The Competition Act: Price Discrimination
Pursuant to the recent amendments to the Competition Act (89 of 1998), the Minister of Trade and Industry has published for public comment regulations, and corresponding guidelines, dealing with price discrimination and buyer power.
These regulations have been published with the intention of curbing the power of dominant firms and encouraging competitive participation from small and medium sized firms. The regulations restrict the power of dominant firms in the supply chain, whether they be purchasers or suppliers.
Price discrimination regulations
The regulations on price discrimination go some way to providing clarity on what can be defined as price discrimination, the factors to be taken into account in establishing whether a contravention has occurred, and whether it is likely to impede effective participation by those vulnerable entities falling within the “designated class” of consumers which the Legislature has identified as deserving of specific protection. The “designated class”, as defined, includes:
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 purchase less than 20% of the relevant goods and services supplied by the dominant firm.
Price discrimination factors
In order to establish whether there has been price discrimination, there are 4 factors that must all be satisfied. These are:
the supplier must be “dominant” as defined in the Act;
differential treatment between a purchaser in the designated class and any other purchaser relating to the price charged for the goods or services supplied, discounts given, the provision of services in respect of the goods or services supplied or the payment for those services;
this treatment cannot be justified for any of the generally accepted commercial reasons, such as an act of good faith to meet a competitor’s price or taking into account the differing costs of different areas or methods of supply; and
this treatment impedes the ability of firms in the designated class to participate effectively in the market.
The regulations go on to provide a number of factors that must be considered when determining if the effective participation of a firm in the designated class has been impeded. Some of these are:
the extent of the difference in prices or discounts, or other factors relevant to other firms in the same or another adjacent downstream market;
the duration and timing of the price differential;
the likelihood that the elimination of the differential would result in the firm concerned facing increased demand for its goods or services in the downstream market or experiencing improved profitability and investment.
Implications for the franchise business model
The franchise business model is a good example of where these regulations are important. As between franchisors and franchisees, a franchisor may be dominant within the meaning of the Act, not by virtue of market share, but because of its ability to impose anti-competitive practices on the franchisee. This ability arises because of the franchisee’s sunk investments and the franchisor’s power to confer benefits and impose costs on franchisees. Suppliers designated as exclusive suppliers to its franchisees by a franchisor may in turn also be dominant in relation to those franchisees.
Franchisors must therefore take note of the 4 factors listed above. The most important factor to be considered is the designated class firm’s ability to participate effectively. The Commission emphasises here that the notion of effective participation means more than the mere existence of the firm, it means that the firm can be sustained, and that it can compete. If the actions of the dominant (or seemingly dominant) firm are found to impede this effective participation, the Commission is likely to consider that there has been a contravention of the Act.
Penalties for contravention
Important to note for firms in terms of these regulations are the penalties that can be imposed by the Commission for a contravention. 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 price discrimination sections of the Act by avoiding selling goods or services to a firm within the designated class. Should a dominant firm be found guilty of such avoidance, the above penalties will apply.
The release of these regulations make it clear that dominant firms must take care to conduct their business relationships with smaller business in a fair and equitable manner so as to avoid contravening the Act.
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