South Africa: What Makes A Price Excessive?

Last Updated: 28 August 2014
Article by Mark Garden

Most Read Contributor in South Africa, September 2018

Section 8(a) of the Competition Act contains a single sentence, the length of which belies the complexity of the underlying prohibition. It reads simply that "it is prohibited for a dominant firm to charge an excessive price to the detriment of consumers". The legislative intent is equally apparent – a firm whose comparative size in a particular market means that it is less constrained by competition than would ordinarily be the case, is prohibited from abusing this enviable position by charging consumers excessive prices for the goods it sells or the services it provides. It is paradoxical, therefore, that one of the shortest provisions in the Competition Act continues to flummox competition law practitioners, regulators, judges and jurists alike.

The complexities involved in successfully prosecuting an excessive pricing complaint are perhaps best illustrated by that fact that the recent decision against Sasol Chemical Industries (SCI) marks only the third attempt at an excessive pricing complaint since the inception of the Competition Act in 1998. The first attempt, which entailed an excessive pricing complaint lodged by Harmony Gold Mining Company and Durban Roodepoort Deep against ArcelorMittal, was successful before the Competition Tribunal, but overturned by the Competition Appeal Court on appeal and ultimately settled out of court. The second attempt, in which Telkom faced allegations of excessive pricing brought by the Competition Commission, was unsuccessful on the basis of insufficient evidence.

When one considers the case law in relation to excessive pricing in South Africa, the greatest challenge facing any complainant seeking to establish a charge of excessive pricing is the definition of excessive price in the Competition Act. A price is excessive if it bears no reasonable relation to the economic value of a good or service and is higher than that value. In 2009, the Competition Appeal Court formulated the legal parameters for an excessive pricing analysis. First, the actual price of the goods or service must be ascertained. Second, the economic value of the goods or service must be established. Third, it must be determined whether the difference between the actual value and the economic value is reasonable or not. Fourth, if the difference is unreasonable, it must be determined whether the excessive pricing harms consumers.

In the SCI matter, the Tribunal was called upon to adjudicate whether or not SCI charged excessive prices for propylene and for polypropylene in the domestic market, to the detriment of consumers. In so doing, the Tribunal conducted its analysis within the framework of the four part test set out above.

The first part of the test, which required a factual determination of the actual prices for propylene and polypropylene in the domestic market over the impugned period, was discharged with relative ease on the basis of evidence reflecting historical prices charged. Since the Competition Act provides no definition for the term "economic value", nor does it provide guidance as to how one should go about calculating the "economic value" of a good, the Tribunal relied on the evidence of expert witnesses to discharge the second part of the excessive pricing test. The hybrid approach adopted by the Tribunal was to employ a range of price-cost tests; conduct a comparison of domestic prices with prices in other geographic markets; and conduct a comparison of SCI's export prices with domestic prices for each product, to arrive at the economic values of propylene and polypropylene. As regards propylene, the Tribunal held that the price-cost test provided the most reliable method of determining the economic value of purified product sold by SCI in South Africa during the complaint period. A combination of these methods was employed by the Tribunal to ascertain the economic value of polypropylene.

The Tribunal's next challenge was to ascertain whether or not the relationship between the actual values and the economic values were reasonable. Once again, the Competition Act provides no assistance in this regard, hence the leading of evidence from 13 witnesses, including 8 expert economists (both international and local), industry analysts, business analysts and financial experts during the proceedings.

The Tribunal placed tremendous store on the "ultimate objective and the policy and principles underlying the prohibition on excessive pricing in the context of our Act". In so doing, the Tribunal's approach to interpreting the prohibition against excessive pricing in section 8(a) of the Competition Act was to contextualise the impugned conduct within South African economic history. The Tribunal found, in this regard, that SCI "benefitted from significant state support over an extended period of time and its market positions in purified propylene and polypropylene are a consequence of that".

After having regard to the characters of the products concerned; their importance as intermediate inputs in industrial development; historical and prevailing market characteristics; the policy objectives of the Competition Act understood in the context of the South African economy; and the history of SCI and how it achieved its dominant market position, the Tribunal concluded that the propylene and polypropylene prices charged by SCI during the relevant period bore no reasonable relation to the economic values of those products. This resulted in the imposition of a R534 million administrative penalty and behavioural remedies designed to reduce the prices of propylene and polypropylene to local customers.

While various of the more established competition law regimes have either eschewed entirely, or else subsequently dropped, the offence of excessive pricing from their respective canons, the Tribunal's decision has breathed new life into this beleaguered section of our Competition Act. Given that SCI has expressed and intention to prosecute an appeal against the Tribunal's decision to the Competition Appeal Court, however, only time will tell whether or not that decision will ultimately prevail.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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