By: Michael-James Currie, Gina Lodolo and Nicola Taljaard
As aptly put by Campton P “it is probably safe to say that in the developed world, competition is now accepted as the best available mechanism for maximizing the things that one can demand from an economic system in most circumstances. Economic regulation is increasingly perceived to be at the opposite end of the spectrum – it tends to leave a larger number of people with a reduced real income and a lower standard of living.”
Regulatory intervention in the competition law arena, which is aimed at ensuring markets function optimally and are competitive, is the essence of most traditional competition law regimes. There is, however, an increasing risk of over regulation and over enforcement which may undermine incentives to invest and innovate, ultimately leading to a dampening effect on pro-competitive conduct.
Competition enforcement should principally be aimed at ensuring features of the market do not distort competition on the merits. It should not be used as a tool for price regulation. In this paper, we explore some of the recent abuse of dominance cases in South Africa – most notably the “price gouging” cases – adjudicated during the height of the Covid-19 pandemic and flag several risks that may materialize if those cases are to be used as blueprints for future enforcement activity.
In this paper we explore the benchmarks set out in what was the leading jurisprudence on excessive pricing in South Africa, namely the Sasol Chemical Industries Limited v Competition Commission before the Competition Tribunal (“Tribunal”) and Competition Appeal Court (“CAC”) respectively and how the excessive price test and standards against which excessive pricing cases have recently been adjudicated, has developed – both in terms of the amendments to the legislation as well as recent cases assessed under the “price gouging” rubric. This is particularly topical as we expect to see an increase in the number of excessive pricing cases brought in South Africa.
In the CAC decision of Babelegi, however, Judge Dennis Davis himself noted the challenging nature of the excessive pricing doctrine for competition authorities, as it “requires them, to a considerable extent, to act in the manner of a price regulator”. He further notes in relation to these challenges, that the decision by the CAC in Babelegi was even more complicated in light of the fact that it had to be “determined through the prism of an excessive pricing provision” which was not specifically designed for the complex and novel conditions brought about by the pandemic.
Against this backdrop, we discuss the Sasol case as well as unpack the price gouging cases and highlight several concerns associated with an overly interventionist approach in prosecuting perceived excessive pricing cases.
Excessive pricing: Unpacking the Sasol Benchmark
Excessive pricing cases have been inherently difficult to sustain by the South African Competition Commission (“SACC”), especially in industries where there are low barriers to entry. This is because, in ordinary circumstances, for an incumbent firm to charge excessive prices, they need to be a quasi-monopolist, otherwise the charging of excessive prices typically encourages entry by third parties as there are pecuniary profits to be made. This new entrant would ordinarily result in the incumbent reducing prices to ultimately reach competitive levels. In simple terms, the market self regulates.
Before discussing the price gouging cases, it is useful to briefly sketch an overview of excessive pricing cases in South Africa and the clear benchmarks set in Sasol. In this regard, the CAC in Sasol noted the complexity associated with excessive pricing cases in that: “[p]ricing power derives from market power. However, the mere possession of market power is not contrary to competition law. Indeed, some important source of market power is innovation and other, pro-competitive conduct. The rents derived from the possession of market power will, in most circumstances, sooner or later attract new entrants, the more so if the dominant incumbent takes ‘excessive’ advantage of its privileged position. And so, the effort to acquire market share and, therefore, pricing power and the attention it attracts from rivals are an important driver of the competitive process.”
Notwithstanding the likelihood that the market will find a way to self-regulate through the threat of new entrants, when considering an excessive pricing case, there are further factors that need to be taken into consideration to determine whether the price is indeed excessive. For example, the Tribunal in Sasol considered the risk versus reward dynamic and the reasons why a dominant firm “is able to charge a price above the economic value of the good or service”. An oft used example is prevalent in the context of patents. A patent holder is conferred a statutory monopoly position and is entitled to charge prices which are substantially above the cost of producing the patented product. This is because, simply put, a manufacturer must be entitled to benefit from the risks of developing a patented product (which has no guarantee of success) as well as the costs associated with failed attempts. If a firm is deprived of the ability to potentially earn substantial profits if they are successful in developing a patented product, why take the risk in trying to develop such a product in the first place. This would clearly deprive consumers of innovation.
The Tribunal’s major gist in the Sasol case was that Sasol, as a previously State-Owned Enterprise (“SOE”) achieved its dominance by virtue of State support as opposed to risk and innovation. Accordingly, the Tribunal found that Sasol had engaged in excessive pricing. Sasol, however, successfully had the Tribunal’s finding overturned on appeal.
In short, the CAC applied a revised costing calculation mechanism which led to the conclusion that Sasol had implemented substantially lower mark-ups in comparison to those calculated by the Tribunal, and in relation to this determination, established that returns that are above economic value are not unreasonable per se. Further, the CAC in Sasol noted that pricing is not excessive merely because it is above economic value, rather, such pricing should be substantially higher than the economic value: “some measure of latitude has to be given to firms with regard to pricing. If not, a court will become a price regulator”.
While the CAC deviated slightly from the Tribunal in imputing significant importance to the question of how Sasol obtained its market position, the CAC and Tribunal still aligned to the extent that innovation and risk-taking “may have a bearing on economic value of its product and the reasonableness of the price” – it is, however, not a “license for patent holders to engage in excessive pricing”.
Subsequent to Sasol, the Competition Act, 18 of 2018 (“Amendment Act”) came into force to provide that when determining whether a price is “excessive”, the SACC must inter alia, take into account “the structural characteristics of the relevant market, including the extent of the respondent’s market share, the degree of contestability of the market, barriers to entry and past or current advantage that is not due to the respondent’s own commercial efficiency or investment, such as direct or indirect state support for a firm or firms in the market”.8 (own emphasis)
Further, the Amendment Act changed the test for excessive pricing from “a price for a good or service which bears no reasonable relation to the economic value of that good or service; and is higher than [a certain value]” to now provide that a price can be excessive where the price is “higher than a competitive price and whether such difference is unreasonable.” This Amendment makes the position even more opaque.
While cases such as Sasol remained the guiding precedent, the quantitative benchmarks were relatively clear. However, the outcome of the excessive pricing decisions in Dischem and Babelegi, leaves much to be said about the certainty of excessive pricing cases to follow. In this regard, we argue below that the latter judgments create uncertainty considering their application outside of the ambit of the anti-price gouging regulations (“Regulations”) and their deviation from the notion that excessive pricing may incentivize entry into the market and that the market self-regulates.
A Discussion of the Subsequent Price Gouging Cases
Price gouging occurs when sellers of goods and/or services increase their prices for these economic commodities to levels considered unreasonable or unfair, usually during periods of extreme supply or demand changes in the market.
As a result of a short-term change in market conditions, price gouging is a form of excessive pricing which is usually subject to a different standard from the usual excessive pricing tests contemplated by competition laws.
In order to address price gouging concerns in South Africa during the Covid-19 pandemic, the South African Government declared a State of National Disaster in March 2020, and published the emergency Regulations. These Regulations applied to both the supply and the pricing of certain ‘essential’ goods.
In short, the Regulations prohibited firms from increasing prices unless it was directly proportional to a cost increase. Policy issues aside, the Regulations could not be faulted in so far as they were clear and ensured that all players in the market knew what the rules were – i.e., a key tenet of the principle of legality.
Notably, however, the two precedent-setting price gouging cases adjudicated before the South African Competition Authorities, were based on conduct which preceded the promulgation of the anti-price gouging Regulations. The Regulations were therefore not applicable, and the cases were adjudicated under the excessive pricing prohibition in the Amendment Act. Moreover, it was also the first excessive pricing cases to be adjudicated under the new amended excessive pricing test following the amendments to Competition Act 89 of 1998 (“Act”). As some final contextual background, these cases were brought on an urgent basis and parties only had a matter of a few weeks to prepare economic evidence in these cases.
The Dischem and Babelegi decisions, which both concerned instances where the respondents had increased the prices they charged for face masks during the initial stages of the Covid-19 pandemic, were decided within a month of one another.
Both parties disputed their dominance in the market. In Babelegi, it was not disputed that Babelegi only had less than 5% market share, yet it was held to be “dominant” based on short term market power. In Dischem, the Tribunal found it unnecessary to conduct a market share analysis as Dis-Chem’s market power was directly inferred from its conduct. The Tribunal held that Dis-Chem’s ability to significantly increase the prices of face masks all the while increasing sales volumes was direct evidence of Dis-Chem having market power.
In Babelegi, the Tribunal held that a firm’s ability to increase prices within a short period of time is indicative of dominance and that market power or dominance must be determined with reference to context. In this regard, the Tribunal states that even small firms may have market power. In emphasis of the point that even small firms may be considered dominant,we note again that Babelegi had less than a 5% market share and was still deemed to have had market power as it had the ability to profitably increase its prices without providing any cost justifications.
Similarly, in Dischem, the Tribunal found that the SACC had established a prima faciecase of excessive pricing based on Dis-Chem’s ability to substantially increase its profit margins and pricing above what is reasonable, which, in relation to essential goods was held to be any increase whatsoever.
Although the CAC upheld the Tribunal’s decision in Babelegi, Judge Dennis Davis made the following noteworthy statement:
“These observations do not detract from the complexity of the task confronting this court, particularly in the present case where at the relevant time, government had not introduced bespoke price gouging regulations. As a result, the present case has to be determined through the prism of an excessive pricing provision [which] was not intended for use in the specific and unique conditions of a Covid 19 pandemic. The present case is mercifully somewhat more confined than might otherwise confront a competition authority in dealing with an excessive pricing case.”
The CAC therefore acknowledged that the “price gouging” case was really a product of extreme market circumstances and an unfortunate lacuna in the regulatory environment. It should therefore not be used as a benchmark against which all future excessive pricing cases are adjudicated. Failure to consider the unique circumstances which both the Tribunal and CAC sought to emphasize throughout their respective decisions, will significantly water down the excessive pricing standards and most notably, create uncertainty for businesses in the pursuit of profit maximizing conduct fearing the risk of being sanctioned for taking advantage of short-term market fluctuations.
Following the Dischem and Babelegi decisions, in Tsutsumani,the Tribunal decided the first case under the Regulations, read with section 8(1)(a) of the Amendment Act, wherein which it also confirmed that the Regulations were not in force during the complaint period of Babelegi. Tsutsumani emphasised the importance of “context” (as also emphasised in the Babelegi CAC decision) – being the unprecedented Covid-19 pandemic. In this regard, to determine whether the price was “excessive”, the Tribunal in Tsutsumani applied the various benchmarks set out in section 8(1)(a) and 8(3)(a)-(f) of the Amendment Act. In this regard, to determine whether a price that is higher than a competitive price is unreasonable, the Amendment Act, in section 8(3)(b)(f), provides for consideration of “any regulations made by the Minister, in terms of section 78 regarding the calculation and determination of an excessive price.” It was within this framework that the Tribunal applied the Regulations to ultimately make an adverse finding against Tsutsumani.
To establish dominance, the SACC, however, relied on Dischem to find that, even though Tsutsumani only entered the market during the pandemic, its market power could be inferred by its pricing. Even though Tsutsumaniargued thatthere were 18 other alterative suppliers who responded to the Request for Quote from the South African Police Service, the SACC went further to place reliance on Babelegi wherein it was found by the CAC that “a store, by merely having PPE products in the context of such excess demand could enjoy market power. Multiple firms – even stores located in the same shopping mall – could conceivably exercise market power in the supply of PPE vis-a-vis their customer”. The Tribunal again, however, in making a finding that Tsutsumani was dominant, emphasized that Tsutsumani was a “lucky monopolist” that capitalized on a crisis and further that even though there were alternative suppliers, “the lucky monopolist might not be a single firm in the relevant market. Given the exogenous factors, multiple firms can be found to be dominant during the crisis” – thereby confining its decision to this crisis context only.
Interestingly, in Tsutsumani, the Tribunal suggests that the National Disaster Regulations prescribe a 10% benchmark. This appears to be an error as the National Disaster Regulations suggest that “any markup” may be scrutinized. The error arises likely by a reading of the Dischem and Babelegi decisions where the SACC considered the United States wherein a 10% markup during price gouging situations is usually the benchmark. Accordingly, in conjunction with the uncertainty created regarding the conferring of short-term market power as a benchmark for dominance, there is further uncertainty as to what profit margin may prima facie be viewed as excessive. This results in a lack of clarity in how businesses can ensure that price increases are proportionate to cost increases in circumstances where the increase is usually benign. This places a significant administrative burden on firms and an unjustified increased cost of compliance. It would be preferable if there was a clear materiality threshold so that competitively benign or cost justified price increases do not get caught in the snare of an overly conservative approach to excessive pricing.
Accordingly, the context in which these cases were decided is instructive. The risk, however, of the price gouging decisions finding application in other markets or other market circumstances is not immaterial. The incoming Commissioner of the SACC has expressly stated that the price gouging cases provide a basis for the SACC to implement the amendments to the Act – these include not only excessive pricing but also amendments to the price discrimination (and several other abuse of dominance) prohibitions. In this regard, newly appointed Commissioner, Ms Doris Tshepe, whose role is inter alia to fulfil the mandate embodied in the amendments to the Act, stated that “[w]hat the Commission did, together with the Competition Tribunal and the CAC [Competition Appeal Court], during the COVID crisis, was to show that there is capacity to find and deal with matters as efficiently as possible. We could learn and use those lessons to try and implement the amendments [to the Competition Act].” The Commissioner added further that “[w]e don’t have 10 years to set precedents on the new amendments. There is an urgency, we are in a crisis, our economy is in crisis, and in order to achieve desirable outcomes we are going to have to work a bit faster”.
Accordingly, while much of this paper has been dedicated to the price gouging cases, the principles underpinning these cases may well be used in pursuing other sectors or instances of market shocks which are unrelated to the Covid pandemic. We suggest that this would pose a significant risk of regulatory intervention and amount to quasi-price regulation.
Market Inquiry Powers: A Power Tool to Price Regulate
In addition to the lower standards and approaches to market power and excessive pricing, we note that the amendments to market inquiry provisions in the Act provide expansive and far-reaching powers to the SACC to pursue behavioral and structural remedies.
Previously, the SACC’s powers, following the conclusion of the market inquiry, were limited to making recommendations to the Legislature to address any perceived features in the market which hinder effective competition. The SACC now has powers to directly impose any remedy (except penalties), including behavioral and structural remedies (the latter to be confirmed by the Tribunal) directly following the conclusion of a market inquiry. Unlike the sanctions for abuse of dominance findings, which are typically the imposition of an administrative penalty by the Tribunal, the SACC could notionally impose more direct pricing related remedies following a market inquiry.
The test against which the SACC will assess whether any features distort competition is also lower than the “substantial lessening of competition”. While market inquiries typically do have lower standards, the power to make behavioral or structural remedies based on a standard that does not require a showing of substantial lessening of competition poses a significant risk to firms.
To date there have not been any market inquiries which have been concluded (although there are several which have, or will soon, commence) and hence it is too early to make any pronouncements on the manner in which market inquiries are used as an investigative tool to price regulate markets. Suffice to note in this paper that the SACC has an important responsibility not to overstep and utilize its broad powers in pursuing perceived distortions by price regulating markets.
The price gouging cases in South Africa are somewhat unfortunate. While they protected the public from significant price hikes for critical products during the pandemic, the urgent manner in which they were brought and the fact that they were the first cases assessed under the amended excessive pricing prohibitions, has resulted in an application of the excessive pricing test which may not be fit for purpose. Notwithstanding the CAC’s cautionary remarks that context matters in excessive pricing cases and that Covid-19 posed unique challenges, the principles set out in those cases are likely to be utilized in pursuing cases unrelated to the Covid-19 pandemic. Excessive pricing cases, which are pursued too liberally based on short term market power and without clear benchmarks as to what constitutes “excessive”, amounts to price regulation (or at least an attempt to price regulate). This risk should be guarded against by the competition adjudicative bodies. Having clear anti-pricing gouging regulations in instances of national disasters published (as they were in South Africa albeit after the conduct in respect of the precedent setting price gouging cases took place) would be preferable to using traditional excessive pricing tests and frameworks to penalize firms who only temporarily possess market power due to a demand or supply shock.
The SACC has, however, indicated in several instances, either directly or indirectly, that the principles set out in the price gouging cases will be utilized going forward. Combined with the SACC’s expanded market inquiry powers, there is a material risk of over regulation in pursuit of price regulation which is not what competition law was designed for.
 Crampton P “Striking the right balance between competition and regulation: The key is learning from our mistakes.” OECD 16-17 October 2002.
 Sasol Chemical Industries Limited v Competition Commission 48/CR/Aug10 (“Sasol Tribunal”).
 Sasol Chemical Industries Limited v Competition Commission 2015 (5) SA 471 (“Sasol CAC”).
 Babelegi Workwear and Industrial Supplies CC v The Competition Commission of South Africa 186 CAC (“Babelegi”).
 Babelegi Para 41.
 Babelegi Para 43.
 Sasol CAC Para 2.
 See Sasol Tribunal Para 101 and Para 94 read with footnote 44 wherein it was stated that “the real distinction to be drawn lays in those advantages which are the product of the dominant firm’s own innovation, risk taking and investment, for example stemming from the patent or an innovation. For example, if a firm invests particular software or innovates and then patents, it will enjoy certain advantages as a result this would be a return for its own efforts and risk taking and innovation and should be rewarded”.
 See Para 76 of Sasol Tribunal where it was stated that “the principal issue thus was whether or not one should take SCI’s feedback cost advantage into account in favour of SCI, given the peculiar circumstances as alleged by the Commission, namely that this advantage is not as a result of SCI’s own risk taking and innovation, but the result of its history of state support”.
 Sasol Tribunal Para 174.
 Sasol CAC Para 184.
 Sasol CAC Para 173.
 Competition Commission of South Africa v Dis-Chem Pharmacies Limited CR008Apr20 (“Dischem”).
 The Consumer and Customer Protection and National Disaster Management Regulations and Directions GN R350 GG 43116, 19 March 2020.
 W Boshoff “South African Competition Policy on Excessive Pricing and its Relation to Price Gouging during the Covid-19 Disaster Period”(2020) 0 SAJE 1.
 J Oxenham & MJ Currie “Covid-19 Price Gouging Cases in South Africa: Short-term Market Dynamics with Long-term Implications for Excessive Pricing Cases”(2020) 11 JECLAP.
 Babelegi Workwear and Industrial Supplies CC v Competition Commission of South Africa CR003Apr20 para 41.
 The Competition Commission v Tsutsumani Business Enterprises CC COVCR113Sep20 (“Tsutsumani”).
 Tsutumani Para 3.
 Para 13.
 Section 8(1)(a) of the Amendment Act provides that “it is prohibited for a dominant firm to— (a) charge an excessive price to the detriment of consumers or customers”. Further section 8(3)(a)-(f) of the Amendment Act provides that “any person determining whether a price is an excessive price must determine if that price is higher than a competitive price and whether such difference is unreasonable, determined by taking into account all relevant factors, which may include— (a) the respondent’s price-cost margin, internal rate of return, return on capital invested or profit history; (b) the respondent’s prices for the goods or services— (i) in markets in which there are competing products; (ii) to customers in other geographic markets; (iii) for similar products in other markets; and (iv) historically; (c) relevant comparator firm’s prices and level of profits for the goods or services in a competitive market for those goods or services; (d) the length of time the prices have been charged at that level; (e) the structural characteristics of the relevant market, including the extent of the respondent’s market share, the degree of contestability of the market, barriers to entry and past or current advantage that is not due to the respondent’s own commercial efficiency or investment, such as direct or indirect state support for a firm or firms in the market; and (f) any regulations made by the Minister, in terms of section 78 regarding the calculation and determination of an excessive price.”
 Tsutsumani Para 61.
 Para 62.
 Para 71.
 Para 70. In this regard even though there were alternative suppliers, the South African Police Service lacked sufficient information on the status and available volumes from other suppliers and feared that they would be able to obtain the stock required.
 Tsutsumani Para 90.
 Dischem Tribunal Footnote 66.
 Babelegi Tribunal Para 98-103.
 Media Statement: New Competition Commissioner Doris Tshepe says she is Ready to Push Boundaries and be Innovative (2022) (Available at https://www.compcom.co.za/wp-content/uploads/2022/09/Media-Statement-on-the-final-day-of-the-competition-conference-1-September-2022_.pdf) 1.
 Media Statement: New Competition Commissioner Doris Tshepe says she is Ready to Push Boundaries and be Innovative (2022)(Available at https://www.compcom.co.za/wp-content/uploads/2022/09/Media-Statement-on-the-final-day-of-the-competition-conference-1-September-2022_.pdf) 1.