The Competition Act: Buyer Power
Following the amendments to the Competition Act (89 of 1998), the Minister of Trade and Industry has published regulations, and corresponding guidelines, dealing with price discrimination and buyer power. While the price discrimination regulations intend to protect “designated class” purchasers in the downstream market, the buyer power regulations intend to protect designated class suppliers in the upstream market. In essence, the regulations are designed to protect smaller businesses from large or dominant firms which have the power to impose prices and deals which favour them.
Designated Class
An important inclusion in the buyer power regulations is the introduction of three specified sectors in which dominant firms are prohibited from imposing on a supplier unfair prices or trading conditions. These are the agro-processing sector, the grocery wholesale and retail sector and the online intermediation services sector. This means that firms which fall into the “designated class” shall find protection under these regulations. Those entities which fall into this “designated class” include:
small or medium-sized businesses (businesses are classified as “small” or “medium-sized”, based on the number of their employees and their turnover, according to the sector into which they fall); and
businesses controlled or owned by historically disadvantaged people that supply less than 20% of the relevant goods and services purchased by the dominant firm.
Buyer power contravention
In order to establish that there has been a buyer power contravention, the following factors must be considered:
the purchasing firm must be within a designated sector;
the buyer firm must be dominant or shown to have market power in a purchasing market;
the supplier must fall within the designated class of suppliers;
the price or trading condition must have been required from or imposed on the supplier by the buyer firm; and
the price or trading condition must be unfair.
Unfair price or trading condition
In order to determine whether the price or trading condition is unfair, a number of factors must be considered. These are:
the price paid to other suppliers of like goods or services, in particular those outside the designated class;
the magnitude of any differences in prices to other suppliers of like goods or services;
whether reductions in the purchasing price are directly or indirectly required or imposed;
whether reductions in the purchasing price are retrospective and /or unilateral and /or unreasonable;
whether costs are directly or indirectly imposed on or required from the supplier, which reduce the net price received;
whether the direct or indirect imposition or requirement of costs is retrospective and /or unilateral and /or unreasonable.
To determine whether trading conditions are unfair, a number of factors should be considered. These are:
whether the trading condition unreasonably transfers risks or costs onto a firm in the designated class of suppliers.
whether the trading condition is one-sided, onerous or not proportionate to the objective of the supply agreement (such as overly long payment terms).
whether the trading condition bears no reasonable relation to the objective of the supply agreement.
Highlighted as important by the Commission in the Guidelines are the contracts entered into between the supplier and purchaser. It is on the basis of these contracts that buyer power and abuse of dominance should be measured. One of the important factors the Commission will consider is whether there is a shared risk. Also important to the Commission is how the unfair price or trading condition came to be. Should the Commission find that a price or trading condition was imposed unilaterally, it is likely to consider the price or condition to be unfair. The main goal of the regulation and guidelines in relation to buyer power is to foster bargaining power on the side of the designated class supplier.
Much like a contravention of the price discrimination regulations may lead to the imposition of a penalty, so too may a contravention of the buyer power regulations. In both instances, an administrative penalty of up to 10% of annual turnover for a first-time offender and up to 25% for a repeat offender may be levied.
Given the severity of the potential penalties, dominant (or potentially dominant) firms may think it is safer to stop contracting with firms which fall within the designated class. The Commission has foreseen this possibility and has included avoidance provisions in the Act and guidelines. These avoidance provisions prohibit dominant firms from trying to circumvent the buyer power sections of the Act by avoiding buying goods or services from a firm within the designated class. Should a dominant firm be found guilty of such avoidance, the above penalties will apply.
Those firms which fall into the designated class should be aware of the protections now afforded to them. Similarly, dominant firms must be aware of these regulations in order to avoid contravening the Act.
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