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Prohibited Practices

Overview

Chapter 2 of the Competition Act 98 of 1998 (Competition Act) deals with certain conduct which is prohibited because it is harmful to competition in the relevant market. The harm arising out of such conduct generally relates to the anti-competitive effects of collusion between competitors or strategic behaviour which seeks to exclude competitors or prevent competition on the merits (such as quality of products).

The commercial activities which are prohibited under the Competition Act are concerned with conduct relating to a firm's:

  • interaction with its competitors (horizontal relationship);
  • interaction with its customers and suppliers (vertical relationship); and
  • unilateral conduct by a dominant firm (abuse of dominance).

Conduct in each of these three categories is either prohibited outright or is potentially prohibited. Outright prohibited conduct is presumed to be anti-competitive and cannot be justified on the basis of any pro-competitive benefits resulting from the conduct. Potentially prohibited conduct is only prohibited if it has the effect of substantially preventing or lessening competition in a market and cannot be justified on the basis of pro-competitive benefits resulting from the conduct.

Horizontal prohibited practices

Section 4 of the Competition Act prohibits conduct arising out of an agreement between, or concerted practice by, firms who compete against each other.

Outright prohibited practices as between firms in an horizontal relationship consist of an agreement, practice or decision between competitors that involves:

  • fixing prices or other trading conditions;
  • dividing markets by allocating customers, suppliers, territories or specific types of goods or services; or
  • collusive tendering.

Potentially prohibited practices as between firms in an horizontal relationship consist of an agreement, practice or decision that has the effect of substantially preventing or lessening competition in the relevant market unless pro-competitive benefits are attributable to and outweigh the anti-competitive effect. An example of this type of conduct is information sharing between competitors that leads to co-ordinated conduct in the relevant market.

Vertical prohibited practices

Section 5 of the Competition Act prohibits conduct arising out of the interaction between a firm and its customers or suppliers.

It is prohibited outright for a firm to engage in the practice of minimum resale price maintenance. This means that a firm may not prohibit a customer to re-sell its product at a price below the minimum level set by that firm. However, the Competition Act provides that a minimum resale price may be recommended.

Potentially prohibited practices as between firms in a vertical relationship consist of an agreement that has the effect of substantially preventing or lessening competition unless pro-competitive benefits are attributable to and outweigh the anti-competitive effect. An example of such conduct is an exclusive arrangement between a supplier and customer in respect of supply or purchase.

Abuse of dominance

Unilateral conduct by a dominant firm, which is regulated by sections 7, 8 and 9 of the Competition Act, relates to actions that constitute an abuse of a firm's dominant position in a relevant market. Dominance is construed as market power which allows a firm to control prices, exclude competition or to behave to an appreciable extent independently of its competitors, customers and suppliers.

A firm is presumed to be dominant where its market share, and the presence of market power, is as follows:

 

Market share Requirements of market power
45% Presence of market power is presumed
More than 35% but less than 45%  Unless the firm can show that it does not have market power
Less than 35% If it is established that the firm has market power

A dominant firm is prohibited outright from:

  • charging an excessive price to the detriment of consumers; and
  • refusing to give a competitor access to an essential facility when it is economically feasible to do so.

It is potentially prohibited for a dominant firm, unless there are attributable and outweighing pro-competitive benefits, to:

  • impede or prevent a firm form entering into or expanding within a market;
  • require or induce a supplier or customer to not deal with a competitor;
  • refuse to supply scarce goods to a competitor when supplying those goods is economically feasible;
  • sell products on condition that the buyer purchases separate products unrelated to the object of a contract, or forcing a buyer to accept a condition unrelated to the object of the contract;
  • sell products below their marginal or average variable cost;
  • buy up a scarce supply of intermediate goods or resources required by a competitor; and
  • engage in price discrimination unless this only makes allowance for cost differences, meets competition or responds to market changes.

Penalties and other orders

A contravention of the prohibited practices provisions of the Competition Act can result in the Competition Tribunal making various orders, including:

  • interdicting a prohibited practice;
  • ordering the end of a prohibited practice;
  • imposing an administrative penalty of up to 10% of a firm's annual turnover in South Africa;
  • ordering divestiture;
  • ordering the reasonable supply or distribution of products;
  • ordering reasonable access to an essential facility;
  • declaring the whole or part of an agreement to be void; and
  • declaring conduct to be a prohibited practice for the purposes of civil actions for damages.

Exemptions

On application by a firm, the Competition Commission may exempt certain prohibited conduct that:

  • contributes to the maintenance or promotion of exports;
  • contributes to the promotion of the ability of small businesses (or firms controlled or owned by historically disadvantaged persons) to become competitive;
  • contributes to the change in productive capacity necessary to stop decline in an industry;
  • contributes to the economic stability of any industry designated by the Minister; or
  • relates to the exercise of intellectual property rights and the rules of professional associations.