12 August 2020 by , and Competition Alert

Excessive pricing during COVID-19 and beyond: The cautionary tale of Babelegi and Dis-Chem (Part 2)

In Part 1 we addressed the practical means by which an excessive pricing complaint may be investigated in terms of the Consumer and Customer Protection and National Disaster Management Regulations and Directions (Regulations). It was emphasised that, despite the Regulations not applying to material price increases implemented by dominant firms prior to 19 March 2020, when the national state of disaster commenced, or after the state of disaster ends, this did/does not mean that such firms act without consequences in terms of the Competition Act 89 of 1998, as amended (Act).

This theme has been reinforced by the Competition Tribunal (Tribunal) in its recent decisions of Competition Commission and Babelegi Workwear Overall Manufacturers and Industrial Supplies CC (Babelegi) and Competition Commission and Dis-Chem Pharmacies Limited (Dis-Chem), which found that the excessive pricing abuse of dominance provisions of the Act had been contravened.

In Babelegi, over the complaint period of 31 January to 5 March 2020, the respondent’s average mark-up for masks was alleged to be in excess of 500%, with price increases alleged to be as high as 987%. Babelegi was alleged to have a market share of less than 5% for the sale of the relevant masks (with Babelegi submitting that even this approximation was grossly overstated). Dis-Chem involved a JSE listed national pharmaceutical retailer who was alleged to have implemented price increases on its masks of some 47 - 261%. The Competition Commission (Commission) alleged that Babelegi and Dis-Chem’s respective conduct amounted to an abuse of dominance in the form of excessive pricing. Pursuant to contested hearings, the Tribunal agreed with the Commission in finding both Babelegi and Dis-Chem had indeed contravened the Act, and levied respective administrative penalties of R76,040 and R1,200,000.

The decisions posit pertinent precedent with regard to the future interpretation of the Act. For example, abuse of dominance cases generally used to commence with the same opening scene of defining the relevant market in which the antagonist was alleged to be dominant (after all, firms cannot be dominant in a vacuum). However, following Babelegi and Dis-Chem, this script has been rewritten.

Despite the Regulations being found to be inapplicable in Babelegi and Dis-Chem, the economic test that was applied by the Tribunal to determine whether there was excessive pricing is markedly similar to the tests proposed by the Regulations. This is consistent with the Tribunal’s statement in Dis-Chem that the economic tests contained in regulation 4 of the Regulations (as discussed in Part 1), while inapplicable to the facts of the case, nevertheless can still inform an excessive pricing analysis under section 8 of the Act.

Opening scene: Market definition, market power and dominance

The excessive pricing prohibition under section 8(1)(a) of the Act is only applicable to dominant firms (provided that annual turnover or asset value of the firm alleged to be dominant meets or exceeds R5 million).

In terms of the Act, firms with a market share of 45% or more are presumed to be dominant on an irrebuttable basis. If a firm has at least 35% but less than 45% of a relevant market, there is a rebuttable presumption of dominance, unless the firm can show that it does not have market power. A firm with less than 35% of a relevant market, is assumed not to be dominant, unless it can be shown to have market power. The concept of ‘market power’ is in turn defined in the Act as “the power of a firm to control prices, to exclude competition or to behave to an appreciable extent independently of its competitors, customers or suppliers”.

In concluding that Babelegi was a dominant firm for the purposes of the Act, the Commission and the Tribunal dispensed with the need to define a relevant market, having held that “there is no compelling reason to engage in market delineation if other means exist to determine market power”.

In Dis-Chem, the Commission similarly did not undertake a relevant market definition or market share analysis as its approach to establishing market power, and in turn dominance, was ‘inferential’ (i.e. inferred from Dis-Chem’s conduct itself). Dis-Chem had argued that it is a requirement of the Act to define the relevant market in which it is alleged that there is an exertion of market power, as this is essential in determining whether a firm is dominant. The Tribunal conceded that market shares and defining the relevant market are usually the analytic tools deployed when assessing market power, but held that these are not the only tools and that, in some cases, direct evidence could be relied upon instead, such as price increases or the imposition of terms and conditions.

In seeking to establish market power, the Tribunal posited the question as follows: “what advantages does this global health crisis confer on Dis-Chem, advantages that it would otherwise not enjoy in the counterfactual world of normal market conditions?

The Tribunal subsequently held, astonishingly so if considered through the lens of the case law preceding COVID-19, that: “[a] store, by merely having PPE products in the context of such excess demand could enjoy market power. Multiple firms – even stores located in the same shopping mall – could conceivably exercise market power in the supply of PPE vis-à-vis their customers”.

In Dis-Chem, the Tribunal further confirmed that “at the level of principle, it cannot be refuted that market power can be inferred from a firm’s economic behaviour”. The successive price increases that were implemented on certain face masks, which allegedly resulted in a significant increase in Dis-Chem’s margins, viewed alongside the increased demand for face masks, was in the Tribunal’s view indicative that Dis-Chem both enjoyed and exerted market power. By virtue of this alone, Dis-Chem was held to be dominant for the purposes of the Act.

As always however, context is important. In Babelegi, the Tribunal emphasised that the market power enquiry cannot be divorced from the national socio-economic COVID-19 crisis, having held that the latter can confer market power on firms that ordinarily would never have enjoyed consideration as being dominant. In Dis-Chem, on the gateway issue of dominance and the relevant market, the Tribunal accentuated that material price increases of life essential items such as masks, even in the short run, in a health disaster such as the COVID-19 outbreak, warrants the Tribunal’s intervention.

It is clear that in both cases the Tribunal was at pains to emphasise the context of the COVID-19 outbreak, suggesting it would be in dereliction of its duty if it did not intervene in a timely manner in states of natural disasters or emergencies to protect vulnerable consumers. This does beg the question as to whether, going forward, the Commission will be able to replicate its successful assertion of market power and dominance without defining a market, in cases where such extreme market conditions are absent.

The plot thickens: Economic test

In terms of setting the scene, the essence of the economic test in section 8 of the Act is to determine whether a price charged by a dominant firm is higher than a ‘competitive price’. The Act provides for a non-exhaustive list of factors to be considered in an enquiry as to whether a price is higher than a competitive price. If a prima facie case of excessive pricing has been shown by the prosecutor (in the Babelegi and Dis-Chem cases, this character being the Commission), the evidential burden to prove the price increases were reasonable, shifts to the dominant firm. This reverse onus is a novel plot twist introduced by recent amendments to the Act.

In Babelegi, the Tribunal found that the successive nature of Babelegi’s price increases and mark-ups and the significant levels thereof, together with an alleged failure to provide a credible justification was sufficient to prove a prima facie case of abuse of dominance in the form of excessive pricing. It then concluded that there was unreasonableness on the basis that the prices and mark-ups bore no reasonable relation to Babelegi’s prices and mark-ups prior to the complaint period (as this was, in the Tribunal’s view, the appropriate benchmark of what competitive prices and mark-ups would be under conditions of normal and effective competition).

In Dis-Chem, the Tribunal confirmed that where a dominant firm, in the context of a health crisis, increases its prices significantly without any increases in costs, this alone could establish prima facie that its new prices are higher than the competitive benchmark, and that “there is no need to quantify this benchmark more precisely.” The Tribunal reasoned that in the economic conditions of the COVID-19 outbreak, masks are as essential to consumers as water is in a drought, which in turn, conferred on Dis-Chem the ability to allegedly materially increase its prices for the masks, in a manner it could not have done in the counterfactual world of normal market conditions. The relevant comparator or “competitive price” used by the Tribunal in this exercise was Dis-Chem’s own pricing or margins prior to its March increases which were under scrutiny. In the Tribunal’s view, Dis-Chem was unable to discharge the burden of showing that its price increases were reasonable in the context of COVID-19.

In finding that Babelegi and Dis-Chem had both contravened sections 8 of the Act by charging excessive prices, it is interesting to note that the economic tests applied in both cases substantially echoed those provided for in the Regulations.

Conclusion

In terms of Babelegi and Dis-Chem, the abuse of dominance provisions of the Act cast a much wider net, potentially catching small firms, who may have previously disregarded these provisions in their compliance efforts. While the Regulations are only of force for a limited duration, the Tribunal’s analysis in both Babelegi and Dis-Chem was in terms of the Act, such that the legacy of the Tribunal’s prescripts may hold relative permanency. In terms of this cautionary tale, all firms, regardless of their size, are encouraged to remain cognisant of their pricing policies and practices.

For the time being, and unless the story is retold on appeal, market power can be inferred from a firm’s economic behaviour alone, and in the context of COVID-19, such power can even be temporary.

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