THE COMPETITION AMENDMENT BILL, 2018 INTRODUCED IN PARLIAMENT: PRICE DISCRIMINATION BY A DOMINANT FIRM IN TERMS OF SECTION 9

By Maryanne Angumuthoo Thursday, July 26, 2018
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The fifth in a series of perspectives of the main proposals contained in the Bill.

This article focuses on the proposed amendments to the provisions of the Competition Act, 89 of 1998 (the Act) relating to price discrimination by a dominant firm in terms of Section 9. The drafters of the Bill appear to have specifically tailored Section 9 to address the issue of fostering the growth and development of small and medium enterprises and firms. However, the proposed changes, discussed below, may well have the unintended consequence of undermining competition and consumer welfare.

Section 9 currently

Section 9 of the Act, as it currently stands, prohibits price discrimination by a dominant firm if the price discrimination implicates equivalent transactions and is likely to result in a substantial lessening or prevention of competition. The discrimination may be justified on certain grounds, including allowances for differences in costs of supply, meeting price competition, and changing market conditions.

In Sasol Oil (Pty) Ltd and Nationwide Poles CC, the Competition Appeal Court (the CAC), in 2005, rejected a price discrimination complaint based on Sasol Oil offering different discounts to customers, according to the volumes purchased, on the grounds that the complainant failed to show that Sasol Oil’s pricing structure substantially prevented or lessened competition. Nationwide Poles was a small downstream firm that complained that its costs were higher than its larger competitors due to the higher price it received from Sasol Oil, as compared to the lower prices afforded to the larger competitors. The CAC found that there was no substantial lessening of competition, as the complainant was able to compete and to continue operating, and there was evidence that small firms were able to compete effectively against larger rivals. 

The CAC noted that the only evidence before it was the increased cost burden imposed on Nationwide Poles by Sasol Oil’s discount policy; and that there was insufficient evidence as to the nature of the cost structures of small firms. Such evidence would have indicated the impact, if any, of the discount structure on their ability to operate effectively. There was also inconclusive evidence as to whether any small firms had exited the market, following the operation of the discount structure. The CAC indicated that, had this information been available, it might have been able to conclude that there was a reasonable possibility that Sasol Oil’s pricing structure substantially lessened or prevented competition.

The proposed amendment

  1. seeks to remove the requirement that the harm to competition must be substantial – requiring only that there be a lessening or prevention of competition.
  2. introduces an additional requirement that – “(3) When determining whether the dominant firm’s action is prohibited price discrimination, the dominant firm must show that its action does not impede the ability of small and medium businesses and firms controlled or owned by historically disadvantaged persons to participate effectively.” 
  3. expands the application of the price discrimination provision to a dominant firm in its capacity as a purchaser – “(4) The provisions of subsections (1) to (3), read with the changes required by the context, apply to a dominant firm as the purchaser of goods or services”.

Effect on competition

The rationale given for deleting the word “substantially” is that small and medium businesses are often unable to show prohibited price discrimination because the effect on small businesses is not considered to be a “substantial” prevention or lessening of competition; and that this favours complainants that are large firms because they can more easily demonstrate a substantial effect.

Removing the substantiality requirement creates a lower test for proving prohibited price discrimination and so reduces the onus placed on the Commission or a complainant to make its case. In this regard, it is important to note that price discrimination is often an important part of competition in the ordinary course, may enhance consumer welfare and has the ability to stimulate competition both upstream and downstream. A simple example: a supplier may engage in price discrimination in order to move stock and may link discounts to volume off-take (outcomes generally sought to be encouraged by competition regulators). In turn, a large volume customer who benefits from the lower prices may be able to pass on these cost savings. Counter-intuitively, therefore, the lowering of the price discrimination test may have the effect of discouraging and penalising pro-competitive initiatives and may well negatively affect small and medium enterprises and ultimately consumers.

Further, the lowering of the test does not mean that a small or medium firm will be able to succeed with a price discrimination complaint purely by showing an increased cost burden due to the differential pricing. Such a firm will still have to prove a lessening or prevention of competition. Accordingly, even the lower test contemplates a harm that is broader than an individual complainant’s case. 

In the circumstances, the reasons for the proposed changes appear misdirected and there are no apparent grounds for the current provision to change materially. The Commission should rather be encouraged to engage in these matters as a proxy for smaller businesses, and to rely on a proper interpretation of the section, taking into account any unique needs of small and medium firms on a case-by-case basis. This interpretation is already to be found in the CAC’s comments regarding the evidence required to establish price discrimination and the impact of that evidence. The CAC’s comments provide a more suitable solution than the proposed amendment. A proper showing of evidence as described by the CAC – including, inter alia, the nature of the cost structures of the small firms; the impact, if any, of the discount structure on their ability to operate effectively; and whether any small firms had exited the market – would assist the Commission to put forward a strong case on behalf of small and medium enterprises. In proving a case in line with the CAC’s reasoning, the Commission would be able to illustrate competition harm and would remain in step with established competition law tests internationally.

Onus on dominant firms

The requirement – “that the dominant firm must show that its action does not impede the ability of small and medium businesses and firms controlled or owned by historically disadvantaged persons to participate effectively” is an additional provision that serves to impose a new onus on dominant firms. 

This additional requirement makes specific provision for the impact of price discrimination on small and medium enterprises, and on firms controlled by historically disadvantaged persons; creates an additional element in the assessment of price discrimination; and places the burden of proof onto the dominant firm for this element.

At present, the Commission or a complainant is required to prove the elements of price discrimination and to show that the discrimination has resulted in a substantial lessening or prevention of competition. Only then is the dominant firm required to justify its conduct based on the limited grounds provided in the Act. In the absence of a showing of substantial harm to competition, the dominant firm bears no obligation to justify its conduct.

The proposed addition raises several questions. First, on an ordinary reading of the provision, it is unclear when the onus is intended to apply (i.e. it is unclear whether absent a showing of harm to competition, the dominant firm need not discharge the onus or whether the dominant firm is required to bear this onus even where harm to competition is not demonstrated). Second, it is unclear as to how, practically speaking, a dominant will be able to discharge the onus in circumstances where it does not necessarily participate in its customers’ markets and where it does not have insight into the markets in which customers operate. This onus should rather be for the Commission to discharge, as it is best placed to do so. 

This requirement does suggest though that dominant firms can no longer be agnostic about the profile of their customers and suppliers; and that they may have to invest in understanding these businesses and their contemplated growth over time. The exact scope of this obligation will have to be delineated by the competition authorities, especially where the meaning of “participate” is concerned.

Dominant firms as purchasers

This amendment proposes that dominant firms who are recipients of favourable prices (i.e. firms acting in the capacity of purchasers), may also fall foul of the price discrimination prohibition. This amendment raises issues as to its practical application and as to how it should be interpreted in accordance with ordinary business practices. After all, it is the supplier that has the ability to engage in price discrimination and Section 9 is intended to penalise dominant firms that engage in price discrimination. The customer does not have the ability nor is it responsible for the price discrimination. The customer is also not privy to, nor does it have control over, the prices received by other customers. Penalising a customer (even a dominant one) does not accord with the competition law principles underlying this section. In short, this section is fraught with significant interpretation challenges.

Volume discounts

Finally, there is some debate as to whether the proposed amendments to
Section 9 mean that volume discounts will become unlawful. Given that
Section 9 still contains the justification provisions, in particular those relating to allowances for differences in the cost of supplying a customer, it appears that volume discounts remain viable but would need to be rigorously justified.

Conclusion

We acknowledge the Minister’s imperative that the sustained growth of small and medium businesses is critical to the growth of the broader economy and to the ability of such firms to participate meaningfully in the economy, and that legislative measures must be taken to address this issue. However, we submit that the Section 9 amendment may be inconsistent with these objectives and may have the unintended consequence of stifling competition, as it may lead to dominant firms not implementing pro-competitive pricing initiatives and to these firms pricing up to the least advantageous price to avoid any accusation of price discrimination – leading to net consumer welfare loss.

If you have any questions relating to the above, please contact your usual contact in our Competition Practice.