Covid overpricing: Watchdog takes a sledgehammer to a fly
Competition Tribunal panellist suggests ‘justice must be tempered with compassion’ as Competition Commission deals with the case of a small business making protective gear
The Competition Commission, which has now received more than 900 complaints of excessive pricing relating to coronavirus products like masks, says it’s determined to root out profiteering during the pandemic.
But the very first case involving Covid-19-related products, which was heard last week at the Competition Tribunal, which acts as an antitrust court, raised sharp questions over whether the commission is targeting small businesses as “easy wins”.
The commission charged Babelegi Workwear & Industrial Suppliers, a small family-run business in Rosslyn, Tshwane, with excessive pricing under the Competition Act. The commission wants the tribunal to issue the maximum fine it can – 10% of Babelegi’s annual turnover.
The claim is that Babelegi hiked the price of 76 boxes of dust masks (1,520 masks in all) during February by an average of 500%, before a single confirmed Covid-19 case had reached SA. In one case, the price was hiked by a whopping 888%.
Two of the 15 customers that bought the dust masks, used to protect factory workers against pollutants, complained to the commission about the new prices.
The hearing was held, virtually, last Friday.
In Babelegi’s defence, advocate Margaretha Engelbrecht said: “The first referral for excessive prices under Covid-19 was not ArcelorMittal or Sasol or some other apartheid behemoth. It is Babelegi … a firm you have never heard of in your life.”
Engelbrecht said that while it’s “easy to be outraged about high prices at this time”, outrage isn’t a legal test.
The issue, she argued, is that the commission is relying on the rules governing excessive pricing that applies to dominant firms that have more than 35% market share and are able to set prices since they have significant market power.
But is Babelegi, a small industrial clothing supplier, really a dominant market player able to appreciably control the dust mask market? Is this not a case of a state agency missing the point, by using a sledgehammer to swat a fly?
As Engelbrecht argued: “When Danie and Michelle van Niekerk sat in their little office in January, could they ever have expected that they would be considered a dominant firm and that the commission would come after them, demand [a fine] of 10% of turnover and possible criminal sanction?”
She said the law that makes excessive pricing illegal requires that the firm has a “substantial and persistent” ability to set very high prices, and an appreciable ability to act independently of the market. “Babelegi was not a dominant firm. It was not before the national disaster. It is definitely not one now,” she said.
In response, James Hodge, the commission’s chief economist, said the fact that Babelegi could hike prices so significantly was proof that the firm had gained “temporary market power” and could therefore be described as dominant.
Hodge argued that by hiking mask prices 500% since December, even though it hadn’t faced any cost increases, Babelegi was clearly “price gouging” – adding on a large profit margin when there is no increase in the price of the inputs.
In legal papers, the commission said: “Price increases applied in an emergency situation, such as the present crisis, have the most detrimental impact on poor individuals … who are already the most vulnerable.”
Engelbrecht responded that none of the 15 customers that had bought the masks were “poor”, but rather typical purchasers of industrial clothing.
Where’s the compassion?
Yet it is the size of the fine that the commission wants – 10% of Babelegi’s annual turnover – that has raised eyebrows. So severe, in fact, was the commission’s request that tribunal panellist Enver Daniels even asked the commission whether “justice must be tempered with compassion”.
But the commission’s attorney, Candice Slump, argued that the price hikes were “particularly egregious” since consumers were struggling to protect themselves from the virus – so the penalty “must be punitive” to act as a deterrent.
Other lawyers don’t agree. Heather Irvine, a lawyer for Bowmans, which isn’t involved in this case, says she is concerned that the commission is throwing the book at Babelegi. “I don’t think fining small companies in the middle of a deep recession and a global pandemic is a good idea,” she says.
The commission has received more than 900 complaints of excessive pricing related to the Covid-19 outbreak, many of which fall under new rules gazetted in March prohibiting price gouging during the state of disaster.
But Irvine says the commission will be wasting its resources if it investigates all those complaints.
“The main risk of this new provision is that the commission has been swamped with consumer complaints about temporary price increases, all of which now have to be investigated. It seems to me that the temporary shortages we experienced at the start of the lockdown have now generally been resolved by the market self-correcting,” she says.