In black and white: Media24’s case spells out the law on pricing for a host of new industries. Picture: 123RF/BLEND IMAGES
In black and white: Media24’s case spells out the law on pricing for a host of new industries. Picture: 123RF/BLEND IMAGES

Few areas in competition law are more prone to dogmatic disputation than predatory pricing, the practice whereby an incumbent company seeks to force a rival from the market through sustained loss-making low prices.

It is critical for a competition regime to get predatory pricing right as it intervenes in the very heart of the competitive process, whereby one company seeks to gain business from another by undercutting its prices. In a world of omnivorous tech giants and plucky entrants, the boundary where a dominant company’s discounting crosses into prohibited conduct should be clear. In the recent Media24 vs Competition Commission ruling, the Competition Appeal Court has drawn a clear line.

For a case that spells out the law on pricing for a host of new industries, Media24 vs Competition Commission carries the distinct whiff of printer’s ink. It concerned a battle between two small community newspapers in the Free State mining town of Welkom in the early to late 2000s. These humble events resulted in a case that ran for seven years and raised many knotty issues.

The Competition Commission argued that Media24’s Forum was unprofitable and only existed to eliminate a rival, Gold-Net News. Media24 disputed this allegation and argued that Forum was a legitimate commercial concern; although the title was unprofitable on a total cost basis, its revenues (and hence prices) exceeded its incremental costs. On this basis, the title made a contribution to Media24’s bottom line.

The court sent a clear message to dominant companies: if they price in a manner that does not increase incremental profits, they are at risk of being found to be predating

The key question for the law on predation is: how does one distinguish between low prices reflecting competition on the merits and prices that seek to stop the competitive process?

Classically, the approach has been to compare prices to a cost benchmark chosen to differentiate between profit-enhancing prices and those only explicable as attempts at anticompetitive exclusion. But the Competition Tribunal’s 2015 decision in this case followed a different tack. It elevated the intent of Media24 to a critical factor. The tribunal found that pricing below the high benchmark of average total costs was predatory due to an intention to predate on Media24’s part. But intent in this context is a slippery concept, as competing companies by definition intend to take business from one another. It is therefore unclear when that intent becomes anticompetitive.

The Competition Appeal Court unanimously rejected the tribunal’s approach.

The court confirmed that section 8(c) of the Competition Act sets a test in which exclusion and anticompetitive effect need to be proved objectively. There is no role for intent.

The court also rejected the requirement that companies set prices above average total costs. This is to be welcomed, as companies often have legitimate commercial reasons for not covering all allocated overheads, a component of average total costs. Multiproduct companies often price below average total costs and still make an incremental profit. And when assessing the commercial viability of a new product or service, a company compares the additional revenues of that product to the additional costs.

The average total costs standard imposed by the tribunal would have prevented dominant companies from introducing new products that would add incrementally to overall profits. Such an approach would also have prevented companies from utilising economies of scope, which are savings derived from having shared infrastructure servicing a portfolio of products. Companies would have been prohibited from passing on such savings through lower prices. An unnecessary price cushion would have been imposed.

The court sent a clear message to dominant companies: if they price in a manner that does not increase incremental profits, they are at risk of being found to be predating. Following the court’s decision, dominant companies are required to price above the average avoidable cost of their products. Prices have to cover all costs truly incremental to the production of that product, whether labelled variable, fixed or overhead.

It is a standard that enjoys wide support in international case law and economic literature. This aspect of the decision brings welcome clarity for dominant companies wishing to compete vigorously yet lawfully and for companies wishing to be protected from predation.

Of further importance is the court’s rejection of another aspect of the commission’s case. The commission had wished to include in the calculations not only costs directly incurred in producing the product, but also those hypothetical profits foregone by not pursuing a different business strategy. The court held that such opportunity costs by way of foregone profits are irrelevant for predation analysis. This decision, too, will aid effective compliance.

The court clarified how predation should be tested for under section 8(d)(iv), another part of the act cited by the commission, which imposes significant fines on respondent companies of up to 10% of total turnover. The decision clarified that predation cases brought under that provision should apply the more forgiving cost standards of marginal or average variable cost, using the conventional economic understanding of these terms. In the short run, marginal cost or average variable cost will be materially lower than average avoidable cost, which makes compliance with section 8(d)(iv) easier.

The threat of predatory pricing by dominant companies is a legitimate concern for the Competition Commission. The court’s ruling brings clarity for companies wishing to compete in a lawful manner. Equally importantly, it protects smaller companies, in venerable and cutting-edge industries alike, against pricing that seeks to exclude rather than engage in legitimate competition.

The authors are employees of Genesis Analytics, an economics consultancy firm retained by Media24 and Werksmans Attorneys for the duration of this matter.