On 19 November 2020, the Competition Appeal Court (CAC) delivered a seminal judgment that could significantly impact the way abuse of dominance cases are prosecuted in South Africa. The CAC's finding that industrial supplier, Babelegi Workwear and Industrial Supplies CC (Babelegi), had charged excessive prices for dust masks, is the first ever finding of excessive pricing against a firm by the CAC. This was also the first case to be based on section 8(1)(a) following the introduction of amendments to the Competition Act 89 of 1998 last year.
The judgment could mean that small firms, that may not otherwise have been regarded as dominant outside of a disaster period, may be found to have market power due to their ability to raise prices.
Although it was common cause that Babelegi charged significantly increased prices for FFP1 masks through a series of price increases amounting to a total of 888%, the CAC had to consider three key issues in order to assess whether Babelegi's conduct amounted to an abuse of dominance under the Competition Act.
- First, was Babelegi a dominant firm with market power for purpose of this case?
The CAC noted academic literature which indicates that in a crisis situation, such as the Covid-19 pandemic, one needs to use a different conceptual framework from what ordinarily would be employed in an excessive pricing case. The CAC had regard to the concept of a "lucky monopolist" - where a firm's dominant position comes from events that fall outside of the knowledge of the economic actor or its ability to determine the timing thereof.
Although Babelegi enjoyed less than a 5% share of the national market, the test for dominance in the case of a firm that has less than a 35% share of the defined market is whether it has market power. Market power is defined 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".
After assessing the cost, prices and mark-ups, the CAC found that for the relevant period, Babelegi had the power to control its prices and not be concerned that a countervailing power of a competitor would cause it to reduce its prices during that particular period. The CAC concluded that, throughout the complaint period, Babelegi was able to act as if it was a monopolist, extracting the maximum price that it was able to obtain and that its ability to price in the manner that it did was reflective of its power.
- Second, in the context of Babelegi's conduct and explanation of why it raised prices – were the increased prices reasonable?
The CAC found that Babelegi did not adduce enough evidence to sustain its argument that it based its price increases on justifiable and anticipated price increases of its suppliers. Furthermore, Babelegi did not condition its prices with reference to its competitor's pricing and there was no evidence produced to show that costs were expected to rise by an amount which was anywhere close to the 888% increase.
- Third, has there been detriment to consumers as a result of Babelegi's conduct?
The CAC found that in this case, the excessive prices were charged at a time of crisis when the use of a mask by every person in the country was essential. Importantly, the CAC noted that competition law in South Africa is designed to ensure that markets work fairly and do not add to the economic disadvantage of millions of presently disadvantaged South Africans.
In determining an appropriate penalty, the CAC had regard to Babelegi’s size, the number of masks sold at an excessive price and the harm Babelegi had suffered as a result of its own excessive pricing conduct. After taking these factors into account, the CAC decided that no administrative penalty should be imposed.
This precedent-setting judgment has important ramifications but also raises some uncertainties. For instance, it has raised questions as to how exactly competition authorities will apply the dominance test based on market power outside of pandemic circumstances. It was noted throughout the judgment that the context of the case involved market conditions that have been altered by an unprecedented pandemic. That said, since it is also unclear how long the pandemic might last – in the current circumstances, the CAC's finding significantly increases the risk that market players, regardless of size, could be considered as dominant. Also, since this judgment was based on existing provisions in the Competition Act and not the Covid-19 related excessive pricing regulations, the scope of products is not limited and could also extend beyond healthcare and other essential goods. Firms of all sizes should keep a careful record of the reasoning behind price increases to be able to show that such increases are appropriate and justified, based on increases in input costs and relevant market conditions.