The price is always (objectively) right: The Competition Appeal Court attempts to clarify the predatory pricing blur

The case concerned three relatively small community newspapers which served readers and more importantly, (since the publications were distributed free to readers), advertisers in the Welkom area. Two of these newspapers (Forum and Vista) were owned by Media 24 and the other newspaper (Gold Net News) was independently owned.

The Competition Commission (Commission) had referred the complaint to the Competition Tribunal (Tribunal) where it alleged that Forum had engaged in predatory pricing in contravention of s8(d)(iv), alternatively s8(c), of the Competition Act, No 89 of 1998 (Act). On the Commission’s version, Forum allegedly did so by selling its newspaper advertising space at discounted rates, unrelated to Forum’s production and overhead costs, which ultimately resulted in Gold Net News exiting the market.

Section 8(d)(iv) of the Act prohibits a dominant firm from selling goods or services below its marginal or average variable cost unless a technological, efficiency or pre-competitive gain outweighs the anti-competitive effect. Should the alleged predatory conduct not fall within the ambit of s8(d)(iv), s8(c) provides a “catchall” provision whereby dominant firms are prohibited from engaging in “any other exclusionary act” (other than those provided for in s8(d) of the Act) if the anticompetitive effect outweighs its technological, efficiency or pro-competitive gain.

The Tribunal found that the standard in s8(d)(iv) was not breached, but found a contravention of s8(c) by applying a cost standard based on average total cost. What appeared to drive the Tribunal’s decision, however, was evidence of predatory intent (which the CAC referred to as a finding based on “Average Total Cost plus intent”).

The CAC confirmed the strictures of the objective thresholds set out in s8(d)(iv) of the Act, being marginal and average variable cost. However, the CAC, in considering the appropriate test for s8(c), found that the wording of the Act does not support a requirement of intention, with the effect that competitive firms resorting to “fighting talk” will in itself not be a basis to impugn the competitive conduct it underpins. Furthermore, imposing a standard of average total cost would result in a firm that is recovering its variable costs for production but not its initial fixed costs, falling within the ambit of predation. The CAC found this to be too strict a standard which might encourage higher prices if it were to be implemented.

The CAC found the standard of average avoidable costs (AAC) to be a more appropriate benchmark when assessing a s8(c) predation case. The AAC standard is better suited to determining whether a dominant firm is capable of excluding an equally efficient competitor. This is because pricing below AAC means that more profit would have been made by forgoing sales altogether by not producing the product. In other words, if these costs aren’t covered, an equally efficient competitor – ie with the same costs – would need to operate at a loss to match the price, which is thus prima facie predatory.

The CAC refused to consider opportunity costs (that is, forgone revenue) as forming part of AAC as this does not go to the costs of producing the goods. Moreover, if dominant firms had to add the cost of a discount to AAC, this would make the test more difficult to pass and thus result in higher pricing, for fear of a contravention.

The CAC ultimately found that there was not sufficient compelling evidence before it to suggest that the AAC threshold was breached. The CAC dismissed the complaint and ordered the Commission to pay costs.

Predatory pricing remains a complex battleground. The CAC judgment attempts to deal with some of the complex economic tests involved, but as always, context is key and the decision expressly stopped short of engaging with a residual question of when pricing below AAC might be justified.

The judgment notably makes specific reference to the dangers associated with too readily prosecuting firms for apparently low pricing. The provisions of predatory pricing should never have the effect of making competitors afraid to compete on price. This would undermine the vital objectives of competition law itself, being lower prices and increased consumer welfare. This warning should perhaps be heeded in light of the proposed Competition Amendment Bill whereby the Legislature proposes removing s8(c) and amending s8(d)(iv) to make predatory pricing dependant on “a relevant cost benchmark”, as well as introducing rules aimed at prosecuting attempts to lower input pricing upstream (“predatory buying” for lack of a better term). This will run a serious risk of resulting in increased prices at all levels of the value chain – exactly the mischief the CAC warns against in enforcement.