A case for price gouging policy versus price control
Prosecuting price gouging using competition policy comes with constraints
To most readers the Competition Commission is a distant institution that deals with big bad corporations, either when they seek to merge or when they have agreed to fix prices. This image has been shattered in recent months. Since March the commission has apparently focused on complaints against small businesses, prosecuting individual pharmacies and distributors for charging “excessive” prices for hand sanitiser and face masks. The commission appears to have turned into the Covid-19 price police.
The consumer often welcomes — even demands — prosecution of disaster-related price gouging. Prices of food and medical supplies sometimes surge after hurricanes and earthquakes; natural disasters may lead to sharp increases in prices as supply chains are disrupted and panic buying ensues. The onset of the Covid-19 pandemic raised a similar concern, within government and among consumers, that sharp price increases for food, cleaning products and face masks were on the cards.
The hundreds of consumer complaints received by the authorities suggest that prices for certain essential items did increase substantially in at least a set of geographically isolated markets. It is a far cry from a general trend, though it is fair to note that the vigorous policy response to these complaints may well have been key to deterring others contemplating similar increases. We might never know. Even if a policy response to Covid-19 price gouging was necessary, one might ask why the task of enforcement fell on our competition authorities.
One explanation is that the commission is the authority best placed to launch and conclude legal proceedings within the short time horizon of Covid-19. In a government left structurally weak after the Zuma years, it may have been particularly important to rely on a functioning agency such as the commission. Another explanation is that the government believes, as a matter of principle, that competition policy should be concerned with price gouging during the Covid-19 crisis and that it should apply to businesses of all sizes.
SA competition law prohibits firms enjoying market power (due to limited competition) from charging prices in excess of benchmark competitive prices. Because estimating benchmark prices is difficult, excessive-pricing cases are rare, both here and abroad. Even so, do the excessive-pricing provisions offer a tool against Covid-19 price gouging?
In other countries, competition authorities have asked for emergency legislation to allow them to prosecute price gouging, limiting immediate prosecutions. Even the SA government had to publish special regulations to allow the Competition Commission to prosecute price gouging in relation to several “essential” consumer goods.
The Competition Tribunal, the court that judges competition cases, appears to take a different view. In its ruling against Babelegi, a face mask wholesaler, the tribunal held that the excessive-pricing provisions can be interpreted as a policy tool against price gouging, even without considering the new regulations.
Policies against price gouging aim to prevent firms using demand or supply shocks arising from an unforeseen event to charge higher prices. Excessive-pricing provisions seek to prevent powerful firms charging prices beyond what is merited by demand and supply forces. The policy tools are not mutually exclusive.
In the cases prosecuted thus far, including the case against Babelegi, the benchmark for the excessive-pricing complaint is similar to a price gouging benchmark. The firm under investigation experienced a large surge in demand, which subsided relatively quickly. The price increase merited by the temporary demand surge should be temporary too. Neither excessive-pricing nor price gouging investigations would view a higher price favourably if the higher price persisted.
In other cases, including those against Dis-Chem, higher prices may reflect persistently elevated demand or cost levels. While the supply of hand sanitiser and face masks has increased substantially (reducing costs and depressing prices), demand or cost levels may remain elevated for several food or medical items. When demand or cost pressures persist, prices in competitive markets rise. Reports of higher food price inflation may well provide the first systematic evidence. Excessive-pricing provisions in competition law view price responses to persistently elevated demand or cost pressures as competitive, implying a higher benchmark price than that of price gouging.
One only knows whether demand or cost pressures are transitory after the fact. Excessive-pricing cases must allow sufficient time for adjudication, whereas price gouging investigations can be quicker. Even if enforcement against price gouging is technically merited under competition law, as the tribunal holds, it is more complex and, hence, more time consuming than enforcing purpose-built price gouging policy.
The welfare costs of anticompetitive conduct do not merit immediate intervention, especially when demand and cost shocks persist. The Covid-19 disaster is not a discrete disaster event, such as an earthquake or hurricane, and introduces an array of different demand and cost shocks to the economy. The size and durability of the shocks must first be understood.
But should we apply the Competition Act to small firms? In its Babelegi decision the tribunal argued that “abnormal” market conditions imbue even small firms with temporary market power. It is fair to argue that market power is determined by the choices available to the firm’s customers, not by its size per se.
Yet assessment of market power must be case specific. The court should assess market power by studying the substitutes available to the firm under investigation. Merely asserting that market “abnormality” implies market power is perplexing (possibly due to time pressure). It would have been reasonable for the commission to argue for narrower markets during Covid-19, at least in cases involving smaller retailers. But merely asserting that market conditions are abnormal may not be merited if such abnormality requires understanding competition.
Prosecuting price gouging using competition policy is preferable to counterproductive price control policies. It is also possible, though possibly costly to agencies, to prosecute large and smaller firms for such price gouging. But it requires accepting the constraints of competition law. One is that speedy adjudication is undesirable and another that case-specific analysis is key. Combined, these ensure a sufficient time period to understand the nature of Covid-19 demand and cost pressures in any particular market.
• Prof Boshoff is director of the University of Stellenbosch Centre for Competition Law and Economics.