South Africa: Questions on the legality of price gouging enforcement under the Competition Act
On 20 April 2020, the Competition Tribunal (the Tribunal) approved the first consent order under the price regulations adopted to address the price gouging of essential products/services during the COVID-19 pandemic. This development sheds some light on the approach of the Competition Commission (the Commission) to price gouging under the Competition Act and, in particular, whether it is applying the prohibition of excessive pricing to all businesses (whether dominant or not).
The price regulations apply the existing prohibition of excessive pricing by dominant businesses under the Competition Act to exploitative price hikes for essential products/services. In particular, the price regulations specify that a price increase of an essential product/service will constitute excessive pricing if it:
- does not correspond to, or is not equivalent to, the increase in the cost of providing that good or service; and
- increases the net margin or mark-up on that good or service above the average margin or mark-up for that good or service in the three months prior to 1 March 2020.
In only regulating price gouging by dominant businesses, in theory, the price regulations are different from the type of regulation seen in other jurisdictions (e.g. at a federal level in the US) that impose price hike restrictions on all businesses. However, this difference may not be evident in practice as the first consent order approved under the price regulations highlights the application of excessive pricing to businesses that would ordinarily not be seen as dominant.
As part of this consent order, a pharmacy agreed that it had charged an excessive price for facial masks by earning mark-ups in excess of 150% during March 2020. The pharmacy is a single store situated in a town (Boksburg) with a population of over 250,000 people served by over 50 pharmacies. The consent order does not explicitly state that the defendant was dominant in the relevant market. The Commission rather asserts that “… the mere ability to raise prices is indicative of market power as it demonstrates a lack of constraints such that there is an ability to control prices and/or behave independently of competitors and customers …”
Aside from the fact that the pharmacy had not increased prices (as it previously did not sell facial masks), the consent order raises the implausible scenario that any business that can raise prices must be dominant. It would normally be inconceivable that a single store could be dominant even in a narrower geographic market due to the imposition of travel restrictions. Further, this approach would render dominant every manufacturer, distributor and retailer of essential products / services if they ever raised prices.
It could be argued that the issue of price gouging is of such importance that the requirements of the Competition Act should be relaxed. While acknowledging the importance of the supply of essential products/services, the price regulations do not, and indeed cannot, amend the provisions of the Competition Act by extending the prohibition of excessive pricing to all businesses (whether dominant or not).
Moreover, the wider sanctioning of price gouging is already catered for by the provisions of the price regulations relating to the Consumer Protection Act. The price regulations specify that the factors identified in connection with the assessment of excessive pricing should also apply to the prohibition of unconscionable and unjust conduct under the Consumer Protection Act. This prohibition is applicable to all businesses (with turnover exceeding R 2m (approx. USD 106,000)) that offer products/services to consumers. In this regard, on 9 April 2020, the National Consumer Commission referred a complaint of unconscionable conduct to the National Consumer Tribunal after a supplier allegedly increased prices for hand sanitisers.
The need for the Commission to establish dominance in an excessive pricing complaint was not tested in the consent order where the defendant agreed not to contest the allegations. It is however anticipated that the Commission’s approach to dominance will be challenged in other cases. The Tribunal will hear the first referral of excessive pricing on 24 April 2020. Despite the undoubted importance of the supply of essential products/services, it must be questioned whether the Commission’s enforcement of price gouging is consistent with the Competition Act.