25 April 2018 by and Competition Alert

Competition authorities seek to regulate ‘buyer power’

It is an accepted competition law principle that firms are not prohibited from being dominant in a market. What is prohibited: an abuse of that dominance. Typically, competition legislation regulates, among others, the business practices of dominant suppliers of goods and services to ensure that they do not engage in conduct which amounts to an abuse of dominance. Some countries are now attempting to regulate the business practices of dominant purchasers of goods and services to make sure that they are not anticompetitive. This is certainly the case in South Africa and Kenya which seek to regulate ‘buyer power’. 

A conventional interpretation of buyer power refers to a situation where demand in a market is sufficiently concentrated, allowing buyers of goods and services to exercise market power over selling firms by forcing them to reduce prices and/or output below levels that would ordinarily emerge in a competitive market.

In South Africa, the Competition Amendment Bill 2017 (Bill) seeks to prohibit dominant buyers from “buying goods or services on condition that the seller accepts an unreasonable condition unrelated to the object of a contract” and/or “requiring a supplier to sell at an excessively low price”. Moreover, if there is a prima facie case that a dominant buyer “required a supplier to sell at an excessively low price, the dominant firm must show that the price was reasonable.” Save for requiring the Competition Commission to publish guidelines on the relevant factors and benchmarks for determining whether a price is excessively low, the Bill takes the concept of buyer power no further.

In Kenya, the proposed rules on abuse of buyer power (Rules) do go further, providing a list of acts which would amount to buyer power. These include: (i) delayed payment by a buyer without reasonable justification; (ii) unilateral termination or the threat of termination by a buyer of a commercial relationship without notice, short notice or without objectively justifiable reasons, (iii) refusal to accept returns without justifiable reasons, (iv) transferring costs or risks to suppliers in relation to promotional advertising; and (v) demand for preferential terms by buyers which are unfavourable to suppliers or demand limitations on suppliers to other buyers.

The foundation for the abuse of supplier power, leading to adverse competitive effects, is well established, for example, dominant suppliers charging an excessive price, entering into exclusive supply/dealing arrangements with specific firms to the exclusion of others, refusing to supply scarce goods/services). The exertion of buyer power will, however, not necessarily result in anti-competitive effects. What the Bill and Rules seek to do is place supplier power and buyer power, on equal footing.

Buyer power may have pro-competitive benefits. For example, buyer power may place a firm in a better negotiating position, incentivises supplier firms to be more competitive, which in turn may result in lower prices and other benefits for consumers.

While the Kenyan legislation seeks to identify the criteria to determine the basis for buyer power, the proposed South African amendments are less clear. In the South African context, the proposed amendments therefore increase the risk of large buyers being accused of buyer power and having to defend what may be an unjustified multiplicity of complaints simply because they attempted to negotiate competitive terms with suppliers or took a business-savvy decision. The ease with which a supplier could allege an abuse of power if a large firm seeks to negotiate on price, declines to contract or switches supply to a cheaper source exposes larger firms to a risk of buyer-power accusations, which, it is submitted, may have a chilling effect on commercial negotiation and competition.

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