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.

Sha’ista Goga, March 2019

The draft Buyer Power regulations called for by the Competition Amendment Bill have been published, causing some consternation to businesses that may be affected. The regulations aim at protecting small and medium businesses and those owned by historically disadvantaged individuals from what is termed “unfair” prices and/or other trading conditions being imposed on them by buyers who are dominant firms. This means preventing large firms from imposing prices or trading terms that are too low or designed in a manner that prevents their smaller suppliers from sustainably growing and competing in the market. This may inadvertently lead to changes in the way that large companies in the six broadly specified sectors proposed for designation do business. These sectors are the private healthcare, food and grocery, financial and insurance services, apparel retail, and construction supply chains as well as online trading platforms.

The regulations and the amendments to the Competition Act themselves were met with much debate. The regulations, while attempting to better flesh out the meaning of the Act have been critiqued as not being specific enough. Even smaller suppliers who are the beneficiaries of the changes have also raised concerns about whether the regulations go far enough in defining the elements required to successfully bring about an abuse case.

Firstly, the standards and test outlined is vague. Taken at its broadest interpretation the amendments could arguably compel a large buyer to deal with smaller suppliers regardless of their relative price or value. While a larger company which has achieved scale may be able to sell at a lower price, under the regulations if this price is too low in relation to the cost structures faced by smaller companies it could be seen as unfair.  This is likely to increase compliance costs for firms who have a high share of the market.

One question about the practicalities of the regulations, is what it means for a price to be deemed “unfair”. The guidance given in the regulations include defining an “unfair price” as a price that inhibits an efficient firm in a designated class from operating sustainably and growing their business. While the regulations provide a list of factors that can be taken into consideration these are broad and may not provide firms with buyer power with a definitive guide to the extent to which they can safely purchase products that undercut smaller suppliers. Also, a price is deemed unfair if it is inferior relative to providers outside of the designated class without a reasonable rationale. However, this may also be complex for a supplier to assess. For example, while quality may be considered in developing a rationale it requires suppliers to be able to assess objectively whether the difference in price is reasonably related or proportionate to the identified differences in quality. This is no easy task. At the outset the regulations as they stand are likely to lead to long-running and costly cases as each point is litigated.

Secondly, unlike other parts of the Competition Act there is no need to demonstrate any adverse effect on competition or a need to weigh up the impact on suppliers against that on consumers or customers of the buyer. As dominant buyers are generally purchasing inputs that may affect the cost of products and thereby final prices to consumers, the ultimate effects of this legislation aimed at supporting the public interest may not always be in the interest of swathes of the public. Paying more to providers of inputs may inadvertently lead to higher consumer prices.   

Thirdly, it is unclear if industries suggested for “designation” are appropriate. Many of the industries that have been suggested for designation (such as supermarkets and construction) are made up of a group of large buyers, not all of which may individually meet the threshold of dominance, rather than one overwhelmingly dominant buyer. As such, it is not clear that the regulations will apply in some of the sectors that raise the most complaints from small suppliers. In addition, is of interest that some of the proposed industries are those that are already known to be subject to market failure and as such are regulated, for example, private healthcare and financial and insurance services. Others already are or have been subject to competition inquiries, in part due to supplier complaints. As such, it implies that the relevant regulators and policymakers are not empowered to or providing sufficient market conduct oversight or pro-active intervention in these sectors. The true question is whether designation of these industries for the purposes of the Competition Act is required, or whether tougher questions need to be asked of the regulators and whether more specific regulatory reform or market inquiry with concrete and implementable recommendations may be a more direct and nuanced means of addressing issues that are often very industry specific.

Many have an instinctive sympathy for small businesses which, given the concentrated nature of many industries in South Africa have little bargaining power against larger buyers. Large buyers, as testified by small business owners in the Parliamentary hearings, often seem to be hesitant or unwilling to even engage with smaller firms or those owned by historically disadvantaged individuals. However, due to market concentration alternative routes to market and alternative customers may not exist. As such, in many ways the provisions address the symptom (buyers that impose unfair prices) rather than the cause (market concentration that leads to buyer power). In industries such as private healthcare and insurance where there are third party payers, the competitive dynamics are further skewed and smaller or HDI businesses are often excluded from competing in the market entirely unless selected as a provider or benefiting from a government tender. The selection of favoured providers is often done in a non-transparent manner that favours corporate entities. For these companies the amendment and regulations may potentially provide some legal recourse.

Supporters of the regulations also may point to care taken to define exceptions and way in which the many areas in which factors that justify pricing differentials are elaborated on. For example, considerations such as quality, brand value and product characteristics may be used to provide a rationale for differing prices, though some might say that this provides some loopholes to buyers who can use phrases that can be subjectively interpreted such as “quality” to still bypass smaller businesses. This may have the effect of watering down what is a strong provision in the Act to a weaker provision in practice.

Creating a fertile environment for the growth of small and black businesses in this country is an imperative. However, a blunt tool may not always be the best solution, particularly when it is being used as a second-best alternative to suitable industry-specific regulation or in-depth engagement through evidence-based inquiry where specific measures are implemented to improve the workings of the market and their regulation.

 

Sha’ista Goga, November 2018

The rise of online retail internationally has raised an apocalyptic spectre of empty malls, dying city centres, local factory closures and rising unemployment.

It also evokes images of a de-personalised landscape in which electronic orders are processed at automated warehouses and boxes of goods on conveyor belts in China are shipped directly to mailboxes around the world. This, while the international tech giants that facilitate transactions, profit without paying income tax.

But the reality is that while e-commerce is changing the face of retail internationally, it has the potential to enhance consumer experiences and create organic opportunities if we correctly harness it. Appropriate policies for the digitalisation of business are urgently required to make sure the playing field is level and to ensure technological changes open up markets to entrepreneurs.

At present, online retail in SA is small, making up a mere 1% of total retail, while the most developed online markets such as the UK approach 20% of retail spend. This has been attributed to having densely populated markets of customers with fast internet access, credit cards and a willingness to pay extra for delivery.

By comparison, in SA we have a shopping mall culture, concerns over sharing card details online and delivery by an inefficient postal service.

However, local industry is innovating to expand the pool of potential customers. In response to low broadband penetration, companies are investing in mobile shopping apps. Small entrepreneurs are using social media platforms to build their brands and reach consumers. Retailers are integrating store payment cards into online shopping to expand the customer pool. Innovation in the payment space includes instant electronic fund transfers (EFTs) and options including cryptocurrency. Investment in data analytics is increasing.

Many local larger retail groups see omni-retailing or seamless integration of in-store and online experiences as core to their growth plans. Developments in websites are being combined with the digital transformation of other aspects of retail businesses (such as integrated inventory systems). For example, a store may allow customers to check stock of their size at their local store online before going in to try it on.

Online-only retailers are investing substantially and creating new employment. Entrepreneurs have created a plethora of companies that support payment, logistics and software, particularly in segments that service small, medium and micro-sized enterprises (SMMEs). Small businesses have also benefited as barriers to creating websites fall, while the potential to outsource specialised aspects such as payment systems and logistics have risen.

SA has been shielded from international competition by a combination of factors. From a customer perspective there is a disincentive to order from international firms due to weak local postal services, delays due to customs processes and duties that are variable and opaque at point of purchase.

From an international provider perspective, the cost of shipping, small market size, volatile exchange rate and high levels of theft make SA unattractive for direct entry thus far. However, that can and will change as other markets mature.

Entry by companies such as Amazon or Alibaba, which have immense scale, brand, supplier networks and data capabilities could change this balance and move the location of head office employment, taxation and manufacture offshore with repercussions for our tax, employment and local industry. In the absence of steps to inoculate us, these changes could decimate local industry.

SA has not developed into an e-commerce hub for supply to other countries in Africa. This is despite us having infrastructural advantages — ports, rail, and internationally competitive logistics. As such, it is important that the country focuses on smart proactive regulation to support the industry as has been done by countries such as China and Malaysia.

First, we need to protect local companies from unfair international competition. Ensuring that tax policy is set to ensure a level playing field is important, particularly in the face of income tax avoidance by large tech companies, and consumer tax avoidance by suppliers who try to avoid duties by under-invoicing.

The Treasury has led the way internationally in taxing intangible goods, but this needs to be extended. The UK has recently announced a 2% turnover tax on the largest tech companies to address income tax avoidance. It is also important to make tax collection more efficient, especially on large volumes of small value purchases, through digitalisation of tax collection.

Second, public infrastructure that impacts on e-commerce needs to be improved. While payment systems are working well, the Post Office and ineffective telecoms regulation are letting down the team. SA urgently needs cheaper, faster and more reliable data.

Third, policies need to be to put in place to promote use of e-commerce by SMMEs. Practical skills development in e-commerce entrepreneurship and simple information on the required processes and providers is essential to better equip SMMEs to access online opportunities. Investment in coding and science, technology, engineering and mathematics (STEM) skills is integral to the broader industry.

Fourth, proactive policies are needed to enhance outward-facing commerce. This can include incentives for e-commerce investment, and strategic investments in the value chain (as in China and Malaysia). OR Tambo International Airport or the Durban harbour can be developed to create hubs for African e-commerce, providing local industry with a platform for outward expansion. Warehouses for exports could be built, goods that are not entering the country could be expedited for onward travel and we would benefit from employment and investment effects of an e-commerce hub.

Fifth, a united regulatory and policy approach to e-commerce is required with the relevant government departments working in a unified manner to harness the benefits.

Change in retail is coming, and it is still early enough in the game that we can leapfrog rather than being left behind if we move quickly now.

This article was first published in the Business Day on 19 November 2019.