Understanding what it means to “substantially lessen competition” is crucial for Australian businesses, directors, and legal advisors. This legal concept sits at the heart of Australia’s competition law framework and is used to assess the legality of a wide range of commercial conduct—from mergers and acquisitions to exclusive dealing and misuse of market power.
This guide, prepared by our commercial law team, explains what the term means, how it’s applied by regulators and courts, and what businesses can do to stay compliant with the Competition and Consumer Act 2010 (Cth) (CCA).
Key Takeaways
- “Substantially lessen competition” (SLC) is a central test in Australian competition law, focusing on conduct that meaningfully reduces market rivalry
- The assessment is both qualitative and quantitative, considering market structure, barriers to entry, and competitive effects
- SLC applies to contracts, exclusive dealings, mergers, and cartel conduct under the CCA
- Courts require a real, not merely hypothetical, impact on competition
- Businesses must consider the market definition, counterfactual scenarios, and the effect on consumers
What does "Substantially Lessen Competition" mean?
The phrase “substantially lessen competition” is not defined in the Competition and Consumer Act 2010 (Cth), but Australian courts take a commercially realistic approach. The focus is on whether the conduct in question reduces the level or intensity of competition in a market to a meaningful degree.
Common signs that competition may be substantially lessened
Higher prices for consumers
Reduced choice or quality of goods/services
Decline in innovation
Fewer market entrants or increased barriers to entry
Increased potential for monopolistic behaviour
Suppression of smaller or emerging competitors
Importantly, the effect must be real and material – not trivial or speculative.
Statutory Framework: The Competition and Consumer Act 2010 (Cth)
The SLC test underpins several critical sections of the CCA:
Section | Prohibited Conduct | Application |
45 | Anti-competitive contracts, arrangements or understandings | Purpose, effect, or likely effect of SLC |
46 | Misuse of market power | Conduct by companies with substantial market power that SLC |
47 | Exclusive dealing | Only unlawful if it SLC |
50 | Mergers and acquisitions | Prohibits acquisitions likely to SLC |
Key Legal Principles
Market Definition
The first step is to define the relevant market. This includes identifying the goods or services involved and the geographic scope. Courts consider substitutability from the consumer’s perspective.
The High Court in Queensland Wire Industries Pty Ltd v BHP confirmed that market definition is central to any SLC analysis.
Counterfactual Analysis
Courts assess what would likely happen with and without the conduct in question. This helps isolate the impact of the conduct on the competitive process.
This approach was highlighted in ACCC v Metcash Trading Limited.
Assessment of Competitive Process
The focus is on the competitive process—not just competitors. The question is whether a firm can act persistently differently from how it would behave in a competitive market.
The Full Federal Court in Rural Press Ltd v ACCC stated the test is whether conduct would allow a firm to behave persistently differently from how it would in a competitive market.
Timeframe and Likelihood
The impact does not need to be immediate, but it must be more than hypothetical. Courts look for a real chance or likelihood that competition will be lessened.
As clarified in Australian Gas Light Co v ACCC, there must be a “real likelihood or possibility” of SLC.
Factors Considered by the ACCC
When investigating possible breaches, the ACCC considers several commercial and structural factors:
Barriers to market entry for new competitors
Market share and concentration levels
Ability and incentive to raise prices or reduce quality
Nature of existing and potential competitive constraints
Likelihood of coordinated conduct in concentrated markets
Practical Steps for Businesses
To reduce legal risk and ensure compliance with competition law, businesses should:
Define the relevant market: Identify all products/services and geographical areas your business operates in.
Assess your market position: Determine if your business has significant influence in that market.
Consider the competitive effect of your conduct: Ask whether it could reduce consumer choice, raise prices, or block rivals.
Use counterfactual thinking: Consider what would happen in the market if your conduct did not occur.
Document your analysis: Keep internal records showing your competition law risk assessments and legal advice.
Case Studies
Example 1: Exclusive Dealing
A supplier refuses to supply goods unless retailers do not stock competitors’ products. If this conduct meaningfully limits consumer choice or raises barriers for rivals, it may SLC and breach section 47 of the CCA.
Learn more about exclusivity contracts in our article.
Example 2: Merger
A proposed merger between two major industry players is scrutinised if it could reduce rivalry, leading to higher prices or reduced innovation – see ACCC v Metcash.
If you are concerned about how your business practices may affect competition or need tailored legal advice on compliance with Australian competition law, contact our experienced team today to book a consultation.
Frequently Asked Questions
What are the consequences of substantially lessening competition?
Breaching SLC provisions can lead to significant penalties, court orders to unwind transactions, and reputational damage.
How do courts determine if conduct substantially lessens competition?
Courts use a factual and counterfactual analysis, focusing on real-world commercial effects, not just theoretical possibilities.
Which sections of the Competition and Consumer Act 2010 apply to SLC?
Sections 45 (contracts), 46 (misuse of market power), 47 (exclusive dealing), and 50 (mergers and acquisitions) all use the SLC test.
Can small businesses be affected by SLC laws?
Yes. Even small businesses must ensure their conduct does not have a substantial effect on competition within their relevant market.
What factors increase the risk of breaching SLC provisions?
High market concentration, significant barriers to entry, and conduct that restricts consumer choice or entrenches market power all increase risk.
