The South African Competition Commission recently referred a supplier of the main ingredient in bricks used in the construction of affordable housing to the Competition Tribunal for charging excessive prices.
The Commission said that the supplier of clinker ash for bricks, Afrimat and its two subsidiaries, Clinker and SA Block and Concrete, were referred to the Tribunal for abusing their dominance. However, the case is likely to be difficult to prove because of the complexities involved in the assessment of excessive pricing.
Engaging in cost ratio analyses
Excessive pricing cases are notoriously difficult to make, because there is so much wiggle room for arguments as to why the supplier sets its prices at the chosen level. According to the Competition Act, a dominant firm in a market may not charge a price that is greater than the economic value of the good concerned. The first difficult question is how that economic valued is determined. This might be done by engaging in cost ratio analyses, and by comparing the pricing trends and levels of the same or similar products in comparable markets, but where there is competition.
Only two excessive pricing cases in South Africa have been tried at the Competition Tribunal – the ArcelorMittal South Africa, case which was remitted back to the Tribunal by the Competition Appeal Court and eventually privately settled, and the Sasol polymers case, which was overturned on appeal.
In an excessive pricing case, suppliers could argue, for instance, that they have fairly exploited a market gap, and are being penalised for offering a successful product to the market for which there has been uptake. The Tribunal has to decide whether the firm is reaping the rewards of innovation and risk taking that justifies its price, or if it is exploiting consumers who have nowhere else to go for the same or substitutable product. It is up to the Tribunal to decide whether the profits made are the justifiable returns of a successful business or symptomatic of exploitation by a firm that knows that it is not susceptible to competition from new entry in its market.
In the clinker bricks case, it appears the geo-economic conditions are important, as consumers apparently cannot acquire the same or reasonably substitutable products from outside of their geographic region without incurring significant transport costs making the exercise uneconomical. According to the Commission, Afrimat is the only supplier of the ash ingredient for clinker bricks for 100 kilometres, having exclusive rights to three of Eskom’s ash dumps in the area. It may be argued that no one would import bricks from more than 100 km away, making them the only supplier in a very small market where there is no likelihood of new market entry to undermine the pricing system, and therefore abusing their dominant position.
Because of the difficulty in proving excessive pricing, this is an ambitious prosecution for the Commission, but it is not surprising. Although this case is most immediately relevant to a small economy and a small market, there is national interest in these matters as the Commission will be looking to set a precedent for successful excessive pricing prosecutions in the future.