Competition Commission's new approach to price gouging hits small firms hard

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South Africa's competition authorities have acted with speed in an attempt to curb excessive pricing and its hitting small that firms would not normally meet the legislated market share thresholds for dominance, reports Daily Maverick.

The report says the Competition Commission’s pursuit of these cases is occurring under the Disaster Management Regulations introduced by Minister of Trade, Industry and Competition Ebrahim Patel in April 2020. The aim is to strengthen the ability of the Competition Commission and the National Consumer Commission to respond to incidences of unjustifiable and exploitative pricing.

The regulations prohibit dominant firms from selling essential goods and services at excessive prices during the period of the State of National Disaster. To date, over 1,600 complaints have been lodged and over 30 cases have been settled. Between April and early July 2020, the authorities’ COVID-19 excessive pricing investigations had yielded settlements to the value of R14m, of which R5.5m has been donated to the Solidarity Fund.

“Our position on price gouging has consistently been to discourage firms from engaging in price gouging of essential goods during this period of the pandemic. The Commission will stop at nothing in ensuring that firms that are engaged in price gouging of essential goods are prosecuted,” says Competition Commissioner Tembinkosi Bonakele.

The Commission’s intervention in these cases has nipped excessive pricing in the bud, in these particular cases, with the parties concerned committing to reducing margins. This is undoubtedly a desirable outcome.

What has been particularly unusual has been the competition authorities’ approach to assessing dominance during the pandemic. Many of these firms would not – in ordinary circumstances – meet the market share thresholds for dominance for purposes of the Competition Act.

“In light of the Covid-19 pandemic, they have been regarded by the Commission as having market power,” says Judd Lurie, a partner in competition law at Bowman Gilfillan.

“One would usually not regard customers of a small hardware store, pharmacy or seller of ginger to be price takers with no other alternatives or as being captive to those retailers.”

A number of firms were caught unawares by these regulations.

Small entities would ordinarily not consider the abuse of dominance provisions of the Competition Act in their compliance efforts because they are not big enough to exert any form of market power, adds Rosalind Lake, director at Norton Rose Fulbright.

“Even if a company has a market share of 15%, they could be considered ‘dominant’ because they have bargaining power with their customers or a category of customers. This means that the abuse of dominance provisions are potentially catching a much broader category of parties, and while the disaster regulations are in place, anyone with ‘excessive’ margins will likely be considered dominant.”

One could argue that the Competition authorities have been targeting the proverbial “low hanging fruit”. And one could also argue that firms should have ostensibly not settled with the Commission and challenged the finding before the Competition Tribunal – as some are doing.

However, “the costs of challenging may far exceed settling, particularly for small amounts,” says Lurie.

By taking on an advocacy role together with its role as a market conduct regulator, the Commission has sought to warn firms which exploit Covid-19 to earn unreasonable profits.

However, one needs to be aware, says Ahmore Burger-Smidt, a director at Werksmans Advisory Services, Werksmans Attorneys, that the approach in relation to market definition and market power adopted by the competition authorities is not in line with the “normal” application of competition law economics.

In addition, the authorities have also chosen to disregard certain economic factors such as replacement costs. “I do realise that we are dealing with these aspects during COVID-19, but this is not sufficient reason to change core competition law economics and should be watched carefully.”

 

Full Daily Maverick report

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