Author: Gary Moore

Date: 16 October 2016

The Competition Act, 1998[1] prohibits a “dominant” firm from charging an “excessive” price.[2] The Act says a firm is “dominant” in a market if it has a specified percentage of it, or has one or another lesser specified percentage but has “market power.”[3] The Act defines market power as power to control prices, exclude competition or act appreciably independently of competitors, customers or suppliers.[4] It defines an excessive price as one bearing “no reasonable relation” to the “economic value” of the good or service.[5]

The Competition Appeal Court has said enforcing this prohibition is “immensely complex” because the excessive-price doctrine is “fraught with…controversy.”[6] The Court referred to a criticism by a retired chairman of the Competition Tribunal of the notion that “market power” enables a firm to dictate pricing.[7] The Court cited with approval a critique[8] of the corresponding excessive-pricing provision in the Treaty on the Functioning of the European Union[9] (TFEU):

The use of Article 102 TFEU to curb excessive prices has been criticised on several different levels.  A first basic objection is that no generally accepted criterion exists in the decisional practice and case law to determine when prices are “excessive.”   Further, even if a criterion, or series of criteria, could be agreed upon as a benchmark, determining an excessive price in practice is extremely complex and subject to a number of difficulties.  A second criticism is that prices above marginal cost are common and necessary in many industries where high profits are necessary to recover large up-front capital and other fixed costs.  Third, any policy on excessive prices is likely to yield incorrect predictions in many instances and the costs of such errors is likely to be higher than the costs of allowing certain excessive prices to escape censure.  Fourth, little or no guidance is offered in the decisional practice and case law on what might constitute objective justification for a price that exceeds the relevant criterion for determining an excessive price.  Finally, devising effective remedies in excessive pricing cases raises difficult issues.

The factors that no criterion exists to determine when prices are excessive and that an excessive-price policy likely yields incorrect predictions indicate that the Act’s excessive-price provision undermines the principle of the Rule of Law that laws should not be vague. A law must indicate with reasonable certainty what is required.[10]

[1] Competition Act 89 of 1998.

[2] To the detriment of consumers. Competition Act s 8(a).

[3] A firm is dominant in a market if it has at least 45% of it; or at least 35% but less than 45% unless it can show it does not have market power; or less than 35% but has market power. Competition Act s 7.

[4] Competition Act s 1(1) sv “market power”.

[5] Competition Act s 1(1) sv “excessive price” para (aa).

[6] Sasol Chemical Industries Ltd v Competition Commission [2015] ZACAC 4; 2015 (5) SA 471 (CAC), para [2].

[7] “Pricing power derives from market power.  But mere possession of market power is not contrary to competition law: an important source of market power is innovation and other pro-competitive conduct.  The rents derived from the possession of market power will, in most circumstances, sooner or later attract new entrants, the more so if the dominant incumbent takes ‘excessive’ advantage of its privileged position.  And so the effort to acquire market power and pricing power and the attention it attracts from rivals are an important driver of the competitive process.” David Lewis, Thieves at the Dinner Table (2012) p 177.

[8] Robert O’Donoghue, A Jorge Padilla. “The Law and Economics of Article 102 TFEU.” 2nd ed. (2013) p 737.

[9] Treaty on the Functioning of the European Union (consol. OJ 26 Oct 2012) art 102(a). “Any abuse…of a dominant position…shall be prohibited… Such abuse may, in particular, consist in: (a) directly or indirectly imposing unfair purchase…prices…; …”

[10] Affordable Medicines Trust and Others v Minister of Health of RSA and Another, ibid, para [108].

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Gary Moore

Gary Moore BA LL.B. (Witwatersrand) LL.M. (UC London) is a South African lawyer and Senior Researcher at the Free Market Foundation.

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