMP as a commodity 24 CMP were not the subject of patent, copyright or any other form of intellectual property protection. With some limited exceptions, CMP were not sold under a brand name or trade mark. In essence, CMP were a commodity. (d) "Alternative" products (1) "Tilt-up" and pre-cast panels 25 "Tilt-up" and pre-cast were essentially the same: a section of a wall was cast in concrete and then placed in position. The terms were occasionally used interchangeably. Sometimes, the term "tilt-up" was applied to a product of this kind made off site. 26 With respect to the considerations which could influence a choice between tilt-up or pre-cast on the one hand, and concrete block on the other, according to the evidence of Mr Peter Slattery, an experienced quantity surveyor - · Since before the recession in Victoria in the early 1990s, the market position of CMP had weakened, except in relation to houses. · There were two major reasons for this change: (i) In working for a economical outcome, building owners had moved away from traditional materials such as CMP; and (ii) Pre-cast concrete wall panels had gained acceptance as a real alternative to CMP not only because of a relatively modest unit cost, but also because of significantly reduced construction times. Further, the structural characteristics of pre-cast concrete panels eliminated many of the structural elements required with traditional load-bearing masonry construction. 27 According to the evidence of Mr Gregory Steele, Rocla's Commercial Sales Manager - "Despite the superficial cost advantage which block appears to have over tilt-up, within a few years [of its introduction] tilt-up had diminished the block market by 65 to 75 per cent …. [I]t had such a significant impact that it brought the masonry commercial walling industry to its knees." 28 During the boom years of the late 1980s, the cost of using CMP increased, because of higher labour costs associated with laying blocks (block or bricklayers were part of a highly unionised labour force). 29 Subsequently, when block costs fell, the substitution of tilt-up for block was to some extent, reversed. According to the evidence of Mr Simon Pethica of Bradys - "[S]ince the mid 1990s … the cost of labour on site in concrete block laying has fallen in comparison to concrete panel and tilt-up. This has led to an increased use of concrete block in recent years in preference to tilt-up or pre-cast concrete." (2) Plasterboard 30 Mr Slattery, a quantity surveyor, described the complexities involved in choosing between concrete block on the one hand and, on the other, stud and plasterboard. Where a structural wall was required, or where there were noise or fire rating concerns (as with internal party walls) it was often preferable to use CMP. The benefits of CMP blocks were that they had good sound transmission and fire resistant characteristics, they were robust, relatively easy to reinforce and readily maintained. However, they were heavy, and in many high-rise constructions their use had increased structural costs because the floor slabs must be designed to bear their extra weight. Stud and plasterboard partitions, by contrast, were built off the floor, and installation was quicker. It was also difficult to remove or redesign CMP walls. Yet stud and plasterboard provided a lower quality. This could be an important factor for a developer, especially for luxury apartments, or when ongoing ownership was contemplated. (3) Clay bricks 31 Physically interchangeable with masonry bricks, clay bricks performed the same function. Clay commons (i.e. second grade clay bricks unsuitable for use on the uncovered face of an external wall) were used in commercial applications where appearance was not so important, or where buildings or walls were to be rendered, bagged or finished in some way. According to the evidence of Mr Ullner of C & M, a second quality clay brick was often used for rendering, and completed with C & M's render brick. 32 According to the evidence of Mr Vella, BBM's Victorian Sales and Manufacturing Manager, prices of masonry render bricks fell from mid 1994 and this affected sales of both clay commons and clay face bricks (i.e. first grade bricks suitable for external walls). From mid 1994 a growing number of houses were built with masonry rendered bricks, and between 1993 and 1995, demand increased by 30 per cent. 33 Before 1994, Glenvill used clay brick seconds for 90 per cent of houses that were to be rendered. Glenvill changed to concrete bricks when C & M approached it with an attractive offer. According to the evidence of one of C & M's main shareholders, C & M was able, with its low prices, to expand the volume of concrete brick sales in Melbourne by taking business away from clay bricks.

(4) Paving "alternatives" 34 In situ concrete, clay pavers or asphalt could perform the same function as concrete pavers. (e) Monitoring of sales of "alternative" products by CMP manufacturers 35 CMP manufacturers, including BBM, regularly monitored products which threatened to take away sales from CMP. They also formulated defensive strategies and offensive strategies aimed at capturing sales from the "alternative" products. 36 For example, BBM's 1992 Strategic Business Plan (prepared by Mr Rawnsley, Victorian General Manager) stated that significant sections of the market had disappeared to "alternative" products; that BBM should aim to "elevate the image of concrete brick so as to be an acceptable alternative to clay at a competitive price"; and that BBM's concrete brick would gain an estimated 3 per cent of the clay market within three years. 37 Further, in a memorandum addressed to BBM State managers in July 1994, Mr Magnus (Tim) Cormack, BBM's Chief General Manager, Masonry and Road Services Division, noted that managers were "to obtain information about the cost of products which compete with masonry and to consider the future of masonry products in light of the competition faced from substitutable products". In this connection, Messrs Rawnsey and Vella compared the price of CMP with the price of "alternative" products, including plasterboard, clay, tilt-up, asphalt and concrete. 38 An analysis prepared by BBM in 1995 indicated these shares of the total walling market: clay (77 per cent); masonry (11 per cent); tilt-up (10 per cent); and timber (2 per cent). 39 In May 1995, the industry association, the Concrete Manufacturers Association of Australia, commissioned a report to review the position of CMP vis-ŕ-vis competing products and systems, taking into account the purchasing process and attitudes towards concrete, masonry and alternatives. 40 According to the evidence of Mr Griffin, Pioneer's Victorian State Manager, the main aim of Pioneer's October 1993 price list was to win back sales from tilt-up by approaching jobs that had been specified in pre-cast and tilt-up with a view to winning them back to block. Pioneer also lobbied builders and architects about the products' relative merits. One aspect of Pioneer's marketing effort was directed at having concrete pavers used in residential driveways rather than in situ concrete. 41 According to the evidence of Mr Steele of Rocla, CMP manufacturers made efforts to persuade architects, and builders, to specify block rather than tilt-up. 42 Mr Ullner's evidence was that when C & M set up its Melbourne operation, it planned to get sales from clay bricks and clay pavers, and expected to obtain 5.44 per cent of sales of clay products in Victoria. (f) Concrete masonry "events" in Melbourne 1992 - 1996

(1) Conditions in 1992 43 In the early 1990s, the Victorian economy was in severe recession; building activity was depressed until about 1994; and real improvements were not apparent until 1996 or 1997. The recession affected the level of demand for CMP; there was substantial excess production capacity; customer acceptance of CMP was at a very low level; and developers and builders, working for the most economical outcome, were very receptive to suggestions that they change to alternative products and building systems. 44 BBM then had poor management, and its Victorian Manager was dismissed in 1992. (2) BBM's plants 45 BBM had a plant in Deer Park with a Besser machine. Adjoining the plant was a quarry operated by another member of the Boral Group. BBM also operated a plant at Sunshine. In 1992, this (inefficient and worn out) plant produced Calsil, made with silica (and not a CMP). (3) BBM's initial reaction to the establishment of C & M's new plant at Campbellfield 46 C & M's move to Melbourne excited a fair amount of apprehension among the CMP manufacturers. BBM commissioned research into the production capacity of the Hess machine and Mr Cormack was impressed by its potential, believing that its efficiency would give C & M technical and cost advantages over other CMP manufacturers in terms of the cycle times, pallet size, rapid mould change times (allowing flexibility in making products) and significant labour savings. 47 According to Mr Cormack's evidence (which his Honour accepted): "… the aggressive competition between BBM, Pioneer and Rocla for sales of [CMP] blocks had started well before [C & M] started production at Campbellfield …[and] … the price war between Pioneer, Rocla and BBM had nothing to do with C & M …. [It] was a product of extreme competition for sales of [CMP] blocks between the three existing major players in a depressed market, and the combined struggle for market share." (4) The commencement of the "price war" - Royal Melbourne Hospital/St Vincent's Hospital/Eastland (July 1993) 48 A "price war", initially between BBM, Pioneer, Rocla and Budget, commenced in mid-1993. 49 Indications of the state of the price war were found in the prices offered by BBM and its competitors in their tenders for several major projects. In almost all of these projects, a tender was invited for the supply of concrete blocks of various sizes, including 15.01 block. (Described in the evidence as the "Holden motor car" of concrete blocks and for present purposes, it will usually be sufficient to refer to the prices for 15.01 only.) 50 In July 1993, Bradys won the block laying contract for three major projects at Royal Melbourne, St. Vincent's and Eastland Shopping Centre. BBM's quote, which included 15.01, was: Royal Melbourne - 85 cents; St Vincent's - 86 cents; Eastland (which was further from Deer Park) - 90 cents. 51 Bradys asked BBM to revise its quote, which it did, as follows: Royal Melbourne - 76 cents; St Vincent's - 77 cents; Eastland - 81 cents. 52 The Royal Melbourne project was awarded to Pioneer at an early stage. In August 1993, Mr Pethica (Bradys) arranged a meeting with Messrs Rawnsley and Vella (BBM) and informed them that BBM's price was higher than any of the other suppliers, referring specifically to Rocla's significantly lower quote of 71.2 cents. Mr Rawnsley indicated that BBM would match Rocla's prices. 53 When Rocla did not win the tender, it decided that it could not compete in CMP in Victoria. According to the evidence of its Commercial Sales Manager, Mr Steele: "Rocla tendered for this project, costing it on a marginal basis as a one-off to test and see whether Rocla's continued operation in Victoria was viable. Rocla's competitors seemed to be in free fall, and it was Rocla's view that it simply had to make a clean break from price discounting if that was all that was necessary to avoid sustaining losses." (5) BBM's reaction to Pioneer's pricing policy (October 1993) 54 Block prices remained at about July/August 1993 levels for about three months. In October 1993, Pioneer further reduced prices for most block products to levels substantially lower than previously (including 15.01 at 70 cents), and undertook to keep prices at these levels for six months for customers who would commit to Pioneer for that period. Several block layers informed BBM that they would commit to Pioneer unless BBM matched its prices. BBM was "very concerned" about Pioneer's prices and agreed to match them. BBM's new prices applied to all products supplied thereafter, even if a project had already commenced. (6) Greensborough Shopping Centre Project (January 1994) 55 BBM made several tenders on this project, initially to the builder (Civil & Civic); and, after the builder sought tenders from blocklayers, BBM quoted to Bradys, Mulgrave and Deca. Bradys suggested to BBM that if it dropped its price by $50,000, Bradys would give BBM all its upcoming work and pay an extra 2 cents per block. BBM accepted the proposal, but Mulgrave was awarded the blocklaying contract. As a result, BBM's tender was accepted (by Mulgrave) without any commitment (to Mulgrave) to provide a discount of $50,000. The average price for 15.01 block supplied was 63 cents. (7) Commencement of production by C & M in Melbourne (February 1994) 56 C & M's Cambellfield plant commenced full scale production of bricks and pavers, but not blocks, from February 1994. Blocks were manufactured at the Bendigo plant and sold into the Melbourne market. (8) Negotiations for acquisition by BBM of C & M's Campbellfield plant (February - July 1994) 57 Initially, these negotiations were between Mr Rawnsley (BBM) and Mr Ullner (C & M). Mr Ullner indicated that Pioneer was also interested. Mr Ullner discussed the Hess plant's capabilities, and said that BBM would be "shot out of the water" in Victoria. On 16 February 1994, Mr Rawnsley wrote to C & M confirming that BBM was seriously examining the viability of acquiring the assets of C & M. Subsequently, BBM indicated that it was interested in the Hess plant only. However, Mr Ullner stated that he and Mr Kupke were only prepared to sell the plant if all of the assets of the business were then acquired. BBM proceeded to give consideration to the prospect of acquiring the Hess plant, and if necessary the entire C & M operation, although the earlier urgency abated when Pioneer's threat to buy the machine receded. (Negotiations between Pioneer and C & M commenced in February 1994 and concluded, without agreement on any acquisition.) On 6 May 1994, BBM made an (internal) assessment, which noted that the purchase of C & M would provide one means of alleviating the industry's problem of over-capacity: Victoria then had Australia's lowest consumption (but more plants) per capita of CPM; prices were generally very low, and all industry participants were competing vigorously; within this context, C & M was performing relatively well - it was aggressively winning sales and market share in concrete bricks and pavers; there were continuing rumours that C & M was about to commence block production; and C & M appeared to be the only option available for purchase. 58 On 1 July 1994, Mr Ullner informed Mr Rawnlsey that C & M had accepted an offer from another party. Mr Rawnsley refused to believe this. He and Mr Vella put to Mr Ullner an offer to buy the Hess plant (only) for $3.8 million. Mr Ullner rejected the proposal outright, Mr Kupke having previously mentioned to Mr Rawnsley that C & M had spent $13 million on the Campbellfield operations. 59 Although nothing ultimately eventuated from these negotiations, his Honour rejected a suggestion that BBM was using the process as a means of getting information about C & M, or of intimidation, and found that BBM had acted in good faith. (9) Western Metro College Project (April 1994) 60 BBM was anxious to win this tender because the project was close to Deer Park, so that BBM's cartage costs would be lower and Stertern, the blocklayer selected for the project, then bought all its block requirements from Pioneer. BBM quoted 68 cents for 15.01, but was informed that Pioneer's quote was considerably lower. Mr Vella refused to match the prices of Pioneer, which was awarded the job. Mr Vella's evidence was that he thought prices at the time were too low and he was "trying to raise BBM Victoria's price a bit".

(10) Dandenong Shopping Centre Project (May 1994) 61 BBM quoted several blocklayers for the Centre's car park, but not Glover, which won the tender. According to Mr Vella's evidence, BBM did not quote Glover because it was then buying most of its products from Pioneer, and Mr Vella believed that Glover would not deal with BBM unless BBM further reduced its prices, which Mr Vella did not wish to do. 62 Subsequently, however, BBM was awarded by Glover the job of supplying 15.01 block at 63 cents to the Centre itself, mainly because its "Assano" white block was specified. Thereafter, Glover bought a lot of product from BBM.

(11) Melbourne Exhibition Centre (June 1994) 63 BBM quoted here for 15.01 at 62 cents, but Pioneer, whose price is not known, was awarded the job. (12) BBM's transfer of concrete brick production to Sunshine (October 1994) 64 In 1994, concrete brick for use in rendering became increasingly popular. To cope with demand, all brick production was transferred from Deer Park to Sunshine, notwithstanding that the plant there was obsolete. (13) Epping Plaza Project (December 1994) 65 BBM quoted on this project to several blocklayers, including Bradys, who won the project and asked BBM to revise its quote for 15.01. BBM was prepared to do this (charging 79 cents) because it had developed some other special products, for which it was able to charge a higher price. (14) Crown Casino Project (December 1994 to July 1995) 66 In December 1994, BBM quoted the builder of this very large project (Grocon), with which BBM had a good relationship. BBM tendered at higher than market prices "as it had made a conscious decision to raise prices generally". In March 1995, BBM submitted a revised quote for 15.01 at 80 cents. This was still significantly higher than the market. The quote was further revised (slightly). In April 1995, BBM was awarded the job. 67 In June 1995, Grocon informed BBM that for the next stage of the project, it proposed to contract out to blocklayers. In response to Grocon's request for a recommendation, BBM mentioned three firms, but recommended Bradys, assuming that since Bradys had a good relationship with BBM, Bradys would buy from BBM at the price agreed by Grocon. However, when Bradys was selected by Grocon, it informed BBM that, because Pioneer had offered a lower price (71 cents), Bradys would have to deal with Pioneer unless BBM reduced its price. BBM approached Grocon, which indicated that Grocon preferred not to deal with Pioneer, and that if BBM would match Pioneer's prices, BBM would get the job. BBM agreed to match Pioneer, and also to pay confidential rebates to Grocon (4 per cent of all products supplied) and to Bradys ($1,000 per month). As a result, Pioneer's order was cancelled. (15) BBM's Deer Park upgrade (1995) 68 In late 1994, BBM's management noted that Boral Masonry was the only national masonry operator and that this gave BBM an advantage in the eyes of major customers, who preferred to deal with national operators; but that because C & Mhad lower costs of production in the case of concrete bricks and pavers, BBM had sustained some short term losses in seeking to meet stiff competition, although the Boral Group as a whole was prepared to accept lower positive returns on CMP because masonry was an important consumer of quarry tiles and cement. BBM decided to meet the competitive threat by C & M through "cost rationalisation", that is, by shutting the inefficient Sunshine plant and, instead, duplicating the Deer Park facility at a cost of $3.2 million, which included the acquisition of a second Besser machine. 69 BBM's strategic business plan for the period 1994 - 2000 stated: "Because we have reached the limit of productive capacity we have had to reduce the level of discounting which we had been using to build market share and weaken the opposition. Our projections are that the market will downturn slightly in 1995/96 and 1996/97 and then recover strongly. To take advantage of the downturn which will put pricing and volume pressure on the market prior to the recovery is the rationale for additional production capacity. When the market turns down our volume … will enable us to supply pressure to our competition. Feed back from the market indicates that C&M and Budget are awed at the prospect of Boral doubling its capacity." (16) Beacon Cove Project (April 1995 - May 1996) 70 For the first stage of this large residential development, in April 1995 BBM quoted the developer for 10.01 (there was no 15.01) at 72 cents. C & M quoted 4 cents lower. The developer then declined BBM's offer to match C & M. 71 BBM quoted for the second stage in May 1996, and succeeded (against Pioneer) because the architect had specified BBM's product "Quickbrick". (17) BHP Global Leadership Building (May 1995) 72 BBM quoted successfully against Pioneer for 15.301 fire-rated block at 71 cents. Pioneer's "Shannon Stone" was specified. BBM's counterpart was "Boral Heritage Stone", a split face sandstone block. BBM worked with the successful tendering blocklayer, and the builder, to produce special shaped products. (18) Rockman's Regency Project (June 1995) 73 In June 1995, BBM gave several blocklayers tendering for this project indicative quotes of 78 cents for 10.31 and 80 cents for 15.83. In August 1995, one of the blocklayers invited BBM to requote, since it appeared that Pioneer had quoted 69.2 cents for 10.31. BBM then requoted at 68 cents for 10.31, at 66 cents for 15.83, and at 71 cents for 15.01. Next, BBM was informed that Pioneer had further reduced its prices and the blocklayer asked BBM whether it wished to consider its position. BBM responded by offering the blocklayer a 41 per cent rebate, being the margin indicated by the blocklayer as required in order to secure the job. BBM's offer was accepted. The net price for 15.01 after allowing for the rebate was 42 cents. The project's key product, 10.31, was rebated to 40 cents. (19) Monash Sports Centre Project (June 1995) 74 BBM quoted to several builders which tendered for this project at prices similar to those originally quoted for Crown Casino, and in accordance with BBM's objective of raising prices, 15.01 was priced at 84 cents. (20) Women's Prison Project (July 1995) 75 BBM was keen to secure this project as the site was near Deer Park. BBM quoted 15.01 at 88 cents to several builders. BBM was informed that Pioneer's prices were considerably less. BBM then agreed to match Pioneer, resulting in an average price of 71 cents. (21) Rocla's withdrawal from CMP manufacture (August 1995) 76 In 1994 Rocla made an assessment of the CMP market, concluding that there was substantial over-capacity in the market. On its assessment, any one of the three major manufacturers - Pioneer, BBM or Rocla - could, with their plant operating three shifts seven days a week, have supplied the market's demand. In Rocla's view, production over-capacity had led to lower prices. At the end of 1994, Rocla decided to concentrate on its product strengths - faced bricks for domestic housing and coloured paving products. However, in the first six months of 1995, housing demand declined substantially and Rocla decided to close down its Victorian operations. (22) Laverton Men's Prison Project (September 1995 to September 1996) 77 In September 1995, BBM submitted to the builder a quote of 88 cents for 15.01. About a year later, BBM quoted several blocklayers, some at 92 cents for 15.01, others at $1.00, depending on the relationship with BBM. In September 1996, Bradys informed BBM (a) that Pioneer was quoting for 10.01 at five to ten cents less than BBM, notwithstanding Pioneer's higher transport costs; and (b) that C & M were quoting slightly lower than BBM for some products (70 cents compared with 72 cents for 10.01) and higher in others (94 cents compared with 92 cents for 15.01). Yet BBM secured the job because of its good relationship with Bradys and because BBM continued to allow Bradys a rebate of $1,000 per month. Accordingly, the net price paid by Bradys was slightly lower than the invoice price. (23) Kraft Leitchville Project (October 1995) 78 BBM quoted to several builders for this project. The site was near Albury. The only price offered was 88 cents for 15.83. Pioneer secured the job. (24) Smorgons Laverton Project (October 1995) 79 For this project, near Deer Park, BBM quoted a blocklayer 72 cents for 15.01. The blocklayer informed BBM that its price was higher than Pioneer's (at 66 cents). BBM requoted at about 66 cents and was awarded the contract. (25) Swanston Dock Project (November 1995) 80 BBM tendered for this large paving job, which was secured by C & M who quoted 90 cents per square metre less. (26) Park Central St Kilda Road Project (December 1995) 81 BBM quoted blocklayers and builders here for its "Quickbrick" CMP, which was similar in appearance to two bricks stacked on top of each other. Although Pioneer's price was lower, it could not supply an equivalent of "Quickbrick". BBM secured the contract. (27) Deer Park Shopping Centre Project (December 1995) 82 After BBM had tendered here, a blocklayer (Mulgrave) asked it whether it would match Pioneer's considerably lower prices. BBM refused (on the ground that this was inconsistent with BBM's objective of maintaining higher prices). This caused tension between BBM and Mulgrave, and Mulgrave stopped buying BBM's products for some months. (28) "Negotiations" between C & M and BBM and Pioneer (December 1995) 83 In December 1995 C & M raised with BBM and (separately) with Pioneer, the possibility of a sale of the Campbellfield plant. However, nothing eventuated. (29) Flagstaff Gardens Project (February 1996) 84 After BBM had tendered here, the bricklayers (Bradrear) informed it that its prices were higher than Pioneer's (for 15.01, 78 cents against 77 cents; and other products showed greater discrepancies - e.g. for 15.83, 80 cents against 72 cents). Although asked to match Pioneer, BBM declined on the ground that BBM did not have a well established relationship with Bradrear. (30) Budget ceases operation (June 1996) 85 By June 1996, Budget had sustained losses for five consecutive years and its reserves had been depleted. It was unable to survive because of "[t]he continual downward pressure on prices" and ceased the manufacture of masonry products. (31) BBM's upgrade of Deer Park (August - October 1996) 86 By October 1996, BBM's both new and old plants were operating. Deer Park then had sufficient capacity to manufacture render bricks as well as other products. Although Deer Park could not make Calsil brick, the demand was small and, in any event, it produced a substitute. Sunshine was closed at the end of October 1996. (32) Museum of Victoria Project (October 1996) 87 BBM quoted 90 cents for 15.01 here. When, after some months, no response was received, BBM revised its quote at $1.05, having by then increased its prices generally. The blocklayer informed BBM that C & M's quote was for $20,000 less. However, BBM did not revise its quote. C & M secured the contract. This was the first major block contract awarded to C & M. (g) BBM's pricing - questions of principle (1) The concept of "avoidable" or "variable" cost 88 His Honour made a number of findings as to BBM's "variable" costs of manufacture and supply, which was taken as a reference to the concept of "avoidable" costs; and which were illustrated by the following example: assume a cost of raw materials of $6.00 and fixed costs of $4.00; any sale over $10.00 will return a profit; a sale at $8.00 will incur a loss but the cost of raw materials will be recovered, and a contribution will be made towards fixed costs; however, unless a price of at least $6.00 is achieved, it would be better not to make the article, that is, this cost ($6.00 for raw materials) will be avoided by not making the product (i.e. "avoidable" or, for present purposes, "variable" cost). (2) Treatment of cost of upstream inputs 89 BBM contended that, in calculating the true cost of raw materials purchased from other members of the Boral Group, an adjustment needed to be made by removing the seller's profit element from the transfer price, thus reducing the avoidable cost. However, his Honour rejected the contention, holding that such an adjustment was not appropriate for several reasons. First, the transfer prices were, in general, at market levels for arm's length transactions. Secondly, since s 46 is concerned with the actual (i.e. subjective) purpose, a retrospective rewriting of costs to levels which were not actually given consideration at the time is impermissible. (3) Price/cost analysis - "whole of business" treatment 90 BBM contended that in the case (as this was) of a multi-product firm, a price/cost analysis should be carried out on a "whole of business" basis. According to the opinion evidence of BBM's expert, Professor George Hay - "To support an inference of predatory pricing, [one] would look at the product range as a whole to see if revenues persistently failed to cover avoidable costs." 91 However, whilst his Honour accepted that the profits or losses on a "whole of business" basis cannot be ignored, the learned Judge thought it conceivable that, within an overall profitable period, there might be "such deep discounting" of a particular product that, if the other ingredients of s 46 existed, a contravention of its provisions might be established. (h) BBM's pricing - the details (1) The relationship between sales revenue and variable cost 92 In the thirty months in question, sales revenue exceeded variable costs of manufacture and supply for all products in all except eight months (that is May, July, August, September and December 1994, January and November 1995, and October 1996) in a total amount of $1.3 million. In the four financial years 1993 - 1997, the excess was: 1993 - 1994: $732,220; 1994 - 1995: $124,413; 1995 - 1996: $373,086 and 1996 - 1997: $770,420. 93 In the case of total sales of 15.01 block, from a high in April 1994 of $25,000 for both revenue and costs, there was a fall to $8,000 for both in June 1994, followed by a sharp rise to August 1994 when costs ($30,000) exceeded revenue ($25,000). This was followed by a more gradual fall-off until February 1995, with costs consistently above revenue, although the gap was narrowing. From a low of $10,000 for both costs and revenue, the two items rose together to peak at $53,000 for May 1995. These figures declined sharply for December 1995 (costs $18,000; revenue $15,000), with costs in this period consistently above sales. This was followed by a sharp rise in both items (virtually the same - $53,000) for October 1996. 94 A comparative analysis of revenue and cost per unit of 15.01 block indicated that for April 1994, both were 80 cents; then prices fell to 75 cents in May 1994, with costs remaining at 80 cents, while prices recovered so as to equal cost for July 1994. Next, costs rose to 86 cents, remaining there until July 1996, when there was an increase of 2 cents. Between August 1994 and May 1996, with the exception of June 1995 (when they coincided), price was always below cost - in October 1994 by as much as 18 cents. From April 1996, price mostly exceeded cost. 95 An analysis of total BBM sales and costs showed in April 1994 revenue of $480,000 and costs of $440,000. Sales were up at $760,000 for November 1994, down at $460,000 for February 1995, rising to $850,000 for December 1995, then falling sharply before rising to $800,000 for October 1996. For about three-quarters of the period, total sales equalled or exceeded total costs. 96 A comparison of BBM and Pioneer unit prices for 15.01 block showed that, for almost all of the relevant period, BBM was below Pioneer by between 10 and 20 cents. However, between April and July 1994 Pioneer won contracts for Western Metro TAFE, Dandenong Shopping Centre and Car Park and Melbourne Exhibition Centre projects, with prices well below BBM's average monthly unit selling price. With the Flagstaff Gardens Project in February 1996, Pioneer was below BBM's average, but to a lesser extent. 97 When the spread of invoice prices of BBM and Pioneer was considered, more often than not, the lowest BBM invoice was below the lowest Pioneer invoice; nonetheless, they were fairly close together. Yet, consistently with Pioneer having a greater number of smaller customers (from whom it could seek higher prices), Pioneer invoices had, generally speaking, a wider spread from lowest to highest. 98 A comparison of prices for 15.01 block of BBM, Pioneer and C & M with BBM's cost per unit showed that Pioneer and C & M prices were substantially above BBM's costs (except that there were brief dips in January 1995 and between October 1995 and January 1996 in the case of Pioneer; and between August and November 1995, December 1995 to March 1996 and in May 1996 in the case of C & M). BBM's price was below its cost per unit in March/April 1994 and between June 1994 and March 1996. (2) Major projects 99 BBM attached importance to winning major projects (of which at any one time in 1995 - 1996 there were six or seven in Melbourne) so as to keep production volumes up and recover fixed costs, and to achieve market share. (3) BBM's pricing policy 100 His Honour found that in strict terms of measuring price against avoidable cost, for important parts of BBM's product range, cost exceeded price for a significant part of the relevant period; and inferred that management knew this, although there was no ground for concluding that they believed or suspected that BBM's pricing might contravene s 46 of the Act.

THE FINDINGS AND REASONING AT FIRST INSTANCE - THE ULTIMATE ISSUES

(a) The relevant market - market definition 101 His Honour noted that the provisions of s 4E of the Act spoke of "a market for those goods … that are substitutable for, or otherwise competitive with, … goods …", and that in the well-known passage in Re Queensland Co-operative Milling Association Ltd (1976) 25 FLR 169 at 190, the Trade Practices Tribunal described a market as "the field of actual and potential transactions between buyers and sellers amongst whom there can be strong substitution, at least in the long run, if given a sufficient price incentive…. It is the possibilities of such substitution which set the limits upon a firm's ability to 'give less and charge more'…". Referring to evidence of the use of various "alternative" products such as tilt-up and clay bricks, his Honour said (at par 122): "The evidence mentioned was but a sample of a large body from both the Commission's and the respondents' witnesses, which was all the one way. This is not a case where the Court has to prognosticate or hypothesise as to the likely behaviour of suppliers or consumers. There was abundant evidence of actual substitution, rising and falling as factors such as price, labour costs, aesthetics and building fashions waxed and waned. This is hardly surprising given the basic facts that the substitutable products were readily available in Melbourne and physically performed the same function." 102 The primary Judge referred to the evidence of Mr Vella that there was a "wider" market, which included tilt-up, clay brick and plasterboard and Autoclaved Aerated Concrete ("AAC") block, but also an "inner" or "direct" market, in which BBM competed, of CMP. But his Honour said (par 126): "… there was substantial evidence of the monitoring by BBM (and other masonry manufacturers) of competing products and the formulation of strategies to take sales away from such products and to prevent losing sales to them. For example, Pioneer's October 1993 price list was, according to Mr Griffin, fundamentally designed to win back sales from tilt-up. Concrete masonry manufacturers lobbied builders and architects to specify masonry products, on occasions even after a contract was awarded." 103 His Honour said (at par 127) that concrete blocks, bricks and pavers "were not distinct products generating distinct demands". He went on to say (at par 130): "A wall is a wall, whether it is made of concrete blocks or tilt-up or concrete bricks or clay bricks. The only need of the builder is to have a wall which will perform as a wall, and for the lowest possible cost. There is no suggestion in the evidence of any builders who had a particular attachment to or need for concrete blocks or bricks so as to generate the kind of product loyalty considered in Arnotts and United Brands." 104 The trial Judge concluded (at par 131) that - "… there was a market in which builders (either directly or through sub-contractors such as blocklayers) acquired materials for use in the construction of walls and paving. Within that market there was not only the ever present threat (or promise) of potential substitution but actual substitution over the time with which this case is concerned." 105 His Honour added (at par 132): "The matter can be tested simply. Could manufacturers of concrete masonry block have significantly increased prices without any fear that there would be, in the words of QCMA, "much of a reaction" from tilt-up? Plainly not."

(b) BBM did not have substantial market power 106 His Honour held (at par 155) that low barriers to entry, and the existence of strong competitors, in particular Pioneer, and later C & M, meant that BBM did not have power to behave independently of competition and of competitive forces, either in the broader market found by his Honour, or even in the narrower market contended for by the ACCC.

(c) Even if BBM had a substantial degree of market power, it did not take advantage of it 107 The Judge held (at pars 157 - 158) that there must be a causal connection between the market power and the impugned conduct; that is, the conduct must be made possible only by the absence of competitive conditions; and, if the conduct has a business rationale, this is a factor pointing against taking advantage of market power. Selling below avoidable cost, even for a prolonged period, can be a rational business decision; and such conduct is not of necessity consistent only with taking advantage of market power for a predatory pricing purpose (par 175). What BBM did was to make legitimate business decisions, consistent with it being in a very competitive market, and consistent with it not having any degree of market power or taking advantage of such power (par 180). 108 With respect to BBM's offer to buy C & M's Hess machine, his Honour referred to s 46(5) of the Act and said (at par 186) that, in itself, acquiring plant cannot contravene s 46. (By s 46(5) it is provided that a corporation shall not be taken to contravene by reason only that it acquires plant or equipment.) The trial Judge went on to say that there were valid reasons for BBM entering into negotiations. He said (at par 186): "Its Sunshine plant was to be closed and that capacity needed replacing. The C&M Hess machine would be an alternative to upgrading the old and inefficient Deer Park plant. Also the possibility of its major competitor Pioneer acquiring the Hess plant was something BBM would wish to avoid, irrespective of its degree of market power." 109 With respect to the upgrade of Deer Park, the Judge held (at par 187) that it was "understandable …, especially in the light of the closure of Sunshine. The upgrade would enable the production of more value added products and reduce overall costs of production. The availability of the [second] Moss Vale plant was a fortuitous opportunity." He added (at par 188): "In part the Deer Park upgrade was a signal of BBM's commitment to be a long term manufacturer of concrete masonry in Melbourne. This is not inconsistent with BBM being a participant in a competitive market. But at bottom BBM's motive in upgrading Deer Park was to achieve efficiency, just as efficiency drove C&M's decision to enter the market with the Hess machine."

(d) BBM did, however, act with one of s 46's proscribed purposes 110 Although not strictly necessary (his findings as to the relevant market and degrees of market power being determinative), his Honour held (at par 190) that there was evidence, of which examples were given, which established that BBM did act "with one or more of the purposes proscribed by s 46(1)".

THE ACCC'S GROUNDS OF APPEAL 111 By its grounds of appeal, the ACCC contends that the primary Judge should have construed s 46 as a whole and applied its elements in an integrated manner; and that the trial Judge should have applied s 46 as a whole to the facts and found, in particular, that BBM had consciously priced important parts of its product range below their avoidable costs of production for a significant part of the period from about April 1994 to about October 1996 ("the relevant period"); and that BBM had so acted for a purpose or purposes proscribed by s 46 of the Act.

THE ACCC'S CHALLENGE TO HIS HONOUR'S IDENTIFICATION OF THE RELEVANT MARKET 112 The ACCC contends, inter alia, that - · the trial Judge should not have approached the question of market definition without giving sufficient consideration to market behaviour and the use of market power. · the trial Judge should not have held, as was contrary to the weight of the evidence, that C & M had prospered during the relevant period. · the trial Judge should not have found that the relevant product market was the market in which builders (either directly or through sub-contractors such as blocklayers) acquired materials for use in the construction of walls and paving ("the wall and paving materials market"). · the trial Judge should have held that a limited degree of demand-side substitutability between products within and without a market for the supply of CMP was consistent with, and did not derogate from the existence of, a product market confined to CMP. · in finding that the relevant product market was the wall and paving materials market, the trial Judge did not give sufficient weight to the evidence (a) of the existence of a market for the supply of CMP that ought properly to be inferred from the conduct of, and views expressed by, BBM and the firms which they regarded as their competitors; (b) of BBM's own expressed views and understanding of a market for the supply of CMP in Melbourne; (c) of the close supply-side substitutability of CMP; and (d) that products other than CMP were not, either functionally or otherwise, close substitutes for CMP. · his Honour should, accordingly, have held that the relevant product market for the purposes of this proceeding was the market for the supply of CMP. 113 In support of this branch of its appeal, the ACCC contends that the issue of market definition should be approached in its entire industrial setting; and that the weight of the evidence demonstrated that the following inferences should be drawn from the uncontested primary facts (many of which have already been noted): (1) By 1993, BBM had considered that there were too many competitors in the Melbourne market for CMP. Further, BBM had become aware late in 1992 that C & M proposed to install a highly efficient, state of the art plant in Campbellfield with a view to producing CMP for the Melbourne metropolitan market. BBM believed, during 1993, that this new plant would effectively render BBM's old plant obsolete and uncompetitive. (2) Between April 1994 and October 1996, BBM sold a number of its important lines of CMP at prices which it knew were substantially below its avoidable cost of producing those products. During this period BBM planned for, and constructed, plant which provided a significant increase in its productive capacity of CMP in Melbourne. Moreover, it used this additional capacity to greatly increase output despite the fact that every additional unit of production cost BBM money (that is, it was sold at a price below the avoidable cost of production). (3) BBM undertook this conduct for two principal purposes: (a) to reduce the number of CMP manufacturers in the Melbourne market by driving one or more of them, including C & M if possible, out of business; and (b) to discourage entry by other firms into the Melbourne market or into other markets in which BBM competed in the manufacture and supply of CMP. (4) BBM believed that, if it achieved these purposes, prices would rise and it would then achieve profits which would otherwise be unobtainable. 114 This conduct, the ACCC submits, took place in the following industry and market context or setting, revealed by the uncontested evidence (much of which had previously been found by his Honour and noted earlier in these reasons) to the following effect: (i) The Victorian building industry was in recession in the early 1990s. The recession continued until about 1994, although improved conditions for builders were not apparent until about 1996 - 1997. As building activity declined, so did the level of demand for CMP, because demand for CMP is linked closely to the general building industry cycle. The CMP industry was characterised by substantial excess capacity which was exacerbated by the poor demand in the early 1990s. After a period of very poor performance, during which BBM's share of sales of CMP in Melbourne fell to 12 per cent in early 1992, BBM decided that it should aim for a market share of at least 30 per cent. (ii) The major players in the Melbourne CMP market during the relevant period were BBM, Pioneer, Rocla, C & M and Budget. There were a number of other minor players. (iii) BBM was part of the Boral Masonry Division. This division was part of a national, vertically integrated, building products group. It purchased all its raw materials, including sand, cement and aggregate, from related companies. BBM manufactured a full range of CMP, including blocks, bricks and pavers. Blocks and bricks constituted some 55 per cent of BBM's CMP turnover. Until 1996 BBM operated from two plants, one in Deer Park operating a Besser block making machine and one in Sunshine operating Krupp machines utilising the Calsil process. The Deer Park plant was upgraded in three stages, commencing in late 1994 and concluding in 1996. These upgrades substantially increased BBM's production capacity and on their completion the Sunshine plant was closed. (iv) Pioneer operated in the Melbourne market through Besser Masonry, a trading division of Besser Pioneer Pty Ltd, a subsidiary of Pioneer International Ltd. Pioneer manufactured CMP of all types and operated two Besser three-block machines (capable of manufacturing bricks, pavers and blocks) at its plant located in Wellington Road, Clayton. Pioneer had similar corporate characteristics to BBM, being vertically integrated and acquiring most of its significant raw material inputs from subsidiaries of the Pioneer International group. It was at all material times BBM's largest competitor. Pioneer pursued a corporate strategy of trying to maintain higher prices in the market and earning profits so far as possible. (v) Rocla Pavers and Masonry, a division of Amatek Limited which, until August 1995, manufactured and sold CMP in Victoria under the trading name "Rocla Eureka", operated Besser block machines at plants in Geelong (which closed in mid 1993) and Dandenong and a Rosacometta paving plant at Dandenong. Rocla obtained some of its raw materials from within the BTR-Amatek group, but others were obtained from outside the group, including some from BBM and Pioneer. Rocla focused its activities particularly on the brick and paving market. By August 1993, Rocla was considering whether it should abandon the CMP market in Victoria due to the depressed economic conditions, and doubts about whether its business could be profitable in Victoria. In December 1993 Rocla withdrew from the manufacture and supply of concrete masonry blocks. Rocla's parent company gave an ultimatum that, unless the business could be made profitable, it would be closed down. In August 1995, Rocla decided that its CMP business was no longer viable because of the low prices prevailing in Melbourne, and it was then closed down. (vi) C & M operated as a Bendigo CMP supplier until its decision to enter the Melbourne metropolitan market in 1992. C & M constructed a large, modern and highly efficient plant at Campbellfield during 1993 and commenced full production in February 1994. The greater efficiency of C & M's Hess plant enabled it to quote prices which were below those offered by other CMP manufacturers, but which were profitable for C & M. C & M concentrated its production on bricks and pavers, because the prevailing price levels in relation to blocks prevented it from producing blocks economically. Because of low prevailing prices, C & M made losses in its first years of operating the Campbellfield plant. The business was not making profits. Between January 1994 and June 1997, C & M's net profit amounted to some $89,000. In these circumstances, C & M required further finance. C & M had borrowed from the ANZ Bank, and its overdraft had increased beyond its acceptable limit. Accordingly, its shareholders lent some $2.9 million to C & M, which was at this time dependent upon extended credit terms from its suppliers. Finally, C & M sought additional equity funding from Oupan Resources, which purchased a 10 per cent holding in C & M with an option for a further 40 per cent for $700,000 in 1995. These funds were necessary to allow C & M to continue trading. But for an accounting treatment recording depreciation at 1 per cent, C & M's profit and loss account for 1994/1995 would have shown a loss. (vii) Budget commenced production in 1987, and ceased in June 1996. It was owned and managed by Mr Coghill, and operated a single Columbia block machine. Between 1993 and 1996, Budget operated at a reduced output, and was unable to secure sufficient orders to keep the plant running even at one shift per day five days per week. Budget needed to operate this plant for at least one shift a day to remain viable. Mr Coghill observed dramatic price cutting in the Melbourne CMP market immediately before C & M commenced production in late 1993. Mr Coghill formed the view that BBM and Pioneer were prepared to decrease their prices below those of any new competitor in order to protect their market shares. Budget incurred trading losses continuously between 1991 and 1996. By 1996 its capital reserves had been exhausted, and it was decided to close the business. 115 The ACCC contends that the following table of market shares of sales of CMP in Melbourne, extracted from BBM's documents in evidence, showed, so far as BBM knew, how the market for CMP was divided (in percentage terms): Date Boral Pioneer Rocla C & M Budget Late 1992 21 26 21 9 15 February 1993 26 June 1994 28 26 23 11 7 October 1994 33 24 24 8 4 May 1995 31 25 22 15 7 March 1996 28 Mid 1997 42 32 21

116 The ACCC contends that BBM's conduct must be considered in its industry context and by reference to its activities in the market disclosed in the uncontested primary evidence (most of which was noted by the primary Judge) as follows: (a) In 1992, BBM commenced an aggressive marketing campaign, substantially based on price reductions, clawing back what it regarded as its rightful share of sales of CMP in Melbourne.

(b) As a result of this campaign, BBM's share of sales of CMP increased from 18 per cent in December 1992 to more than 30 per cent in December 1993.

(c) In late 1992, BBM became aware of the impending entry of C & M, which was proposing to install a highly efficient new plant and enter the Melbourne market.

(d) BBM intensified its price cutting early in 1993, in the belief that C & M's plant would commence operation in April 1993.

(e) BBM then further significantly reduced its prices for blocks to win three major contracts in mid 1993 - the Eastland Shopping Centre, St. Vincent's Hospital and Royal Melbourne Hospital projects. These prices set a new and low base for block prices during the second half of 1993.

(f) These low prices were reinforced generally when BBM consciously circulated to many contractors a letter from Pioneer dated 12 October 1993 offering lower prices to contractors in exchange for six months' exclusive purchasing arrangements with Pioneer. BBM's action frustrated Pioneer's plan to offer lower prices to selected customers if they agreed to deal with Pioneer exclusively; and ensured that lower prices became generally available.

(g) In November 1993, C & M commenced trial production at its Campbellfield plant.

(h) In December 1993, Rocla withdrew from the production of concrete blocks.

(i) In February 1994, C & M commenced commercial production of bricks and pavers at Campbellfield.

(j) Soon after, BBM commenced aggressive discounting of blocks to below its avoidable cost of production.

(k) In or about February 1994, BBM determined to win every major block contract that it could, even if it was necessary to price below its avoidable cost of production; and

(l) BBM recognised that, in order to effectively drive out competitors, it needed to increase its production capacity and output so that it could supply more of the available demand. Accordingly, BBM planned to replace, and in fact did replace, its inefficient plant at Sunshine with a second Besser line at its plant at Deer Park. BBM's Strategic Business Plan 1994/2000 (previously mentioned) noted:

"We believe our current share of the total market is 30%, which will increase to 50% on installation of new plant. Our ability to supply the market has been constrained in recent months by our lack of capacity. … Our aim through 1996/97 and 1997/98 is to drive at least one competitor out of the market. The new plant gives us the ability to do this." (Emphasis added)

117 In the course of oral argument, Senior Counsel for the ACCC developed the above contentions as follows: · As a matter of principle, the process of market definition requires an identification of close competition, so that it was not enough for BBM, in this connection, to point to some evidence of substitution in some particular situations. In support of this argument, the ACCC relies upon the observations of Deane J in Queensland Wire Industries Pty Ltd v Broken Hill Proprietary Co Limited (1989) 167 CLR 177 (at 195) that the word "market" is "not susceptible of precise comprehensive definition when used as an abstract noun in an economic context"; and that the most that can be said is that, for present purposes, "market" should be understood in the sense of "an area of potential close competition in particular goods and/or services and their substitutes …" (emphasis added). And, as Deane J went on (at 196) to observe, "one overall market may overlap other markets and contain more narrowly defined markets which may, in their turn, overlap, the one with one or more others". · Reliance is placed by the ACCC on Arnotts Limited v Trade Practices Commission (1990) 24 FCR 313, where, after citing these last observations of Deane J, the Full Federal Court (Lockhart, Wilcox and Gummow JJ) said of s 4E (at 332): "Deane J was making the point that the application of the concept of substitutability requires the making of a value judgment. The question of substitutability is not to be disposed of merely by showing that, upon some occasions, some people consume one product rather than another or that some products within a claimed market do not directly compete with some other products in that market; or do compete with some products outside that claimed market." (It is convenient to note here that the Full Court in Arnotts went on (at 332) to observe: "The same point was made, in different language, by Mason CJ and Wilson J in Queensland Wire at 188. Their Honours did so by their quotations from Hoffmann-La Roche and United Brands (supra). Both quotations include words which indicate that substitutability is a matter of degree: 'sufficient degree of interchangeability' and 'only to a limited extent interchangeable'.") · Although it was common ground that the introduction of tilt-up as a construction material in the 1980s did lead to a very substantial reduction in the demand for CMP, and in particular concrete block, it does not follow that there was no market for CMP in Melbourne in the relevant period (1993 - 1996). On the contrary, during the relevant period the relationships between tilt-up and concrete blocks had stabilised; specifically - (a) There were similar levels of demand for each product. For instance, in February 1995, BBM estimated that the demand by the construction industry for concrete masonry was 11% (of the walling product industry) and for tilt-up was 10 per cent; and in December 1995, 21 per cent and 23 per cent respectively. That is, the evidence showed that the relativities remained steady. (b) By the middle of the 1990s (i.e. the relevant period), the respective well-differentiated roles of each product had become clearly understood and applied in the construction industry. According to the evidence of Mr P R Slattery, quantity surveyor, concrete masonry was not generally the most appropriate material for low rise commercial construction; and reinforced concrete wall panel, either tilt-up or factory produced (pre-cast), was far more commonly specified because, inter alia, it was fast to construct compared to block work. At the same time, there were limits to the scope of application of tilt-up. According to the evidence of Mr G R Mould, architect, if mould costs are to be justified, pre-cast and tilt-up could only be used where there was significant repetition. The main cost in using pre-cast and tilt-up concrete panels was incurred in preparing the moulds, rather than in making and installing each panel. If the building allowed for repetition of a panel shape, the cost of the mould preparation could be amortised over a large number of units; so that where external walls were to be of different types and sizes, pre-cast and tilt-up were not cost effective. According to the evidence of Mr M A Coghill, the Managing Director of Budget, the extent that concrete panel may be substituted for block was limited. Panel was primarily suited to large commercial or industrial buildings, i.e. larger jobs where there are longer, straight runs of wall. (c) According to the evidence of Mr G Whiteford, the General Manager of Rocla, sworn in June 1998, concrete blocks and tilt-up panels were used for different building purposes, although there was some overlap in their use for low-cost construction of factories and commercial buildings. Generally, concrete block manufacturers had moved to diversify their products from low-cost building use of common grey blocks, with tilt-up panels being used for purposes different from those for which concrete blocks were used. The distinction between them had become clearer over time. According to the evidence of Mr S P Pethica, Bradys' Estimator and Contract Administrator, factory buildings, being open plan and simply designed, lent themselves to tilt-up construction because they had fewer constraints than other buildings in terms of space. Although tilt-up material costs were higher, actual construction time was less and no scaffolding was required. (d) There were technical limitations and other considerations which distinguished tilt-up from block, e.g. less flexible, inferior fire rating, tendency to draw and transfer moisture, and sound transmission characteristics. · By the mid 1990s (the relevant period) the impact of tilt-up had become largely a matter of history. A significant section of his Honour's description of "Alternative products" is historical only and by the mid 1990s had been partly reversed. · The initial appeal of tilt-up was significantly enhanced by the fact that it avoided labour shortages, a factor in the boom economy at the time. According to Mr Rawnsley's evidence, the demands of bricklayers had become so exorbitant that builders looked to the alternatives. · There was no evidence of close competition between tilt-up and concrete masonry blocks in the relevant period. According to the evidence of Mr W T Griffin, Pioneer's Victorian State Manager, Pioneer kept a register of jobs "won/lost" and it indicated that in 1994 and 1995, of more than 950 jobs listed, only seventeen were said to have been lost to tilt-up. It was true that when, in late 1995, Mr Vella was asked to check whether the acquisition by BBM of C & M would give BBM such a large share of the market as to contravene the Act, Mr Vella worked out that this would give BBM a market share of CMP of approximately 50 per cent, but that if a wider market (i.e. a walling product industry) were taken into account, a market share of approximately 22 per cent only would be indicated. But Mr Vella's documented approach in this area should be viewed as a whole and in its context; that is to say, the assessment is plainly an artifice which does not arise from BBM's commercial assessment of its competitive position at all. 118 (It will be convenient to describe Mr Vella's document at this stage. It is headed "TPC [i.e. Trade Practices Commission (ACCC)] Issues - Monopoly Situation". It stated that in 1994 and 1995 the total Victorian masonry market (say, 380,000 tonnes) was divided between BBM Masonry (30 per cent), C & M Masonry (20 per cent) and Pioneer Masonry (30 per cent), so that if BBM acquired C & M it would give BBM a market share of approximately 50 per cent; that the TPC's attitude was that when major companies command over 50 per cent market share, they cannot acquire any smaller competitors due to market dominance; that, however, "if [BBM] were to add the total walling and paving markets in as one it would then be alright, e.g. clay brick and pavers; masonry; tilt-up; pre-cast pavers". The document went on to estimate that in 1994 and 1995 the total market for, e.g., brick, pavers, masonry and tilt-up was 1,789,000 tonnes; and that, even if clay bricks were taken out, BBM still had only approximately 22 per cent market share.) · Temporary dumping of clay commons aside, there was no evidence of close competition between clay bricks and concrete bricks in the relevant period. Clay commons had an anomalous significance for concrete brick manufacturers only because clay manufacturers had an excess inventory which they dumped on the market. The price of clay commons meant that, ordinarily, they were not a substitute for concrete bricks; even less so were the more expensive clay face bricks. Moreover, in many respects, clay commons were not a suitable functional substitute for render bricks. The evidence was that clay was specified on aesthetic grounds; and that concrete bricks were preferred to clay commons for rendered finishes, because of superior evenness and adhesive qualities of concrete brick. · The evidence as to the involvement of builders, or (rarely) manufacturers, in the specification of CMP (or alternatives) could not establish an area of close competition between CMP manufacturers and manufacturers of the other products because: (a) According to the evidence of Mr P R Slattery, quantity surveyor, the substitution of products after a project had been designed and specified was rare, since (i) the parties had little financial incentive to review their decisions, and any cost saving resulting from substitution had to be compared with the costs generated by the proposal to change; (ii) a change could affect the structural integrity of the building as designed; and (iii) a change could have consequential cost implications which outweigh any perceived cost savings - for instance, a change from plasterboard to concrete masonry for internal walling would require a revised specification to be written for a project, bearing in mind that a change in wall thickness impacted on the structure, on the internal finishes required and had other dimensional consequences. (b) The manufacturers of CMP had a common, rather than competitive, interest in securing the specification of CMP rather than other products. According to the evidence of Mr Griffin, Pioneer's Victorian State Manager - "[It] does not matter if it is C & M, Pioneer or [BBM] as long as it's concrete masonry and it looks good, then we'll get more jobs from that". (c) According to the evidence of Mr M L Byrne, the Manager and Director of Sterterns, blocklayers, even if, as sometimes happened, an architect were to specify a particular concrete block manufacturer, the blocklayer would not necessarily use that manufacturer's products since most concrete blocks were interchangeable with the blocks of other manufacturers, especially in the case of 10.01, 15.01 and 20.01. Mr Byrne said: "My experience is that most manufacturers' products have the same code, specifications and appearance so they are highly interchangeable. I would attempt to use alternative blocks if a price advantage could be obtained". Mr Byrne went on to say: "The clay brick market is different in terms of substitutability. Every clay brick is a different colour, and a different product in terms of texture. Generally, the products are not substitutable. Stertern uses whatever the architect specifies". · Although mentioned from time to time in the evidence, AAC, a lightweight concrete masonry block product, accounted, on BBM's own analysis, for no more than 1 per cent of the total of all building products. According to the evidence of Mr G R Mould, Architect, the advantages of AAC were that it had a very high fire rating, was light, required no mortar and may be laid quickly. Its disadvantages were that because it was soft, it is not suitable for use in high impact areas; it was difficult to fix heavy fittings to it; because it was highly porous, it was not suitable for use in external walls without rendering or some other means of sealing the surface; and that it had poor acoustic characteristics. Although AAC blocks' cost was similar to concrete masonry block, Mr Mould had used AAC only once in a major project, a cinema complex, where AAC's sound reflection characteristics were an advantage. · Although plasterboard, particularly if fire-rated, could be used for some applications for which concrete brick or block could be used, there was no evidence of close competition between any CMP manufacturer and any plasterboard manufacturer. Mr Mould's evidence was plasterboard-lined stud partitions were very rarely used for heavy load-bearing walls in commercial buildings, and were not suitable if subject to impact wear and tear. According to the evidence of Mr P R Slattery, quantity surveyor, plasterboard provided "a lower quality outcome". · The evidence indicated that there was a distinct demand for concrete blocks - they were used for particular applications, where they were especially suited. This was quite a different demand than the demand for concrete bricks, which had their own special application, viz. for rendered walls - where they were much cheaper than clay bricks, whether commons or fully finished. Likewise, pavers had a distinct demand. There were also substitutional discontinuities in the case of tilt-up when compared with block - different time factors, different labour factors, different uses, different properties, different qualities and different fire ratings, amongst others. Although there was evidence of some functional interchange - as between what his Honour described as the "alternative products" - there was no detail given in the evidence which could support a finding of close rivalry between the "alternatives" of the kind of continuous head to head competition between the rival manufacturers of CMP. The distinction was reflected in the description given in evidence by BBM's executive, Mr Vella, in speaking of "the wider market (which includes tilt-up)" on the one hand, and on the other, "the inner market that we compete with which is the masonry market". Mr Steele (Rocla) also spoke of tilt-up etc. as part of "a wider market", whereas the real area of competition was CMP. 119 In my opinion, there is considerable force in the ACCC's challenge to his Honour's opinion on the question of market definition for the reasons advanced in its submissions. But before proceeding to determine whether or not there was any appellable error in the primary Judge's approach, it will be convenient next to refer to the ACCC's other ground of appeal, and to BBM's notice of contention, in order to obtain a more complete picture of the industry's dynamics.

THE ACCC'S CHALLENGE TO HIS HONOUR'S CONCLUSIONS THAT BBM DID NOT HAVE A SUBSTANTIAL DEGREE OF MARKET POWER 120 By this ground of appeal, the ACCC contends, inter alia, that the weight of evidence at trial demonstrated the following: (1) that the economic circumstances of the market, including the presence and advantages of incumbents, the existence of excess capacity and the likely response of incumbents to new entry, were likely to deter or inhibit significant entry; that the barriers to entry into the market for the supply of CMP included (i) the threat of retaliatory action, such as predatory pricing by BBM, (ii) the access to financial resources of existing suppliers of CMP, and (iii) information asymmetries between existing suppliers of CMP and potential entrants to the market for the supply of those products and their respective suppliers of financial services; that BBM knowingly priced below the avoidable cost of production with respect to important products in their product range for a significant part of the relevant period; that BBM increased the capacity of its CMP plant at Deer Park, notwithstanding the existence of excess production capacity for those products in the market for the supply of CMP in the Melbourne metropolitan area; that BBM's behaviour had the purpose and had, or was likely to have, the effect of deterring or preventing significant entry into, or precipitating exit from, the market; and that the barriers to entry to the market for the supply of CMP were not low. (2) that the trial Judge should have found: (a) that each of BBM and Pioneer was a large, publicly listed, integrated building products group of companies and an incumbent in the market, having similar economic interests; (b) that BBM believed that it was in the common interests of itself, and of Pioneer, for smaller competitors to leave the Melbourne market, and that after the number of competitors had decreased, profits would return; (c) that BBM believed that, between Pioneer and itself, it was mutually recognised that the two firms were commercially interdependent in the market, and that neither would act to constrain a return to mutually profitable operations; and (d) that BBM was not constrained by any competitor, including Pioneer. (3) that the trial Judge should have found that the advantages which BBM derived from the factors identified in pars (1) and (2) above in the context of the market structure established on the evidence, gave BBM a substantial degree of power in the CMP market in Melbourne during the relevant period. (4) that his Honour should have found (a) that it was likely that a potential new entrant would be deterred from entering or remaining in the market given the presence of substantial incumbent firms, substantial excess capacity and the likely pricing behaviour of the incumbents in response to any actual or threatened new entry; and (b) that BBM's conduct, in knowingly pricing below avoidable costs of production with respect to important products in its product range for a significant part of the relevant period constituted (i) a taking advantage by BBM of market power; and (ii) conduct in which BBM would not have engaged but for its market power. 121 In its submissions, the ACCC sought to support this branch of its appeal as follows: q The statutory language of a "substantial degree" of market power indicates that relative market power must always be a question of degree; and, in principle, there is no reason why more than one firm cannot have that degree of power. If needed, this is confirmed by the Explanatory Memorandum accompanying the amendments to the Act made in 1986, stating that: • "all participants in a market possess a degree of market power which may range from negligible to very great" [par 41]; • "'substantial' … is not intended to require the high degree of market power connoted by … being in a position substantially to control a market, or … the power to determine the prices of a substantial part of the goods in a market" [par 43]; • "the circumstances which give rise to absence of competitive constraint upon a corporation are diverse. They are not confined to size or market share in relation to competitors, or to those matters combined with technical knowledge, raw materials or capital" [par 45]; and • "more than one firm may have a substantial degree of power in a particular market" [par 46]. q Market power may be based on structural or behavioural elements, or a mix of both. In Queensland Wire, above, Dawson J said (at 200): "But market power has aspects other than influence upon the market price. It may be manifested by practices directed at excluding competition such as … predatory pricing …. The ability to engage in these practices may be as indicative of market power as the ability to influence prices …. Market power is thus the advantage which flows from monopoly or near monopoly and … s 46(3) [makes provision] consistently with that notion." q Section 46(3) of the Act relevantly provides that in determining the degree of market power, the court shall have regard to the extent to which the conduct of the players in the market is "constrained" by the conduct of (a) competitors or potential competitors; or (b) persons to whom or from whom any of the players supply or acquire goods in that market. q At the relevant time, BBM had a substantial degree of power in the CMP market in Melbourne because of the following: (i) the advantages BBM derived from vertical integration, specifically the ability to engage in apparently irrational short-term loss-making behaviour for long-term strategic aims; (ii) the fact that BBM had the largest share of sales of CMP in Melbourne and significant production capacity; and (iii) the deterrence of potential competitors by means of BBM's deliberately maintained reputation for determined pricing attacks on new entrants. q BBM was not, on the evidence of its own executives, constrained by Pioneer's presence to refrain from its predatory pricing behaviour. According to the evidence of Messrs Cormack, Rawnsley and Randerson, once the market had been "rationalised" by the removal of two or three competitors as a result of the "price war", BBM believed that Pioneer would not prevent prices then rising to, and remaining at, profitable levels. According to Mr Rawnsley's evidence, it was obvious to any informed operator in the market that if there were two big players and two little players, it would be in the interests of the big players if the little players "fell over", and Pioneer "would have as much interest as [BBM] to reduce the number of major operators in the market and if [BBM] were pushing to gain Budget's customers, Pioneer would presumably be doing the same thing". q In 1994, BBM had found that its ability to supply the demand created by its low prices was constrained by its own shortage of capacity. BBM thereafter embarked upon a three-stage process of expansion: (i) the existing plant was replaced (at the end of 1994) by comparable plant imported from interstate; (ii) the boilers and kiln were upgraded (in early 1995); and (iii) an additional production line was installed in 1996. According to Mr Rawnsley's evidence, BBM ensured that its plans to expand capacity were made known to competitors: he "wanted to send a signal of strength to our competitors, particularly to Pioneer and C & M". A BBM report dated May 1995 stated that "Rocla [is] panic stricken at our intention to double capacity". q BBM's significant increase in output occurred at a time when it was pricing below avoidable costs. According to Mr Vella's evidence, BBM's output increased as follows: YEAR OUTPUT 1992 - 1993 48,180 1993 - 1994 70,040 1994 - 1995 117,260 1995 - 1996 133,980 1996 - 1997 137,280

q According to Mr Rawnsley's evidence, the Boral Group already had, and sought to protect, a long-standing reputation as a large, reliable supplier of building products; and BBM was the market leader in concrete blocks, because it provided a quality of service superior to that provided by its competitors, and customers were prepared to pay higher prices for Boral products. q According to the evidence of Mr Glover, a blocklayer, he "would not consider acquiring concrete masonry blocks from any supplier other than Boral, unless there was a price advantage of more than 5%". q Mr Rawnsley's evidence was that both BBM and Pioneer had a number of established customer links. q BBM recognised, according to the evidence of both Mr Cormack and Mr Rawnsley, that it was important to demonstrate that it could, and did, inflict harsh retaliation against new entrants into the CMP industry, so as to create a disincentive for those who might aspire to enter the industry. q The evidence of each of Messrs Rawnsley, Cormack and Vella was that BBM was able to rebuild its market share from 18 per cent to more than 30 per cent within twelve months (1992 - 1993) and entertained a realistic ambition to build it to 50 per cent in a further twelve months by its aggressive pricing. q Mr Vella's evidence was that once competitors had left the market, their departure was hailed by BBM as a success for its policy of maintaining prices at low levels indefinitely, notwithstanding the accumulation of substantial losses on each sale. 122 Again, for the above reasons, there is substantial force in the ACCC challenge to his Honour's conclusions on this aspect. However, here also it is preferable that I defer expressing a final view in this connection until a more complete perspective of the industry's structure and activities is at hand. Accordingly, I propose next to proceed to explain the ACCC's challenge on his Honour's conclusion that BBM did not "take advantage" of any market power it possessed.

THE ACCC'S CHALLENGE TO HIS HONOUR'S CONCLUSION THAT BBM DID NOT "TAKE ADVANTAGE" OF ANY MARKET POWER IT POSSESSED 123 By this ground of appeal, the ACCC contends, inter alia, as follow. (1) that even if BBM's conduct had a business rationale, it did not follow, as his Honour held, that this could not constitute a taking advantage of market power. (2) that the trial Judge should have found, on the weight of the evidence, that BBM's decision to expand the capacity of its CMP plant at Deer Park did constitute a use of market power for one or more of the following substantial purposes: (a) deterring potential new entrants from entering the CMP market; (b) deterring or preventing competitors from engaging in competitive behaviour in the market; and (c) enabling the continuation by BBM of predatory pricing. (3) that the trial Judge should not have applied the American concept of "recoupment" to determine the meaning and scope of s 46 of the Act; and should not have held that, to establish predatory pricing in contravention of s 46 of the Act, it was necessary to establish that BBM had sold below costs and first, had a reasonable prospect of being able to recoup its losses from predatory pricing by charging supra-competitive prices; and/or secondly, expected to recoup its losses from predatory pricing by supra-competitive pricing later. 124 In this branch of its argument, the ACCC makes the following submissions: · Although a causal connection between the market power, and the conduct sued upon, must be demonstrated, his Honour adopted a different test, namely whether the conduct had "a business rationale", was no more than an exercise of "commercial judgment" or was a "rational" or "legitimate" "business decision". But the test under s 46 is different. It is whether (to adapt the language of Mason CJ and Wilson J in Queensland Wire (at 192)) "by virtue" of BBM's market power, BBM "can afford in a commercial sense" to engage in the conduct sued upon. This is a question of factual characterisation, to be inferred from all of the circumstances, as the Explanatory Memorandum accompanying the 1986 amendments indicated. The Memorandum explained: "[A] corporation is able, by reason of its market power, to engage more readily or effectively in conduct directed to one or other of the objectives in paragraphs 46(1), (a), (b) and (c). It is better able, by reason of its market power, to engage in that conduct. Its market power gives it leverage which it is able to exploit and this power is deployed so as to 'take advantage of' the relative weakness of other participants or potential participants in the market. Whether this is so in a particular case is a matter to be inferred from all of the circumstances" [par 49]. · The adoption by the primary Judge of a "rational business decision" criterion as an exculpatory consideration is, in truth, an attempt to introduce into s 46 an ingredient of moral reprehensibility - a notion specifically rejected by both Deane J and Dawson J in Queensland Wire (at 194 and 202 respectively). · The relevant question for his Honour was whether, for the purposes proscribed by s 46, BBM had used its market power to price below avoidable costs between April 1994 and October 1996. · BBM's explanation, that its pricing policy was no more than reactive to competitive market conduct, was contradicted by the graphs in evidence indicating relevant price trends. For instance, the following graph, which represents prices for 10.01 of Pioneer, BBM and C & M Melbourne in the period June 1993 to October 1996, indicates that BBM priced below its avoidable cost of production for many months, and that its prices were well below the prices of both Pioneer and C & M.

· In any event, selling below avoidable cost for a prolonged period is not, in principle (contrary to his Honour's approach), a rational business decision. · Moreover, his Honour erred in adopting the American jurisprudence (see below) that predatory pricing will only constitute a contravention if it is likely to lessen competition, so that it is necessary to prove that a specified level of "supra-competitive" pricing would follow the pricing said to be predatory; that is, a level sufficient to recoup the losses incurred during the period of the pricing claimed to be predatory. 125 (The American doctrine was considered by the Supreme Court of the United States in Brooke Group Ltd v Brown & Williamson Tobacco Corp. 509 U.S. 209 (1993). Kennedy J, delivering the opinion of the Court said (at 224): "That below-cost pricing may impose painful losses on its target is of no moment to the antitrust laws if competition is not injured: It is axiomatic that the antitrust laws were passed for 'the protection of competition, not competitors.'") · But proof of an effect of substantially lessening competition forms no part of the test under s 46 which, rather, is directed to the use of market power for a proscribed purpose. The language of s 46 may be contrasted with the provisions of ss 45, 47 and 50 which prohibit conduct that has an anti-competitive purpose or effect. In several cases, the Federal Court has warned against the uncritical importation of United States jurisprudence into Australian law (see Eastern Express v General Newspapers (1992) 35 FCR 43, at 71 - 72; Davids Holdings Pty Ltd v Attorney-General (Cth) (1994) 49 FCR 211, at 235 - 236; TPC v Pioneer Concrete (Qld) Pty Ltd (1994) 50 FCR 160, at 170 - 171). Furthermore, because s 46 does not incorporate an "effect" test, there is no need to inquire whether there was a realistic prospect of recoupment. · Even if (as is disputed) the notion in s 46 of "taking advantage" requires proof that BBM did expect that prices would be restored to more profitable levels following upon its predatory pricing campaign, on the question whether BBM expected to win "supra-competitive" prices thereafter, according to the evidence of Messrs Cormack, Randerson and Rawnsley, BBM did expect that prices would return to "normal", once one or more competitors had been driven out of the market. 126 Here also, whilst in my view there is substantial force in the ACCC's contentions for the above reasons, it is preferable that, without yet expressing a concluded view on this aspect, I proceed to consider BBM's challenge, on its notice of contention, to his Honour's finding that a proscribed purpose was established on the evidence.

BBM'S CHALLENGE TO HIS HONOUR'S FINDING OF THE EXISTENCE OF A PROSCRIBED PURPOSE 127 On behalf of BBM, the following contentions are now made: · The meaning of "purpose", where used in s 46, cannot be treated as the same thing as the inevitable consequences of conduct: competitors usually try to "injure" each other. In Queensland Wire, Mason CJ and Wilson J observed (at 191) that "these injuries are the inevitable consequence of the competition s 46 is designed to foster. In fact the purpose provisions in s 46(1) are cast in such a way as to prohibit conduct designed to threaten that competition". · If Parliament had intended to equate the "purpose" of conduct with its "effect", it would have referred to "purpose or effect" (as has occurred in other statutory contexts). It follows that Parliament evidently recognised that legitimate competitive activities by those with market power can have the effect of excluding others, although this was not their purpose. As Learned Hand J said in US v Aluminium Co of America 184 F 2d 416 (1945) (at 430): "A single producer may be the survivor out of a group of active competitors, merely by virtue of his superior skill, foresight and industry. In such cases a strong argument can be made that … [t]he successful competitor, having been urged to compete, must not be turned upon when he wins." · The proper inference to be drawn from the evidence is that BBM's manufacturing and supply activities during the relevant period were directed at (i) surviving the difficult industry conditions in the hope that they would improve; and (ii) defending and improving BBM's competitive position, with a view to becoming profitable in due course. · The best evidence of BBM's purpose "was provided by looking at what was actually done" per Wilcox J in Pont Data Australia Pty Ltd v ASX Operations Pty Ltd (1990) 21 FCR 385 at 416. Mr Rawnsley's periodic reports in evidence provided a regular summary of the competitive activity actually occurring, recording what competitive measures BBM did take and its perception of what competitors were doing, and showing, along with Mr Vella's uncontested evidence as to jobs won and lost, that BBM's fundamental purpose was this: to survive, whilst recognising that in the conditions of supply and demand prevailing, it was inevitable that some capacity had to exit the concrete masonry industry. · The evidence of the ACCC's own economic expert, Professor Officer, was that reductions in price were also consistent with normal vigorous competition, particularly in a situation where the available industry capacity greatly exceeds demand. · Whether a finding as to a s 46 proscribed purpose should be inferred from the evidence as to pricing must be judged by considering the logic of the matter, and by asking whether "general human experience" would be contradicted if the conduct which occurred was unaccompanied by the purpose sought to be proved (per Lockhart and Gummow JJ in Eastern Express, above, at 72). · Here, rational commercial explanations of BBM's activities, other than one of predation, are plentiful. · In Brooke Group, the United States Supreme Court warned (at 226 - 227) of the danger of drawing mistaken inferences from pricing behaviour. American courts and tribunals have found that no inference of predatory intent can arise when there is evidence that below-cost price level was reached defensively (In the Matter of General Foods Corporation 103 FTC 204 (1984)) or where the price cuts constituted a legitimate competitive response to market conditions (Richter Concrete Corporation v Hilltop Concrete Association 691 F 2d 818 (1982)). · His Honour should have inferred from the evidence that BBM's pricing was driven by the exigencies of the competitive demands of the market place; and that BBM was doing no more than defending its position against incursions by other producers, and responding to pricing constraints imposed by market conditions. · Even if it were to be found that BBM contemplated, or even intended, the demise of one or more of its rivals, this would be consistent with competitive activity. · In the present connection, his Honour should have applied his earlier finding that BBM's conduct was legitimate, rational and commercial behaviour; and should have concluded that there was no evidence of any proscribed purpose. Specifically, the primary Judge should not have found that such a purpose existed by inference from statements appearing in memoranda written by BBM's executives, absent a finding that BBM's conduct was motivated by, or directed to, or associated with, the matters mentioned in those statements; and his Honour should not have found that these statements indicated a proscribed purpose without considering their context and object. · Having found that there was no conduct which constituted a taking advantage of power, it was incorrect to proceed to find a contravening purpose. "Purpose" cannot be assessed in a vacuum: it can carry meaning for the purposes of s 46 only when there is some relevant conduct which constitutes a taking advantage, to which a "purpose" can attach; that is, the only relevant "purpose" is that of conduct which amounts to a taking advantage of market power. · The statements of BBM's executives relied upon by his Honour are equally consistent with braggadocio, swagger, intent to triumph in a highly competitive market, or wishful thinking. However, "purpose" in s 46 is something different, as was recognised by Mason CJ and Wilson J in Queensland Wire at 191 (see below). Competitive measures designed to take sales away from other competitors cannot constitute a taking advantage of market power; so that, in the absence of taking advantage of market power, it is pointless to speak of "purpose". · (In the passage relied on by BBM from Queensland Wire, Mason CJ and Wilson J said (at 191): "[T]he object of s. 46 is to protect the interests of consumers, the operation of the section being predicated on the assumption that competition is a means to that end. Competition by its very nature is deliberate and ruthless. Competitors jockey for sales, the more effective competitors injuring the less effective by taking sales away. Competitors almost always try to 'injure' each other in this way. … [T]hese injuries are the inevitable consequence of the competition s. 46 is designed to foster. In fact, the purpose provisions in s. 46(1) are cast in such a way as to prohibit conduct designed to threaten that competition - for example, s. 46(1)(c) prohibits a firm with a substantial degree of market power from using that power to deter or prevent a rival from competing in a market. The question is simply whether a firm with a substantial degree of market power has used that power for a purpose proscribed in the section, thereby undermining competition." ) · In any event, in order to amount to a taking advantage of market power, conduct must, by necessary implication from its very nature, or by reference to other circumstances, constitute a use of that power; there must be a causal connection between the conduct alleged and the market power pleaded, such that it can be said that the conduct is a use of that power. Yet, his Honour failed to find any such causal connection, thus failing to connect a proscribed purpose with any of (a) BBM's pricing behaviour; (b) BBM's losses; (c) the upgrade of Deer Park; and (d) the negotiations for the purchase of C & M's plant. · From his Honour's own findings in relation to the impugned conduct and the economic circumstances of the industry, it was overwhelmingly clear that general human experience would not be contradicted if that conduct was unaccompanied by a proscribed purpose. · The primary Judge relied upon statements appearing only in occasional, "strategic" documents such as the business plans, and which did not appear in the more reliable, regular, contemporaneous reporting, e.g. the weekly and monthly reports. His Honour did not, contrary to the observations of Lockhart and Gummow JJ in Eastern Express at 68 - 69 (see below), have regard to the circumstances in which the statements in the "strategic" documents were made in determining their probative force. 128 (In the passage relied on from Eastern Express, Lockhart and Gummow JJ said (at 68 - 69): "[T]he reception into evidence of an alleged admission must be distinguished from the sufficiency of that evidence to establish or support an affirmative conclusion in favour of the party who tenders it and bears the relevant onus of proof. It does not follow that because the evidence of the various statements in question here was admissible this is enough to prove the issue of predatory purpose. The probative force of the statements must be determined with regard to the circumstances in which they were made: see Lustre Hosiery Ltd v York (1935) CLR 134 at 138-139, 143-144; Stone and Wells, Evidence, Its History and Policies (1991), pp 329-331.") · In this respect, his Honour did not take account of the evidence that the occasional "strategic" plans were in the nature of "stretch exercises"; whereas the weekly and monthly reports were contemporaneous reporting on the competitive state of play.

CONCLUSIONS ON THE ACCC'S APPEAL AND BBM'S CONTENTION 129 The questions involved in the ACCC's appeal and in BBM's contention are, as Deane J observed in Queensland Wire (at 194 - 195), "a kaleidoscope of law and fact: the effect of the relevant statutory provisions and the inferences to be drawn from largely uncontested facts"; and, as Deane J went on to say (at 195), "there will ordinarily be little point in attempting to define relevant markets without first identifying precisely what it is that is said to have been done in contravention of the section". (a) The meaning and operation of s 46 130 The decision of the High Court in Queensland Wire is authoritative on the meaning and operation of s 46 and for our purposes settles any room for argument in this area. It was there held that BHP had contravened s 46 in using its market power to withhold supplies of a product. By this refusal of supply, BHP was using or taking advantage of its substantial market power for the purpose of preventing a potential competitor from entering the market. 131 Mason CJ and Wilson J said (at 187) that the analysis of a s 46 claim necessarily begins with a description of the market. In identifying the relevant market, the object is to discover the degree of a respondent's market power. In defining the market and evaluating the degree of power in that market, even if for the sake of simplicity of analysis, the two are separated. 132 Referring to the description of market and the notion of substitution mentioned in s 4E, their Honours (at 188) cited the observations of the European Court of Justice, first, in Hoffman-La Roche v Commission (1979) 1 ECR 461 (at 516) that the concept of the relevant market presupposes that there is "a sufficient degree of interchangeability" between all the products, in so far as a specific use of them is concerned; and, secondly, in United Brands v Commission (1978) 1 ECR 207 (at 227) that for the banana to be regarded as forming a market which is "sufficiently differentiated" from other fruit markets, it must be possible for it to be "singled out" by "such special features" distinguishing it from other fruits that it is "only to a limited extent interchangeable with them and is only exposed to their competition in a way that is hardly perceptible". 133 Mason CJ and Wilson J said (at 188) that market power can be defined as the ability of a firm to raise prices above the supply cost without rivals taking away customers in due time, supply cost being the minimum cost an efficient firm would incur in producing the product. Referring (at 188 - 189) to the element of the extent of the constraint mentioned in s 46(3), their Honours noted that in Europemballage and Continental Can v Commission (1973) 1 ECR 215 (at 248) the European Court recognised the necessity of considering potential competition in determining the degree of market power, and specifically, where competitors in other fields of the market can by "a mere adaptation", enter the relevant market "with sufficient strength to form a serious counterweight". 134 Mason CJ and Wilson J noted (at 189) that courts have often looked to market share to determine degree of market power and have inferred monopoly power from a predominant share. But as s 46(3) and Continental Can suggest, a large market share does not necessarily mean that there is a substantial degree of market power - "[t]he relative effect of percentage command of a market varies with the setting in which that factor is placed" (citing United States v Columbia Steel Co (1948) 334 US 495 at 528). 135 Their Honours said (at 189): "A large market share may well be evidence of market power (see Roche), but the ease with which competitors would be able to enter the market must also be considered. It is only when for some reason it is not rational or possible for new entrants to participate in the market that a firm can have market power: see Continental Can." 136 Mason CJ and Wilson J said (at 191) that the phrase "take advantage" in s 46(1) does not require "a hostile intent inquiry". The provision already contains "an anti-competitive purpose element". It is these purposes that define which uses of market power constitute misuses. 137 Deane J said (at 195 - 196) that "market" is not susceptible of precise, comprehensive definition when used as an abstract noun in an economic context. The most that can be said is that "market" should, in the context of the Act, be understood in the sense of an area of potential close competition in particular goods and/or services and their substitutes. Market definition will commonly involve assessment of the relative weight to be given to competing considerations in relation to questions such as the extent of product substitutability. 138 Earlier (at 194) his Honour had said that the essential notions with which s 46 is concerned are economic and not moral ones; and that, read in context, the words "take advantage" do not reflect some indefinite moral or public purpose qualification. 139 Dawson J said (at 198) that he agreed generally with Deane J. His Honour noted (at 199) that the basic test in market definition involves the ascertainment of cross-elasticities of supply and demand, which reveal the degree to which one product may be substituted for another - a notion reflected in the language of s 4E. But these notions do not provide a complete solution to market definition. A question of degree is involved - at what point do different goods become closely enough linked in supply or demand to be included in the one market? The process is an inexact one. 140 Dawson J said (at 200) that the term "market power" is ordinarily taken to be a reference to the power to raise price by restricting output in a sustainable manner. But market power has aspects other than influence upon the market price. It may be manifested by practices directed at excluding competition, such as predatory pricing. The ability to engage persistently in such a practice may be as indicative of market power as the ability to influence prices; that is, a firm possesses market power when it can behave persistently in a manner different from the behaviour that a competitive market would enforce on a firm facing otherwise similar cost and demand conditions. Market power is thus the advantage which flows from monopoly or near monopoly and the provisions of s 46(3) are consistent with this. 141 Dawson J spoke (at 201 - 202) of the importance of recognising the assistance given by the identification of conditions, in the nature of barriers to entry, for the purposes of market definition, measuring the extent of market power and determining whether that power has been exercised. 142 His Honour said (at 202) that the difficulty in determining whether conduct constitutes a taking advantage of market power stems inevitably from the need to distinguish between monopolistic practices (which are prohibited) and vigorous competition (which is not). The synonyms that have been used are not particularly helpful. Words such as "normal methods of industrial development", "honestly industrial", "anti-competitive", "predatory" or "exclusionary conduct", merely beg the question. 143 Dawson J said (at 202 - 203): "For the reasons given by Deane J. I am of the view that the words 'take advantage of' do not have moral overtones in the context of s. 46. That being so, there can be no real doubt that B.H.P. took advantage of its market power in this case. It used that power in a manner made possible only by the absence of competitive conditions. Inferences in this regard can be drawn from the fact that B.H.P. could not have refused to supply Y-bar to Q.W.I. if it had been subject to competition in the supply of that product. B.H.P. supplies all its other steel products without restriction and its practice with regard to Y-bar was not in accordance with its normal behaviour. If there had been a competitor supplying Y-bar, B.H.P.'s refusal to supply it to Q.W.I. would have eroded its position in the steel products market without protecting A.W.I.'s position in the fencing materials market. Moreover, the existence of barriers to entry into the steel products market must inevitably, upon the findings of the trial judge, have influenced B.H.P. in the course which it took." 144 Toohey J, referring to the introduction of s 4E into the Act in 1977, said (at 210) that the definition of the relevant market requires a consideration of substitutability both on the demand and on the supply side. 145 His Honour (at 213) agreed with Q.W.I.'s submission that the words "shall not take advantage of that power for the purpose of" is a composite expression involving two elements; and on this approach, it is unnecessary and unhelpful to employ expressions such as "predatory". There is no breach of s 46 unless there has been a use of market power for one of the purposes proscribed. But once there has been such a use, the section is contravened, and it adds nothing to consider motives. 146 Toohey J said (at 214): "Section 46 looks to the situation of a corporation that has availed itself of the circumstance of having a position of power in the market. To attain monopoly power is not of itself a contravention of the section. There is no relevant misuse of market power unless a corporation has one of the purposes proscribed by the paragraphs of s. 46(1). Expressions such as 'predatory' add nothing to an understanding of the section though 'predatory' conduct may evidence the existence of a proscribed purpose." 147 His Honour went on to say (at 216): "The only reason why B.H.P. is able to withhold Y-bar (while at the same time supplying all the other products from its rolling mills) is that it has no other competitor in the steel product market who can supply Y-bar. It has dominant power in the steel products market due to the absence of constraint. It is exercising the power which it has when it refuses to supply Q.W.I. with Y-bar at competitive prices; it is doing so to prevent the entry of Q.W.I. into the star picket market; and it has been successful in that attempt." 148 In its facts, Queensland Wire was perhaps unusual in that BHP was a "near monopolist"; it is plain that Dawson J had in mind the facts of that case in his Honour's reference (at 200) to a "monopolist or near monopolist". The same description could not be applied to BBM. But it is plain from the language of s 46(1) that this degree of power is not essential if the provision is to operate. What is required is that BBM had a "substantial" degree of power in the market. In the present and other contexts, "substantial" is used in a relative sense, the notion of competition importing relativity (see ASX Operations Pty Ltd v Pont Data Australia Pty Ltd (No. 1) (1990) 27 FCR 460, per Lockhart, Gummow and von Doussa JJ at 478). As Lockhart and Gummow JJ pointed out in Eastern Express, above (at 63) - "For a corporation to have a substantial degree of market power it must have a considerable or large degree of such power. The difficulty lies not in defining the word 'substantial' but in applying the concept of a substantial degree of market power to the circumstances of each case and in identifying whether the requisite degree of market power exists. This is a relative concept." 149 In assessing BBM's degree of market power, it is not permissible to treat BBM and an unrelated corporation (for instance Pioneer) together on the basis of "shared" position of substantial market power. A corporation charged with a contravention of s 46 must itself have a substantial degree of market power (see Eastern Express per Lockhart and Gummow JJ at 61). 150 In Eastern Express (at 62 - 63) Lockhart and Gummow JJ said that the existence of market power is concerned with power which enables a corporation to behave independently of competition and competitive forces; and the primary consideration is barriers to entry, as Queensland Wire decided: to what extent is it rational or possible for new entrants to enter the market? Other factors to be taken into account in defining and identifying market power are, as Mason CJ and Wilson J noted in Queensland Wire - "• 'the ability of a firm to raise prices above the supply cost without rivals taking away customers in due time, supply cost being the minimum cost an efficient firm would incur in producing the product'; • 'the extent to which the conduct of [any of the respondents] in that market is constrained by the conduct of … competitors, or potential competitors ….' (s 46(3)); • Market share of each respondent must be examined but this alone is generally not determinative of market power as 'the relative effect of percentage command of a market varies with the setting in which that factor is placed' (per Mason CJ and Wilson J when adopting the language of Reed J in United States v Columbia Steel Co (supra)); • The presence of vertical integration is another factor, but its presence does not necessarily mean that a substantial degree of power exists." 151 Lockhart and Gummow JJ went on to say (at 72): "It will be for the judge to decide whether the existence of the proscribed purpose may properly be inferred, with or without the aid of other evidence, from evidence of the conduct of the corporation in relation to the prices it charged. No pre-ordained and fixed categories as to the level of pricing or economic theory or practice of costing necessarily controls the drawing of that inference in any particular case. Whether the finding as to purpose which is sought against the corporation should be inferred from the evidence as to pricing must be judged by considering not only the logic of the matter; the court must also consider whether 'general human experience' would be contradicted if the conduct which occurred were unaccompanied by the purpose sought to be proved." 152 In Dowling v Dalgety Australia Ltd (1992) 34 FCR 109, Lockhart J (at 139) noted that in the Explanatory Memorandum for the 1986 Bill, it was stated, first, that in the context of s 46, "substantial" was intended to signify "large or weighty" or "considerable, solid or big"; and secondly, "substantial" in this context was not intended to require the high degree of market power connoted by the reference in the existing provision to being in a position substantially to control a market. Lockhart J went on to say (at 141): "There is a high level of competition in the relevant market in this case. As mentioned earlier, the existence of barriers to entry is a crucial factor when considering market power. It is only when for some reason it is not rational or possible for new entrants to participate in the market that a corporation can have market power." 153 Of course, the criteria to determine the extent of market power are not fixed, however useful as a starting point. As Cooper J has said (Trade Practices Commission v Pioneer Concrete (Qld) Pty Ltd (1994) 50 FCR 160 (at 170): "[U]ltimately what must be identified is the relevant market and its structure, and the particular circumstances of the individual corporation which bear upon its freedom of conduct in that market." 154 It follows, in my view, that given this settled interpretation of s 46 as a consequence of the decision in Queensland Wire, it is not necessary for present purposes to consider the comparative American jurisprudence. However, it will be seen that, upon an analysis of the reasoning in Queensland Wire, it does not appear that there is any scope in the operation of s 46 for an absolute exception in the case of activities which may be seen as "rational" or "commercial" in character. Such a characterisation of the activities of a firm can be no more than equivocal for present purposes. There is no express exception of these activities from the operation of s 46, and there is no reason, in logic or experience, to imply such an exception. Nor is there any basis for implying a recoupment theory into the working of s 46.

(b) The uncontested primary facts 155 As has been seen, the primary facts were largely uncontested. The real issue at trial was the proper inferences to be drawn from them, or their appropriate characterisation. 156 It will be convenient to recall these facts (many of which have already been mentioned) in their full context or setting as follows. 157 The competitive state of the CMP industry in 1992 was as described in BBM's strategic marketing plan prepared in September 1992 by Mr Rawnsley (G 525) (previously mentioned) as follows: · Competition was keen in a shrunken market. · The percentage shares of CMP in Victoria in 1992 were estimated at - Pioneer 26% Rocla 21% Budget 15% C & M 9% Boscato 3% Shepbrick 2% Stratblox 3% BBM 21% · It was not believed that any of these operators, except Stratblox, were profitable. · In boom times, the three major players had become complacent and lacked innovation, allowing the growth of Budget and the intrusion of C & M and the subsequent growth of other small operators. · BBM would implement a new pricing policy in January 1993 aimed at achieving minimum gross margins of 30% whilst slowly increasing market share at the expense of the smaller operators, particularly Budget and C & M. 158 In the middle of 1992, Mr Cormack instructed Mr Rawnsley to meet competitors' prices, or if necessary, to just beat those prices by the smallest margins; and although Mr Rawnsley should not try to lead the market price down, if he had to drop his prices to win business, he should do this by pricing only slightly below a competitor (C 4, par 6.19). 159 Mr Vella was then instructed by Mr Cormack and Mr Rawnsley that BBM had to increase its market share and production volume in Victoria. Mr Vella was instructed "not to lose a block job to Pioneer". Mr Vella's evidence was that in the period 1993 - 1996, Pioneer was BBM's "major competitor" in Victoria in respect of block, and that there had "always been a lot of competitive rivalry between the two companies" (C 13, par 76). 160 BBM's strategy did achieve an increase in its market share to more than 30 per cent by December 1993 and this was maintained through to 1996, at the end of the relevant period (G 36). The evidence of Mr Cormack and of Mr Rawnsley was that BBM's share during the relevant period was around 35 per cent (T pp 568, 726). 161 In August 1992, Mr Cormack instructed Mr Rawnsley to "knock off C & M at any price" (G 523 - 008). 162 Although BBM saw Pioneer, rather than C & M, as "the enemy", in February 1993 BBM viewed C & M "as a major frightening threat" (T p 726). At that time, Mr Rawnsley, anticipating C & M's start-up at Campbellfield in April 1993, was "targeting" C & M (T p 790) and informed Mr Cormack that "[t]he [price] war is on from 1/4 [1st April 1993]" (G 542). 163 In late 1993, a major price war in block in Victoria developed between BBM, Pioneer Rocla and Budget. The causes were Rocla's quotation on the Eastland Project, the distribution of Pioneer's October 1993 price list, and the entry of C & M into the market (C 5, pars 112 - 113). 164 In 1993 - 1994, BBM believed that there was excess capacity in the industry and too many players; so that it was essential that there be a rationalisation of the market, which should lead to the exit of players such as Budget and C & M, whose access to financial resources was less than that of BBM, Pioneer and Rocla; and the return of "stability" to the market (T p 764). 165 In BBM's Strategic Business Plan - Review and Update for 1993/4 (prepared in October 1993) (G 569), it was noted that the Victorian market had "recovered strongly"; that its market share was "estimated at 35 per cent and growing"; that BBM's volumes had been driven by price and perceived service and there was now evidence that this strategy was bearing fruit; that the volume projected for 1993 was a 40 per cent increase on 1992; and that the advent of C & M - "… initially drove prices down but it is now strongly rumoured … that [C & M] is in severe financial difficulty …. Budget are known to be in a similar position [and] … Rocla … and Pioneer … are known to be reeling from our assault on the market… This market is now being heavily targeted with good results". 166 The Review further stated: "We must avoid at all costs the possibility of one or both of the plants being acquired by a new operator which would guarantee a return to the merry go round of pricing. A good level of profitability and volume is possible with 3 operators in the Melbourne market but beyond this number chaos is inevitable." 167 In its summary, the Review stated that BBM was well placed to take advantage of a growing market and to become profitable (potential ROAA 26%+) "when stability returns to the Melbourne market". 168 During the relevant period, BBM sold a number of its important lines of CMP at prices which it knew were substantially below avoidable cost (T p 617). 169 BBM's Strategic Business Plan which was prepared mid-1994 (previously mentioned), stated that market shares were as follows: BBM 28% Rocla 27% Pioneer 26% Budget 7% C & M 11% Other 5% 170 The Plan noted that BBM had "rebuilt its position as market leader", and that this had been achieved by "customer focus and manufacturing efficiency". 171 The Plan noted that C & M "is clearly available for acquisition and the company which achieves this will be in a leading position in the market …". 172 An Update of BBM's Strategic Business Plan ("SBP") (G 661) was prepared in March 1995 upon the following assumptions: "Assumptions 1) We will buy honing and polishing equipment to gain a competitive advantage and increase the average selling price of blocks. (Cost allowed $500K) 2) We will buy the Besser equipment at Moss Vale and install at Deer Park at a total cost of $4M. 3) We believe our current share of the total market is 30%, which will increase to 50% on installation of new plant. Our ability to supply the market has been constrained in recent months by our lack of capacity. Our marketing efforts have been successful to the extent that our customers are prepared to buy from us even though our prices may be slightly higher. Our aim through 1996/97 and 1997/98 is to drive at least one competitor out of the market. The new plant gives us the ability to do this. 4) The Brick Market. As well as supplying Calsil bricks for rendered walls (currently running at 1000000 bricks per month), we estimate that the demand for masonry face brick is increasing. It is estimated that masonry product will comprise 20% of the total face brick market within 18 months. The total face brick market is approximately 250 million per year. 20% of this is obviously 50 million bricks or 190,000 tonnes. In the total market scenario, we have included from 20000 tonnes in 1995/96 to 70000 tonnes in the 1999/2000 year, of which we will supply 50%." 173 The Update noted, in connection with the proposal to acquire the Moss Vale Besser plant, that BBM's "tactic … is to place pressure on the Melbourne market during a future minor downturn in order to precipitate a shake-out and subsequently consolidate our position"; and that - "From a long term view this development presents the opportunity to break out of the cycle which has prevailed in Victoria over many years. Boral Masonry needs the capacity to supply the market through highs & lows (at a high market share 40%+) to remove the ability of minor players to survive when the market turns up thus allowing them to play another day always at the expense of gross margins and market share. The coup-de-grace could have been delivered to 2 minor players in 1994 had Boral had sufficient productive capacity." 174 The Update further noted - "At the present time no Victorian masonry manufacturer is believed to be trading profitably. Because we have reached the limit of productive capacity we have had to reduce the level of discounting which we had been using to build market share and weaken the opposition. Our projections are that the market will downturn slightly in 95/96 & 96/97 and then recover strongly. To take advantage of the downturn which will put pricing and volume pressure on the market prior to the recovery is the rationale for additional production capacity. When the market turns down our volume capability will enable us to apply pressure to our competition. Feedback from the market indicates that C&M and Budget are awed at the prospect of Boral doubling its capacity. This is vindicated by recent evidence of vicious price cutting and intense customer targeting by C&M including attempted exclusivity supply arrangements. In addition we believe that Budget is in a precarious financial position only alleviated by our recent decision to increase prices and [Pioneer] and Rocla have tenuous commitment to the Victoria market…" 175 BBM's Victorian Manager's report for August 1995 (G 56) noted that the following (amongst other) "objectives" of the SBP had been achieved: (1) Deer Park layout finalised. (2) Rocla advised intention to close plant and quit Victorian market. 176 BBM's Victorian Manager's report for September 1995 (G 57) noted that another SBP "objective", that Budget was believed to be in financial difficulties, had been "achieved". 177 In a presentation to Boral executives in August or September 1995, Mr Vella, with the agreement of Mr Rawnsley, made the following (amongst other) observations about the Victorian "masonry market" (being "masonry blocks, bricks, pavers and retaining wall systems"): ¨ Changes in building trends were "highly favourable" for masonry, although technology and innovation were "a cause of concern". ¨ There had been a rejuvenation of masonry products for architectural design product. ¨ BBM was well placed to capitalise on expected commercial growth in Victoria. ¨ In assessing BBM's strengths as a supplier, 100 per cent of all raw materials came from within the Boral Group; so that, despite BBM's current loss situation, it was a contributor to the Boral Group parent company, Boral Limited. ¨ Rivalry between suppliers was "very high due to the over-capacity" (of 540,000 tonnes). · In assessing the strengths of customers, Mr Vella there said: "GREY BLOCK - Customers in the block market have a very strong foothold. They are in between the major builders and the masonry companies due to the major builders preference to have a supply and lay package with the blocklayers. PAVING - Most paving sales are made through retail outlets, this is a more buoyant market. Commercial paving projects are usually won at very low margins. Our range of pavers is mature. The future lies in larger pavers. BRICKS - Completely price driven. Market decision in this area is only based on price and nothing else. RETAINING WALLS - High margins are enjoyed in this area. Boom market in all areas. A number of new major road developments over the next 5 years presents significant growth opportunities. Retaining wall margins remained high and it is important that Boral retain its position in this segment." · In assessing the "[t]hreat of substitutes", Mr Vella made this assessment: "HIGH - Clay Brick - A.A.C. - Tilt-up - Plasterboard Walling Systems - Timber" · In assessing the "[t]hreat of [n]ew [e]ntrants", Mr Vella said: "VERY HIGH - Due to the low cost of setting up masonry, a new entrant could spend only 800k - 1 million dollars to manufacture the basic block range required to enter the market. The outcome of this would be a further over supply into our industry and a price war situation." · In his "assessment overall", Mr Vella stated the following: "• Highly competitive industry due to the low cost of entry. • However, the market is now very unattractive for any new player. • Major players are now Boral and Pioneer. Both companies are committed through their quarries and cement interests. • Boral's strategic plan is to continue the pressure on the market, part of this strategy has been realised with Rocla withdrawing from the market at the end of September '95. • Customers in the commercial market have far too much power in the area of pricing due to large building wanting supply and lay prices." · In the summary of his industry analysis, Mr Vella made the following general observation on "industry trends": "- Highly competitive - Low cost of entry - Attractive industry for companies that have their core business in construction materials - Expanding market acceptance for masonry product" · With respect to "opportunities", Mr Vella said: "• Continue pressure on the industry to further reduce the amount of manufacturers. Part of our strategy has been realised. One major player is withdrawing from the market end of September '95. • We must lobby the Government and legislative bodies in the area of plant safety, and environmental issues to help raise the threshold cost into our industry. • Move into niche markets by producing unique products." · With respect to "[t]hreats", Mr Vella said: "- C & M could be sold to CSR or another major building company. - Pioneer could continue price cutting strategy. - As the market stabilizes new players could enter the market." · In his "[m]arketing [a]ctivities [a]nalysis", Mr Vella said this of "[p]rice": "Price is determined by market activity however some of our strategic aims have been met e.g. Customer prepared to pay extra when dealing with Boral." · Mr Vella said of the "[f]ocus for next 12 to 24 months": "Continue the competitive drive to reduce the number of manufacturers. Continue the R & D into new and unique products and at the same time position ourselves in as many niche markets as possible. Focus for the Future New plant upgrade will reduce our manufacturing costs e.g. improved machine efficiency reduction of cement costs Capital expenditure to double our capacity at Deer Park will reduce costs further by less downtime for mould changes, reduction in labour costs. Production capabilities will give us the chance to command 50% market share of the current requirements." · In his "summary of marketing performance", Mr Vella said: "General observation on our marketing performance Boral Masonry has been very successful over the last 3 years with our market share rising from 17% to 32%. Strengths - Largest transport fleet in the industry - Excellent stockest total 35 Melbourne metro and country Victoria - Unique products for niche markets - Excellent lead tracking system - Training/Relationship marketing Weaknesses - Price core products (price war) - Lack of quality display centres Melb. Metro - Maturity of sales team - Software inadequate for segment analysis" · In his SWOT analysis of BBM, Mr Vella said, amongst several other things, that one "weakness" was that "50% of our sales are exposed to very competitive price cutting". In describing "initiatives" Mr Vella said: "We will continue strategic plan to reduce the number of masonry manufacturers in Victoria. Part of our plan has been realised with Rocla B.T.R. Nylex withdrawing from the market by the end of September '95." · In describing BBM's "relative competitive advantage", Mr Vella said: "Our relative competitive advantage Relationship Our whole marketing plan is based on customer relations, ensuring that customers needs and requirements are met and often exceeded. Speed Due to Boral Masonry being a national producer of masonry product we in Victoria can leverage from a large R.D. base giving us opportunities to be first in the market with new unique product. Design Very hard to differentiate in the grey block area but as far as the value added products are concerned we hold an excellent advantage over our competitors. Reliability We are recognised in the industry as one of only 2 manufacturers who consistently achieve customer requirements. Service We are the best in our industry. We have the largest transport fleet and are second to none in the area of meeting critical crane times." · Describing BBM's "Key Marketing Issues and Opportunities", Mr Vella said: "- Acquisition of competitor in the South East area of Melbourne Metro putting us in a better position to service the Melbourne Metro market. - Acquisition of high volume large paving and brick machine as per our competitor this giving us an advantage in a very profitable market. - Continue to develop and train our staff in the area of customer service and relationship marketing. - R & D in the new and unique products for niche markets - R & D into cost reduction program to maintain our low cost manufacturing." 178 In Boral's draft SBP prepared in March 1997, it was noted that BBM's "major competitors" in Victoria were C & M and Pioneer and that there were no "minor competitors". It was further noted that Deer Park was "incapable of competing profitably against the C & M Hess on any except block products". Strategies planned included: "• Establish highly efficient, least cost manufacturing facilities, capable of high product flexibility, thus ensuring the ongoing utilisation of (at a minimum) the current volume of Boral materials. Progressively replace & upgrade equipment to allow maximum product & market penetration. • Eliminate our competitive disadvantage in the Melbourne market by either further investment or acquisition.

(c) The proper inferences to be drawn from the uncontentious primary facts 179 In my opinion, the following inferences ought to be drawn from these uncontentious primary facts: (i) The relevant market was for the supply of CMP. It was in this area only that there was, in truth, close competition. There was detailed evidence of head-to-head competition for the supply of CMP throughout the relevant period. It is true that there were, to a degree, alternative products available, and that, on occasions, some measure of substitution occurred. But given the discontinuities of substitution previously mentioned, and the price differentials involved, it ought not, in my view, to be inferred that the relevant market was the wider walling products market advocated by BBM. A critical factor, I think, is that BBM itself treated the relevant market as that for the supply of CMP, as its own planning documents stated. The distinction drawn between competition, on the one hand, and close competition on the other, is crucial in the present context. In my view, the unequivocal conduct of the players in the industry demonstrated that the rivalry between them with respect to the "alternatives" was not sufficiently intense, or long-lasting, to warrant the description "close". Nor, in my opinion, was the substitution of the "alternative" product "strong", as was said in Queensland Co-operative Milling Association - the necessary degree of substitution was not present. Here, the substitution that occurred was on a relatively limited scale. (ii) During the relevant period, BBM had some degree of power in the market for the supply of CMP. This inference is inescapable, given the existence of the several factors mentioned in BBM's various strategic planning documents, that is to say, (i) Boral's significant share of the market; (ii) its standing as a large well-funded national operation; and (iii) its reputation for good service and loyalty to customers. At the same time, it was not, to use the words of Dawson J in Queensland Wire, "a monopolist or near monopolist"; and it had, in its own assessment, two "major competitors" in Pioneer and C & M. Moreover, as BBM's own documents put it, the structural barriers to entry to the CMP market were low, and this was illustrated by the relative ease of entry of C & M. At the same time, in considering degrees of market power, it is proper to look not only at the phenomenon of entry into a market, but also whether, by virtue of the exercise of market forces, existing players and newer entrants actually have disincentives to remain there. In the present case, the fact is that during the relevant period two players, Rocla and Budget elected to quit the market. C & M almost failed and sought to be bought out. This all happened at times when the CMP market had recovered from the depressed conditions experienced earlier in the decade. Another uncontrovertible factor in the dynamics of the CMP market in the relevant period is that, to the knowledge of its management, BBM's prices were below avoidable cost for most of the time. Given BBM's significant market share, the inference is inescapable, in my view, that BBM was prepared to use its power in the market so as to provide a disincentive to other competitors (with the exception of Pioneer) to remain in the market. Even if this conduct may not be, in strictness, a barrier to entry, it must have been a factor in the decisions of Rocla and Budget to quit; and in the case of C & M, it must have influenced its decision to seek to be bought out. When regard is then had to the structure of the market and to these activities of BBM, the picture emerges of its domination by two major players (BBM and Pioneer), both well resourced and well connected nationally, both prepared to engage in "price wars" for extended periods and, in the case of BBM at least, to price below avoidable cost for significant periods. Although BBM was not a near monopolist and whilst it is not open under s 46 to aggregate the respective strengths in the market of BBM and Pioneer, BBM's power in this market should, I think, be described as considerable or large, that is to say, "substantial". In the terms of s 46(3), BBM's conduct in the market was, to a large or considerable degree, not constrained by the conduct of its competitors. It is true that, on occasions, BBM's actions were, to an extent, influenced by the activities of both Pioneer and C & M. But the facts that BBM was able to increase its market share by almost doubling that share (from 18 per cent to 35 per cent) and able to double its production capacity in a few years, are a good indicator of the exercise of its economic strength. This was, in my view, attributable not only to its capacity but also to its willingness to forego profits in the short or even medium term, in the expectation that other players (albeit not Pioneer) would probably decide to depart. In short, BBM was able to sell below cost for long periods, and double its production capacity because, as Mason CJ and Wilson J put it in Queensland Wire (at 192), BBM could afford it in a commercial sense. In my opinion, BBM not only possessed a substantial degree of market power, but also used it in the sense explained in Queensland Wire. "Taking advantage" here means, as each member of the High Court held in Queensland Wire, that the power was "used". It is not a pejorative expression. (iii) The real question now is whether the proscribed purpose was established on the evidence. It will be recalled that the primary Judge held that it was. In my opinion, his Honour was correct in so finding. 180 The trial Judge said (pars 190 - 194): "… there is evidence which establishes that BBM did act with one or more of the purposes proscribed by s 46(1). For example in its Strategic Business Plan Update 1994 - 2000 prepared in approximately May 1995, it is stated: '… Our aim through 1996/97 and 1997/98 is to drive at least one competitor out of the market. The new plant gives us the ability to do this.' 'New plant' is a reference to the upgrade of Deer Park. BBM's view throughout the period was that it was necessary in order to stabilise prices that two or more players should leave the market. In its reaction to the exit of Rocla and Budget, BBM said in its Strategic Plan: 'Part of our plan has been realised with Rocla and BTR Nylex withdrawing from the market by the end of September 1995.' Another internal assessment spoke of the price war and said: 'So, one of the requirements was to make it more difficult for new entrants to gain a foothold. How can Boral do that?' In the same document it had said: 'The long term solution to the market decline in Melbourne is for C&M to fail as a producer and one of the major producers to pick up the assets.' There is more material to the same effect." 181 Although BBM invited the Court to treat these statements as no more than boasting (cf. Posner, Anti-Trust Law: An Economic Perspective (1976) at 189 - 190), the present question, a subjective one, was very much a matter of impression for the trial Judge gathered from the whole of the evidence, including his Honour's assessment of the credibility of the testimony of BBM's witnesses on the point. In this area, essentially one of credit, we should be reluctant to depart from his Honour's impressions. Moreover, high-level planning documents of a strategic kind should provide the best evidence of the subjective intent (as distinct from "effects") required by s 46. In any event, the Judge's finding of a proscribed purpose was corroborated by the uncontrovertible fact that some competitors did actually quit the market. This was at least consistent with the existence of BBM's purpose, to eliminate or substantially damage a competitor, or to prevent the entry of a person into this market, or to deter or prevent a person from engaging in competitive conduct, as found by his Honour.

CONCLUSION - CONTRAVENTION BY BBM ESTABLISHED 182 It follows, in my view, that a contravention of s 46 by BBM was established.

ORDERS PROPOSED 183 It further follows that I would allow the ACCC's appeal from the dismissal of its application against BBM, although as has been mentioned, the ACCC no longer presses its appeal from the dismissal of its application against BBM's parent company, Boral Limited. So far as BBM is concerned, the orders made at first instance ought to be set aside, and the matter remitted to the primary Judge for further hearing and determination on the question of relief, in accordance with the judgment of this Full Court. The costs of all proceedings at first instance should be in the discretion of the primary Judge. 184 I propose the following orders:

1. The appeal against the dismissal of the application against the second respondent be allowed.
2. The orders of the trial judge, in relation to the second respondent, be set aside.
3. The proceeding be remitted to the trial judge, for further hearing and determination in relation to the relief sought by the appellant, in accordance with the judgment of this Court.
4. The second respondent pay the appellant's costs of the appeal and of the hearing below.
5. The appeal against the dismissal of the application against the first respondent, be dismissed.
6. The appellant pay the first respondent's costs of the appeal. I certify that the preceding one hundred and eighty-four (184) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Beaumont.

ON APPEAL FROM A SINGLE JUDGE OF THE FEDERAL COURT OF AUSTRALIA

BETWEEN: AUSTRALIAN COMPETITION AND CONSUMER COMMISSION

MERKEL J: 185 The present matter concerns the line that must be drawn between price competition that is promoted by Pt IV of the TPA as an aspect of competitive conduct, and price competition that is prohibited by s 46 of the TPA as a misuse of market power. 186 When first enacted s 46 only applied to a firm "in a position substantially to control a market for goods or services", ie a firm that is a monopolist or is dominant in a market. Under both United States and European case law persistent pricing below avoidable cost (or some other appropriate measure of cost) by a monopolist or firm with the probability of recoupment by the subsequent extraction of monopoly profits, will usually constitute unlawful predatory pricing. Such conduct, which is designed to eliminate rivals, is regarded as harmful to competition, notwithstanding the short term benefit it may provide to consumers. See Matsushita Electric Industries Co, Ltd v Zenith Radio Corp 475 US 574 (1986); Brooke Group, Ltd v Brown and Williamson Tobacco Corp 509 US 209 (1993) and AKZO Chemie BV v Commission of the European Communities [1994] ECR I-3359. Thus, as originally enacted, s 46 may have reflected, albeit in a different form, the economic principles that provided the foundation for the United States and European requirements for predatory pricing. 187 The first review of the operation of the TPA was conducted by the Swanson Committee which, after receiving numerous submissions, presented its report to the Minister: see Trade Practices Act Review Committee's, Report to the Minister for Business and Consumer Affairs (August 1976). The Committee considered that s 46(1) as originally enacted provided the "most suitable" system in Australian conditions for dealing with monopolies: see [6.1]. The Committee also considered the guidance offered by s 46(3) as to the meaning of "being in a position to substantially to control a market" and stated: "6.14 The Committee notes that sub-section 46(3) is an inclusive definition derived from the holding of the Commission of the European Communities in Re Continental Can Co. Inc. (1973) CMLR D11. The definition indicates some of the empirical factors which may be taken into account in determining whether the corporation is in a position substantially to control the market. In determining the market it may be necessary to go beyond those factors and to undertake a full and complete economic evaluation of the structure of the market and its functioning in order to determine whether, considering all factors, including the relative size and strength of competitors, freedom of entry, pricing terms and practices, profits, and consumer demand, the corporation has the requisite power. 6.15 …a distinction may be drawn between a corporation having a leading position in a market and a corporation in a position substantially to control that market. The presence of a corporation enjoying a leading position is not incompatible with the existence of effective competition in the market. However, the presence in the market of a corporation in a position substantially to control that market, assumes the absence of that degree of competitiveness in the market which could ordinarily be relied upon to have a material influence upon its activities. (See Bellamy and Child, Common Market Law of Competition, 1973, paragraph 705)…." 188 In spite of the views expressed in the Swanson Committee's Report, the Trade Practices Revision Bill 1986 ("the 1986 amendments") was introduced in Parliament. The Bill, which was enacted with effect from 1 June 1986, lowered the s 46 threshold from a firm in a position "substantially to control a market" to a firm that has "a substantial degree of power in a market". The lowering of the threshold meant that the section prohibited a firm with a substantial degree of market power (which must include, but is not limited to, a firm with monopoly or dominant market power) from taking advantage of that power in a market for any of the anti-competitive purposes proscribed in the section being: (a) eliminating or substantially damaging a competitor; (b) preventing a person from entering that, or any other, market; (c) deterring or preventing a person from engaging in competitive conduct in that, or in any other, market ("the proscribed purposes"). 189 In his Second Reading Speech the Attorney-General explained the amendments to s 46 as follows: "Misuse of Market Power …[A] large enterprise may be able to exercise enormous market power, either as buyer or seller, to the detriment of its competitors and the competitive process. Accordingly, an effective provision controlling misuse of market power is most important to ensure that small businesses are given a measure of protection from the predatory actions of powerful competitors. Unfortunately, section 46 as presently drafted has proved of quite limited effectiveness in achieving that result, principally because the section applies only to monopolists or those with overwhelming market dominance… The amendments proposed…are designed to make section 46 much more effective. The test for the application of the section is to be reduced from that of a corporation being in a position substantially to control a market to a test of whether a corporation has a substantial degree or market power. As well as monopolists, section 46 will now apply to major participants in an oligopolistic market and in some cases, to a leading firm in a less concentrated market….Section 46 in its proposed form, which will be described as misuse of market power rather than monopolisation, is not aimed at size or at competitive behaviour as such of strong businesses. What is being aimed at is the misuse by a business of its market power. Examples of misuse of market power may include in certain circumstances, predatory pricing or refusal to supply." See Hansard, House of Representatives 19 March 1986 at 1626. 190 The Explanatory Memorandum which accompanied the 1986 Amendments stated that: · market power is a recognised economic concept [39]; · all participants in a market possess a degree of market power which may range from negligible to very great [40]; · "substantial" is intended to signify "large or weighty" or "considerable, solid, or big" and imports "a greater rather than less degree of power"; thus "substantial", in this context, is not intended to require the "high degree of power connoted by…being in a position substantially to control a market, or…the power to determine the prices of a substantial part of the goods in a market" [41]-[42]; · the new s 46(3), which provides a guide to the way in which market power is to be determined, requires that consideration be given to the extent to which the conduct of a firm is or is not constrained by other participants in the market, potential entrants to the market, suppliers or purchasers". [43]; · under the lower threshold "more than one firm may have a 'substantial degree of power' in a particular market" [45]. 191 The Explanatory Memorandum acknowledged at [45] that moving from a dominant or controlling degree of market power criterion to a substantial degree of market power criterion necessarily resulted in the section applying to firms that had a lesser degree of independence from the constraints of competition, and that, consequently, more than one firm may have a "substantial degree of power" in a market. 192 Lockhart and Gummow JJ observed in Eastern Express Pty Ltd v General Newspaper Pty Ltd (1992) 35 FCR 43 ("Eastern Express") at 62-63: "Market power is concerned with power which enables a corporation to behave independently of competition and of the competitive forces in a relevant market. The primary consideration in determining market power must be taken to be whether there are barriers to entry into the relevant market. This is the fundamental point made in Queensland Wire; see also Arnotts (at 336, 339) and Dowling (at 137-138). To what extent is it rational or possible for new entrants to enter the market in this case? That is the primary question in considering whether each of the respondents has a substantial degree of market power. Other factors to be taken into account in defining and identifying market power are referred to in the judgment in Queensland Wire, in particular per Mason CJ and Wilson J (at 188-190), namely: · 'the ability of a firm to raise prices above the supply cost without rivals taking away customers in due time, supply cost being the minimum cost an efficient firm would incur in producing the product'; · 'the extent to which the conduct of [any of the respondents] in that market is constrained by the conduct of…competitors, or potential competitors…' (s 46(3)); · Market share of each respondent must be examined but this alone is generally not determinative of market power as 'the relative effect of percentage command of a market varies with the setting in which that factor is placed' (per Mason CJ and Wilson J when adopting the language of Reed in United States v Columbia Steel Co (supra)); · The presence of vertical integration is another factor, but its presence does not necessarily mean that a substantial degree of power exists. … For a corporation to have a substantial degree of market power it must have a considerable or large degree of such power. The difficulty lies not in defining the word 'substantial' but in applying the concept of a substantial degree of market power to the circumstances of each case and in identifying whether the requisite degree of market power exists. This is a relative concept." 193 It is in the above context that the approach of the primary judge to predatory pricing that is unlawful under s 46(1) must be considered. The background, detailed facts and contentions of the parties are set out in the reasons for judgment of Beaumont J and Finkelstein J and need not be repeated. For the sake of convenience I will use the same abbreviations in this judgment as their Honours have used. 194 At the outset the primary judge accepted at [159] that it would be "an error to translate into the operation of s 46 the United States decisions, dealing with 'predatory pricing' at the expense of an independent examination of the Australian legislation as it applies to each case" (see Eastern Express at 71-72). However, his Honour at [166] agreed with the following analysis of senior counsel for BBM as to how predatory pricing would contravene s 46:

"A firm with a substantial degree of market power can move above the market price and not suffer a significant diminution in sales. If it chooses to sell below market price, or at a loss, or below avoidable cost, there are two possibilities: (i) legitimate non-proscribed business purpose or (ii) anti-competitive proscribed purpose. It will be anti-competitive if the firm has engaged in the conduct so that competitors will exit the market so that in due course it will more readily enjoy the advantages of market power and recoup its losses. Such conduct is taking advantage of power because only the firm with market power can elect to price lower knowing it is a worthwhile outlay. It is worthwhile incurring those losses because the firm can recoup them later."

195 In explaining why selling below avoidable cost without the prospect of recoupment would not constitute predatory pricing his Honour at [172]-[173] stated:

"…I do not agree that financial strength necessarily equates to a substantial degree of market power or that spending a lot of money necessarily equates to taking advantage of such power.

This issue is really another aspect of the concept of predatory pricing and its place within the framework of s 46. To recapitulate, selling below cost plus recoupment by supra-competitive pricing equals predatory pricing. Absent the second element, or at least the hope or expectation thereof, there is no more than ruthless competitive conduct, something which the TPA does not forbid, but rather promotes."

196 However adaptable the primary judge's criteria may have been to s 46, as originally enacted, in a practical sense the criteria would necessarily limit predatory pricing under s 46 to a firm that is a monopolist or dominant in a market. This is because a firm in a market in which more than one firm has a substantial degree of power is unlikely to ever have the capacity to recoup its losses by subsequently extracting supra competitive or monopoly prices, assuming the absence of complicity. Thus, his Honour's test is based upon misuse of monopoly power rather than upon misuse of a substantial degree of market power. The test would render nugatory the lowering of the s 46 threshold by the 1986 amendments in respect of predatory pricing cases, which were clearly intended to fall within s 46 in its amended form (see Explanatory Memorandum at [53] and the Second Reading Speech at 1626). The significance of the lowered threshold was not required to be explored by the High Court in Queensland Wire Industries Proprietary Limited v The Broken Hill Proprietary Company Limited (1989) 167 CLR 177 ("Queensland Wire") as the conduct in question was held to be in breach of s 46 both before and after the 1986 amendments. 197 Further, as s 46 expressly specifies each of the requisite elements of misuse of market power, including the proscribed purposes which lie at the heart of the offence, there is no need to superimpose upon those requirements the further requirements of below cost pricing or recoupment. If a firm with a substantial degree of power in a market fixes its prices for the purpose of achieving any of the purposes proscribed by s 46 and the pricing constitutes taking advantage of that power, that is all that is necessary to establish a contravention of s 46. In my view the primary judge was in error in adopting below cost pricing and recoupment as necessary elements of unlawful predatory pricing under s 46. 198 It does not follow that the extent to which below cost pricing has occurred, or the extent to which some recoupment might be anticipated, are irrelevant to s 46. For example, predatory pricing with "a dangerous probability" of recoupment (see Brooke Group, Ltd v Brown & Williamson Tobacco Corp 509 US 209 (1993) at 224 for a proscribed purpose will be an example of a breach of s 46 resulting from persistent below cost pricing. Further, the extent of below cost pricing and the likelihood of recoupment are relevant circumstances to be taken into account in determining whether a proscribed purpose may be inferred (see s 46(7)) and, as I later explain, can also be relevant to the question of whether there has been a taking advantage of market power by a firm having a substantial degree of such power. 199 I turn now to the question of what is required for predatory pricing to contravene s 46. 200 The composite question under s 46(1) is whether a firm with a substantial degree of market power has used that power for a proscribed purpose: see Queensland Wire at 191 per Mason and Wilson JJ. Also, as was pointed out at [36] of the Explanatory Memorandum, s 46(1) is to be construed "as a single provision even if particular words or expressions need to be looked at separately in the first instance". 201 The first of the expressions that needs to be looked at separately is the relevant market. For the reasons given by Beaumont J and by Finkelstein J, I am also of the view that the primary judge erred in concluding that the relevant product market was the wholesale market for walling products. In my view the evidence establishes that the products that were in close competition with each other, and for which there was strong demand and supply side substitution, or put another way, a relatively high cross-elasticity of demand and of supply, were concrete masonry products. 202 The very general evidence relied upon by the primary judge did not, in my opinion, establish a sufficiently close substitution between walling products to warrant the conclusion that they all compete in the same market. Although the primary judge said at [122] that there was "abundant evidence of actual substitution, rising and falling as factors such as price, labour costs, aesthetics and building fashions waxed and waned" he did not outline in any detail the precise nature and extent of the substitutability he said was established by the evidence. In particular, his Honour did not state whether the actual or potential competition between the walling products he was considering was sufficiently "close" to conclude they were all competing in the same market: see Queensland Wire at 195 per Deane J and Re Queensland Co-Operative Milling Association Ltd (1976) 25 FLR 169 at 190. His Honour also appeared to have placed undue emphasis on function, in preference to the strength of demand and supply side substitution, in reaching his conclusion: see Queensland Co-Operative Milling Association Ltd at 190. For example, little consideration was given by the primary judge to whether there was any significant supply side substitution. Other than in respect of concrete masonry products (for which there was strong substitutability) there was little evidence of significant supply side substitution between walling products. 203 Accordingly, I agree that the relevant market in the present matter was the wholesale market for the sale of concrete masonry products and that the geographic dimension of the market was Melbourne. 204 The remaining question is whether BBM's pricing strategy between April 1994 and October 1996, the subject of the ACCC's claims, constituted a misuse by BBM of a substantial degree of market power for a purpose proscribed by s 46. At the outset it is necessary to briefly summarise certain evidence concerning the price war in the Melbourne market for concrete masonry products between 1993 and 1996. 205 When the price war commenced in mid 1993 the major competitors in the relevant market were BBM, Besser Pioneer Pty Ltd ("Pioneer"), Rocla and Budget. BBM and Pioneer were substantial companies and each was part of a national, vertically integrated building products group. Rocla was also a member of a national group but, by mid 1993, it was considering whether it should abandon the Victorian market because of concerns about the firm's profitability in the depressed economic conditions in that market. 206 C & M operated as a Bendigo concrete masonry product supplier. In pursuance of its decision to enter the Melbourne market, in June 1992 C & M commenced construction of a modern and highly efficient plant at Campbellfield, near Melbourne, with the intention that the plant would supply products to that market. C & M commenced production of concrete bricks and pavers at the plant on a trial basis in November 1993, and commenced full production in February 1994. As a result of Boral's pricing strategies C & M deferred production of concrete blocks at the plant until much later. 207 After the commencement of its price war in 1993, BBM knowingly and persistently sold important parts of its concrete masonry product range at prices that were below avoidable cost. In doing so, BBM rebuilt its market share from approximately 18% to more than 30% within twelve months and aimed, by further aggressive pricing, at building its share to 50% after the upgrade of the Deer Park plant. The Review and Update of its Strategic Business Plan prepared in October 1993 shows that BBM believed its market share was "35 per cent and growing" and that its price strategy was bearing fruit. The Update stated that Budget and C & M appear to be in severe financial difficulty and Rocla and Pioneer are "reeling" from BBM's assault on the market. 208 If BBM's purpose, in engaging in the price war the subject of ACCC's claim, had been the rebuilding and extension of its market share in order to become profitable, BBM would not have engaged in the price war for a proscribed purpose. However, the primary judge did not accept BBM's submissions on purpose. His Honour, giving examples relating to the elimination or damaging of competitors in the Melbourne market (Rocla, Budget and C & M), stated at [194] that "there is sufficient evidence that [BBM acted with] one or more of the proscribed purposes". Understandably, the primary judge preferred the plain meaning of statements made in BBM's contemporaneous documentation to the subsequent explanations proffered in evidence by its witnesses. 209 His Honour also indicated that "there is more material to the same effect" as the examples he gave. In that regard there was evidence that executives of BBM believed that if BBM was able to drive competitors out of the market (in particular, Rocla, C & M and Budget), profits would return to "normal", as Pioneer was not expected to prevent prices rising to, and remaining at, profitable levels. There was also evidence that C & M was viewed by BBM "as a major frightening threat" and an instruction was given to "[k]nock off C & M at any price". The evidence shows that BBM believed that a rationalisation of the market with the exit of players such as Budget and C & M, whose access to financial resources was less than that of the major players, would return "stability" to the market. It also shows that BBM believed that "[a] good level of profitability and volume is possible with three operators in the Melbourne market but beyond this number chaos is inevitable". Other documents reveal that BBM wanted to "drive at least one competitor out of the market" and that its strategy was "to reduce the number of masonry manufacturers in Victoria". 210 Although BBM sought to challenge the finding of the primary judge on purpose there is more than ample evidence to support it and no error on the part of his Honour has been demonstrated by BBM. 211 The evidence accepted by the primary judge establishes that BBM's purpose was to drive rivals, especially Rocla, Budget and C & M out of the Melbourne market, as well as to prevent C & M from gaining a foothold in that market. 212 BBM's internal reports acknowledge that it successfully achieved its objective in respect of Budget and Rocla. By August 1995 the continuing low prices and declining demand led Rocla to shut down its concrete masonry operations altogether. By June 1996 Budget's continuing losses, caused in large part by BBM's aggressive pricing, also forced it to close down. 213 BBM almost achieved its objective in respect of C & M. As BBM's price war was directed primarily at concrete blocks, and to a lesser extent concrete bricks and pavers, C & M was able to survive by confining its operations to the manufacture and sale of concrete bricks and pavers and by obtaining extensive external financing to enable it to continue trading. 214 In addition to its price war BBM commenced the upgrade of its Deer Park plant in late 1994 and completed the upgrade in 1996. The upgrade was designed to improve BBM's production efficiency and to substantially increase its production capacity in an oversupplied market during a period of declining demand. The context in which the decision to increase capacity was made is disclosed in BBM's Strategic Business Plan prepared in March 1995 which, relevantly, stated: "From a long term view this development presents the opportunity to break out of the cycle which has prevailed in Victoria over many years. Boral Masonry needs the capacity to supply the market through highs & lows (at a high market share 40%+) to remove the ability of minor players to survive when the market turns up thus allowing them to play another day always at the expense of gross margins and market share. The coup-de-grace could have been delivered to 2 minor players in 1994 had Boral had sufficient productive capacity. … At the present time no Victorian masonry manufacturer is believed to be trading profitably. Because we have reached the limit of productive capacity we have had to reduce the level of discounting which we had been using to build market share and weaken the opposition. Our projections are that the market will downturn slightly in 95/96 & 96/97 and then recover strongly. To take advantage of the downturn which will put pricing and volume pressure on the market prior to the recovery is the rationale for additional production capacity. When the market turns down our volume capability will enable us to apply pressure to our competition. Feedback from the market indicates that C&M and Budget are awed at the prospect of Boral doubling its capacity. This is vindicated by recent evidence of vicious price cutting and intense customer targeting by C&M including attempted exclusivity supply arrangements. In addition we believe that Budget is in a precarious financial position only alleviated by our recent decision to increase prices and [Pioneer] and Rocla have tenuous commitment to the Victoria market…" 215 BBM ensured that its plans for increased capacity were made known to competitors in order to signal BBM's strength and long term commitment to remaining in the market. Plainly, the signal also demonstrated BBM's determination to continue with its price war at the expense of its rivals, irrespective of the losses it was incurring in doing so. 216 BBM's upgrade was intended to, and did, place further pressure on its competitors. It is not surprising that the market feedback to BBM was that two of its targets, Budget and C & M were "awed at the prospect of Boral doubling its capacity". A BBM report dated May 1995 stated that "Rocla [is] panic stricken at our intention to double capacity". 217 BBM's ability to persist in its price war was due to its financial and production capacity and because of the vertical integration within the Boral group that enabled Boral Ltd, the ultimate holding company, to make a net profit out of concrete masonry products during the relevant period notwithstanding the losses incurred by BBM (which acquired raw materials from the group at arms length prices) in conducting the price war. 218 Further, as explained above, an objective of BBM's price war was to rationalise the Melbourne market so that market stability and profits would return to "normal". Importantly, BBM believed that its major competitor, Pioneer, would not prevent prices rising to, and remaining at, profitable levels after the price war had finished. While the expected long term benefits for BBM could not recoup its losses by monopoly profits, it is clear that it saw higher prices and better profitability as benefits that would flow from achieving its objective of "rationalising" the Melbourne market. Thus, BBM elected to price lower in the expectation that it would be a worthwhile outlay as there would be some recoupment later by reason of higher prices and better profitability, although this recoupment would not amount to a monopoly rent. It is significant that BBM, which operated a relatively inefficient concrete block making plant, expected prices and profits to rise after the elimination of some of its rivals. That indicates that better prices and profits were expected than were able to be extracted by BBM in a highly competitive market. 219 The "power" used by BBM to conduct its price war by engaging in below cost pricing to exclude competition, included four inter-related elements: · BBM's financial and production capacity to persistently engage in its price war by selling at below avoidable cost to eliminate rivals over a sustained period, and in doing so, to more than double its market share; · the upgrade of BBM's Deer Park plant to a capacity in excess of its requirements and the pressure that exerted on its rivals; · BBM's capacity within a vertically integrated group to persist in selling its important products below avoidable cost while the group continued to make a net profit from BBM's activities; · BBM's election to price lower in the expectation that it was a worthwhile outlay as there would be some recoupment later by reason of better prices and profitability than were able to be achieved in a highly competitive market. 220 On the basis of the findings of the primary judge and the evidence upon which those findings were based, it is plain that BBM's power was used for the purpose of eliminating or substantially damaging BBM's competitors, Rocla, Budget and C & M, and also to prevent C & M gaining a foothold (which can be treated as equivalent to "entry") in the Melbourne market for concrete masonry products. Thus the purposes for BBM's exclusionary conduct are proscribed purposes (s 46(1)(a) and 46(1)(b)). 221 But, was the power used by BBM "market power" and, if so, was that market power "substantial"? 222 Where, as in the present case, a firm's ability to expel rivals from the market or prevent a rival from entering that market is relied upon, the existence of its market power cannot be determined independently of the exclusionary conduct, which can itself indicate market power. As was stated by Dawson J in Queensland Wire (at 200): "…market power has aspects other than influence upon the market price. It may be manifested by practices directed at excluding competition such as exclusive dealing, tying arrangements, predatory pricing or refusal to deal. The ability to engage persistently in these practices may be as indicative of market power as the ability to influence prices. Thus Kaysen and Turner define market power as follows: 'A firm possesses market power when it can behave persistently in a manner different from the behaviour that a competitive market would enforce on a firm facing otherwise similar cost and demand conditions. (Kaysen and Turner, Antitrust Policy (1959), p.75).'" 223 Although Dawson J added that "[m]arket power is thus the advantage that flows from monopoly or near monopoly…" that observation must be understood in context. Queensland Wire was concerned with claims against BHP, which was found to have acted in breach of s 46 in both its pre 1986 form (which applied to the claim for damages) and in its post 1986 form (which applied to the claim for injunctive relief). 224 BBM's ability to persistently engage in predatory pricing to exclude competition is an indication of its market power. However, it does not follow that that market power is substantial. In order to make that evaluation it is necessary to consider the matters set out in s 46(3) and the other matters referred to in Eastern Express (at 62-63) in the context of the particular circumstances of the present case. 225 On the question of barrier to entry, during the price war it was possible, but it would not have been rational, for a new entrant to enter the market. C & M's ability to enter the Melbourne market with an efficient state-of-the-art plant at a reasonable capital cost demonstrated that it was not difficult to enter the market. Thus, the structural barrier to entry was low. However, it was probably not rational to enter the market during the price war as the market had substantial excess capacity in a period of declining demand, with the major national competitors (Boral and Pioneer) apparently committed to staying in the market and maintaining or increasing market share by selling, where necessary, at below cost prices. Thus, at least during the price war there was a dynamic or strategic barrier to entry which gave at least the major participants in the market some market power. The dynamic barrier arises as a result of the prevailing economic circumstances in the market, including a potential entrant's disincentive to enter because of the presence, advantages and pricing strategies being persisted in by the major incumbents. In considering the degree of market power, rather than whether there is monopoly power, I am satisfied that a dynamic or strategic barrier to entry is a relevant factor. 226 BBM argued that pricing below avoidable cost during the price war showed only that it had financial, rather than market, power. BBM also argued that its conduct was constrained by the conduct of its competitors and, in particular, Pioneer. However, the arguments understate the true situation. As stated above, indications of BBM's market power were its capacity to persistently drive down and maintain prices at below avoidable cost to drive rivals out of the market; an expectation of some recoupment by reason of higher prices and better profitability with fewer rivals; a capacity to supply the increased market share; placing pressure on rivals by increasing capacity to a level greater than needed; and doing so in circumstances where a net profit was still is being made by the group. 227 When the above matters, which are closely related to or form part of BBM's exclusionary conduct, are considered cumulatively it is clear that to a significant extent BBM was able to behave independently of competition and of the competitive forces in the market. Each of the elements of BBM's exclusionary conduct demonstrate that during the relevant period it persistently behaved in a manner that was significantly different from the behaviour that a competitive market would enforce on a firm facing otherwise similar cost and demand conditions. The factors to which I have referred indicate that during the relevant period BBM's market power was substantial. 228 Exclusionary conduct can also confirm the substantiality of market power in the present case. In Queensland Wire, in explaining why BHP's refusal to supply Y-bar otherwise than at an unrealistic price for the purpose of preventing Queensland Wire from competing with it was a misuse of substantial market power, Deane J said of BHP's purpose (at 197-198): "That purpose could only be, and has only been, achieved by such a refusal of supply by virtue of B.H.P.'s substantial power in all sections of the Australian steel market as the dominant supplier of steel and steel products. In refusing supply in order to achieve that purpose, B.H.P. has clearly taken advantage of that substantial power in that market." 229 In the particular circumstances of the present case, BBM's purpose of preventing competition by eliminating or substantially damaging Rocla, Budget and C & M, and of preventing C & M from gaining a foothold in the Melbourne market for concrete masonry products, was only achievable by use of market power that was substantial, in the sense of being considerable or large. The facts of the present case establish that BBM was capable of achieving those objectives. In fact, BBM achieved its objectives in respect of Budget and Rocla and nearly achieved its objectives in respect of C & M. Thus, the use of BBM's market power both evidences and constitutes a use, and therefore taking advantage of, substantial market power. 230 The primary judge expressed the view (at [155] of his reasons) that BBM did not have power to behave independently of competition and of competitive forces. However, his Honour's approach to market power appears to assume that only a monopolist, a near monopolist or a dominant firm in a market can have market power as it is only such firms that can behave independently of competitive forces and thereby "win supra-competitive or monopoly profits" (see for example [139] and [154] of his Honour's reasons). The same problem beset his Honour's evaluation of the substantiality of BBM's market power which is, of course, a relative concept. The issue under s 46(1) is not necessarily one of independence of market forces; rather, it is one of the relative independence of such forces. As explained earlier, his Honour's approach does not recognise, and would render nugatory, the lowered threshold resulting from the 1986 amendments. 231 My conclusions are consistent with the objectives sought to be achieved by the 1986 amendments. In that regard, the Explanatory Memorandum stated at [49]: "[T]he corporation is able, by reason of its market power, to engage more readily or effectively in conduct directed to one or other of the objectives in paragraphs [46(1)] (a), (b) and (c). It is better able, by reason of its market power, to engage in that conduct. Its market power gives it leverage which it is able to exploit and this power is deployed so as to 'take advantage of' the relative weakness of other participants or potential participants in the market…" 232 BBM's exploitation of the weaknesses of the other participants in the market, apart from Pioneer, was intended to secure their elimination from the market in order to restore stability and "normal" profits, thereby undermining competition: cf Queensland Wire at 191. 233 Thus, I agree with Beaumont J and with Finkelstein J that BBM had substantial power in the concrete masonry product market and that it misused that power for a proscribed purpose when it engaged in its predatory pricing scheme between 1994 and 1996. I also agree with the orders proposed by their Honours. 234 I acknowledge that the above conclusions, and the reasoning that sustains them, may not sit comfortably with the principles that have provided the underpinning for the European and United States case law on predatory pricing. However, the departure from those principles in the Australian context does not arise as a result of their rejection by the Court. Rather, it results from the 1986 amendments which, as stated in the Second Reading speech, lowered the s 46 threshold to "ensure that small businesses are given a measure of protection from the predatory actions of powerful competitors" who include "major participants in an oligopolistic market and in some cases…a leading firm in a less concentrated market". I certify that the preceding fifty (50) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Merkel.

ON APPEAL FROM A SINGLE JUDGE OF THE FEDERAL COURT OF AUSTRALIA

BETWEEN: AUSTRALIAN COMPETITION AND CONSUMER COMMISSION

FINKELSTEIN J: 235 The Australian Competition and Consumer Commission charges Boral Besser Masonry Ltd ("BBM") with having a substantial degree of power in the wholesale market for the supply of concrete masonry products, and with misusing that power by pursuing a predatory pricing scheme to eliminate or substantially damage competitors in that market, especially Rocla Pavers and Masonry, a division of Amatek Ltd ("Rocla") and Budget Bricks & Pavers Pty Ltd ("Budget"), and to prevent the entry of C & M Bricks Melb Pty Ltd and Eramosa Pty Ltd (collectively "C & M") into the market. 236 It is generally accepted that a competitive market produces two desirable results: production efficiency and the efficient allocation of resources. Traditional economic modelling holds that a firm which is in a competitive market will seek to maximise profit. In a market that is in long-run equilibrium under competition the marginal cost of goods is equal to price, that is supra-normal profits are absent, and resources are employed at maximum productive efficiency: F M Scherer & D Ross Industrial Market Structure and Economic Performance (3rd ed 1990) ch 2. The Italian economist, Vilfredo Pareto, said there is allocation efficiency when it is not possible through further reallocations to make one person better off without making someone else worse off, and that there is efficiency in production if no further reallocation would permit more of one good to be produced without necessarily reducing the output of some other good. 237 Part IV of the Trade Practices Act 1974 (Cth) (now comprising ss 45 to 51AAA) was enacted to protect competition in Australian markets. It achieves that object by outlawing what is considered as anti-competitive conduct. This case is concerned with s 46, which prohibits a corporation that has a substantial degree of power in a market from taking advantage of that power for certain purposes. The section does not specify what particular behaviour is prohibited. It is clear, however, that predatory pricing, among other predatory and exclusionary conduct, is forbidden. On the second reading of the Trade Practices Revision Bill 1986, which introduced the present form of the section, the Attorney-General said: "Section 46 in its proposed form, which will be described as misuse of market power rather than monopolisation, is not aimed at size or at competitive behaviour as such of strong businesses. What is being aimed at is the misuse by a business of its market power. Examples of misuse of market power may include in certain circumstances, predatory pricing or refusal to supply." (see Representatives Hansard, 19 March 1986, at p 1626) The Attorney-General did not elaborate on what was meant by "predatory pricing". It is to this issue that I now turn. 238 Predation in a market is a concept that has been developed largely by economists concerned with industrial organisation, not by lawyers. It is under the influence of economists that the courts have strived to discover what constitutes predatory pricing. The trial judge produced a definition: "Selling below cost plus recoupment [or the hope or expectation thereof] by supra competitive pricing equals predatory pricing." Was he correct? To answer this question, it is convenient first to consider other definitions of predatory pricing. 239 Professor Hay, the economist called by BBM, has defined predatory pricing as "pricing behaviour by a dominant firm that adversely affects competition either by injuring existing rivals or deterring new entry." This is not the definition that he gave in evidence. It appears in an article he wrote in 1982 entitled "The Economics of Predatory Pricing" published in 51 Antitrust Law Journal 361 at 362. It is a useful definition to which I will return. 240 A well-known definition of predatory pricing is that given by Professor (later Justice) Bork in his influential text The Antitrust Paradox (1978) at p 144: "[A] firm's deliberate aggression against one or more rivals through the employment of business practices that would not be considered profit maximizing except for the expectation either that (1) rivals will be driven from the market, leaving the predator with a market share sufficient to command monopoly profits, or (2) rivals will be chastened sufficiently to abandon competitive behavior the predator finds inconvenient or threatening." 241 On these views predatory pricing is a strategy to drive a rival out of the market or to deter the entry of a potential rival. That is apparent from the two definitions which characterise predatory pricing by reference to its object. They do not, however, provide any real assistance in enabling a judge to distinguish between price cutting that is predatory and price cutting that is no more than an aspect of competitive conduct between rivals, or potential rivals. Antitrust law generally, and s 46 in particular, should not deter every reduction in the price of goods. So it is still necessary to determine when price cutting is lawful and when it is not. 242 In the United States this task has been undertaken by economists and academic lawyers with an understanding of economics. Their influence on the judiciary has been enormous. Economics rather than law dominate antitrust litigation. Let me explain their influence, without attempting to find a cause. 243 Before the 1960s, predatory pricing had not received much judicial attention: W J Leibler "Whither Predatory Pricing? From Areeda and Turner to Matsushita" 61 Notre Dame Law Review 1052 (1986). In the last thirty years or so there has been a significant increase in litigation in this area and a staggering volume of economic literature has been published where almost countless, often contradictory, views on the topic have been expressed. For the purposes of this appeal, it is necessary to discuss some of these developments. First, I should briefly explain the statutory background. 244 The Sherman Act (15 USC ss 1 to 7) enacted in 1890, the Clayton Act (15 USC ss 12 to 27) enacted in 1914 and the Robinson-Patman Act, which amended the Clayton Act in 1936, all serve the purpose of protecting competition. Section 2 of the Sherman Act provides that "[e]very person who shall monopolize, or attempt to monopolize, … any part of the trade or commerce among the several States, … shall be deemed guilty of a felony …". The purpose of the section is to prohibit monopolisation and attempted monopolisation: Standard Oil Company of New Jersey v United States 221 US 1, 50 (1910). The Clayton Act, as amended, prohibits discrimination "[i]n price between different purchasers of commodities of like grade and quality, … where the effect of such discrimination may be substantially to lessen competition or tend to create a monopoly…": 15 USC s 13(a). 245 There are differences in approach between the sections. Under the Sherman Act, a court must determine whether the defendant has monopolised or attempted to monopolise a defined market. The emphasis is on structural competitiveness: J F Brodley & G A Hay, "Predatory Pricing: Competing Economic Theories and the Evolution of Legal Standards" 66 Cornell Law Review 738, 766 (1981). On the other hand, under the Robinson-Patman Act, a court will focus on unfairness and determine whether the defendant's conduct has injured competition at the defendant's level: Brodley & Hay at 766, fn 82. 246 Before 1975, courts had not formulated a precise definition of predatory pricing. Nevertheless, two elements had to be established. First, goods had to be sold at below their competitive price: Story Parchment Co v Paterson Parchment Paper Co 282 US 555, 561 (1931) where goods were sold below the "point of fair profit"; National Dairy Products Corporation v United States 350 F2d 321, 327-328 (8th Cir 1965) (reversed on other grounds 384 US 883 (1966)) where goods were sold at "unreasonably low prices". Second, it was necessary to show "predatory intent". In this regard, the leading case was Utah Pie Co v Continental Bakery Co 386 US 685 (1967). A local frozen fruit pie manufacturer brought suit against three larger national pie manufacturers, asserting that the defendants had joined in predatory pricing schemes to drive the plaintiff out of business and injure competition. The single issue before the Supreme Court was "whether the evidence against each of the respondents was sufficient to support a finding of probable injury to competition within the meaning of s 2(a) [of the Sherman Act]": 386 US at 688. In this regard, the court focused on the defendant's "predatory intent" to injure Utah Pie: 386 US at 696, fn 12. According to the court, predatory intent could be inferred from sales below cost, although there was no mention of the cost base. The court held that, according to the evidence, the jury was entitled to conclude that at least one defendant had contravened the Act. This was in circumstances where the frozen pie market had expanded greatly during the period under examination and the plaintiff had not only retained its leading position in that market but had expanded its absolute sales volume. 247 Utah Pie Co was roundly criticised by both economists and lawyers. Professor Bork wrote that "[t]here is no economic theory worthy of the name that could find an injury to competition on the facts of the case": R Bork, The Antitrust Paradox (1978) p 387. The court erred, according to Professor Bork, because it failed to analyse market characteristics. Professor (now Chief Judge) Posner, commented that "[b]y linking exclusionary intent and geographical price discrimination, while ignoring the relationship between price and long-run marginal cost in the relevant market, the Supreme Court reached an anticompetitive result in Utah Pie Co v Continental Baking Co": R A Posner Antitrust Law - An Economic Perspective (1976) pp 193-194. Professor (now Judge) Easterbrook said that "the history of antitrust law is filled with decisions that now seem blunders." In 1989 his Honour described Utah Pie Co, while not within that category of precedent "that is dead but unburied", as a case "that is living on borrowed time": A A Poultry Farms, Inc v Rose Acre Farms, Inc 881 F2d 1396, 1405 (7th Cir 1989). 248 In 1975, Professors P Areeda and D Turner of Harvard University published an article entitled "Predatory Pricing and Related Practices Under Section 2 of the Sherman Act" 88 Harvard Law Review 697 (1975). It is one of the most influential pieces ever written on predatory pricing. In their article, Areeda and Turner criticised judicial standards for predatory pricing such as "ruinous competition" (Porto Rican American Tobacco Co of Porto Rico v American Tobacco Co 30 F2d 234 (2d Cir 1929), cert denied 279 US 858 (1929)) and predatory intent. They formulated a test that determined when predatory pricing existed, based on the relationship between the cost of producing goods and the price at which those goods are sold. Professors Areeda and Turner pointed out that economic theory holds that a profit-maximising firm (economic theory presumes that all firms seek to maximise profit) will attempt to maximise profits or minimise losses in the short term. For a monopolist that point would be where marginal cost equals marginal revenue. Marginal cost is the increase in total costs resulting from the production of an additional unit of output. In a competitive market, a price that is equal to marginal cost represents an efficient allocation of resources. Accordingly, Areeda and Turner argued that predatory pricing would exist where a firm set its price below its anticipated marginal cost. They recognised, however, that marginal cost, being an economic and not an accounting concept, would be difficult to ascertain from a firm's records. Accordingly, they proposed that a firm's average variable cost be used as a surrogate for marginal cost. The costs that a firm incurs are either fixed or variable. Fixed costs are those that are incurred regardless of the level of production, eg, rent, the cost of plant and machinery, and taxes. Variable costs will increase with output, eg, materials and direct labour costs. The average variable costs of a firm is the sum of its variable costs divided by output. 249 Although there was a good deal of debate about the appropriate price-cost relation (eg, F M Scherer "Predatory Pricing and the Sherman Act: A Comment" 89 Harvard Law Review 869 (1976); O E Williamson "Predatory Pricing: A Strategic and Welfare Analysis" 87 Yale Law Journal 284 (1977)) the Areeda-Turner test was adopted almost immediately by a number of federal circuit courts, particularly the second and fifth circuits. On the other hand, other circuits focused not on average variable costs but on average total costs as the level of price below which predatory pricing would be inferred. The Areeda-Turner test was rejected by some circuits because it did not place any weight on predatory intent. For a comprehensive survey of the case law, see B O Bruckman (ed) "Predatory Pricing Law - a Circuit-by-Circuit Survey" (1995) published by the Antitrust Law Section of the American Bar Association. 250 The Supreme Court had the opportunity to consider whether the Areeda-Turner test, or some other price, would provide the appropriate threshold to determine whether there has been predatory pricing, but has declined to do so. The first occasion was in Matsushita Electric Industrial Co, Ltd v Zenith Radio Corp 475 US 574 (1986). The plaintiffs, manufacturers of television sets in the United States, alleged that the defendants, Japanese television set manufacturers, imported and sold sets at low prices to drive the American firms from the market. The plaintiffs argued that the defendants used their monopoly profits from the Japanese markets to fund the predatory price campaign. The defendants sought summary judgment. The trial judge granted that judgment. This was reversed by the Court of Appeals. The decision of the majority in the Supreme Court was delivered by Powell J. His Honour noted that predatory pricing referred to cases in which a single firm having a dominant share of the relevant market cuts prices in order to force competitors out of the market. He said "[i]n such cases, 'predatory pricing' means pricing below some appropriate measure of cost": 475 US at 585 fn 8. He did not stipulate the appropriate measure. The Supreme Court said much the same in Cargill, Inc v Monfort of Colorado, Inc 479 US 104 at 117 fn 12 (1986) and in Brooke Group, Ltd v Brown & Williamson Tobacco Corp 509 US 209 (1993). 251 It is convenient now to return to the economists and mention the views of those from the so-called Chicago School of modern economics. These economists are not always regarded as in the mainstream of industrial organisation economics. The Nobel Prize-winning economist, George Stigler, referred to them as "that hypothetical kingdom, the Chicago School of Economics", in his essay on Henry Calvert Simons published in 17 Journal of Law and Economics 1 (1974). For a more favourable treatment, see R A Posner "The Chicago School of Antitrust Analysis" 127 University of Pennsylvania Law Review 925 (1979). The members of this school defend monopolies as short-lived and often beneficial. They argue that monopoly power rarely exists, and if it does, it is transient and cannot have important effects, as a matter of economic logic. They contend that a monopoly is merely an embodiment of efficiency. A superior firm will grow larger than others and obtain higher profit rates. 252 Further, these economists assert that price predation is economically irrational: the cost would be substantial and its rewards deferred and problematic. Professor Bork has written that "[u]nsophisticated theories of predation abound, leading to drastic overestimations of its likelihood": Bork at p 144. He says that a rational profit-maximising firm will make an investment in predation only if it can be sure that the future flow of profits will exceed the losses incurred during the predatory price war. Hence there developed the notion of recoupment. It was explained by Professor Easterbrook in his well known article "The Limits of Antitrust" 63 Texas Law Review 1 at 26 (1984): "The logical story of any exclusionary practice is that a firm with market power adopts a strategy to increase its rivals' costs. This strategy is costly to the aggressor too, but it plans to recoup the costs by raising its prices after expelling the rival from the market or scaring the rival out of entering. The aggressor may reduce its price, and rivals must match the cut or lose sales; the aggressor may build a very large plant or introduce new products, making entry less attractive or diminishing the attraction of rivals' products to consumers; the aggressor may buy upstream or downstream suppliers, forcing rivals to search elsewhere for supplies; the list could be extended. These and other strategies are ambiguous. Low prices and large plants may be competitive and beneficial, or they may be exclusionary and harmful. We need a way to distinguish competition from exclusion without penalizing competition. If the practices are exclusionary, they will be profitable only if the aggressor can recoup. If the aggressor cannot, there is no reason for antitrust concern. Either the business losses during the period of aggression will act as the penalty, or the conduct will turn out to be efficient." Because predation is unlikely to be profitable, there is really no need for litigation to deter it, according to Professor Easterbrook (63 Texas Law Review 1 at 29): "The costs of the judicial process - including the costs of errors, which deter beneficial practices - suggest the wisdom of letting the competitive process rather than the courts deal with conduct that does not create profits by reducing competition. If the practice really is anticompetitive and privately unprofitable, it will go away in time. If it persists, the appropriate inference is that it has competitive benefits. We may not yet understand these benefits, but our understanding is not a condition of legality." However, even the Chicago School economists accept that there are some cases where predatory pricing could be successful. This will be when the incumbent could maintain monopoly power long enough to both recoup the predation losses and make additional gains. 253 When members of the Chicago School (Professors Posner, Bork, Easterbrook and others) were appointed to the federal judiciary, their treatment of predatory pricing overtook the Areeda-Turner test. For example, in Matsushita Powell J, after referring to Professor Bork's discussion of predatory pricing, said (at 589): "As this explanation shows, the success of such schemes is inherently uncertain: the short-run loss is definite, but the long-run gain depends on successfully neutralizing the competition. Moreover, it is not enough simply to achieve monopoly power, as monopoly pricing may breed quick entry by new competitors eager to share in the excess profits. The success of any predatory scheme depends on maintaining monopoly power for long enough both to recoup the predator's losses and to harvest some additional gain. Absent some assurance that the hoped-for monopoly will materialize, and that it can be sustained for a significant period of time, '[t]he predator must make a substantial investment with no assurance that it will pay off.' Eastbrook, Predatory Strategies and Counter Strategies 48 U Chi L Rev 263, 268 (1981). For this reason, there is a consensus among commentators that predatory pricing schemes are rarely tried, and even more rarely successful." 254 This decision caused dismay among many commentators. Professors Adams and Brock said that if it was correctly decided it meant that "…if a species of observed behaviour cannot be explained by a theory of economic rationality, we may be reasonably certain that it did not occur": W Adams and D Brock "Predation, 'Rationality', and Judicial Somnambulance" 64 University of Cincinnati Law Review 811 (1996). According to a journalist writing for the Wall Street Journal, the Supreme Court in Matsushita held that the alleged predators "wouldn't, couldn't, and didn't": "Predatory Pricing, RIP" Wall Street Journal, 1 April 1986, p 32. 255 More recently, in Brooke Group, the Supreme Court made it clear that unless there is a "dangerous probability" of recoupment, a predation case will fail. The plaintiff, known by its former name, Liggett, a cigarette manufacturer, brought action alleging that the defendant was engaging in predatory pricing in generic cigarettes. The trial lasted 115 days and the jury found in favour of Liggett, with an award of damages of $148.8 million. The District Court set aside the verdict: Liggett Group, Inc v Brown & Williamson Tobacco Corporation 748 FSupp 344 (1990). The Court of Appeals (964 F2d 335 (4th Cir 1992)) affirmed that decision, holding that because the cigarette market was an oligopoly, recoupment was not possible. The court noted (at 339) that predatory pricing must involve, in addition to below-cost pricing, a reasonable expectation of later realising monopoly profits. The defendant had a 12 per cent share of the market and the court said that no theory could explain how the defendant could attain the necessary monopolistic position. This decision was affirmed by the Supreme Court. Writing for the court, Kennedy J said that in a claim alleging predatory pricing under s 2 of the Sherman Act, it was necessary for the plaintiff to establish two propositions. First, the plaintiff: "must prove that the prices complained of are below an appropriate measure of its rival's costs." (509 US at 222). The second prerequisite: "is a demonstration that the competitor had a reasonable prospect, or, under s 2 of the Sherman Act, a dangerous probability, of recouping its investment in below-cost prices … Recoupment is the ultimate object of an unlawful predatory pricing scheme; it is the means by which a predator profits from predation. Without it, predatory pricing produces lower aggregate prices in the market, and consumer welfare is enhanced. Although unsuccessful predatory pricing may encourage some inefficient substitution toward the product being sold at less than its cost, unsuccessful predation is in general a boon to consumers": 509 US at 224. 256 The recoupment theory is not without its critics. They contend that even on strictly rational grounds, predatory pricing is far more rational and is more likely to occur than the Chicago School is prepared to concede. The points they make include the following. (1) It may be rational to sacrifice present profits in order to preserve the long-term stability of an existing market structure. (2) An aspect of the first point is that it may be rational for a firm to seek to maximise total output, thus fulfilling management's intentions rather than those of the shareholder. (3) The notion that it is irrational to suffer large losses as a result of price predation confuses absolute losses with relative burden. (4) If the long run objective of a predator is to contain or eliminate competition then signalling that it will do so by short-term below-cost pricing can create an effective barrier to entry (as to which see later). (5) Maintenance of market control, stability of an entrenched position and the preservation of an existing power structure may be viewed as reasons of utility. See by way of example the following articles: K Elzinga and D Mills "Trumping the Areeda-Turner Test: The Recoupment Standard in Brooke Group" 62 Antitrust Law Journal 559 (1994); J B Baker "Predatory Pricing After Brooke Group: An Economic Perspective" 62 Antitrust Law Journal 585 (1994); S Beck "Intent as an Element of Predatory Pricing under Section 2 of the Sherman Act" 76 Cornell Law Review 1242 (1991). 257 I can now return to the question whether it is necessary to show "selling below cost plus [the likelihood of] recoupment by supra competitive pricing" for there to be unlawful predatory pricing under s 46. 258 The left side of the equation is comprised of two addends: (1) selling below cost, and (2) the likelihood of being able to recoup the losses incurred by an ability to extract a monopoly rent. The first addend is covered by cases to which I will refer in a moment. At present, I wish to concentrate on the second. 259 One thing that is clear is that there is no universally accepted meaning of predatory pricing. Further, the definition adopted by the trial judge has been advanced by economists whose primary view is that predatory pricing is unlikely to occur because it is irrational and even when it does occur there is no real need for intervention because predatory pricing can only ever be a short term strategy. 260 The effect of accepting the definition that found favour with the trial judge should be considered. As the United States decisions demonstrate, it will be almost impossible to maintain a successful predatory pricing prosecution against a firm other than a monopolist. Although the Supreme Court in Brooke Group paid lip service to the possibility of an oligopolist being liable under s 2 of the Sherman Act, it is tolerably clear that this will not occur unless the oligopolist acts in concert with other firms. 261 It is also necessary to bear in mind the reason why the United States courts have sought to give a precise meaning to the notion of predatory pricing. It was an attempt to provide a standard that could be applied rationally to all circumstances, a "bright line test" that would not depend upon the alleged predator's intent, which was regarded as an unsatisfactory criterion upon which to found liability. 262 The terms of s 46 suggest that adoption of the test developed in the United States would frustrate the objects of the provision. It must also be remembered that in the United States antitrust legislation is concerned with constraining the behaviour of a monopolist. That is not the focus of s 46. Our section is aimed at regulating a firm with a substantial degree of market power, which would include, but not be limited to, a monopolist. While a monopolist may have the ability to extract a monopoly rent and thus recoup its losses, a firm with only a substantial degree of power may never be in that position. Thus, the test proposed by the trial judge will, for all practical purposes, make it impossible to establish a case of a predatory pricing scheme against a firm that is not a monopolist. Moreover, under s 46 there is no need to have recourse to a test such as "selling below cost plus recoupment" because intent is at the heart of the offence. In my view the trial judge was in error in adopting recoupment as an element of predatory pricing. 263 It remains to consider whether below-cost pricing is an essential element of predatory pricing. Here again, the answer must be in the negative. The authorities, such as they are, suggest that below-cost pricing is not a necessary condition for a contravention of s 46. Before turning to the cases, it is convenient to refer to the Explanatory Memorandum that accompanied the Trade Practices Revision Bill 1986 which introduced the current s 46. Paragraph 55 of the Explanatory Memorandum reads: "On the other hand, a corporation which is able to price its goods very competitively by reason, for example, of economies of scale or the acquisition of new efficient production facilities, would not be inhibited from doing so by reason of the fact that it enjoys a substantial degree of market power. By reflecting in its pricing policy its efficiency it would not, without more, be taking advantage of its market power notwithstanding any effect of its pricing on its competitors". 264 That parliament did not intend to circumscribe s 46 by requiring proof that a predator sold goods below a particular measure of cost, is suggested by the cases. Victorian Egg Marketing Board v Parkwood Eggs Pty Ltd (1977-1978) 33 FLR 294 is a case where predatory pricing was found to exist. In considering what level of price should be considered predatory Bowen CJ said (at 303) that he need not resolve: "[w]hether in the ordinary course a monopolist can engage in predatory price-cutting only if the price is below some particular cost, and not where the price set, although it may deter competitors, is one which merely does not maximize the monopolist's profit. It may be that where one can infer the requisite purpose from other evidence, price-cutting may be predatory in the sense referred to and a "taking advantage" of power derived from the substantial control of a market, notwithstanding that it is not below marginal average variable cost and does not result in a loss being incurred." Trade Practices Commission v CSBP & Farmers Ltd (1980-1981) 53 FLR 135 was an unsuccessful claim of predatory pricing. Fisher J said (at 147): "Here where the behaviour of the defendant which is challenged is its reduction in price, I would see this as predatory behaviour if it be proved that the defendant charged an unreasonably low price with the intent to keep [a competitor] out of the urea industry in Western Australia" He added (at 152): "…[C]ounsel was prepared to concede that a subjective element such as purpose or motive must be established. He conceded that it is not sufficient merely to look at the effect of the exercise of the power, but that consideration must be given to what the exercise of the power was directed at." There was no evidence that the defendant had taken advantage of its market power. 265 In Eastern Express Pty Limited v General Newspapers Pty Limited (1991) 30 FCR 385 Wilcox J said (at 407): "Predatory pricing may be established in one of a number of ways: by express admission; by inference from facts other than the extent of the price cuts themselves; or by analysis of the effect of the price cuts, giving rise to an inference as to the purpose behind their adoption." Later his Honour said (at 409): "If there is no loss, it would be difficult to infer a proscribed purpose." On appeal ((1992) 35 FCR 43 at 72) Lockhart and Gummow JJ (with whom Beaumont J generally agreed) said: "No pre-ordained and fixed categories as to the level of pricing or economic theory or practice of costing necessarily control the drawing of that inference [as to proscribed purpose] in any particular case." 266 In my opinion the existence of predatory pricing should not be determined by reference to some precise formula or definition. Predatory pricing is no more than a price set at a level designed to eliminate a competitor or keep a potential competitor from the market. That is the gist of the definition given by Professor Hay that I mentioned earlier in these reasons. It is all that is necessary for the purposes of s 46. In particular, in my view, it does not matter that the price charged might exceed either the average total cost or average variable cost. In the circumstances of a particular case it may nevertheless be a predatory price. 267 This is not to say that it may not be important to determine whether price has been reduced to below average variable cost. On the one hand, if goods are sold at a loss for a sustained period, it might be wrong to hold that an anti-competitive purpose exists. To take one example, incurring losses as a means of putting excess capacity into operation may be justifiable competition, although cut-throat and ruinous. On the other hand, a firm with a substantial degree of market power usually has no interest in setting prices at such a level (that is, at a price where it will necessarily incur a loss) except to eliminate a competitor or to keep a potential competitor out of the market. 268 It is of some interest to note the position in Europe. Under Article 86 of the Treaty of Rome, exclusionary behaviour by a dominant firm is prohibited. Since the decision in AKZO Chemie BV v Commission of the European Communities [1994] ECR I-3359 it is an established principle that below cost pricing by a dominant company is predatory where eliminatory intent is found. The Court of Justice identified as an object of Article 86 the prohibition of a dominant firm from eliminating a competitor and thereby strengthening its position by using methods other than those which come within the scope of competition on the basis of quality. The Court recognised, however, that not all competition by means of price can be regarded as legitimate. In this regard the Court said (at I-3455 to I-3456): "Prices below average variable costs (that is to say, those which vary depending on the quantities produced) by means of which dominant undertaking seeks to eliminate a competitor must be regarded as abusive. A dominant undertaking has no interest in applying such prices except that of eliminating competitors so as to enable it subsequently to raise its prices by taking advantage of its monopolistic position..... Moreover, prices below average total costs, that is to say, fixed costs plus variable costs, but above average variable costs, must be regarded as abusive if they are determined as part of a plan for eliminating a competitor. Such prices can drive from the market undertakings which are perhaps as efficient as the dominant undertaking but which, because of their smaller financial resources, are incapable of withstanding the competition waged against them." See also the decision in Irish Sugar plc v Commission of the European Communities [1999] ECR II-2969. Irish Sugar had a policy of offering selectively low prices to potential customers of rival sugar suppliers. Those prices did not significantly undercut those of its competitors. Nevertheless, the Commission held that Irish Sugar, a dominant firm, had deliberately attempted to shut out competitors. This decision was upheld by the Court of First Instance. 269 I do not agree with the view that there is a cost (eg average variable cost) below which there must be a per se finding of predatory pricing. I would accept, however, that for the purposes of a prosecution under s 46, if a dominant firm persistently prices its goods below average total cost, predatory intent may be inferred, and the inference would be much stronger if the price was set below average variable cost. At least in the latter case it would be for the firm to show that there was a legitimate purpose for its conduct. 270 The trial judge found that BBM did not have the capacity to recoup the losses that it incurred during the price war between the concrete masonry block manufacturers (the details of which I discuss later) by charging non-competitive prices when the battle was over. For that reason alone, the trial judge would have given judgment in its favour. As I have been at pains to demonstrate, the trial judge was in error in his approach to this aspect of the case. It will be necessary later to consider whether there was in fact predatory pricing for a relevant purpose. To deal with that question, and other aspects of the decision under appeal that must be considered, it is necessary to turn to the facts. 271 BBM manufactures concrete masonry products, namely blocks, bricks and pavers. The blocks and bricks are used for walls: walls for houses; walls for factories; walls for multistorey developments; walls for large commercial premises; even walls where once a fence was used. Many other products are used to make walls: eg, steel, glass, plasterboard, wood, concrete slabs (made on site), precast concrete panels (manufactured at a factory) and clay bricks. 272 There was a time when the walls of most houses, factories and commercial premises were constructed from clay bricks. Internal walls might be made from glass, plasterboard, timber or some other light product. By the 1960s concrete masonry blocks had become the favoured material used for external walls of commercial buildings. Concrete blocks and concrete bricks were also used in the construction of houses when it was intended that the wall be painted or bagged; almost all concrete blocks and bricks are grey in colour and unsightly in appearance. 273 In the 1980s many inner-city multistorey residential buildings were being developed. Concrete blocks were used in their construction. By then clay bricks were confined for use mostly in domestic buildings. Concrete masonry blocks did not, however, remain the chosen material for commercial and multistorey buildings. During the building boom of the 1980s brick and block layers began to charge too much for their work. Builders started to look for an alternative product. Precast slabs and tilt-up panels became the preferred product for the construction of factories, warehouses and multi-storey buildings. Precast slabs and tilt-up panels had advantages over other products, including a reduction in the cost of labour and ease of construction. The introduction of this material had a dramatic effect on the sale of masonry blocks. Some estimates are that the sale of concrete blocks fell by 65 to 70 per cent in just a few years. 274 Concrete blocks still had their use. There were some circumstances in which precast concrete or tilt-up panels could not be used. These products do not have the same fire rating as a concrete block. It may not be possible to use tilt-up panels or precast concrete in certain locations or for internal walls. 275 Tilt-up slabs and precast concrete panels remain popular in the construction of warehouse and factories, while blocks are often used for commercial and industrial buildings. Clay bricks are now predominantly used for domestic construction. When external walls can be bagged or rendered, masonry bricks are sometimes used instead of second quality clay bricks. 276 A major recession occurred in the building industry in Victoria in late 1989 or early 1990. It followed on from the collapse of three major financial institutions, Tricontinental Corporation, Pyramid Building Society and Estate Mortgage. Building work almost came to a standstill. The industry did not begin to recover from the effect of the recession until about 1996. 277 At the beginning of the recession there were four main concrete masonry product manufacturers in Melbourne: BBM, Besser Pioneer Pty Ltd ("Pioneer"), Rocla and Budget. BBM accounted for approximately 30 per cent of the sale of concrete masonry products. There is no direct evidence of the share of sales held by the other three manufacturers. However, from the evidence of their respective shares held two years later it can be inferred, on a rough and ready estimate, that Besser Pioneer had held approximately 22 per cent of sales, Rocla approximately 19 per cent and Budget approximately 14 per cent. 278 Over the next two years BBM's share of sales declined dramatically. From a high point of 31 per cent in August 1990 it slipped to 12 per cent by the beginning of 1992 before settling at around 16 to 18 per cent later in the year. BBM attributed its decline over this period to bad management, inefficient plant, poor customer service and a lack of product range. All in all, BBM was operating a very run down business. 279 BBM was not the only manufacturer with inefficient or out-of-date plant. Each of BBM, Rocla and Pioneer used block-making machines manufactured by either Besser or Columbia. This machinery was not as advanced as machines that were available from other European and United States manufacturers. However, BBM's performance was worse than that of its rivals. At least that was the view of the chief general manager of its masonry division, Mr Magnus (Tim) Cormack; a view that was confirmed when BBM made a negative return (of approximately 7 per cent) on capital during the 12 months ended 30 June 1992. 280 BBM could not allow this position to continue. If it was not to close down operations, BBM had to dramatically improve its performance. Mr Cormack knew that two things had to be achieved; a reduction of expenses (that is become more efficient) and an increase in production (that is reduce per unit costs). However, an increase in production required an increase in sales. This was the key. BBM had to recover its share of the sales of masonry products for its business to become profitable. And this required dramatic action. 281 There was a step that could be taken that would produce a dramatic increase in sales. Concrete blocks and concrete bricks are largely generic products. There is little that distinguishes one manufacturer's product from another. There are some exceptions. To attract business some manufacturers did produce concrete bricks of different colours and textures. But in the area where most sales take place, size and colour are uniform. The difference is in price. So, to attract more business BBM decided to reduce its prices. Accordingly, Mr Cormack instructed his general manager, Mr Rawnsley, who was in charge of sales, to beat the price of competitors to win business. Mr Rawnsley was told not to "leave any money on the table" to attract custom. 282 The task of recovering market share proved more difficult than was first anticipated. There was a small masonry block manufacturer, Concrete & Masonry Pty Ltd, in country Victoria. From late 1989 this manufacturer had been supplying paving products to distributors in Melbourne. In mid 1992 the proprietors of this manufacturer established C & M Brick (Melbourne) Pty Ltd to sell concrete masonry products in Melbourne. For this venture C & M purchased a new block making machine (manufactured by Hess) that would produce blocks in larger volumes and at a lower cost than blocks made by a Besser or Columbia machine. With a Hess machine C & M could sell blocks at a profit whereas if its competitors sold them at the same price, they would either break even or incur a loss. 283 The risk to the incumbents of an efficient competitor was evident. Mr Cormack made a note: "Knock off C & M at any price". Mr Rawnsley knew he had to increase market share "at the expense of the other operators particularly Budget and C & M". At that stage no-one was aware that C & M was intending to compete with a Hess machine. When this was discovered in the middle of 1993, the threat to the existing manufacturers was all the more apparent. 284 BBM began its assault on the market in 1992 and continued its attack throughout 1993. (Here I am referring to the market in concrete masonry products. Whether this is a relevant market for the purposes of s 46 is a matter to be considered later). By the end of 1993 BBM had recovered its position to the point where it held approximately 30 per cent of the market. According to a note made by Mr Rawnsley around this time: "Rocla Eureka and Pioneer Besser are known to be reeling from our assault on the market and Rocla within the past few weeks have totally withdrawn from the block market relying instead on their strong paver market. This market is now being heavily targeted with good results." His view was that "[b]oth C & M and Budget will collapse in the near future." 285 Although BBM had recovered its market share, this had come at a cost. To achieve a significant increase in sales over a relatively short period BBM was required to sell concrete blocks (its largest selling product) at below cost prices. At the same time, the price at which BBM was offering to sell concrete blocks caused C & M, a more efficient producer, to defer the commencement of production of concrete blocks. Instead C & M concentrated on the manufacture of concrete bricks, pavers and retaining wall products. 286 Speaking generally, a profit maximising firm will not operate at a loss for an extended period unless it perceives long term benefits. In any event, in the face of efficient competition, a profit maximising firm might think it rational to purchase the competitor's business rather than drive that competitor out of business by below cost pricing. Mr Rawnsley believed that if it acquired C & M, BBM could "achieve 50% of the concrete masonry market by end 1997." He also believed that the acquisition would enable BBM "to drive at least one competitor out of the market." Not surprisingly then BBM made two attempts to acquire the business of C & M. 287 In 1994 BBM offered to purchase the Hess plant from C & M. There was a financial motive for C & M to sell its plant. It was finding it difficult to survive in view of the low price at which it had to sell its products to meet competition. However, it decided not sell the plant. Instead it raised equity capital. With this capital C & M was able to remain in business although its accounts showed that but for an accounting treatment recording depreciation at 1 per cent, it was trading at a loss. In 1996 there were further discussions between BBM and C & M about a possible sale of the C & M business, but without result. 288 Although there had been substantial discounting by BBM since mid 1992, Mr Rawnsley said that "a major price war" between the concrete block manufacturers began in late 1993. BBM says the price war was started when Rocla submitted a very low tender for what was known as the Eastland Shopping Centre project and when Pioneer distributed a price list setting very low prices for its products. What caused the price war is immaterial. In reality it seems to have been no more than a continuation of a state of affairs which had begun when BBM dramatically reduced its prices in 1992 to attract business. This reduction was often matched by competitors who wished to retain their customers. The price war continued for 3 years or so, until 1996 or thereabouts. During the period of the war BBM increased its share of the market substantially by selling concrete blocks below average variable cost. 289 BBM was engaged in the price war not only to obtain or maintain market share. It should be remembered that by 1993 BBM had regained its 30 per cent share of the market. BBM knew there had to be a "shake out" in the market. Not all concrete masonry manufacturers could survive. Mr Rawnsley wanted to "drive at least one competitor out of the market". One method of achieving this objective, in addition to a continuation of the price war, was to increase BBM's capacity to supply masonry products. Not only would an increase in capacity reduce its costs of production (by economies of scale) but giving notice of an intention to increase capacity when the concrete masonry market was already in a state of over-supply would have an obvious effect on competition. BBM decided to upgrade its plant at Deer Park, one of its two plants in Melbourne. Mr Cormack told Mr Rawnsley "to make sure the market knew that it was BBM's intent to upgrade Deer Park. This was to put psychological pressure on our rivals". 290 The upgrade of Deer Park took place in 1996 at a cost of between $3 to $4 million. Mr Cormack, who pressed for the upgrade, believed that the market for blocks would decline for 2 years but that "if the additional capacity was installed then BBM would [nevertheless] attempt to increase its market share even though there was an absolute reduction in the market." 291 It is true that the Deer Park plant was outdated and inefficient, and that sooner or later it would have to be replaced. Nevertheless, it is the timing of the upgrade that is important for this case. Significant capital expenditure was required to be spent in an unprofitable market, and in the expectation that the market would decline further. BBM could not have expected a return on the capital cost of the upgrade for some time. In other words, there would be additional losses incurred as a result of the capital expense incurred, at least in the short term. 292 Most wars have their victors and their vanquished. The concrete masonry products price war was no exception. The first casualty was Rocla. Because of low prices, Rocla decided to discontinue production of bricks and blocks and concentrate efforts on face bricks for domestic buildings and advanced technical products. These were "value added" products at the upper end of the market and offered greater profit margins than concrete blocks. However the decline in demand in 1995 forced Rocla to shut down operations altogether. It was not prepared to operate unprofitably for an extended period. 293 The second casualty was Budget. It only had a small share of masonry product sales, around 5 per cent. Budget had a small number of customers, some of whom had undertaken large construction projects which were sufficient to enable Budget to maintain its market share for a number of years. But the losses it was making in the years 1991 through 1996 could not continue. Those losses were increasing each year, and capital reserves were being depleted. In 1996 it was decided to close the business. By then Budget was hopelessly insolvent and its principal shareholder and director lost not only the business but most of his personal assets, which had been pledged to the company's banker. 294 C & M was not a casualty but it suffered injury. It was forced to confine its operations to the manufacture of concrete bricks and pavers. BBM did not "go after" the concrete brick business to the same extent as it sought to increase its sales in concrete blocks. This is not to suggest that BBM did not substantially reduce its price of concrete bricks to attract business. To return a reasonable profit, bricks had to be sold at $250 per thousand, and at $225 per thousand to cover production costs. BBM sold bricks for as low as $170 per thousand, well below its average total cost or average variable cost of production. It was content to reduce the level of its sales of bricks presumably because it did not wish to increase its losses. 295 BBM did not escape the price war unscathed. While business was won over as a result of tenders offering prices below that of its competitors, the cost to BBM was significant. Losses on the sale of concrete bricks have just been mentioned. BBM also suffered considerable losses on the sale of concrete blocks. The most popular selling item was the block known as '10.01'. Before discounting began, this block was sold for around $0.87. The direct evidence discloses that during the price war, BBM sold this block for as low as $0.39, and that it discounted other blocks by as much as 50 to 60 per cent and perhaps more. 296 Vigorous competition will often harm rivals. The active pursuit of more business, or of increasing market share, will, if the pursuit is successful, prejudice competitors. That is the inevitable consequence of such conduct. Was BBM's intention merely to increase its share of the market so that in due course it could operate a profitable business? That is what BBM contends was its object. The trial judge did not agree. He found that BBM's purpose was to eliminate or substantially damage its competitors (the incumbents) or prevent a person (C & M) entering the market. These are among the purposes that s 46 mentions. 297 The finding on purpose was made largely because of the "smoking gun" documents found during discovery or in reliance on the Commission's statutory right to obtain the production of documents. The finding was made in spite of evidence given by senior executives of BBM, including the authors of the incriminating documents. Those witnesses denied that it was BBM's intention to damage competitors or prevent anyone entering the market. The authors of the incriminating documents gave detailed explanations as to the "true" meaning of, or the "proper interpretation" to be given to, the documents. Their evidence was not accepted. The finding that there was a relevant purpose for the conduct is consistent only with the rejection of the evidence of the witnesses on this issue. It is a finding that in part reflects the opinion of the trial judge on the credit of the witnesses. Although BBM now seeks to challenge the finding, it faces an impossible task. On the basis of authorities such as Jones v Hyde (1989) 63 ALJR 349; 85 ALR 23, Abalos v Australian Postal Commission (1990) 171 CLR 167, Devries v Australian National Railways Commission (1993) 177 CLR 472 and State Rail Authority of New South Wales v Earthline Constructions Pty Ltd (in liq) (1999) 73 ALJR 306; 160 ALR 588, the trial judge's ruling is unassailable. 298 How was BBM able to sustain a loss of revenue, which resulted in actual trading losses, for so many years? Remember that as its share of the sale of masonry products increased so did its losses. That is to say, in a price war the higher the share of sales the larger will be the loss. BBM suffered a significant loss of revenue, in the millions of dollars. BBM's Victorian operations reported operating losses for every month during the period from May 1992 until June 1997. In the four years concluding with the twelve months ended 30 June 1997 its trading losses amounted to at least $1.3 million; some evidence suggests that its trading losses were much higher. Price warfare is a war of attrition. To succeed the victor must have the capital resources to outlast its rivals or be able to inflict disproportionate losses on the victim. BBM had the ability to wage a long term conflict. The company was a member of a vertically integrated group. Related companies produced the fine aggregates, sand and concrete that constituted the raw materials for the manufacture of concrete masonry products. BBM purchased its raw materials from related companies at arm's length prices enabling those companies to return a satisfactory margin on sales. Overall the Boral group of companies returned a profit from the sale of concrete masonry products, although one company in the group, BBM, suffered losses. 299 BBM's conduct in persistently selling at below average variable cost for the purpose of eliminating or damaging its competitors, Rocla and Budget, or preventing the entry of C & M into the market (that is, predatory pricing on any view) will contravene s 46 only if it can be shown that BBM "ha[d] a substantial degree of power in a market [and had taken] advantage of that power for [that] purpose": s 46(1). 300 The first element of the offence is the possession of a substantial degree of power in a market. This makes it necessary to delineate the relevant market. As the definition of "market" in s 4E shows, a market is comprised of those goods or services that are reasonably interchangeable. Section 4E provides: "For the purposes of this Act, unless the contrary intention appears, market means a market in Australia and, when used in relation to any goods or services, includes a market for those goods or services and other goods or services that are substitutable for, or otherwise competitive with, the first-mentioned goods or services." 301 The critical factors to be considered are: (a) what products are sufficiently close substitutes (the relevant product market) and (b) what firms are sufficiently proximate to compete effectively (the relevant geographic market). 302 Defining the product market presents no difficulty when identical goods are involved, assuming that the purchasers or potential purchasers are informed and rational. It is when the products are not the same that difficult issues may arise. Products in a market are defined by describing those products that are sufficiently close substitutes such that if a firm or group of firms tried to raise its prices substantially on any product in that market it or they would promptly lose substantial business to these substitutes: R Pitofsky "New Definitions of Relevant Marketand the Assault on Antitrust" 90 Columbia Law Review 1805, 1810 (1990). In Industrial Market Structure and Economic Performance Professors Scherer and Ross give the following definition of a market (at p 75): "The ideal definition of a market must take into account substitution possibilities in both consumption and production. On the demand side, firms are competitors or rivals if the products they offer are good substitutes for one another in the eyes of buyers. But how, exactly, does one draw the line between 'good' and 'not good enough' substitutes? The essence of the matter is what happens when price relationships change. If the price of Product A is raised by a small but meaningful percentage and as a result consumers substitute Product B for Product A in significant quantities, then A and B are good substitutes and ought to be included under a common market definition." 303 But it is not only demand substitutability that must be considered. An ideal definition of a market should also take into account when a seller will substitute one product for another. Groups of firms making non-substitutable goods may be competitors if they employ similar skills and equipment and could easily move to other product lines if conditions become favourable: R Hubbard "Potential Production: A Supply Side Approach for Relevant Product Market Definitions"48 Fordham Law Review 1199 (1980); United States v Columbia Steel Co 334 US 495 at 510-511 (1947); Brown Shoe Co, Inc v United States 370 US 294 at 325 fn 42 (1961). 304 Supply or demand substitutability is not, however, the only defining feature of a market. The borders of a market may be determined by practical considerations. For example, industry or public recognition of a market as a separate economic entity is a factor to be taken into account. So also are the peculiar characteristics of a product and whether there are specialised vendors, distinct customers and other features. Further, the purpose for identifying the market must always be borne in mind. Here the purpose is to determine whether BBM has a substantial degree of market power. If the market is defined too narrowly important sources of competition will be ignored and BBM's power will be overstated. Conversely if there is too broad a definition, real market power will go undetected: see generally G Hay, J C Hilke and P B Nelson "Geographic Market Definition in an International Context"64 Chicago-Kent Law Review 711 (1988). 305 Without further elucidation these statements of market definition are not always helpful. For example, when market definition is based on a movement in price, different results will occur depending upon the magnitude of the price movement assumed and upon the time frame analysed. Value judgements cannot be avoided. As Deane J said in Queensland Wire Industries Proprietary Limited v Broken Hill Proprietary Company Limited (1988-1989) 167 CLR 177 at 195-196: "The identification of relevant markets and the definition of market structures and boundaries for the purposes of determining whether B.H.P.'s refusal to supply Y-bar to Q.W.I. contravened s. 46(1) involves value judgments about which there is some room for legitimate differences of opinion. The economy is not divided into an identifiable number of discrete markets into one or other of which all trading activities can be neatly fitted. One overall market may overlap other markets and contain more narrowly defined markets which may, in their turn, overlap, the one with one or more others. The outer limits (including geographic confines) of a particular market are likely to be blurred: their definition will commonly involve assessment of the relative weight to be given to competing considerations in relation to questions such as the extent of product substitutability and the significance of competition between traders at different stages of distribution." For reasons that will soon become apparent, no issues of real difficulty present themselves in this case. 306 The trial judge found, on evidence which he described as "all the one way", that concrete masonry products compete with and are substitutable for other walling products. His Honour said: "A wall is a wall whether it is made of concrete blocks or tilt-up or concrete bricks or clay bricks. The only need of the builder is to have a wall which will perform as a wall, and for the lowest possible cost." In a market where walling products include masonry blocks and bricks, clay bricks, tilt-up panels, precast concrete, plasterboard, timber, glass, aluminium, steel products, and fibro-cement sheeting, BBM could not have significant market power. But was the trial judge correct in his determination of the product market? Or did the evidence in fact establish the existence of a narrower market, such as the one for which the Commission contended, namely a market for concrete masonry products? 307 A simple approach in this case would have been to follow what was said by the Supreme Court of the United States in United States v E I du Pont de Nemours & Co 351 US 377 (1956). The government alleged that du Pont had monopolised interstate commerce in cellophane in violation of s 2 of the Sherman Act. It was necessary to define the market which it was alleged du Pont dominated. Either it was a market for cellophane or a market for flexible packaging materials. The judgment of the Court was delivered by Reed J. In discussing the relevant principles his Honour said (at 393): "Determination of the competitive market for commodities depends on how different from one another are the offered commodities in character or use, how far buyers will go to substitute one commodity for another. For example, one can think of building materials as in commodity competition but one could hardly say that brick competed with steel or wood or cement or stone in the meaning of Sherman Act litigation; the products are too different." 308 It is apparent that the Supreme Court would have had little difficulty in rejecting the views of the trial judge. It appeared self-evident to that court that diverse building products, such as are under consideration here, could not possibly be in the same market. As I will show, the evidence adduced at trial leads inevitably to the same conclusion, even upon a traditional rather than an instinctive analysis. 309 The specification of what products are to be used in the construction of a building occurs at the stage when plans for the building are drawn. The choice of products is usually made by the architect (not the builder to whom the trial judge was directing attention in the passage quoted), sometimes in conjunction with an engineer or other consultant such as a quantity surveyor. Cost is but one factor, albeit an important factor, that is taken into account in choosing the appropriate product. Structural requirements, aesthetic considerations, site requirements, performance characteristics and the like are also important factors. Very often there will be little choice in the selection of the appropriate material. The choice will be dictated by the requirements of a particular project. One of BBM's witnesses, Mr Mould, an experienced architect, said that in only approximately 10 per cent of projects will there be a choice of building materials, which are of similar cost implications and performance characteristics, for use in a particular application. 310 When it comes to selecting the product which is to be used for a wall the following features, among others, are taken into account: whether the wall is interior or exterior; the wall load bearing; the risk of fire and safety requirements; sound transmission requirements; whether windows or doors are required in the wall; building code requirements concerning matters such as impact, hygiene and security. 311 Each walling product has its own characteristics that make it more or less capable of satisfying a particular requirement. For example a timber or plaster wall does not have the fire rating of a concrete block. Tilt-up walls are porous and transmit sound more readily than clay brick or concrete brick. Pre-cast concrete has certain technical limitations. All in all, one thing that comes across quite clearly from the evidence is that a wall is not just a wall. 312 When the design of a building is completed the specification will include details of all the building material to be used in the design. When the building material is a generic product, for example, a concrete block or a clay brick, the specification will mention the generic type. It is at the point when tenders are called that one finds intense competition to supply the selected material. When the selected material is concrete block, the masonry manufacturers will compete for the job, almost always on the basis of price. When some other building material is specified there may be some attempt to alter the choice, but this will meet limited success for it is usually too late in the day to make a change. 313 To be sure, manufacturers of concrete masonry products do make some attempt to influence the decision of the architect when choosing the product that is to be specified. BBM described the evidence as establishing "vigorous" competition with the manufacturers of other walling products. This is not a realistic characterisation of the evidence. In the fifty or so lever arch folders of evidence, comprising thousands of pages, there are but a few scattered sentences that attest to some effort in this regard. No doubt it was not worthwhile to press too hard. 314 The evidence upon which the trial judge based his conclusion that any one walling product is substitutable for another took into account, in a significant way, the dramatic extent to which tilt-up panels and pre-cast concrete had taken business from concrete masonry manufacturers in the 1980s and early 1990s, the use of stud walls in preference to masonry concrete products for internal use in high rise buildings and the fact that concrete masonry bricks have been taking sales from clay bricks since mid-1994. 315 It is true that the evidence established that, for a number of years before the recession, concrete bricks (if they were to be rendered or bagged) were interchangeable with clay bricks in residential constructions, concrete blocks were interchangeable with tilt-up panels and pre-cast concrete for external walls in commercial and high-rise apartments, and concrete blocks were interchangeable with plasterboard for internal walls, when other factors permitted the substitute product to be used. But the evidence also shows that once tilt-up panels and pre-cast concrete in particular, being products which for practical purposes were new products in the 1980s, had acquired a degree of acceptance, they did not thereafter compete to any significant extent with the products they had originally displaced. 316 A number of witnesses, Mr Steele, the managing director of Shannon Tower Pty Ltd, a company that carried on the business of reselling and distributing clay and masonry products (trading as 'Brick N Pave'), Mr Whiteford, the general manager of Rocla, and Mr Pearson, the executive director of the Concrete Masonry Association of Australia, all said that the explanation for he reduced sales of concrete blocks during the 1980s and early 1990s was the increased use of tilt-up and precast concrete in commercial construction. Mr Steele said that tilt-up had reduced the block market by 65 to 75 per cent. This he attributed to be a direct result of the sharp increase in labour costs for laying blocks. 317 But there is very little evidence of any significant substitution between alternative building materials in the 1990s, especially during the period of the price war. This is the most revealing feature of the evidence as regards the determination of the product market. There was a substantial reduction in the price of concrete blocks and a similar, although not as sustained, drop in the price of concrete bricks over an extended period. The two largest suppliers, BBM and Pioneer, were suffering heavy losses as a consequence. Professor Hay said that products will be close substitutes when "any attempt to charge more and give less with respect to one of the products would result in a significant loss in sales to the other product." Professor Hay highlights the obvious point that substitution between products that in fact compete with one another will take place when the seller of one product either raises or lowers his prices. If there is 'cross-elasticity of demand' (the favoured expression of the economist) the raising of prices will result in lost sales and the lowering of prices will gain sales. When this occurs the products are usually in the same market. 318 If the trial judge was correct, one would expect to find a substantial movement away from pre-cast and tilt-up concrete slabs, clay bricks and any other material used to make walls, and a corresponding increase in the sale of concrete masonry products during the price war. Moreover, this is one of those seemingly rare cases where there is no need to speculate on what would occur. Economic theory can be proved by actual market behaviour. Indeed, I cannot stress too highly my view that the court should consider actual patterns of market behaviour, as these are more likely to produce a better market analysis than hypothetical markets and even historical evidence. For example, past sales patterns may have occurred for reasons that are idiosyncratic and may not be repeated. 319 What do the facts show? Certainly not enough to sustain the finding of the trial judge. As regards tilt-up panels and pre-cast concrete, a number of witnesses, Mr Rawnsley, Mr Pethica, an estimator and contracts administrator, Mr Byrne, the manager of a bricklaying company, and Mr Coghill of Budget, all said that as the cost of concrete blocks fell, tilt-up panels and pre-cast concrete was used in preference. To what degree, in what quantity, and in which situations we are not told. Mr Vella of BBM said that the low prices offered by C & M for its render bricks caused a dramatic increase in demand for that product. The evidence was that C & M won over business from competing concrete brick manufacturers (for example BBM and Pioneer) as well as from clay brick manufacturers. Other suppliers, including BBM on the occasions when it matched the price for concrete bricks, also took away business from the manufacturers of clay brick. The extent to which this occurred is not explained, although many witnesses would have been in a position to explain. Importantly also, is the fact that Mr Vella, one of BBM's key witnesses, spoke only of "competition" in render bricks and not in other products. 320 This scant evidence certainly does not support a finding that there was sufficient substitution of walling products to conclude that they share the same market. Indeed I am of the firm opinion that the evidence, especially the absence of evidence of substitution during the price war, established the opposite position. If confirmation of this conclusion be necessary I note that if products are in the same market one would expect to find that over a period of time the price movement of each product would correlate. When price movements do not correlate the chance of the products being in the same market is not great: G J Stigler and R A Sherwin "The Extent of the Market" 28 Journal of Law and Economics 555 (1985). Here the evidence does not show that the price of the building materials which the trial judge considered to be in the same market followed the same movement from 1992 through to the end of the price war. The evidence, such as it is, suggests the opposite. An example is the evidence of Mr Mould that I mentioned earlier. Thus, there was a market for the sale of concrete masonry products, in my opinion. The geographic dimensions of that market (Melbourne) were not in dispute on this appeal. 321 Having established the dimensions of the relevant product market it is necessary next to consider whether BBM had a substantial degree of power in that market. Monopoly power and market power must be kept distinct. Section 46 does not require monopoly power to be shown, but of course if it exists it will, of necessity, suffice. All that need be established is that BBM had considerable and not a minimal degree of market power: Dowling v Dalgety Australia Limited (1992) 34 FCR 109 at 138-139; see also Explanatory Memorandum for the Trade Practices Revision Bill 1986, para 42 ("substitution … [does] not … require the high degree of market power connoted by … being in a position substantially to control a market"). 322 Whether a firm has market power is not a matter of measurement, but of judgment. But what is it that must be judged? Various definitions have been put forward, usually in the context of considering the power of a monopolist. L Sullivan in Antitrust (1977) at p 30 defines market power as: "the power of a firm to affect the price which will prevail on the market in which the firm trades." W M Landes & R A Posner in "Market Power in Antitrust Cases" 94 Harvard Law Review 937 (1981) at 937 define market power as: "the ability of a firm (or a group of firms, acting jointly) to raise price above the competitive level without losing so many sales so rapidly that the price increase is unprofitable and must be rescinded." P E Areeda, J L Solow & H Hovenkamp in Antitrust Law (1995) vol IIA p 85 define market power as: "the ability to raise prices by restricting output…[or the ability] to raise price without a total loss of sales." In these and most other definitions, the reference to "price" is misleading. It is not intended to be confined to the actual price of goods or services. It includes the ability of a firm to supply inferior goods or services, and the ability to impose unfavourable terms and conditions. 323 According to Landes & Posner a simple meaning of market power is the ability to set price above marginal cost, that is the minimum cost, including an appropriate rate of return, that an efficient firm would have to incur to produce the product in question. In a competitive market, price will equal marginal cost. If a firm can raise price above marginal cost without losing business it has market power: Queensland Wire at 188. Presumably, when a firm can raise its price above marginal cost by more than a trivial amount, the firm will have substantial market power. The greater the discretion to raise price above marginal cost, the closer the power will approximate that of a monopolist. 324 To decide whether there is an ability to increase price, it is necessary to consider the extent to which the ability of the firm is constrained by its competitors, potential competitors, suppliers and customers. Both economic theory and s 46(3) require that consideration be given to these issues. It is for these reasons that reference to matters such as the firm's market share, the size of its profits and barriers to entry (as to which see later) have been the common ways of establishing the existence of market power. No doubt these factors must also be taken into account when determining the degree of market power that is held. In its decision in Re Continental Can Co Inc [1972] CMLR D11, the European Court of Justice said (at D27): "Undertakings are in a dominant position when they have the power to behave independently, which puts them in a position to act without taking into account their competitors, purchasers or suppliers. That is the position when, because of their share of the market, or of their share of the market combined with the availability of technical knowledge, raw materials or capital, they have the power to determine prices or to control production or distribution for a significant part of the product in question. This power does not necessarily have to derive from an absolute domination permitting the undertakings which hold it to eliminate all will on the part of their economic partners, but it is enough that they be strong enough as a whole to ensure that those undertakings and overall independence of behaviour, even if there are differences in intensity in their influence on the different partial markets. 325 However, even if a firm is not in an immediate position to set its price above marginal cost, it may still have market power. Market power can exist when a firm has power to exclude competition. This was recognised by the Supreme Court of the United States in du Pont. Reed J, delivering the opinion of the court, said (at 389): "This court has pointed out that monopoly at common law was a grant by the sovereign to any person for the sole making or handling of anything so that others were restrained or hindered in their lawful trade… However, as in England, it came to be recognized here that acts bringing the evils of authorized monopoly --unduly diminishing competition and enhancing prices - were undesirable and were declared illegal by s 2. Our cases determine that a party has monopoly power if it has, over 'any part of the trade or commerce among the several States', a power of controlling prices or unreasonably restricting competition." (Authorities omitted) Later (at 391) Reed J said: "Monopoly power is the power to control prices or exclude competition." 326 Thus, according to the Supreme Court, a firm will have monopoly power if either test (the ability to control prices or the ability to restrict competition) is satisfied. Some economists have criticised this formulation. In an article entitled "Market Power in Antitrust" 60 Antitrust Law Journal 807 (1992), Professor Hay argues that for the economist the power to control prices depends on the absence of competition. Hence, the "power to exclude competition" permits "the power to control prices". He says that the two statements are the same phenomenon. 327 Be that as it may, courts in the United States do not agree and have continued to adopt and apply the two tests as separate tests. See, eg, United States v Grinnell Corp 384 US 563, 571 (1965); TV Signal Company of Aberdeen v American Telephone and Telegraph Company 462 F2d 1256, 1261 (8th Cir 1972); Jack Winter, Inc v Koratron Company, Inc 375 FSupp 1, 68-69 (1974); Bhan v NME Hospitals, Inc 669 FSupp 998, 1019 (1987); Betaseed, Inc v U & I Incorporated 681 F2d 1203, 1231 (9th Cir 1982); US Anchor Manufacturing, Inc v Rule Industries, Inc 7 F3d 986, 994 (1986); American Key Corporation v Cole National Corporation 762 F 2d 1569, 1581 (11th Cir 1985). 328 In their article 'Market Power in Antitrust Cases', Landes and Posner comment on the definition of market power in du Pont (94 Harvard Law Review at 977): "The first part of this definition [power to control prices] seems equivalent to the economic definition of market power …. The second [power to exclude competition] is puzzling. The Court may just have been making the corollary point that any firm that has and exercises the power to raise price above the competitive level must be able to exclude entrants; otherwise it would not be able to maintain the higher-than-competitive price …. Finally, the Court may have had in mind the exclusion of equally or more efficient competitors through predatory pricing or other exclusionary practices - a dimension of the monopoly problem to which our analysis does not speak directly." 329 Although not the subject of analysis by Landes and Posner, the second test was considered in some detail by T Krattenmaker, R Lande and S Salop in, "Monopoly Power and Market Power in Antitrust Law" 76 Georgetown Law Journal 241 (1987). The authors argue that the core concept underlying the notion of market power is a firm's ability to increase profits and to harm consumers by charging prices above competitive levels. They point out that this can be achieved directly by restricting output: the classic formulation of market power. On the other hand, the authors explain that the same result may be achieved indirectly by raising a rival's costs, thereby causing it to restrict its output. This, the authors say, is at the bottom of the claimed harm to competition by excluding competitors. On this analysis, the second test formulated by the Supreme Court in du Pont is not so easily dismissed. 330 More importantly for present purposes, the fact that market power can be exercised by means other than the power to raise price by restricting output was accepted by Dawson J in Queensland Wire. There his Honour said (at 200): "But market power has aspects other than influence upon the market price. It may be manifested by practices directed at excluding competition such as exclusive dealing, tying arrangements, predatory pricing or refusal to deal. The ability to engage persistently in these practices may be as indicative of market power as the ability to influence prices. Thus Kaysen and Turner define market power as follows: 'A firm possesses market power when it can behave persistently in a manner different from the behaviour that a competitive market would enforce on a firm facing otherwise similar cost and demand conditions. (Kaysen and Turner, Antitrust Policy (1959) p.75).'… Market power is thus the advantage which flows monopoly or near monopoly…" (Of course, for the purpose of s 46, in its current form, it is not necessary to show the power of a monopolist or near monopolist.) 331 Generally, an analysis of abuse of market power involves a two-stage process: first, it is necessary to determine whether a firm has market power, second it is necessary to examine whether that power has been abused. However, when the existence of market power is defined by reference to a firm's ability to exclude competition, the two step investigation is not appropriate. The evaluation of market power and the abuse of that power is part of one analysis. The existence of market power based on this approach cannot be examined independent of the alleged exclusionary conduct. It is the exclusionary conduct that establishes market power, not the reverse. 332 I mentioned earlier that any consideration of market power must necessarily take into account barriers to entry. Scherer & Ross have referred to entry barriers as the sine qua non of monopoly: FM Scherer and D Ross, Industrial Market Structure and Economic Performance at p 18. Barriers to entry are perhaps the single most important determinant of a firm's ability to exercise market power, although the extent to which it faces competition from existing rivals is obviously important. 333 It may be accepted that if there are absolutely no barriers to entry, that is where entry is free (not disadvantageous) and exit is costless (no sunk costs) there can be no effective market power. In such a market, a perfectly contestable market as it is usually referred to, an incumbent enjoys no advantages because cost and demand conditions are symmetrical between all firms, actual and potential, and sunk costs are presumed to be zero. Of course, there is no perfectly contestable market to be found outside the economists' model. Every real market has real barriers. 334 The issue of what constitutes a barrier to entry has given rise to a body of literature. Indeed, it is difficult to find a definition that commands wide acceptance. Here it will be sufficient to refer to the more popular meanings. The main definitions are in terms of cost symmetries or in terms of the ability of the incumbent firm or firms to earn supra competitive profits in the long run without attracting entry. 335 One of the most important definitions is that proposed by J S Bain in his seminal work Barriers to New Competition (1956). Bain described barriers to entry (at p 3) as: "…the advantages of established sellers in an industry over potential entrant sellers, these advantages being reflected in the extent to which established sellers can persistently raise their prices above a competitive level without attracting new firms to enter the industry." 336 Thus, a barrier to entry exists if an entrant cannot achieve the same profit as the incumbent. Bain also argued that a barrier is fundamentally a structural characteristic of a market. He would not accept, for example, that an incumbent's behaviour was a relevant influence on a potential entrant. Nor would Bain regard as a barrier transitory market conditions such as trade cycles and so forth. 337 According to Bain, barriers would exist if the incumbent had absolute cost advantages such as would flow from legal restrictions (patents and the like), access to limited raw materials, technology and other scarce factors relating to production, and the capital cost of establishing a new firm. Bain also includes as a barrier the advantage flowing from the preference for the incumbent's goods which an entrant could only avoid by lowering prices or engaging in expensive advertising. Probably the most common structural barrier is that which arises from economies of scale. These he characterised as real economies of scale (those existing in relation to production and distribution), pecuniary economies of scale (giving the firm greater bargaining power), and real or strictly pecuniary economies of large-scale advertising and sales promotion. 338 G J Stigler in The Organisation of Industry (1968) at p 67 proposed an alternative definition which is often referred to in industrial organisation literature. According to Stigler a barrier to entry is: "…a cost of producing (at some or every rate of output) which must be borne by a firm which seeks to enter an industry but is not borne by firms already in the industry." By this definition any cost advantage of an incumbent over a potential entrant is a barrier to entry. Thus, inadequate demand resulting from an economic cycle would be as much a barrier as would economies of scale. 339 C C von Weizsäcker widened Stigler's definition to incorporate an explicit consideration of economic welfare. In his article entitled "A Welfare Analysis of Barriers to Entry" 11 Bell Journal of Economics 399 at 400 (1980), von Weizsäcker defined a barrier to entry as: "a cost of producing (at some or every rate of output) which must be borne by firms which seek to enter an industry but is not borne by firms already in the industry and which implies a distortion in the use of economic resources from the social point of view." 340 More recently, economists have turned from economic models to dynamic market behaviour to determine what is a barrier to entry. P Geroski and J Schwalbach (eds) Entry and Market Contestability: An International Comparison (1991) give this definition: "Barriers to entry are obstacles which inhibit the ability of firms outside a market to enter and compete with established insiders." 341 This definition has significant advantages over some of the earlier ones. It follows the recent trend of economists to broaden barriers beyond those that are structural, to incorporate the strategic behaviour of incumbent firms. In particular, it is now accepted by many economists that the behaviour of incumbent firms to exclude rivals by a variety of restrictive or uncompetitive practices is as much a barrier to entry as any structural condition that may exist in a market: see, eg, P Geroski, R J Gilbert & A Jacquemin Barriers to Entry and Strategic Competition (1990) p 15ff; A van Witteloostuijn Barriers to Entry and Dynamic Economies - A Survey and Critique (1986). This approach recognises the realities of a market. It also involves the rejection of the Chicago School economists' view that these practices should not be the concern of antitrust law because they are motivated by considerations of efficiency. 342 Incumbents are often willing to take action that will result in short-term reductions in profit to prevent the establishment of a new entrant. Some economists refer to these deterrent activities as "strategic" barriers to entry, "purposely enacted to redress the possibility of entry" as opposed to "innocent" entry barriers "unintentionally erected as a side effect of innocent profit maximisation": S Salop, "Strategic Entry Deterrence" 69 American Economic Review 335 (1979). 343 Two types of exclusionary behaviour are presently relevant. The first is the predatory pricing that was carried out in a sustained fashion between 1993 and 1996. It is of no surprise that an incumbent firm with large financial resources might seek to drive out a financially constrained rival by engaging in price cutting for a sustained period. A rival will exit before the price war has become too prolonged: D Harbord and T Hoehn "Barriers to Entry and Exit in European Competition Policy" 14 International Review of Law and Economics 411, 420 (1994). Further, a prospective entrant may stay out of the market altogether. As Harbord and Hoehn point out, and as common experience shows, the presumption that predation is not a rational strategy has been shown to be false. They also explain that one reason for predatory behaviour is the incumbent's wish to achieve a reputation for predation in order to deter future prospective entrants. See also D L White "Shaping Antitrust Enforcement: Greater Emphasis on Barriers to Entry" Brigham Young Law Review 823, 845-846 (1989), where the author discusses "limit pricing" as a barrier to entry. 'Limit pricing' is the charging of a price low enough to discourage entry but sufficient to provide an economic profit. Moreover, an incumbent can erect a larger barrier to entry if the nature of the group of which the incumbent is a member allows substantial temporary losses. For example, diversified or vertically integrated firms, because of their ability to cross-subsidise, can engage in sustained predatory pricing thereby raising very real barriers to entry. 344 What I have said so far about predatory pricing being a barrier to entry is not a universally accepted proposition. For example, it does not accord with the views of Professor Hay, whose opinion on this issue was accepted by the trial judge. Professor Hay said: "In the course of this case, the concept of a barrier to entry has been distorted beyond recognition. If only for the benefit of future generations of would-be economists, one point must be made emphatically - low prices are not a barrier to entry. A barrier to entry is a factor that would deter a new firm from entering the market, even though the incumbent firm (or firms) is charging monopoly prices and earning monopoly profits. It is therefore a contradiction in terms to talk about low prices as a barrier." 345 There are a number of comments that can be made about this testimony. The first is that it seems to confine an entry barrier to one that occurs only when the incumbent is earning monopoly profits. This is unnecessarily restrictive and wrong in my view. Second, it echoes the views of economists who believe that barriers to entry are structural and not dynamic. This is no longer a mainstream opinion. Finally, and I mean no disrespect to Professor Hay when I say this, it confuses the ideal market with the real market. The fact is that there are firms that engage in predatory behaviour to be rid of competition, whether or not it is a rational strategy from an economist's stand point. When it is necessary to assess market power it is inevitable that entry barriers resulting from predatory behaviour must be considered. Indeed, I rather suspect that Professor Hay begrudgingly recognises this. In "Predatory Pricing" 58 Antitrust Law Journal 913 (1990), Professor Hay wrote (at 918-919): "Another potential problem with entry barriers as a filter is that, according to some commentators, the very active predatory pricing can create disincentives for subsequent entry. By way of example, suppose we observed that the private garbage-hauling business in most parts of New York City was effectively monopolized, one company having all the business on the Lower East Side, another company, the Upper East Side, and so forth. If we looked only for the traditional structural barriers to explain the absence of entry, eg, capital market barriers, brand loyalty, or high sunk costs, we might be inclined to characterize the market as contestable. Cynics, on the other hand, might observe that the barrier to entry is that if you tried to enter that business you would end up in the East River with cement overshoes. I don't want to overdo the point, but simply to point out that, according to some economists, a major barrier to entry in certain markets will be the reputation of the monopolist as one who will stop at nothing to get rid of its rivals." 346 For my part, I would accept the views of those economists who consider the dynamics of a market to determine its barriers, in preference to opinion of Professor Hay, in the passage quoted from his evidence. If Professor Hay's thesis be accepted, it will render less effective in the face of damage to a market not only s 46, but also those other provisions in Part IV of the Trade Practices Act a breach of which depends upon the establishment of market power. 347 The second aspect of exclusionary behaviour is the upgrade of the plant at Deer Park to increase BBM's production capacity. Excess capacity should also be regarded as a barrier to entry. van Witteloostuijn notes (at p 7) that: "An incumbent firm with excess capacity disseminates the threat of increasing output after the appearance of an entrant and hence the threat of reducing prices. Reduced post-entry prices imply less profitable entry." Hence, he says that excess capacity is a barrier to entry. I agree. More importantly, even if the threat to make use of excess capacity is not usually sufficient to deter entry, it most certainly will during a price war. This is what BBM understood only too well. As I have pointed out, when BBM decided to increase its capacity at Deer Park, it publicised that fact to exert "psychological pressure" on its rivals. What was that "psychological pressure"? BBM intended to signal to its rivals that it was willing to continue to wage the price war for some time and that it would bear whatever losses may result. The case for a strategically-erected barrier to entry could not be more clear. 348 There is another aspect of strategic barriers to entry that should be mentioned. The creation or strengthening of barriers to entry can, in appropriate circumstances, be seen as a misuse of market power. Melway Publishing Pty Ltd v Robert Hicks Pty Ltd (1999) 90 FCR 128 is an example of such a case. There the incumbent had a near monopoly in the supply of street directories in the relevant market. It refused to supply a former customer to keep it out of the market. That refusal was held to be in breach of s 46. Plainly enough, the refusal to supply was a barrier to entry. The case is not much different from one where the incumbent has control of a scarce resource. At the same time as raising an entry barrier, the refusal to supply was an abuse of market power because its purpose was to impede competition in the street directory market. 349 In my opinion, BBM has substantial power in the concrete masonry product market and it misused that power for a relevant purpose when it engaged in a predatory pricing scheme. A similar allegation against Boral Limited, BBM's parent company, was abandoned during the appeal. Accordingly, the appeal should be allowed in part, the orders made below in favour of BBM should be set aside, and a declaration should be made to the effect that BBM has contravened s 46. The matter should be remitted to the trial judge to determine the precise form of that declaration, whether any injunction should be ordered and what penalties

ought to be imposed. The Commission should have its costs of the appeal and of the hearing below. I certify that the preceding one hundred and thirteen (113) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Finkelstein.

Associate: Dated: 27 February 2001 Counsel for the Appellant: Mr N Young QC and Mr D Shavin QC with Mr M Crennan

Solicitor for the Appellant: Australian Government Solicitor

Counsel for the Respondents: Mr A Archibald QC and Mr C Maxwell QC with Mr I Stewart

Solicitor for the Respondents: Blake Dawson Waldron

Dates of Hearing: 7, 8, 9 and 10 February 2000