The Competition Tribunal has now confirmed three consent agreements relating to Covid-19 excessive pricing complaints. Although many more firms are expected to litigate against, or also settle with the Competition Commission, these agreements provide some valuable insights. This note examines the first two confirmed consent agreements - firms that have been accused of similar conduct, or firm attempting to navigate the risks of price increases during the lockdown, should take note of certain terms of these agreements which provide a useful indication of how the Commission is evaluating these complaints and the circumstances in which the Commission may deem price increases to be excessive under the Consumer and Customer Protection and National Disaster Management Regulations and Directions (the Pricing Regulations).
In the first case, the Commission found that Cilliers and Heunis CC, trading as Centrum Pharmacy (Centrum Pharmacy) charged excessive prices for facial masks during March 2020. The second case involved a Gauteng hardware store, Main Hardware (Pty) Ltd (Main Hardware). The Commission found that Main Hardware charged its customers excessive prices for surgical gloves. In terms of the Pricing Regulations, facial masks and surgical gloves fall under the category of ‘medical and hygiene supplies’ - the pricing and supply of which is regulated during the period of national disaster.
In terms of traditional competition law enforcement (i.e. pre-Covid-19), there has not been a successfully prosecuted excessive pricing case in South Africa. This section of the Competition Act explicitly applies to dominant firms and usually involves complex economic analysis, as well as expensive and protracted litigation. When the Pricing Regulations were first published, many questioned how the Commission would establish that some of the firms accused of excessive pricing could be viewed as dominant. Although the dominance thresholds in the Competition Act require certain market share thresholds to be met (i.e. a dominant firm usually has a market share of above 45%), market power is also a key consideration.
In fact, both consent agreements indicate that the Commission is likely to use market power as the principle indication of dominance in the market. In this instance, market power has been inferred from the economic behaviour of the firm. Importantly, the Commission asserts that the mere ability to raise prices is indicative of market power as it demonstrates a lack of constraints such that there is an ability to control prices and/or behave independently of competitors.
Although the consent agreements do recognise that the state of disaster provides for temporary market conditions i.e. market power being held by market participants that may not otherwise have market power, this broad expansion of the dominance test raises concerns and must be noted by firms involved in the supply of the good or services listed in the Pricing Regulations.
Another important insight in relation to dominance that can be deduced from both consent agreements is that the geographic market being assessed is likely to be narrowly defined. Usually firms are regarded as dominant in national or regional markets, for example a large grocery retailer could be seen to have a 45% share of the market within a particular province. In this instance, due to the restricted movement of citizens as a result of the national lockdown, dominance is likely to be assessed in relation to the areas in which the complainant resides and access to competing products. For example, a local grocery retailer within a particular suburb such as Bryanston may be seen as the dominant supplier of certain essential food items, due to the fact that the customer is restricted from travelling outside of a particular radius to competing retailers i.e. a supermarket located in Sandton central.
While excessive pricing cases usually require the assessment of complicated factors such as rates of return, profit histories, structural market features etc. in both consent agreements it appears that the primary assessment questioned if the price increase related to a corresponding cost justification. In the Commission's view, an excessive profit margin is detectable if ordinary prices are increased materially absent cost increases. Although there is no indication that Centrum Pharmacy did put forward evidence in relation to costs or other justifications, the Commission found that the pharmacy’s average mark-up in respect of facial masks for March 2020 was in excess of 100% (in this case 150%), which is significantly above its average mark-up on “non-essential” products that it has maintained over time. Similarly, the Commission found that Main Hardware's increase in the mark-up of 19.75% in respect of surgical gloves for March 2020 was unreasonable and amounted to an abuse of dominance.
Notably, both consent agreements do not contain an admission of liability which means that although Centrum Pharmacy and Main Hardware agreed to settlement terms with the Commission; neither firm admitted that the prices charged were excessive.
Over the next few weeks, we are likely to see more firms enter into similar consent agreements with the Commission, particularly smaller businesses that may not have the resources to fight the allegations at the Tribunal level. As punitive measures, Centrum Pharmacy agreed to donate hand sanitizers, surgical gloves and face masks, valued at ZAR 25 410.00, to two old aged homes in its area of business, while Main Hardware was ordered to refund all its customers who bought boxes of surgical gloves for the higher price. Although, such outcomes are certainly laudable, there is much uncertainty as to the application of this truncated excessive pricing test and whether the Tribunal will agree with the Commission's approach during contested proceedings. What is clear is that we can expect the Competition Act to be applied in an unprecedented manner which may result in significant consequences for firms found guilty of supplying goods and services at excessive prices during the lockdown period.