Re Aut 6 Pty Ltd v Wellington Place Pty Ltd; Alfaro Pty Ltd; Anderson Nominees Pty Ltd and Citywide Investments Pty Ltd [1992] FCA 589 (3 December 1992)

FEDERAL COURT OF AUSTRALIA

Re: AUT 6 PTY LTD
And: WELLINGTON PLACE PTY LTD; ALFARO PTY LTD; ANDERSON NOMINEES PTY LTD and
CITYWIDE INVESTMENTS PTY LTD
No. WA G175 of 1992
FED No. 915
Number of pages - 41
Trade Practices

COURT

IN THE FEDERAL COURT OF AUSTRALIA
WESTERN AUSTRALIA DISTRICT REGISTRY
GENERAL DIVISION
French J.(1)

CATCHWORDS

Trade Practices - misuse of market power - non-renewal of motor vehicle dealership - market definition - luxury motor vehicles - propounded definition not made out - uncertainties as to substitutability and other factors - market power of distributor limited - distributor subject to competition from head distributor or dealers appointed by head distributor - application dismissed.

Trade Practices Act 1974 s.46

Re Queensland Co-Operative Milling Association Ltd; Re Defiance Holdings Ltd (1976) 25 FLR 169

Top Performance Motors Pty Ltd v. Ira Berk (Queensland) Pty Ltd (1975) 5 ALR 465

Ah Toy Pty Ltd v. Thiess Pty Ltd (1980) ATPR 40-155

Queensland Wire Industries Pty Ltd v. The Broken Hill Proprietary Co. Ltd [1989] HCA 6; (1988) 167 CLR 177

US v. Guerlain 155 F Supp 77 (1957)

Re A Merger in the Cutlery Sector (1987) ECC 115

HEARING

PERTH
3:12:1992

Counsel for the Applicant: Mr N. McKerracher with Mr M. Pendelbury

Solicitors for the Applicant: Clayton Utz

Counsel for the Respondent: Mr M. McCusker QC with Mr C. Tolson

Solicitors for the Respondent: Tolson and Co.

ORDER

THE COURT ORDERS THAT:
1. The application is dismissed.

2. The applicant to pay the respondents' costs of the action unless
within seven (7) days it files a motion for a different order as
to costs.

Note: Settlement and entry of Orders is dealt with in Order 36 of the Federal Court Rules.

DECISION

Introduction
FRENCH J. Aut 6 Pty Ltd carries on business as a dealer in Mercedes Benz passenger cars under the name Chellingworth Motors. It does so pursuant to a dealership agreement with the Western Australia distributor for Mercedes Benz, four companies trading as Diesel Motors. The agreement is renewable annually and is automatically renewed subject to notice of non-renewal ninety days prior to the end of the year. Diesel Motors has this year given notice of non-renewal. Aut 6 Pty Ltd alleges that in so doing it has engaged in a misuse of market power in contravention of s.46 of the Trade Practices Act 1974. Although the notice of non-renewal was given in May 1992 these proceedings were not commenced until 9 October 1992. They were heard on 18, 19 and 20 November 1992 and require urgent determination because, if the notice is to remain in force, the current dealership agreement will expire on 31 December 1992.

The Participants
2. Mercedes Benz motor vehicles are distributed within Australia by Mercedes Benz (Australia) Pty Ltd (MBAu) a wholly owned subsidiary of the manufacturing company, Daimler Benz AG. In 1981 MBAu appointed a firm called Diesel Motors as its distributor for Western Australia. As well as acting as distributor under the agreement that firm carries on business as a retailer of Mercedes Benz vehicles. It is operated by the respondents, referred to in these reasons collectively as "the respondent". The business is owned as to 50% by Wellington Place Pty Ltd, which is one of a group of companies controlled by Mr Stan Perron. Mr Perron also has a controlling interest in Prestige Motors, a firm which deals in Lexus motor vehicles manufactured by Toyota.

3. In 1990 the respondent appointed the applicant as a Mercedes Benz dealer pursuant to a Dealership Agreement dated 11 June 1990. The applicant is corporate trustee of the Mounts Bay Unit Trust and has carried on business at 138 Mounts Bay Road, Perth under the name Chellingworth Motors since late 1989. It also has dealerships for Rolls Royce and Porsche motor vehicles which it operates under the names Silkwood Motor Company and Autohaus Motors respectively. The directors of the company are Gregory Lle Arnold, Robert Branchi and Vern Wheatley. Prior to the appointment of the applicant as a dealer, the business of Chellingworth Motors had been carried on by Bamford Holdings Pty Ltd as trustee for the Chellingworth Unit Trust. The applicant bought the business from Bamford Pty Ltd. It is not necessary for the purposes of this case to further explore its corporate connections.

The Diesel Motors Distributor Agreement
4. On 1 July 1981, the companies then operating Diesel Motors executed a Distributor Agreement with MBAu. Under that agreement Diesel Motors was appointed as a distributor of Mercedes Benz passenger cars, trucks, buses, coaches, tractors and multi-purpose vehicles. Its territory of prime responsibility was defined as Western Australia. Its appointment was not exclusive. Renewal was automatic from year to year unless at least ninety days before the expiry of any year written notice of termination were given by one party to the other. In the event that the agreement were terminated by either party the distributor was required to cancel all agreements between itself and its appointed Mercedes Benz dealers. (cl.10) It is not in dispute that the agreement so executed is in force today between MBAu and the respondent trading as Diesel Motors.

5. It is a term of the agreement that MBAu will sell to the respondent and the respondent will buy from MBAu for resale at wholesale or retail the Mercedes Benz products, parts and accessories, assuming the obligation of selling and promoting their sale in Western Australia which is defined as the respondent's territory of prime responsibility (cl.2). A set of distributor agreement standard provisions is incorporated in the agreement. Clause 1 of the standard provisions relates to business standards and provides:

"The Distributor will do everything possible to
safeguard and promote the reputation of MB products
and of MBAU and Daimler-Benz and of the Distributor's
appointed dealers and shall completely refrain from
any conduct which could be harmful to the reputation
or marketing of the product or inconsistent with good
public relations, avoiding all discourteous,
deceptive, misleading or unethical practices."

The respondent is required to establish and maintain a dealer organisation sufficient to ensure adequate sales and service representation within Western Australia and to operate a retail establishment in its principal centre of business and under its own name. The retail operation is required to be conducted "as if in fact it was a Dealer appointed by the Distributor" and subject to all the conditions set out in a Mercedes Benz dealer agreement annexed to the standard provisions (cl.3(a) and (b)). The distributor is required to use every effort to achieve the best possible sales performance for Mercedes Benz products within Western Australia. There is provision for the sales performance to be evaluated at least every year by MBAu and the respondent or their representatives together based on reasonable criteria including, but not limited to:

"(i) The establishment of fair and reasonable
sales objectives for the Distributor.
(ii) Comparison of MB product penetration into
the market on both nation wide and area
basis and a comparison with other MB
Distributors operating in areas reasonably
comparable to the Distributor's area.
(iii) The Distributor's sales performance over a
reasonable period of time and also
particular conditions in the area which
affect sales performance and potential
sales performance." (cl.3(h))

The agreement does not exclude MBAu from the right to sell Mercedes Be nz products direct to customers within Western Australia nor from the right to appoint other distributors for the State. The respondent, as distributor, is not entitled to receive any fee or other payment in respect of sales made direct by MBAu (cl.4(a)). Clause 8 of the standard provisions relates to the appointment of dealers by the distributor and requires that the distributor appoint a sufficient number of dealers, each with adequate display rooms and workshops and part facilities to ensure both intensive sales canvassing and proper servicing of Mercedes Benz products by correctly trained and motivated staff. Dealers may be appointed in the categories of Authorised Mercedes Benz Dealer, Authorised Mercedes Benz Service Dealer or otherwise as decided and directed by MBAu (cl.8(a)). There is a mechanism whereby the respondent and MBAu can survey Diesel Motors territory of prime responsibility, in this case Western Australia, to assess the need for the appointment of dealers. The survey takes into account markets and market potential as well as the needs of Mercedes Benz product owners and other factors. The distributor is primarily responsible for such survey. The relevant clause, which is 8(b), includes the following provision:

"After MBAU approval of the proposed dealer category
appointments and the relevant territories of prime
responsibility for such dealers the Distributor shall
carry out any necessary rationalisation and
termination of existing authorised dealers and the
processing of applications for appointment of dealers
to vacant territories of prime responsibilities. Any
subsequent variation from this survey may only be by
mutual agreement between MBAU and the Distributor but
it shall be reviewed and updated each year as an
incorporated part of the Distributor Operating
Requirements Agreement."

Dealer agreements are processed by the respondent only after receiving approval in writing from MBAu.

6. In addition to the provisions relating to non-renewal of a distributor agreement on ninety days notice, the agreement is terminable on sixty days notice without cause by the distributor and forthwith by MBAu for cause.

The Chellingworth Motors Dealer Agreement
7. Late in 1989 the applicant was appointed by the respondent as an Authorised Mercedes Benz Dealer. The appointment was embodied in a dealer agreement dated 11 June 1990. The agreement expressly provided that the dealer is not and should not represent itself to be an agent of the respondent. Their sole relationship is that of vendor and purchaser (cl.1.2). An area of prime responsibility for the applicant is defined by a list of postcode area numbers set out in an Attachment to the agreement (cl.1.5 and para 4 of Pt. 1 of Attachment). The location of the premises for the dealership in respect of both new and used vehicles is 138 Mounts Bay Road, Perth (cl.1.5). The agreement does not confer any exclusive right to sell Mercedes Benz products within the territory, nor does it prevent the applicant from entering into transactions with customers outside the territory. But for the purpose of evaluating the dealer's performance under the agreement, the respondent is not required to take into account activities, transactions or performances of the dealer outside or in relation to customers outside its territory.

8. Clause 2.4 provides for establishing sales targets and evaluating performance by reference to them:

"2.4 The Distributor and Dealer acknowledge that
achievement of maximum market penetration of Mercedes
Benz products within the Territory is in their joint
interests. In recognition of these interests the
Distributor shall, after consultation with the Dealer,
fix and notify in writing to the Dealer a level of
Mercedes Benz product sales (which if applicable,
shall be based on the achievement by the Dealer of
average national or State market penetration) that the
Dealer would be expected to achieve within a specified
period in the Territory.
Periodically, the Distributor will evaluate the sales
levels of Mercedes Benz Products achieved by the
Dealer, using the Dealer's actual sales, comparative
data if available and previous sales of the dealership
within the Dealer's territory. The Dealer shall
comply at all times with specific recommendations
relating to the achievement by the Dealer of sales
targets for Mercedes Benz Products made by the Distributor."

9. The term of the agreement is dealt with in s.8 which provides as follows:

"SECTION 8 - TERM OF AGREEMENT
This Agreement shall commence on the date upon which
the same is made as set out in the first line of this
Agreement and shall expire on the last day of the
calendar year in which it is made. Unless written
notice of non-renewal is given by the Distributor to
the Dealer at least ninety days before the date of
expiry, then upon expiry this Agreement shall revive
automatically and continue in force until the last day
of the next calendar year and thereafter shall be
renewed automatically on its expiry at the end of each
calendar year unless and until not less than 90 days
prior written notice of non-renewal shall have been
given by the Distributor to the Dealer prior to any
expiry date.
This clause shall be read subject to clause 9."

Clause 9 relates to termination of the agreement which may be by mutual consent between the parties or upon sixty days notice by the dealer or forthwith by the distributor upon any one of a number of grounds which are specified and which are not material for present purposes.

The Notice of Non-Renewal
10. On 27 May 1992, the respondent's General Manager, Mr Rayder Sandon, sent a notice of non-renewal to the applicant in the following terms:

"To: Aut 6 Pty Ltd
252 Aberdeen Street
Perth WA 6000
Notice of Non-Renewal of Mercedes-Benz Standard Dealer
Agreement made 11th June 1990.
Pursuant to Section 8 of the above Agreement notice is
hereby given (being notice of not less than 90 days)
that the Agreement will not be renewed on the next
expiry date, namely 31 December 1992, and will
therefore expire on the 31st December 1992.
Dated the 27th day of May 1992.
R. SANDON
GENERAL MANAGER
DIESEL MOTORS"

The Present Proceedings
11. On 9 October 1992, the applicant instituted proceedings in this Court against the partners in the respondent claiming damages and injunctive relief for alleged abuse of market power in various aspects of their conduct including the non-renewal of the dealer agreement. It pleads the existence of two relevant markets, the first being a market with respect to the supply to new motor vehicle retailers of new luxury motor vehicles retailing for not less than $80,000. This is designated in the amended statement of claim as the Wholesale Luxury Market. The second market pleaded is that with respect to the retail supply in the Perth Metropolitan Area or alternatively Western Australia of new luxury passenger motor vehicles retailing for not less than $80,000. This is designated the Retail Luxury Market. In respect of each of the claimed markets the following particulars are provided to support its existence:

1. Motor vehicles in the designated price range are
expensive in comparison with motor vehicles outside the
range.
2. Motor vehicles in the designated price range have high
prestige value.
3. Purchasers of motor vehicles in the designated price
range retain high brand loyalty.
4. There is extreme product differentiation and sales
promotion of vehicles in the designated price range.
5. People buying in the designated price range from
retailers tend not to subsequently replace their
purchases with cheaper vehicles unless forced to do so by
an inability to afford the cost of purchasing a vehicle
at the same or a higher price.

The respondent as the sole supplier to retailers of new Mercedes Benz passenger vehicles is said to be a supplier to the wholesale luxury market. The respondent and the applicant as the two retailers of new Mercedes Benz passenger vehicles are retailers in the Retail Luxury Market. A further supplier in both the Wholesale and Retail Luxury Markets is said to be Prestige Motors which supplies Lexus motor vehicles and is related to Wellington Place Pty Ltd, one of the partners in Diesel Motors.

12. The respondent and Prestige Motors are together said to be suppliers of the largest quantity of vehicles by number and by value in the wholesale luxury market and are retailers in and have the largest share of the retail luxury market. The companies comprising the respondent are alleged, by reason of a number of matters including their sole control of the appointment of authorised Mercedes Benz dealers in Western Australia and of the annual renewal of Standard Dealer Agreements, to have a substantial degree of power in the retail luxury market. For similar reasons and because of the market shares (in volume and turnover) of the Mercedes Benz product, the respondent is said to have and to have had since at least 1989 a substantial degree of power in the wholesale luxury market.

13. The applicant says that the respondent has taken advantage of its power in both the wholesale luxury market and the retail luxury market in various ways which relate in part to restrictions on the number and range of new Mercedes Benz vehicles made available to the applicant, warranty fees charged in respect of each vehicle, not permitting the applicant to participate in bonus programs or to have information as to the range of vehicles held in Bond Warehouse by the respondent and informing prospective customers of Aut 6 Pty Ltd that its business would soon not be an Authorised Mercedes Benz Dealer. In substance however, the case in respect of taking advantage of market power rested substantially upon the issue by the respondent of the notice of 27 May 1992 that the dealer agreement would not be renewed beyond 31 December 1992.

14. The use by the respondent of its power in each market is said to have been for the purpose of:

(a) Eliminating or substantially damaging Aut 6 Pty Ltd, a
competitor of Diesel Motors;
(b) In the alternative, deterring or preventing Aut 6 Pty Ltd
from engaging in competition in the retail luxury market.

The applicant claims to have suffered loss and damage by the conduct of the respondent, although this was not quantified at trial. It says it will continue to suffer loss and damage if the respondent is not restrained from relying upon the notice of non-renewal. Damages and injunctive relief are claimed against the respondent. In the event, no case for damages was presented and I take the applicant's claim to be in substance one for injunctive relief against the non-renewal of the dealership agreement.

The Statutory Framework
15. The relevant parts of s.46 of the Trade Practices Act 1974 provide:

"46(1) A corporation that has a substantial degree of
power in a market shall not take advantage of that
power for the purpose of -
(a) eliminating or substantially damaging a
competitor of the corporation or of a body
corporate that is related to the
corporation in that or any other market;
.
.
.
(c) deterring or preventing a person from
engaging in competitive conduct in that or
any other market.
.
.
.
(3) In determining for the purposes of this section
the degree of power that a body corporate or bodies
corporate has or have in a market, the Court shall
have regard to the extent to which the conduct of the
body corporate or of any of those bodies corporate in
that market is constrained by the conduct of-
(a) competitors, or potential competitors, of
the body corporate or of any of those
bodies corporate in that market; or
(b) persons to whom or from whom the body
corporate or any of those bodies corporate
supplies or acquires goods or services in
that market.
(4) In this section -
(a) a reference to power is a reference to
market power;
(b) a reference to a market is a reference to
a market for goods or services; and
(c) a reference to power in relation to, or to
conduct in, a market is a reference to
power, or to conduct, in that market
either as a supplier or as an acquirer of
goods or services in that market.
.
.
.
(7) Without in any way limiting the manner in which
the purpose of a person may be established for the
purposes of any other provision of this Act, a
corporation may be taken to have taken advantage of its
power for a purpose referred to in sub-section (1)
notwithstanding that after all the evidence has been
considered the existence of that purpose is
ascertainable only by inference from the conduct of the
corporation or of any other person or from other
relevant circumstances.

The term "market" is defined in s.4E of the Act:

"For the purposes of this Act, unless the contrary intention
appears, "market" means a market in Australia and, when used in
relation to any goods or services, includes a market for those
goods or services and other goods or services that are
substitutable for, or otherwise competitive with, the
first-mentioned goods or services."

The Markets - The Evidence
16. The applicant's success in these proceedings is critically dependent upon an acceptance of its propounded markets. It is an agreed fact that on the applicant's case the vehicles presently sold in the wholesale and retail luxury markets as defined by it are as follows:

Rolls Royce Silver Spur $387,600
Rolls Royce Silver Spirit $328,900
Bentley
Eight $286,800
Mulsanne $318,600
Turbo R $387,800
Turbo RL $438,600
BMW
325i Convertible (E30) $ 82,400
535i $111,000
730i $114,000
M5 $157,500
735iL $149,100
750iL $213,900
Jaguar
XJ6 3.2 $ 99,800
SJ6 4.0L Sport $127,800
Sovereign $134,600
Honda Legend Coupe $ 82,400
Mercedes Benz
300 Diesel $108,100
230 E $101,700
300 E 2.6L $110,400
300 E $126,300
300 E 24 $137,100
300 TE $134,000
300 CE 24 $161,600
300 SE $173,500
400 SE $208,000
400 SEL $217,400
500 SEL $245,600
600 SEL $318,700
Lexus LS 400 $331, 568
Audi V8 $119,990
Saab
9000 CD Turbo $ 84,900
9000 CS Turbo S $ 86,100
Volvo
960 (Sedan) $ 86,000
960 $ 86,000

The respondent has propounded a wider market for "high quality passenger motor vehicles" which includes those listed above and extends to the following:

Sports
Porsche 968 Coupe $135,253
Porsche 968 Cabriolet $156,681
Porsche 911 Coupe $175,120
Porsche 911 Cabriolet $196,240
Porsche 911 Turbo $278,888
Porsche 928 $229,729
Ferrari Mondial $231,710
Ferrari 348 ts $224,315
Lotus Elan $ 89,972
Lotus Esprit $199,360
Lamborghini Diablo $695,000
Maserati Biturbo Spyder $129,000
Maserati 430 $130,000
Maserati 222E $117,000
Maserati 228 $152,000
Honda NSX $167,000
Nissan NX $ 25,370
Nissan NXR $ 30, 430
Morgan 4/4 $ 79,350
Morgan plus 4 $ 87,500
Morgan plus 8 $102,500
$45,000 - $80,000
Alfa Romeo
164 $ 59,900
164 Lux $ 66,690
164 Q $72, 900
Audi
80 2.3E $ 45,690
80 2.8E $ 65,990
BMW
318is $ 51,750
320i $ 57,750
325i $ 75,450
325is $ 78,650
520i $ 71,850
525i $ 85,800
Citroen XM $ 79,750
Ford
LTD 4.0L $ 55,696
LTD 5.0L $ 58,303
Holden Caprice $ 59,390
HSV
Senator $ 45,827
Senator 5000i $ 58,871
Statesman 5000i $ 62,850
Honda Legend $ 79,990
Lexus ES300 $ 59,600
Mazda
929 $ 57,135
929 S-Lux $ 67,775
Mercedes Benz 180E $ 45,690
Saab
900i (Sedan) $ 45,800
900i (Convertible) $ 59,700
900 Aero Turbo S $ 63,990
9000 CS Turbo $ 79,200
Toyota Tarago GLS 4wd $ 54,600
Volvo
940 SLE (Sedan) $ 61,900
940 SE (Wagon) $ 65,900
Under $45,000
Alfa 33 QV, Permanent 4 $ 36, 725
Audi 80 2.OE $ 39,990
BMW 318i $ 44,150
Citroen
BX TZi (Sedan) $ 35,250
BX TZi (Wagon) $ 37,990
BX GTi 16v $ 39,750
Ford
Fairmont Ghia 4.0L $ 39,166
Fairmont Ghia 5.0L $ 41,638
Fairmont 4.0L $ 39,011
Fairlane Ghia 4.0L $ 40,912
Fairlane Ghia 5.0L $ 43,432
Holden
Calais 3.8L $ 37,542
Calais 5.0L $ 39,332
Statesmen 3.8L $ 38,670
Statesmen 5.0L $ 42,160
Honda
Accord 2.2EXi $ 34,990
Accord 2.2 Exi FWS $ 42,080
2.2 Accord Aerodeck $ 37,990
HSV Clubsport $ 40,182
Mazada
626 V6 (Sedan) $ 33,995
626 V6 (Hatch) $ 37,285
Mitsubishi
Magna Elite $ 34,363
Verada Xi $ 39,820
Nissan
Maxima M $ 34,900
Maxima Ti $ 40,400
Peugeot
205 GTi $ 32,400
505 Gti Wagon $ 43,480
405 $ 42,390
Saab
900i (Hatch) $ 38,600
900 Turbo $ 43,900
9000 CS $ 43,480
9000 CD $ 43,900
Subaru Liberty RS Turbo $ 37,075
Toyota
Cressida GLX $ 39,174
Cressida Grande $ 43,990
Tarago GLX $ 37,211
Volvo
240 GLE (Sedan) $ 38,455
240 GLE (Wagon) $ 40,581
940 GL (Sedan) $ 43,990

17. The Mercedes Benz product range now includes the recent 180E model which has sold very successfully at about $45,000. The sales of Mercedes Benz in Western Australia in relation to other vehicles in the luxury range over the last three years, not including the 180E, is illustrated by a table which was part of Exhibit GLA32 to one of Mr Arnold's affidavits:

AUG YTD 1992 FULL YEAR 1991 FULL YEAR 1990
# % # % # %
AUDI 3 - 2
BMW 21 15.2% 45 26% 74 24%
FERRARI 1 5 1
JAGUAR 8 6% 18 10% 42 14%
LEXUS 19 14% 19 11% 10 3%
LOTUS 1 - -
MERCEDES
BENZ 63 46% 70 41% 133 44%
NISSAN GTR 2 - -
VOLVO 9 6.5% 9 5% 12 4%
PORSCHE 9 6.5% 4 2% 20 6.6%
SAAB 2 - -
MASERATI - - 2
ROLLS
ROYCE/BENTLEY 2 6
TOTAL # 138 172 302
AVERAGE
SALES PER
MONTH 17.25 14.3 25.1
NB Mercedes Benz sales per month:
(a) 1990 - 11.08
(b) 1991 - 5.83
(c) 1992 - 7.87

18. Evidence in relation to the existence of the relevant markets was adduced first from Mr Arnold, one of the directors of the applicant and its dealer/principal. He made a number of general observations based on his experience in the motor vehicle trade. In his view, buyers of vehicles in the "upper luxury range" are not as sensitive to price as buyers in the mass produced vehicle range. Price discounting between brands in the upper luxury range of motor vehicles is rare and advertising of price discounting is almost non-existent. The product tends to sell regardless of discount because the consumer invariably wants to buy a particular brand. There is therefore little incentive for dealers of one brand to discount in order to gain sales from others. On the other hand, there is competition between his company and the respondent, not so much in terms of discounting new vehicles, but in terms of the price paid for a trade-in vehicle. If as dealer/principal of Chellingworth Motors he becomes aware that a prospective purchaser is also making inquiries with the respondent he does his best to obtain details of the change-over package being offered by the respondent and attempts to match or better it. He touched on barriers to entry pointing out that there are only a few manufacturers of luxury vehicles, that their cars sell at low volumes and that dealerships are difficult, if not impossible, to obtain unless an existing dealership is terminated or not renewed. There are only six dealers in Western Australia retailing cars at prices over $130,000. They are as follows:

Auto Classic for BMW's
Silkwood Motor Company for Rolls Royce
Autohaus Motors for Porsche
Auto Classic for Ferrari
Lexus of Perth for Lexus
Barbagallo for Jaguar

Generally speaking the only way to obtain a dealership is to purchase it from an existing dealer unless one becomes available because of the termination or non-renewal of an existing dealership. Mr Arnold said that in recent times only one new model of car had entered the upper luxury price range, that being the Lexus manufactured by Toyota. His evidence on consumer attitudes was no doubt based upon inferences from personal experiences and talk in the trade. He had sales experience with a proportion of his customers with whom he would have contact towards the end of the negotiating process after they had been dealing with a floor salesmen. He had no way of knowing their decision-making processes before they entered his premises. In particular, he had no way of knowing whether, prior to visiting his dealership, a prospective purchaser might have considered buying a Porsche, a Rolls Royce, a BMW, a Ford Fairlane or any other kind of vehicle.

19. Vernon Charles Wheatley, also a director of the applicant, has spent some 40 years in the motor vehicle retail industry. He expressed the opinion that there is a luxury vehicle market in Western Australia comprising Mercedes Benz, BMW, Rolls Royce, Lexus, Jaguar/Daimler, Volvo and to a limited extent, Audi motor vehicles. He regards luxury "sports" cars such as Ferrari, Maserati and Porsche as falling into a distinct market. There is, he said, very little interchangeability between those brands and other brands in the price range above $80,000. Four wheel drive vehicles such as the Range Rover also, in his opinion, fall into a separate market. Mr Wheatley dealt with barriers of entry asserting the extreme difficulty of starting up a new dealership in the luxury vehicle market. The reasons he stated for this opinion were as follows:

(a) There is only a limited number of brands of vehicle
available in the luxury vehicle market.
(b) Consumer demand in the luxury vehicle market has
contracted because of the down turn in the economy
although that demand will increase when the economy
recovers.
(c) An important feature of purchasers of motor vehicles in
this range is high brand loyalty.
(d) Manufacturers and distributors are very reluctant to
grant additional franchises.
(e) Dealerships in the luxury vehicle market by comparison
with dealerships in the "normal vehicle market" rely more
on advertising to specifically targeted customers to
establish consumer awareness than on location.
(f) Showrooms and service facilities need to be of a higher
standard than those in the normal vehicle market which
requires a greater initial capital outlay.
(g) Customers expect a higher standard of service. For
example many customers would expect that rather than
having to drive the vehicle to the dealer for servicing
themselves the dealer would arrange pickup and delivery
of their vehicle.
(h) New brands of luxury vehicles are rarely released.

There are, in his opinion, only two ways of obtaining a dealership in a luxury vehicle market namely:

(a) Upon the release of a new brand; and
(b) By the purchase of an existing dealership.

This evidence did not address the possibility of acquiring a new dealership where an existing dealership had been terminated or not renewed. Mr Wheatley was also of the opinion that it is extremely difficult to obtain a new dealership in the normal vehicle market and referred to the desire of manufacturers to space dealerships geographically, the high start up costs of building a show room and service facility and the fact that if an existing dealership becomes available it is quite often because the proprietor is having financial difficulty. In the last ten years there has been only one new dealership in the luxury vehicle market commenced in Perth and that is Lexus of Perth operated by Prestige Motors.

20. In cross-examination Mr Wheatley said that, for the most part, his role in the motor vehicle industry has been administrative. He is and has been Chairman of Directors of Automotive Holdings Pty Ltd for many years. Although at one time he had direct experience in selling Holden motor vehicles that experience did not extend to luxury vehicles. His views about the non-interchangeability of Porsche and Ferrari vehicles on the one hand and Mercedes Benz on the other seem largely intuitive and personal. In his definition of the luxury car market he did not include the Honda Legend Coupe even though it retails at $82,240 and is included in that market on the case presented by the applicant. The intuitive nature of his evidence was exemplified by his observation that that model of car "does not have the same prestigious feel" as the other brand names he had identified. Asked whether his view as to what comprises the luxury market was "very much a question of feel", he said:

"It is a case of feel. And as I have already advised
from my personal experience of being involved in the
management side."

He added:

"But not from a position of selling individual vehicles."

He did not regard the Saab as falling within the luxury market. Yet the Saab 9000CD Turbo and 9000CS Turbo S were both picked up in the applicant's definition of that market as set out in the agreed facts. While accepting that the name Mercedes has a certain prestige he would not extend the same level of prestige to the Mercedes 180E which had outsold all other models of Mercedes vehicles since its introduction and which he agreed accounts for a very significant proportion of Mercedes Benz sales in Western Australia. In relation to four wheel drive vehicles he said he owns a Mercedes Benz but for a four wheel drive vehicle he had bought a Toyota. In asserting that the Range Rover four wheel drive vehicle is not part of the relevant luxury market he based his opinion upon management meetings and a range of personal contacts in the trade including among them people who own Range Rovers. He could not say he had ever met anyone who had changed between a Mercedes Benz and a Range Rover and could not recall the names of anyone who owned both.

21. Mr Wheatley accepted that competition in the market for motor cars generally had become more fierce in recent years with a "huge increase" in the number of brands and models with those brands on sale to the Australian public. As a general proposition he saw price competition in the market for motor vehicles as operating through the trade in prices offered to buyers for their existing motor vehicles.

22. Mr Robert Webster is a director of Sten Pty Ltd which trades as Premier Motors. Prior to 1992 it traded as Commodore Motors. It sells Volvo motor vehicles. Between 1984 and 1990 his company also sold Honda motor vehicles through a business called Scarboro Honda. From mid 1991 it has sold Suzuki, Renault and Daihatsu vehicles. He supported the existence of a separate retail luxury market for vehicles selling at a price exceeding $80,000 but at one point would not include in it sports type vehicles such as Ferrari, Maserati and Porsche. There would, he said, be very little interchangeability between those brands and others in the $80,000 plus price range. It would be extremely rare for a person contemplating the purchase of a Mercedes Benz vehicle, when confronted with a 5% or 10% price increase on that vehicle, to purchase a Porsche or Ferrari instead. The same would apply to Porsche customers. The only vehicle in the Volvo range above $80,000 is the Volvo 960 with a retail price of $86,750. Customers who purchase vehicles in the "normal vehicle market" generally do not make inquiries of him concerning vehicles for sale in the luxury vehicle market. Customers generally make it quite clear what price range they are interested in either by stating a figure or more usually by indicating the types of vehicles they are considering.

23. On the matter of advertising, Mr Webster made the point that advertising in the luxury market tends to focus on image rather than the particular deals that are available. He also expressed the opinion that there is a standard profile of purchasers of vehicles in the luxury market. Generally speaking, he said, the consumer will be over 50 years of age and semi-retired or at least well established. They are almost always men and read publications such as the Financial Review and the Bulletin. This profile would differ to some extent from product to product in the luxury market. Purchasers of BMW's are generally "up and coming" people, the driver of the Volvo 960 is more conservative, while the Mercedes owner is someone who is very well established. With respect to Mr Webster, little weight can be given to these anecdotally based impressions.

24. He saw prestige as an important factor in decision-making in the luxury market and in descending order of importance in that respect ranked Rolls Royce, Mercedes Benz, BMW, Saab, and Volvo and Lexus together. Volvo however does not have the brand name prestige to compete in the market. In practice even the Volvo 960 often sells for less than $80,000 after discounts have been given to purchasers. Mr Webster also deposed to the tendency of luxury market customers to continue to purchase vehicles in that market when they had entered it, and the near impossibility of starting up a dealership in that market recently exacerbated by its absence of growth. It is also, he said, very difficult to start up a new dealership in the normal vehicle market. While there is price sensitivity in relation to the purchase of Volvos the main features dictating percentage of sales achievable in the luxury market are prestige and image, value for money/quality, after sales service and, related to that, the stability of the dealer. Somewhat inconsistently with the earlier statement about sportscars such as Ferrari, Maserati and Porsche, he said at a later point in his affidavit evidence that he would regard vehicles comprising the luxury vehicle market in Australia as Mercedes, BMW, Rolls Royce, Porsche, Ferrari, Lexus, Jaguar/Daimler and to a limited extent the Volvo 960 and Range Rover. He also said that at that retail level purchasers of vehicles in the luxury market generally make their purchases within Western Australia. But because of the considerable investment in vehicles of this class a purchaser may look outside Western Australia to be sure he is getting a good price.

25. In cross-examination Mr Webster expressed the opinion that the price sensitivity of most vehicles increased the lower the price range in question. He accepted that that opinion was "really just a guess" and that he was not sure to what extent it applies to vehicles at a higher price. He conceded some interchangeability between Volvos and BMWs and that his Volvo business competed with the Mercedes 180E. He said however that the brand loyalty with Mercedes Benz seems very strong and that there is great difficulty persuading Mercedes owners to change to a Volvo. He would nevertheless argue to the buyer of a new car that dollar for dollar the Volvo is better value than the Mercedes. Mr Webster's last experience with floor sales was some four years ago although he still takes inquiries particularly from referrals coming from friends or previous purchasers from him. Turning to recent changes in the luxury car market, he identified the Lexus as one of the newest competitors. He also mentioned a new Mazda model called the Euno. It was, he said, too early to tell whether that would make any impression on the luxury car market.

26. The principal witness relied upon by the applicant on the question of market definition was Michael Smith, Managing Director of the Marketing Centre Pty Ltd, which he described as "the largest marketing research and advisory firm in Western Australia". He is a Fellow and immediate past State President of the Australian Marketing Institute, a position he held for six years. He has had extensive involvement in the area of branded goods and includes in his experience work in high quality product areas including cars (Mitsubishi and Toyota), premium wine/beers, housing, land, professional services, airlines and gold bullion investments. While his organisation is involved in regular market research in a variety of areas to assess the effectiveness of product advertising, it had conducted no market research in relation to Mercedes Benz motor vehicles. His report was not based upon specific experience in the motor vehicle industry. Rather it was as he said "underpinned by the theory of consumer behaviour as it applies to high involvement purchases and publicly consumed luxury goods". It was further supported by specific market research over 13 years which has confirmed the theoretical models of consumer behaviour. Mr Smith was asked:

"So in terms of actual knowledge of the behaviour and
the reasons for it in Mercedes Benz customers, you
have no - your organisation has no direct experience
of that?"

To which he answered "No". His report contended that what he called the "image factor" is one of the most dominant in selling prestige cars. Products, he said, offer two kinds of benefits, functional and emotional. Many products which offer high emotional benefits are also functionally superior to their competitors. Buyers of such products nevertheless pay sometimes considerable amounts for small useable increases in performance and large increases in emotional benefits. He cited the examples of the Rolex watch, French champagne, silk ties and designer jeans. The acquisition of a motor vehicle is a high involvement purchase in which the consumer takes considerable care in making his or her decision. Cars which cost in excess of $80,000 are purchased in part, for the emotional benefits that they offer. They offer little increase in functional benefits over those which can be purchased for, say, $45,000.

27. In relation to the Mercedes Benz motor vehicle, Mr Smith considered improvement of the buyer's image and reputation to be an important factor in the purchasing decision. It was his opinion that a single dealer could, in the absence of competition, achieve a price increase because, for many buyers of Mercedes cars, the attraction of the alternative would not be sufficient to counter the penalty of such a price rise. Mr Smith suggested that this propounded price insensitivity would operate over a range of about 5% of current price. He did not indicate that it would extend to any specified proportion of Mercedes' buyers. He expanded upon the way in which image and prestige are the dominant attractions for cars in the luxury range over $80,000. For the majority of people buying prestige cars, he said, one of the major elements in making the purchase is to make a statement about themselves. He discussed product differentiation in the car market and the existence of market segments. This latter term seems to have been intended to refer to classes of purchasers defined "... in terms of the features and image of the car that they wish to purchase". Prestige motor vehicle manufacturers, he said, attempt to differentiate their products to make them seem "preferably different" to those market segments which are most attractive. The differences in the way in which motor vehicle manufacturers in the luxury market "position the image of their cars" he said "touches on the area of substitutability". He referred to perceptions of the types of people who own Mercedes and BMWs. Cars below the luxury price range do not have the same ability to confer prestige on the owner. There is little opportunity for substitution among those buyers who are seeking prestige between cars of over $100,000 and cars retailing at below $80,000. Evidence of the special nature of the market could be seen in the advertising for it which reflects a lot of effort put into the communication of image related benefits.

28. Mr Smith made a number of statements in relation to Mercedes Benz motor vehicles in similar vein to the remarks summarised above. It was apparent, however, that although framed as statements about consumer attitudes based upon direct observation, they were in truth conclusions founded upon theories of consumer behaviour in high involvement purchases. Examples were:

"A Mercedes buyer is most likely to consider a BMW when
the BMW range is brand new and the Mercedes range is
relatively old."
"For many people Mercedes is a powerful statement of
achievement and prestige. Not something people easily
give up, thus the high loyalty found amongst the
Mercedes owners."

One might as easily say that for many people Mercedes is a powerful statement of conspicuous consumption. Indeed in cross-examination Mr Smith accepted that there are people, perhaps a reasonably substantial number, who are deterred from the purchase of luxury goods by reason of the image projected in their advertising. He was unable to say how large the groups are who might, for the one part, find it important to display their success or for the other part, wish to project an image of austerity and prudence. The observation quoted above appears to have been invoked in support of the proposition that it is very unlikely that there is substitutability between cars that cost less than $80,000 and the mid range Mercedes.

29. Mr Smith did refer to the power of the Mercedes name and its associated prestige by reference to harder evidence when he considered the success of the Mercedes 180E. This, as he pointed out, is a "spartan package". The fact that it sells as well as it does at $45,000 against Australian and Japanese vehicles with equal or better performance and features is an indication of the prestige factor. It might of course be observed that the 180E experience shows that prestige can move down-market. What it suggests is that "prestige" vehicles may be able to compete across a wider price range if market conditions are right. At any rate that is not excluded as a possibility.

30. Mr Smith concluded that if there were one dealership for Mercedes vehicles rather than two, the dealership could impose its margin, probably by paying less for trade-ins, and could achieve an effective price increase in excess of 5% in all but the 180E models. Many people, he said, specifically want a Mercedes and would require a greater than 5% difference to swap into another car within a similar price range. It is to be noted that a 5% increase on the lowest priced Mercedes above the 180E, namely the 230E, would represent an additional $5,000. Absent a less theoretical basis for Mr Smith's observation it seems counter-intuitive to suppose that such a difference would have no effect on the market. Of those people who are buying a Lexus instead of a Mercedes, he observed, a 5% increase was unlikely to make a great difference because the price differential is already so extreme. Mr Smith also suggested that as people grow more successful their need to display the signs of success often diminish. They become intent on buying what will do the job with less heed paid to "emotional benefits". The basic propositions outlined above were repeated in various ways in other sections of the report.

31. In cross-examination Mr Smith accepted that factors other than prestige were of importance in the purchase of motor vehicles in the luxury range. Thus, the Jaguar vehicle, despite its prestige, had suffered due to its inability to deliver the same sort of quality and reliability as the BMW and the Mercedes Benz. Prestige, he said, is sometimes associated with price but his experience indicated that the number of people prepared to buy a Mercedes Benz because of price based prestige would be small. Asked if the majority of Mercedes Benz buyers would be likely to be attracted to other vehicles which are equally functional and comparably finished if the price were right, he replied that price, like prestige, is a component of the decision-making process. There will be, he said, a group of people, and he did not know how big, for whom none of the prestige brands offered a perfect match to what they want. They would be driven more by price and other features. As to his estimate of 5% price insensitivity in relation to the Mercedes Benz, he accepted that it was an opinion based on experience, but not experience with Mercedes Benz or luxury vehicles. He also agreed that whatever the degree of brand loyalty to Mercedes Benz it would eventually give way in the face of price increases for the particular product. As to the number of people who would change brands or not buy a Mercedes Benz in response to price increases he agreed that a few people could have a very significant impact given the low volume and high price of this range of vehicles.

32. Overall Mr Smith, I think, offered the best evidence he could, some of it based upon accepted theories of consumer behaviour. None of it however was based upon any study he had carried out of consumer behaviour in relation to the purchase of luxury cars. Much of it seems to derive from intuitive views about the attitudes of persons who have purchased or are contemplating purchasing a Mercedes Benz. This was so in large part in respect of the evidence of the other of the applicant's witnesses to whom I have already referred.

33. Evidence supportive of a wide market definition and of the extent of competition faced by the Mercedes Benz cars from other models was given by Rayder Sandon, the General Manager of the respondent. He maintained that Mercedes Benz motor vehicles compete in only one market which comprises what he called "the prestige and luxury market for passenger motor vehicles". I take this to be generally a reference to the high quality market propounded by the respondent in its pleading. He contended that the most important factors in the competitive selling of motor vehicles in this range are the attributes of the vehicles themselves. If different makes have substantially the same quality, finish, safety features, power, after sales service and warranty coverage, then within that range price will be an important competitive factor. The retail market which he called "prestige" and "luxury" commenced with vehicles in competition with the 180E, being largely the "3" series BMW, Honda and Mazda. He disputed the proposition that Mercedes Benz buyers are not price sensitive. He noted that sales of the Mercedes Benz S Class Range had suffered dramatically upon the introduction of the new BMW 7 Series. He produced tables of retail prices for Mercedes Benz passenger vehicles in February 1990 and May 1990. Sales tax on those vehicles had been increased from 30% to 50% with effect from 1 April 1990. The increase had been announced by the government in March 1990. The effect on prices was as follows:

Model February Price May Price
190E Auto $ 78,600 $ 88,296
190E 2.6 Auto $ 93,300 $104,845
230E Saloon $ 91,900 $103,269
260E Saloon $ 99,900 $111,937
300D Saloon $ 97,500 $109,573
300E Saloon $113,800 $127,923
300E-24 Saloon $123,300 $138,618
300TE Station
Wagon $120,500 $135,466
300CE-24 Coupe $145,100 $163,159
300SE Saloon $133,600 $150,213
300SEL Saloon $142,400 $159,895
420SE Saloon $158,000 $177,682
420SEL Saloon $164,100 $184,548
560SEL Saloon $213,200 $239,824
560SEL Coupe $233,500 $262,676

Registration of new Mercedes Benz vehicles on a monthly basis by State from January to May 1990 appears to reflect a significant market reaction to these changes:

1990 Jan Feb Mar April May
NSW 76 77 244 157 172
Vic 47 62 156 144 94
Qld 29 34 80 102 27
SA 3 9 17 14 14
WA 12 12 53 23 9
Tas 2 0 10 2 2
NT 1 0 0 1 2

The price variation between February and May 1990 was about 12% on each model. This does seem to indicate at least an upper limit on price insensitivity.

34. Sandon denied the suggestion that there is little incentive to discount in the higher price ranges. He pointed out that when BMW launched a new 3 Series in January 1991 it launched the series for the Asia Pacific Region and discounted heavily in order to achieve a high volume of sales. John O'Neill who was Managing Director of Trivett BMW from July 1987 to December 1988 and later worked at Prestige Motors until August 1991 said that in his experience it was not material which model of BMW one was trying to sell. The need to win business was equally important and competitive no matter what the model. And that applied to bigger models as well as smaller. Evidence of discounting of the prices of new BMWs was given by Neil Fowler, a new car salesman employed by Auto Classics between 10 February and 10 June 1992. He said Auto Classics discounted to obtain volume sales. He cited three specific examples being discounts of $3,500 and $2,328 on the price of new BMW 318i vehicles and a discount of $1,340 on a BMW 320i. His evidence was not challenged. There was evidence also of market penetration by the Toyota Lexus at the expense of the Mercedes Benz. David Crawford, the General Manager of Prestige Motors provided a list of 21 sales of Lexus vehicles between 6 July 1990 and 20 October 1992 to former Mercedes owners.

35. Sandon said that there had been a significant change in the market share of Mercedes Benz in relation to the wider prestige/luxury range of motor vehicles which the respondent says represents the relevant market. A graph, RBS 31, showed a Mercedes Benz market share based upon a "moving average" falling from a high of just over 20% in March 1989 to 11% or 12% in June 1992. The Lexus which was introduced in May 1990, almost immediately established an average market share on that measure equal to that of the Mercedes Benz. Sandon also said that Mercedes Benz compete with other cars with comparable features, not simply other cars of the same price. There was a time when the Mercedes Benz safety features were well ahead of other vehicles. They are now very similar in the vehicles with which Mercedes Benz competes. He denied that brand loyalty was any more applicable to the owners of Mercedes Benz vehicles than to the owners of various other makes. In addition to the Toyota Lexus which competes with the Mercedes Benz, he cited the new Mazda Euno 500, described in the Automotive Business and News Section of the Australian Newspaper of 22 October 1992 as "... a genuine luxury challenger to the Mercedes Benz, Audi and Saab". It was there reported that Mazda has released its first two Euno models of which the 2.0 litre Euno 500 priced from $42,400 is "pitched directly at the BMW 318i, Mercedes 180E, Audi 80 2.3 and Saab 9000CDi. Two new models are said to be planned for release in the next 18 months. One is a mid-size saloon along the lines of the BMW 500 Series. The other is "an upper luxury flagship that is intended to surpass the Lexus LS400".

36. Sandon's opinions have, of course, to be viewed in the light of his interests in the outcome of the case as do the market opinions of Arnold and Wheatley. Having said that, there was support in the figures to which he pointed and evidence from other dealers, for a greater degree of competition in the luxury vehicle area than portrayed by the witnesses called for the applicant. Importantly his evidence did indicate a non-stable market share for Mercedes Benz which seems to underlie concerns about the respondent's own position in Western Australia as a distributor for MBAu.

Markets - Conclusion
37. There is no doubt that in the upper price ranges of the passenger car market the prestige associated with particular brands is an important factor. The mathematics of percentage based price increases would suggest some degree of insensitivity which in absolute money terms may seem high but not so when measured against the total purchase price. There was evidence called for the applicant to support the proposition that the marketing of motor vehicles in the upper price range tends to emphasise prestige and image over function. That did not go uncontested but there is no doubt an element of truth in the proposition. In my opinion, however, a degree of caution is necessary when referring to advertising or marketing techniques as an aid to market definition. While image and prestige may be highly persuasive factors today, safety, performance and environmental concerns may be more persuasive tomorrow. Indeed there may be a marketing benefit in breaking away from the pack of luxury vehicles with advertising emphasising function more, and emotional benefits less. Particular advertising and marketing techniques would need to be shown not to be short run phenomena before they could safely be relied upon in market definition.

38. The evidence did not enable firm conclusions to be drawn about the extent to which there is substitutability of products in the retail luxury and luxury/prestige range. As between the $80,000 plus range on the one hand and the price range just below that on the other, there was no persuasive evidence about consumer decision-making processes before entry into the dealer's premises. The fact that prestige can move down-market as evidenced by the Mercedes 180E suggests that the position may be more volatile than that propounded by the applicant. And there was evidence to support that proposition from Sandon, O'Neill and Fowler. The ready penetration of the Lexus and the introduction of a luxury model Euno suggest that the market is open to new entrants which are substitutable for those in the luxury and luxury/prestige ranges. The possibility that a price increase in Western Australia might lead a purchaser to consider buying a vehicle from the Eastern States and transporting it to Perth was not able to be excluded. Nor was the possibility that in some cases a late model used luxury vehicle might be taken as an appropriate substitute for a new vehicle of a particular model.

39. The onus rests upon the applicant in this case to establish the existence of a market in which the respondent has a substantial degree of market power. In doing so it must establish that market in accordance with the definition of the Trade Practices Tribunal in Re Queensland Co-Operative Milling Association Ltd; Re Defiance Holdings Ltd (1976) 25 FLR 169 at 190-191:

"We take the concept of a market to be basically a very
simple idea. A market is the area of close
competition between firms or, putting it a little
differently, the field of rivalry between them. ...
Within the bounds of a market there is substitution -
substitution between one product and another, and
between one source of supply and another, in response
to changing prices. So a market is the field of
actual and potential transactions between buyers and
sellers amongst whom there can be strong substitution,
at least in the long run, if given a sufficient price
incentive. Let us suppose that the price of one
supplier goes up. Then on the demand side buyers may
switch their patronage from this firm's product to
another, or from this geographic source of supply to
another. As well, on the supply side, sellers can
adjust their production plans, substituting one
product for another in their output mix, or
substituting one geographic source of supply for
another. Whether such substitution is feasible or
likely depends ultimately on customer attitudes,
technology, distance, and cost and price incentives.
It is the possibilities of such substitution which set
the limits upon a firm's ability to "give less and
charge more". Accordingly, in determining the outer
boundaries of the market we ask a quite simple but
fundamental question: If the firm were to "give less
and charge more" would there be, to put the matter
colloquially, much of a reaction? And if so, from
whom? In the language of economics the question is
this: From which products and which activities could
we expect a relatively high demand or supply response
to price change, i.e. a relatively high cross-elasticity
of demand or cross-elasticity of supply?"

40. The applicant made reference to the decision of the Australian Industrial Court in Top Performance Motors Pty Ltd v. Ira Berk (Queensland) Pty Ltd (1975) 5 ALR 465 when, in a dealership termination case, it was held that there was a market for Datsun vehicles on the Gold Coast of Queensland. That case predated the enactment of s.4E of the Trade Practices Act 1974. There was no detailed exposition of the market concept there beyond the proposition that it is a question of fact and referred to trade or traffic. In Ah Toy Pty Ltd v. Thiess Pty Ltd (1980) ATPR 40-155, Forster J. appears to have held that there was a market for Toyota vehicles in the Northern Territory. What his Honour said on the point was simply that "the respondent being the only wholesaler of Toyota vehicles and parts in the Northern Territory is plainly in the position substantially to control a market for goods". No reference was made to s.4E or questions of substitutability. Neither of these cases can now be regarded as reliable authorities on the question of market definition having regard to the operation of s.4E which postdated the first and was not considered in the second. There is now a strong emphasis on supply substitutability as an element of market definition - Queensland Wire Industries Pty Ltd v. The Broken Hill Proprietary Co. Ltd [1989] HCA 6; (1988) 167 CLR 177.

41. A narrow market definition by reference to prestige or luxury features of the range of products propounded as falling within the definition was said to be supported by decisions overseas including US v. Guerlain 155 F Supp 77 (1957). That case dealt with an allegation of monopolisation in relation to quality trademarked perfumes and there it was observed, at 85, that:

"Objectively the product may be more than reasonably
interchangeable with others. But the lack of
objectivity in consumer demand impairs the basis of
interchangeability and negates a finding of cross-elasticity."

Nevertheless as was pointed out by counsel for the respondent, that case related to goods using a highly exploited trade mark. It turned on the facts of the case namely:

"...the most important element in the appeal of a
perfume is a highly exploited trade mark. There seems
to be agreement that no quality perfume can be
successfully marketed without a famous name. It would
appear, to a highly significant degree, that it is the
name that is bought rather than the perfume itself.
This fact gives the market a rigidity not found in the
Cellophane case." (84-85)

Indeed in Guerlain the judge remarked, at 86, in response to the citation by the defendants of a case relating to the automobile industry, that:

"In the first place, it would seem that the element of
cross-elasticity of demand for automobiles is much
greater than for highly exploited, trade-marked
perfumes or that, in any event, the automobile market
does not possess the rigidity of the quality perfume market...."

Another case referred to by the applicants was Re A Merger in the Cutlery Sector (1987) ECC 115. That was a merger case before the German Federal Supreme Court in which the substitutability of silver plated and stainless steel cutlery was discussed. It was said at 121:

"Silver or Silver-plated cutlery belongs to a different market since
it differs substantially from steel cutlery in respect both of the
circumstances of its use and its price. In the same way cheap
products of the lowest quality and without brand names, sold to the
catering industry or in special sales and intended for use for only
a limited period, are not to be included in the relevant market."

These cases may no doubt be multiplied and may support the proposition that product differentiation by reference to prestige value can be an element in market definition. Nevertheless, each case must turn on its own facts. I am not satisfied that on the facts of this case that there is the rigidity in the sale of luxury motor vehicles for which the applicant contends.

42. The relationship between market definition and market power was considered by the High Court in Queensland Wire Industries Pty Ltd v. BHP Co. Ltd (supra) at 187-188 (Mason C.J. and Wilson J.):

"In identifying the relevant market, it must be borne in mind that
the object is to discover the degree of the defendant's market
power. Defining the market and evaluating the degree of power in
that market are part of the same process, and it is for the sake of
simplicity of analysis that the two are separated. Accordingly, if
the defendant is vertically integrated, the relevant market for
determining degree of market power will be at the product level
which is the source of that power... After identifying the
appropriate product level, it is necessary to describe accurately
the parameters of the market in which the defendant's product
competes: too narrow a description of the market will create the
appearance of more market power than in fact exists: too broad a
description will create the appearance of less market power than
there is."

43. On the question of market power in the present case, there is no doubt that the respondent is in a powerful position vis a vis the applicant by virtue of the dealership agreement which it can decide not to renew, but to say that such a power exists is not to say that it constitutes any or any substantial degree of market power. The power to give or withhold supply may be an element of market power but not necessarily co-extensive with it in a particular case. And while the market share associated with the Mercedes Benz product as appears from the evidence in this case may also evidence or be an element of market power, it does not conclusively establish such power. A particular market share may be a short run phenomenon subject to reduction by the entrance of potential competitors or the activities of existing competitors. Also relevant for the purpose of determining market power and ultimately market definition are the barriers to entry which, in the case of new dealers in the market for the sale of new motor vehicles generally, are high because of the capital costs associated with the establishment of new dealerships. But the evidence does not dispel the proposition, at least in relation to the Mercedes Benz product, that two dealers can operate successfully in Western Australia. Despite concern from the respondent about contraction in the market and losses on the commercial vehicle side of its operations, there is nothing to suggest that either of the existing dealerships is presently or likely to be commercially unviable. In that respect I should say at this stage that I do not accept the suggestion that the applicant was performing badly or that the respondent so perceived it. There was a deal of evidence given on behalf of the respondent on that issue relevantly to the purpose of the proposed non-renewal of the dealership agreement. But as I indicated during closing addresses, I do not accept that as a fact or as the reason for the proposed non-renewal.

44. The point remains that notwithstanding the non-renewal of the dealership agreement between the applicant and the respondent, it remains open to MBAu to appoint another dealer in competition with the respondent. The possibility also exists that the applicant or another could approach MBAu and seek to be substituted as distributor/dealer for the respondent. MBAu can take the decision to not renew the respondent's distributor agreement and begin to act as distributor itself. It could reasonably be expected that the factors that might induce it to do any of these things would be related to the respondent's performance in Western Australia. On that analysis the rights that the respondent has under the distributor agreement is nowhere near as important in defining its market power as the extent to which it can, independently of those rights, disregard competitors or potential competitors.

45. In my opinion in this case the evidence about the claimed retail luxury car market leaves uncertainty about the true range of product substitutability and even the geographic spread of the market. It does not eliminate the possibility that current market shares and factors which influence purchasers to buy particular luxury vehicles are short run and subject to change according to changing social and economic conditions or perceptions and changing marketing techniques associated with these. Given that uncertainty I am not satisfied that the applicant has demonstrated the existence of a retail market in which the respondent has a substantial degree of market power within the meaning of s.46 of the Trade Practices Act 1974. What it has demonstrated is a degree of product differentiation in respect of so called prestige cars. But that reflects marketing techniques and does not exclude a strong degree of substitutability in significant sections of the population capable of purchasing vehicles in this range. It may be that there is within the range defined by the applicant a sub-market. But I am not persuaded that there has been shown to exist within its boundaries a market for the purposes of s.46. And having come to that view in respect of the retail market, I am not satisfied that there is an upstream wholesale market separately defined for the luxury range of motor vehicles. In any event, if there were such a market, I am not satisfied that the respondent has been shown to have a substantial degree of market power within it.

46. In coming to the conclusion I have I should also say, although it is strictly unnecessary to do so, that I did not accept the explanation advanced on behalf of the respondent, of its purpose in not renewing the dealership in so far as it reflected upon the performance of the applicant. I do not accept that the alleged poor performance by the applicant was a factor in the decision. In my opinion the probability is that the respondent's purpose was to increase its market penetration and profitability by adding to its existing sales those derived from sales which would otherwise have been made by the applicant and to protect its position with MBAu. In so doing it has taken advantage of contractual powers, but while those may be an element of market power they do not constitute or form part of a substantial degree of market power in the relevant sense.

47. In my opinion, for these reasons the application must be dismissed.