Boral Besser Masonry Limited (now Boral Masonry Ltd) v ACCC M1/2002 [2002] HCATrans 250 (22 May 2002)

IN THE HIGH COURT OF AUSTRALIA

Office of the Registry

Melbourne No M1 of 2002

B e t w e e n -

BORAL BESSER MASONRY LIMITED

(now BORAL MASONRY LTD)

Appellant

and

AUSTRALIAN COMPETITION AND CONSUMER COMMISSION

Respondent

GLEESON CJ

GAUDRON J

McHUGH J

GUMMOW J

KIRBY J

HAYNE J

CALLINAN J

TRANSCRIPT OF PROCEEDINGS

AT CANBERRA ON WEDNESDAY, 22 MAY 2002, AT 10.17 AM

(Continued from 21/5/02)

Copyright in the High Court of Australia

GLEESON CJ: Yes, Mr Archibald.

MR ARCHIBALD: If the Court please, at paragraph 347, page 309, volume 2 Justice Finkelstein addressed the topic of excess capacity. He said at line 33, "Excess capacity should be regarded as a barrier to entry",

meaning a strategic barrier. He relied for that view solely on a passage in a Netherlands Research Paper published in 1986 and referred to a passage at page 7 of that research memorandum at about point 5 on that page. At about point 7 on the same page the paper proceeded to state that:

Incumbents . . .threatened potential entrants to eventually reduce the pre-entry monopoly price to the post-entry competitive price.

So the threat appeared in the view of the author to be dependent upon a move from supra-competitive prices to competitive prices.

GLEESON CJ: Where is this in Justice Finkelstein's judgment?

MR ARCHIBALD: I am sorry, at paragraph 347, line 33, his Honour extracts three lines from the paper in question. That is at page 309. If one goes to the paper itself, a little bit further down that page in a passage not extracted by his Honour, one sees the proposition that I was articulating with the Court. So our contention would be, if one looks at the full content of the paper, a so-called deterrent is dependent, in the view of the author, upon moving from supra-competitive prices to competitive prices. Here, of course, there never were supra-competitive prices. The competitive prices - - -

KIRBY J: Again, you are addressing Justice Finkelstein's reasons. Apart from saying that Justice Beaumont's reasons were very brief and encapsulated, you have left his Honour alone.

MR ARCHIBALD: I think I took the Court yesterday on strategic barriers, both to what Justice Merkel said in respect of the matter, merely assuming - - -

KIRBY J: It is complicated where we have three reasons and if you focus only, or mainly, on one, to see whether the error that you are alleging affected the order of the court in the other reasons.

MR ARCHIBALD: I addressed the Court yesterday on the concept of strategic barriers and dealt with the reasons of all three of the members of the court. This is the further point about that aspect of strategic barriers said to be constituted by excess capacity.

KIRBY J: I suppose it is fair to say that in this area of discourse there is much more use of economists' writings than there is in the normal law case but you make a fair point, that when you actually go to the source, the source is a pretty weak source for the proposition that Justice Finkelstein made.

MR ARCHIBALD: Given the circumstances that attend this case, leaving aside the conceptual issues, the evidence, in our submission, is clear that there was not evidence that any deterrent impact was achieved by the notion of the Deer Park upgrade. The most striking evidence in that regard was Mr Coghill - Mr Coghill called by the Commission, in his evidence-in-chief, in volume 8, at page 1400. The Court will recall the contemplation in the Boral strategic plan that rivals would be awed by the upgrade. Mr Coghill, at paragraph 8 at page 1400, line 23, said:

John Rawnsley states -

in his statement -

that "feedback from the market indicates that C&M and Budget are awed at the prospect of Boral doubling its capacity." In response, I say that I was not aware of any increase in Boral's manufacturing capacity at the time. Accordingly, I was not, and could not have been "awed" by it.

KIRBY J: Who is this witness?

MR ARCHIBALD: That is Mr Coghill of Budget. He is the owner and operator of Budget, the one who was said to be awed and he said, "I was not awed".

McHUGH J: And what is more he was destroyed, was he not? He lost his home and lost his business as a result of this - - -

MR ARCHIBALD: Yes.

KIRBY J: Was C&M awed?

MR ARCHIBALD: Well, no. They were marching from strength to strength, capturing more and more of the market day by day.

GLEESON CJ: They were under-awed.

MR ARCHIBALD: So whatever the concept might be, the evidence does not find any embodiment of any barrier in fact being erected.

HAYNE J: Just before you depart from this article or research paper to which you have taken us, at page 10 of that article the author refers to, at line 2:

by definition barriers to entry imply the possibility to set prices persistently above the level of (minimum) average costs -

Is that a theory or proposition that found reflection in evidence actually given at the trial?

MR ARCHIBALD: It was the precise evidence of Professor Hay and Professor Officer that barriers to entry proceed upon the footing of the ability to charge monopoly prices.

HAYNE J: At some point convenient if you could let us have a note of where that is. Do not stay and - - -

MR ARCHIBALD: I will take the Court back to it. That was the very evidence that Justice Finkelstein said he regarded as unjustifiably narrow and wrong and rejected. That was the only basis upon which his Honour was able to say that low prices were a barrier to entry. I will have these references dug out and referred to you shortly.

HAYNE J: Thank you.

MR ARCHIBALD: In relation to market definition, I said in the course of submissions yesterday from time to time that the major mistake in the Full Court was to confuse sub-markets for the market itself. That confusion, or error, is most clearly apparent from the reasons, again I have to say, Justice Kirby, of Justice Finkelstein - - -

KIRBY J: I just thought I would let you know that I am watching.

MR ARCHIBALD: - - - at paragraph 304 at page 296. There the Court will see at line 11 his Honour said:

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.

Although not attributed, his Honour is plainly, in our submission, taking the concepts and language set out at that point and in the following lines from the reasons of the Trade Practices Tribunal in Queensland Co-operative Milling Association, 25 FLR at 191. There the Tribunal said that:

The indicia of sub-markets listed in the American case Brown Shoe Co. Inc. v US are suggestive -

and an extract from that decision was then set out. The first sentence of the extract was as follows:

"The boundaries of such a sub-market may be determined by examining such practical indicia as industry or public recognition of the sub-market as a separate economic entity" -

and his Honour has taken those precise words with very minor adjustments, but has attributed them to characteristics of a market.

GLEESON CJ: Is there a dichotomy between "market" and "sub-market"?

MR ARCHIBALD: There is, a sub-market or sub-markets are, if one likes, the inner elements of the market itself which inner elements exhibit particularly intense competition between rivals, but they do not describe the boundaries of the market themselves and to focus on sub-markets is to focus on short-term matters and particularly intense competition, as the earlier passage in the reasons of the Tribunal in this case, starting at page 190 point 7 show, is to focus on those matters and not to see the long-term potential features which are the defining characteristics of the market.

KIRBY J: In Queensland Wire it was acknowledged that how you defined the market may be very important because of the capacity to dominate little markets and not big markets.

MR ARCHIBALD: Yes, yes, indeed.

KIRBY J: Now, what is the discrimen or what is the principle by which one defines the market?

MR ARCHIBALD: The principle is to consider the field of rivalry in terms of the potential for substitution in the long term.

GLEESON CJ: This was discussed in the Brewery Ties Case, as I recollect it, and somebody or other bravely argued that there was not a market in beer.

MR ARCHIBALD: Yes. The references as to principle that we would give the Court in the case I have just referred to, Queensland Co-operative, pages 190 to 191; Tooth, at page 38; and Queensland Wire, page 188, point 2 to point 6, including there the reference to United Brands. So our contention is that here, in approaching the issue of market, the Full Court did not pay attention to those principles but was focusing on the narrowness, within a market, of the features of sub-markets, and short-term considerations rather than long-term potential.

Thus, for example, Justice Finkelstein at paragraph 315, appeal book page 299, proceeded upon the footing that the incursion of tilt-up into the demand for concrete masonry had ceased in the mid-1990s. There had been, in effect, a move to the mid-1990s and the matter was static. So it may have been in the short run, at that moment of time, but as the further evidence showed, in the subsequent years there was a move back to concrete block from tilt-up. The potential was actually realised shortly after the point of time upon which alone the Full Court focused. That is dealt with in our submissions at paragraph 33 - I will not take the Court to that material. But the ebb and flow, in fact, continued and the potential for the ebb and flow was evident, demonstrating, in our submission, the existence of a market that was, in truth, a walling and paving market, not confined to concrete masonry products.

Justice Beaumont thought it critical that Boral treated the market as confined to concrete masonry products. He said that at paragraph 179, page 253, lines 18 to 20, but his Honour neglected to consider the very considerable amount of evidence to the contrary effect showing that Boral in its monitoring and strategy steps did pay attention to and was concerned about the rivalry afforded by other products and that material - in fact, I think 34 items of that evidence appears in part 4 of schedule 2 at pages 5493 to 5498 of volume 27.

Justice Merkel on market agreed with the reasons of the other members of the court. He said that at paragraph 201, page 264, lines 14 to 15. So our contention is that the Full Court erred in principle in its approach to this issue and looked only at fragments of the evidence, concentrating on the shorter immediate term and not the longer term potential.

GLEESON CJ: But it does not demonstrate that there is no such thing as a market in beer just because there are many people who would be willing to substitute wine or lemonade and as a result the price of wine or lemonade operates as a constraint on the price of beer.

MR ARCHIBALD: No, that is so, but when one looks at the interchangeability and the cross-price elasticity demonstrated here by looking at the installed cost of the products, one sees the high degree of relativity between the competing products. That is true as much in block, with the competition afforded by tilt-up, as it is in brick, competition afforded mainly by clay commons, and in paving, the competition afforded by clay pavers and other products.

CALLINAN J: For what it is worth, major brewing companies have been acquiring substantial wine assets in order to minimise the competition from other alcoholic beverages.

MR ARCHIBALD: There are lots of exemplifications but perhaps one of the important things in the Tooth Case is the emphasis on looking at markets broadly, rather than narrowly, in assessing these issues.

Now, I should conclude our submissions at this point. Could I just hand to the Court a note of some select evidence references on market definition and a version of schedule 2 in volume 27 of the appeal books which has added to it appeal book references, whereas the appeal book only has Full Court transcript references in it. If the Court pleases, those are our submissions.

GLEESON CJ: Thank you. Yes, Mr Young.

MR ARCHIBALD: On barriers to entry, the evidence of Professor Hay, if I may mention this in response to your Honour Justice Hayne, is volume 19, pages 3743 to 4, paragraphs 38 and 39, 3775 to 3776, paragraph 7 and 3777, paragraph 11; Professor Officer volume 22, pages 4666 to 4667, if the Court pleases.

GLEESON CJ: Thank you. Yes, Mr Young.

MR YOUNG: May it please the Court, our starting point is section 46 of the Act. The course taken in relation to section 46 is to apply a special rule of conduct to companies occupying the stated threshold position of having "a substantial degree of power in a market".

In taking that course our Act takes the same course as legislation in New Zealand, in Canada, and Article 82 of the Treaty of Rome, recently renumbered from Article 86. It is authorities in those jurisdictions that shed the principle light upon the course that should be taken in applying section 46. On the other hand, US legislation is concerned solely with the containment of monopoly power. Relevant US statutes, in particular section 2 of the Sherman Act and section 2 of the Clayton Act, have enunciated tests that depend upon proving in both cases a dangerous probability of achieving monopoly. In the US context monopoly power equals market power and the terms are used interchangeably.

McHUGH J: What about the Brooke's Group Case? Their share of the market was only 12 per cent.

MR YOUNG: Yes, your Honour, and the allegation was brought under the Clayton Act, price discrimination provision, that one of the members of the tobacco oligopoly, albeit one of the smaller but longstanding members with 12 per cent, had undercut prices in a predatory fashion. The case failed because of the failure to prove recoupment in the same market of more than sufficient profits to recover all of the money expended in the price undercutting period. That is why it failed. Recoupment and the language of supra-competitive prices was explained by the court as meaning, "The achievement of monopoly prices in the same market after the exit of the new challenger". So, supra-competitive prices equals monopoly prices and that is all because the tests enunciated for the Clayton Act equated to the tests under the Sherman Act, namely, you must demonstrate, in the context of price discrimination, a dangerous probability of achieving monopoly and thereby reaping monopoly rents, that is to say, supra-competitive prices.

I will take the Court through the authorities and we will do that rather early in the submissions if we may, but our essential submission is that the US jurisprudence because of its different statutory context is of no real assistance in the interpretation of section 46 and to submit that is simply to echo the views expressed by several Full Courts in the past, including the Full Court in Eastern Express, of which Justice Gummow was a member.

Secondly, we say that the examination of section 46, through a prism of the concept of predatory pricing, is unhelpful and inappropriate. To answer the Chief Justice's question the other day, we have never adopted that framework of analysis. To do so, in our submission, is to reintroduce notions expunged in Queensland Wire of reprehensible conduct, predatory intent or hostile intent which have no place in this field of discourse under section 46.

GLEESON CJ: It seems to have come in as a result of a second reading speech in Parliament and you will end up construing the second reading speech instead of the statute.

MR YOUNG: Yes, your Honour, and likewise the explanatory memorandum referred to predatory pricing. Perhaps it is not just the politicians, your Honour; Justice Dawson gave predatory pricing as an example of conduct which was a manifestation of market power in Queensland Wire. So that terminology - - -

GLEESON CJ: It is an expression that carries with it a lot of baggage.

MR YOUNG: That was exactly what I was about to say, your Honour. It carries a lot of unhelpful baggage because it introduces US notions that cannot be separated from the concept of market power in the sense of monopoly power and the reaping of supra-competitive profits.

McHUGH J: Yes, but in the context we are dealing with, section 46 does not seem to make much sense in a price-cutting situation. I mean, it seems to me the logic of your case would lead to the view that any price-cutting by the corporation that has a substantial degree of market power - it has cut its prices knowing that another competitor in the market could not compete - would offend section 46.

MR YOUNG: No, your Honour.

McHUGH J: You have to bring in - what is the difference between - sorry, yes.

MR YOUNG: May I try and explain, your Honour, and encapsulate what we say.

McHUGH J: Yes.

MR YOUNG: It is not any price-cutting by a company holding the threshold position for a proscribed purpose that falls foul of the contravention in section 46. There must be a connection, to use the words used in Melway, between the possession of a substantial degree of market power and the ability to implement and, to use Justice Finkelstein's words, to sustain the price cuts.

McHUGH J: Where do you get that in the section? This is a gloss that you want to put on it. I mean, they are all glosses. You have to put a gloss on it.

MR YOUNG: It is not a gloss, your Honour. The key to the section is the threshold. Once you impose a threshold of the possession of a substantial degree of market power, it covers to the necessary extent the sorts of notions that your Honour is mentioning. It covers everything to do with the risk that recoupment might occur in this market or in some other market, or that you might be protecting monopoly rents in some other product within your product range and so forth. That is embroiled in the idea of stipulating the possession at the outset of a substantial degree of market power.

To take the example in Melway, all the integers of the section were satisfied, save that this Court held that there was no relevant causal connection between the refusal to supply the recently terminated distributor and the possession of a substantial degree of power, the reason being that that course of action was an ordinary part of the establishment of that sort of distribution system which had pre-existed the attainment of the threshold level of power. It was not an exercise of that power. To use the language of the explanatory memorandum, it was not materially assisted or facilitated by the possession of power; it was disconnected. That is what the Queensland Wire test of likelihood of conduct gets at.

GLEESON CJ: What does that expression "a substantial degree of power in the market" mean, Mr Young?

MR YOUNG: Your Honour asked me a very large question. Can I take it in stages. First, it is helpful to look at the change that occurred between our section 46 pre the 1986 amendment and post, because that sheds light on the answer. Can I ask the Court to go to Queensland Wire [1989] HCA 6; 167 CLR 177 where the two forms of the section are conveniently set out. The passage is at 186. The pre-1986 form of the section is at point 3 on page 186. The critical words are:

in a position substantially to control a market for goods or services shall not take advantage of the power in relation to that market that it has by virtue of being in that position -

A much longer formulation. The words "in a position substantially to control a market" really approached the possession of monopoly power. It may not quite going so far, but certainly going to a position of dominance, and that has been explained in various European, Canadian and New Zealand authorities. The change effected appears at the bottom of page 186 and the top of 187.

First, can I note that there is no reference to market power in terms in the section. Both times the reference was to a power that arises from being in a particular position, in the case of the pre-1986 Act, and with the Act we are now concerned with, the reference is to:

a substantial degree of power in a market shall not take advantage of that power -

Now, there is a ready slide when you have an Act that is talking about something close to monopoly power into the US jurisprudence and the economic literature about monopoly power. That slide is to be avoided given the form of the present section. So the first thing we would say to your Honours is this, that a very significant change was effected by the 1986 amendments.

GLEESON CJ: Do you mean that the power that is now being talked about is not market power?

MR YOUNG: No, your Honour, I do not mean that. The power that is being talked about necessarily takes its colour, its content, from the limiting words around it: "a substantial degree of power in a market".

GLEESON CJ: The adjective "substantial" means that you have to measure something. It is a question of degree. But what exactly is it that you are measuring?

MR YOUNG: You are measuring - - -

GUMMOW J: Power to do what?

MR YOUNG: You are measuring the capacity or ability to act in a manner that is to a substantial extent not constrained by the sorts of factors mentioned in section 46(3).

HAYNE J: And, in particular, in the facts of this case, is it right or is it wrong to commence by examining the power to set prices?

MR YOUNG: Your Honour, can I again take that in steps. The starting point really is to look at the structure of the market and behaviour in the market - and here it was proved as uncontroverted fact - to try and determine, by reason of those factors, the aspects of structure or conduct that give the relevant corporation a degree of market power. Let us not add the word "substantial" for the moment. What are the factors that give rise to it?

Then the next question is have those factors been relied upon to facilitate the price setting, to use a neutral term? Because, of course, the conduct we are concerned with is mundane conduct, in the sense that any participant in the market can bring their prices down or bring them up. Any participant in the market can refuse supply or attempt to impose terms and conditions on supply. Any participant in the market can restrict its output. Any participant in the market can bring on excess capacity, and so forth. Their actions - - -

McHUGH J: But it is power either as a supplier or as an acquirer.

MR YOUNG: Of course, it is, your Honour.

McHUGH J: It seems to me, perhaps insufficient attention has been given to section 46(4) in this case, particularly paragraph (c).

MR YOUNG: Well, your Honour, the only power that we look to is power "as a supplier or as an acquirer of goods or services". That is, of course, relevant - - -

McHUGH J: Yes. It is a reference to a power or conduct in that market as a supplier of goods or services - in that market.

MR YOUNG: Yes, your Honour.

McHUGH J: That is what you have to concentrate on.

MR YOUNG: Yes, we agree with that, your Honour, but that is not to say that the power in reference to the supply or acquisition of goods or services in that market cannot be founded on advantages derived, for instance, from vertical integration, access to resources, product differentiation - of which there was much, in this case - and so forth. You need to look at the features and dimensions of the marketplace - the real marketplace. That is your starting point.

HAYNE J: And in such a marketplace, can a participant be restrained or constrained by competitors or acquirers in some aspects of its conduct, but not others?

MR YOUNG: Yes. It has been so decided in - - -

HAYNE J: Does it therefore follow that market power, or the power with which we are concerned, is not a single, global concept but a concept that is to be related to particular kinds of conduct?

MR YOUNG: Yes, we would accept that, your Honour. May I add that that is what the Europeans have decided in a chain of cases. They are, of course, concerned with abuse of a dominant position, but you still have a threshold test, be it substantial degree of power, dominant power, et cetera.

HAYNE J: But does it then follow from that that in the facts of this case, and the allegations that were made in this case, that the relevant question is whether Boral was constrained, in a relevant way, in fixing its prices? There are other questions, of course, that will arise, but is that a question that arises?

MR YOUNG: It is a question that arises, but it is helpful to reframe the same question differently, and I do that because that is what the Full Court did. They asked the question in the light of the trial judge's findings, that particular products, and only particular products, had been priced below avoidable cost, over a period of 22 months, knowingly and consciously by Boral, for the proscribed purpose. So the Full Court asked the question, how was Boral able to sustain - in other words, what aspects of its market position did it rely upon to sustain its below cost pricing for that period, for those proscribed purposes, in circumstances where other majors, Pioneer and Rocla, who were vertically integrated and had other strengths in the marketplace, did not engage in such conduct? In other words, the paradigm, the QWI paradigm of how someone would be likely to behave without market power, in this case, would be Rocla or Pioneer. They did not price below avoidable cost. They competed for jobs, but they refused persistently price below avoidable cost. They did not have these proscribed purposes.

McHUGH J: Yes, I know, but you are engaged in a circular argument. You assume in favour of yourself that Boral has market power. Your assumption is that Rocla has not market power but Boral has.

MR YOUNG: No, that is not my assumption at all, your Honour. My assumption is that every participant in a market has some degree of market power. Your Honour hinted yesterday at the economist's definition of market power. The economist's definition of market power is the ability to price one or more cents above marginal cost. To price at marginal cost means that you are only recovering your costs, plus your cost of capital, and nothing more. Your cost of capital is simply the minium rate of return that represents what it costs to invest the funds in the production.

Now, an economist defines competition, pure competition and competitive prices, the situation where everybody prices with marginal cost. Nobody does that. Everybody tries to make a profit above their cost of capital, so everyone has some degree of market power. Prices are not competitive, in the economist's sense, as soon as they rise above marginal cost.

GLEESON CJ: Say that again, please? "Everyone has some degree of market power"?

MR YOUNG: Everyone has some degree of market power.

GLEESON CJ: I would just like to - - -

MR YOUNG: That is expressly stated, your Honour, in Melway, amongst other things. It is stated in the explanatory memorandum for section 46. Every participant in the market has some degree of market power. So, my answer to Justice McHugh is that we do not assume that Pioneer and Rocla did not have market power. Our case is that Boral was the - - -

GLEESON CJ: You mean everyone has some degree of market power because in real life nobody prices at marginal cost.

MR YOUNG: Exactly.

GLEESON CJ: And the capacity to price above marginal cost reflects some market power.

MR YOUNG: Exactly.

GLEESON CJ: I wonder if it just does not reflect the fact that nobody, for the time being, is willing to price below marginal cost or at marginal cost.

MR YOUNG: No. If you price below marginal cost you cease to get a return on the next unit of production for part of your variable costs and if you press on and go lower you may get no return for your variable costs and that is the concept of avoidable cost. In other words, each unit of production is not only going to cause a loss, you are better off not producing it. Can I take the Court to the trial judge's definition of "avoidable cost" which may assist just in understanding the point.

GAUDRON J: When you said "better off not producing", does that include some allowance for closing costs and re-start-up costs?

MR YOUNG: No, your Honour, the- - -

GAUDRON J: Because it seems to me to be - as I said yesterday, this seems to me to be far too mechanistic. You may have a conscientious employer who does not want to put his work force out of work.

MR YOUNG: Yes, your Honour.

GAUDRON J: And says, "It's better for me to keep my work force here" for all sorts of reasons than to close.

MR YOUNG: Yes, your Honour, granted. We are not suggesting that as soon as you price below some fixed economic measure of cost you are in breach of section 46. We are not suggesting that. You need the additional element of proscribed anti-competitive purpose. So, your Honour's example does not address the application of the section.

GLEESON CJ: You also need the additional element of taking advantage of your market power.

MR YOUNG: Taking advantage reflects a use of market power to achieve the purpose. It is the connecting factor between the threshold and the purpose, but it means, in our respectful submission, no more than use as - - -

GLEESON CJ: Let me give you an example that is less altruistic than Justice Gaudron's. Suppose you have a construction company that is engaged in earthmoving operations and it is bidding in a competitive environment for a particular job, and let it be supposed that it makes a calculation that its better not to have its equipment idle than to be in a position where it has a lot of idle equipment on its hands, so it bids for the job below cost. Now, as was mentioned yesterday, that word "cost" could give rise to a Royal Commission on its own, but in what way is that an exercise of power?

MR YOUNG: It is not necessarily an exercise of power, is the answer. You would have to make another inquiry into whether that action was facilitated or assisted by the possession of market power, or to flip it around and pose a counterfactual as in Queensland Wire, whether that action would have been engaged in if the firm lacked market power, but all other factors were equal. You do not always have to ask that counterfactual but in some circumstances it can assist.

GLEESON CJ: I am assuming a highly competitive situation. I am assuming that there are a lot of earthmoving contractors around the place with bulldozers and other machinery and one of them comes in low because he calculates that if he does not get this job his equipment is going to be lying idle for a substantial time and he would rather incur what superficially might appear to be a loss than to leave his equipment idle for a year.

KIRBY J: That could happen in an airline, for example.

MR YOUNG: Well, exactly, your Honour, and the mere fact that competitive activity is under way tells you nothing about one or other player having a substantial degree of market power. But to return to the Chief Justice's question of me: the mere fact that you price low does not mean that you are in that situation going to bring yourself within section 46 for two reasons.

One: the mere fact that you price low, yet otherwise you are a fairly large participant of the marketplace, does not necessarily prove the connecting factor between market power and its use in taking that particular decision. Here we have the evidence of Mr Steele of Rocla that in order to try and stay in blocks, keep its plant active, keep its people employed, it would price the Eastland project at marginal cost, and it would do so very carefully. They would make no profit on the job but they would try and win that particular contract for exactly the same sorts of reasons that your Honour has articulated.

McHUGH J: But so what? Maybe Rocla was an inefficient producer.

CALLINAN J: Maybe it had much lower sunk costs and had more recent costs, capital costs.

McHUGH J: Exactly. The theory that you propounding seems to me that you would be able to indict under section 46 a company which priced above its average variable cost but under an inefficient producer's costs for the purpose of driving that person out of the market. Is that an offence?

MR YOUNG: If it uses its market power to price below its average variable costs with the proscribed purpose and it has the threshold condition, yes.

McHUGH J: I do not know how anybody in a competitive market could ever avoid having one of the proscribed purposes. It seems almost a contradiction in terms to say that a company in a market fighting for a market share is not doing so for the purpose of "substantially damaging a competitor", or all its competitors.

MR YOUNG: Your Honour, I come back to the point I was trying to make about section 46. It applies a rule of conduct - a special lens was the word used in Melway - to companies occupying a position of a substantial degree of power. Section 46 is a norm of conduct. If you like, the Americans would call it a per se rule. It applies to a corporation, in our submission, that uses its market power for the proscribed purpose, so the elements - - -

McHUGH J: It cannot possibly be the object. What about the consumers? What is a company to do? Let us say it is Boral, for the moment. Let us assume for the moment that Rocla is an inefficient producer. Is Boral not to use its market power to undercut Rocla? Because it will not help the consumers.

CALLINAN J: Could I just ask you this: what, is Rocla, on the entry of C&M, expected to stay on the percentage of the market that it has or to forego part of that market? Naturally, it is going to respond to a new competitor, is it not?

MR YOUNG: Of course they are going to respond. With respect, your Honours are missing our point. Boral priced below its own avoidable cost.

McHUGH J: I have a real problem at the moment as to what that has to do with it. What is the difference if it priced one cent above its AVC, or one cent under? Is this what it all turns on?

MR YOUNG: Avoidable cost is not AVC. Avoidable cost is not average variable cost. Avoidable cost means that you are not only below; it means you are getting no contribution at all to your fixed costs and you are getting nothing for your variable costs. So each unit you go backwards. You lose a massive amount of money on each new unit of production.

Boral knew, roughly speaking, as conceded yesterday, the costs of production of Pioneer and Rocla because they had the same sort of facilities. Boral priced low in blocks. C&M was not in blocks. It was deterred from entering blocks. It priced low in blocks. The consequence of going below its avoidable costs for a period of 22 months was, amongst other things, that Rocla ceased to produce blocks and C&M stayed out of blocks.

Your Honour asked me how competition is harmed. Competition is harmed because we had a highly efficient new competitor whose machine could supply the whole of the market, and its costs were a fraction of Pioneer and Boral's, but it was deterred from producing blocks for a period of three years and it almost failed. By these policies of pricing below avoidable costs for 22 months whilst expanding capacity, irrationally, it almost killed off a very efficient new player, which is to the detriment of the whole economic efficiency that the Act, through competition, is designed to advance.

CALLINAN J: No, there was enormous advantage for consumers for 22 months.

MR YOUNG: Yes, your Honour, but if the new efficient plant had not survived and had sunk, in the long run the competitive process would have been worse off.

McHUGH J: The competitors get a positive advantage for 22 months and your case is, "Oh well, maybe in the foreseeable future they wouldn't get an advantage". So they substitute present gain for some theoretical loss in the future.

MR YOUNG: No.

CALLINAN J: There is a finding against you in relation to a recoupment, is there not, by the trial judge?

MR YOUNG: Yes. Your Honour, can I deal with Justice McHugh's question first if I may.

CALLINAN J: I am sorry.

MR YOUNG: I am jumping a long way ahead, but your Honour - - -

McHUGH J: Yes, I have lost the structure of your argument. You started with a section and now you are - - -

MR YOUNG: I am about to come back to the section, your Honour. Your Honour misunderstands our case. All the while, whilst this was happening, in products representing 77 per cent of profit, Boral was charging as it wished on its high margin products. So they were protecting their high margin products by what they were doing in their commodity high volume product. These are things I will need to go on and refer to, and if you will forgive me, Justice Callinan, I have forgotten the thrust of your question.

CALLINAN J: No, do not trouble about that.

MR YOUNG: Can I return and try and give the argument some structure if I may. I went to - - -

KIRBY J: I rather liked it when you started with the section. It was nice to go back to the section of the Act, as Justice Gaudron said yesterday.

MR YOUNG: Can I go to Justice Merkel's judgment where he sets out the thrust of the explanatory memorandum, simply as a convenient reference point. It is at paragraph 189 at page 260. On that page his Honour sets out the second reading speech. We draw particular attention to the second paragraph at line 15 and line 18 to 20. His Honour then summarises the explanatory memorandum, including point two:

all participants in a market possess a degree of market power which may range from negligible to very great.

There is reference to "substantial".

GLEESON CJ: At line 18 there is reference to "major participants in an oligopolistic market". Do you say the market for masonry products was oligopolistic?

MR YOUNG: Your Honour, we would say the evidence never really allowed one to determine whether that was precisely so but it is not - - -

GLEESON CJ: What would you say is the difference between an oligopolistic market, in which there are four competitors, and a highly competitive market, in which there are four competitors?

MR YOUNG: We would say this, your Honour: the difference between an oligopolistic market in which there are four competitors is that between them the four competitors are in a state of relative harmony, enjoying a comfortable life and sharing - - -

GLEESON CJ: I would have thought an example of an oligopolistic market in which there are four competitors is one in which the four competitors have entered into a restrictive agreement.

MR YOUNG: I was going to say, your Honour, that it falls short of that but, effectively, there is an understanding between them of the kind that the evidence pointed to between Boral and Pioneer here, namely, that they both recognised that if they could get rid of - or if a few small players disappeared, things would return to normal, you would have a good level of profitability and you would not have the chaos that was under way in this period.

GLEESON CJ: But there was no finding here of an anti-competitive agreement arrangement of understanding, was there?

MR YOUNG: No, there was not, your Honour.

GLEESON CJ: Am I right in thinking that the key to identifying a market as oligopolistic is some anti-competitive agreement, arrangement or understanding?

MR YOUNG: No, I think it falls short of that. The economic terminology refers to a highly concentrated market in which without an explicit agreement there is effectively an understanding that they will share a comfortable life.

GLEESON CJ: I said an agreement, arrangement or understanding.

MR YOUNG: Yes, your Honour, I am sorry.

GLEESON CJ: So you do not have oligopoly just because you have a small number.

MR YOUNG: No, but - - -

KIRBY J: Was not that the original meaning of oligopoly?

MR YOUNG: It is, your Honour.

KIRBY J: At least in my economic training I thought that was.

MR YOUNG: The economists seem to draw a distinction between a highly concentrated market where there are a few firms - what goes on to say a leading firm and a less concentrated market. Here we have a highly concentrated market, as most markets in Australia are, with a few players, a couple of major players and a few fringe players.

GLEESON CJ: But do you suggest the market that you say existed here was an oligopoly?

MR YOUNG: I do not think at this stage, your Honour, I can say that there are findings to that effect or that the case was ever conducted on the basis that it was an oligopoly, but it was conducted on the basis that it was a highly concentrated market in which Boral was the leading firm in which there was a degree of recognition between Boral and Pioneer, that if two or three minor players could be removed they could enjoy a comfortable life. There is evidence from Boral that that was their expectation of the course that Pioneer would take. So, the answer I can give your Honour is only that the evidence indicated that this market was a market approaching or in the nature of an oligopolistic market.

GLEESON CJ: Was it a highly competitive market?

MR YOUNG: There was a high level of competitive activity in certain areas. The same might be said of the airline industry in Australia or the beer industry.

GLEESON CJ: There are certain barriers to entry into the airline industry.

MR YOUNG: Yes.

GLEESON CJ: Like a two-airline agreement or policy.

MR YOUNG: Or there was.

GLEESON CJ: Yes.

MR YOUNG: But the fact that there is a level of competitive activity, all the cases have said, does not gainsay the fact that one - - -

GLEESON CJ: I would have thought it would be impossible to select an industry in which there were higher barriers to entry than the airline industry.

MR YOUNG: I am not sure that is right, your Honour. We have had a number of recent new entrants. The other side point to the fact of entry and they say, "There you are, somebody has entered. That proves that the barriers are relatively low". The absolute capital costs of entry are not necessarily determinative, but just take it as an example of an industry where there have been entrants and there has been heavy price competition. The fact that there has been heavy price competition, a high level of competitive activity around about the time of entry does not deny the fact that the leading player, the leading incumbent, may have a substantial degree of market power.

To allege that the answer to this case is that there was a high level of competitive activity is to beg the question in exactly the same way as you would if we labelled their conduct predatory or anti-competitive.

GAUDRON J: When you say that and you use the expression "market power", which is part of the definition of power as appears in subsection (4), can you tell me whether one is to take that in as a matter of ordinary language or as an art term based in economic theory?

MR YOUNG: In our submission, it is a matter of ordinary language but informed by a background of understanding of economic principle, but it is not an economic term. Section 46 does not use any economic terms that are to be defined as strict economic terms. For instance, it does not use barriers to entry, as Justice Dawson rightly pointed out in Queensland Wire. It uses a broader concept.

GAUDRON J: You have gone back to define market power, I thought, as the ability to charge above marginal prices.

MR YOUNG: I said that is how the economist would define it, your Honour. We would say market power is the ability by virtue of the attributes you have in the market place, which may be many and varied, structural or conduct driven, but the ability you have to a substantial degree to act without constraints.

GAUDRON J: Well, perhaps. Why is it not just the ability to change the nature or activity in the market, the nature of the market or the extent of activity in the market?

MR YOUNG: That may well be an appropriate broad definition of market power but, in the context of a section that is concerned with specific conduct for proscribed purposes, it is probably too broad to be of great assistance.

GAUDRON J: Why is it not market power if you have the ability, one way or another, to reduce the number of suppliers?

MR YOUNG: It depends precisely on what steps you take and how you sustain or support those steps.

GAUDRON J: I am just talking about the notion of market power, where I thought we still were.

MR YOUNG: Can I give your Honour an example: a refusal to deal.

GAUDRON J: I thought you had not got to "take advantage of" or "purpose".

MR YOUNG: No, I have not.

GAUDRON J: So I thought we were still on market power.

MR YOUNG: We are, your Honour, but even so - - -

KIRBY J: I thought we were still on the section before we got into market, market power, take advantage of market power in a market.

MR YOUNG: We are, your Honour, we are.

KIRBY J: I am one of those old-fashioned lawyers who likes to have a structure. It is very unusual, I know, nowadays.

MR YOUNG: I am trying to hold to one, your Honour.

GLEESON CJ: So you look at the definition in subsection (4) of the words in subsection (1).

MR YOUNG: Yes, you do, your Honour.

GLEESON CJ: The definition tells you that "power" means "market power", which is how we got into market power - we looked at the definition in the section.

MR YOUNG: Yes, that is so. Can I just finish with the explanatory memorandum by saying this. Justice Merkel summarised it, but the actual memorandum said this, if I might quote from paragraph 46:

Whatever the position in regard to `dominance', more than one firm may have a `substantial degree of power' in a particular market.

Then there is citation of European cases, and then this is said:

The term take advantage in this context indicates that the 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 (a), (b) and (c) . . . 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.

KIRBY J: Now, is that correct? That is "leverage", "exploit" and so on. In this Court, in Queensland Wire, it was just said it just means "use". I think Melway approved that.

MR YOUNG: It does, but this section was getting, really, between the connection between the use and the market power. So you need to do more than simply engage in conduct for a proscribed purpose. There has to be a connection with market power, but the connection is only that you rely upon market power to give you the leverage to do what you do, to sustain it, or to enable you to do it more readily or effectively.

Now, we started with the section because our learned friend's submission was that the 1986 amendments made absolutely no difference to the concepts that were to be applied and, in particular, it did not alter the core concept from one of US-style monopoly power to act, as our learned friend repeatedly said, free of all constraints, so that you are completely free to set your own level of profits. Now, of course, it did fundamentally alter that conception. We are only concerned with a substantial degree of market power, not the power to set your own level of profits as you like, completely free from constraints.

McHUGH J: But in paragraph 47 of the memorandum, the Attorney said that:

Although the test of dominance is higher than that applying in the case of a substantial degree of market power, these cases -

that is a reference to the European cases -

adopt a similar approach to that envisaged by new sub-section 46(3) - - -

MR YOUNG: Yes. Well, I want to take your Honours to those cases, because they make the point that a degree of competitive activity in the market is not inconsistent with the presence, in those cases, of dominance, a fortiori, not inconsistent with a substantial degree of power being held by the leading player. Can I do that immediately. Can I start with Queensland Wire, that I think the Court may still have handy. I wanted to take the Court simply to Justice Dawson's well-known passage at page 200.

KIRBY J: Now, these are being put forward to support which proposition?

MR YOUNG: They are being put forward to support this proposition, your Honours, that in assessing market power, the fact that there is competitive activity in the market does not deny the fact that one or other player in the market may have either dominance or a substantial degree of market power. There is nothing inconsistent in the two propositions. Secondly, that in assessing market power, you undertake a broad review of all of the circumstances of the market, including conduct, as well as structure.

Now, BBM's submissions fundamentally deny both propositions. I might add, thirdly, a fundamental part of their case was that there is only one test for market power, namely, the ability to raise prices immediately, at will, free from all constraints. These cases deny that proposition. The cases also refuse to apply a recoupment notion in the context of sections that have a threshold requirement of either dominance or something like dominance.

Now, can I go to Queensland Wire at page 200, point 6. Justice Dawson sets out the well-known sentence about manifestation of market power, but then his Honour adds in a passage that was not referred to, "The ability to engage persistently in these practises"- that is to say, practises directed at excluding competition - "may be as indicative of market power as the ability to influence prices." Now, it was exactly that test that Justice Merkel applied to the facts in this case.

GLEESON CJ: What do you say about the last sentence on page 200?

MR YOUNG: Yes, your Honour, but that is addressing section 46 in its pre-1986 form and also in a factual context where it was acknowledged all around that BHP had monopoly power. It is no longer correct to say that our Act, as amended, is one to which that sentence could be applied. Market power- - -

GLEESON CJ: Well, if market power is no longer the advantage that flows from monopoly or near monopoly, what is it now?

MR YOUNG: Market power is the advantage that flows from possessing the position described in the threshold of - well, the threshold of section 46 is a substantial degree of market power. Therefore, a concept of a substantial degree of market power is the advantage which flows from being able to act to a significant or to an extent of substance without the sorts of constraints that might affect somebody who has no market power.

GAUDRON J: Or less?

MR YOUNG: Or less.

CALLINAN J: How would the appellants have behaved had it been the competitive market which you say it should have been?

MR YOUNG: This follows, your Honour: we say the evidence is clear that Boral drove prices down; they went much lower than they needed to- - -

GLEESON CJ: No, I know that you say it did, but do you say it would have done in the ideal competitive market?

MR YOUNG: It would not have priced below its avoidable costs of production. It would not have gone in price- - -

GLEESON CJ: Not even for a month or two months or 11 months?

MR YOUNG: No, it would not have gone below its avoidable costs of production. It would have priced the levels that were competitive with Pioneer and Rocla, not way below them. We are talking here- - -

GLEESON CJ: But did not at times Pioneer get down to its cost or very close to it- - -

MR YOUNG: Can I show your Honour the graphs and Justice Heerey's - - -

GLEESON CJ: In a moment, yes, but I wonder if you could just help me with these matters, first?

MR YOUNG: I will, but the answer is, across the broad range of products - and we are not only concerned with the 18 projects. Boral, across all products relevantly, was way below - and I say "all products relevantly" - the particular products that are the subject of the judge's findings - it was way below the prices of the others and way below its costs of production right through the period, and it did not need to be, and but- - -

CALLINAN J: Did not it just on occasions underbid Pioneer?

MR YOUNG: No, your Honour, that is the misconception that our learned friends cling to all the time, that is, look at 18 major products which are a fraction of the market. The case here was that the broad range of conduct towards all consumers, most of whom did not buy through these major projects, was the course of conduct of below cost pricing. If your Honour bears with me for one moment I might be able to assist. Can I have volume 18 - - -

CALLINAN J: Certainly, I would like to see that. You say there are 18 projects, in particular, but did not all the judgments focus on those 18 projects?

MR YOUNG: Justice Heerey's judgment did, but not the Full Court. We spent five days going through the evidence with the Full Court of the broad position for all products, not just the 18 projects. The graphs that his Honour accepted - these were tendered and agreed by consent - as accurately showing the position of all the evidence, appear in volume 18 of the appeal book commencing under tab 1. Tabs 1 to 5 are the relevant graphs but I can simply explain it by the graphs under tab 1 and tab 2, and I trust the Court has coloured copies.

GLEESON CJ: Yes, thank you.

MR YOUNG: The red line is Boral's pricing. The blue line with crosses is Boral's costs of production of 10.01 block. It is avoidable cost of production. Above both lines you will find Pioneer's prices and C&M's prices for 10.01 blocks, not just the major projects but across the board. Can I turn to tab 2 which is the holding of blocks, I think.

CALLINAN J: Just before you do that, there is no line to indicate C&M's or Pioneer's cost of production?

MR YOUNG: No, that was never calculated or possible to be calculated on the evidence. The general effect of the evidence was that Pioneer had a similar cost of production to Boral and it was known that C&M's costs of production were way below those of Boral, and that was the effect of the evidence.

If you turn the holding of blocks, the next tab 2, at 15.01, the red line is Pioneer across all sales of 15.01 blocks.

KIRBY J: Where do we find the type of block that is being described, where is it referred to on the graph?

MR YOUNG: At the top of the page, 15.01, and the actual figures - the agreed figures - if we turn behind the graph under tab 2 to the next page, 3634, the Court will see the agreed "Average Unit Selling Price" across all blocks for Pioneer, Boral, C&M.

GLEESON CJ: Did you say 3644?

McHUGH J: No, 3634.

MR YOUNG: 3634, I think, your Honour.

CALLINAN J: There is no graph that plots market share against these lines?

MR YOUNG: No, your Honour, but these graphs were the basis of his Honour's finding, tendered by consent, that Boral, across all sales of these blocks, knowingly priced below its avoidable cost. The selling price is in the table. The Court will see how far under Pioneer and C&M, Boral went on average, right through the relevant period. Take Pioneer, June 1995 and July 1995 for instance, Pioneer's prices were 96 cents and 94 cents, Boral's are 82 and 77, C&M's were 99 cents and $1.16. Boral was way below its avoidable cost of production in the same period. That is the evidence, undisputed evidence, that founded his Honour's finding of pricing below avoidable cost.

Can I answer your Honour's questions about the QWI test that how would a party be likely to behave if it lacked market power? Our submission is that Boral did not need to win business, to price below its avoidable costs. It did so, as concurrent findings of fact establish, for prescribed purposes of driving out one or more competitors. It did so for a sustained period. It did so, not because it was taking advantage of any particular efficiencies or competitive position or otherwise competing on the merits, it did so in order to try and drive out a very efficient new competitor that it greatly feared would eliminate its dominance in Victoria and go on to affect its operations in other States.

GAUDRON J: It seems to have done this in blocks but not in pavers, is that right?

MR YOUNG: That is right. That is because C&M's machine was so efficient in producing interlocking pavers that they decided, "We'll simply lose if we compete there. We'll put Rocla into head-to-head competition with C&M in pavers." I will take the Court to the evidence about that.

CALLINAN J: Mr Young, the table that we have just been looking at, "AVERAGE UNIT SELLING PRICE", does that include all of the block production, 15.01 block production, of each of the - - -

MR YOUNG: Yes. All sales.

CALLINAN J: All sales. Including the big and the small projects?

MR YOUNG: Yes, and that was the case and that is why focusing on a few hotly contested major projects is a false view.

CALLINAN J: But it is average.

MR YOUNG: It is average.

CALLINAN J: Is there evidence that shows what the small consumers were paying?

MR YOUNG: Yes. They were by and large subject to pricing discretion by BBM. The evidence was that BBM could extract prices above market from small customers when they wanted to - - -

CALLINAN J: I will get you to refer me to that evidence at some stage, please.

MR YOUNG: I will, your Honour. And Pioneer likewise. They both had the discretion vis-à-vis small customers, a discretionary element of price whereby, if they wanted to, they could extract a premium from small customers.

CALLINAN J: I suppose that happens in any business though.

GLEESON CJ: Was there evidence, Mr Young, of what proportion of their sales was represented by sales to major projects?

MR YOUNG: Yes, your Honour. Yes, there is, and I will take the Court to it. I think it may be - - -

HAYNE J: Thus revealing whether, or to what extent, these averages are skewed by - - -

MR YOUNG: Yes, there is that evidence and I will take the Court to it, but can I try and maintain some structure by going through the authorities. I said that Justice Merkel applied that precise formulation by Justice Dawson. It is paragraph 224:

BBM's ability to persistently engage in predatory pricing to exclude competition is an indication of its market power.

That was criticised but it finds wholesale support in Justice Dawson's approach, which was endorsed itself in Melway. Next, can I turn to Melway - - -

GAUDRON J: To approach it that way, is it not to beg the question? I mean, just as a matter of reasoning.

MR YOUNG: I missed the start of your Honour's question of me, I am sorry.

GAUDRON J: I said is not that approach really to beg the question?

MR YOUNG: No, your Honour. It is not to beg the question because, as all the cases I am going to say, it is impossible to make an assessment of a corporation's degree of market power without examining its course of conduct and practices that are under way in the real live marketplace. It is not an arid compartmentalised inquiry, and cannot be. The cases say that.

GAUDRON J: But to call it predatory pricing seems to me almost - in that context, is to beg the question. If you said to consistently underbid its competitors - - -

MR YOUNG: Your Honour, we agree, we do not - - -

GAUDRON J: That would seem to me to indicate market power.

MR YOUNG: Yes.

GAUDRON J: That would be all you need to say. Now, whether that is predatory pricing or not seems to me really to be irrelevant.

MR YOUNG: We agree, your Honour. Can I take the Court to Melway to its general discussion of market power at page 608, 75 ALJR, paragraphs [41] to [43], but we would draw particular attention to paragraph [43] between E and F:

Market power may or may not be total; what is required for the purposes of s 46 is that it be substantial.

In another passage the Court spoke of the concepts being interrelated. I cannot immediately find that. The Court did endorse the idea that market power can be detected by direct observation which was an approach ascribed to Justice Deane in Queensland Wire. That appears at paragraph [53] at page 610. At paragraph [67] to [68] are the other passages I would draw the Court's attention to, particularly in the second column at paragraph [67], the reference to the need, opposite C, to establish a "relevant connection". Now, I will not stay to explain it, but the Court effectively said that in some cases it may be useful to pose the Queensland Wire counterfactual, but it is not always necessary. If it is to be posed, great care must be taken so as not to introduce assumptions there about the distribution system that did not reflect the reality of the marketplace.

KIRBY J: The point about interrelationship of the concepts is at paragraph [25] at 606.

MR YOUNG: Thank you, your Honour. Next, can I turn to the recent decision of Justice Hill in ACCC v Universal Music, (2002) ATPR, page 41-855. This, I think, is the only place where the case is reported at the moment. It is a decision of December 2001.

GUMMOW J: Is there any appeal pending in this matter?

MR YOUNG: I am not aware of that, your Honour. November, I am told. The case concerned an allegation that a corporation with a 15 per cent share of the relevant market had engaged in conduct in breach of section 46 because of the special circumstances of the recorded music market, but I wanted to take the Court not so much to the facts but to the statements of principle. First at page 357, at page 44-677, second column.

GLEESON CJ: Paragraph 357.

MR YOUNG: I am sorry, paragraph 357 at 44-677. At paragraph 360, Justice Hill said he found the views explained there about the impracticality of separating the threshold test from the other aspects of the investigation to be persuasive. At the very bottom of the first column in paragraph 360 his Honour stated an issue raised by the case as to whether there could be market power, "notwithstanding" an inability "to raise existing prices as a result of competitive constraint". Then can I turn to 409 and 410.

GLEESON CJ: I suppose there are some government-regulated markets in which there is price fixing, that is by government, so that you cannot rise the prices. It does not necessarily mean you cannot have a substantial degree of power in the market.

MR YOUNG: But you can have, in our submission, a substantial degree of power in the market.

GLEESON CJ: Pharmaceutical companies, for example, operate, in many respects, for reasons that are all too obvious, recently, under government pressure on pricing and they may, nevertheless, perhaps, have a substantial degree of market power even though their capacity to raise their prices is limited by government control.

MR YOUNG: Yes. I agree with your Honour, but leaving that aside, there are circumstances where market power can exist and can be utilised and is utilised even though there is no immediate ability to elect to raise prices to some chosen monopoly-type level. The idea that you can immediately raise your prices, either if you are a dominant firm or a leading firm in the sort of markets we are talking about, is really to infiltrate a notion of monopoly power back into the section.

McHUGH J: You rely on Justice Dawson, but if you look at page 202 of his judgment, he seems to, in effect, regard taking advantage as referring to monopolistic or near monopolistic practices. At the top of page 202:

The difficulty in determining what conduct constitutes taking advantage of market power and what conduct does not, stems inevitably from the need to distinguish between monopolistic practices, which are prohibited, and vigorous competition, which is not.

MR YOUNG: Yes, your Honour, but he is dealing with a monopoly in the context of an Act that has a different threshold. Can I simply finish the references in the Universal Music Case by giving the Court a reference to 409, 410 - - -

GLEESON CJ: Where do we find the article by Professor Brunt that is referred to in that judgment?

MR YOUNG: At paragraph - your Honour, I do not think it is in the materials but we can supply it.

GLEESON CJ: I would like to see that article, if I could.

MR YOUNG: The Salop article is in the materials and have been supplied. At 409 and 410 - 409, in particular, the opening words:

there is nothing in what is said -

in the section -

that makes power over prices the sole test of market power. Indeed the comments of Dawson J are to the contrary.

HAYNE J: But is it the sole relevant question where the conduct complained of is conduct about price setting?

MR YOUNG: No. It cannot be, your Honour, and that is the very reason why the Americans have introduced recoupment, because of the paradox. What you are looking at is conduct that is normally competitive conduct, cutting prices. Even the American jurisprudence recognises that sometimes it is the antithesis of competition on real examination. So, you have to move beyond the paradox and then formulate a test - - -

HAYNE J: But you move beyond the paradox by observing whether or not the firm concerned has capacity to fix its price at its wish, unconstrained.

MR YOUNG: That would be the test in the US monopoly context. In our context the test is, how is it able to sustain prices below avoidable cost for that length of time in circumstances where it is not forced to go so low and in circumstances where its proscribed purpose is to eliminate a competitor? What resources has facilitated that conduct?

HAYNE J: That, posed in that form, seems to be an inquiry about financial strength.

MR YOUNG: No, it is not, your Honour, or not only. But if we are talking about the capacity to cut prices, you cannot put financial strength aside. It can be no answer to say you have used financial strength. You use financial strength in many of the activities that might fall within section 46.

GLEESON CJ: If deliberate intensification of a price war, in the expectation that you can outlast one or more of your competitors and drive them out of the market, is conduct within section 46, what does it matter whether the level at which you are setting your prices is above or below average variable cost or avoidable cost?

MR YOUNG: Yes. The precise measure of cost is not really the brunt of what we put. What matters about that sort of inquiry is that you need to establish a connection between the conduct in intensifying price and the possession of a substantial degree of market power. You look for the connector by inquiring into what sustained the price increases, what advantages were utilised to facilitate or assist - sorry, the price reductions, and if that is difficult, one alternative is the Queensland Wire counterfactual, would it be likely that a company without market power would engage in these price cuts? Now, we do not think in this context that the counterfactual is as helpful as a thorough examination of the aspects of Boral's market power and position that facilitated the price cut.

GLEESON CJ: Suppose you had a market in which one company had a very small percentage of the market and, on the face of it, had an insubstantial degree of market power, but it was just a great deal richer than all its competitors, and the company said, "We calculate that if we actually start a price war, we can outlast some of these others and we will emerge, at the end of the price war, with a much bigger share of the market than we have now. So let us call on a price war." Is that conduct within section 46?

MR YOUNG: Can I answer it this way, your Honour: it may be. The fact that great financial strength has been resorted to does not disqualify it for potential inclusion as a contravention of section 46, but we would submit that you need to undertake a more thorough analysis of precisely what aspects of its market position were relied upon, and why, and how, to implement that course of conduct. The economists, of course, would say that a long purse can be - - -

GLEESON CJ: What I have just described is a typical course of conduct for a new entrant into a market, is not it?

MR YOUNG: That a new entrant is met by such conduct?

GLEESON CJ: No, for somebody trying to break into a market?

MR YOUNG: Yes, that is true. I mean, a new entrant will budget for losses, to begin with, and undertake promotional campaigns and the like. That is why I have said to your Honour that the answer simply does not lie in looking at financial strength. You need to ascertain the dimensions of the incumbent's position that have been utilised to implement the campaign.

McHUGH J: But supposing in this case after six months Mr Berg had said, "I have had enough, this division is losing money, I'm calling it off"- in fact they get out of the market themselves - would you still say that they have breached section 46 in the six months that they had persisted in this conduct?

MR YOUNG: Quite possibly, yes, your Honour. I mean, there is no component in section 46 that says your conduct has to achieve its purpose.

GLEESON CJ: No, but the norm of conduct proscribed by section 46, as you characterised it earlier, is not Parliament saying to participants in a market, "Don't damage your competitors"?

MR YOUNG: No, it is not simply saying that, your Honour.

GLEESON CJ: What form of competition does not have a purpose of damaging competitors?

MR YOUNG: Most forms of competition that I can think of - perhaps all, your Honour - I am not trying to avoid the question - do have an intention of damaging competition in the sense of winning sales from them and so on.

GLEESON CJ: Damaging competitors?

MR YOUNG: Sorry, damaging competitors, but the point I was going to make is what the section does not do is to insert into section 46 a requirement that the competitive process be damaged. Our learned friends have sought to instil that in their submissions which is again to borrow from US jurisprudence because they have no subsection.

Parliament here has made the judgment that conduct of a certain kind by certain parties in a certain position is presumed to damage competition. That is the predicate- - -

GLEESON CJ: Well, I am not sure about that. Given what is in the explanatory memorandum it may be a fairly familiar case of Parliament being told something about how the section is going to operate, is to effect monopolis or near monopolis, now it is going to effect oligopolists and the bureaucracy then pressing it beyond what Parliament had in mind.

MR YOUNG: Well, your Honour, that explanation sits ill with construction of the whole of Part IV, because take section 4D in exclusionary conduct, that is made a per se offence, regardless of any effect on competition.

McHUGH J: Yes, I know, but they are not being prosecuted for any of those.

MR YOUNG: No, I understand that, your Honour, but the idea that- - -

McHUGH J: I just wonder whether or not if this concrete case had been put up before the Parliament it would have been passed - the legislation would have been passed.

MR YOUNG: Well, I cannot answer that, your Honour.

GLEESON CJ: I am wondering, Mr Young, whether the paradox - and I think you are right to say there is a paradox here - is more extensive than was earlier mentioned. Part of the paradox is that price-cutting looks like competition but another part of the paradox that strikes me, when you apply section 46 to a case of price-cutting, is that the purpose on which the section fastens, that of eliminating or damaging a competitor, is usually for the purpose underlying all competitive behaviour.

MR YOUNG: Can I accept that as a premise, your Honour. The section though does not simply proscribe conduct that eliminates or damages a competitor. It only proscribes conduct which has that objective, or purpose, when engaged in by a corporation to whom a special lens is applied.

GLEESON CJ: And when it is taking advantage of something to do that.

MR YOUNG: Yes, when it is using its market power we would say. You do not need to engraft anything on to take advantage because it is enough, that experience tells that if someone is in a position of a substantial degree of market power and they use that power for a proscribed purpose, more often than not it is going to be damaging to competition. Therefore, we implement a per se rule proscribing that conduct as contravening conduct, just as the Parliament did with section 45A, section 45 coupled with 4D and with 47(6), third line forcing. It is presumed to be damage to competition per se, no test of substantial lessening of competition.

GLEESON CJ: You might want to come back to this in due time at your own choosing, but I notice that Justice Heerey did not actually specify the purpose that he said existed. All Justice Heerey said was there was one or other of the purposes referred to in section 46.

MR YOUNG: Yes, that is so.

GLEESON CJ: Did the Full Court get more specific than that?

MR YOUNG: I think they did. Can I say, firstly, about Justice Heerey, the very evidence he relied upon for purpose, the document showing a purpose of driving out a competitor. So that must be amongst the purposes he has found. What his Honour did was simply not limit himself to paragraph (a), eliminating a competitor, or "deterring" entry, but he simply said there is probably sufficient to fall within the other paragraphs as well.

GLEESON CJ: In all events, it is that purpose of eliminating or damaging a competitor that seems to me to involve part of the paradox that you mentioned.

MR YOUNG: Yes, your Honour, but I have endeavoured to answer that by saying there are other elements that Parliament has postulated. I am afraid time is really not going to permit me to undertake a review of all the cases that I had intended. Can I give the Court some reference - - -

HAYNE J: Before you go on, can I just flag something to which I do want you to come at some point.

MR YOUNG: Yes, your Honour.

HAYNE J: You have referred several times to Boral's use of aspects of its market power, and this notion of aspects of market power being used has been employed often. At some point I would be helped by you ticking off, in the form of a list, those items which you say are particularly relevant.

MR YOUNG: I will, your Honour. Yes, I will, but we have in our written outline effectively ticked off that list. I will add to that and deal with your Honour's question.

HAYNE J: Yes.

GAUDRON J: And when is it that a characteristic of a participant in the market converts itself, if you like, into an aspect of market power? For example, C&M came in with efficient machinery. Selling its product at less than its competitors because it had efficient machinery would not seem to come within 46 at all.

MR YOUNG: Yes.

GAUDRON J: Notwithstanding that its entry may immediately have given it substantial market power - and I would think that might be right.

MR YOUNG: Yes.

GAUDRON J: Yes. What is the difference between that and having substantial financial resources, or being part of what is called the vertically integrated enterprise, which seem to me to be the two you have to come to.

MR YOUNG: Yes. With C&M, once they had established themselves -and they almost failed in doing that, but once they established themselves they had a machine that gave them the capacity to supply the whole marketplace. It was not just the efficiency of the machine, the speed of it. The figures are in the papers and I will indicate them, but they could produce in one eight-hour shift something like two or three times the production that Boral could produce.

HAYNE J: That is the paradox, is it not, Mr Young. The fact that Boral is relatively inefficient, slow, high avoidable costs, and that therefore its pricing decisions are coming in under its avoidable costs. It seems a curiosity when you say that an aspect of its market power is it has a high avoidable cost. It cannot be.

MR YOUNG: Your Honour, C&M is not in blocks. Boral's pricing low in blocks to keep C&M out of blocks, its mass product.

HAYNE J: I understand that.

MR YOUNG: I will go on and explain other aspects.

HAYNE J: Yes.

MR YOUNG: Can I simply complete the references. The New Zealand cases are important and of real assistance. They are in volume 1 of the materials we have supplied to the Court, from tabs 1 onwards. They deal both with market power and with a rejection of a recoupment notion. The leading decision is Carter Holt Harvey, the decision of the Court of Appeal is November [2001] NZCA 298; (2001) 10 TCLR 247, and I simply give the references, paragraphs 72 to 77, and 81.

We have the decision below, the trial judge's decision in the same case, under tab 3, 9 TCLR 535. I will just give the paragraph numbers if that is sufficient for the Court.

KIRBY J: What was the paragraph in the Court of Appeal, I am sorry?

MR YOUNG: Pages 72 to 77, and 81. In the trial, where the judge sat with a professor of economics to assist him, Professor Lattimore, the relevant pages are 608, paragraphs 267 and 269. Then at page 619 to 620, paragraph 27, which is in the professor's judgment or opinion. Then at page 624, paragraphs 47 to 52, and at page 625, in paragraph 54. At trial, the idea of recoupment was also rejected in the context of a dominant position section.

Another decision is Port Nelson Ltd v Commerce Commission [1996] 3 NZLR 554, under tab 5, and the relevant passages are at page 569, point 3, 571, point 6, 574, point 8, 575, point 9, and 577 to 578. It also espoused a broad approach to assessing both conduct and structure in the one inquiry, and rejected recoupment, at 571, as having no place in a New Zealand application of the section.

Finally, Telecom v Commerce Commission [1992] 3 NZLR 429, under tab 6, and the relevant passage is at 444, point 2. Next, can I turn to Canada. We have incorporated under tab 8 of the folder the relevant Canadian statutes. They have an abuse of dominant position section. We have also included the enforcement guidelines - - -

GLEESON CJ: Is the New Zealand section abuse of dominant position, or substantial degree?

MR YOUNG: Until 2001 or 2002, your Honour, it was abuse of dominant position, and they have now adopted our section 46. The cases are on the former dominant position section.

GLEESON CJ: Thank you.

McHUGH J: They use the word, "use", instead of "take advantage".

MR YOUNG: They do, your Honour, yes.

KIRBY J: But does that make the New Zealand cases, a fortiori, given that they were applying their minds to a dominant - - -

MR YOUNG: Yes, they are, a fortiori. They are rejecting recoupment and applying a broad approach in the context of dominance - - -

KIRBY J: Do they address this paradox that has been referred to? That is to say, the object seems to be to encourage competition, and yet - including price competition.

MR YOUNG: Well, they essentially do what Melway did, that is to say, address it as a question of fact, no preconceptions about predatory conduct and the like, and no real use of US jurisprudence. Now, the enforcement guidelines are useful because they include a broad definition of barriers to entry that includes strategic barriers. I will not go through those; they are under tab 12. There are two useful Canadian cases on the dominance provision they have. The first is Nutrasweet, under tab 9: Canada (Director of Investigation and Research) v Nutrasweet (1990) 32 CPR (3d) 1. The Court will see it is a decision of the Competition Tribunal. The Competition Tribunal is made up by judges of the Federal Court Trial Division of Canada - all members, not just a presiding member.

KIRBY J: Well, is that so? It says - - -

MR YOUNG: No, I am corrected.

KIRBY J: - - - Justice Strayer and Justice Teitelbaum and Mr Roseman.

MR YOUNG: Yes, I am corrected. There are lay members, but the judges come from the Federal Court. The relevant passages in Nutrasweet: at page 27, dealing with entry barriers; at 28 to 29, dealing with market power - particularly 29, opposite b.

GLEESON CJ: I cannot see the page numbers.

GUMMOW J: We do not have copies.

MR YOUNG: I apologise if it is badly copied, your Honour.

GLEESON CJ: The judgment is divided into sections. Which section is this in?

MR YOUNG: In the section headed, "Control". I am sorry, it is after section 5, dealing with section 79.

GLEESON CJ: Some malicious person has cut the page numbers off.

MR YOUNG: I apologise, your Honour. These reports, your Honour might appreciate, were not easily found.

GLEESON CJ: I have got to section 6. With iron-clad logic, I would assume section 5 is before it.

KIRBY J: Could little yellow stickers be put in these at lunchtime?

MR YOUNG: We will, yes, your Honour.

GLEESON CJ: Where is the market power, where does it talk about market power?

MR YOUNG: After the commencement of section 79, it is in the next double-sided page, the top of the right-hand page opposite b.

GLEESON CJ: Thank you.

MR YOUNG: The sentence reads, I can simply read it:

The structure of the section does, however, raise a question regarding how far it is necessary to go into evidence on control, since it may include an examination of the alleged anti-competitive acts and their effects. If all of the evidence is taken up here then the three principal elements in paras (a), (b) and (c) of s-s 79(1) may become melded in the evaluation of the first element. This is pervasive in competition law because the relevant factors in the different statutory elements are rarely distinct and it is impossible not to draw on common factors whenever required.

GLEESON CJ: Can I draw your attention to the left-hand column. They seem to be talking about "control" which is the Canadian statutory term. Then they give a definition of "market power" in the last complete paragraph on the left column:

Market power is generally accepted to mean an ability to set prices above competitive levels for a considerable period.

MR YOUNG: Yes. That it is in the context of a section, though, that operates off the notion of control. But to talk about setting prices above competitive levels is not very helpful because you have to then identify what is a competitive level of price. The economist will tell you a competitive price is a marginal price. That is unhelpful. What does "competitive price" mean? Well, to a lay person it is the prevailing level of price generally in a market place. But, of course, then you need to take a long-term view to determine what is a truly competitive price. So we would say it does not take one very far, it is circular.

MR YOUNG: Then 45 is the next page which rejects the recoupment proposition that recoupment must be had in the same market. Now, it will be too difficult to find. I think the best thing is if we give the Court a reference, try and find a copy of this case with pages and we provide, if we can, precise references to the pages I want to take the Court to, if we can try and do that instead of occupying time with a search for unnumbered pages.

To answer your Honour's question, Tele-Direct is the next case. I will not go through the pages, but can I just make a couple of observations about it, it is Canada (Director of Investigation & Research) v Tele-Direct (1997) 73 CPR (3d) 1. Like Melway, it said that you may need to make direct observation of market power. I read a passage from page 83, the case is numbered is what the Court has.

GLEESON CJ: Yes.

MR YOUNG: It is the first paragraph opposite a and b:

The broad question that is posed is whether the observed performance results (eg, profits) or observed patterns of conduct, (eg, pricing policy) are more likely to be associated with a firm or firms that are competitive or with those that have market power.

The court deals with barriers to entry at pages 91, 94 and 95, adopting a broad concept of barriers to entry to include strategic barriers. Page 91, it is the first complete paragraph.

GLEESON CJ: Where do we see an example of a strategic barrier?

MR YOUNG: In the last couple of sentences, your Honour:

Thus, the combination of sunk costs and likely response by the incumbent - - -

GLEESON CJ: Page 91?

MR YOUNG: Page 91.

GLEESON CJ: Left or right column?

MR YOUNG: The right side of the page, between c and d.

GLEESON CJ: Thank you.

MR YOUNG: Then there is similar discussion of strategic barriers at 94f and 95e. Finally, in the case, at 102 to 103 and 104 to 105 we have referred to price discrimination between customers as another form of strategic barrier. The final Canadian case is Laidlaw. It is under tab 11, Canada (Director of Investigation & Research) v Laidlaw (1992) 40 CPR 289.

HAYNE J: Another one where we are minus page numbers, I am afraid, Mr Young.

MR YOUNG: Yes, I will just mention what it deals with then, your Honour. At 327 it deals with excess capacity. There is a barrier to entry. At pages 330 to 331 it deals with conduct erected barriers to entry and, likewise, at 341 and 344, and at 347 to 348 it holds that the relevant acts which were actions of tying were anti-competitive actions buttressed by artificially created barriers through conduct. That is the Canadian approach to matters. The approach in Europe is similar.

KIRBY J: What do you say is drawn - perhaps when you finish the European you can say what you contend are the common themes that - - -

MR YOUNG: If I may, your Honour. I will not go through all of the European cases. They are in volume 2 of our folder.

GUMMOW J: Surely, there is some useful text on the European jurisprudence. Why do we have to plough through all the cases?

MR YOUNG: No, there does not tend to - there tends to be a - there is a service, a Matthew Bender Service, and there is another short book but tends to be - no, not really a textbook, your Honour. That is all we have found. That is not to say that there may not be one that we have missed.

Now, can I just broadly state the position in Europe and do no more than identify what we say are the most important cases. Continental Can is a well-known case under tab 15. Another well-known case of similar ilk is Roche, and we will provide copies of Roche to the Court. It is not in this folder.

Those cases deal with the definition of "dominant position". They make it clear that a dominant position does not exclude the possibility of competitive activity being undertaken in one or other segment of the market. The passage in Continental Can is at D27 - that is under tab 15.

GUMMOW J: These judgments are famous for having one paragraph saying one thing and then the things get upset and they put another paragraph in saying the opposite later on.

MR YOUNG: Continental Can is a well-known passage that has been referred to by our courts on numerous occasions. It is at page D27. It is paragraph 3. It is the last sentence of the passage on which we rely. There is a passage in Roche, which the Court does not yet have, at paragraphs 38 to 39.

McHUGH J: We have it.

MR YOUNG: The Court does have it. It is at page 520, paragraphs 38 to 39. It is speaking about dominant position. Paragraph 39 starts off by saying:

Such a position does not preclude some competition, which it does where there is a monopoly or a quasi-monopoly, but enables the undertaking which profits by it, if not to determine, at least to have an appreciable influence on the conditions under which that competition will develop, and in any case to act largely in disregard of it so long as such conduct does not operate to its detriment.

Now, that is dominance. We say "substantial degree" is less than that and admits of a greater degree of competitive activity.

GLEESON CJ: The next paragraph is interesting because it distinguishes oligopoly from a competitive market in which there are only a few competitors.

MR YOUNG: Yes, your Honour.

GLEESON CJ: And it says that the distinguishing characteristic of oligopoly is parallel behaviour, whereas in the case of a competitive market each firm determines its own position unilaterally.

MR YOUNG: Yes. Your Honour, I think it is the sort of implicit or explicit interaction, is what I was trying to convey earlier to the Court. Irish Sugar is another useful decision. This is at tab 16.

KIRBY J: Can I just ask, on those graphs that you showed us earlier with the price movements, is there anything you want to say about that, relating to that last question? Because there seems to be some parallel between price movements with Pioneer but none in relation to C&M.

MR YOUNG: If your Honour turns to "Brick" under tab 4, to which his Honour's findings did not extend, you will see that what Boral did there was pretty much track its costs and track C&M's prices.

GLEESON CJ: There has to be a difference between conscious parallelism and meeting the market.

MR YOUNG: That is what I am saying. This is effectively meeting the market, not going below avoidable cost in the same way as the campaign in relation to block. There is a difference. But there is, to take Justice Kirby's point, in the earlier graphs broadly speaking a sort of similar pattern, if you look at the lines for C&M, Pioneer and Boral, in that they are peaking and troughing in a broadly similar way. I was about to refer the Court to a passage in Irish Sugar under tab 16. The passage is at - - -

GUMMOW J: Did that stay in the court of first instance? That did not go any further?

MR YOUNG: Which case, your Honour?

GUMMOW J: Irish Sugar.

MR YOUNG: Irish Sugar, no, I do not believe it went any further. One of the cases we will refer to did. Irish Sugar, paragraph 114, that is what we would particular refer to in this context, but paragraphs 111 to 114 are all relevant.

The next case, United Brands, is well-known case on both market and dominance. It is about the market for bananas.

GUMMOW J: Yes, and apples.

MR YOUNG: No, bananas only, your Honour.

GUMMOW J: Apples were not substitutable, were they?

MR YOUNG: No, apples were - - -

GUMMOW J: Bananas are unique to Europeans?

MR YOUNG: No.

GUMMOW J: Is that what the case decided?

MR YOUNG: It decided that there was a market in bananas because although there was substitution with other fruits, properly assessed, if all the banana producers got together they could have cartel power because there was sufficient differences, both in the product and in the market, for it to constitute for the purposes of Article 86, a separate market.

Paragraph 113 is what we would particularly refer to at page 283. The whole section, 105 to 129, is relevant, but we point particularly to 113, then 119, local "fierce" competition, and then 125 and following. The argument was put that you ought not to find dominance because United Brands had been making losses and they did not have power to fix prices. Rejected, 126 and following.

Finally, there is a fighting ships case, going back to Mogul Steamship really, Compagnie Maritime, under tab 19, and there we have both the commission's decision, and on appeal, the court's judgment. The passages we go to are, firstly, in the commission at page 1418, paragraph 132. Then, on appeal, in the second part of the photocopy, the judgment of the European Court of Justice commences at page 1442 and the passages are at paragraphs 114 to 120 at page 1476.

I appreciate I have not given the Court time to absorb the references, for which we apologise, but it is our submission that all those cases entirely support the approach we have urged to section 46.

I should finally give the Court reference at the end of that folder to the case from the United Kingdom which is the last tab. It is a decision of the Competition Commission Appeal Tribunal. It applies the European cases- - -

GLEESON CJ: Which tab?

MR YOUNG: The last tab, your Honour, 22.

GLEESON CJ: I have tabs through to 25.

KIRBY J: We have a little bonus - - -

MR YOUNG: Your Honours have a bonus.

KIRBY J: - - - just in case we wanted a little bit more to read.

MR YOUNG: It is tab 22. I think what has been added are - tab 22 Napp Pharmaceutical Holdings Limited. The relevant provision is at page 1 of the judgment, abuse of a dominant position, under the Competition Act 1998 of the UK. The court applied the European authorities to which I have taken the Court at page 50 and following, paragraphs 207 to 210. Indeed, the discussion goes further than 207 to 210; it finishes at 216.

Now, finally, we would say this, that that approach to sections prescribing a threshold requirement contrasts markedly with that in the United States. Section 2 of the Sherman Act and section 2 of the Clayton Act have been interpreted in this broad fashion. Section 2, dealing with monopolisation or intent to monopolise, has been interpreted to require anti-competitive actions, coupled with an intent to monopolise, plus a dangerous probability of achieving monopoly. That is section 2 of the Sherman Act.

Section 2 of the Clayton Act, which deals with pricing discrimination which tends to create a monopoly, has been interpreted so as to require a dangerous probability in the same fashion or a real probability of achieving monopoly, coupled with recoupment of all of the losses made during the price discriminatory period at a future date within the same market. Not in a different market, but in the same market. Both sections and the interpretations are driven by containment of monopoly. Both sections, as interpreted, require proof of a dangerous probability of achieving monopoly, in its full-blown sense, so that when the cases speak about supra-competitive prices, they are explicitly speaking about monopoly prices. That is apparent from Brooke. I will just give the Court a reference to Brooke. The elements of the sections I have just described to the Court appear in the opinion of the majority of the court at pages 224 to 225 of Brooke [1993] USSC 105; 509 US 209 (1993) - - -

GUMMOW J: 1993.

MR YOUNG: I am sorry?

GUMMOW J: 1993.

MR YOUNG: 1993? That is what I said, your Honour.

GUMMOW J: Quite recently.

MR YOUNG: The approach to the Sherman Act has been confirmed by the US Supreme Court in Spectrum Sports [1993] USSC 13; 506 US 447 (1993), and the relevant passage there is at 459 - - -

GLEESON CJ: Does it come down to this, Mr Young, that in the United States context, which you say is different from ours, the practical significance of the possibility of recoupment is that, absent the possibility of recoupment, you are not likely to be heading towards monopoly?

MR YOUNG: Exactly. Well, you are not - - -

GLEESON CJ: Or put it another way, your position would be unsustainable.

MR YOUNG: It is really this, that without recoupment, you will not establish the dangerous probability of monopoly that is required by the judicial interpretation of the sections. Therefore they require that dangerous probability of a recoupment to be proved and, moreover, proved in the same market by recoupment of sufficient profits to offset the entirety - not just the majority, or a large part, but the entirety of the losses suffered during the earlier period of what they would call predation.

KIRBY J: You do not have to prove that that has been achieved, but that the alleged monopolist is on the way to it. Is that how it is approached?

MR YOUNG: That is so.

GLEESON CJ: Recoupment just looks like a factual ingredient that is relevant to the determination of whether a certain form of price-cutting can leave you, in the end, in a monopoly position.

MR YOUNG: It is certainly central to the proof that you are likely to end up, via this conduct, in a monopoly position.

GLEESON CJ: I do not, as present advised, have any difficulty with your submission that this notion of recoupment has come to the fore in the United States in a significantly different context, but I noticed from those European cases that you were taking us to earlier - and Hoffmann-La Roche is a good example of one - there seems to be an idea that it is possible to distinguish between what might be called normal and abnormal competitive behaviour, and that there is a certain intensity of price-cutting that can be described as anti-competitive behaviour even though it is superficially competitive.

MR YOUNG: Your Honour is correct, I think not just about Europe but about - in the US they speak about not competing on the merits. That sort of language is not very helpful because it does not take the analysis very far, but our Act requires that the conduct be connected with market power, be a use of market power, and the element that leads to it being adjudged to be worthy of proscription is essentially threefold. First, it is a person in a peculiar or special position to whom a special lens is applied. You start with a substantial degree of power. The second element is that you must be - - -

KIRBY J: First of all, stop there. The "special lens" are the words of Justice Scalia in Kodak and, therefore, that is common to the United States and Australian - - -

MR YOUNG: Can I explain the context in which Justice Scalia used it. Justice Scalia used that expression in explaining why the court has developed per se rules. His explanation is that the court has developed per se rules of conduct, as distinct from rules of reason for other conduct, because the court has adjudged that certain types of conduct is to be presumptively proscribed, such as price fixing, regardless of the need to prove actual harm to competition, because the judgment is that conduct of that kind, more often than not, without the need for proof, is likely to harm competition. That is the context in which it has been used.

KIRBY J: Anyway, I took you off your track. You said you had three points.

MR YOUNG: Yes. Can I just return to what the Chief Justice said about recoupment for a moment. Your Honour reminds me that when I went through the European cases I inadvertently passed over one of them. There is no need for the Court to go back to it. It is Tetra Pak International. It was under tab 14. That case in Europe rejected the idea of recoupment. It did so at page 6012, 6013. This rejection was endorsed in subsequent cases. What the court said - and I will simply read from paragraph 44 at 6013 - is this:

Furthermore, it would not be appropriate, in the circumstances of the present case, to require in addition proof that Tetra Pak had a realistic chance of recouping its losses. It must be possible to penalize predatory pricing whenever there is a risk that competitors will be eliminated . . . The aim pursued, which is to maintain undistorted competition, rules out waiting until such a strategy leads to the actual elimination of competitors.

which, of course, is the sine qua non of recoupment.

All of the New Zealand cases say that recoupment is to be rejected because it is additionally a naive concept because you might be engaging conduct in one market to protect your entrenched position in a related product market or a related geographic market. Hence, there is going to be recoupment in concrete bricks but you might protect your position in high engineered concrete blocks or you might be protecting your position in New South Wales, or the recoupment may take the form of protecting a position which is already a position of some strength. So it is not a question of recouping in the future, it is really a question of protecting yourself against the consequences that will unfold in a broader sense, not just loss of profit.

HAYNE J: Accepting that recoupment is not a test that is to be engaged under this Act, that is, accepting this limb of your argument, is it nevertheless pertinent to consider whether the firm concerned has any, and what degree of, freedom in its pricing decisions?

MR YOUNG: Can I say this, your Honour. It is relevant to consider it, of course, but the notion that the price decrease falls outside section 46 - - -

HAYNE J: No, that is not the assumption. Simply that the question of freedom of choice in its setting of price is the particular aspect to which I want to focus attention.

MR YOUNG: Your Honour, we would say the analysis is not to be developed by reference to ideas of election or freedom of choice. Once there is a predatory purpose, or prescribed purpose is a better expression, the question is - and we know the conduct was engaged in and we know the nature, extent, depth, of the price cuts, and the period, and the range of products - it is possible to infer simply from the nature, extent, duration and depth of the price cuts that they involved a use of market power, without troubling yourself with questions as to whether it was voluntary or elective.

GAUDRON J: Why cannot they just involve use of financial power?

McHUGH J: That is what I was going to say to you. That was what I thought you were getting out of the European cases, I have to concede. Until you took us to those cases, I had in mind a notion of market power as ordinarily meaning a power to increase prices beyond the competitive level or to supply inferior goods at competitive prices or to impose your own terms and conditions, but it seems to me that the European cases show that you have market power if you are in a position to act without taking into account your competitors, your producers, your suppliers, because of your share of the market or the availability of technical knowledge, materials or capital which allows you to determine prices or control production or supply without worrying about your - - -

MR YOUNG: Yes.

McHUGH J: That is what the European cases seem to indicate. I know they talk about dominant position but your market share, your availability of capital or your access to raw materials, all those matters may enable you to determine prices, whether up or down.

MR YOUNG: That is so, and the fact that you elect voluntarily to do something really does not add much to the debate. The way your Honour has put it is precisely how we put the case and precisely how it was found by the Full Court, that is - - -

GLEESON CJ: But electing voluntarily to do something does add to the debate, does it not, because "power" means absence of constraint?

MR YOUNG: Yes, but it is the substantial absence of constraint which must be the subject of the inquiry, not the elective nature of the conduct.

GLEESON CJ: They are just two sides of the one coin, are they not?

MR YOUNG: Well, let me give your Honour an example, by reference to the evidence here. Can I ask the Court to go to volume 21 of the appeal book. This is the evidence of Mr Cormack I want to take the Court to. He was in charge of the national concrete masonry division, reporting directly to Mr Berg, the managing director of Boral Limited. He was in charge of Victoria and other States' concrete masonry. At 543 of the transcript, which is at 4304 of this volume, he is being asked about pricing policies. The passage to which we refer is between lines 10 and 24. Now, that is prefatory to a passage I want to take the Court to, but that makes it clear that on the major jobs, they were simply going for a few, and, at line 24, they were charging quite different prices to different purchasers.

GLEESON CJ: Yes, because there are some purchasers who have more bargaining power than other purchasers.

MR YOUNG: But that is also an aspect of market power of the incumbent, the ability to discriminate between purchasers and to charge different prices to different customers and different price - - -

KIRBY J: But is that not the operation of the market? Is that not what a vendor is expected to do, to discriminate and - - -

MR YOUNG: Yes, it is, but it is indicative of the fact that the person who can discriminate has some market power. But can I go to 585, then.

GLEESON CJ: What about 4304, line 30.

MR YOUNG: Sorry, 430 - - -?

GLEESON CJ: It is 4304, line 30, the page you were just on.

MR YOUNG: Yes, I know, your Honour, but some of my pages are obliterated, as some the Court's, the numbers, probably are.

GLEESON CJ: Line 30.

MR YOUNG: Your Honour wants line 30. There is other evidence about that to which I will take the Court. Indeed, there are explicit findings by Justice Beaumont that his instruction to Rawnsley was to knock C&M off at any price. That was before C&M's entry and that is what Rawnsley said about doing, knowing that what he was doing was pricing below cost. Cormack admits to knowing the prices were set below cost and Justice Heerey found that they knew that prices were set below cost. At 585 is the other passage from this volume.

McHUGH J: Page 5?

MR YOUNG: I am sorry, it is 4346, transcript 585, line 12.

CALLINAN J: What about earlier, though:

The producers were in effect price takers and not price makers - - -

MR YOUNG: Yes. The point I am making is nobody could force Boral to go below cost. He says they did so to keep their volume going. They did keep their volume going but that was to sustain their high pricing in other products.

GLEESON CJ: But the essence of the dispute, as it seems to me, is whether or not what Boral were doing was an exercise of power.

MR YOUNG: Yes, your Honour. We agree. The crux of this case - - -

GLEESON CJ: You say they were exercising market power.

MR YOUNG: Yes.

GLEESON CJ: Mr Cormack seems to be wanting to say they were responding to the market.

MR YOUNG: Well, I will take the Court to some other evidence. At transcript 661, page 4421, in the same volume, line 25 - - -

HAYNE J: What do we make of that? You say the evidence was that they were selling below cost and they knew they were selling below cost. What is the next step, or is there a next step? Do you say that is it, close the book, the contravention is demonstrated?

MR YOUNG: No, I went to these passages to deal with our learned friend's submission that they never elected to go below cost.

GLEESON CJ: I have a lot of trouble seeing recoupment in section 46 but I have equal difficulty seeing below cost in section 46.

MR YOUNG: Well, your Honour, it is not part of our case that you introduce some stipulated below cost test into section 46. It was rejected in Eastern Express and it was not done by the Full Court in this case. But it must be the case that on the facts of any case the nature, depth, extent and duration of price cuts is relevant to the question whether what occurred was an exercise of market power, and the deeper you - - -

GLEESON CJ: Taking advantage, you mean?

MR YOUNG: Taking advantage. Well, the deeper you go below cost, the longer the period you go below cost. The extent to which you go below the cost of your rivals all bear upon the question whether you are using market power.

HAYNE J: But it also depends upon the degree of efficiency of the firm concerned. If they are the least efficient participant in the market they tuck in under their costs much sooner than anybody else in the market and to say that the least efficient producer is the one with substantial market power seems to contain within itself the seeds of its own contradiction.

MR YOUNG: Your Honour's question has a number of premises that are not correct. The evidence here was that Boral was as efficient a producer as - and its costs were a similar level to Pioneer and Rocla. There was one very efficient producer and it was the new entrant. It was targeted by Boral. The others did not go, that is Rocla and Pioneer did not go below their cost production. Boral did, by a long way, and went a long way below the costs of others.

Now, there are the premises that should go into a question and if you adopt those premises the question is, how did they sustain their below cost pricings? Why were they adopted? We have concurrent findings of fact about why they were adopted - to drive competitors out - and how did they sustain it and did they use their market power to sustain it?

GAUDRON J: You see, the difficulty I have is very similar. The market changes. The market changed immediately C&M came in, thereby indicating, if you like, that C&M's entry brought with it a very substantial amount of market power. We can assume still substantial market power in Boral and perhaps the others as well. We can assume substantial market power on all of them. Boral looks around and says, "This market has changed. Given the entry of C&M it is not big enough for all of us. Somebody is going to have to go but we are determined to be here for the long haul and thereby what we must do is maintain our market share and to do that we are going to have to cut prices." At what point is that the use of market power?

MR YOUNG: Well, again, it is a large question, your Honour. Can I just deal with several aspects of it. First, the cases I took the Court to when they deal with barriers to entry make the point that entry is concerned with sustainable entry. So the first issue is C&M's entry had to be sustained before it might be said that they gathered real market power. They had to establish themselves and reach a sustainable point. That is the first point. Secondly, there is a point about timing. Boral started cutting prices - not below cost, but started its campaign of price cuts by targeting C&M prior to its entry - so trying to nip the new entrant in the bud, as it were. So there is an issue about timing.

Secondly, when C&M got up and running, they went below avoidable costs for a lengthy period of time, and they expanded their capacity in two ways. They built up their inventory from that period in advance of C&M's entry, and then flooded their inventory at the market at very low prices. They ran their plants flat out, selling more and more product at greater and greater losses, and then they expanded their capacity to go on making greater losses on each unit. Now, at some point in that process, we say, Boral was exercising substantial market power against other competitors. It wanted to shake out the market, get rid of some of the smaller competitors, and get back to normalcy.

HAYNE J: Well, what is the power it is using? List for me the items of power it is using in doing that.

MR YOUNG: Well, we have, your Honour. We have listed them in our outline. It used, amongst other things, vertical integration and product differentiation; it used the volume of its sales; it used its capacities as a national firm, able to carry losses in Victoria by profits on the same products in other States; it used its excess production capacity and then expanded it; it used its better access to raw materials; it used its more efficient fleet of transport; and it used its established customer relationships that allowed it to discriminate between various customers and to charge a premium to smaller customers. All those resources were brought to bear to sustain the course of conduct.

CALLINAN J: They all sound to me like efficiency market. Does it not get a premium for efficiency?

MR YOUNG: Well, we would say they are not efficiencies. We do not seek to label these features reprehensible or problematical and they should not exist or anything like that, your Honour. We simply say these are the ordinary resources of a leading firm in an industry with a national dimension that it relied upon to facilitate its price-cutting.

HAYNE J: What was the consequence of those eight features in market behaviour? What aspect of market behaviour flowed from the deployment of those eight features?

MR YOUNG: Relevantly, two. Pricing below avoidable costs for 22 months and expanding capacity when the industry was already flooded with over-capacity.

HAYNE J: Now, pricing is something that occurs between rivals. Capacity is not. I can understand the relevance of pricing as an indicator of market power. The connection between inventory, production and the like is not, at the moment, evident to me.

MR YOUNG: Your Honour, it is the point that the Chief Justice raised yesterday. How would expanding your plant assist you to drive a competitor out? You cannot go on pricing lower and lower unless you can supply the product. You have to have your built-up inventories that you have built up for this contingency or your expanded capacity to make the strategy work. The two go hand in hand. You have to have the product to supply, that the price is below avoidable cost.

I recognise the time but can I make this point. Our learned friend said at the outset there were several features of the industry: falling demand, excess capacity, undifferentiated product, the major project tender system being critical and everyone was making losses.

Now, we take issue with every one of those. Demand was not falling, it was growing throughout this period; there was substantial excess capacity, but it was exacerbated deliberately by Boral; there was a grey commodity product, but the profits in the industry were in the differentiated high margin products that Boral was trying to protect, where it had complete dominance; the major products were a fraction of the relevant market and whilst everyone was making losses, only one company was pricing below avoidable cost. I will turn to those matters at 2 o'clock.

GLEESON CJ: At 2 o'clock. We will adjourn until 2 pm.

AT 1.01 PM LUNCHEON ADJOURNMENT

UPON RESUMING AT 2.04 PM:

GLEESON CJ: Yes, Mr Young.

MR YOUNG: Your Honour, the arrangement I have reached with Mr Archibald is that we would take the afternoon and if it meets the Court's convenience, Mr Archibald would file a short reply in writing within a few days.

GLEESON CJ: Thank you.

MR YOUNG: Your Honours, I wanted to turn to the factual matters I mentioned in closing at 1.00 pm. Can I ask the Court to go to volume 13 of the appeal book. The first industry feature advanced by the appellant is that throughout the relevant period of below cost pricing there was falling demand and that contention is a central feature of their written submissions as well. It is controverted by the evidence, including all their strategic plans, and I take the Court to page 2594 of this volume. It is document 569. The document is - - -

GLEESON CJ: Did you manage to find that strategic business plan that was quoted from?

MR YOUNG: Yes, your Honour. I will come to it, if I may, in the course of the submissions.

GLEESON CJ: Thank you.

MR YOUNG: The relevant passage is at the second page. Using the page at the bottom, it is 002. This is the 1993 strategic business plan. Mr Cormack and Mr Rawnsley dealt with it respectively in paragraphs 10.1 and 330 of their witness statements. It dates from late 1993 before C&M commenced commercial production. It opens by saying:

The Victorian market has recovered strongly particularly in the areas of commercial, infrastructure, domestic and retail.

The third paragraphs is the paragraph accepted by the Full Court as to market share position as at that time.

McHUGH J: Yes, but this is dealing with the Victorian market which, for these purposes, are not the same as the Melbourne market and, interestingly, he says the "Central Business District activity is still low".

MR YOUNG: Your Honour is correct to draw the distinction but I will take your Honour through the documents and it becomes clear that demand is growing through the relevant period. This is immediately at the gateway to the relevant period but before it and can I just draw your Honours' attentions on somewhat different points but to save coming back to it, last paragraph on the same page:

The advent of C&M into the market initially drove prices down -

et cetera. At this stage C&M had not commenced commercial production and where the prices fell most heavily related to blocks which C&M never produced. At the top of the next page, first paragraph, and the last paragraph on the next page we draw particular attention to.

GLEESON CJ: What about the third-last paragraph on the page?

MR YOUNG: On the first page, your Honour?

GLEESON CJ: Page 2595.

MR YOUNG: Yes, I will come to that in due course. As Justice Hayne suggested I will go through each of what we say are important aspects of the evidence concerning market power. As for production, the top of the next page, 2596, the:

Deer Park plant is now working a 14 hour staggered shift with stock still declining.

This has stretched plant and staff to breaking point.

Can I then go to page 10 of the same document - - -

CALLINAN J: Just before you leave that, what about the last paragraph on page 3:

A good level of profitability and volume is possible with 3 operators in the Melbourne market -

to take Justice McHugh's point -

but beyond this number chaos is inevitable.

MR YOUNG: Yes.

CALLINAN J: They will all go to the wall. That is hardly in the public interest.

MR YOUNG: Your Honour, at this stage, there were three main operators in the Melbourne market, Pioneer, Rocla and Boral. Each of them were national firms vertically integrated. Budget was always a very minor player and C&M was about to enter.

McHUGH J: No, C&M had entered. If you look at the paragraph above what Justice Callinan drew your attention to, it says:

C&M . . . will collapse in the near future.

MR YOUNG: Well, the point I am drawing your attention to, your Honour, is that C&M, at this stage, was building its plant. The trial judge's findings were that it had trialed production in November 1993 and only commenced commercial production in February 1994.

McHUGH J: Well, that is hardly consistent with 002, just under the heading:

(b) Competitors

The advent of C&M into the market initially drove prices down - - -

MR YOUNG: Well, your Honour, that is referring to the fact that C&M is about to enter the market. They are building a plant. I can take the Court more thoroughly through it, but those were the findings of the trial judge in terms of timing.

CALLINAN J: But accepting all of that, is an operator supposed to accept a situation of chaos?

MR YOUNG: An operator can obviously respond competitively to a new entrant, your Honour. It is no part of our case to - - -

CALLINAN J: It does not have to endure chaos.

MR YOUNG: Well, your Honour, it depends whether it engages in conduct that it is proscribed by section 46 and whether or not the motive is to avoid chaos is, in a sense, beside the point. The only relevant motive for section 46 is the proscribed intent or purpose that section 46 sets out. That is the relevant statutory intent and other motivation, legitimate business reasons, BHP's desire to remain vertically integrated- - -

CALLINAN J: I am not talking about motives; I am talking about results. Is it to engage in proscribed conduct to try to avoid a situation of chaos?

MR YOUNG: Well, your Honour, that is the objective sought to be achieved, to avoid a future situation of chaos. The only irrelevant objectives for the purposes of section 46 are those set out in subparagraphs (a), (b) and (c). It is to distort the section to overlay some additional element of purpose or objective and to say, "You can't be in breach of the section because, although you had the proscribed purpose, the reason why you wanted to eliminate a competitor by acting in the proscribed manner is to avoid what would otherwise be chaos." That, as we would understand it, is the effect of this Court's decision in Queensland Wire and Melway. No additional mental element is to be superadded to the section.

McHUGH J: Well, maybe no mental element, but you do not want to act on the basis that I will feel bound to follow Queensland Wire and subsequent cases, that "take advantage" equals "use". If Parliament meant that, it should have said so, and it did not say so.

MR YOUNG: Your Honour, I am under no misapprehension about your Honour's feelings about that matter, but there are still two decisions, unanimous - well, unanimous in the case of Queensland Wire - - -

McHUGH J: Yes, but they were set in a certain context and - - -

MR YOUNG: Well, no different, your Honour. Let me take Queensland Wire. The argument by the Chief Justice, then senior counsel for BHP, was that it was legitimate and proper competitive conduct for BHP to decide that it wanted to consume all of the intermediate product, Y-bar, produced in its plant and to sell that as part of integrated fencing materials through one of its subsidiaries. That was a legitimate business consideration. It was the way in which it maximised its profits.

Now, it was no answer to the application of section 46 that BHP had a legitimate business objective in mind, that was thoroughly rational, thoroughly sensible, thoroughly understandable in the context of the business.

McHUGH J: That can be accepted but I subscribe to the view that one ought to interpret general words having regard to the objects and purposes of an Act and section 15AA of the Interpretation Act so directs you and given the objects of this part, namely the protection of consumers, the protection of the competitive process, I do not see why those words "taking advantage" should not be read in that context.

MR YOUNG: Can I take your Honour's approach and adopt it and use it because it is not inconsistent with our case at all.

McHUGH J: No, if you look, for example, at Professor Officer's evidence, he takes the view that what was done here does not fit within one of the objects of this particular section and this particular part.

MR YOUNG: Your Honour, more than that, we would say that the evidence that I am about to go to is that if "take advantage" means "have recourse to the advantages that your substantial position gives you", which would seem to be a natural and purposive meaning of the word, that is exactly what happened here. They had recourse to the advantages conferred upon them by vertical integration to sustain their pricing policies. They had recourse to the advantages and pricing discretions given to them by their differentiated product range to sustain this conduct and I will come to that evidence and try and demonstrate it.

One more reference to - and I go - one other aspect, before I leave this volume because it will be quicker to deal with it this way, related to the capacity situation in the industry. I simply want to refer the Court to the document which is under tab 580, G580 at 2629. This confirms that C&M is effectively about to commence commercial production. I will not take the Court right through it but at the first page, the second-half of the page, "Will dominate". There is a reference to the plant:

No financial problems - therefore can survive for long period.

At the top of the next page:

All other plants in Victoria are now obsolete and their only future is to become small niche players.

At the bottom of the page, the last three lines, the whole:

plant can satisfy the whole of the current Melbourne market in blocks, brick -

et cetera. Middle of the next page:

The co'y which acquires the plant will immediately and automatically dominate the market.

GLEESON CJ: Which plant is that?

MR YOUNG: 2631.

GLEESON CJ: No, which plant?

McHUGH J: C&M.

MR YOUNG: The Hess plant.

GLEESON CJ: C&M, yes.

MR YOUNG: C&M's Hess plant. Next page, page 2632, reference to market share at the start, then next paragraph:

In a stable market selling prices should be capable of increasing by $30 per tonne.

GLEESON CJ: Mr Young, on page 2602, in the last paragraph there is reference to the first strategic business plan. Where do we find that?

MR YOUNG: It is in the same volume. It is tab 525, 2471. This is the 1992 strategic marketing plan. Mr Rawnsley authored it and sent it to the General Manager, Mr Cormack, in late 1992, according to their respective affidavits. I will just draw the Court's attention to a couple of passages in that document to avoid coming back. At page 2475 marketing objectives are mentioned, including 2(c) and 3 are significant for a matter I am about to come to. The top of the next page, 2476, (a):

the Victorian economy was showing significant signs of recovery -

The bottom of the page, under (c) "Technological":

No major technological advances have been made by any operator for the last 10 years and the bulk of the plants are in excess of 15 years old.

Top of the next page:

No competitor has the degree of access to quality raw materials which Boral Masonry enjoys.

At the bottom of that page, under "Industry and Trade":

significant signs of recovery are now apparent -

On high margin products, 2482, paragraph (a). Now that is the first strategic business plan. I was about to take the Court in volume 14 to the 1994 strategic business plan. It is under tab G611.

KIRBY J: What is the date of this?

MR YOUNG: That is at page 2728 it commences. Mr Rawnsley prepared this and sent it to Mr Cormack.

KIRBY J: What date?

MR YOUNG: It is early 1994, your Honour. I will find a reference in the transcript of the date and provide it.

At page 2729, under "1. Market Volumes", there is reference to:

the market is improving and is expected to continue to do so over the next four years. Some limited new activity in the CBD is expected commencing around 1996.

Then there are references to markets shares. At the next page, 2730, below the table of market shares:

C&M now have the capacity to service the entire Victorian Market.

All other operators including Boral have outdated equipment and none has a sustainable competitive advantage.

A bit further on, after reference to the C&M plant's "unique products":

Boral Masonry has rebuilt its position as the market leader.

Then there is reference to the high margin products that I will come to. The top of the next page, first two paragraphs. Under terms of capacity of the new plant and speed of production, at page 2733 in the middle of the page, the Hess plant is discussed. There is reference to comparable levels of paving production and the flexibility of the Hess plant. Now, just on that same plant, could I ask the Court to turn back to tab 604 at 2643. These are the relative speeds of production of the C&M versus Deer Park plant. On the first page it is:

Paving

. . .

68% more production at C & M

in a shift. The next page is "Blocks", 2644:

C&M 1001 Block -

about four lines in, roughly 47,000 units per 8 hour shift. Deer Park, 14,000 units per 8 hour shift and so on.

Now, in the same volume, can I take the Court to 614. This is a paper about proposed purchase of C&M assets. It was authored by Grise, Vella and Rawnsley on 6 May 1994, according to their witness statements. Just above the last heading, "Production Plan", three lines above, that paragraph, we say, is relevant:

It is imperative that at least one player be taken out of the market.

The next document is Mr Cormack's own document at tab 614- - -

KIRBY J: Were the witnesses cross-examined about that statement?

MR YOUNG: Yes, they were, your Honour, and I will provide some references.

GLEESON CJ: This is in the context of discussing the acquisition of C&M?

MR YOUNG: It is.

GLEESON CJ: And that was the way they were planning to take them out of the market, by buying them?

MR YOUNG: Having weakened them, yes.

KIRBY J: Is it your case that they then hit upon a different and less expensive strategy?

MR YOUNG: No, they tried to buy them out cheaply, were rebuffed, and then they went deeper and longer with their below cost pricing, not necessarily abandoning the strategy of buying them out in due course.

HAYNE J: Just before you leave that document at 2739. The sentence immediately preceding the one you took us to seems to be saying, "They can price better than we can, therefore it is imperative to take them out", but is the proposition for which you contend that the less efficient had power over the more efficient in relation to price?

MR YOUNG: No, exactly the opposite, your Honour. Our contention is that unless - or put it this way, your Honour, that Boral's approach was, "Unless we take them out or take others out quickly, we're going to be overwhelmed by the more efficient. We are less efficient, therefore we have to resort to other tactics. The tactics we employ is below cost pricing coupled with production expansions to" - - -

HAYNE J: "Below our cost pricing"?

MR YOUNG: Yes, below their own costs. Whenever I say "below cost", it is below their own cost.

HAYNE J: Yes, not below C&M's - - -

MR YOUNG: No, of course not, your Honour. The next paper is Mr Cormack's own concrete masonry position paper. He prepared it for the managers of the concrete masonry division in each State of Australia in the middle of 1994. That is his evidence in paragraph 14.1 at volume 4 AB 696. The first two pages of the paper seeking approval for the duplication of production capacity at Deer Park which was forthcoming, but following it, there is something called the concrete masonry position paper, commencing at 2752.

This reaches to vertical integration as an important source of power that was used. Fourth paragraph:

Masonry is a core business of Boral -

now that is speaking nationally of the parent -

as it is a valuable upstream consumer of the finer aggregates which otherwise could be a by-product. Here remains an important, but hidden benefit to Boral Construction Materials, i.e. the value added component that Construction Materials receive from Masonry.

That, in the end, the Court will see, it was something like $19 million per annum of purchases or 3 million in Victoria.

KIRBY J: But is not that against you? Is not that the very point that the appellant was making?

MR YOUNG: No.

KIRBY J: This gives a legitimate and entirely reasonable upstream purpose to the appellant for acting as it did?

MR YOUNG: Turn it around, as we say it should be, your Honour, that is to say, the only reason - or the ability to sustain the below cost pricing, which could not be sustained by a freestanding entity, was in this case sustained because the sand, aggregate and cement which was being used to make the concrete blocks was making a profit contribution to other arms of the organisation. So, below cost pricing was tolerated and, indeed, sustained and pursued as a strategy.

KIRBY J: But it is like the reverse side of a coin or whether a glass is half full or half empty because you say it is a matter of sustaining a long-term strategy to destroy. They say, "It is terribly sad we have to destroy them but there isn't room for this and we have a legitimate strategy because it is against our interests as a corporate group."

MR YOUNG: Your Honour, the point of reference is section 46. The question is whether they are making use, or having recourse to advantages - - -

KIRBY J: That is characterisation and if you characterise it that they are making use to abuse their market power, that is one thing. If they are making use - this is a series of questions Justice Gaudron has asked you - to make the most of their upstream corporate advantages, then that is a legitimate business decision.

MR YOUNG: Your Honour, it may be a legitimate business decision. We do not take issue with that. The simple point we make is the factual one that the existence of the upstream contribution allowed this organisation to say, "We will price below avoidable cost for 22 months, notwithstanding that massive losses are being made within Victoria, because for each concrete block we make and sell below avoidable cost we use some sand, we use some cement, we use some aggregate, which we buy from elsewhere in our organisation and that contributes a profit component elsewhere." It is the contribution of that profit component to other arms of the organisation, that is to say, vertical integration, that supports, facilitates the below cost pricing strategy.

GLEESON CJ: Where do we find them saying that their policy is to price below cost?

MR YOUNG: You find it, your Honour, in some evidence I will take the Court to.

GLEESON CJ: Looking at the last paragraph on page 2752, it might be thought that in the answer to those questions you would find some reference to the proscribed conduct.

HAYNE J: And the answer given at 2754 is not that. At 2754 the answer given in paragraph 2 is buy them out.

MR YOUNG: After recognising that there are "too many producers in the market".

HAYNE J: Yes.

MR YOUNG: Yes, but that strategy failed, they could not buy them out, and then they persisted in the below cost pricing. But you will find it in evidence and in the trial judge's findings that they knowingly priced below cost.

GLEESON CJ: You said their policy was to price below cost.

MR YOUNG: Yes.

GLEESON CJ: It is one thing to have a policy of pricing at a certain level and to know that that level is, at the moment, below cost. But what was their policy?

MR YOUNG: We would say it was the same, your Honour.

GLEESON CJ: It is funny that you do not find it in this document.

MR YOUNG: Your Honour, perhaps Mr Cormack is conscious of provisions like section 46. But leaving that aside, you do find it in the conduct, your Honour. Your Honour puts to me that they might inadvertently or for a short period price below cost. You cannot price below persistently for 22 months without that being the policy that is being pursued.

KIRBY J: It cannot be absence of mind.

MR YOUNG: No, your Honour.

GLEESON CJ: What is the relevance of the fact that it is below cost to section 46 of the Act?

MR YOUNG: It says this about it, your Honour, that - and when we talk about below cost, I also include depth and range - - -

GLEESON CJ: When you talk about below cost, you are talking about below BBM's cost.

MR YOUNG: Its avoidable cost.

GLEESON CJ: BBM's avoidable cost.

MR YOUNG: Yes, I am, your Honour.

GLEESON CJ: Yes.

MR YOUNG: But I also bring into it the depth below cost and the duration of it. Speaking of it in that fashion, it is not conduct that would likely be undertaken by an organisation operating commercially without market power.

GLEESON CJ: This is the counterfactual.

MR YOUNG: That is the counterfactual in QWI. You do not have to go so far. You can make direct observation from purpose, nature and extent and duration of the conduct, as Justice Deane did in QWI. But if you go deeper, and you say, "It is so deep and it is so sustained that it is costing them a fortune. Why would they be doing it and how are they doing it? How can they justify to their board of directors that they are doing it for 22 months?" Well, one answer is, they are relying upon the vertical integrated, upstream profits that are being contributed elsewhere in the organisation as an offset to say, "We will do this for strategic reasons in Victoria, to drive out competitors, and we are able to sustain it and justify it to our board because, at the same time, we are using cement aggregate and sand."

GLEESON CJ: So we are not really doing it below cost, at all.

MR YOUNG: From a group perspective, that is what they say.

GLEESON CJ: Well, let me use another word, from a "firm" perspective - - -

MR YOUNG: Yes. Well, from a firm - I accept your Honour's - - -

GLEESON CJ: If the relevant firm was the aggregated corporate entity, then the argument that you are putting is only another way of saying, if you took a rather more sophisticated approach to the question of the firm's costs, you would find that they are not doing this below cost, at all.

MR YOUNG: But the relevant comparison, your Honour, is this. We are analysing their market power in the relevant market, which at both levels was found to be the Melbourne metropolitan market. Secondly, we are analysing the industry for the purposes of assessing the degree of their market power within that market.

GLEESON CJ: But what is the difference between saying BBM in Victoria can afford to sell at these low prices because, if you looked at the entire firm, you would find that there are benefits coming from volume which offset the cost of production - what is the difference between saying that about BBM and saying C&M can afford to sell at their low prices because they have this high tech new machine?

MR YOUNG: Well, your Honour, the high tech new machine may be a source of market power for C&M once they are established in the marketplace. So to that extent, the answer is the high tech new machine can be a source of market power that is used, just as vertical integration can be a source of market power that is used. So the answer is, in due course, there is no difference. They are both potential or actual sources of market power. But the issue is whether recourse is being had to the advantages provided by market power to engage in a course of conduct.

As soon as you have recourse to the upstream profits generated through sand aggregate and so on, purchases, you are demonstrating that this policy, this practice of sustained below cost pricing, which would not be entertained by a single firm like C&M that was in no business other than concrete masonry, the relevant market, is being sustained by Boral because of the advantages it has by virtue of being a national, vertically integrated producer of both concrete blocks and, at the same time, the raw materials for those concrete blocks.

HAYNE J: That I could understand if they were pricing below C&M and their costs but - - -

MR YOUNG: No, your Honour, they were pricing below C&M.

HAYNE J: But not C&M's avoidable costs, were they?

MR YOUNG: They were, your Honour, to this extent. They kept C&M out of blocks in so far as its new Campbellfield efficient plant was concerned. The only blocks that C&M was manufacturing and selling came from its old Bendigo plant and they were selling them into Melbourne. So when you take that into account and you compare C&M, a single firm, not vertically integrated, not in resources, the great advantage of the Hess plant which might be a potential source of market power but they are not yet in blocks.

Boral, through recourse to the advantages of vertical integration and upstream profits sustains a practice over 22 months of below cost pricing on all its blocks. Now, we say that that involved a taking advantage of market power.

CALLINAN J: Mr Young, carried to its logical conclusion - and I do not think you would baulk at this - a company could infringe the section if it took advantage of super efficiency. If it were the most efficient company, it could not price at a profitable level if the consequence were to drive a competitor out of the business. Is not that right?

MR YOUNG: If you assume that a firm was in the position of having a substantial degree of power - - -

KIRBY J: That could happen. An airline company could get the new wonder jet, the Comet, or the 707, when it came out.

MR YOUNG: Yes.

KIRBY J: Or, in this industry, C&M's machine could have been so fantastical that it meant that C&M, with perhaps some licence arrangement, really could totally corner and destroy everyone else in the market.

CALLINAN J: On your argument, you cannot take advantage of anything, no matter how good morally or otherwise it might be.

KIRBY J: Economically - - -

CALLINAN J: Economically or good for the consumers if it had the purpose.

KIRBY J: What is your answer to that?

MR YOUNG: My answer is this that if you have a company with a substantial degree of market power and if it has the prescribed purposes nothing more is required to demonstrate breach of the section if they take advantage of that market power for those prescribed purposes.

CALLINAN J: So you have to charge at a level - you might have to charge at a level which would yield you a significantly higher profit than any of your competitors.

MR YOUNG: We would not say that charging a price that returned a sensible return on your investment and a good profit - - -

KIRBY J: Sensible is in the eye of the beholder, though.

MR YOUNG: I understand that, your Honour, but charging a price that was a profitable price for you because of your efficient plant.

KIRBY J: Justice Callinan prefaced his question by saying, "You did not baulk at that" and I must say I would be astonished if that was the purpose of section 46, that if C&M had this magnificent machine or an airline had a new - - -

CALLINAN J: Yes.

MR YOUNG: But we do baulk at the proposition that mere pricing, in accordance with the efficiencies of your plant, infringes section 46. It does not. You need to have the prescribed purpose.

CALLINAN J: But add the element, your supra-efficiency and you are going to utilise that supre-efficiency to drive one competitor out of the marked.

MR YOUNG: And that is your purpose.

CALLINAN J: That is your purpose, so therefore you cannot utilise that efficiency.

MR YOUNG: If you have a substantial degree of market power - - -

CALLINAN J: You cannot utilise it.

McHUGH J: Let us assume C&M has 30 per cent and they say, "We've got this super machine. We're going to get 98 per cent of this market."

KIRBY J: "We know this will drive out two others."

MR YOUNG: That is different than having a purpose that actuates the conduct of eliminating a competitor.

KIRBY J: So does that not mean that you are really urging on the Court, as Justice McHugh was saying earlier, that "take advantage" means more than "use". It has as that professor from America, Professor Edwards, suggested an element in it contrary to Queensland Wire and Melway that you have to be able to characterise the purpose as not just legitimate business purpose but an anti-competitive purpose.

MR YOUNG: Your Honour, once you introduce those sorts of notions - - -

KIRBY J: An intention.

MR YOUNG: - - - of what is predatory and what is anti-competitive, then, with respect, it seems to us that you just move away from the section. Can I try and grapple with the point that is put to me, without using words like that.

The section requires that you take advantage, that is to say, you engage in a course of conduct that is materially assisted or facilitated by the advantages you hold by reason of being in a substantial degree of power or in a dominant position or greater. Now, once you use the advantages you have in that way, you are taking advantage of them - - -

CALLINAN J: Say you get into that position because you have been very efficient. What have you got to do? Stop being efficient?

MR YOUNG: Your Honour, Queensland Wire would have been decided differently. BHP had a vertically integrated operation.

CALLINAN J: It had a monopoly, did it not? It had 97 per cent of the market - - -

MR YOUNG: For the premise your Honours have given me, it does not matter whether it is a monopoly or a dominance or a substantial degree of power. It is over the threshold, whatever it be. Being over the threshold, the argument advanced for BHP was that its most efficient way of conducting its operations and of maximising its profit is not to sell the intermediate product to anyone but to sell it only to its own subsidiaries.

CALLINAN J: Where does it hold that that was the most efficient way to do it, as opposed to the most profitable way to do it? Because I do not read that into it. All I can read in the reasons for judgment in Queensland Wire is that it was in a position to do it, but not that - - -

MR YOUNG: Yes, your Honour is correct in that there is no such holding, but beyond that there was evidence that BHP had sold on occasions Y-bar to someone else, and even on this occasion with QWI had offered it at an unrealistically high price I think. Your Honour, we would say, just applying your Honour's test to the conduct here, that no corporation but for the advantages derived from vertical integration and product differentiation, would have engaged in loss making activities of this order for 22 months, for the prescribed purpose of eliminating a competitor. In circumstances where C&M was not even in block, and C&M's prices for block were much higher than Boral's, it would not have done it.

CALLINAN J: Pioneer was similarly vertically integrated, was it not?

MR YOUNG: Pioneer was, and did not - - -

CALLINAN J: What about Rocla? Did it have any vertical - - -

MR YOUNG: They both were vertically integrated. Neither priced below vertical cost - sorry, avoidable cost. Rocla refused to go below marginal cost, priced one project at marginal cost to see whether it could stay in blocks, lost to Boral and pulled out. So if you apply the test of a doing something that ordinary competitors would not do, the answer is most certainly, yes.

So, even if "take advantage" has the connotation in QWI, that is, it is conduct that a firm would be unlikely to engage in but for recourse to its market power for a proscribed purpose, that is satisfied here, as Justice Beaumont and Justice Merkel and, indeed, Justice Finkelstein expressly found.

CALLINAN J: Was this a case in which - the witnesses were cross-examined, is that right, about their motives?

MR YOUNG: Yes.

CALLINAN J: Is this a case then that there was any advantage to the trial judge in seeing and hearing - - -

MR YOUNG: No, because as Justice Beaumont pointed out when he set out all the facts and then made factual findings, all of the evidence about the industry were essentially uncontested facts.

CALLINAN J: But purpose was a matter of contest.

MR YOUNG: We rely upon the trial judge's findings as to purpose. There are concurrent findings as to purpose.

CALLINAN J: Yes, quite.

MR YOUNG: That is the only thing that turned on the evidence of witnesses. The rest was industry evidence and it was a question of what were the right inferences to draw about how the pricing and capacity expansion were supported.

Now, I had gone to the concrete masonry position paper. Can I just point out a couple of passages. On other products, 2752, the three bullet points. On the same point, the second last paragraph on the next page, 2753. Can I go then to the next volume, if the Court pleases, volume 15. Under tab 661 one finds the 1994 strategic business plan update from early 1995, that is Cormack, paragraph 15.13. Your Honour the Chief Justice asked me about the particular passage the trial judge relied upon. It is at page 2917 in what is called the assumptions document. The passage is just above item 4, but above that:

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.

Page 2919, we refer the Court, essentially, to the whole of that page. The next page, 2920, under the heading "Moss Vale Plant Proposal", the document that went to Mr Cormack, the general manager nationally, "The tactic involved", et cetera. The next page, 2921, last three paragraphs. Then at the next page, 2922, the second half of the page, last three paragraphs. The last paragraph refers to:

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 -

and:

The coup-de-grace could have been delivered to 2 minor players in 1994 had Boral had sufficient productive capacity.

KIRBY J: The two minor players were players who were not vertically integrated?

MR YOUNG: That is right, Budget, and by this stage, C&M. At 2931, the second-half of the page - - -

GLEESON CJ: Sorry, Budget and C&M?

MR YOUNG: Budget and C&M.

KIRBY J: The coup-de-grace? I see, it was never, in fact, delivered to them but could have been?

MR YOUNG: No. Then 2931, the second-half of the page explains the link between production capacity and discounting:

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.

Then on the next paragraph:

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.

The rest of the page is relevant. I think that is all I need refer the Court to in that document.

At page 662, or under tab 662, there commences some documents dealing with - - -

McHUGH J: Look at 2932 to show what a competitive market this still is. The paragraph at the top of the page:

This is vindicated by recent evidence of vicious price cutting and intense customer targeting by C&M - - -

MR YOUNG: Your Honour, we do not deny that there is a lot of competitive activity. We just simply say that the presence of competitive activity is not inconsistent with somebody having a substantial degree of market power and taking advantage of it.

Page 662 is a memorandum from the national manager of masonry to Mr Berg, the managing director of Boral Ltd, explaining the reasons for the plant upgrade. It shows that production is growing and demand is growing, fuelled in part by low prices. So the idea that you have got collapse in demand running right throughout this period, and that is the explanation for the low prices, is just totally inconsistent with these documents.

The second page, 2938, items 8 and 9: 9 is advanced as a justification for expanding capacity at a time when every extra unit of capacity is losing money, namely:

Boral Construction Materials sell $3 million of product and services per annum to Boral Masonry - - -

KIRBY J: I wonder that you did not start your case with all this. I mean, it is pretty strong stuff, a campaign, a deliberate strategy. I know you accept the primary judge but am I wrong to think that that colours the approach that one takes to the whole section?

MR YOUNG: Well, it is undeniable, we would say, that a relevant factor in assessing whether there has been a taking advantage of market power is the nature, extent, duration and purpose of the price cuts. Melway recently said that a permissible approach, followed by Justice Deane in QWI was to infer "taking advantage from direct observation of purposive conduct."

McHUGH J: But "take advantage" must mean that you get some benefit?

MR YOUNG: Well, they did get some benefit. They were getting 77 per cent of their profit from the high margin products and they were preserving and protecting that. They had an enormous stream of profits in New South Wales that they were preserving and protecting, because this was the most efficient plant, this Hess plant, in the country.

McHUGH J: But BBM were not getting 77 per cent, were they?

MR YOUNG: Yes, 77 percent of - the masonry division's profits came from high margin profits, and I will take the Court to that. But the reason - your Honour can see one reason for doing this expansion of capacity in the middle paragraph, two paragraphs below 9:

This action would also remove a threat to the Sydney market of an entrepreneur gaining control of this equipment -

that is the Moss Vale plant that was going to be moved down to Melbourne -

at a low cost of entry.

Now, they were not installing state of art plant. They were going to install 15-year-old inefficient plant to double capacity to make more losses to sustain the below cost pricing.

KIRBY J: Now, you are telling us all these things. I really am beginning to get very anxious. Here we are with two days, the Full Court of the Federal Court had five days, the trial judge had weeks and we are expected to absorb all this factual data that you are throwing at us. I am not doubting that it is correct, but it is a reason for great caution in looking at the factual findings.

MR YOUNG: Your Honour, we have referred in our written outline to the factual findings by the Full Court, and the factual findings by the Full Court are to the effect of what I have been putting to the Court. It is our learned friends who say ignore the fact-finding exercise legitimately undertaken by the Full Court because they are inferences from uncontested fact and documents. Ignore that, and go back to the trial judge, as if we are having all over again the appeal to the Full Federal Court. We are only doing this because of the submissions that were made to the effect that simply because there is a level of competitive activity, the section cannot apply and they were forced to price down.

Can I go over then to G679 which is an update of the strategic business plan - no, I am sorry, I can pass over that document. I think I do not need to take the Court to anything else - yes, I do, I am sorry. G764, the last tab. It is page 3040. On the first page of this strategic business plan 1996 draft from March 1996, Mr Rawnsley, paragraph 406 of his witness statement, the first page under the heading "Situation Analysis" the third item:

Pricing varies by product and market segment. Currently attempting to maximise sales of high margin product.

Have won every major coloured and splitface project in Melbourne over past 2 years.

Then strengths are mentioned, including "90% purchase of raw materials from" within Boral. Then can I go to the market breakdown that Justice Hayne asked me about, at page 3053. This gives markets segments and market shares. You will see the breakdown within traditional masonry - essentially grey concrete blocks and bricks - 43 per cent, 39 per cent and 43 per cent. This is March 1996, within the relevant period. Then the specialty products, the high margin products - retaining walls, architectural (face) block, et cetera - they have 64 per cent of that market, 43 per cent of retaining walls.

KIRBY J: What is the significance of that? What is the significance of those two statistics?

MR YOUNG: That is where 77 per cent of the profit comes from and it was the mass of grey block production that supported the production of the high margin products.

KIRBY J: See, that is the added premise that you have to know in order to establish the significance of this.

MR YOUNG: Yes, your Honour. It becomes clearer as we go through this document and two more - I think it is only two more I want to go to. At 3055 there is the breakdown of customers. This shows there are very few large customers, representing a relatively small percentage of overall sales, even - that is the case for traditional masonry. Indeed, that is admitted on the pleading. There is only a small number - and I will take the Court to that in a moment - of major customers - the bulk of sales that are small customers over which they have pricing discretion.

Then in the same section, the significance of the specialty products is explained further, at 3076, the bottom left-hand box, "OPPORTUNITIES":

Use of specialty products as "hooks" eg BHP Project -

There is a lot of evidence to which I will direct the Court to the effect that major projects were won on the basis of whether you could supply the specialty product. If you could supply the specialty product, you would get the product for the grey blocks that went into the basement, or the toilets, or whatever. They were critical to winning major projects and this was a segment of the market dominated by Boral.

At 3078, there is reference to the strengths in relation to retaining walls, where their major product was a licensed patented product from the US, Keystone. Then at 3079, one of the strengths in specialty products is said to be "Know how & product from interstate operations".

Can I then ask the Court to go to volume 16. I want to go to document 770, which is at page 3107. This is a strategic business plan of Boral Masonry Australia of late April 1996. Randerson, paragraph 9.7, volume 6 of the appeal book, at page 1000. I direct the Court to the last two paragraphs on the first page and then the first half of the next page. The first half of the next page starts to put in context this masonry business:

Well over half the Division's present output is "commodity" grey block & brick, sold to the building and construction industry . . . sales currently generate a loss of around $2 million p.a. - much of which will be recovered in future as we progressively achieve (at worst) production cost parity with our competitors.

HAYNE J: That is presupposing reinvestment in new equipment.

MR YOUNG: It is, your Honour, yes.

Benefits accrue from this segment by way of volume efficiencies and upstream profits from our purchases of cement & quarry products from Boral (amounting in total to over $10 million p.a. of each) -

that is $30 million -

and in no way would a precipitous withdrawal seem sensible.

The Division has however now developed strengths in a number of products & markets in which it can profitably specialise such as -

and they are listed.

All these represent segments of considerable potential with good margins -

The next document gives the 77 per cent figure. That is at G773.

GLEESON CJ: Just before you pass from 3108, are those products alongside the dashes or bullet points part of the market - - -

MR YOUNG: Yes, your Honour.

GLEESON CJ: - - - as found by - - -

MR YOUNG: The Full Court?

GLEESON CJ: Thank you.

MR YOUNG: Yes, your Honour.

GLEESON CJ: That is the market for concrete masonry products.

MR YOUNG: Yes, but the trial judge's market was much wider than that. The next document is early May 1996 - Randerson. The purpose of this document was part of the presentation of the 1996 strategic business plan: Randerson, paragraph 9.10 of volume 6, appeal book 1002 to 1003. He was Mr Cormack's successor as divisional manager. The first bullet point:

53% of the Division's -

this is the national division -

current sales are in "Traditional Masonry" (bricks, blocks etc.) and in aggregate are sold at a loss.

Then over the next page, after referring to 23 per cent sold through resellers, and that was mostly paving:

The remaining 24% of the Division's current sales provide 77% of its current profits. These come from relatively new developed areas such as -

and they are listed. The next bullet point about opportunities, and then the next bullet - - -

GLEESON CJ: Just before you pass -I suppose one of the reasons why 77 per cent of the current profits come from those products appears from page 3155 in the first paragraph there. It is because:

53% of the Division's current sales are . . . sold at a loss.

MR YOUNG: In part that must be so, your Honour, but in part it is because these are high margin products in any event and they deliver the sales of the commodity products as well. They are the hook that gets you the sale for the grey brick. Then at the bottom of that page, at 3116:

While the "Traditional Masonry" operations are not in themselves currently profitable they certainly provide "mass" to our manufacturing operations. They provide not insignificant upstream benefits to other Boral operations. To withdraw from them on anything but a gradual, planned basis would be to hand over to our competitors the solution to a problem they currently share with us - and simultaneously hand them a real opportunity.

And the next page is relevant but I will not read it to the Court.

GLEESON CJ: Is there anywhere where they discuss an alternative to what they are currently doing except withdraw?

MR YOUNG: No, your Honour.

GLEESON CJ: And of course except buying C&M.

MR YOUNG: That was the earlier alternative. Reinvestment is the other alternative, investment in more efficient plant. I think it is fair to say that these papers assume that that is the way to go.

GLEESON CJ: These papers are trying to make out a case to somebody

MR YOUNG: Yes, they are.

GLEESON CJ: For reinvestment, for funds.

MR YOUNG: Yes.

GLEESON CJ: They are saying the only alternative is to get out.

HAYNE J: Or, as they say at 3118:

WE ARE IN DEAD TROUBLE

MR YOUNG: In Victoria.

HAYNE J: In Victoria.

MR YOUNG: Yes. "Blood on the floor", I think that note yesterday said. Then 808 I will take the Court to because whilst it is the 1997 business plan, or a draft of it, from March 1997, Randerson paragraph 9.25 at appeal book 1012, it does contain retrospective figures that show the position over previous years. We draw the Court's attention to the break-up of the business, is similar to the previous document, at 3130. The two bullet points about retaining walls and engineered masonry say that those segments are:

dominated by the major players -

that is Pioneer and Boral in the context of this document.

GLEESON CJ: What about the third sentence in the first paragraph on page 3130?

MR YOUNG: Page 3130? "Price is the critical factor to the user"?

GLEESON CJ: No, that is the second sentence.

MR YOUNG: I am sorry, your Honour. On market definition, your Honour, we say there was some substitution with alternative building products. We have never said otherwise. But in the relevant period there was no cross-elasticity demonstrated. The price differentials were so significant that there was a discontinuity. There may have been overlapping markets or there may have been a broad market in the sense spoken about in Queensland Wire but relevantly for the purposes of assessing market power, concrete masonry was the proper market notwithstanding some substitution across the boundaries. That simply will apply Arnott's.

GLEESON CJ: That seems to be a statement that there is just as much competition from other building materials and systems as there is from other masonry producers.

MR YOUNG: That was not borne out by the evidence, your Honour. The evidence was to the effect summarised by Justice Finkelstein, namely that the suggestion of real competition from tilt-up was historical. During the relevant period, 1994 to 1996, there was no evidence of any significant substitution, no evidence of cross-elasticity in price or demand - - -

McHUGH J: That is understandable if prices are down.

MR YOUNG: But if prices are down, you would expect it to have an effect on tilt-up sales. It did not.

GLEESON CJ: What did the Full Court make of that statement?

MR YOUNG: In terms of market definition, is that what your Honour asks me?

GLEESON CJ: Yes.

MR YOUNG: The Full Court found that the - specifically of this statement, I do not think it is mentioned in the judgments, but broadly speaking, they found that the bulk of the evidence was that there was limited substitution with other alternative building products and that the correct way of measuring market power relevantly was to look at the concrete masonry industry. We will say this later on if we get a chance, your Honour, but you ask yourself this question, which is the Tooth question, "If all the manufacturers of concrete masonry formed a cartel, so there was effectively only one supplier of concrete masonry products, would that sole supplier of concrete masonry products have market power?"

GLEESON CJ: It would depend on whether that statement in the third sentence in the first paragraph is correct.

MR YOUNG: Yes, but the evidence from - and I will take the Court to it; some of it is in our outline - but the price differentials during the relevant period between block and tilt-up were very significant. So there was a large area of movement before you were going to get any substitution. Now, you might get substitution on functional-based grounds because tilt-up - because of its special properties, you put up a factory with tilt-up walls, but because of its poor sound transmission qualities, you cannot use it for other functions that block fulfils. Now, we will try and deal with that as best we can in the time available.

CALLINAN J: How can you say that tilt-up walls were not in competition when there is evidence that their introduction reduced the block market by 65 to 75 per cent when they were introduced?

MR YOUNG: In the late 1980s or early 1990s.

CALLINAN J: It does not matter. How can you say that they were not substitutable when that was the direct consequence of their introduction?

MR YOUNG: Your Honour, we do not dispute that there is a degree of substitution.

CALLINAN J: But they had a huge impact. I am looking at Justice Finkelstein at 299 and 300.

MR YOUNG: Yes. Your Honour, I am not debating that. They did have a huge impact.

CALLINAN J: How can you say if they had the impact that they were not competing products, substitutable products?

MR YOUNG: Because once tilt-up, which was a new product, was out there and available in the late 1980s and early 1990s, it shrank the size of the concrete block market because certain applications were best suited for tilt-up and some were best suited for concrete block.

CALLINAN J: To that extent, it remained in competition and thereafter it remained in competition with concrete block.

MR YOUNG: Thereafter, your Honour, the question became, now that tilt-up has established a range of uses for which it is sought after in preference to concrete block and having regard to the price differentials between the two during the relevant period, was there a sufficient degree of close competition between the two that it made sense for the purposes of analysing market power to say they are one market or to say that there is a separate and distinct concrete masonry market within which those within that market have market power?

In our respectful submission, what your Honour puts was rejected by the Full Court in Arnotts. That was the market between biscuits and confectionary. Chocolate biscuits obviously compete with confectionary. There is substitution across the boundaries of the market and there usually is. The beer and wine market is an example. The growth of wine sales in Australia has caused the beer market to shrink. That does not mean that there is not a market for the manufacture and supply of beer.

It is an instrumental concept to understand whether those supplying beer have market power and they can have market power even though there is substitution across the boundaries. That is what all of the cases say. So, that is essentially the issue and ultimately it was an issue of fact. The facts were extensively reviewed before the Full Court and this is an area where the Full Court has made explicit findings of fact by each of the three members of the court as to the correct boundaries of the market to properly assess market power.

Justice Heerey did not adopt the principal approach that ought to have been adopted. He said a wall was a wall, timber competes with plasterboard, competes with metal stud walls, competes with concrete and brick and as well they all compete with asphalt and terracotta tiles.

GLEESON CJ: Do you accept as correct the statement made on page 3133 alongside the third star?

MR YOUNG: Page 3133 in the third star?

GLEESON CJ: Beginning with the word "Fluctuating"?

MR YOUNG: To this extent, your Honour, that we accept that there was an area of the concrete masonry market where there was a high degree of price competition, but that is not the entirety of the market. It cannot be right because of what they say about the 77 per cent profit segment of the market where they say they have 64 per cent and they are dominant.

GLEESON CJ: But they get 77 per cent of the profits out of those products because they are selling their other products at a loss?

MR YOUNG: Not, only, your Honour, it is because of the reasons I have mentioned. Can I take the Court then to just a few other pages within this document: 3135, the upstream purchases, the figures I mentioned and then 3137.

GLEESON CJ: Those money sums on 3135 do not seem very large.

MR YOUNG: $18.9 million.

HAYNE J: Nationwide, are they not, or are these State?

MR YOUNG: Nationwide, yes.

HAYNE J: These are Nationwide?

MR YOUNG: They are. At least $3 million in Victoria was the figure given in another document. The spread of the business is given at 3137.

KIRBY J: Now what are we to make of this given that we are not talking of a Victoria-wide market but a Melbourne metropolitan market?

MR YOUNG: Well, the same products are sold within Victoria and in Victoria- - -

KIRBY J: Why are you citing this? What is it proving that is relevant for our decision?

MR YOUNG: What it shows, your Honour, is that in Victoria Boral had a dominant position in high margin products as well as a significant market share in traditional masonry. That is Victoria wide. All the figures in the case from whatever source really seem to be Victoria wide but there was evidence that 80 percent of Boral's sales were directed into Melbourne, and we have referred to that evidence in our outline.

The types of sale undertaken are at the next page, that is according to the type of acquirer, 3138, and the relevant market shares. Our learned friends suggested that the major tenders were the be-all and end-all effectively of their business. It is not borne out by the evidence.

The national profit position is revealed at 3139, historically, and the Court sees that Victoria was negative ebit, negative return on year-end assets right through the relevant period in the 1990s, so was South Queensland, whose document show that both areas were the subject of price wars because of new entrants. But New South Wales and ACT is a very profitable segment of the market by comparison.

GLEESON CJ: Just before you leave 3138, I am just not sure what I make of those figures. Reading along the line does not add up to 100 per cent.

MR YOUNG: No.

GLEESON CJ: Sales to contractors and subcontractors in Victoria, 54 per cent, and then 35 per cent and then 41 per cent.

MR YOUNG: It is not meant to add up, your Honour. They are simply saying, as the first column indicates, if you take all commercial and civil construction sales, Boral has within Victoria 54 per cent of that, Pioneer has some other per cent, C&M has some per cent.

GLEESON CJ: Then how do those figures demonstrate that it is not correct to say that they relied substantially on sales to large customers?

MR YOUNG: Your Honour, because of the earlier documents, effectively, is my answer. That 77 per cent of the profit was generated by columns - well, you cannot tell from - - -

GLEESON CJ: But 77 per cent of the profit was generated because most of their business was unprofitable. Of course, that part of their business that was profitable generated a large percentage of their profits because they did not have any.

MR YOUNG: What it demonstrates, your Honour, we would say, is this, that they made significant sales outside commercial, or at least - put it this way, your Honour - they have a significant share of sales outside commercial within Victoria.

GLEESON CJ: But we know that outside commercial includes multistorey residential construction.

MR YOUNG: Yes, we do, but it is not the subject of these 18 tenders, by and large. I gave the Court a reference to the pleading. I will not ask the Court to go to it; I will just give the references. At paragraph 9(c) of the amended defence, Boral admitted or made an admission in relation to the spread of its customers and then gave particulars of the spread of its customers, and listed its large customers at pages 58 to 61. What is clear is that only two or three customers during the relevant period accounted for more than 2 per cent of sales, consistent with the document that I took the Court to.

HAYNE J: Do we have a sum of the table at 58 to 61? Is it appropriate to simply sum it to get a total percentage that went to so-called large customers?

MR YOUNG: The last column of the table says "% of BBM's Total Sales" that went to particular customers.

HAYNE J: So, if I sum it, do I get all of the large customers?

MR YOUNG: No, these percentages will not add to 100 per cent, your Honour, but my point - - -

HAYNE J: They will not but they will add up to a large percentage, will they not, of total sales?

MR YOUNG: No, your Honour.

HAYNE J: They will not. What is the sum?

MR YOUNG: I have not summed them, but if your Honour can run your eye down the page, it is pretty clear that you end up with a figure that certainly is less than about 15 per cent.

HAYNE J: I am surprised by that, but there we are. I will do the sums.

MR YOUNG: Can I turn to answer a question that the Chief Justice raised yesterday, that is, did Boral, on any occasion, price lower than it needed to? In our submission, contrary to the answer given yesterday, the evidence was clearly, yes.

GAUDRON J: That it needed to for what purpose?

MR YOUNG: The question the Chief Justice asked was in the context of tenders.

GLEESON CJ: Boral had needed to win a contract.

MR YOUNG: Yes, your Honour, but the - can I put it - our learned friends have referred to the 18 tender projects that the trial judge discussed. Most of those were won on factors other than price, as the evidence shows. Over and above that, though, there are many sales to many customers beyond them. The graphs themselves show - - -

GLEESON CJ: Just sticking with those for the moment, the ones that Mr Archibald showed us.

MR YOUNG: Yes, I am going to come to those immediately, your Honour, if I may, but can I just make the point generally that the graphs demonstrate that Boral went far below, on average, the prices of Pioneer and C&M.

GLEESON CJ: Are they the prices quoted or the prices at which contracts were entered into?

MR YOUNG: They were the prices at which contracts were entered into and - - -

GLEESON CJ: How do we know what the others quoted if they did not get the contract?

MR YOUNG: You do not from that data, your Honour.

GLEESON CJ: No. So the graph will only show you the comparison between BBM's successful quotes and its competitor's successful quotes?

MR YOUNG: Yes, for all sales of the relevant products.

GLEESON CJ: And the graph will not show you a comparison between Boral's successful quotes and its competitor's unsuccessful quotes?

MR YOUNG: No, the graph does not show that, I accept that, your Honour. But, nonetheless, over the 22 months or so covered, the pattern is clear that Boral's average prices for sold blocks in the relevant categories were far below the average price at which its competitors were selling the equivalent product.

Can I deal then with specific projects, but can I say to begin with, schedule 7 and schedule 2 which found their way into the appeal book were not evidence. They are a set of submissions put together by BBM and they do not include any of the evidence given by Pioneer.

KIRBY J: Where is this, where are these schedules?

MR YOUNG: Those schedules are in volume 27 and Mr Archibald took the Court to them yesterday.

GLEESON CJ: I think he took us to a folder that he handed up.

MR YOUNG: They added appeal book references and I thought that a separate document was handed to the Court - - -

GLEESON CJ: Yes, I remember that.

MR YOUNG: - - - and supplemented today with a further schedule. I just wanted to make sure there is no misunderstanding. That was not part of the evidence, although for some reason that we do not understand it found its way into the appeal book. That is not a document of evidence, it is - - -

GLEESON CJ: I thought that Mr Archibald yesterday morning took us to that document.

MR YOUNG: That document in the folder, your Honour, is simply a transcription of paragraphs from various affidavits.

GLEESON CJ: Yes.

MR YOUNG: But the document I am referring to is schedule 7, Major Projects.

McHUGH J: It has 0053 up the top.

MR YOUNG: It has, your Honour. Then a further document was handed up this morning called schedule 2 which has 5475 at the top. That is simply a set of submissions that Boral prepared in the lower courts.

HAYNE J: Are they Full Court or trial court?

MR YOUNG: Trial court I think, your Honour. It does not include any reference to the evidence of Mr Griffin, the managing director of Pioneer, who explained and set out contemporaneous documents as to the prices actually quoted by Pioneer and what was achieved on these projects by Pioneer, which is contrary to the evidence in many parts of schedule 7 and schedule 2. I want to deal with a few of the major projects if I may to demonstrate what we have said. Can I hand to the Court a very brief document that deals with some of those major projects, and refers to Mr Griffin's evidence.

GLEESON CJ: Thank you.

MR YOUNG: I do not propose to take the Court through all of the projects. I simply want to deal with a handful of them.

GLEESON CJ: Have we got the document you are referring to?

MR YOUNG: Sorry, I thought I was being handed one for my use, your Honour. Can I just take a couple of examples, your Honour. Can I take Melbourne Exhibition Centre. It is the third last item on the first page. Mr Griffin of Pioneer dealt with the case of the Melbourne Exhibition Centre. The appellant's documents said that Pioneer's prices were not known, and Justice Heerey said that in his judgment at paragraph 65. In fact, Mr Griffin's evidence dealt with it.

GLEESON CJ: What were the prices of the other - were there only two tenderers?

MR YOUNG: There were only two, and BBM was far under Pioneer. Pioneer nonetheless won the job because of the loyalty of the - the regular customer status of the relevant blocklayer Sterten, Gill and Byrne. A similar position obtained at Western Metro College, the third item in that column. Pioneer won. It won at prices which were greater than those quoted by BBM.

CALLINAN J: Does that not show how keenly you have to price your products in order to increase your market share? That even if you go very low you might not be successful, because of loyalty and factors of that kind.

MR YOUNG: Your Honour, our case is not built around the major projects. There are only 18 of them - - -

CALLINAN J: No, but you have taken us to the major projects now.

MR YOUNG: Yes, your Honour.

CALLINAN J: And it does make that point. It makes the point that in order to increase market share, I would have thought, or even to hold market share, it may not be nearly sufficient to go very, very significantly below your nearest competitor.

MR YOUNG: Yes. Well, on some projects, Boral did go significantly below, and I will come to two more examples - - -

CALLINAN J: Well, it did on Melbourne Exhibition.

MR YOUNG: Yes. It did on Crown Casino, and it did on Rockman's Regency.

CALLINAN J: But it did not get the Melbourne Exhibition contract, and it did not get the Western Metro contract.

MR YOUNG: No, and other contracts were awarded not on the basis of price, but on the basis of the ability to provide a specialty product. Now, all that shows is really that you cannot simply look at the 18 contracts and say, "There you are, there is competitive activity. There can be no section 46 conduct. They are just a snippet of the market, and there was - - -

CALLINAN J: Yes, let me accept that, but what I am trying to put to you is, you can get other things from it, too. One of them is what I have just suggested to you.

MR YOUNG: Well, your Honour, let me accept the premise that, as Mr Cormack's passage of evidence that I went to before lunch said, they only went after one in three of these major projects anyway, and let us assume that on some of the projects they priced competitively in order to win, without going below avoidable cost and without for other reasons. That does not really grapple with the case that we make against them, that across the broad range of business for the supply of blocks - - -

CALLINAN J: No, but it is relevant, is it not? It is relevant to section 46(3), when you are looking at degree of market power, and when you are doing that, you have to have regard to the way in which your conduct can be affected by others and how your conduct can influence others. Now, pricing very low may not necessarily influence the market in your favour, as these two instances we have just referred to show.

MR YOUNG: Your Honour, let me take the assumptions, that is, that in relation to these major projects, under a tender system, there were constraints affecting BBM's pricing policies. Let me accept that. Most of these projects were won on factors other than price. Griffin says, only two of 18 were determined by price. Now, our case is that on the broad range of sales of blocks - even if you accept that there was genuine competitive activity on a handful of these major projects - on the broad range of sales of blocks, Boral was pursuing a strategy of going below avoidable cost to force prices down, to eliminate a competitor. The point to these projects - which, we say, do not say what BBM contends for - does not really take the issue very far.

Can I turn to two of these projects, being Rockman's Regency and the Casino. Can I start with the Casino project. The situation is very briefly referred to in this note, but this is consistent with the trial judge's findings and the Full Court findings, that is to say that Boral won a contest for the supply of blocks at the second stage by providing two heavy rebates, one to Grocon of 4 per cent of all products supplied to Grocon - which was the builder of the Casino - and secondly, to Brady's, of $1,000 per month for the duration of the Casino project, which was made retrospective to the start and then was extended beyond the conclusion of the Casino project until September 1997.

KIRBY J: Where are these? I do not see these under Rockman's Regency in the schedule.

MR YOUNG: No, I lam sorry, your Honour, that is the Casino project. I have confused your Honour. I apologise. What I just referred to is referred to by Justice Heerey in paragraphs 68 to 72 at appeal book 134 to 135, but the extent of the rebates is described in this evidence that I will not ask the Court to go to because of time constraints but I will give the references. Mr Pethica in his two affidavits, firstly, B14, paragraphs 45 and 46 at volume 3 of the appeal book, 562 to 563, and in his second affidavit, paragraphs 11 and 12 at volume 8 of the appeal book at 1499 to 1500, and also by Mr Vella in his affidavit, paragraph 256, volume 7 of the appeal book, at 1246.

In fact, even if you leave aside the rebates, Boral did not simply match Pioneer's prices, it went lower, as their evidence respectively shows. Pethica at paragraph 11(a), page 1499 to 1500 of the appeal book, and Vella, paragraph 260 at page 1247 to 1248 of the appeal book. As to the extent of the rebates and their retrospectivity, Vella, paragraph 264. So, in the case of the Casino, they went way under Pioneer by giving rebates. In the case of Rockman's, the position is briefly summarised in this note. Boral won by giving:

a 41 per cent rebate even though its original prices were almost all lower than Pioneer's quote

I would ask the Court to go to volume 22 of the appeal book. I want to take the Court to 786 of the transcript at 4543, from lines 27 to 46. Then I want to take the Court to Mr Carnevale, who was the - - -KIRBY J: Justice Heerey made findings about this at paragraphs 84 and 86 of his decision.

MR YOUNG: Yes, that is so.

KIRBY J: Now, do you challenge his findings on this matter?

MR YOUNG: No, his findings were to the effect that there was a 41 per cent rebate given. No, we do not challenge it, your Honour. Our learned friend, Mr Archibald, said yesterday that they were gullible to offer it, thinking it was perhaps what one of the other parties had offered, but plainly not borne out by the evidence. It was way below cost. It was offered to hurt Budget, to take one of their big customers off them on a big project. So to that extent, your Honour, that is not reflected.

KIRBY J: You say that the inference to be drawn is not gullibility, but that this is part of the strategy of carrying forward the purpose?

MR YOUNG: Yes, and it is an example that the Chief Justice asked for of a case where Boral went much lower than it needed to, a rebate of 41 per cent, in order to eliminate a competitor.

Now, can I ask the Court to go to volume 8 of Mr Carnevale's affidavit. He was the director of Mulgrave. They were the blocklayers who had the Rockman's contract.

KIRBY J: I am sorry, which page?

MR YOUNG: I want to take your Honour to 1513 under tab D10. I was explaining who Mr Carnevale was. Mulgrave were the blocklayers who had the contract to lay blocks at the Rockman's Regency Hotel. They were the ones calling for tenders. They were a regular customer of Budget, and Carnevale was the director of the Mulgrave blocklayers. At 1513, 27 and 28, I draw the Court's attention to:

We looked after you at Rockman's. We deserve better than this.

KIRBY J: It was suggested, I think, yesterday that this is evidence not of a coherent strategy of undercutting but of quid pro quo such as one would expect in a marketplace where one good price was offered and a little bit of loyalty was expected in return.

MR YOUNG: The evidence we draw attention to, your Honour is that 41 per cent was an extraordinary rebate. It was aimed to delivering a body blow to Budget. The next project along, they say, "We looked after you at Rockman's". There was no gullibility in offering 41 per cent rebate.

CALLINAN J: It is a big rebate, but one is told that there is, or will shortly be a gross oversupply of barristers and it may not be surprising if some of the barristers who are out of work say, "We'll give you a 41 per cent rebate, just to get the work, to been seen around the courts with our wigs on and getting our names in lights and the law reports, noticed by the judges".

McHUGH J: It used to be called dock briefs.

MR YOUNG: Yes, your Honour. Without rising to the debate about briefs, we say this simply about the Budget situation: BBM's accountant provided figures at trial at volume 9 appeal book 1631 that I will not go to, showing that Boral made a loss of $98,484 on this single contract supplying blocks at a 41 per cent rebate. Its purpose is disclosed by the evidence I have gone to. It was not a case of gullibility. It was an example of going much lower than necessary, extravagantly lower, in order to pursue a proscribed purpose.

GLEESON CJ: Why would they go any lower than was necessary to achieve their purpose?

MR YOUNG: They did not know how much it would take to deliver a body blow to Budget.

GLEESON CJ: What was going to deliver a body blow to Budget was taking away their client, their customer.

MR YOUNG: Yes, but this was a regular - - -

GLEESON CJ: So why did they go lower than was necessary to take away their customer?

MR YOUNG: They had to go - this was a regular customer of Budget. They had to persuade the regular customer of Budget to go their way.

KIRBY J: In a sense, you use it to establish your case that it is proof that this was part of the strategy because they would not have had to go that low just to win the contract.

MR YOUNG: Exactly.

GLEESON CJ: So what was going to deliver a body blow to Budget was to win the contract.

MR YOUNG: Yes.

GLEESON CJ: According to the evidence you took us to a few minutes ago.

MR YOUNG: Yes.

GLEESON CJ: So why would they go lower than was necessary to win the contract?

MR YOUNG: They were prepared to go as low as necessary, whatever figure Carnevale nominated, even if it was a ridiculously low figure - - -

GLEESON CJ: "Necessary" meaning necessary to win the contract.

MR YOUNG: He told them 41 per cent. They said, "Fine, we'll pay it". That is the effect of the evidence.

GLEESON CJ: That is what Mr Archibald told us yesterday.

MR YOUNG: But there is no gullibility about it, your Honour.

GLEESON CJ: You seem to be suggesting that this is an example of them going lower than they had to go to win the contract. It was winning the contract that was going to hurt Budget. So the question was how low did they need to go to win the contract. I understand you to be submitting to us that the evidence shows that they went lower than it was necessary to go to win the contract, and I am asking why.

MR YOUNG: Because, we would submit, that their purpose was all important to them and that they were prepared to go to whatever figure was nominated by Carnevale - - -

KIRBY J: To do whatever it takes.

MR YOUNG: Yes.

GLEESON CJ: To win the contract.

MR YOUNG: They would go as low as it takes regardless of their own costs.

GLEESON CJ: To win the contract.

MR YOUNG: No.

GLEESON CJ: As low as it takes to win the contract.

MR YOUNG: In order to deliver a body blow to Budget.

GLEESON CJ: Yes, by winning the contract.

MR YOUNG: Yes, I accept that, your Honour.

KIRBY J: Did Mr Carnevale nominate the 41 per cent? Was that his figure?

MR YOUNG: His evidence was to that effect, your Honour. Can I just give your Honour a reference. In cross-examination, volume 21, appeal book 4231. He said he was in disbelief when they accepted his nomination of 41 per cent. He said:

My nomination of 40 cents -

I think it should be 41 per cent:

was pie in the sky . . . I was in disbelief when he accepted that, yes.

HIS HONOUR: Sorry, you didn't ask for more?---I didn't want to steal them.

It was pie in the sky and obviously so, was our submission. It was half as low again as what they were told or what they knew to be the competitive position.

If your Honour asks us for an example of a situation where, despite their general knowledge that they could the contract for around about X, if your Honour wants definite knowledge that they knew the precise figure that would have achieved it, that they went lower, one is not going to find that sort of evidence. What you are going to find is a figure so low that they must be taken to have known that it is far lower than would be necessary to achieve the contract, and that is this case, of Rockman's. The rebates given in the Casino case were also very large and ongoing.

KIRBY J: You say that because it does not have the smell about it of a commercial arrangement you therefore have to look for an alternative characterisation of it and that is a characterisation that offends the section of the Act?

MR YOUNG: Yes, and it is really only a question of giving effect to the inferences that are otherwise available on the evidence, your Honour. Can I ask the Court to go to Mr Griffin's affidavit, D12 in volume 8. Mr Griffin's evidence is very significant because he gives specific detail, prices and documents concerning Pioneer's position, demonstrating that, far from the case presented here, the case was as accepted by the Full Court, that is, that Boral aggressively led the prices down in pursuit of its strategies. It was not forced down at all.

Can I draw the Court's attention in Mr Griffin's affidavit, without reading it, to the following paragraphs - and I would ask the Court to turn the pages with me if they would - commencing at paragraph 15, page 1528. The two points are Pioneer's pricing discretion with ordinary customers and their policy of never going below competitor's prices. Then paragraph 17, first sentence.

Then could I turn to paragraph 45 to 46. Paragraph 45 to 46 lists jobs lost and won between Boral and Pioneer. I provide the Court with the exhibit WTG-20 and 21. Eight jobs were lost from Boral to Pioneer, in exhibit 20, and exhibit 21, 60 jobs were lost by Pioneer to Boral in the period. Then paragraph 47, the last sentence - - -

KIRBY J: Would you just distinguish those two categories? The eight on 1537 - - -

MR YOUNG: That is paragraph 45.

KIRBY J: Yes.

MR YOUNG: Eight lost from Boral to Pioneer, and the next paragraph, 46, Pioneer lost 60 jobs to BBM - last line on the page.

GLEESON CJ: Who is Bill Griffin?

MR YOUNG: He is the general manager of Pioneer. The equivalent to Cormack.

KIRBY J: So the list on 1538 is representative?

MR YOUNG: Yes, it is representative, your Honour. There is a much longer list in the exhibit. Then can I go to paragraph 59 - - -

GLEESON CJ: Paragraph 50, there is a quote from a committee meeting:

C&M are in the process of commissioning their new paving plant -

Is that the Hess?

MR YOUNG: Yes, and that is October 1993, when the trial judge found it was a trial production run in about October - - -

GLEESON CJ:

C&M . . . are offering very cheap prices . . . Boral is reacting.

MR YOUNG: Yes. The top of the next page, your Honour, 1540:

Recently we specified on two large projects however we lost the supply to Boral who undercut our price by 25%)".

Commencing at paragraph 59, Mr Griffin starts to go through a number of contemporaneous documents.

KIRBY J: I may be getting confused, but I thought Mr Archibald told us that Mr Griffin did not really come up to this proof. Did he waver - - -

MR YOUNG: He was not cross-examined about these matters.

KIRBY J: He was not?

MR YOUNG: No.

KIRBY J: I must be confusing it with some other evidence.

MR YOUNG: This was uncontested. Paragraph 62 is really where he commences turning to the contemporaneous documents. Can I draw the Court's attention to a few of them. Paragraph 66 - - -

GLEESON CJ: Before you go, paragraph 63, is the new competitor there referred to C&M?

MR YOUNG: Yes, your Honour. Paragraph 66 - and these are quotes from contemporaneous Pioneer records - then 68 - - -

KIRBY J: And that is marked "Highly Confidential". Does it still have that confidentiality?

MR YOUNG: No, not in our view, your Honour. Then 73, then 75, at the top of page 1546 - sorry, 75 is the bottom, and the top of the next page, 76 and 77.

KIRBY J: Who are the Australian Business Products Division? Is that of Pioneer?

MR YOUNG: That is of Pioneer.

KIRBY J: I see.

MR YOUNG: Then, 81, 82 and 83. Then Mr Griffin goes through the particular projects in the paragraphs between 88 and 107 and his conclusion is that of the 18 jobs that Vella dealt with only two were determined by price alone.

KIRBY J: I do not understand that submission.

MR YOUNG: Your Honour, commencing at page 1533, Mr Griffin goes through the major tender projects.

KIRBY J: Yes. He establishes the way that the appellant was undercutting.

MR YOUNG: Yes, but his conclusion is that through all the jobs he goes through of the jobs won by Pioneer, of which there are 18, only two of those victories were determined by price. Most were determined by the ability to provide the specialty product that was sought, or by regular customer relations.

HAYNE J: Which paragraph do I find that in?

MR YOUNG: I think it concludes at 106 to 107. I do not think it is expressly said. I think it is a question of travelling through the affidavit and adding them up, your Honour.

GAUDRON J: He does say two jobs were won on price alone at paragraph 106.

MR YOUNG: Yes, by Pioneer, that is right. There are some relevant exhibits of Mr Griffin that did not find their way into the appeal book and we will provide them to the Court, but the overall effect of Mr Griffin's evidence is that Pioneer was not doing battle over price in the way suggested, that Boral was the one aggressively leading prices down.

KIRBY J: To such a point that Pioneer considered it would just not be commercially viable for it to compete on price.

MR YOUNG: Yes, on price, but it was competing through its regular customer relations specialty products and on smaller customers it had relationships established where it had some degree of pricing discretion to charge above market, as the evidence was that Boral, likewise, had pricing discretion over certain customers through regular relationships. It also establishes that it gave rebates, whereas Pioneer did not. Now, all those matters are the ability to discriminate in price, the specialty products that operate as a hook for various projects are sources of market power possessed by the incumbents.

Now, it is our respectful submission that the Full Court was right, having thoroughly reviewed the evidence, to find that Boral sustained its below cost pricing and its capacity expansions by relying upon the advantages it had in the marketplace as an incumbent in the diverse ways that we have referred to.

HAYNE J: Yes, I know, but what you have got to face up to, it seems to me, is how you can make a finding that a company has substantial market power if the firm has not the power in the future to make supra-competitive profits. I mean, it seems to me a contradiction in terms to say that you have market power if you cannot recoup it. I can understand it if your case was once you got rid of C&M there would be a rise in profits that would be shared by Pioneer and Boral and that would allow them to recoup the losses that they suffered, but that is not your case. You deny that recoupment has anything to do with it.

MR YOUNG: Your Honour, we deny that the American concept of recoupment has anything to do with it as an ingredient of the section. We say the evidence was clear, and so held by Justice Merkel, that they were seeking to return themselves to a stable, normal environment where they had a - - -

McHUGH J: Yes, but that is different from making supra-competitive profits?

MR YOUNG: It is, we accept that, but that does not mean that we say that- - -

McHUGH J: It is difficult to escape the conclusion that given the trial judge's findings, the Full Court entered on a new analysis of market power. You may find some assistance from it in the European cases, I concede that, but it just seems to me a contradiction in terms to say that you have market power, substantial market power, if you cannot in the future raise your prices to a supra-competitive level.

MR YOUNG: Well, your Honour, with all due respect, we say your Honour's proposition contains the contradiction in terms, because what it does is to conflate monopoly power with a substantial degree of power.

McHUGH J: No, it is not. It is to simply apply the tests in Queensland Wire and the exposition of market power by Justice Lockhart in Dowling's Case.

MR YOUNG: With respect, no, your Honour. Let met try and grapple exactly with what you say. Justice Heerey's approach was to define predatory pricing and to say predatory pricing equals the low cost pricing below avoidable cost plus an expectation of recouping supra-competitive prices.

Now, that is to distort section 46, because once you define the future in terms of supra-competitive prices, you are importing a concept of monopoly power into the section, which is a vice, and it is not only dealing with the end of the matter. Once you require recoupment of supra-competitive prices, you are distorting the beginning point, which is the substantial degree of power. That is why we say it is a contradiction.

If you have a substantial degree of power - and, as here, Boral was trying to protect its steady stream of profits in New South Wales because C&M might expand there or Boral was trying to protect its dominant position in the high value end of the market. It could achieve recoupment by achieving either of those objectives, not in the American sense of within the same market recovering dollar profits equal to the costs of the predatory pricing. It would - - -

McHUGH J: I could understand that analysis, in a way, that you are doing it for an indirect purpose to achieve, but there are not findings along those lines.

MR YOUNG: There is a finding by Justice Merkel that they expected the market to return to a situation of normal profits and a good level of profitability.

McHUGH J: Yes, but that does not recover your losses and there was evidence from one of the witnesses who said, "Well, they are gone. Those losses are gone." It was Cormack, I think, who said, "Well, they are gone. Those losses are gone and they can't be recovered."

MR YOUNG: It does not recover all of their losses, but it recovers some of their losses. But more than that, it kills off a threat to their entire operations, as the document indicated.

McHUGH J: Yes, but it does not matter that C&M get destroyed, as long as the competitive process is still there which prevents Boral from recovering what it has lost. It cannot hurt anybody if Boral - it can only benefit consumers. Predatory pricing that does not achieve its object is a boon to consumers.

MR YOUNG: Well, I have two responses to that, your Honour. The first is that the achievement of the objective is no part of section 46. The contravention is complete when the conduct occurs for the proscribed purpose whether or not it achieves its objective.

McHUGH J: No, I appreciate that, but the point I am putting to you is on this question of whether you have substantial market power.

MR YOUNG: The second response I had to your Honour was that if recoupment can be achieved indirectly in various ways, as all the literature says that we have given the Court reference to, and if as here it could be achieved indirectly by forestalling threats in other States or to other products, even if it is for a period of time, that, we say, affords a sufficient connection between the elements in section 46, and you do not - - -

McHUGH J: Well, I am not of that because of the necessity to be in the same market. It has to be the taking advantage in this market. We are not going to start talking about other markets.

MR YOUNG: What your Honour says is not correct in terms of section 46, we would submit, but Parkwood Eggs demonstrates that, but there is no requirement in section 46 that the recoupment - - -

McHUGH J: Well, it is an injunction. Does that go - - -

MR YOUNG: It is an injunction case, but there is no requirement that the recoupment take place in the same market as the conduct. That is to build artifice upon artifice in terms of section 46.

GLEESON CJ: I wanted to ask you a question about that, Mr Young, before you conclude. It is not a matter that has come up so far in discussion but as I have followed the argument, the whole case in this Court has been argued on a particular basis and I understand, but I just want to confirm that this is what was argued below.

If you look at section 46, it covers situations in which the contravening conduct involves the exercise of power in a market for a purpose of damaging a competitor of a body corporate that is related to the contravening party in another market.

MR YOUNG: Yes.

GLEESON CJ: Am I right in thinking that the whole case has been conducted, and still is being conducted, on the basis that the only market with which we are concerned is the market that BBM is operating in which Justice Heerey found to be a wider market but what you say is a narrower market, and we need not get into that argument at the moment. But it has never been argued, for example, has it, that Boral Ltd contravened section 46 by exercising its power in relation to the building materials market for the purpose of benefiting its related corporation, BBM, in the concrete masonry products market? Boral Ltd is not a party to these proceedings.

MR YOUNG: The answer to the second part of your Honour's question is, no, it was not conducted on the basis that Boral was taking advantage of power in a building products market but it has been part of the case that Boral would derive benefits in the sense of rational recoupment - I hesitate to use that word - - -

McHUGH J: Are you now using Boral in the strict sense in contradistinction to BBM?

MR YOUNG: No, I am using it in the sense of BBM. BBM would derive benefits of an indirect kind - - -

McHUGH J: I think the Chief Justice's question was directed to two separate entities.

MR YOUNG: It was.

GLEESON CJ: You made submissions about vertical integration and the significance of the benefit to other companies in the group from whom BBM was acquiring product, but this is not a case - first of all, there is no member of the Boral group other than BBM who was a party to these proceedings.

MR YOUNG: There was originally but the case was not pressed on appeal against it.

GLEESON CJ: Right, so we can forget about any possibly contravening conduct on the part of any member of the group except BBM?

MR YOUNG: Yes.

CALLINAN J: Is it an advantage to BBM that it is a subsidiary in a vertically integrated group of companies?

MR YOUNG: That is our case and was always part of the case. That is that Boral - BBM derives advantages that feed into its market power.

GLEESON CJ: I need to be clear about this.

MR YOUNG: Yes, your Honour.

GLEESON CJ: Section 46 covers conduct in one market having an effect in another market.

MR YOUNG: Yes.

GLEESON CJ: We are not concerned with that aspect of section 46 in this case.

MR YOUNG: The answer is, no, but for Justice McHugh's case can I add this, that save to the extent that recoupment becomes relevant, we do argue that recoupment through advantages derived by related companies would need to be addressed.

GLEESON CJ: Even so, the contravening conduct and the consequences of the contravening conduct occurred in the one market.

MR YOUNG: Yes.

GLEESON CJ: Whatever that market may be.

MR YOUNG: Yes, your Honour.

GLEESON CJ: I just wanted to be clear about that.

MR YOUNG: Can I seek the Court's indulgence simply to make several very short points that I need to, and they are really strictly by way of response to a few things that Mr Archibald said that I have not yet reached.

GLEESON CJ: Yes.

MR YOUNG: First, strategic barriers to entry. Our learned friend criticised Justice Finkelstein for having regard to that concept, we would say without warrant. Professor Officer's evidence at trial dealt at length with strategic barriers to entry. He was not challenged on that evidence. He referred to the academic article that is perhaps one of the centrepieces of the academic literature on the subject, namely Ordover & Saloner, who deals with strategic barriers to entry between paragraphs 38 and 51 - I am sorry, Officer deals with strategic barriers between 38 and 51.

The Ordover & Saloner article to which Professor Officer specifically referred footnoted many of the articles to which Justice Finkelstein went. So strategic barriers was always part of the evidence and the criticism is unwarranted.

Secondly, in relation to strategic barriers, all of the cases to which I took the Court support the view that strategic barriers do exist and they do need to be assessed in making any judgment about market power. The trial judge ignored the importance of strategic barriers and conduct that erected barriers. He dealt only with structural barriers. He ignored product differentiation in terms of a barrier to entry and a source of market power. Now, in those circumstances, the Full Court, having fully reviewed the evidence, was fully entitled to consider those aspects as they bore upon market power.

Next, excess capacity is a recognised barrier to entry in all of the economic literature and in the cases that I referred the Court to. It was specifically recognised as a barrier to entry in Carter Holt, particularly when it is exacerbated deliberately. Brand loyalty, customer loyalty that delivers pricing discretion is also a recognised source of market power. Carter Holt so decides. There was plenty of that in this case, as borne out by the evidence that the major projects were determined by factors other than price, are determined by products, product differentiation and customer loyalty.

Finally, on market definition, it is our submission that the cases to which we referred the Court support the market definition approach undertaken by the Full Court, in particular the Arnott's Case - - -

CALLINAN J: Mr Young, I am sorry to interrupt you on this, but is it not right that certainly both Justices Beaumont and Merkel adopted the view - and I think there might be a basis for it in Queensland Wire - that the test was whether there was close competition as opposed to competition and I am referring to 253 and 264. That expression is to be found in Queensland Wire, but it is nowhere anywhere in the Act, is it?

MR YOUNG: The first part of your Honour's proposition is correct. The concluding portion is not. Close competition is virtually in every passage discussing definition of market from QCMA to - - -

CALLINAN J: No, in the Act itself, is the expression "close competition" used? It is not used in section 46, is it?

MR YOUNG: No, it is not used in section 46 - - -

CALLINAN J: Is it used anywhere?

MR YOUNG: - - - or in the definition of market. No, your Honour, but every judicial exposition of the concept of market and how it is to be applied - - -

CALLINAN J: I understand that. I understand that, Mr Young, but it looks to me like a gloss and possibly, very arguably, a totally unwarranted gloss. It really has the effect, very much, of narrowing the area of competition.

MR YOUNG: Your Honour, in our respectful submission, it is not a gloss. It is a principle that guards the application of a very broad concept.

CALLINAN J: It is an importation into the section of a qualification that the section does not express.

MR YOUNG: Your Honour, we would put it this way, if I may. Justice Dawson is right in Queensland Wire. Substitution is not the sole determinant because you have to consider the degree of substitution, the intensity of the competition, the realities of the market place and bearing in mind the objective at hand, which under section 46 is to ascertain whether those supplying particular products or acquiring particular products truly do have the substantial degree of power.

GLEESON CJ: Did you find that statement of Professor Brunt?

MR YOUNG: Yes, we did, your Honour, and we have it to provide.

GLEESON CJ: I would be very surprised if she did not deal with this question.

MR YOUNG: She does, but in the broad way that we have suggested. There is one final step about market - and I beg the Court's indulgence simply to say this. Can I refer the Court to evidence during the relevant period of significant differentials in price between tilt-up and blocks. It is Byrne's affidavit, paragraph 18 at 4222, Goulding's affidavit, paragraph 22, at paragraph 453, and Glover affidavit, paragraph 41G at page 542 to 543 of the appeal book.

GLEESON CJ: Thank you, Mr Young.

MR YOUNG: I thank the Court for its patience.

GLEESON CJ: Mr Archibald, I understand that your are going to put in written submissions in reply. Can I just mention a couple of points we would appreciate your assistance about?

MR ARCHIBALD: Certainly, your Honour.

GLEESON CJ: First of all, in relation to the construction of section 46, assuming for the moment that it is more useful to consider section 46 in its operation in relation to pricing, not by reference to the concept of predatory pricing but by reference to what might be called the more neutral concept of illegal pricing. Why, in those circumstances, would you import into the section any concept of recoupment and, similarly, why would you import into the section any concept of pricing below cost?

Secondly and in connection with that perhaps, could you let us have your submissions on the arguments advanced by Mr Young as to the significance we should attach to the New Zealand, Canadian and European decisions to which he referred? Thirdly, there is a passage in volume 15 of the appeal book at pages 2931 and 2932 under the heading, "STRATEGIC INITIATIVES". If you assume that the purpose there spoken of and the means there described as the way of achieving the purpose are to be accepted at face value, why does that not amount to taking advantage of a substantial degree of market power for a proscribed purpose?

Finally, could we have your responses to Mr Young's specific submissions that tendering for major projects did not have the factual significance that you attributed to them, and that the evidence in relation to that activity is not fully contained in the document, schedule 7.

MR ARCHIBALD: Yes, we will address each of those questions.

GLEESON CJ: There will no doubt be many other things you will want to refer to as well, but they are the particular matters that would assist us.

MR ARCHIBALD: Yes, if the Court please.

GLEESON CJ: Can you put that in within seven days?

MR ARCHIBALD: Yes, we can.

GLEESON CJ: Thank you, Mr Archibald. We will reserve our decision in this matter.

AT 4.29 PM THE MATTER WAS ADJOURNED