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Working Out the Standards for Excessive Pricing in South Africa
Abstract
Excessive pricing is one of the contentious areas of competition law and the standards are developing. South Africa has had at least two important excessive pricing cases. We review the approaches of the Competition Tribunal and the Competition Appeal Court in the Mittal Steel and Sasol decisions in order to demonstrate the complexity of the challenge of giving practical effect to the excessive pricing provisions of the Competition Act. Both the Mittal Steel and the Sasol decisions were concerned with excessive pricing by former state-owned firms. For example, Mittal Steel sold steel in the domestic market at more than import parity to its many South African customers that needed steel as an input while selling the steel for export at the much lower world price. We argue that the ultimate solution may be found in the purposive reading of the law which at the same time does not ignore the required elements to be proved.
... From the supply side, limitations on business operations may also delay or prevent entry of new competitors during the disaster period, which would further support arguments that market power may rise during the disaster period. Indeed, competition authorities often view a lack of entry as an important condition for prosecuting excessive pricing (Jenny, 2018): entry may temper excessive pricing in the medium run, limiting enforcement costs (see Ezrachi and Gilo, 2010;Mncube and Ngobese, 2018; Das Nair and Mondliwa, 2017 on how entry and investment considerations played out in seminal excessive-pricing cases in South Africa). The COVID-19 disaster may give rise to significant, though transitory, market power with no prospect of an immediate increase in competition: the short duration of the disaster period may limit the probability of entry. ...
The declaration of a state of national disaster in South Africa, due to the COVID‐19 pandemic, was followed by excessive‐pricing regulations pertaining to certain consumer and medical products and services. The regulations and their application suggest an intertemporal benchmark to judge excessive pricing, deviating from previous practice. Intertemporal comparisons assume a structural shift during COVID‐19 that changes competitive conditions, related to changes in consumer behaviour. Such comparisons must also account for demand and cost changes. While the COVID‐19 regulations allow for cost‐based price increases, demand‐based increases are not explicitly accounted for, suggesting that the regulations are framed more generally as price‐gouging regulations. The differences between price‐gouging and excessive‐pricing benchmarks depends on the type of disaster‐period demand shock. They are similar following a transitory demand spike, provided sufficient time is allowed for dynamic price behaviour, but differ markedly when demand is elevated for the duration of the disaster period. Applying simple cost‐based comparisons in recently concluded cases against smaller retailers are consistent with excessive pricing, given the presence of a demand spike. To the extent that these involve persistently higher demand, cases against wholesalers and larger retailers will be more complicated, as such demand must be reflected in competitive prices.
This background paper considers the role of economics in abuse of dominance cases. Economic analysis and evidence has become increasingly important in the context of effects-based approaches to assessing possible abuse of a dominant position. The paper sets out the core economic framework for assessment of abuse of dominance including the balancing of over-and under-enforcement and the relevance of the characteristics of the markets and economies in question. It comments, in particular, on the challenges faced by authorities in developing and middle-income countries given the rapid expansion of competition law in these jurisdictions. The economic tests in different types of exclusionary and exploitative abuses of dominance are considered along with the practical challenges in the gathering of evidence and undertaking appropriate assessments. The role of economists in cases, including as experts providing testimony on the part of private parties, is examined.
In an article written for the European Competition Law Conference in 2003, we discussed the treatment of excessive pricing in the European Union, commented upon the case-law, and indicated which exceptional circumstances might in our view justify resorting to excessive pricing actions. We proposed a four-condition test: (1) high and non-transitory barriers to entry leading to a monopoly or near monopoly; (2) this (near) monopoly being due to current or past exclusive or special rights; (3) no effective means to eliminate the entry barriers; and (4) no sector regulator being competent to regulate the excessive prices.
Since 2003, our paper has been followed by many others, some proposing a more lenient test for the competition authority to intervene while others suggesting a stricter test of intervention. Excessive pricing has been discussed more and more for at least two reasons. The first one is that the European Commission is reconsidering its policy on Article 82 of the EC Treaty, and although exploitative practices have not been addressed yet in its policy documents, it is well known that the Directorate General for Competition plans to deal with them in the future Guidelines on Article 82 enforcement. The second reason is that dissatisfaction with the outcome of the liberalisation process (more particularly with the high level of prices in many recently privatised and de-regulated sectors, as for instance energy), which has taken place in Europe has led many policy-makers – both at the level of Member States and at the EU level – to call for drastic measures of intervention, including structural remedies (for instance unbundling in energy and telecommunications) and price controls.
In this paper, we come back to the issue by summarising our previous contribution and especially by discussing our policy proposal, in the light of recent developments. We limit our analysis to excessive prices which directly exploit the consumers where, as we show, the conditions for antitrust intervention should be very strict. We do not deal with exclusionary excessive prices (which often take the form of price squeezing) where the conditions for antitrust intervention may be less strict.
The paper is organised as follows. After these introductory remarks, Section 1.2 sets very briefly the legal framework of exploitative abuses. Then Section 1.3 proposes a threecondition screening test to determine the markets that are candidates for intervention of excessive pricing actions. Section 1.4 deals with the standard of proof for the excessive pricing. Section 1.5 deals with the choice of the efficient remedy. Finally, Section 1.6 concludes with some recommendations for an efficient dealing of excessive pricing.
South Africa's Competition Tribunal recently ruled in favor of the complainant in the first case of excessive pricing to come
before it since the 1998 Competition Act established new institutions in 1999. This article examines the standards that should
be adopted in assessing excessive pricing in a small developing country such as South Africa, through a review of the complainee,
Mittal Steel South Africa's, pricing practices. It is argued that entrenched dominance is central to a finding of excessive
pricing, where that position has not been attained through innovation or product development, and that the excessiveness of
the pricing ought to be assessed against a range of indicators of pricing under effectively competitive conditions. It is
argued that in a country such as South Africa, the conditions for excessive pricing are much more prevalent than in large
industrialized economies.
This Essay describes an approach for designing antitrust rules for assessing whether firms have engaged in anticompetitive unilateral practices that is based in part on the error-cost framework pioneered by Judge Easterbrook. We focus particularly on the role of economic theory and evidence in forming presumptions about the likelihood that unilateral business practices reduce welfare and on the implications of this role for the kinds of research that economists need to conduct concerning unilateral business practices. We then apply this approach to tying. Our approach towards designing legal rules proceeds in two steps. First, economic theory and empirical evidence are used to formulate explicitly a set of presumptions regarding the cost and likelihood of errors resulting from condemning welfare-increasing business practices or condoning welfare-reducing ones. Second, based on those presumptions, a legal rule that minimizes the cost of errors is selected. We will refer to this as a neo-Chicago approach, since it accepts the fundamental tenet of Chicago thinking that legal rules and legal outcomes can and should be assessed based on their efficiency properties, while also incorporating the learning of the Chicago and post-Chicago literatures in designing these rules.
European competition laws condemn as “exploitative abuses” the pricing policies of dominant firms that may result in a direct loss of consumer welfare. Article 82(a) of the EC Treaty, for example, expressly states that imposing “unfair” prices on consumers by dominant suppliers constitutes an abuse. Several firms have been found to abuse their dominant positions by charging excessive prices in cases brought by the European Commission and the competition authorities of several Member States. Those cases show that the assessment of excessive pricing is subject to substantial conceptual and practical difficulties, and that any policy that seeks to detect and prohibit excessive prices is likely to yield incorrect predictions in numerous instances. In this paper we evaluate the pros and cons of alternative legal standards towards excessive pricing by explicitly considering the likelihood of false convictions/acquittals and the costs associated with those errors. We find that the legal standard that maximizes long-term consumer welfare given the information typically available to regulators would involve no ex post intervention on the pricing decisions of dominant firms. A possible exception to this general rule is discussed.
One of the thorniest areas of antitrust enforcement is whether, and how, to deal with excessive pricing allegations. Even
in jurisdictions that have laws against excessive pricing, there has been little case law on the issue. A recent dispute over
the pricing of flat steel in South Africa provides helpful guidance on the correct approach to excessive pricing cases. The
Competition Tribunal took a structural approach and deduced the existence of excessive pricing on the basis of super-dominance
and market segmentation. The Competition Appeal Court overturned this decision and clearly stated that (1) an empirical exercise
comparing prices with cost benchmarks is required in assessing these cases, and (2) excessive prices need to be judged against
the long-run average costs of an efficient firm. A purely structural approach was not deemed adequate. In this article, we
describe the case and explain why the judgment by the Competition Appeal Court is sound from an economic perspective and why
it sets an important precedent in this area of competition law.
The role of antitrust in curtailing excessive prices has long been a contentious area. Consequently, the charging of excessive prices has been subjected to diverse levels of enforcement across the world. U.S. antitrust law, for example, does not encompass the charging of high prices as such, and was held not to “condemn the resultant of those very forces which it is its prime object to foster: finis opus coronat.” By contrast, competition laws in other jurisdictions provide for the condemnation of excessive or unfair pricing. Such is the case under EU competition law, the competition provisions in the European Member States, and in other jurisdictions across the world. But even among those competition regimes which do intervene against the charging of excessive prices as such, one may identify different levels of enthusiasm for doing so. In Europe, for example, recent years have witnessed a restrained approach by the European Commission but a more proactive approach by some of the competition authorities of the Member States. Varying levels of intervention reflect a controversy as to the merit of prohibiting excessive pricing. Three main grounds are often used to justify non- or limited intervention: (1) intervention is not necessary, as high prices would be competed away by new entry, attracted by the excessive price; (2) there are practical difficulties in speculating what a price would have been had there been competition and in determining the excessiveness of the prices actually charged; and (3) enforcement which targets excessive prices may chill innovation and investment. To illustrate the difficulties of assessment and to question some of the justifications that are used to rationalize non-intervention, this article reviews the recent litigation in South Africa related to alleged excessive pricing by Mittal Steel. We use the decisions of the South African Competition Tribunal and the South African Competition Appeal Court as a case study to highlight both the complexity of, and possible merit in, antitrust intervention against excessive pricing.Our analysis focuses on the three grounds for non-intervention. First, with respect to the self-correcting nature of excessive prices, we illustrate how excessive prices, in and of themselves, do not attract new entry when potential entrants are either informed or uninformed about their post-entry profits. Referring to our previous work on this subject, we question the South African Competition Tribunal’s holding in the Mittal case with respect to the prerequisite conditions for intervention against excessive pricing. Second, we consider how the difficulties of assessing what is an excessive price affected the outcome in the Mittal litigation. Without underestimating these difficulties, we consider how they may be alleviated in certain cases through reasonable methods for inferring what may constitute an excessive price. Third, while acknowledging the possible validity of concerns about chilling ex ante investment, we outline instances in which these concerns should not serve to support nonintervention. It should be stressed that this article does not advocate across-the-board intervention. It does, however, question the validity of a categorical “hands-off” approach, which deems excessive prices to be outside the realm of competition law. We consider separately the weight that should be assigned to each ground for non-intervention. Subsequently, we argue in favor of a case-by-case approach which explores the factual matrix of each case and considers the benefits, costs, and net effects of intervention.
Excessive pricing by a dominant firm is considered as one of the most blatant forms of abuse. Despite this, competition authorities
frequently refrain from intervening against excessive prices. The non-interventionist approach is based, among others, on
the premise that high prices encourage new entry and thereby should be feared less. According to this view, in many cases,
excessive prices are likely to be competed away and make intervention redundant. This paper questions this conventional view
and reconsiders whether excessive prices are indeed self-correcting. It illustrates how, in the majority of cases, excessive
prices will not attract new entry of viable competitors, whether entry barriers are high or low. Furthermore, it shows how,
at times, the prohibition of excessive prices may encourage, rather than discourage, entry. By doing so, this paper narrows
and focuses the arguments against intervention. Accordingly, it concludes that if excessive pricing is not to be prohibited,
it should not be because it is thought to be “self-correcting,” but rather for reasons such as the need to stimulate investment
or difficulties of implementation, which should be assessed on a case by case basis.
Monopoly pricing per se, that is without need of proof of anti-competitive conduct or intent, is regulated very differently on both sides of the Atlantic, at least in theory. U.S. antitrust law sets a straightforward rule: monopoly pricing, as such, is not regulated. In contrast, under EC law excessive pricing is considered an abuse of dominance and is punishable by fine and subject to a prohibitory order. These approaches fit the divide between the regulation of exclusionary and exploitative conduct: whereas exclusionary conduct is an offense against antitrust law on both sides of the Atlantic, exploitative conduct generally only breaches EU law. This article analyzes these regulatory approaches, their historical and theoretical roots, as well as the differences that exist in practice between the two systems. As will be shown, the divergent legal rules reflect different ideological goals and different assumptions about how markets operate. The U.S. views the unregulated economy as essentially competitive, if the creation of artificial barriers is prohibited. This approach places significant emphasis on the workings of the market and considers monopoly created by means other than artificial barriers to be relatively unimportant. It also reflects the limited role granted to government in regulating markets directly and the social, moral and political values attributed to the process of competition. EC law reflects a lesser belief in the ability of market forces to erode monopoly and a stronger belief in the ability of a regulator to intervene efficiently in setting the business parameters of firms operating in the market. It also reflects a stronger emphasis on distributional justice. The importance of the analysis lies beyond antitrust intervention in monopoly pricing, as it opens a window to much broader themes which underlie the competition policies of both jurisdictions and enables us to exemplify and contrast the foundations of both regulatory systems. The regulation of excessive pricing encapsulates issues such as the goals and underpinning of EC and U.S. antitrust systems; the equilibrium point which was adopted to balance between the forces of Darwinian capitalism and those of social justice; the role of government regulation; the balance between practical problems and theoretical principles; and the assumptions regarding the relative administrability of various types of regulation. Monopoly pricing regulation is thus, in many ways, a microcosm of competition policy.