Part D â Understanding and improving industry performance (PDF ...

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Case study Cabcharge penalised for misuse of market power ACCC v Cabcharge Australia Ltd [2010] FCA 1261 In September 2010, the Federal Court imposed a fine of $14 million – the highest ever penalty for misuse of market power – on Cabcharge for contravening section 46 of the Trade Practices Act 1974 (TPA). The court declared that Cabcharge had taken advantage of its substantial degree of power in the domestic market for the supply of: • services to enable the manual and electronic acceptance, by non-cash means, of payments for taxi fares and charges by taxi passengers; and • non-cash instruments that could be used only for the payment of taxi fares and charges, by • refusing to deal with competing suppliers to allow Cabcharge payments to be processed through rival EFTPOS terminals; and • supplying taxi meters and fare schedule updates below cost or free of charge. Cabcharge admitted to three contraventions of section 46(1) as part of its settlement with the ACCC. Cabcharge had refused requests by Travel Tab Australia Pty Ltd (a competing payment processing system) to allow Cabcharge’s non-cash payment instruments to be accepted and processed electronically on the Travel Tab system. Cabcharge acknowledged that, although there would have been time and costs involved in developing appropriate interfaces, there was no technical reason that would prevent any electronic taxi-specific payment product from being processed by any EFTPOS terminal as long as the instrument and terminals complied with banking industry protocols. With Cabcharge holding such substantial presence in the market, the court found that this conduct deterred or prevented Travel Tab from engaging in competitive conduct in the processing market. Vertical integration The high degree of vertical integration involving the payment systems market and other layers of the taxi industry has also raised barriers to entry and barriers to expansion for potential entrants seeking to process noncash payments in the taxi industry. Numerous vertical mergers involving Cabcharge have been cause for concern for the ACCC over the past 15 years. Cabcharge’s acquisition of network service providers (NSPs) in Australian capital cities is considered to have given Cabcharge valuable influence over the payment systems installed in its affiliated taxis and raised barriers to entry that have protected its position in the payments system market. This influence was demonstrated by the authorisations requested (and granted by the Trade Practices Commission) by several networks between 1986 and 1994 to require taxi operators and drivers to accept certain forms of noncash payments approved under the Cabcharge Account System (see case study). Through its NSPs, Cabcharge also provides a wide range of services to the industry, including driver training, taxi vehicle ‘fit-outs’, taxi cameras and meters, licence brokerage and insurance for taxi operators. It is the inquiry’s view that these activities have implications for competition in the payments services markets. More specifically, they help to maintain market power in payment instruments and payments processing: that is, Cabcharge is not likely to be seeking to ‘foreclose’ downstream markets by providing affiliated NSPs with lower cost access to payments services, but is seeking to make it more difficult for entrants into payments processing to provide services to taxi operators. Through this strategy, elements of the market essentially become foreclosed to other processors, making it harder for them to build scale and compete with Cabcharge. This protection of the 10 per cent surcharge is a key consideration for Cabcharge given that income from the service fee contributes around $87.3 million to its annual revenue (almost 50 per cent of the company’s total annual revenue). 19 19 Cabcharge Annual Report 2011, accessed on 29 March 2012 at: www.cabcharge.com.au/pdfsubframe.htm?/ pdf/2011CabchargeAnnualReport.pdf?sel=conditions, p.42 Understanding industry performance CUSTOMERS FIRST 257
Case study Authorisations granted by the ACCC to taxi networks to require use of the Cabcharge payment system On 25 February 1986, the Trade Practices Commission (predecessor to the ACCC) granted authorisation to De Luxe Red & Yellow Cabs in Sydney to provide radio booking services on the condition that taxi operators and drivers accept the taxi hiring account system (Cabcharge) and display the decals of that system. At the time, the Cabcharge Account System covered the acceptance of most major credit cards and vouchers. The Commission agreed that consumers should not be misled as to the availability of credit card services and that it was in the public’s interest for De Luxe to require that all taxis offer the Cabcharge payment system to passengers. Between 1986 and 1994, 11 other taxi companies/cooperatives in New South Wales, Victoria and South Australia (many linked to Cabcharge) were granted authorisation for similar conduct to De Luxe. Most, if not all, of the networks who had authorisation put in place incentive schemes to encourage operators to process card transactions through Cabcharge in preference to other providers. In 2004, the ACCC commenced the process for revocation of the authorisations on the basis that there may no longer be any public benefit in continuing them because credit card payment had become such a universally accepted form of payment and it was in the taxi drivers’ interest to process most cards. However, the ACCC decided that the small public benefit generated by the authorised conduct marginally outweighed the negligible public detriments and chose not to revoke the authorisations. Mr Michael Jools, President of the New South Wales Taxi Drivers Association, was dissatisfied with this decision and applied to the Australian Competition Tribunal under s101(1) of the Trade Practices Act 1974 for a review of the decision. The Tribunal considered further whether the authorisations would continue to make new entry and competition less likely than would otherwise be the case. They considered that with the authorisations in place, the opportunities for a new market participant would be severely reduced. However, without the authorisations, there would be very little incentive for Cabcharge to permit its credit cards to be used in other systems. Further, Cabcharge did not need the authorisations in force to encourage taxi networks to take up their system. The Tribunal found that the potential benefit in sustaining the authorisations could not be said to amount to a sufficiently certain benefit and the authorisations were revoked in June 2006. The interconnectivity between the NSPs and Cabcharge means that potential entrants have to negotiate individually with taxi operators or drivers for the supply of competing non-cash payment systems. Negotiation with many thousands of individual taxi operators and drivers is highly inefficient and takes time. The inquiry has also been told that operators who are affiliated to NSPs with links to Cabcharge are hesitant to install Cabcharge’s competitors’ payment systems as they fear being penalised either directly through the booking network or indirectly by losing assigned licences that are effectively under Cabcharge’s control. 12.4.3. Market performance The surcharge and the behaviour of payment processing providers The market characteristics described above have led to the 10 per cent surcharge on electronic payments becoming standard practice for all payment systems providers. It is important to understand the reasons why this charge remains so high – that is, so far above the merchant service fees that are levied on payments processors. The inquiry understands that a significant factor in maintaining the surcharge is that portions of the surcharge are directed to NSPs – and, in some instances, to operators and drivers – as incentive payments for the use of particular payment processing systems. The Gange Corporation told the inquiry that under Silver Top Taxis’ commercial arrangement with Cabcharge, Silver Top Taxis are entitled to a service fee of 2.5 per cent on all transactions it processes on behalf of the relevant operator. Beyond a certain threshold, a further two per cent rebate on Cabcharge transactions is also provided by Cabcharge to Silver Top Taxis, which is passed through to the taxi operator and not retained by Silver Top Taxis. So, in total, up to 4.5 per cent is offered by Cabcharge as incentive payments. 20 20 Gange Corporation, Op. Cit., p. 7 258
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Part D Understanding industry perfo
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The number of licences is restricte
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9.2.2. Quality and safety controls
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Case study New Zealand’s experien
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Case study Singapore’s unique reg
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Case study London’s quality contr
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A report commissioned by the inquir
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From these comparisons, we can obse
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New Zealand is an example of a taxi
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Chapter 10. 10. Taxis, hire cars an
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10.1.2. Substitution with public tr
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Nonetheless, there are market mecha
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10.2.2. Detriments from restriction
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On the other hand, some submissions
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4. The regulatory burden of decidin
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Country licence releases and the pu
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10.2.3. Are there offsetting benefi
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The inquiry conducted research into
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10.2.4. Valuing the effect of licen
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It would also be possible to implem
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Inquiry findings è The detriments
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In its 1999 report, KPMG argued tha
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10.3.4. Effect on taxi operators an
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The practices raised with the inqui
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Page 54 and 55: Merging the taxicab markets of two
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Page 58 and 59: 10.5. Regulation of taxi-cab fares
Page 60 and 61: • It exposes taxi operators to a
Page 62 and 63: KPMG argued that these restrictions
Page 64 and 65: 10.7. Vehicle regulations Taxis and
Page 66 and 67: Advertisements The policy to remove
Page 68 and 69: In recent years, NSPs have increase
Page 70 and 71: Some respondents argue that the mar
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Page 76 and 77: From 1953, the use of two-way radio
Page 78 and 79: 11.4.2. Mandatory network affiliati
Page 80 and 81: The inquiry considers that there is
Page 82 and 83: Walters FM also said: Until such ti
Page 84 and 85: The ACCC has been called on a numbe
Page 86 and 87: The ACCC also noted that West Subur
Page 88 and 89: This also means that other NSPs and
Page 90 and 91: Metropolitan NSPs charge affiliatio
Page 92 and 93: Figure 12.1 Average fare costs, met
Page 94 and 95: 11.8.3. Affiliation with more than
Page 96 and 97: However, unlike most other goods an
Page 98 and 99: 12.3. Characteristics of the paymen
Page 100 and 101: A further key feature of two-sided
Page 104 and 105: To compete with Cabcharge, the newe
Page 106 and 107: 12.5.1. Removing regulatory barrier
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