Excessive pricing in a crisis: Should competition authorities step in?

The recent civil unrest created unfortunate scenes of consumers queuing for basic foods. In such a crisis, our competition authorities are mindful that suppliers may be able to take advantage of vulnerable consumers by charging higher prices, despite the underlying costs not changing to the same extent.

In South Africa, consumer protection regulations were promulgated at the beginning of the Covid-19 pandemic. These have shaped how Section 8 of the Competition Act is to be applied in this time of crisis, and specifically prevent certain suppliers of basic foods, medicine, and clean-up products and services, from applying price increases that are not equivalent to the increase in the cost of providing the goods or service, or that increase the net margin or mark up of that goods or service above the mark up or average net margin for the good or service in the three-month period prior to 1 March 2020.^[1]

Recently the government issued a further notice that firms in the supply chain for essential goods remained subject to the same regulations in the wake of the unrest and shortages that ensued.^[2] These measures are aimed at preventing price gouging and the exploitation of vulnerable consumers. They are well intentioned and there is merit in protecting vulnerable consumers from significant price spikes of essential products in a crisis. Some economists have questioned these interventions, given the impact they may have on the demand and supply of essential goods.^[3]

In circumstances where there is a short-term but significant supply-demand imbalance of goods, it is argued that consumer welfare may be enhanced if prices are allowed to increase because this encourages more supply and moderates consumption so that essential goods become available to everyone and not just those first in line.

Although such criticism may hold true in some instances, it should not be accepted without scrutiny. For example, it is not always the case that allowing prices to increase will result in a sufficient and timely supply response. It is also not true that higher prices are required to trigger a supply response because supply can also increase on the back of expected future changes in demand. In the short term, the appropriate level of rationalisation is not guaranteed in the face of higher prices because wealthier consumers are in a better position to hoard scarce essential goods.

In light of the government’s aim to maintain the affordability of essential goods during a crisis, it is worth reassessing last year’s judgments of the Competition Tribunal (Tribunal) and the Competition Appeals Court (CAC), regarding the prices of goods that were deemed essential for consumers during the Covid-19 pandemic.

The cases against Dis-Chem Pharmacy and Babelegi Workwear & Industrial Supplies involved the sale of face masks, which both firms increased in price following a significant increase in demand. In both cases the Tribunal and the CAC departed from the traditional approach in adjudicating excessive-pricing cases. The approach to establishing the existence of market dominance resulted in defining narrower markets than otherwise would have been the case. Additionally, a comparison of realised prices to economic costs over an extended period (i.e. at least five years) was not undertaken. Rather, in both cases:

• An inferential approach was adopted for the determination of market power. The authorities used the evidence of substantial increases in prices as evidence of the firms’ market power. This was despite both firms holding significantly less than the market-share thresholds for presumed dominance.
• It was concluded that where a firm, in the context of essential goods in a crisis or national disaster, increased its prices significantly without a corresponding increase in costs, this established a prima facie case of prices being unreasonably excessive.
• The authorities argued that there should be no allowance for price increases without changes to underlying costs at all when concerned with the pricing of an item considered to be essential in the fight against the pandemic of Covid-19, and crucial to public health.

The competition authorities' approach in these cases, and the Commission's general application of the regulations, raise questions for excessive pricing matters. For example:

• The behaviour in these cases occurred before the promulgation of the regulations and was prosecuted under the traditional excessive-pricing framework, namely Section 8(1)(a) of the Competition Amendment Act. This raises questions of the extent to which the principles set out in these decisions are a precedent for cases beyond the national disaster, and the implications, more broadly, for excessive-pricing cases in more traditional settings where the concern has centred on dominant firms pricing significantly above economic value, over an extended period.
• When are demand-driven price increases by dominant firms acceptable, even outside a crisis or a national disaster?
• What is the appropriate price response by firms when supply is affected by a crisis? Should a retailer always be required to continue selling scarce essential goods at original economic cost when replacement stock is likely to be significantly more expensive?
• What is the de minimis threshold (in terms of time and level of sales) that should be applied to assess the pricing conduct of a firm during a crisis? In Dis-Chem, the Tribunal imposed a penalty of R1.2 million, based on a multiple of the excess profits earned over the complaint period (about one month). Conversely, in Babelegi the CAC concluded that, although there was a contravention of Section 8(1)(a), the minimal harm caused by the small number of sales (76 boxes) and short duration of the complaint period (about one month) did not warrant a penalty. Given these differences in approach, there remains uncertainty on the time and the scope of sales that a dominant firm prices above economic costs, for a punitive outcome under Section 8(1)(a).

These questions create significant ambiguity in how future excessive-pricing cases will be handled. What is clear is that certain suppliers of basic foods, medicine and clean-up products and services (not just dominant firms in the traditional sense) need to be careful when considering increasing prices. 

In the current environment, price increases in the absence of corresponding cost increases, pose a material compliance risk. There is also a significant question of how these recent price-gouging matters may affect, and even confuse, the approach to assessing dominance and traditional excessive-pricing complaints outside of the sale of essential goods in a crisis.

Notes:

^[1] Department of Trade and Industry: Consumer and customer protection and national disaster management regulations and directions, 19 March 2020.

^[2] Department of Trade, Industry and Competition: Block exemption for security of supply of essential goods, 15 July 2021.

^[3] See for example, Chakraborti and Roberts: Anti-price gouging laws, shortages and Covid-19: Big data insights from consumer searches, 09 June 2020.