COMPETITION LAW: PRICE DISCRIMINATION

Introduction

On 13 February 2020, the minister of trade and industry brought into effect the operation of the amended section 9 (dealing with price discrimination) and section 8(4) (buyer power provisions) of the Competition Act No. 89 of 1998 (the “Competition Act”), together with the respective Regulations. Both these provisions have been aimed at assisting small or medium owned enterprises (“SMME’s”) or firms controlled by historically disadvantaged persons (“HDP’s”) participate effectively in the economy and market.

POSITION PRIOR TO 13 FEBRUARY 2020

Many SMME’s and HDP’s have struggled to compete effectively in their relevant market as, unlike their more established counterparts, do not have the financial muscle to purchase goods in bulk (thus get discounts on the goods purchased which they can pass down to their consumers). Previously, where an allegation of price discrimination was made, the complainant was required to first establish that the firm complaint of was dominant in the relevant market. Once this onus had been discharged by the complainant, it was then required to establish that the price differences complained of constituted prohibited price discrimination in terms of section 9(1) of the Competition Act. This in turn, required a showing that the dominant firm’s action was likely to have the effect of substantially preventing or lessening competition.

Once the complainant had established all the aforementioned factors, the dominant firm was then entitled to raise any of the defences contained in section 9(2) of the Competition Act. One of the accepted defences which was available to dominant firms, relates to the implementation of price discrimination on the basis of differences in sales volumes. In other words, a dominant firm was allowed to apply volume discounts, i.e the greater the quantity purchased, the higher the price discount. Conversely, the smaller the quantity purchased, the lower the price discount.

MEANING OF DOMINANT FIRM

Section 7 of the Competition Act provides that a firm is dominant if: (a) it has at least 45% of that market; (b) it has at least 35%, but less than 45%, of that market, unless it can show that it does not have market power; or (c) it has less than 35% of that market, but has market power. The Competition Act defines “Market Power” 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.

NEW PRICE DISCRIMINATION PROVISIONS

At the heart of section 9, is a prohibition of volume-based rebates or trading terms. While the Competition Act permits for certain efficiency-based pricing differentials, suppliers are now prohibited from competing purely based on quantities.

The new price discrimination provisions prohibit dominant firms from offering different prices or trading terms to SMMEs or HDPs who purchase less than 20% of the goods or services sold by the dominant firm, if doing so impedes or prevents those customers from participating sustainably in a market. Price differences can no longer be justified on the basis that the SMME or HDP customers buy smaller volumes than the dominant firm’s high-volume customers.

Sectors / Industries affected by the new provisions

The Buyer Power Regulations designate specific sectors of dominant firms which are prohibited to require or impose unfair prices or other trading conditions to SMME’s and HDP customers. These are the grocery retail and wholesale sector, agro-processing sector, and e-commerce and online services sector.

Anti-Avoidance Provisions

The changes to the Competition Act also include anti-avoidance provisions which mean that dominant firms cannot simply refuse or avoid dealing with SMME’s or HDP firms in order to circumvent the buyer power and price discrimination provisions. These provisions are yet another development in competition law which companies will have to consider when arranging their commercial affairs.

Penalties for price discrimination

Dominant firms found guilty of contravening the new provisions face an administrative penalty of up to 10% of their turnovers in south Africa and exports from South Africa for a first time offence, and up to 25% for a repeat contravention.