Genna Robb, March 2019
Price discrimination is often good for the economy and consumers. It is what gives us discounts for students and retirees, reduced prices in return for larger purchases and cheap last-minute deals. Price discrimination allows firms to find buyers who would otherwise not have purchased their products at all. In fact, throughout the economy we observe different prices everywhere for what seems like the same thing, and this is mostly a good thing for consumers.
The recently passed Competition Amendment Bill and associated draft regulations extend the current prohibition on anti-competitive price discrimination by a dominant firm to include situations where the price discrimination impedes “the ability of small and medium businesses or firms controlled or owned by historically disadvantaged persons, to participate effectively”. It means it will not be necessary to show that competition or customers have been harmed in order for a dominant firm to be found to have contravened the Competition Act. The fact that a larger purchaser receives a lower price in return for ordering greater volumes will not be permitted as a defence. Dominant firms may also not avoid doing business with such firms as a way of circumventing the provision.
The regulations provide some helpful clarification in terms of how this will work in practice. They explain that the difference in price relative to other purchasers must causally impede participation by putting the firm at a competitive disadvantage that is not trivial or immaterial. They set out the types of evidence which should be used to demonstrate that “effective participation” has been impeded which include the extent of the price difference, the importance of the input as a proportion of costs and how the firm is performing relative to peers.
However, they do not fully deal with the concern that price discrimination is often good for customers and the economy. Imposing a uniform price will not necessarily result in all buyers receiving the low price and, in fact, where the seller enjoys a degree of market power, it can result in higher overall prices through removing the ability of buyers to negotiate discounts. Eliminating secret discounting can also make collusion more likely. Even though the new provisions only apply to dominant firms and not necessarily all firms in the market, there are a number of industries made up of a small number of firms which may be considered individually dominant. In this context, collusion is a real concern as illustrated in many of the cartel cases uncovered by the competition authorities.
Forcing uniform pricing can dampen the incentive for large firms to bargain aggressively for lower prices which they know will also be extended to their smaller competitors and small firms have less reason to work to improve their efficiency over time as they are protected from competition.
Thus, there is a trade-off between encouraging the growth of small firms and increasing prices paid for products by firms and consumers.
Practically speaking, it is also important to consider how potentially dominant sellers are to know whether or not they will contravene the Act, unless they have a very good understanding of their small customers’ cost structure and competitive position. The Amendment Bill and regulations therefore risk chilling efficient price discrimination which does not impede the ability of such firms to participate effectively.
While the aim of lowering barriers to entry and participation is an important one, the amended Competition Act and draft regulations are a blunt instrument for tackling these problems. In addition to the economic complexities described above, there are a range of barriers to entry and expansion facing small firms which need to be tackled, input pricing being only one.
While such firms may often be at a pricing disadvantage to their larger rivals, a blanket prohibition on price discrimination is fraught with complexity and risks doing more harm than good. Other ways to support participation include ensuring effective economic regulation in sectors with significant scale economies and network effects (such as telecommunications, energy and transport), using policy to lower barriers to entry throughout the economy and ensuring that development finance institutions and SOEs are incentivised to promote access and competition rather than stifle it.