Why South Africa’s tough new competition law is proving hard to implement

Amendments to South Africa’s competition law provides more scrutiny of pricing practices in oligopolistic markets. Shutterstock

Changes to South Africa’s competition law have widened the scope for the country’s antitrust bodies to punish anti-competitive behaviour. But implementing the changes, which were passed into law five years ago, is proving to be fraught.

The Competition Amendment Act gives the Competition Commission powers to investigate complex monopoly conduct in a market. Under certain conditions, it allows the Competition Tribunal, which adjudicates competition issues referred to it by the Competition Commission, to prohibit such behaviour. Complex monopoly is where firms tacitly act as if they are a single firm in setting prices in the market.

The provision that gives these powers, Section 10A, has not yet been enforced more than five years since the amendments were promulgated. It is one of a number of amendments that have not come into operation. It is not clear what is causing the delay. One possible explanation is that government is aware that some of the sections may be unconstitutional. It may be trying to avoid unintended consequences or difficulties in the operation and credibility of the amendments.

Extending liability

If Section 10A comes into effect it will mark a significant change in the country’s competition law. It extends the liability for prohibited anti-competitive practices by firms beyond an agreement or concerted practice to include tacit coordination in certain concentrated market structures and circumstances.

One consequence of this would be increased scrutiny of pricing practices in oligopolistic markets. These are markets where only a few firms compete. The banking sector in South Africa is one example.

It is well-known that oligopolists are ‘interdependent’ in their pricing decisions. The prices they charge are based partly on their competitors’ anticipated responses.

Recognition of their common interest often leads to less vigorous price competition and prices that are elevated substantially above competitive levels. Examples of these kinds of pricing practices are:

  • price leadership, where a firm sets the price and its competitors follow;

  • meeting competition clauses, such as matching competitors’ prices;

  • most favoured customer clauses in contracts;

  • uniform delivered pricing policies; and

  • facilitating practices, such as exchanges of price information and price signalling.

Collusion taken to a whole new level

Another pricing policy that will be affected by the amendment is the use of focal points to set and adjust prices. A focal point price is a coordinated price set by two or more sellers, without communication, that can generate excessive profit way above cost and risk consideration.

The price coordination arises from a convergence of expectations or mutual understanding of what the appropriate market price should be and it is chosen for its salience, prominence or uniqueness in the market.

Examples of focal point prices are price ceilings such as credit card and loan interest rates or fees charged at maximum rates set by legislation or regulation.

Another example is price floors such as minimum wages. Or the conversion of South African banks’ prime overdraft rate fixed at 3,5 percentage points above the South African Reserve Bank’s repo rate.

If this amendment comes into effect, it will bring South African legislation closer to the economic approach of punishing collusive conduct advocated by antitrust scholars such as Richard Posner and Louis Kaplow. According to this approach, liability is determined by its effects or market outcomes, whether explicit or tacit, rather than being based on proof of the existence of an agreement.

Economists argue that the decision by a rational, profit-seeking firm to coordinate its activities with its competitors, whether expressly or tacitly, is essentially the same. The firm decides by balancing the benefits from colluding against the costs, including the risk of punishment by competition authorities.

The scope is too wide

The widening of the scope of collusive practices to include ‘conscious parallel conduct’ is therefore soundly based on economic theory and may act as a deterrent to firms charging excessive prices in highly concentrated markets. But implementing section 10Aa would trigger a number of problems and difficulties.

The broad scope of the Commission’s investigative mandate under the amendment is almost equivalent to a market inquiry. The difference is that the investigation is directed against the conduct of specific firms, rather than a market as a whole. If the Commission succeeded in establishing complex monopoly conduct, the firms involved could be held accountable for this conduct.

The overly broad scope of the provision means that it is likely to catch conduct that in reality is not harmful to economic welfare, the so-called false negatives. This is particularly the case when it comes to focal point pricing.

Focal point prices in many market circumstances can result in prices being set at elevated levels in comparison with prices that are independently determined by firms. As such, these are likely to be under scrutiny when the amendment comes into effect.

The amendment also provides scope for the Tribunal to impose structural remedies. The Tribunal is empowered to address this conduct by making an order that deals with the effect of the complex monopoly conduct on the market. Should it impose behavioural remedies to reduce prices, it would be acting as a price regulator. This is a function it is ill-suited to perform.

Consequently, if section 10A comes into effect, it may raise more concerns than it is likely to solve. The concerns include uncertainty and potentially harmful economic effects in oligopolistic industries, such as the banking industry.

This article is based on a paper “Focal point pricing: A challenge to the successful implementation of Section 10a (introduced by the Competition Amendment Act)” by the authors and Jessica Staples, an Attorney of the High Court of South Africa.