South Africa: Taking stock of the enforcement of COVID-19 price regulations

June 04, 2020

While other competition authorities around the world (such as the Competition and Markets Authority in the UK) are still contemplating the introduction of new powers to deal with price gouging during the COVID-19 pandemic, the Competition Commission (the Commission) has been relentless in investigating businesses under the COVID-19 price regulations that were adopted on March 19, 2020. Amidst this flurry of activity, we take a critical look at the Commission’s enforcement approach during the last 11 weeks. Although very successful in prompting public awareness and driving numerous settlements, the Commission’s approach remains highly contentious and  likely to be litigated for years to come.

At the outset, it is recognised that the Commission has been very successful in using the price regulations to prompt unprecedented levels of consumer activism relating to the enforcement of Competition Act. With the use of a COVID-19 toll-free line and social media, the Commission has received around 1,500 complaints from consumers.

The Commission has equally been successful in using the price regulations as a tool to obtain price freeze concessions from major retailers as well as a steady feed of pricing information. Building on this engagement with main retailers, the price regulations have also been remarkably effective in leading to consent orders/settlement agreements in 15 out of the 18 finalised investigations to date.

These successes do not, however, mask the controversy surrounding the application of the price regulations, which are premised on the abuse of dominance provisions of the Competition Act. Whereas industrial giants (such as Sasol and Mittal) have previously been hauled in front of the Competition Tribunal (the Tribunal) for abuse of dominance, the enforcement of price regulations has, with the exception of Dischem, not featured household names. The size of the businesses that have been investigated is reflected in the fact that, in all but three of the settled cases, the applicable sanctions are R60,000 (approx. US$3,500) or lower, which is considerably lower than the typical fines under the Competition Act.

In a number of cases, the Commission has targeted individual retail outlets (mainly pharmacies) on the theoretical basis that any business that can raise prices has market power and that the state of disaster can give rise to temporary market power that would not otherwise exist. These assertions have not been substantiated by the type of economic analysis that would ordinarily be a pre-requisite of any dominance case.

This stance was heavily attacked in the two price gouging cases (involving Babelegi and Dischem) which were argued before the Tribunal. Having listened to the Commission’s pleadings in these cases, it is still not clear whether the purported market power arises from supply chain disruptions during the lockdown, the travel restrictions imposed on consumers and/or the vulnerability of consumers in a panic-buying mind-set. At a conceptual level, these approaches seem, at best, limited to the first days of the lockdown when concerns were rife that products or services would dry up. Since then, not only have these concerns dissipated, but every shop seems to be now selling the essential products (sanitisers and face masks) that the Commission has targeted. It remains to be seen whether the Commission’s approach has any application with the opening up of the economy with the introduction of Level 3 restrictions from June 1, 2020.

The Tribunal’s ruling in the Babelegi case on June 1, 2020 that a seller of face masks had engaged in excessive pricing does not vindicate the Commission’s approach. In agreeing with the Commission, the Tribunal stated that, “From an economics perspective, conditions for exploitation of the crisis situation and market power existed from the end of January 2020 due to the COVID-19 health crisis.” Although the Tribunal’s reasons are not yet available, the ruling comes across as the Tribunal being reticent to intervene in such a sensitive area as opposed to a validation of the Commission’s thinking.

Other aspects of the Commission’s approach have also been contentious. For example, there seems to be no materiality thresholds for the price increases coming under scrutiny as the Commission has targeted average cost mark-ups of 45 per cent in one case while 1,000 per cent price increases in another. Another criticism is that the pre-requisites for price-gouging (as set out in the price regulations) have not been consistently satisfied as, in some cases, the Commission has targeted price increases that were implemented before the state of disaster was declared, while in others, the accused businesses did not sell the relevant products before March 2020.

Taking stock of the enforcement to date, it is undeniable that the Commission has met with unprecedented success in prompting public awareness and driving numerous settlements in a matter of weeks. These successes (even with the Tribunal’s ruling in Babelegi) do not however mitigate the concerns arising from the Commission’s highly contentious approach in applying the dominance provisions of the Competition Act to all businesses. Litigation is likely to follow for many years to come.