COMPETITION LAW

2022 SEM 1
Tutor email: busisiwe.masango@webberwentzel.com
WEEK ONE
Judge Dennis Davis Elementary Toolkit notes:
 There is an inherent paradox within competition law- competition law is based on the
idea of a market, predicated on the notion that markets are the best allocator and
distributer of goods and services.
o The paradox is that at the same time competition law accepts that markets
themselves do not work pure, (idea of invisible hand)
 you cannot just assume that any market will work pure and give optimum outcome,
which is an outcome that ensures the allocation and distribution of goods and services
is done so at the optimum level
 what is optimum level?
o What would the cheapest price be for the most well produced item in terms of
the market.
 Because markets do not automatically arrive at this answers, comp law comes in to
correct and answer
 A firm that can work market power, i.e. one which can act autonomously from other
firms in the market and can do so and charge anything at all for its products. This
level of power comes from being the only manufacturer in a field, so can extract as
much money from consumers as they wish.
 Competition law in standard form is there to maximise consumer welfare, so that
consumers can obtain goods and services for the cheapest possible price and on the
most efficient basis for the product.
 Microsoft case: 25 years ago? European courts
o there were two components to the case that were interesting:
 A group server- a Microsoft program through which computers could
link and communicate in the office
 Media player- a software to allow you to play music on your computer.
o The media player produced by a range of competitors to Microsoft were
actually far superior to the ones Microsoft made, but any person who bought a
computer would have to put in the Microsoft ones, and couldn’t put media
players from competitors because Microsoft built it in such a way that the
software would not accept other players.
o This essentially means that Microsoft exploited the fact that it controlled 91%
of the market, and so could impose its will on the market and prevent the
consumer from getting better products
o Court held that this is abusing market power, and Microsoft could not do this.
 The competition act in SA takes into account a broad range of objectives, not just the
traditional ones of getting the best price for the best products, but it also covers
aspects of workers rights, and small businesses and historically disadvangated
businesses.
  Standard consumer approach: is consumer welfare
 SA approach: normative, goes beyond consumer welfare
Lecture 1: Objectives, Histories and Theories of Competition Law in SA
Global histories of Competition Law
Historical Origins
 Sherman Antitrust Act (USA 1890)
o Act prohibited agreements among firms to limit competition
o Purpose was to limit ‘combinations’ including ‘trusts’- large corporations
 Hence ‘antitrust’
o Even government was threatened
o Remains prevailing public culture of antitrust in US
 Harvard School: structure of the market determining conduct of a firm
 Chicago school: law should not intervene to protect small inefficient firms from larger
more efficient rivals
o Fading (at least within gov) of such concerns
o Rise and dominance of economic reasoning
o Relaxed approach to mergers and abuse- increased/continued attention to
cartels
 Rise and spread of global competition law
o National competition regimes
o Distinctive emergence of EU competition law
o Global networks
o Regional economic communities
Pre Chicago (according to Fox, 1987)
 In short, antitrust traditionally had two central concerns, the first was political distrust
of bigness and of fewness of competitors as well as a policy preference for diversity
and opportunity for the unestablished.
 The second was socioeconomic, especially as seen from the vantage point of the small
businessperson and consumer. Having an efficient market
 Antitrust set fair rules for the competitive game, what mattered was getting a fair shot
as an entrepreneur, and having choice and receiving a fair deal as a consumer.
Antitrust was not a tool for increasing aggregate national wealth (sometimes called or
equated with allocative efficiency)
 While a more efficient allocation of resources would probably result from competition
as compared with more direct government intervention or blatant laissez-faire,
improved resource allocation was never a norm for antitrust, nor a condition
precedent to antitrust enforcement.
 In order to get to the jury, neither the govt nor a private plaintiff was expected to show
that a particular enforcement action would achieve efficiency.
 What they had to show was that the competition process was being harmed.
Chicago (according to Fox)
  It is often said that extremists are necessary to move tradition a short step. This is
perhaps what baxter (appointed by Reagan to head anti trust and keep government out
of business) and the Chicago school have done
 Chicago school is about pure markets, and consumer welfare standards, more
concerwend about price, and not about market power and related dynamics.
 In their intellectual universe, antitrust is embodied in a reductionist paradigm:
antitrust concerns the functioning of markets; micro economics is the study of the
functioning of markets; therefore antitrust is microeconomics. The potential and
desired effect of markets is the efficient allocation of resources; therefore the sole
purpose of antitrust is to prevent inefficient allocation of resources
 Private firms can in theory under certain limited circumstances, misallocate resources
by obtaining or enhancing market power and artificially restraining output without
offsetting cost reductions; therefore, output reduction without offsetting cost savings
is the only possible antitrust harm.
Third Epoch of Competition Law?
 Pushback against Chicago school,
 Political Concern with size and dominance rising
 Concern with issues of concentration
 Why these rises?
o Rapid technological change (4IR)
o Massive economic and income inequalities
 Globally, scholars and political figures now discuss the overlap of competition and
democracy, which is a prominent issue
o SA is ahead of this curve with its public interest regime hard wired into the
competition act
o Thus poised to contribute to the global debate.

Objectives
 Consumer welfare as the primary goal of competition law
o When a market is controlled by a monopolist- that firm is unconstrained by
competition- it can reduce otput and increase prices, with no incentive to
innovate or strive for high quality goods/services
 SA Competition Act with a plurality of objectives (consumer welfare plus public
interest objectives)
o Thus far operative in merger area

Preamble of Competition Act: The People of SA recognise:

 That apartheid and other discriminatory laws and practices of the past resulted in
excessive concentrations of ownership and control within the natural economy by all
South Africans.
 That the economy must be open to greater ownership by a greater number of SAns
  That credible competition law, and effective structures to administer that law are
necessary for an efficient functioning economy
 That an efficient, competitive economic environment balancing the interests of
workers, owners and consumers and focused on development, will benefit all south
Africans.
 In order to;
o Provide all SAns with equal opportunity to participate fairly in the economy
o Achieve a more effective and efficient economy
o Provide markets in which consumers have access to and can freely select the
quality and variety of goods and services
o Create grater capability and an environment for SAns to compete effectively
in international markets
o Restrain particular trade practices which undermine a competitive economy
o Regulate the transfer of economic ownership in keeping with the public
interest
o Establish independent institutions to monitor economic competition; and give
effect to the international law obligations of the republic.
Purpose of Act (section 2)
 The purpose of this Act is to promote and maintain competition in the Republic in
order-
o (a) to promote the efficiency, adaptability and development of the economy;
o (b) to provide consumers with competitive prices and product choices;
o (c) to promote employment and advance the social and economic welfare of
South Africans;
o (d) to expand opportunities for South African participation in world markets
and recognise the role of foreign competition in the Republic;
o (e) to ensure that small and medium-sized enterprises have an equitable
opportunity to participate in the economy; and
o (f) to promote a greater spread of ownership, in particular to increase the
ownership stakes of historically disadvantaged persons.
Caveat to Objectives (Fox). Two consensus points in competition law
 Consensus point one: robust markets: we want our markets to be robust. We want
our business to be efficient, effective, lithe, inventive and adaptable to change. We
want an environment that will create incentives for business to strive the hardest they
can in these directions. If business successfully do so, they will deliver to buyers and
ultimate consumers what they need, want and are able to pay for, including the range
of choice they desire; entrepreneurs are likely to have an economic opportunity;
American business is likely to be competitive in the world; the economy is likely to
be strong and grow; and the people in general are likely to be better off.
 Consensus point two: we do not want to, nor could we if we desired, engineer the
results. The answer must lie in safeguarding an environment that creates the right
incentives, the right mis of business freedom and prohibitory rules and standards.
  At this point, consnensu ends. Experts and stakeholders are divided. On what do they
disagree? On perspective and on assumptions.
 On perspective, the big choice is between outcome orientation, on the one hand, and
concern for process as well as outcome, on the other.
o Do we value the process of rivalry, relatively open access, and contestability
of markets by entrepreneurs and firms without market power/
o Or should we limit antitrust condemnation to acts that probably lessen output?
 On assumptions: the big choice is between embracing or not embracing the free
market assumptions apparently favoured by a critical mass of current supreme court
justices
o Markets work well; the forced of competition or potential competition are
strong; business act in the interests of consumers; govtal (antitrust)
intervention is generally clumsy, inefficient and misinformed; and free
markets will almost always cure a market problem faster and better than
antitrust intervention.
Historical Development of SA Law: Early Competition legislation
 1923 Board of trade and Industries Act; Board’s 1951 report leading to..
 Regulation of monopolistic conditions Act 24 of 1955
o Addressed only monopolies
o Subject to executive oversight
 1975-1978: Mouton Commission and Report, leading to..
o Maintenance and promotion of competition Act 96 of 1979
 Recommendations to minister of trade and industry
 First merger control system in SA (in secret)
 David lewis as post apartheid chair of competition VBoard and then chair of
Competition Tribunal
 Act was one means by which high levels of concentration and entry barriers could be
addressed
 1997 dti Proposed Guidelines for competition policy
 Act (effective in 1999) formulated through NEDLAC: business, labour, and state
o Includes non efficiency considerations
o Competition authorities are not subject to executive oversight
o Developments: Corporate Leniency Policy; Criminalisation of cartel conduct
(2016); market enquiries (2013); private damages claims
Nationwide Poles Case para 81-90
 Q: why is there special treatment in the competition Act for price discrimination/
 A: (of tribunal): to protect SMEs
 Evidence (para 88):
o Preamble to Act
o Objects clause – s2(e)
o Explanatory memorandum
 A(of competition appeal court): no special treatment
2018 Amendments to the Competition Act
 Responding to concerns:
o For economic transformation in SA
o About the existing concentration of economic power in SA
 Some changes
o Effectively reversed the nationwide Poles Decision
 So special concern for SMEs under conditions of price discrimination
o More broadly, increased policy concern in th ACT
 With SMEs
 With HDIs (and firms)
o Added greater concern for buyer power
 Especially relevant to digital markets
o Added a market inquiry mechanism to the commission’s enforcemtn toolbox
 Acknowledged as most significant amendment to the Competition Act

Competition Law Explained

What is competition law?

 Competition law is underpinned by economic theory, and in the South African context, by
social objectives expressed in the Competition Act
 The law gives expression to these underlying economic theories and social objectives
 It is impossible to divorce the interpretation and application of the Competition Act from
certain fundamental principles of competition economics, which go to the heart of the goals
of competiton law.

Aims of competition law

Economic aims

 Competition law aims to safeguard the process of competition between firms. In a free
market economy firms act in their own self-interest by trying to make as much profit as
possible for their shareholders
 the process of rivalry (competition) between firms means that they have to innovate,
improve their offerings and supply new and better products at lower prices to win business
from one another
 This kind of rivalry promotes what is known as consumer welfare, which is generally
regarded as the primary goal of competition law
 Consumer welfare is a measure of benefits derived from the consumption of goods and
services, less the costs incurred in providing them. Consumer welfare increases with lower
prices and better quality products. It also increases with a greater variety of products, as
more consumers will then have products that more closely match their needs
 Consumer welfare is maximised when, as a result of competition, goods and services are
distributed (allocated) between consumers based on their ability to pay, and in the long-
term results in a situation where the price of a good or service equals its marginal cost,
which is the cost of producing one additional unit. This is called allocative efficiency
  Markets characterised by a lack of competition will typically result in fewer choices for
consumers, higher prices, poorer products or services, and a lack of innovation.
o For example, where a market is controlled by a monopolist (being the only firm
supplying a good or service in the market), that firm is unconstrained by
competition. It can reduce its output, increase its prices, and has no incentive to
spend money on innovation or offer high-quality products or good customer service
 Fundamental to the aims of competition law is the premise that competition between firms
is beneficial for society, and that the law should intrude in the free market when the
competitive process is stifled or distorted

Objects of the Competition Act

 On 1 September 1999, the Competition Act was enacted in South Africa. The preamble to
the Competition Act provides, among other things, that the Act has been enacted in
recognition of the fact that as a result of apartheid, South Africa’s economy is characterised
by excessive concentrations of ownership, which represent an impediment to the full and
free participation in the economy by all South Africans
 The preamble records that it is necessary to create and maintain a system of competition
law to ensure the efficient and equitable functioning of the South African economy. The
preamble therefore recognises the need for markets to function efficiently (that is, promote
consumer welfare by achieving allocative efficiency); and for them to be equitable, affirming
the need for structural economic reform of the South African economy
 The objects of the Competition Act are set out in section 2 of the Act. They are a mixture of
so-called ‘traditional’ competition policy objectives (such as enhancing consumer welfare),
and social objectives that are unique to South Africa
 Virtually all competition regimes around the world, including in South Africa under the
Competition Act, intervene in the free market to regulate practices that are harmful, or
potentially harmful, to competition. These practices typically include:
o Horizontal agreements that restrict competition: This is the most obvious and direct
way in which competing firms can harm competition, and involves two or more firms
agreeing not to compete in a market or markets. Competitors may, for example,
reach an agreement or understanding with each other about the prices they charge
consumers, their levels of production, the geographic or product markets into which
they sell their products or services, or the tenders for which they submit bids
o Vertical agreements that restrict competition: Agreements between firms in a
‘vertical’ relationship (such as a supplier and downstream retailer) may also restrict
competition. For example, a supplier and retailer may agree that the retailer is
obliged to sell the supplier’s products above a certain price, a practice known as
retail price maintenance
o Abuse of a dominant position: This refers to the direct exercise of a dominant firm’s
power in the absence of sufficiently effective competition. Firms are not held liable
for finding themselves in a position in which they are not adequately constrained by
competition, but they are prevented from abusing that position of strength, referred
to as market power, to exclude competitors or exploit consumers
o Mergers: A merger occurs where one or more firms acquire a form of control over
another firm or firms. In some cases, mergers may result in the combination of one
or more competitors, which would obviously eliminate any competition that might
 otherwise have taken place between the merging firms, thereby adversely affecting
competition in the relevant market

Practices controlled by the Competition Act

 Chapter 2 of the Act deals with ‘Prohibited Practices’. It deals with a number of practices on
the part of firms that are regarded as harmful to competition

Restrictive horizontal practices

 Section 4 of the Act regulates ‘restrictive horizontal practices’

 This concerns the conduct of firms that compete with one anther. Firms that compete with
one another operate at the same level of the market and are thus described as being in a
‘horizontal relationship’ to one another
 Section 4(1) of the Competition Act prohibits certain forms of agreements between
competitors. The concept of an agreement in section 4(1) is broad. An agreement need not
be written or even spoken. It can arise through a pattern of conduct
 Section 4(1) is divided into two subsections: sections 4(1)(a) and 4(1)(b
o section 4(1)(a) entails what is known as the rule of reason test
o Section 4(1)(b) contains specific per se prohibitions
 Section 4(1)(b) operates on the premise that conduct which can be ‘characterised’ as falling
within the ambit of section 4(1)(b) is necessarily conduct that cannot be excused, and the
firms in question are automatically subject to administrative penalties
 Section 4(1)(b) prohibits the following types of conduct between competitors:
o Direct or indirect price fixing: Price fixing occurs when competitors agree to sell at
the same prices or use a methodology to price their goods or services at the same
prices
o Market division: Market division occurs when competitors agree not to compete
with one another in certain markets
o Collusive tendering: Collusive tendering involves a practice where competitors
collude in submitting tenders for work
 Section 4(1)(a) of the Competition Act prohibits conduct by competitors that has the effect
of substantially lessening competition in a market, and where the effect of the anti-
competitive conduct cannot be outweighed by any technological or pro-competitive benefit
 In contrast to section 4(1)(b), which does not require any proof of the effects of the conduct
subject to that section, section 4(1)(a) requires the Commission (or a private party seeking to
prosecute conduct in terms of this section) to prove that the conduct has a substantial anti-
competitive effect. Even then, it is still open to firms to argue that the conduct is on balance
justifiable on the basis that pro-competitive benefits (such as the development of a new
innovative product) that result from the conduct, outweigh any proven anti-competitive
effect
 The differentiation between sections 4(1)(a) and (b) extends to penalties. In terms of section
59 of the Competition Act, where a firm is found to have infringed section 4(1)(b), the firm
may be liable to a penalty of up to 10% of its annual turnover. In contrast, firms that are
found to have infringed section 4(1)(a) do not face administrative penalties for first-time
infringements- this was changed in the 2018 amendment

Restrictive vertical practices

  Section 5 of the Competition Act regulates ‘restrictive vertical practices’ that are harmful to
competition
 The majority of goods consumed follow a process of manufacturing and distribution, often
moving through different manufacturers and distributors before being sold to
endconsumers. This process can be conceptualised as a vertical supply chain
 Vertical practices involve firms that operate in a vertical relationship at different points in a
supply chain
 Section 5(1) prohibits agreements between firms in a vertical relationship where the effect
of the agreement is a substantial lessening of competition in one or more of the markets in
which those firms operate
o Like section 4(1)(a) of the Competition Act, section 5(1) adopts a rule of reason
approach and allows firms to raise efficiency defences, namely that the practice
leads to a pro-competitive gain that outweighs any proven anticompetitive effect
and as such is not prohibited
 A common example of a vertical restriction are what are termed exclusive distribution
agreements. Exclusive distribution agreements often provide for exclusivity in respect of a
range of products in a particular territory
o For example, Firm A may appoint Firm B to distribute Firm A’s product range
exclusively, and within a particular province of South Africa only. This would have
the effect that Firm A could not use anyone but Firm B to distribute its products in a
particular area, and may also mean that Firm B may not distribute any products in
that area which compete with the products manufactured by Firm A.
o These types of agreements can be pro-competitive in the sense that the appointed
distributor (Firm B) will, knowing that it has exclusivity over a range of products, be
prepared to invest in an efficient and high-quality distribution system that benefits
consumers
o These agreements may, however, be anti-competitive where one of the firms has
market power. For example, if Firm B (the distributor) is the only distributor of those
types of products in a particular geographic region, and the cost of entering that
region and starting a competing distributor is prohibitive, then an exclusive
distribution agreement with Firm A may prevent Firm A’s competitors from
competing with Firm A in that market
 Section 5(2) contains a per se prohibition of a practice referred to as minimum resale price
maintenance (RPM)
o RPM is a practice where an upstream manufacturer or supplier forces a downstream
distributor or retailer to sell its goods above a certain predetermined minimum price
o For example, the manufacturer of a luxury perfume may insist that retailers do not
discount its product below a certain price point to ensure that the product retains a
premium brand status
o In South Africa, this has been determined to be irredeemably harmful to
competition

Abuse of a dominant position

 Certain firms have sufficient market power in some markets to further restrict or distort
competition
  In most jurisdictions with competition laws, it is recognised that dominant firms should be
prevented from engaging in this sort of conduct, often referred to as the abuse of a
dominant position or abuse of dominance
 It is important to appreciate, however, that reaching a dominant position in a market is not
in and of itself something that should be punished by competition authorities
 Indeed, a position of dominance or market power is often the reward at the end of fierce
competition between rivals. It is how firms behave when they are dominant that is the focus
of competition law
 The provisions of the Competition Act relating to abuses of a dominant position apply only to
dominant firms. Dominance is a necessary jurisdictional fact for the application of sections 8
and 9 of the Act
 Section 7 of the Competition Act prescribes the circumstances in which firms will be held to
be dominant:
o A firm with a market share of at least 45% of the relevant market is deemed to be
dominant. The presumption is irrebuttable
o A firm with a share of the relevant market of at least 35% but less than 45% is
presumed to be dominant unless that firm is able to discharge the onus on it to
prove that it does not have market power
o A firm with a market share of less than 35% of the relevant market will not be
dominant unless the Commission or a private complainant can prove that the firm
has market power
 The starting point in determining whether a firm has engaged in conduct prohibited by
section 8 of the Competition Act involves identifying the relevant market. From there, it is
necessary to determine whether the firm in question falls within the thresholds in section 7
described above such that it is dominant
 Sections 8 and 9 of the Competition Act prohibit dominant firms from engaging in certain
types of conduct
 Conceptually one may divide the conduct proscribed by these sections into two categories:
o 1. pricing abuses and;
o 2. non-pricing abuses
 Pricing abuses: Pricing abuses entail, for example, conduct referred to as excessive pricing
and predatory pricing. In the case of excessive pricing, a dominant firm can, by virtue of its
dominance in a market, charge consumers excessive prices for goods or services. In the case
of predatory pricing, a dominant firm may adopt a long-term strategy of pricing goods below
cost to force its rivals out of the market (who are unable to compete without incurring
losses) only to raise prices to monopoly levels when the competition has been eliminated. In
some cases, it may also be unlawful for a dominant firm to discriminate between its
customers on the basis of pricing
 Non-pricing abuses: Examples of non-pricing abuses include:
o a dominant firm refusing to allow a competitor access to an essential facility without
which the competitor will be unable to compete with the dominant firm;
o refusing to supply a competitor when it is feasible for a dominant firm to do so; or
o tying the sale of one product to the purchase of another product
Mergers

 Chapter 3 of the Competition Act regulates mergers

  A merger occurs when a firm or firms acquires control over a part or the whole of the
business of another firm or firms
 Central to the concept of a merger is the concept of control
o A change of control can arise when one firm acquires the shares or assets of another
firm
o It can also arise in other circumstances, for example when one firm acquires the
ability to materially influence the policy of another firm
 The Competition Act establishes a framework for notification of transactions that constitute
mergers and which meet certain thresholds
 Where the combined turnover or asset value of the acquiring firm (or firms) and that of the
target firm (or firms) meets these thresholds, then it is obligatory for the parties to the
transaction to notify it to the Commission, and in some cases to seek the approval of both
the Commission and the Tribunal
 The Commission will then investigate the transaction to ascertain whether it is likely to
substantially lessen or prevent competition in a market or markets, and if so whether it
should be prohibited, or conditions should be imposed to ameliorate any anti-competitive
effects
 the thresholds serve a two-fold purpose:
o 1. To filter out mergers that are unlikely to have an appreciable effect on
competition;
o 2. To set out ‘bright lines’ for firms, enabling them to assess when a transaction
should be notified to the Commission
 Merger control is one of the most important areas of competition law. This is because
mergers are the lifeblood of commercial activity in free market economies
 Mergers form a vital part of another competitive and disciplining market mechanism, which
is the market for corporate control. In short, company managements that do not perform
well are ultimately subject to the discipline that those firms may be acquired, and the
management typically replaced by the acquiring firm
 It is essential that mergers are allowed to continue to perform this vital role in incentivising
efficient and effective management (competition for corporate control), while taking into
consideration any impact on competition in the markets for goods and services, which are
the focus of competition law
 The majority of transactions that qualify as mergers, and which meet the thresholds for
notification, have a neutral effect on competition. In some cases, however, parties in an
already concentrated market may seek to merge with one another, reducing competition in
the relevant market, and increasing the likelihood that, post-merger, the market will not
function competitively. The goal of merger control is to interfere in these cases only, in order
to prevent anti-competitive outcomes

COMPETITION THEORY

Supply and demand

 The principles of supply and demand are fundamental to free market capitalism
 A supply relationship refers to the willingness of all producers to supply goods or services at
various prices
o Producers will normally only supply goods if prices exceed their costs of supply
(otherwise they would lose money on every sale)
 o Typically, the cheapest or most efficient producers will first enter production, and
only if there is a need to produce more will the less efficient (higher cost) producers
also start to supply
o a supply relationship is typically said to be as an increased upwards sloping supply is
made available only at higher prices
 A demand relationship refers to the willingness of customers to buy goods or services
o Normally, the customers who want to buy a good the most, and who will buy the
first units, will be willing to pay the most for that good. Other customers will be
willing to pay only lower prices
o Accordingly, a demand relationship, which shows how much all customers would be
willing to buy, is typically said to be downwards sloping as increased quantities of
goods are demanded only if the price falls
 Insert supply and demand curve here (remember supply curves upwards and demand curves
downwards with quantity and price on the x and y axes.)
 If we assume that the competitive price for a widget is R100, then it is evident that some
consumers, such as Consumer B, are paying less for the product than they would have been
prepared to pay. This is referred to as consumer surplus
 The shaded area below the consumer surplus is referred to as producer surplus. It shows
that the producer is selling widgets for more than it costs to produce them

Price elasticity

 Consumer demand can be or elastic or inelastic. The price elasticity refers to the extent to
which the demand for goods or services increases or decreases as prices for those same
goods or services rise or fall
 For example, If the price of the latest smartphone on the market were to increase, one may
observe that a significant number of consumers are no longer willing or able to buy it, opting
to retain their existing model instead. Demand for discretionary purchases, such as the latest
smartphone, is often likely to be elastic
o In markets with elastic demand, even a monopoly supplier will be disciplined by
customers who will simply stop purchasing the good in question if prices rise
significantly
 By contrast, demand for essential goods, such as electricity or water, is likely to be less
responsive to changes in price. Even if the price of water became more expensive, most
households would continue to use a similar amount of water
o In markets characterised by inelastic demand, a monopolist could profitably raise
prices far above cost without losing a significant number of customers. In these
cases, it is only if sufficient alternative suppliers exist that prices will be disciplined.
 Figure 1.2 illustrates the differences between inelastic and elastic demand curves
 the inelastic demand curve is steeply sloping, which means that customers would only
respond with a small change in the quantity of a given product (for example, water) that was
purchased, even for a very large change in relative prices
 The elastic demand curve, on the other hand, is much flatter, which means that customers
would make a big change in the quantity purchased in response to a relatively small change
in price
  The concept of cross-elasticity measures how much the demand for one product is
influenced by changes in the price of another product. One example that is frequently used
to illustrate this is the cross-elasticity of demand between coffee and tea
o During 1995, excessive frost in a coffee-growing region in Brazil dramatically reduced
the supply of coffee beans, leading to an increase in the price of coffee. Instead of
switching to tea, consumers elected to continue purchasing coffee, albeit at a higher
price. This demonstrated that there was little cross-elasticity of demand between
tea and coffee, and that consumers do not regard them as substitutes for one
another
o By contrast, particularly in bars frequented by students, if there are two brands of
beer on offer, with one brand being slightly more expensive, most students would
readily switch to buy more of the cheaper brand of beer. This demonstrates a high
cross-elasticity of demand between the two brands of beer – consumers regard
these as close substitutes for one another

Economies of scale and scope

 The aggregate supply relationship for all firms typically slopes upwards, and less efficient
(higher cost) producers will start to supply only at higher prices
 However, an individual firm may be able to supply incremental units more and more
cheaply, particularly if production depends on a big upfront investment in machinery, which
can then be used to produce more and more output. This phenomenon is known as
‘economies of scale’
 Economies of scale arise where the average cost of producing a good or rendering a service
falls as more of that good is produced or more services are rendered
o For example, the average cost for producing 1 000 widgets may cost a firm less than
the average cost for producing 10 widgets because when the firm buys raw
materials used to produce widgets, it is more cost-effective to do so in bulk. Another
example is software, where initial development may involve a great deal of research
and development (R&D) cost. Once a software product has been developed,
however, it costs very little to sell and distribute each additional copy of the
software to new users
 Economies of scope arise where it is more cost-effective for a firm to produce different
products together as opposed to individually
o For example, it may be more cost-effective for a firm producing widgets to produce
sprockets at the same time because, produced separately, these products would
cost more than if produced in the same factory.

Perfect competition

 The notion of perfect competition is a theoretical construct and it assumes the following
conditions:
o There are a large number of buyers and sellers
o The goods are homogeneous (they have same qualities)
o All buyers and sellers have perfect information (the market is transparent)
o There are no barriers to entry whatsoever, enabling sellers to enter, expand,
contract and exit the market as they please
 Under conditions of perfect competition, sellers are price takers and have no price-setting
power, but rather have to accept whatever price the market dictates
  As sellers are willing to produce at any price above their costs of supplying one additional
unit, they will expand production until this point is reached
 As a result, the prices of goods are driven down to the marginal cost of producing one extra
unit
 For example, that it costs R1 000 to produce 10 bags of cement and R1 100 to produce 11
bags. The marginal cost of producing the eleventh bag is R100. The producer of cement will
thus always be able to generate a profit if it is able to sell the product above its marginal
cost.
 The supply curve is now a horizontal line, showing that sellers are willing to supply each
additional unit of cement at a fixed price of R100
 The demand curve slopes downwards, which means that some consumers would be willing
to pay more than R100, while some would only be willing to pay less
 Under perfect competition, sellers would supply cement at exactly R100, and all customers
willing to pay at least R100 would buy a bag of cement at R100
 Those customers who were willing to pay more, for example, R120, still bought the cement
for R100, but then retained ‘consumer surplus’, of the difference (R20)
 The quantity of cement sold and bought is determined by the intersection of the supply
curve and the demand curve

Allocative efficiency

 In a perfectly competitive market, sellers will sell their products at their marginal cost,
leading to what is termed allocative efficiency
o allocative efficiency arises when buyers are able to purchase goods and services at
prices that equal the costs associated with producing those goods or rendering
those services
 The important thing about marginal cost is that it accounts for all costs associated with
producing the product, including the opportunity cost of investing funds into producing the
product as opposed to employing that capital elsewhere to generate a profit. In a perfectly
competitive market, sellers earn a normal rate of profit that is enough to keep them in
business

Productive efficiency

 Perfectly competitive markets also give rise to what is known as productive efficiency
o Productive efficiency is important in making the quantity of goods demanded, with
the least possible cost of inputs
 Firms that have the lowest costs (and thus can offer the cheapest prices) are those that
actively compete with rivals
 Firms that compete with one another are forced to find ways to reduce their production
costs so that they can maintain profitable margins in the face of price competition
 Over the long run, in a perfectly competitive market, producers will have to reduce their
production costs as much as possible to earn any profit, and an equilibrium will be reached
when the price of a good equals the average cost of producing it

Dynamic efficiency

 The effects of maintaining the appropriate incentives for investment in innovation and new
product developments can be far more important than short-run productive or allocative
efficiencies
  As a general proposition producers will tend to innovate when they have to compete with
rivals for customers
o (High-technology markets are a good example: Apple and Samsung have engaged in
fierce rivalry over innovations in smartphones and tablets to win over new
customers)
 The innovation that is borne out of rivalry between firms is referred to as dynamic efficiency

Monopoly and oligopoly

 A monopoly is the antithesis of perfect competition

 It describes a situation where there is only one seller in a market. In this case, the
monopolist will clearly have some pricing power
 Monopolists are able to earn monopoly rent (excessive profits) by virtue of the fact that they
do not have any competition
 Because they have no competition, monopolists do not have an adequate incentive to
engage in efficient levels of innovation, which they would do if they faced competition
 They can dictate prices to consumers who have no choice but to consume the products or
services of the monopolist
 In a monopoly or oligopoly situation, sellers have market power, and are able to set prices
above their marginal costs, in an attempt to maximise profits
o Strictly speaking, sellers set prices so that the marginal revenues from selling one
extra unit match their marginal costs from producing that one extra unit
 At this higher price a much smaller number of consumers are willing to purchase a unit of
cement (Quantity, monopoly, instead of Quantity, competition). Because prices are higher,
the consumer surplus (which is the difference between what consumers were willing to pay,
and what they have actually paid), is also lower, the smaller triangle. For the units that have
been sold, this consumer surplus has been completely transferred to the monopoly
producer, as producer surplus (the difference between the price (R120), and the cost of
production (R100))
 However, critically, for those units that are no longer sold, for the customers that no longer
purchase any unit, there is neither consumer nor producer surplus. There is simply a
deadweight loss – the darker triangle. This is the consumer welfare that would have been
achieved under perfect competition, but that simply doesn’t exist under monopoly. No one
benefits from these sales that simply don’t take place
 An oligopolistic market or oligopoly is a market between the extremes of perfect
competition and monopoly in which only a few firms are present Oligopolistic markets are
described as concentrated because market power is concentrated in the hands of a small
number of firms
 Because there are a small number of competitors in oligopolistic markets, it is easier for
them to collude and agree not to compete vigorously, even tacitly
 Even without collusion, a small number of firms may act strategically to anticipate one
another’s actions when setting prices or introducing new products so as to avoid aggressive
competition
 For this reason, competition authorities are concerned about mergers between competitors
in concentrated markets where the market becomes even more concentrated as a result of a
merger, making collusion more likely
Market power

 Market power refers to the ability that a firm may have to act independently of the normal
constraints that would exist in a competitive market, namely the discipline exerted by
competitors and customers
 Typically the benchmark for much of the analysis which takes place under competition law is
a notional competitive situation. Because perfect competition is seldom observed, it is
always necessary to apply some threshold, such that a firm with market power is
significantly, or substantially, less constrained than a competitive firm would have been

Market definition

 Market definition is a tool used to identify and define the boundaries of competition
between firms
o Purpose of defining the markets is to establish the correct framework for assessing
the competition constraints on those firms that operate in the market. In particular,
it facilitates the assessment of whether a firm possesses market power
o It is necessary to define the market when applying the provisions of the Competition
Act regulating mergers, abuses of a dominant position, and prohibited vertical
restrictions of competition
 First step in the process of defining a market entails a consideration of the stage of the
supply chain relevant to the inquiry - this is termed the functional dimension of the market
o For example, a dairy farmer (upstream) and a supermarket (downstream) are active
in different markets because they operate at different functional levels of the supply
chain
 Having identified the functional levels of the market, it is then necessary to consider two key
dimensions of that market:
o . A product dimension: What are the products that compete sufficiently closely with
one another? For example, milk and beer are not competing products as most
consumers will not regard them as subsitutes for one another
o Geographic dimension: What are the products that, because of their geographic
availability, compete sufficiently closely with one another? For example, milk
produced in Joburg might compete with milk produced in Pretoria, although neigher
product may compete with milk produced in Cape Town given the time and cost
associated with transporting the product between these locations
 The degree of subsitutability between products or services is at the heart of the process of
defining a market
 Kemp and Sutherland explain market definition with reference to substitutability as: “to
identify in a systematic way all of those firms that constrain the price at which the product
under investigation is sold. This will include all firms that supply a product sufficiently
substitutable to constrain the pricing of the product under investigation (product market),
that are located in a region close enough to constrain the pricing of the product under
investigation (geographic market)”
 When consumers regard goods or services as being substitutes for one another (consumers
are willing and able to switch between goods or services) then those goods or services fall
within the same market
o Products that are regarded by consumers as being substitutes for one another will
act as contraints on each other
 o Producers of those products will be constrained to increase the price of their
product for fear that it may lead to consumers switching to a substitute product

How does one define markets?

Demand-side substitution and the SSNIP test

 The analytical framework commonly used to define markets is described in international

guidlines as the SNNIP test
 SSNIP stands for ‘Small but significant Non-transitory Increase in Price’
 In terms of the SSNIP test a relevant market comprises the set of goods or services over
which a hypothetical monopolist would be able to profitably and permanently raise prices,
by a small but significant amount, typically to be between 5% and 10%
 The process of defining a relevant market under the SSNIP test begins by considering one or
more of the narrow candidate markets typically centred around one or more of the products
or services of the firm or firms in question (product dimension)
 A similar exercise is undertaken in the geographic dimension, analogously starting with a
focus on the geographic areas of operation of the firm or firms in question
 The question that must be answered is whether a hypothetical monopolist, controlling all of
the products or services in the candidate market, would be able to impose a small, but
significant, nontransitory (that is, permanent) increase in price in the order of 5% to 10% (a
SSNIP), without consumers switching to substitute competing products, in sufficient
numbers to render the price rise unprofitable. This is a direct (albeit hypothetical) test for
whether a monopolist over such a set of products has market power
 If the hypothetical monopolist faces competitive constraints in the form of substitutes lying
outside the candidate market (either through substitute products or competition from a
different geographic area) then it would lose sales to these substitutes in sufficient numbers
to render the price increase posited by the SSNIP test unprofitable
o This would then indicate that the market should be widened to include products or
geographic areas previously outside the candidate market, and to which the
switching was occurring
o The test is then repeated iteratively until a price increase would actually be
profitable for the hypothetical monopolist, at which point the products and
geographic areas within the candidate market will have been found to be a relevant
market
 It is not necessary that all or even a majority of customers switch in response to a price
increase. Rather, the focus of the SSNIP test is on marginal consumers who are the most
likely to switch in the event of a price rise
o It is sufficient if enough demand switches so that the profit lost, due to the reduced
volume of sales, outweighs the extra margin gained on retained sales due to the
price increase. Even if the majority of customers would not switch in response to a
SSNIP, the market might nonetheless need to be broadened if the value of sales
represented by marginal customers (that is, those who would switch) is sufficiently
significant
o The SSNIP test therefore tests demand-side substitution – the extent to which
consumers switch between substitute products
 In practice it is rarely the case that the SNNIP test can be implemented as a formally
calculated test
o It is often impossible to collect sufficient data to do so
 o However, although the test is specified in rather formal terms, its value lies in the
conceptual framework that it provides for market analysis: in particular, it is valuable
for the focus that it gives to identifiying the strength and sources of the contraints
on product pricing, and to evaluate evidence that sheds light on the effectiveness of
these constraints.

The ‘cellophane fallacy’

 The SNNIP test needs to be applied with caution so as to avoid incorrect conclusions
 In an abuse of dominance case, however, the nature of the inquiry is different: the very
investigation is centred around the possibility that the allegedly dominant firm has already
abused some degree of market power
 Competition authorities are therefore concerned about what has happened already to raise
prices. In this case, market definition must start from the benchmark of normal competition,
and the SSNIP test must start from the competitive price, and not from artificially high prices
that might already have been observed
 A dominant firm, in extremis a monopolist, will sell its goods or services at inflated prices,
which are the highest possible prices that it can extract from consumers
o Any increase of this price could cause consumers to consider purchasing other
products that they might never have considered purchasing if the price of the good
in question had been at normal competitive levels
o If a SSNIP test is applied in these circumstances, and starting from the observed
inflated prices, the test might falsely identify products outside the market as
substitutes, even though these products would at no point have been significant
constraints to any competitive producers at normal price levels
 This issue has been termed the cellophane fallacy after the case of United States v El du Pont
de Nemours and Co in which the United States Supreme Court committed this error
 Cellophane is a plastic wrapping material produced by DuPont. DuPont had restricted the
production of cellophane by the enforcement of numerous patents. DuPont was then sued
under the Sherman Antitrust Act for monopolisation of the cellophane market. In this case,
the Supreme Court agreed with DuPont’s argument that (when starting from the
monopolistic prices charged by DuPont), customers would consider switching to many other
materials, if there were a further increase in the price of cellophane, even beyond the pre-
existing monopolistic levels
 The error was challenged in an academic article, and is now widely acknowledged
 US antitrust academic and appeal court judge Richard Posner commented on the cellophane
fallacy as follows: “Reasonable interchangeability at the current price but not at a
competitive price level, far from demonstrating the absence of monolopy power, might well
be a symptom of that power; this elementary point was completely overlooked by the court

Supply-side substitution

 Supply-side substitution is relevant in the overall assessement of the boundaries of a market

 Supply-side substitution refers to the ability of suppliers to switch production in response to
an increase in the price of a product, and to market that product for sale in the short term,
 without incurring substantial cost or risk (think alcoholic beverage companies switching to
supply sanitisers during COVID-19)
 For example, if Firm A was to increase the price of its product range (cardboard), it may be
relevant to the definition of the market if Firm B was able to quickly switch production away
from its usual product range (paper), and begin producing cardboard for sale without
incurring significant additional costs in doing so. This is because if Firm B switched to
supplying paper, it would operate as a competitive constraint on Firm A
 Market definition a recap: in summary:
o Market deifintion is the firststep in a competitive assessment in most competition
cases, particularly in abuse of dominance cases and mergers
o Is a means of delineating the boudnaries of competition between firms
o Has a product dimension and a geographic dimension
o Is typically arrived at by assessing demand substitution through the application of
the SSNIP test and other forms of available evidence discussed above
o May entail considering the extent to which supply-side substitution can occur; and
o Will provide the framework within which the market power of a firm can be
assessed.

Market power

Essential characteristics of market power

 The concept of market power is of particular relevance in merger cases and in cases
involving abuses of a dominant position because the Competition Act contains a legal
threshold for ‘dominance’ based on the market share of firms in relevant markets.
 Whether or not a firm is dominant will in turn determine whether the provisions of s8 and s9
of the Act apply to it, and accordingly whether or not it is prohibited from engaging in
certain types of conduct and can be punished for contravening those sections
 When a firm has the ability to act appreciably independently of its competitors, it is said to
have market power
 In terms of section 1 of the Competition Act market power means: “the power of a firm to
control prices, or to exclude competition or to behave to an appreciable extent
independently of its competitors, customers or suppliers”
 This is a broad definition, encompassing the notion that a firm may have market power if it
can ‘control prices’, ‘exclude competition’ or act ‘independently’ in the market
o Arguably, where a firm can control prices or exclude rivals it necessarily acts
‘independently’. This is because it would not be able to control prices or exclude
rivals if it faced competitive constraints on its behaviour
o It is generally accepted that a firm demonstrates market power by being able to
profitably raise prices above a competitive level

Measuring market power

 Section 7 of the Competition Act employs market shares as a proxy for determining
dominance, and thus market power
o provides that firms are conclusively presumed to be dominant (and thus have
market power) if they have a share of the market that equals or exceeds 45%
 Market shares are, however, arguably a crude proxy for assessing whether a firm has
market power. In Europe, for example, the European Commission considers a firm’s market
 shares as a ‘first step’ in determining whether it has market power, and considers market
shares in the context of the conditions of the market.

WEEK 3: RESTRCICTIVE HORIZONTAL PRACTICES (s4)

 Section 4 of the Competition Act regulates ‘restrictive horizontal practices’ and is concerned
with the relationship between competitor firms or firms that operate at the same level of
the supply chain
 ‘Competitor’ is not defined in the Act, but firms are generally regarded as competitors ‘… if
they compete in the same market in respect of the same or interchangeable or substitutable
goods or services’
 Assumes the construction of the market and thus, the concept of a market definition is an
important preliminary step
 however, ‘competitor’ is understood to include actual and potential competitors. Potential
competitors are competitors that have the necessary means to enter the relevant market
within a relatively short period of time (typically between one and five years, depending on
the industry)
 s4(1): an agreement between or concerted practice by, firms, or a decision by an association
of firms, is prohibited if it is between parties in a horizontal relationship and if-
o (a) it has the effect of substantially preventing or lessening competition in a market,
unless a party to the agreement, concerted practice, or decision can prove that any
technological, efficiency or other pro-competitive, gain resulting from it outweighs
that effect; or
o (b) it involves any of the following restrictive horizontal practices:
 Directly or indirectly fixing a purchase or selling price or any other trading
condition
 Dividing markets by allocating customers, suppliers, territories, or specific
types of goods or services or
 Collusive tendering.
 N.B. in s4 firms can include individuals as well

Interpretation of section 4

 Agreement’ includes a contract, arrangement or understanding, regardless of whether it is

legally enforceable
o it includes explicit formal, written and verbal agreements that can be concluded in a
myriad of ways such as, for example, by email, SMS or telephone
o Agreements can also be achieved by any other more implicit means including the so-
called ‘gentleman’s agreement’, or even a wink and a nod which leads another to
believe that they have agreed to act in a particular way
 ‘Concerted practice’ is defined as co-operative or co-ordinated conduct between firms,
achieved through direct or indirect contact, that replaces independent action, but which
does not amount to an agreement
o This phrase captures a category of conduct broader than an agreement or
understanding, and may include any ‘scheme between firms designed to eliminate
the uncertainty about their future market conduct’
 ‘decision by an association of firms’ is not defined, but should be understood to refer to a
body that promotes the interests of a number of firms, like trade and industry associations
or professional bodies
 o By including this provision, the legislature acknowledges that these associations or
bodies, despite having entirely legitimate aims and potentially yielding pro-
competitive benefits, may be used as platforms to establish and enforce cartels
 ‘goods or services’ include ‘any other goods or services that are reasonably capable of being
substituted for them, taking into account ordinary commercial practice and geographical,
technical and temporal constraints’

Important aspects of section 4

 ‘agreements’ between, or ‘concerted practices’ engaged in by firms in a parent/subsidiary

relationship or between firms that are within a ‘single economic entity’ are excluded from
consideration under section 4 (under the single economic entity doctrine two firms are so
closely related to one another that they are not competitors, and the law should not treat
them as such)
o So these can do price fixing, collusion etc
 an ‘agreement’ to engage in a restrictive horizontal practice in terms of section 4(1)(b) is
presumed to exist between two or more firms if any one of those firms owns a significant
interest in the other, or they have at least one director or substantial shareholder in
common and any combination of those firms engages in that restrictive horizontal practice
 a complaint in respect of a prohibited practice may not be initiated more than three years
 after the practice has ceased. (N.B. Pickford case is authority that the tribunal may condone
late complaints if they have prescribed ) The provisions of this section (contained in section
67(1) of the Act) are analogous to provisions under the Prescription Act or similar provisions
in other statutes which limit the time within which actions can be instituted against certain
respondents
o In Pioneer the Competition Tribunal (Tribunal) established that: to the extent that a
firm seeks to rely on prescription (in terms of section 67(1)), it is required to raise
the special plea; for a firm to succeed in claiming prescription, it is required to allege
and prove, on a balance of probabilities, that the conduct complained of ceased
more than three years ago and to discharge the onus, a firm is required to show that
it actively and publicly distanced itself from the cartel conduct and made it known to
the other cartel participants that it had done so
o In Leonard, the Tribunal held that in applying section 67(1), one must not confuse
the ‘consequences’ of a practice with the ‘practice’ itself. What needs to have
ceased is the practice, not its consequences. And ‘practice’ means ‘the conduct that
gives rise to that practice’
o a complaint only becomes time-barred three years after the last instance in which
the parties had acted in accordance with such an overarching understanding
between them, rather than from the date on which the agreement was reached
(Vindex case)

Tribunal Handbook (2021) at 242:

 if the contravention is alleged (by either private complainant or the commission) to be under
s4(1)(a) the respondent firm must show that the agreement result sin technological,
efficiency and or any other pro-competitive gains that outweighs the anti-competitive effects
of the agreement. This is commonly referred to as the efficiency defence:
o basically, once the Commission ahs established a prima facie case that an agreement
is likely to lead to adverse effects on competition, the burden of proof then shifts to
 the respondent firm to rebut the Commission’s case by putting up the efficiency
defence.
 However if the alleged contravention is under s4(1)(b) no efficiency defence is available to
the respondent. This interpretation has been consistently followed by the tribunal and
confirmed by the CAC. The specific types of collusive conduct listed in s4(1)(b) are:
o Price fixing
o Market division/allocation; and
o Collusive tendering, commonly referred to as bid-rigging.
 These contraventions are viewed to be the most egregious infractions in competition law
and are presumed to distort competition in any market.

‘Rule of reason’ prohibitions

 All other horizontal relationships that are not cartel conduct may be assessed in terms of
section 4(1)(a), under the rule of reason analysis
 A contravention under section 4(1) of the Act may only be established on a case-by-case
basis, following a detailed legal and factual analysis, and there are no absolute rules
regarding what types of horizontal agreements may contravene the section

In order to establish a contravention of s4(1)(a):

 1. It must be established by the complainant that the firms in question compete within a
relevant market (that is, they are firms in a horizontal relationship)
 2. The complainant then bears the onus of showing that the agreement between, or
concerted practice by firms, or a decision by an association of firms, has the effect of
substantially preventing, or lessening competition in that market
o a. This requirement applies to such arrangements that have the object or effect of
preventing or lessening competition, not simply those that intend to (distinct from
section 4(1)(b))
o b. The qualifier ‘substantially’, which serves to exclude anti-competitive
consequences, must go beyond a de minimus threshold and may not be trivial or
speculative
 3. The complainant also bears the onus of showing that the arrangement was also the
factual primary cause of the anti-competitive effect and that ‘but for’ the agreement or
concerted practice, the prevention or lessening of competition would not have occurred
(Netstar 2011 CAC)
 4. Only to the extent that the above steps are discharged by the complainant – the onus
shifts to the respondent/s to prove any technological, efficiency and or any other pro-
competitive gains which may have resulted from the agreement (often referred to the
‘efficiency defence’)
o a. The pro-competitive effects are then weighed up as part of a balancing exercise,
to assess whether the losses outweigh the gains. To the extent that the losses
outweigh the gains, a contravention of section 4(1)(a) may be said to have occurred

INCLUDE NOTES ON THE NETSTAR CASE AS AUTHORITY OF s4(1)(a) (ch 4 pg 96-97)

Penalties for a contravention

  A firm found to have contravened section 4(1)(b) of the Act (engaged in cartel conduct) may
be fined up to 10% of its turnover in South Africa and its exports from South Africa in the
firm’s preceding financial year. A firm may face this penalty for a first-time contravention
 This is the same for s4(1)(a) since the 2018 Amendment Act
o Before the fine under (a) was for repeat offences only.
 The Act sets out a wide range of factors that must be considered in determining an
appropriate penalty which include [s59(3)]:
o the nature, duration, gravity and extent of the contravention;
o any loss or damage suffered as a result of the contravention;
o the behaviour of the respondent;
o the market circumstances in which the contravention took place;
o the level of profit derived from the contravention;
o the degree to which the respondent has co-operated with the competition
authorities;
o whether the respondent has previously been found in contravention of the Act.
 The competition authorities are also entitled to order divestiture; order that the firms
concerned supply or distribute goods to another party on terms reasonably required to end
a prohibited practice; or declare an agreement, or portion thereof, to be void
 Most fines are settlement amounts
 Still can go to court to claim civil damages from cartel conduct

WEEK FOUR: s4(1)(b) Cartels and Enforcement

Per Se/outright prohibitions: Cartel Conduct -s41(b)

 s4(1)(b) of the Act places an outright or per se prohibition on price fixing, market division
and collusive tendering, collectively referred to as ‘cartel conduct’, ‘cartels’, or ‘explicit
collusion’
 cartel conduct occurs when competitors decide to cooperate or collude with one another,
rather than compete.
 Cartels harm other business and consumers by artificially raising prices and reducing output
and choice. Members pose as competitors but destroy competition and cause serious ahrm
to the principles of free market economy.
 Coordination between competitors enables a group of firms collectively to enhance, exert
and abuse their collective market power which they might not be able to do alone.
 Incentives for compeittors to collude are driven by the potential for increased profits that
would not be achievable normally.
 Cartels are different from other forms of restrictive agremeents in that they are naked- they
restrict competition without producing any objective countervailing benefits (e.g.
technological, efficiency or other pro-competitive gains)
 Cartel conduct is most egregious contravention of competition legislation, and in recognition
fo the irrdemeably harmful nature of caretkl conduct, SA legislature has introduced criminal
liability for direcotrs who knowilgy engage in cartel conduct.
 S4(1)(b) creates an outright prohibition (per se offence) such that a cartekist cannot rely on
‘technological, efifcieny, or other pro-competitive gains’ as a defence because ti is presumed
that cartels harm competiton. They are ‘presumptively harmful and no evidence that they
may not be, is permitted.’ (johan venter v law society of cape good hope 2013)
  N.B. it is not necessary to show an agreement was actually implemented in order to
establish a contravention, simply establishing that some level of understanding was reached
between competitors that replaces independent action will suffice.
 Competition appeal court has held that passive participation at cartel meetings suffices for
purposes of section 4(1)(b) where the firm In question does not publicly distance itself from
the cartel. This is because passive apricipation cretes the belief that in the minds of others
that the participant subscribes to the arrangement and intends to comply with it.

American Natural Soda Ash Corporation and Another v Compeittion Commission and Others [2005] 3
All SA 1 (SCA)

 In this ANSAC case the SCA introduced the notion of characterisation into the s4(1)(b)
analysis.
 Issue was whether ANSAC was contravening s4(1)(b) in its agreements about price fixing and
trading conditions. The commission investigated and found them to be guilty and refred the
matter to the tribunal, where ANSAC argued that evidence should be allowed to determine
whether the character of the conduct coincides with the prohibition in s4(1)(b). Court held
that the existence of the conduct is sufficient to constitute a contravention of s4(1)(b) and
there was no efficiency defence for such.
 Decision as appealed to CAC who dismissed it, agreeing with tribunal that 4(1)(b) is per se
prohibition and cannot be avoided
 Then appealed to the SCA, where it was held that although yes there is no efficiency defence
for s4(1)(b), there is no provision precluding evidence being led that is relevant o
characterising conduct in order to determine whether or not it falls within the scope of the
legislative prohibition.
 Thus according to the SCA: a proper section 4(1)(b) analysis requires that it first eb
established whether the character of the coduct properly fits into the description of the
prohibited conduct, and the purpose and effect of the agreement must be considered.
 In characterising conduct, there are two elements involved:
o The nature of the prohibition (statutory construction)
o The nature of the conduct complained of (factual enquiry)
 RE: nature of the conduct, in order to be in contravention it has to be ‘to restrict
competition’. Thus it is possible for a respondent to lead evidence as part fo the
characterisation of its conduct that the conduct was aimed at achieving certain efficiencies
rather than restricting competition.
 Basically: the purposive interpretation of s4(1)(b) may be assisted by leading relevant
evidence in order to characterise firm conduct, but NOT to justify it. Remember no efficiency
defence at all for s4(1)(b) contraventions

SAB case

 Sab entered agreements with its distributers about where there could sell beer, (allocating
markets to some distributors at the expense of others)
 Commission raised two theories of harm
o There was a vertical relationship between SAB and its distributers, but SAB also
distribute beer, and by virtue of that, there was also a horizontal relationship.
o So there was both a violation of s5 and s4?
 Here the tribunal and CAC grappled with the SCA’s reasoning in ANSAC. Court held that the
characterisation under the competition act requires a determination of:
 oWhether the parties are in a horizontal relationship; and
oIf so, whether the case involves direct or indirect fixing of a purchase or selling piece,
the division of markets or collusive tendering within the meaning of s4(1)(b).
 The court went down to the core of the agreement which was a distrubtuonal agreement
between a manufacturer and distribuer, which showed that it was actually a vertical
agreement. So basically look at the core essence of the agreement, what is it aiming at.
That’s how it became a section 5 case.

Types of conduct characterised as directly restrictive of competition:

Price Fixing

 Section 4(1)(b)(i) places an outright prohibition on directly or indirectly fixing a purchase or

selling price or any other trading condition.
o Price is broadly construed including discounts, allowances, credit terms, rebates and
margins given to suppliers/customers. Prices may eb set directly where competitors
agree on a price/discount or indirectly where competitors exchange information
which enables them to coordinate pricing
o Trading condition- not defined but understood as relating to the price-quantity-
quality nexus of a transaction or trade, including any agreement to limit output.
Restrictions on output have the effect of increasing price and demand. Trading
conditions also includes delivery charges, minimum quantities and interest charges.
o Prices ad trading terms should always be determined independently and without
any form of consultation with competitors in order not to fall foul f s4(1)(b)(i).
o It need not be shown that a price was actually fixed, or that some intention or deceit
were involved, evidence of collusion is enough to establish a contravention.
o Agreeing to fix prices or trading conditions with a competitor is prohibited
regardless of how long the agreement was in force.
 N.B. Joint purchasing agreements and antii- free riding agreements don’t fall under this, cos
in joint urhcashing agreements, firms cn get economies of scale, and it’s a characterisiation
issue rather than efficiency defence,

Market division

 S4(1)(b)(ii) places an outright prohibition on dividing markets by allocating customers,

suppliers, territories or specific types of goods or services.
 Market division is generally understood as a reciprocal agreement between competitors (or
potential coepeitiors) in terms of which customers, suppliers, geographic territories, or
specific goods/services are allocated between them.
 Competitors engage in market division because it is likely to have similar effects to price
fixing and may be even easier to administer cos participants in the cartel can secure a
monopoly in an allocated area thereby allowing each other to sell at any price without
constraints from rivals in that area. Market division also results in lesenign of quality, service
and innovation as a result of lack of compeition.
 S4(1)(b)(ii) expressly prohibits 4 types of market division:
o Firms may not allocate customers: e.g. they cant agree that one firm will sell its
widgets to customer A and another to B
o Firms may not allocate suppliers: e.g. cant agree that one firm will purchase only
from supplier A while the other buys only from B
 o Firms may not agree to allocate territories: cant say I sell this area, yousell that
o Firms may not decide to allocate particular types of products or services in markets
where some differentiation has occurred: e.g, cant agree that one will supply only
high end products and the other sells lower end in the same market.
 There is an amendment to s41(b)(ii) pending which seeks to include market shares into the
prohibition on division
 Market division does not include restraint of trade agreements

Collusive Tendering:

 this is where instead of entering competitive bids, firms co-ordinate their conduct to
manipulate the tender process. Firms will act in such a way as to allcoate certain tenders to
one another, as well as to artificially increase the price at which a tender is awarded
 current tender regime is PPPFA (act 5 of 2000); new public procurement regulations
operative as of 2017; stalled legislative reform
 ways in which firms engage in collusive tendering:
o firms agree that only one will enter a bid; or
o all of the firms will enter bids, however all the firms apart from one that is agreed
among them will enter sham bids at artificially inflate dprices, in order to ensure that
the allocated firm receives the tender.
 Collusive tendering results in market division and allows prices to be determined by the
allocate firm rather than through competition, resulting in artificially inflated pricing almost
reaching monopoly level.
 Can also be harmful to public as most tenders in SA take place in public sector and these
artificially increased prices cause a strain on public purse.

General points: duty to distance and tacit collusion

 Passive participation in decision without public distancing is sufficient for contravention of

s4(1)(b)
 Tacit collusion- no direct or indirect contact between firms, but some mutual understanding
nonetheless exists; softening competition
o Not covered by s4, but see complex monopoly provisions

Trade/industry associations and professional bodies

 Trade and industry associations and professional bodies do not automatically raise concerns
in terms of section 4 of the Act, they (despite serving useful and legitimate means) usually
involve communication amongst competitors and may provide platforms for collusion
 These fora may facilitate the exchange of competitively sensitive information among
competitors. Competitively sensitive information refers to any commercially sensitive
information which may assist in predicting another firm’s behaviour
 It includes, but is not limited to, information related to:
o Pricing
o customer or suppliers
o business and marketing or sales strategies
o detailed costs or profits
o outputs and distribution channels
  To the extent that this type of information is legitimately in the public domain; or historic
(generally regarded as being more than three months old, depending on the nature of the
market); or aggregated in such a manner that it may not be Restrictive horizontal practices
attributed to any particular firm, the information will typically no longer be considered
competitively sensitive
 The exchange of competitively sensitive information often occurs informally through
discussions amongst competitors before and after official meetings. It may, however, occur
formally through a trade/industry collecting and disseminating statistical and business data –
but doing so in a way that discloses competitively sensitive information because the
information is not sufficiently aggregated or provided to a person to aggregate who is in fact
a competitor stakeholder
 Trade and industry associations or professional bodies have also been found to have
engaged in price fixing, by prescribing fees to be paid for service
o For example, in Association of Pretoria Attorneys, APA agreed that its guidelines,
which set tariffs that attorneys in Pretoria should (APA) charge clients, amounted to
price fixing and agreed to voluntarily withdraw the guidelines and pay an
administrative penalty of R223 000

Exemptions

 Firms may apply to the Commission for an exemption (under section 10 of the Act) for
horizontal restraints that would otherwise contravene section 4 of the Act
 Often done for healthcare, petroleum and airline sectors.
 Three types of exemptions granted by the Commission:
o public interest exemptions (historically disadvantaged, economic stability, air
services)
o intellectual property exemptions
o professional association exemptions

Anti-Cartel Enforcement practices:

The Corporate Leniency Policy

 One of the most important developments in competition law in the fight against cartels.
 In terms of the CLP the commission will grant immunity to a self-confessing cartel member if
that cartel member is the first through the door to approach the commission, and it fulfils all
the requirements and complies with all the conditions set out in the CLP
 Immunity here means that the commission will not seek to impose a penalty againt the firm,
which is conditional on the firm co-operating fully with the commission in prosecuting the
other members fof the carte before the competition tribunal.
 The success of the CLP lies in the incentive that it creates for cartelists to blow the whistle in
exchange for immunity
 This option of just being able to blow the whistle already weakens cartels

Criminalisation of Cartel Conduct:

 Enacted in 2009, partial implementation in may 2016.

 Criminalising cartels is done as a symbolic move primarily, need to show how youre not
going to tolerate it at all
 Besides criminalisation, theres also a penalty of 10% of annual turnover? Confirm this
WEEK 5: SECTION 4 CASELAW

Competition Authorities’ Caselaw Overview

 the competition tribunal of SA adjudicates maters in accordance with the competipn act 89
of 1998, as amended and has jurisdiction throughout South Africa. The Tribunal, together
with the Competition Commission of South Africa (Commission), is responsible for the
enforcement of the Competition Act.
 The Tribunal began operating on 1 September 1999 and has produced jurisprudence since its
first case decided on 26 January 2000. In the early years of the Tribunal the focus of the
agencies was in the area of merger control. The case mix started changing gradually until
2007 when we witnessed a step change in cartel and abuse of dominance enforcement. This
growth in Chapter 2 enforcement led to a concomitant increase in interlocutory cases
involving discovery, exceptions and strike out applications. The introduction of the
Commission's corporate leniency policy (CLP) also brought about novel cases in the area of
litigation privilege, challenges to the validity of the Commission's initiation, disputes about
the ambit of provisions of the Act such as Commission Rule 14 and section 67(1), reviews of
Commission decisions and several applications for dismissals on various grounds. The
volume of cases increased exponentially after the Commission's industry wide CLP and
settlement process for the construction sector. While the substantive cases under Chapter 2
and 3 were widely reported, many of the 'procedural' type of cases went underreported.

Competition Commission of South Africa v Stuttafords Van LInes Gauteng Hub (Pty) (Ltd) and Others
(181/CAC/Jan20) [2020] ZACAC 6 (22 October 2020)

The following is view from the CAC about where the commission/tribunal erred

 Lack of specificity/ consensus

o [38] The Tribunal correctly found, based on the evidence of the Commission’s own
witness, Mr Oosthuizen, that the Commission had not established with sufficient
certainty whether the agreement was reached on the specific amount. It however,
found based on the Commission’s alternate case (not pleaded in its founding
affidavit) that the respondents had reached an understanding at the meeting that:
“The new [e-tolls] cost should be passed on to the consumer possibly as either a flat
rate or percentage... Second, the sums mentioned gave each an indication of the
ballpark of what this amount was. ...What appears to have happened is that Pienaar
had sounded them out at the R250 mark and that others had suggested a higher
amount closer to R350”.
o [39] Apart from the fact that this finding is not based on the Commission’s case as
pleaded in its founding affidavit, there is also a clear lack of specificity in the finding
that the respondents entered into an “understanding” as required by our
jurisprudence. This Court has repeatedly held that for an “agreement, understanding
or arrangement” to constitute a collusive agreement as contemplated in s 4(1)(b)(i)
of the Act, it must be proved on a balance of probabilities that the parties concerned
had reached consensus on the subject matter of the understanding, and that that
they regarded such understanding as binding upon themselves or on each other.
Consensus is of the essence in demonstrating that firms have engaged in a
 prohibited practice in the form of a cartel agreement as contemplated in section
4(1)(b)(i) of the Act.
 Lack of consensus
o [40] The Commission, however, failed to present any reliable evidence
demonstrating that those present, at the January meeting, reached any consensus
on an understanding or arrangement which they regarded binding upon themselves
(or their principals), or that they agreed upon a uniform approach to the recovery of
e-toll costs. To the contrary, the evidence established that different individuals drew
different conclusions from the discussion that took place at the meeting, and none
regarded themselves, the firms they represented, or the other firms represented at
the meeting as being bound by any uniform approach to recoup or recover costs.
o [43] It is manifest from the evidence that none of the respondents’ representatives,
present at the meeting, sought to sum up the outcome of the discussion, and even
though they left with a similar understanding of the substance of the discussion,
they drew different conclusions from it. As indicated, Ms. Vella, the personal
secretary to Mr Pienaar, attended the meeting to take the minutes in the absence of
the customary minute taker. According to her testimony, she was inexperienced at
taking minutes at the time and, consequently, had provided her own conclusion of
the discussion (as she was taught at an executive PA course she had attended), in
the last paragraph of the draft minutes, in circumstances where no one had summed
up what the outcome of the discussion was. Ms. Vella’s evidence was not disputed
by the Commission.
 Procedural/reasoning error
o [49] Accordingly, the Tribunal erred in concluding that the respondents “replaced
their independent action – in this case how to deal with a new expense – with
interdependent action reached as a result of an understanding with competitors”
and that “this is the only credible explanation for why the discussion took place in
the first place and why the amounts and the mechanisms for recovering were
mentioned”. The Tribunal erred in arriving at this conclusion for the further reason
that that it suggested no basis for rejecting the evidence of Mr Pienaar (and the
other witnesses who supported his decision) that the purpose of the discussion was
to highlight the impact of e-tolls on the removals industry and on the business of the
removals firms.
 Error re price signalling
o [50] the Tribunal also erred in finding that what the respondents did at the January
meeting, by mentioning the rates R250 and R350 respectively, constituted “classic
price signalling to competitors at what level they might pass on costs”. Once again,
the Tribunal made this finding without indicating any basis for rejecting the evidence
of both Mr Pienaar and Mr Fear that the amounts which they mentioned were the
product of their own research and desktop calculations of the e-toll costs associated
with hypothetical journeys. Though unwise, the mere mention of these rates does
not translate into an agreement as contemplated in terms of s 4(1)(b)(i) of the Act
without a showing of consensus as understood in our jurisprudence.”

Netstar (Pty) Ltd and Others v Competition Commission South Africa and Another (99/CAC/MAY10,
98/CAC/MAY10, 97/CAC/MAY10) [2011] ZACAC 1; 2011 (3) SA 171 (CAC) (15 February 2011)
 Market definition
o At the CAC, market definition was not a contested issue. The Court described the
market (in their terms “the industry”) thus:
o [1] Prudent motorists insure their motor vehicles, principally against the risk of loss
caused by accidents and theft. Finance houses that fund the purchase or lease of
motor vehicles usually require the purchaser or lessee to take out such insurance.
Short-term insurers provide this type of cover and bear the losses suffered in
consequence of claims under the policies they issue to motorists. It is therefore in
the interests of short-term insurers to take steps to limit or minimise such claims.
o [2] Once a vehicle has been stolen minimising the loss depends upon how quickly it
can be traced and recovered. The ability to do that has been considerably enhanced
by the introduction into South Africa about twenty years ago of stolen vehicle
recovery systems that enable stolen vehicles to be traced rapidly and recovered.
Starting with high value luxury cars but increasingly across a broader range of
vehicles insurers have taken steps to ensure that motor vehicles are fitted with
these systems. The one route they adopt is to require the installation of such a
system and to offer a reduced premium in return. The other is to offer insured
motorists a discount on their insurance premiums if they have such a system fitted
to their motor vehicles.
o [3] The appellants, Netstar, Matrix and Tracker, were amongst those who
established the industry for the provision of stolen vehicle recovery systems. ...
o So, the market is the provision of stolen vehicle recovery services; the Tribunal had
also done market definition briefly; it is a national market; the services apparently
increased recovery rates from 20% to 50%
 Facts and cause of action:
o three large and first-entering firms in this industry formed part of a subcommittee of
an industry body that made standards for these services, standards that short-term
insurers relied upon and used. A new entrant firm claimed that these standards
constituted a barrier to entry – and that thus the agreement forming the industry
association (VESA) and its subcomm was prohibited by s 4(1)(a):
o During the period from 1996 to February 1999 certain criteria for membership and
accreditation were developed and thereafter implemented by VESA. The effect of
this, according to the Commission and Tracetec, was to impede newcomers to the
industry from entering the market for the provision of SVR systems. The reason is
that these criteria or ‘standards’, as they were described, were used by most of the
members of the South African Insurance Association (SAIA) in deciding which SVR
systems would, when installed in the motor vehicles they insured, qualify the
insured to receive a reduced or discounted premium.
o The complaint by the Commission and Tracetec is that newcomers to the industry
could not satisfy the performance component of the standards and hence could not
obtain membership of the Committee and VESA accreditation of their systems. It
was contended that this blocked their entry into the industry because of the
fundamental importance that insurers attached to VESA accreditation. In brief
therefore the establishment and implementation of these standards was said to
arise from an agreement prohibited under s 4(1)(a) of the Act.
 Agreement - were the appellants party to an agreement or concerted practice as alleged by
the Commission?
 o The allegedly excluding criteria including (for one period) that the system had been
fitted in 3000 vehicles; that the operator had been in operation for over a year; that
the supplier had effected over 100 recoveries with that system and that the recovery
rate fell within a defined industry average.
o The issue of a decision of firms not having been raised, CAC draws distinction
between agreements and concerted practices; the distinction is important because
of the investigatory role played by Commission; for rule of law, the evidence must fit
the practice as complained of
o Reviewing the facts, the CAC did not find the understanding of an agreement as
binding or obligatory on the members that an agreements needs (paras 35-41)
o Para 41 (leaving open the issue of horizontal relationship when some parties to
agreement not horizontal)
 Substantial prevention or lessening of competition
o Was there a substantial prevention or lessening of competition in the South African
market for the supply and operation of stolen vehicle recovery systems?
o Paras 42-62: the original complaining firm conceded it could not have entered the
market anyway and other firms were able to enter
o Insufficient evidence (para 57); tribunal paid too much attention on academic theory
focusing on the potential effects of the standards, and not on the facts (para 59)
 Causation:
o if so (e.g. if there was substantial prevention or lessening of competition), was that
substantial prevention or lessening of competition an effect of the agreement or
concerted practice, within the meaning of that expression in s 4(1)(a)?
 Even if there was (b), there was no causation (para 64) because of the key
role of insurer in requiring VESA accreditation (and even setting up VESA)
 CAC interprets causation requirement to mean impact of the agreement or
practice must play “the dominant role” (para 33):
o The language used is not consistent with the agreement or concerted practice being
one of several concurrent causes of the prevention or lessening of competition in
the market. It requires the agreement or concerted practice to have the required
detrimental effect. In my view what is required by this provision is that the primary
or substantial cause of the prevention or lessening of competition must be
identified. Where an agreement and some other separate action by a different party
are identified as both having been necessary conditions for the prevention or
lessening of competition it is only where the agreement or concerted practice plays
the dominant role that it falls within the section. In other words it is necessary to
consider whether the lessening or prevention of competition is so closely connected
to the agreement or concerted practice that it can properly be said that the former
was the effect of the latter and any other action was merely ancillary. ... This is
similar to, but not the same, as the question of legal causation that arises in the
delictual context. In the context of competition law and the requirements of the Act
it is only where the substantial prevention or lessening of competition is the direct
and predominant consequence of the agreement or concerted practice that s 4(1(a)
is contravened.

WEEK 6: RESTRICITVE VERTICAL PRACTICES

 Section 5. Restrictive vertical practices prohibited
o (1) an agreement between parties in a vertical relationship is prohibired if ti hs the
effect of substantially preventing or lessening competition in a market, unless a
party to the agreement can prove that any technological, efficiency or other pro-
compeittive gain resulting from that agreement outweighs that effect.
o (2) the practice of minimum resale price maintenance is prohibited.
o (3) despite subsection (2), a supplier or producer may recommend a n=minimum
resale price to the reseller of a good or service provided-
 (a) the supplier or producer makes it clear to the reseller that the
recommendation is not binding; and
 If the product has its price stated on it, the words ‘recommended price’
appear next to the stated price.
 Section 5 of the Compt Act regulates ‘restrictive vertical practices’ and is concerned with
conduct between firms
 S5(1) prohibits an agreement between parties in a vertical relationship
 S5(2) prohibits the practice of ‘minimum resale price maintenance’ (mrpm), which entails a
supplier prescribing to a downstream reseller the minimum price at which a good or service
must be sold
 ‘Vertical relationship’ is defined in the Act as ‘the relationship between a firm and its
supplier, its customer, or both’
 S5 regulates conduct between firms that operate in a vertical relationship at different levels
of the supply chain (upstream or downstream)
 Although not expressly provided for in the Act, it is generally accepted that intragroup
vertical agreements and practices in a parent/subsidiary relationship, or within a single
economic entity are excluded from consideration under this section.
 S5 does not apply to true principal and agent arrangements
o The customer must take ownership and the risk must be transferred to the buyer
 S5 is concerned with agreements and practices between independent third parties in the
supply chain
 Franchise agreements are considered under s5. However, there is a non-binding practice
note that provides specific guidance to how franchise agreements should operate
 A vertical supply chain usually consist of:
o Manufacturers
o Wholesalers
o Distributors
o Retailers
o end-customers
 Situations may arise where firms are in both a horizontal and vertical relationship.
Identifying a vertical relationship will thus be more complicated and a detailed legal and
economic analysis is required
o A vertical relationship does not preclude a horizontal relationship, and vice versa
 Two steps must be taken when conducting a proper analysis of the relationship between
firms:
o 1. The relevant market must be defined
o 2. The nature of the relationship between the firms must be determined. Although
the legal agreements may be instructive in determining whether the parties are
 suppliers or buyers, these are not dispositive of the issue; the real agreement is the
economic relationship between the firms
 N.B. in the above, when defintin market we just look at what is the market the supply chsin
operates in.
 There is a distinction in the manner in which the Competition Act treats horizontal and
vertical practices
o Horizontal agreements between competitors are much more likely to result in harm
to competition
o Vertical practices and agreements may result in efficiencies (e.g., upstream
manufacturer might be able to deliver its products to market more quickly and
cheaply if it concludes a long-term distribution agreement with a downstream
distributor)
o However, certain vertical practices and agreements are still capable of restricting
competition and having anti-competitive effects, particularly where one or both
parties in the vertical relationship have market power - this is what s5 seeks to
address
 Vertical practices that restrict competition may be divided into two categories: (i.e. the act
protects both:)
o 1. Intra-brand competition: where competition between rival resellers (distributors
or retailers) of the same brand (e.g., different retailers all selling Coke)
o 2. Inter-brand competition: where competition is between suppliers of different
brands of substitutable products (e.g., Coke v Pepsi)
o Sutherland para 6.3- intra-brand competition should only be relevant to competition
lawyers when there is insufficient inter-brand competition.
 Restrictive vertical practices may be:
o restricting the basis on which a product may be resold. (reducing intra-brand
compeition)
 price restraints (minimum/maximum rpm) or
 non price restraints (restraints placed upon, amongst other things, the
classes of customer to whom a reseller may sell, or the locations from which
products may be sold).
o restraints that limit the freedom of buyers to purchase competing brands (non price
restraints e.g. tying agreements and exclusive purchasing requirements). These
restraints effect inter-brand competition.

Per se/ Outright prohibition: minimum resale price maintenance

 S5(2) of the Act provides that the ‘practice of minimum RPM is prohibited’
 Minimum RPM is generally understood as any attempt by an upstream supplier to control or
maintain the minimum price at which a product is resold by a downstream seller
o E.g. Firm A makes and distributes expensive perfume, which it sells via firm b’s retail
outlets. Firm A supplies B on condition that it will price the perfumes at or above a
minimum price. Firm A may seek to justify this on the basis of higher pricing=
premium branding of its perfume, a consideration that cannot be invoked to defend
the ractice of RPM given the per se prohibition in s5(2).
 No agreement between the seller and the buyer to maintain minimum price is required;
minimum RPM may be unilaterally imposed by the supplier. Moreover, s5(2) specifically
refers to ‘practice’ rather than ‘agreement’ and is therefore distinct from s5(1).
 The CAC in Federal Mogul defined ‘practice’ as ‘a form of repetitious or habitual conduct of a
kind which can be discerned from the evidence as being known and recognised to the
interested parties’
 Minimum RPM may be achieved directly by setting the actual price, or indirectly by setting a
component of the price
 To succeed in establishing a minimum RPM contravention, the complainant must show
o (a) that the reseller or distributor knew the price they were expected to on-sell and
would
o (b) face a sanction or penalty for non-compliance for failing to do so
 There is no defence against the finding of a minimum RPM
 How the practice of minimum RPM may be given effect is illustrated in two cases:
o Federal Mogul- FMASA was a manufacturer and supplier of automotive parts,
reduced the rebates given to its distributors (or resellers) if they charged below its
imposed set price. The reduction in rebates increased the wholesale price to such an
extent that the delinquent resellers would not be able to charge below the set price
for long, effectively forcing the resellers to adhere to the imposed resale price. This
practice was found to be a contravention of s5(2).
o In another case, Toyota South Africa Motors prescribed the maximum fleet
discounts for particular vehicles that its delaerhsips could offer. Failure to adhere to
the maximum discount would expose the dealer to a fine. This practice was
contravening s5(2).
 The practice of minimum RPM may restrict competition in a number of ways:
o May facilitate collusion between suppliers by enhancing price transparency in the
market, by making it easier to detect whether a supplier has r=deviated from the
collusive equilibrium by cutting its price
o It may undermine the incentive for the supplier to cut its cost to distributors, as the
fixed resale price will prevent it from benefiting from expanded sales
o May facilitate collusion between buyers at the distribution level by eliminating intre-
brand competition with strong or well organised distributors being able to force or
convince one or more suppliers to fix their resale price above the competitive level
and thereby help them to reach or stabilise a collusive equilibrium
o It may soften competition between manufacturers and or retailers, particularly
when manufacturers use the same distributors to distribute their products and
minimum RPM is applied to al or many of them
o May result in increased prices as it may prevent all or certain distributors from
lowering their sale price for a particular brand
o It may lower the pressure on the margin of the manufacturer and foreclose smaller
rivals if implemented by a manufacturer with market power
o May reduce dynamism and innovation at the distribution level by preventing price
competition between different distributors
o It may prevent more efficient retailers from entering the market and or acquiring
sufficient scale with low prices
o It may prevent or hinder the entry and expansion of distribution formats abased on
low prices such as price discounters.
 The prohibition against suppliers engaging in minimum RPM does not preclude suppliers
from recommending prices to resellers
  S5(3) expressly provides that a supplier or producer may recommend a resale price to the
reseller provided that:
o 1. It is clear to the reseller that the recommendation is not binding
o 2. If the product has its price stated on it, the word ‘recommended price’ appear
next to the stated price

Rule of reasoning prohibitions

 All other vertical relationships that are not minimum RPM may be asserted in terms of s5(1)
 When interpreting s5(1), it is generally accepted that a contravention can only be
established on a case-by-case basis following a detailed legal and factual analysis, and there
is no absolute rules regarding what types of vertical agreements may contravene the section
 The provision refers to ‘agreement’ which is understood to require bilateral or multilateral
agreement. Whether or not there is an agreement in place will be determined on the facts
on a case-by-case basis, but the onus lies on the complainant to prove that there is an
agreement
 It must be shown that the effect of the agreement is to substantially prevent or lessen
competition in a particular market - some likely effect upon price, output and/or quality of
the product or service in question which diminishes consumer welfare must be shown in
order to trigger the application of s5(1)
 The effect shown must go beyond a de minimus threshold and consideration of the
counterfactual is required
 Consideration of the counterfactual entails considering the likely competitive effect absent
the vertical restraint in question (the ‘but for’ test). The onus is on the complainant to show
this effect and also the casual link to the agreement
 Once a substantial anti-competitive effect has been established, the onus shifts to the
respondent to prove any pro-competitive gains which may have resulted from the
agreement
 The competitive effects are then weighed up as part of a balancing exercise, to assess
whether the losses outweigh the gains. To the extent that the losses outweigh the gains, a
contravention of s5(1) may be said to have occurred

N.B.

 Despite the bery broad application of s5(1), the SA competition authorities have rarely dealt
with the provision or found a contravention thereof. The dearth of matters dealing with
s5(1) is likely attributable to two main factors:
o First to establish a contravention, relatively high evidentiary requirements must be
emt. To meet these high evidentiary thresholds, detailed factual and economic
analyses is likely required, such analysis can be both time consuming and costly, an
even to the extent that all the evidentiary thresholds are met, the party accused of
having contravened this section mays till adduce pro-competitive justifications in its
defence; and
o Second, substantial anti-competitive effects are egenrally unlikely to be established
under s5(1) unless one or bpth of the firms have market power. To the extent that
one of the firms has market power, the competitive assessment is mor elikely to be
copleted under the section 8 the abuse of dominance provisions, rather than under
s5(1).

Penalties for a contravention of section 5

  A firm found to have contravened s5(1) or (2) of the Act may be fined up to 10% of it
turnover
o N.B. in new amendment its now 25%
 Contraventions of s5 often:
o Result in settlements, not fines
o Result from s5(2) not s5(1)
o Result in the fine being imposed on the upstream supplier, not the downstream
reseller

Exemptions

 Firms may apply to the Commission for an exemption (under s10) for vertical restraints that
would otherwise contravene s5
 There are three types of exemptions granted by the Commission:
o 1. Public-interest exemptions
o 2. Intellectual property exemptions
o 3. Professional association exemptions

WEEK SEVEN AND EIGHT: ABUSE OF DOMINANCE

Introduction:

 Only firms occupying a dominant position within a market can be guilty of infringing s8 and
s9 of the Compeitition Act which prohibit frims from engaging in conduct that unfairly
excludes compeittors, or that exploits consumers.
 Distinction between exploits and excludes:
o Exploitative conduct:- where a dominant firm with market power uses its position of
dominance to extract higher profits from tis customers e.g. prohibition on excessive
pricing to the detriment of consumers
o Exclusionary conduct: has the effect of excluding or impeding the
growth/maintenance of competition in the market. E.g. prohibition on engaging in
predatory pricing to drive a rival out of business.
 Law ahs to tread a fine line, on the one hand must encourage firms to engage in competitive
conduct such as aggressive price cutting, or the bundling of goods and services but it must
also prohibit this kind of conduct when it forms a part of strategy to exclude rivals and
reduce competition ultimately leaving the market open to exploitation by the dominant firm.

Dominance as theoretical concept

 A firm is dominant if it has ‘market power’ that enables it to act appreciably independently
of its competitors, e.g. where a firm is able to unilaterally raise its prices without losing
market share to its competitors it will be regarded as having market power.
 Remember you always need to define the market first, using SSNIP test, its important to
define markets because s7 of the Act contains a legal test for establishing dominance based
on market share %. Thus the boundaries of market matter greatly: narrower market
definition= more likely for firms to be deemed dominant.
 The SSNIP test assesses the degree to which consumers will switch to ‘substitute’ products
or services in the face of a sustained increase in price
 A thorough assessment of market power should entail the following:
 o Constraints imposed by existing and potential competitors should be considered e.g.
consideration should be given tp the ability of existing competitors to increase
supply or decrease pricing and the likelihood of new competitors entering the
market to place a check on market power
o Consideration should be given to the barriers to entry and expansion in the market.-
how difficult is it for competitors to grow market share, hurdles for new entrants
e.g. regulatory requirements or sunk costs
o Consideration of the extent to which a single customer or multiple customers acting
in concert are able to exercise countervailing buyer power to constrain the conduct
of a firm

Dominance as a legal concept

 Section 6 provides a safe harbour for small firms by excluding firms with an annual turnover
into or from SA that is less than R5 Million, and firms whose assets in SA are less than 5
million. These small firms are not subject to the prohibitions in s8 and s9.
 Section 7 sets out a legal test for when a firm will be deemed to be dominant, based on
market shares as a proxy for market power.
 Section 7:
o If a firm has a share of at least 45% of the relevant market, it is deemed to be
dominant. Irrefutable presumption
o If a firm ahs a market share of at least 35% but less than 45% of the relevant market,
it is presumed to be dominant unless it can show it does not have market power
o If a firm has less than 35% of the relevant market it is not dominant, unless the
complainant (pvt or commmision) can prove that it has market power.
 Tribunal has held that a party alleging dominance must do more than simply allege in
pleadings that the firm is dominant. No Need to give a precise figure of market shares but
are obliged to plead the approximate market shares alleged, and on what basis those market
shares are calculated (sales revenue or number of goods sold)
 N.B: the abuse of dominance provisions of the Competition Act apply to all firms that are
found to be dominant under s7, regardless of their degree of dominance. i.e. super
dominance is not recognised in SA.
 Section 7 refers to a firm (singular) being dominant, what about collective dominance (e.g.
parent subsidiary firms acting in concert? – act doesn’t permit interpretation that allows
firms to be jointly or collectively dominant.
o Need a legislative amendment that punishes firms that co-ordinate conduct to harm
competition.

SECTION 8 ABUSES

 Section 8(1) provides that it is prohibited for a dominant firm to:

o Charge an excessive price to the detriment of consumers (8)(1)(a))
o Refuse to give a competitor access to an essential facility when it is economically
feasible to do so (8b)
o Engage in an exclusionary act other than an act listed in s8(d), if the anti-competitive
effect of that act outweighs its technological, efficiency pr other pro-competitive
gain (8c); and
o 8(d)- Engage in any of the following identified exclusionary acts unless the firm can
justify on the same baais as in s8(c)
  Require or induce a supplier or customer not to deal with a competitor
 Refuse to supply scarce goods to a competitor when supplying those goods
is economically feasible
 Sell goods or services on condition that the buyer purchases separate goods
or services unrelated to the object of the contract, or forcing a buyer to
accept a condition unrelated to the object of a contract
 Sell goods or services below their marginal or average variable cost
 Buy-up a scarce supply of intermediate goods or resources required by a
competitor.
 N.B. it is useful to draw a distinction between exploitative and exclusionary types of conduct
to understand the prohibitions in s8

Exclusionary Conduct (8(1)(c)-(d))

In broad terms, section 8 of the Competition Act prohibits what may be described as exclusionary
abuses by dominant firms. These are listed below, and illustrated by way of the following examples:

 Refusals to give access to an essential facility

o Firm A is a logistics provider that owns a port in a remote area. It refuses to allow
Firm B, a rival logistics provider, access to the port to operate in competition with it.
Firm A’s refusal to give Firm B access to the port may in certain circumstances be
unlawful.
 Inducements not to deal
o Firm A is a manufacturer of widgets. It distributes its widgets via distributors with
which it concludes contracts that incentivise distributors not to deal with Firms B
and C, which produce widgets in competition with Firm A. These incentives, which
are often referred to as ‘customer foreclosure’ may in certain cases be unlawful.
 Refusing to supply scarce goods
o Firm A manufactures and sells widgets. It refuses to sell widgets to a rival Firm B,
which sells sprockets, a competing product, and which is made from widgets. Firm
A’s refusal to supply Firm B is typically referred to as ‘input foreclosure’ and may in
certain cases be unlawful.
 Buying up scarce resources
o Firms A and B manufacture and sell sprockets. Sprockets are made from widgets.
Firm A concludes long-term exclusive supply contracts with all the manufacturers of
widgets, meaning that Firm B cannot feasibly procure any widgets to produce the
sprockets sold by it. This too is a form of input foreclosure.
 Tying (and bundling)
o Firm A manufactures and sells widgets and sprockets. Firm B manufactures
sprockets in competition with Firm A. In the context of ‘tying’, Firm A sells widgets
on condition that its customers also purchase sprockets from it. In the context of
‘bundling’, Firm A will incentivise customers to purchase widgets and sprockets from
it by bundling the products together at a discounted price. In some cases tying and
bundling will be anti-competitive and unlawful.
 Predatory pricing
o Firms A and B manufacture and sell widgets. Firm A sells its widgets at below the
cost of manufacturing them, making it impossible for Firm B to compete without
also making a loss, and thereby driving Firm B out of the market only to allow Firm A
 the chance to recoup its losses by charging monopoly prices when Firm B no longer
competes in the market

AntiCompetitive Effects of Exclusionary Conduct

 Exclusionary conduct caught by s8(1) (c) and (d) is prohibited when:

o 1. It is perpetrated by a dominant firm; and
o 2. It has an anti-competitive effect that cannot be justified on pro-competitive
grounds
 In the SAA case, the Tribunal described what it regards as the meaning of ‘anticompetitive
effect’

CC v SAA [2005] ZACT 50 (28 July 2005)

 Facts:
o In October 2000, National Airlines, a competitor to SAA, lodged a complaint against
SAA with the Commission, alleging that SAA’s incentive schemes were unlawful
under s8(d)(i) (inducing a customer not to deal with a competitor)
o The Commission referred the complaint for adjudication before the Tribunal
 Tribunal said:
o SAA was presumptively dominant in the relevant markets (market for the purchase
of domestic airline tickets sale services from travel agents in SA, and the market for
domestic airline travel) because it had a market share over 45%
o The first step in assessing whether conduct is prohibited under s8(c) or 8(d) is to
determine whether it constitutes an exclusionary act under either section
 For purposes of s8(c), this requires considering whether the conduct in
question falls within the definition of ‘exclusionary act’, which is defined as
‘any act that impedes or prevents a firm from entering into, or expanding
within, a market’
 For purposes of s8(d), this involves determining whether the conduct in
question falls within the ambit of the conduct described in subsections (i) to
(v), in which event the conduct is ‘presumed to be exclusionary’
 In both cases, the onus on establishing the exclusionary act is on the
complainant
o The second step is to determine whether the exclusionary act is anticompetitive in
effect. One of the two requirements must be satisfied by the complainant:
 1. Where there is evidence of actual harm to consumer welfare (e.g.
consumers paying more for domestic airline tickets than they would but for
the conduct in question); or
 2. If the exclusionary act ‘is substantial or significant in terms of its effect in
foreclosing the market to rivals’
o SAA had abused its dominance contrary to s8(d)(i) by using its incentive schemes to
induce travel agents, who exercised significant influence over consumers, not to
deal with SAA’s rivals
o SAA’s conduct was ‘exclusionary’ in nature and the effect of the incentive schemes
was to inhibit SAA’s rivals from expanding in the market, while at the same time
reinforcing SAA’s dominant position

Monopoly leveraging
  Monopoly leveraging refers to a broad class of theories of harm which involves a firm acting
in two different but related markets
 A firm may leverage its dominant position in one market in order to obtain a benefit in a
related market; alternatively a firm with a dominant position in one market might use its
conduct in a related market to protect that dominant position
 Monopoly leveraging often involves tying or bundling
 Tying and bundling refers to practices involving the sale of more than one product in some
form of combination
 In SA, the Tribunal has recognised that a dominant firm may infringe s8 where it leverages its
market power in one market to foreclose a rival in a different market

Burden of proof and efficiency justifications

 Under both s8(1)(c) and 8(1)(d) the complainant must establish that the respondent
engaged in conduct alleged to fall within the ambit of those sections, and that the conduct
produces anti-competitive effects
 However, under s8(1)(c), even where the complainant establishes that the respondent
engages in conduct that produces anti-competitive effects, it is nevertheless also required to
prove that the anti-competitive effects of the conduct are not outweighed by any efficiency
justifications
 In contrast, s8(1)(d) requires that once the complainant has established that the respondent
engaged in anti-competitive conduct proscribed in s8(1)(d)(i)-(v), and that the conduct
produces anti-competitive effects, the burden shifts to the respondent to prove any claim
that a efficiency justification outweighs the anticompetitive effects of the conduct
 Where efficiency justifications are alleged by a respondent, they must relate directly to the
anti-competitive conduct in question (i.e. but for the anticompetitive conduct, the
efficiencies would not eventuate)
 Where efficiency justifications have been raised, the competition authorities have to engage
in a balancing exercise, weighing up the anti-competitive effects of conduct with the alleged
gains
 The types of efficiencies that may eventuate from otherwise anti-competitive conduct could
include: increased output, lower prices, more efficient distribution, improved service, and
increased incentives for innovation

Section 8(1)(c): ‘catch-all’ provision

 S8(1)(c) is a catch-all prohibition, and is designed to catch ‘exclusionary acts’ that do not fall
within the ambit of the prohibitions contained in s8(1)(d)(i) to (v)
 ‘Exclusionary act’ is defined as one that ‘impedes or prevents a firm from entering into,
participating in or expanding within a market’
 The legislature saw it fit to delineate specific acts that are deemed to be exclusionary in
terms of s8(1)(d)(i) to (v), but left open the possibility that other types of conduct - when
engaged in by dominant firms - may also be exclusionary and should be prohibited under
s8(1)(c)

CC v Senwes case

 The Tribunal made a finding that Senwes Limited had contravened s8(1)(c) by engaging in an
exclusionary act described as a ‘margin squeeze’, by charging rival downstream grain traders
 higher prices for grain storage in its silos upstream than it charged its own downstream
trading entity
 Margin squeeze occurs when instead of refusing to supply a downstream rival, a dominant
firm charges a price for a product or service upstream which does not even allow even an
equally efficient competitor to trade profitably in the downstream market
 The Tribunal found that the higher prices charged by Senwes to downstream rivals impaired
rivalry (resulted in foreclosure), and that there was no objective justification for Senwes’s
conduct
 The Tribunal held that in order to establish a ‘margin squeeze’ under section 8(1) (c), a
complainant would need to establish that: [important to note that after 2018 amendment,
‘margin squeeze’ is now dealt with under s(1)(8)(d)(iv)]
o the supplier of the input (that is, the dominant firm) is vertically integrated;
o the input in question is in some sense essential for downstream competition;
o the dominant firm’s prices would render the activities of an efficient rival
uneconomic;
o and there is no objective justification for the dominant firm’s pricing arrangement

SPECIFIC EXCLUSIONARY CONDUCT UNDER S8(1)

Refusing to supply access to an essential facility

 s8(1)(b) S8(1)(b) prohibits dominant firms from refusing to give a competitor access to an
‘essential facility’ in circumstances where it is ‘economically feasible’ for it to do so
 Elements of the prohibition are the following –
o 1. The firm accused of refusing access to the essential facility must be dominant, and
the firm refused access must be a competitor (usually downstream)
o 2. Dominant firm must as a fact refuse access to the facility.
 a. It is possible to refuse access in various ways, such as imposing conditions
on access that makes it all but impossible for the firm seeking access to
feasibly obtain it. The law recognises ‘constructive’ refusal to supply
 b. Example, dominant firm may charge a price for access that makes it
impossible for the firm seeking access to compete downstream. Or, it may
impose conditions on access that impede a downstream rival’s ability to
access the facility in order to compete
o 3. The facility must be ‘essential’. I.t.o s1, the first component of the definition of an
‘essential facility’ refers to ‘infrastructure or resource that cannot reasonably be
duplicated’. Infrastructure is capable of a broad interpretation, and may include
energy networks, telecommunications networks and transport networks
 a. The CAC has stated that ‘resource’ cannot be interpreted to include
‘products, goods or services’. The CAC drew a distinction between s(1)8(b),
where the legislature refers to ‘infrastructure’ and ‘resource’, and s8(1)(d)(ii)
which prohibits a dominant firm from refusing to supply ‘scarce goods’ to a
rival, and which, unlike s8(1)(b), allows a respondent to raise pro-
competitive efficiency justifications for the refusal to supply access
 b. whether or not a facility can be reasonably or practicably duplicated is a
complex issue. It may not be reasonably possible to duplicate a facility due
to physical factors such as the geography of a country; or due to regulations
 that preclude duplicating the facility; or due to the costs of duplicating the
facility
o 4. It must be also shown that it is ‘economically feasible’ for the dominant firm to
supply access to the facility in question

CC v Telkom case

 There was a complaint that Telkom had abused its dominance as contemplated in s(1)8(b) by
refusing rival ‘value added network service provides’ (VANS providers) access to its
telecommunications network infrastructure
 Telkom, a vertically integrated firm, which controlled a facility that VANS providers required
access to in order to compete with it downstream, was constructively refusing such access
and thereby driving VANS providers out of the downstream market in which it was also a
competitor downstream
 Telkom did not dispute that its telecommunications network infrastructure constituted an
essential facility, and did not dispute that it had engaged in conduct constituting a
‘constructive’ refusal to supply VANS providers access to it.
 Telkom’s case was that section 40(2) of the Telecommunications Act, read with its
telecommunications licence, granted it exclusivity over the services offered by the VANS
providers, and it was thus at liberty to refuse them access to its network infrastructure
 The Tribunal rejected this argument, and concluded that Telkom had contravened section
8(1)(b) – finding that the section does not require proof of anti-competitive effects – and
imposed a fine of R449 million on Telkom

Refusing or inducing a customer not to deal with a competitor s8(1)(d)(i)

 Elements of the prohibition –

o Complainant firm must be a competitor or potential competitor to the dominant
firm accused of inducing a customer not to deal
o The dominant firm’s customer must be required or induced not to deal with the
complainant firm
 ‘Requiring’ a customer not to deal contemplates a contractual provision to
this effect in a supply agreement
 ‘Inducing’ a customer not to deal contemplates something short of a
contractual stipulation, which will typically take the form of a financial
incentive paid by the dominant firm that serves to induce the customer to
procure all or most of its supply from the dominant firm to the exclusion of
rivals

CC v SAA [2005] ZACT 50 (28 July 2005)

 Facts:
o In October 2000, National Airlines, a competitor to SAA, lodged a complaint against
SAA with the Commission, alleging that SAA’s incentive schemes were unlawful
under s8(d)(i) (inducing a customer not to deal with a competitor)
o The Commission referred the complaint for adjudication before the Tribunal
 Tribunal said:
o SAA was presumptively dominant in the relevant markets (market for the purchase
of domestic airline tickets sale services from travel agents in SA, and the market for
domestic airline travel) because it had a market share over 45%
 o The first step in assessing whether conduct is prohibited under s8(c) or 8(d) is to
determine whether it constitutes an exclusionary act under either section
 For purposes of s8(c), this requires considering whether the conduct in
question falls within the definition of ‘exclusionary act’, which is defined as
‘any act that impedes or prevents a firm from entering into, or expanding
within, a market’
 For purposes of s8(d), this involves determining whether the conduct in
question falls within the ambit of the conduct described in subsections (i) to
(v), in which event the conduct is ‘presumed to be exclusionary’
 In both cases, the onus on establishing the exclusionary act is on the
complainant
o The second step is to determine whether the exclusionary act is anticompetitive in
effect. One of the two requirements must be satisfied by the complainant:
 1. Where there is evidence of actual harm to consumer welfare (e.g.
consumers paying more for domestic airline tickets than they would but for
the conduct in question); or
 2. If the exclusionary act ‘is substantial or significant in terms of its effect in
foreclosing the market to rivals’
o SAA had abused its dominance contrary to s8(d)(i) by using its incentive schemes to
induce travel agents, who exercised significant influence over consumers, not to
deal with SAA’s rivals
o SAA’s conduct was ‘exclusionary’ in nature and the effect of the incentive schemes
was to inhibit SAA’s rivals from expanding in the market, while at the same time
reinforcing SAA’s dominant position

Refusing to supply scarce goods to a competitor when it is economically feasible to do so - s8(1)(d)(ii)

 The respondent firm that is alleged to have refused to supply the complainant firm scarce
goods must be dominant
 The dominant firm must refuse to supply the scarce goods, either expressly or through
constructive conduct, to a competitor or potential competitor
 The refusal to supply must be in respect of scarce goods. Section 8(1)(d)(ii) does not refer to
‘services’, and accordingly, absent a purposive interpretation of the section, it will only be
prohibited for a dominant firm to refuse to supply scarce goods to a competitor or potential
competitor

Selling goods or services on condition that the buyer purchases unrelated goods or services (tying) -
s8(1)(d)(iii)

 Section 8(1)(d)(iii) requires the sale of the tying good or service to be conditional on the
acquisition of the tied good or service. The conditionality of a sale may take the form of an
explicit contractual provision, or through the conduct of the dominant firm in refusing to sell
the tying good or service in question unless the purchaser also acquires the tied good or
service
 The tied product must be ‘unrelated to the object of a contract’. In effect this means that the
tied product must be unrelated to the tying good or service (the tied product must be
distinct from the tying product)
  If consumers would purchase the tying and tied products independently of one another,
then the products are regarded as being distinct, and the requirement that the tied product
be ‘unrelated to the object of a contract’ would be fulfilled
o This may be established through direct evidence that when faced with a choice to
purchase the products separately (as opposed to in a ‘bundle’) consumers would do
so - ‘but for the tying arrangement imposed by Firm A, consumers would have
bought the one product without also buying the other’
 Also applies to conduct of a dominant firm that takes the form of coercion of a purchaser to
‘accept a condition unrelated to the object of a contract’ that leads them back to the
dominant firm and links the two markets

Selling goods or services below their marginal or average cost (predatory pricing) - s8(1)(d)(iv)

 Prohibits dominant firms from selling goods or services below marginal cost or average
variable cost, unless it can be shown that doing so produces technological, efficiency or
other pro-competitive gains that outweigh any proven anti-competitive effects
 A complainant is required to establish that the dominant firm sold the goods or services in
question at below marginal or average avoidable cost
o Marginal cost is the increase (or decrease) in the cost of production by producing
one extra unit
o Average variable cost is the variable cost of each unit of output, calculated by
dividing the total variable cost by the number of units of output
 Pricing conduct should occur over a sustained period of time (that is, it should not be a once-
off occurrence, or endure only for a limited period of time)
 A complainant is also required to establish that the dominant firm’s conduct produces anti-
competitive effects. Put differently, it does not suffice for a complainant to prove that the
respondent has sold its goods or services below marginal or average variable cost. It must
also show that doing so produces anticompetitive effects.

CC v Media24 case

 the case involved a complaint that Media24 had engaged in predatory pricing in the market
for community newspapers in Welkom by using a title called ‘Forum’ as a ‘fighting brand’,
using it to foreclose a rival (‘Gold Net News’) by charging advertisers below cost rates for
advertising, thereby forcing Gold Net News out of the market
 The Tribunal held that Media24 had priced below average total cost
 According to the Tribunal the additional evidence in the form of evidence of ‘direct intent’,
‘indirect intent’ and ‘recoupment’ demonstrated on a balance of probabilities that Media24
had engaged in the implementation of a ‘plan’ that was predatory in nature
 Regards the notion of ‘direct intent’, the Tribunal accepted that it could consider, albeit
when assessed against other evidence, evidence of subjective intent on the part of Media24
to foreclose competition. This evidence could, for example, take the form of statements
made by company representatives, board minutes, or strategy documents. The Tribunal
cautioned, however, that this evidence must be considered in light of other evidence, to
avoid erroneous conclusions
 Insofar as evidence of ‘indirect intention’ is concerned, the Tribunal stated that, unlike direct
intention, indirect intention is not reliant on direct intention as expressed by the respondent
firm, but is based on circumstantial economic evidence that may give rise to an inference
that conduct is predatory. Evidence of indirect intent is objective, and can include evidence
 of recoupment, evidence that for reputational reasons a dominant firm has engaged in
predatory pricing, or that the firm has targeted specific customers or competitors that are
reliant on external funding

Buying up a scarce supply of intermediate goods or resources required by a competitor - s8(1)(d)(v)

 A complainant would need to demonstrate that the dominant firm engaged in conduct that
falls within the ambit of the phrase ‘buying-up’ scarce goods or resources
o The act of ‘buying-up’ tends to suggest that the legislature contemplated the
prohibition to cover instances where a dominant firm purchases more of a good or
resource than it requires for its own production purposes – that is, that it is
acquiring the good or resource in circumstances where it already has sufficient stock
to cater for its own needs
 The legislature has not provided any guidance as to what quantities suffice for a finding that
a dominant firm has engaged in conduct that can be characterised as ‘buying-up’, however it
is suggested that a common-sense approach should be applied on a case-by-case basis, and
that the overriding consideration should be the extent to which the act of ‘buying-up’
produces anti-competitive effects
 The requirement that the ‘good’ or ‘resource’ is ‘scarce’ suggests that legislature
contemplated that there should be a short supply of the good or resource, irrespective of
the conduct of the dominant firm
 These goods or resources must be ‘intermediate’ in the sense that they are not actually sold
by the dominant firm in question, but are sold by third parties, and used as an input by firms
in the manufacture of products or the delivery of services in a market or markets in which
the dominant firm competes

Engaging in market squeezing - s8(1)(d)(vi)

 This provision was included in the 2018 amendment

 I.t.o s1: margin squeeze is defined to "occur when the margin between the price at which a
vertically integrated firm, which is dominant in an input market, sells a downstream product,
and the Abuse of dominance 15 price at which it sells the key input to competitors, is too
small to allow downstream competitors to participate effectively;’
 See case law discussed for s8(1)(c)

EXPLOITATIVE CONDUCT

 A dominant firm, in particular one that faces little or no competition from rivals, and whose
dominance is so entrenched that it is unlikely any firms will enter the market to compete
with it, will invariably charge consumers ‘monopoly prices’- highest prices that consumers
are able to pay
 S8(1)(a) makes it unlawful for dominant firm to charge consumers excessive prices for their
goods/services.
o Excessive price is one which bears no reasonable relation to the economic value of
that good/service
 The definition of an excessive price is wholly unsatisfactory. It tells one nothing about what
constitutes a ‘reasonable relation’ to the selling price, or what is meant by the ‘economic
value’ value of the goods or services in question, and offers no guidance to competition
authorities or private firms as to the factors that are to be taken into account to determine
 whether a price is excessive and thus unlawful. It has been left to the Tribunal and the
Competition Appeal Court to give meaning to the prohibition
 There are public policy reasons against intervention to curb excessive pricing:
o Markets self-correct
o Could be penalising rewards to innovation and risk-taking
o Public institutions have limited ability to properly assess cases- reluctance to be a
price regulator
o Simply too difficult to calculate counterfactual price.
 Still there is a case for intervention;
o Markets don’t always self-correct
o There may be significant barriers to entry
o Developing countries typically have entrenched monopolies
o And there is particular concern with abuse of dominance by formers SOE’s , or frims
with state support or ast special rights including current or past legal protection.

Pre 2018 Amendment

Harmony Gold Mining Company v Mittal Steel SA

 The case concerned allegedly excessive pricing on the part of Mittal in respect of flat steel
products
 The CAC stated that s8(1)(a) contained a four-stage process for a determination of excessive
pricing
o 1. Determining actual prices –
 a. the actual price charged for the goods or services in question that is
alleged to be excessive must be determined
o 2. Determining ‘economic value’ –
 a. Once the actual price is determined, the ‘economic value’ of the good or
service must be determined and expressed in monetary terms such that it is
possible to compare it to the actual price
 b. Economic value is determined with reference to the following
considerations:
 i. The notional price of the good or service under assumed
conditions of ‘long-run competitive equilibrium’.
o 3. Determining the ‘reasonableness’ of the price –
 a. If the price charged exceeds the ‘economic value’ of the good or service,
the competition authorities are then required to determine whether the
differential is unreasonable, and thus excessive
 b. ‘Reasonableness’ in this context entails a value judgment regarding the
extent to which the price exceeds economic value
 c. A number of factors guide the assessment of reasonableness, including:
the extent of the firm’s dominance, the degree of the mark-up in price
relative to economic value, and the nature of the market. If the market is
characterised by low levels of risk, then a significant mark-up above
economic value is less likely to be regarded as reasonable. However, in high
risk innovation markets, for example, a higher mark-up (and thus higher
profits) may be justified
o 4. Detriment to customers
  a. If it is established under Step 3 that the price charged is unreasonable
(and thus excessive), it is necessary to establish that it is to the detriment of
‘consumers’
 b. Consumers may include customers of the dominant firm who use the
product or service productively, as well as final consumers of the product or
service
 The Competition Appeal Court noted that the first two steps involve objective factual
determinations, whereas the latter two steps entail the exercise of subjective value
judgments. It also confirmed that the offence created by section 8(a) is not per se in its
characterisation, and that complainants are required to demonstrate (in the fourth step)
that the pricing conduct complained of is detrimental to consumers (being immediate
customers of the dominant firm and end-consumers).

CC v Sasol Chemical Industries (SCI) Ltd case

 It was alleged that SCI charged customers excessive prices for purified propylene and
polypropylene, materials used in the manufacture of plastic products, between 2004 and
2007
 The Tribunal ostensibly applied the four-step Mittal test but departed from it in material
respects. In applying the second stage of the test (which involves a determination of
‘economic value’), the Tribunal determined that the cost advantages inherited through state
subsidies (and other forms of institutional support) fell to be included in the cost
determination of ‘economic value’
 The Tribunal’s approach to the Mittal test was strongly criticised by the Competition Appeal
Court. In particular, it held that subjective cost advantages (such as historic state support)
must not be taken into account in determining ‘economic value’. Firm-specific cost
advantages of this nature had to feature in the third stage of the enquiry into
‘reasonableness’. The ultimate differential between actual prices and ‘economic value’ was
tainted by the Tribunal’s approach to the enquiry
 The Competition Appeal Court overturned the Tribunal’s finding that the SCI’s price bore no
reasonable relation to the ‘economic value’ of the goods sold by SCI. It evaluated the
evidence submitted by both parties on the issue of costs, and found that the price-cost
mark-up employed by Sasol was between 12% and 14%, and therefore not unreasonable
 The CAC court held that returns above ‘economic value’ are not unreasonable per se in
terms of section 8(1)(a), and that the competition authorities should avoid the temptation to
become price regulators where prices are not significantly higher than ‘economic value’.

Post 2018 Amendment

 Excessive pricing no longer a defined term – now a more defined statutory reasoning
process to get to an excessive price
 Ss8(2) and 8(3) were introduced
 S8(2) introduces the concept of prima facie cases and the reverse onus on the dominant firm
 A prima facie case will be established by following the three steps laid out in s8(3)
 Three steps laid out in s8(3)
o 1. Determine what is a competitive price
o 2. Compare the allegedly excessive price with the competitive price and determine if
the comparison shows the allegedly excessive price to be ‘unreasonable’
 a. Factors listed in s8(3)(a) to (f) are considered
  b. If it is found to be unreasonable, the prima facie case it met
o 3. Dominant firm has a chance (onus now shifts) to show its price (considering that
price alone, not in comparison to another price) is reasonable

PRICE DISCRIMINATION

 Firms are at liberty to charge consumers different prices for the same goods or services
where the costs of selling the goods or rendering the services do not justify differential
treatment
 ‘Price discrimination’ is commonplace, and has proven pro-competitive benefits that can
result in the efficient allocation of resources (allocative efficiency)
o An example of pro-competitive price discrimination is what is known as ‘Ramsey
pricing’. A firm may supply different products that have common costs
o By charging different customers different prices based on their ability to pay, the
firm is able to maximise its output.
o For example, airlines charge passengers different prices based on their class of
travel; and hotels charge different room rates to customers based on when they
booked, and the types of rooms or services consumers want to pay for

The prohibition

 Price discrimination is regulated in s9, separate from the abuse of dominance provisions in
s8
 It is important to note that although the prohibition is referred to as ‘price’ discrimination,
discrimination can occur in various forms other than just price. For example, section 9(1)(c)
contemplates discrimination in the form of the provision of services in respect of the goods
in question (for example, warranty repairs), or the payment for the goods or services (for
example, extended credit terms)
 It is also important to remember that the goods or services that are alleged to be sold at
different prices (or on different terms) must be sold pursuant to ‘equivalent transactions’
and must be ‘of like grade and quality’. Transactions that are ‘equivalent’ are those that
have the same or similar economic effect
 Beyond market dominance, three elements to prove for price discrimination:
o Action likely to have effect susbtanially preventing or lessening competition
o Action relating to equivalent transactions or like grade and quality
o Action discriminating between different purchasers in terms of
 Price
 Discount/rebate
 Provision of goods/services
 Payment for final goods/services.

Nationwide Poles v Sasol case

 A company called ‘Nationwide Poles’ privately referred a complaint to the Tribunal against
Sasol, a dominant firm, alleging that Sasol had engaged in prohibited price discrimination
 Nationwide Poles produced wooden poles treated with creosote (a wood preservative) and
argued that Sasol had infringed section 9(1) of the Competition Act by supplying creosote to
 Nationwide Poles’s rivals at lower prices (based on volume rebates), thereby placing
Nationwide Poles at a competitive disadvantage
 The Tribunal interpreted section 9(1) as having the purpose of protecting small businesses in
South Africa from competitive harm (in this case being competitively disadvantaged as a
result of being charged higher prices for creosote). The Tribunal held that it is necessary for a
complainant to show that the conduct that forms the basis of the complaint has a
competitive ‘relevance’ and that the conduct has a substantial effect
 The Tribunal held Nationwide Poles had shown the ‘competitive relevance’ of Sasol’s
conduct, in that Sasol, a downstream competitor, had through its conduct affected
Nationwide Poles’s input costs and impaired its ability to compete. The Tribunal held that
this effect was significant and that Nationwide Poles had therefore demonstrated the
substantial effect of the practice
 The Competition Appeal Court rejected the Tribunal’s interpretation of section 9(1). In the
first instance, it rejected the notion that the purpose of section 9(1) is to protect small
enterprises as opposed to the competitive structure of the relevant market or markets (that
is, the Competition Appeal Court rejected the notion that section 9(1) is about protecting
small competitors as opposed to competition in the market)
 The CAC held that, as per the plain wording of section 9(1), it is concerned with whether
price discrimination will substantially lessen or prevent competition (being the same enquiry
for merger analysis), and not with the ‘competitive relevance’ of the conduct
 It held that the test in section 9(1) is a probabilistic enquiry, and that any conclusion as to
the likely effect of conduct has to be based on evidence and not simply unsubstantiated
speculation.
 Applying this test it held that Nationwide Poles had only demonstrated that it had suffered a
competitive disadvantage as a result of Sasol’s conduct but it had failed to establish that the
conduct was likely to substantially lessen or prevent competition

S9(2) price discrimination safe ahrbours:

 Concept of safe harbour: allows for a defendant firm to mount an affirmative defence, in
addition to defending agsint the commission’s burden of proof and persuauson for s9(1)
 S9(2)(a):
 9(2)(b)
 9(2)(c)
 Get them from the ACT.

WEEK NINE AND 10: MERGERS

What is a Merger? – s12

 A merger occurs where two or more firms which previously operated independently of one
another, combine in such a manner that their decision-making is unified.
 Concept of control is fundamental to a merger- there is an acquiring firm and a target firm
 notion of control refers to one firm’s ability to direct the activities of another firm. Where
one firm acquires control over another the transaction pursuant to which the change of
control arose will constitute a merger under the Competition Act.
  Mergers can occur in variety of ways:
o A merger resulting in the formation of a new company
 Firm A and Firm B conclude an agreement whereby the two formerly
independent firms cease to exist, and combine to form a new company, Firm
C. This is what is often called ‘a merger of equals’.
o A merger resulting in the acquisition of sole control
 Firm A acquires 100% of the shares in Firm B and thereby acquires sole
control over Firm B.
o A merger resulting in the acquisition of joint or partial control
 Firm A acquires 51% of the voting shares in Firm B and thus acquires joint
control over Firm B

Introduction to different types of mergers

Horizontal mergers

 occurs between firms that are competitors (i.e. in a ‘horizontal relationship’), or potential
competitors in the same product and geographic markets and at the same level of trade.
 horizontal mergers pose a greater threat to effective competition than vertical or
conglomerate mergers because after the merger the relevant market has one less firm than
before, and post-merger the merged entity will generally have a higher market share (and
thus potentially greater market power) than either of the two firms prior to the merger.
 This greater level of concentration in a market post-merger may lead to what are referred to
as
o unilateral effects: where the merged entity is able to raise prices or reduce output
on its own post-merger; or
o co-ordinated effects: where post-merger there will be fewer market participants and
it is likely that the merged entity and other competitors will have the incentive and
ability to co-ordinate their conduct

vertical mergers

 A vertical merger occurs between firms at different levels of the supply chain (that is,
between firms that are in a ‘vertical relationship’). E.g. where an ‘upstream’ supplier merges
with a ‘downstream’ distributor a vertical merger occurs.
 Vertical mergers are less likely to negatively affect competition than horizontal mergers. This
is because, unlike horizontal mergers, they do not entail the loss of competition between the
merger parties – the upstream supplier does not compete with the downstream distributor
pre-merger.
 Vertical mergers often unlock efficiencies, such as setting lower prices through eliminating
the two margins that were historically set by the upstream and downstream firms. However,
there are cases in which vertical mergers may be harmful to competition.
 The predominant concern with vertical mergers is that merging firms with market power
may foreclose rivals post-merger, either ceasing supply of an upstream input to a
downstream rival, or refusing to buy the products of an upstream rival.

Conglomerate mergers

 Conglomerate mergers are mergers involving firms that are not in a horizontal or vertical
relationship.
  the merging firms will typically offer goods or services for sale in different product or
geographic markets. It is for this reason that conglomerate mergers typically do not raise
competition concerns, and moreover may result in economies of scope and will therefore
seldom be prohibited
 However, there are relatively rare cases in which conglomerate mergers may give rise to
anti-competitive effects. For example, where a firm has market power in one market post-
merger it may be able to leverage its market power in that market into another
neighbouring market by abusing normally pro-competitive practices such as bundling or
tying.
 A conglomerate merger may also result in the elimination of potential competitors

Why regulate mergers?

 Merger activity gives rise to many benefits:

o merged firm being able to exploit efficiencies of scale and scope
o efficient scale of production should reduce manufacturing costs, and result in lower
prices for consumers.
o Mergers may also result in new products being developed, where the merger parties
combine research and development programmes that facilitate innovation.
o A merger may also rescue a failing firm from liquidation
 threat of acquisition acts as an important discipline on under-performing or inefficient firms,
and their management.
 Why regulate mergers?
o mergers have the ability to fundamentally alter the structure of markets. A merger
may lead to a firm acquiring a dominant position or market power in one or more
markets, or expanding and entrenching that market power. Left unchecked, merger
activity can result in firms ultimately attaining positions of monopoly power.

Procedural Aspects of Merger Control

 Section 12(1)(a) of the Competition Act provides that a merger occurs in the following
circumstances:
o ‘when one or more firms directly or indirectly acquire or establish direct or indirect
control over the whole or part of the business of another firm.’
o Section 12(1)(a) thus establishes that the acquisition of control (either direct or
indirect) is a necessary jurisdictional fact for the existence of a merger. It also
provides that not only can control be direct or indirect, but that it can be over the
whole or part of the business of a firm.
o Distellers- merger of firms with 90% control by common shareholders- still needed
to notify the competition authorities.
 Section 12(1)(b): a merger contemplated in section 12(1)(a) can be achieved ‘in any manner’,
and includes the purchase of shares, and interest or assets in another firm, or through an
‘amalgamation’ or other ‘combination’ with the other firm in question.
o The Competition Appeal Court has confirmed that ‘control’ can arise pursuant to a
series of transactions.
 Section 12(2) provides a non-exhaustive list of circumstances in which a person (which
includes natural and juristic persons) will be deemed to have acquired control of a firm,
where the person:
 o a) acquires beneficial ownership of more than half of the issued share capital of a
firm;
o b) is entitled to vote a majority of the votes that may be cast at a general meeting,
or has the ability to control the majority of those votes, either directly or through an
entity controlled by them;
o c) is able to appoint the majority of directors of a firm, or veto their appointment.
o d) is a holding company, and the firm is a subsidiary of that company as
contemplated in the Companies Act;
o e) where the firm is a trust, control occurs through the ability to control the majority
of the votes of the trustees, to appoint the majority of the trustees or to appoint or
change the majority of the beneficiaries of the trust;
o f) where the firm is a close corporation, control arises by virtue of the ownership of
more than half of the member’s interest, or direct control over more than half of
such member’s interest, or control over the majority of the members’ votes in the
close corporation; or
o g) through the acquisition of the ability to ‘materially influence’ the policy of the firm
in a manner comparable to a person who, in ordinary commercial practice, can
exercise an element of control referred to in paragraphs (a) to (f) referred to above.
 The Competition Appeal Court has held that section 12(1) of the Competition Act is to be
broadly construed to ensure that the widest possible range of transactions receive
competition scrutiny
 Bulmer: CAC:
o the purpose of merger control envisages a wide definition of control, so as to allow
the relevant competition authorities to examine a wide range of transactions which
could result in an alteration of the market structure and in particular reduce the
level of competition in the relevant market.
o The wording of section 12(2) clearly contemplates a situation where more than one
party simultaneously exercises control over a company. This situation can be
illustrated with the following example:
 A, beneficially owns more than half of the issued share capital of the firm.
He concludes an agreement with B in order that the latter may run the
business. B agrees provided that he obtains control over the appointments
to the board of directors as well as of senior staff and marketing policy. In
such a situation A would control the firm as defined in terms of section 12(2)
(a) and B would exercise control as defined in term of section 12(2)(g). In
short, while A would have ultimate control, B would have control of a
sufficient kind to bring him within the ambit of control as defined in section
12.
 Competition Tribunal in Ethos: s12(2) lays out bright lines of when control will be assumed.
When firms cross that line, they must notify the commission.
o Control (sole control) is presumed in these cases- these are bright lines

Types of Control under s12(2)

Section 12(2)(a): control through the ownership of shares

 Section 12(2)(a) provides that a person controls a firm if that person:

 o ‘beneficially owns more than one half of the issued share capital of the firm’
 Basically ownership of majority of shares gives rise to control.
 N.B. ownership of majority shares doesn’t always give control though, there could be an
agreement that one firm even though owns less shares, will exercise more control, or there
will have less voting rights
o example of where a transaction that results in the acquisition of beneficial
ownership of more than half of the shares in a company without necessarily
conferring control arose in Cape Empowerment Trust Ltd v Sanlam Life Insurance Ltd
and Another- Sanlam had some preference shares that were more than majority but
did not confer control
 beneficial ownership of shares v beneficial interest (companies v close corporations)
o In Caxton CTP Printers and Publishers Ltd v Naspers Ltd the Tribunal found that it
was not necessary to determine the question of whether an indirect interest falls
within the ambit of section 12(2)(a) of the Competition Act. It did, however, hold
that if section 12(2)(a) does contemplate indirect interests, then it must be the case
that the holder of the interest should ‘at the very least, on its own, control the
indirect holding.

Section 12(2)(b): control through voting rights

 Section 12(2)(b) provides that a person controls a firm if that person: ‘is entitled to vote a
majority of the votes that may be cast at a general meeting of the firm, or has the ability to
control the voting of a majority of those votes, either directly or through a controlled entity
of that person’.
 As discussed above, it is possible to own the majority of the shares in a company without
controlling the majority of the voting rights in the company. Section 12(2)(b) contemplates
circumstances in which a person acquires control over a firm (such as a company or close
corporation) through the ability to control votes at meetings, either directly or indirectly
through a ‘controlled entity’. Voting rights may, for example, be determined in the firm’s
founding documents (such as the memorandum of incorporation of a company), or in
shareholder agreements.
 When does 12(2)(b) apply?
o Direct voting control:
 A holds the majority of shares, which have voting rights in B; or holds the
majority of voting rights (not necessarily shares in B)
o Indirect voting control:
 A holds the majority of voting rights in B, and B in turn holds the majority of
voting rights in C. On this basis A controls C indirectly as contemplated in
section 12(2)(b) of the Competition Act.

Section 12(2)(c): control through the right to appoint directors, or veto their appointment

 Section 12(2)(c) provides that a person controls a firm if that person: ‘is able to appoint or to
veto the appointment of a majority of the directors of the firm’.
 s12(2)(c) recognises that a company ultimately acts through its directors, and thus if a
person is able to control who is appointed to the board of directors (or indeed who is not
appointed), that person is able to exercise control over the company.
 Section 12(2)(c) is not expressly limited to application in the case of companies. The term
‘director’ is, however, strictly speaking only relevant in the case of companies (close
 corporations have ‘members’, trusts have ‘trustees’). The ability to appoint (or veto the
appointment of) directors may arise, for example, by virtue of the founding documents of a
company, or by way of a shareholders’ agreement.

Section 12(2)(d): control through a subsidiary relationship

 Section 12(2)(d) provides that a person controls a firm if that person: ‘is a holding company,
and the firm is a subsidiary of that company as contemplated in section 1(3)(a) of the
Companies Act, 61 of 1973’. (this is reference to the old act)
 S1(3)(a) of Old Companies Act:
o a company (B) shall be deemed to be a subsidiary of another company (the parent
company (A)) in the following instances:
 Where A holds the majority of voting rights in B (as is contemplated in
section 12(2)( ) of the 65 b Competition Act).
 Where A has the right to appoint directors holding a majority of the voting
rights at meetings of the board of B. (This is slightly different to section 12(2)
( ) of the Competition Act in that section 66 c 12(2)(c) simply refers to the
ability to control the appointment of a majority of directors, and does not
address whether or not the majority must have the majority of the voting
rights at board meetings).
 Where A has sole control of a majority of the voting rights in B, whether
pursuant to an agreement with other members or otherwise.
 Where B is a subsidiary of C which is in turn a subsidiary of A.
 Where A and/or any of its subsidiaries hold the rights in B referred to in
points 1 to 3 above.
 Although section 12(2)(d) of the Competition Act refers to the Old Companies Act, it is
suggested that regard should now be had to section 3 of the New Companies Act, which
deals with ‘subsidiary relationships

Section 12(2)(e): control of a trust

 Section 12(2)(e) provides that a person controls a firm if that person: ‘in the case of a firm
that is a trust, has the ability to control the majority of the votes of the trustees, to appoint
the majority of the trustees or to appoint or change the majority of the beneficiaries of the
trust’.
 As is the case with directors of a company, a trust acts through its trustees. Trustees stand in
a fiduciary relationship to the trust, and manage the trust for the benefit of its beneficiaries
in accordance with the trust’s founding document, and subject to the Trust Property Control
Act. Thus, where a person controls the appointment of the majority of trustees, or the
manner in which the majority of trustees exercise their voting rights, that person will be said
to have control of the trust for purposes of section 12(2)(e) of the Competition Act.
 But what about the power to appoint or change beneficiaries? Beneficiaries (unless also
trustees) will not ordinarily have control of a trust. However, the power to appoint or
change the majority of the beneficiaries is nevertheless deemed to give rise to control of the
trust for purposes of section 12(2)(e)

Section 12(2)(f): control of a close corporation

  Section 12(2)(f) provides that a person controls a firm if that person: ‘in the case of a close
corporation, owns the majority of members’ interest or controls directly or has the right to
control the majority of members’ votes in the close corporation’.
 Pursuant to Schedule 3 of the New Companies Act, from 1 May 2011 no new close
corporations may be registered. However, close corporations incorporated prior to the date
continue to exist, and are regulated by the Close Corporations Act.
 Section 12(2)(f) caters for situations where control of a close corporation is acquired. It
contemplates the acquisition of control through the majority of ‘members’ interest’ (in
effect the equivalent to the beneficial ownership of shares in a company as per section 12(2)
(a) of the Competition Act, or the ability to directly or indirectly control the majority of
members’ votes (which is essentially the equivalent to section 12(2)(b) of the Competition
Act.
 Section 12(2)(f) does not deal with control over the appointment of persons in management
authority (the equivalent of directors in company law terms). However, this is because the
Close Corporations Act contemplates that it is in fact managed by its ‘members’, who stand
in a fiduciary relationship to the close corporation.

Section 12(2)(g): control through the acquisition of ‘material influence’

 Section 12(2)(g) provides that a person controls a firm if that person: ‘has the ability to
materially influence the policy of the firm in a manner comparable to a person who, in
ordinary commercial practice, can exercise an element of control referred to in paragraphs
(a) to (f)’.
 Basically a catch all provision to catch what doesn’t fall into the bright lines set out from a to
f, but which nevertheless give rise to a change of control sufficient to constitute a merger.
 12(2)(g) seeks to establish ‘whether a firm has de facto rather than de jure control over a
target firm’. In line with the objectives of the merger control provisions of the Competition
Act section 12(2)(g) is only applied in circumstances where the influence in question extends
to strategic commercial behaviour of the firm – that is, to competitively relevant conduct

Caxton and CTP Publishers and Printers v Media 24 Proprietary Limited and Others (136/CAC/March
2015) [2015] ZACAC 5 (25 November 2015) – the ‘Novus case’

 In the Novus case the Competition Appeal Court clarified certain important principles in
relation to the proper interpretation of section 12(2)(g).
 Summary in textbook
 The Competition Appeal Court made a number of important findings of principle in case:
o First, it is not necessary that a person have a right in the strict sense to steer the
policy of a firm, or appoint someone to do so, but the person must have the power
to do either.
o Second, the ‘ability’ to materially influence can be a power sourced in legal
instruments, such as the company’s founding documents, or shareholder
agreements.
o Third, ‘ability’ means that the person can exercise such influence without it being
necessary to show that this necessarily occurred in practice. In other words, and
contrary to the findings of the Tribunal on this score, it makes no difference under
section 12(2)(g) of the Competition Act whether or not material influence is as a fact
exercised – what matters is whether or not a person has the ability to do so.
 o Fourth, the ‘influence’ that can be exercised under section 12(2)(g) must, as per the
wording of the section, be in respect of matters of ‘policy’, which would be
‘important or strategic decisions of the company such as are typically decided by
shareholders in general meetings or at board level (as reflected by (b) and (c))’.
o Fifth, ‘materially’ refers ‘not to the decisiveness of the power but to the range of
matters over which it extends. In this regard the court held

Types of Control- concepts

 De jure- control by the legal ability to do so. Control over majority of voting shares, veto
rights e.g. ability to veto approval of budget or business plan or requirement to approve
them. (s12(2)(a)-(f))
 De facto- control by commercial leverage. E.g. financial (usually), expertise in sector,
influence at board level. (12(2)(g)).
o N/B/ there is a commercial likelihood that one can control the majority at a general
meeting even below 50% mark
 Can a company only have one controller at a time?
o Distillers: no, company can have more than one, control is not unitary concept.
Firms can be jointly controlled by many other firms
 In Ethos the Tribunal held that ‘a change of control is a once-off affair’. Where a party
acquires sole control over a firm, but their control may be attenuated or fettered to some
extent by other shareholders, for example, and the sole controller later acquires unfettered
control, this would not be notifiable. Remember, you only have to notify if it is the first pass
of a bright line.
o HCI v Competition Commission, (CC) says the same about change of control
 However, where parties have joint control of a firm, and one of the parties acquires sole
control (that is, the form of control exercised over the company changes from joint control
to sole control), this constitutes a merger that, depending on whether the merger
notification thresholds are met, would require notification to the Commission.
o Iscor/Saldanah- gain/loss or joint control needs to be notified.
 A joint venture is a separate business that is established for a specific purpose over which
two or more independent parties exercise joint control.
o For example, two companies, which may in fact be competitors, might establish a
joint venture for the specific purpose of researching and developing a new
technology that neither of them would otherwise be able to develop individually.
 In this sense joint ventures may be efficiency-enhancing and thus pro-competitive. It can,
however, be difficult to determine precisely whether a joint venture arrangement is a
restrictive agreement (which may be anti-competitive where it involves co-operation
between competitors), or whether it is in fact a merger.
 The Commission regards joint ventures as a merger in circumstances where:
o competitors establish a new entity, and transfer assets into the new entity, giving
rise to the acquisition by the new entity of control of a business, or part thereof.
o two or more companies acquire joint control of an existing entity (or any part
thereof) in which none of them had control prior to the acquisition

Control over part of a firm

What happens when theres control over part of a firm rather than over the whole firm.
Competition Commission and Edgars Consoslidated Stores Ltd and Others (95/FN/Dec02) [2003]:

 matter concerning a transaction between Edgars and the Retail Apparel Group (RAG). The
Commission referred the parties to the Tribunal, alleging that the first leg of the transaction
in question constituted a merger which they had failed to notify. The transaction involved
Edgars acquiring RAG’s ‘book debts’ and certain ancillary rights. RAG’s book debts included a
database of customers, and the parties agreed that it constituted an ‘asset’ as contemplated
in section 12(1)(b)(i) of the Competition Act (which recognises that mergers can be achieved
through the transfer of assets).
 The critical question was whether or not it constituted a ‘part’ of RAG’s business, and thus a
merger.
 The Tribunal made the following findings that are of relevance for present purposes:
o It held that the question of when an asset becomes a ‘business’ (or part of a
business) is a matter of interpretation based on the facts of each case. It noted that:
‘… too wide a notion of business would make any number of ordinary transactions
notifiable as mergers, too narrow, would risk creating a loophole for regulatory
avoidance’.
o It referred to what has become known as the ‘Hovenkamp test’ in relation to asset
acquisitions, and to Hovenkamp’s observation that: ‘antitrust policy becomes
concerned with partial asset acquisitions when the asset that changes hands
represents a measurable and relatively permanent transfer of market share or
productive capacity from one firm to another’.
o It ultimately held that on the facts of the case before it, the transfer of RAG’s book
debts and ancillary rights constituted the transfer of an asset which satisfied the
Hovenkamp test: it was a permanent transfer of market share from RAG to Edcon.
 In this regard it held as follows: ‘What the parties acquired as a result of the first merger was
a not a mere book debt. Indeed, this case should not be considered as authority for the
proposition that the acquisition of a book debt constitutes, if the thresholds are met, a
notifiable merger. What we are saying is that when the acquisition of an asset constitutes
the acquisition of a business or part of a business is a question of fact that must be examined
in the context of the whole transaction. Is the acquiring firm by acquiring the asset, acquiring
something more than a bare asset that would enhance its competitive position? One
example of this would be where the purchase of an asset enables the acquiring firm to
increase its market share or to pre-empt a rival from increasing its.

SABC case:

 an aspect of the case involved whether or not an agreement concluded between the SABC
and MultiChoice gave rise to the acquisition by MultiChoice over part of the business of the
SABC. As was the case in Edcon, the essential issue was whether what was transferred under
the agreement constituted part of a ‘business’ for purposes of section 12 of the Competition
Act.
 Caxton, which had brought an application to compel the SABC and MultiChoice to notify the
transaction to the Commission as a merger, argued that the agreement, in terms of which
MultiChoice acquired rights over certain of the SABC’s archival content, constituted a
merger.
 The Tribunal dismissed the application, and made the following findings that are of
relevance for present purposes:
 o It held that the first question that had to be determined was whether there was a
transfer of productive capacity. The Tribunal decided that there was no evidence to
show that the archival content could be utilised as a ‘stockpile’ to produce additional
broadcast material, and thus that the archival content did not have productive
capacity.
o It held that the second question that had to be determined was whether or not the
transfer of the archival content transferred market share from the SABC to
MultiChoice. The Tribunal determined that there were no facts to support the
proposition that market share would be transferred. In this regard, it noted that in
Edcon it was clear that market share had been transferred, because, as explained
above, the transaction involved the transfer of book debts that included RAG’s
customer base, and that RAG would no longer exist as a rival in the market.
o Finally, the Tribunal remarked that the duration of the transfer of the archival
content (which was for a period of five years), was shorter than what was generally
regarded in other jurisdictions as satisfying Hovenkamp’s suggested requirement
that there be a ‘relatively permanent’ transfer of the asset.

N.B. In summary, the Edcon and SABC cases confirm that a merger can occur where control of a part
of a business (such as an asset) is transferred from one party to another. However, in order for it to
constitute a merger, the part of the business transferred must have productive capacity (in the sense
that it can be utilised by the person acquiring it to generate an output), and must be transferred on a
relatively permanent basis (in the SABC case, a period of five years was insufficient). It must also
have market share that can be attributed to it, in the sense that the part of the business transferred
will increase the market share of the party acquiring it, or prevent a rival from increasing its market
share.

Notification of Mergers

 The Competition Act established a system of merger control that requires parties to assess
whether transactions meet the requirements for notification, and if so to notify the
competition authorities accordingly.
 In order for a transaction to require a mandatory notification to the competition authorities,
the transaction must:
o constitute a ‘merger’;
o have an effect within South Africa;
o and meet the asset and turnover thresholds established in terms of the Competition
Act.
 The Competition Act distinguishes between three categories of mergers – small mergers,
intermediate mergers, and large mergers. Only intermediate and large mergers require
mandatory notification:
o To qualify as an intermediate merger, the acquiring and the target firm must have
combined assets or turnover (whichever combination is the higher) of at least R560
million (new its 600 million) and the target firm must have assets or turnover
(whichever is the higher) of at least R80 million.
 Merger parties must notify commission of proposed merger, who has 60
business days to make decision.
 May not implement merger before approval from commission
 If commission approves merger with conditions, tribunal must consider the
merger
 o To qualify as a large merger, the acquiring and target firm must have combined
assets or turnover (whichever combination is the higher) of at least R6,6 billion and
the target firm must have assets or turnover (whichever is the higher) of at least
R190 million.
 Merger parties must notify commission
 May not implement merger till approval from Commission and Tribunal
 Commission must make recommendations to tribunal whether to approve
the merger or prohibit it (within 40 days, can be extended for 15 days
periods)
 Tribunal must approve or prohibit.
 In calculating these amounts, the only relevant assets are the assets of the firms in South
Africa; the only relevant turnover is turnover in, into or from South Africa.
 In the case of the acquiring firm, the entire group of which the acquiring firm forms a part of
must be taken into account in doing the turnover and asset calculation. In the case of the
target firm, only the firm that is transferred is taken into account and its subsidiaries
 The Competition Act does not prescribe specific time limits within which a merger must be
notified, but parties to a merger that requires notification may not implement the merger
until the merger has been approved
 Small mergers are not required to be notified, but if the commission is of the opinion that
the small merger will substantially prevent or lessen competition or cannot be justified on
public interest grounds, it is entitled at its own discretion to call upon the small merger
parties to notify the merger within 6 months after the merger has been implemented.
 Commission will also require notice of small merger if one of the firms involved is under
investigation for cartel conduct or abuse of dominance.

Interventions

 3rd parties can be informed of merger notifications:

o the Commission’s investigatory process requires it to contact third parties, especially
customers and competitors before concluding an investigation;
o trade unions and employee representatives are entitled to be notified of and
participate in merger proceedings and are provided with a copy of the non-
confidential version of the merger notification;
o and the Ministers of Economic Development and Finance are also notified of
mergers and are entitled to participate (in prescribed circumstances)
 in proceedigns before the commission any person may participate and may voluntarily file
any documents wrt to the process.
 In the tribunal however, its more formalised, need to have a material interest in the
transaction, must file an application to intervene, if granted then entitled to full record
except confidential information and can participate fully in the proceedings and entitled to
sum it expert reports and witness statements, lead evidence and cross examine the parties.

Outcome fo merger investigations

 For small and intermediate: commission issues a written decision to the parties- a certificate
with reasons for decision
 For large mergers the tribunal gives detailed reasons for decision in form of an order.
  A merger party can, within 10 business days of the Commission’s decision, request the
Tribunal to consider the approval, conditional approval or prohibition of a small or
intermediate merger.
 An appeal to the Competition Appeal Court of a decision of the Tribunal must be filed within
15 business days of the Tribunal’s decision

SUBSTANTIVE MERGER ANALYSIS

 Substantive merger analysis is forward-looking. It involves drawing inferences on a balance

of probability about what the world would be like if the merger under consideration were to
proceed.
 it involves determining how the structure of the relevant market will be affected by the
merger, and whether post-merger there would be a substantial lessening of competition.
 Central to substantive merger analysis is the comparison between the state of competition
in a market absent the merger to the likely state of competition post-merger.
 The counterfactual refers to the hypothetical scenario in which the merger would not take
place. The rationale behind framing a counterfactual is that it provides a basis for
comparison. It frames the merger analysis. Most often the appropriate counterfactual is the
status quo of the market plus imminent and predictable changes to the market
 It is important to bear the following in mind when determining the appropriate
counterfactual:
o Defining the relevant market is critical for substantive merger analysis. This is
because the boundaries of the market help frame the counterfactual, and thus the
probabilistic enquiry into the competitive dynamics of the market post-merger.
o In most cases the appropriate counterfactual will be the state of competition in the
relevant market that exists at the time of the merger (that is, the status quo).
o However, markets are dynamic, meaning that they evolve and can be altered by
certain (sometimes dramatic) events. Thus, the counterfactual must be framed
taking into account not necessarily just the status quo that prevails pre-merger, but
imminent and predictable changes to the market. For example, it might be relevant
in a merger assessment that but for the merger one of the parties will imminently
exit the market (that is, that one of the parties is what is known as a ‘failing firm’).
This will fundamentally alter the analysis. Instead of the counterfactual being
premised on the failing firm being a competitor able to exercise a competitive
constraint, it should rather be premised on the state of the market without the
firm’s presence as an independent competitor.
o Finally, determining the counterfactual may also involve other considerations, such
as imminent changes to the way in which the relevant market is regulated (for
example, through the requirement to obtain permits to participate in the market,
which would create a barrier to entry).

The role of market definition in merger analysis

  market definition is fundamental to the substantive analysis of mergers. It helps to define
the competitive constraints that the merged entity will face post-merger, and thus whether
the merged entity will have the ability to exercise market power such that competition will
be substantially lessened or prevented, and accordingly whether or not the merger should
be permitted (and if so whether it should be permitted with or without ‘conditions
 medicross- CAC- market definition takes centre stage in merger analysis, it is the first step

Substantive merger analysis- the Act

Section 12A (1)

 Section 12A of the Competition Act sets out the manner in which the competition authorities
are required to analyse the competitive effects of a proposed merger.
 S12A (1): Whenever required to consider a merger, the Competition Commission or
Competition Tribunal must initially determine whether or not the merger is likely to
substantially prevent or lessen competition, by assessing the factors set out in subsection
(2), and –
o a) if it appears that the merger is likely to substantially prevent or lessen
competition, then determine –
 i) whether or not the merger is likely to result in any technological, efficiency
or other pro-competitive gain which will be greater than, and offset, the
effects of any prevention or lessening of competition, that may result or is
likely to result from the merger, and would not likely be obtained if the
merger is prevented; and
 ii) whether the merger can or cannot be justified on substantial public
interest grounds by assessing the factors set out in subsection (3);or
o b) otherwise, determine whether the merger can or cannot be justified on
substantial public interest grounds by assessing the factors set out in subsection (3).
 12A (1) process: In Schumann Sasol the Competition Appeal Court explained that section
12A of the Competition Act provides for ‘definite stages in the inquiry which it mandates’
 o Step 1: the SLC test: define the market and determine whether the proprosed
merger will substantially lessen or prevent competition (SLC= substantially lessen
compt) with reference to certain factors set out in s12A(2).- this is threshold test
o Step 2(a): if the proposed merger does substantially prevent or lessen Competition,
determine if it gives rise to efficiency gains or other pro-competitive efficiencies.
(innovation/efficiencies of scale etc) and
o Step 2(b): whether it can or cannot be justified on substantial public interest
grounds which are set out in 12A(3).
o Step 3: the public interest test: even if the merger does not substantially prevent or
lessen competition, the authorities are required to consider whether it can be
justified on substantial public interest grounds and which entails a consideration of
the effects of the merger on:
 A particular industrial sector or region
 Employment
 The ability of small business or firms controlled or owned by histricaly
disadvantaged people to become competitive
 The ability of national industries to compete in international markets.

Section 12A (2)

 S12A(2): ‘When determining whether or not a merger is likely to substantially prevent or

lessen competition, the Competition Commission or Competition Tribunal must assess the
strength of competition in the relevant market, and the probability that the firms in the
market after the merger will behave competitively or co-operatively, taking into account any
factor that is relevant to competition in that market … (the factors are listed below, it’s a
non exhaustive list):
 Section 12A(2)(a): the levels of import competition (actual or potential) in the relevant
market.
o This factor concerns the extent to which the merged entity may face competition in
the form of imports from other countries, thereby constraining its ability to exercise
market power and forcing it to compete.
 Section 12A(2)(b): the barriers to entry into the relevant market are a factor considered by
the competition authorities to determine inter alia the extent to which the merged entity
may face potential competition post-merger.
o High entry barriers (such as onerous regulatory requirements,) will deter future
competitors, and help insulate the merged entity from competition. By contrast, the
absence of entry barriers means that it is more likely for the merged entity to face
the prospect of competition should it, for example, attempt to raise prices or reduce
output.
 Section 12A(2)I: the ‘level and trends’ of concentration in the market and the ‘history of
collusion’ in the market, are relevant factors in the assessment of mergers (particularly in
relation to horizontal mergers).
o For example, in a market that has only three competitors (A, B and C), if B acquires
C then post-merger C will no longer be a competitive constraint on A and B. The
market becomes more ‘concentrated’ in that A and B will be the only firms
competing in the market post-merger. The fewer firms that compete in a market
post-merger the more likely it is that they may be able to tacitly collude with one
another. The risk of collusion is greater in markets characterised by homogeneous
 goods (for example, cement), and also where the market has a history of collusion
(for example, through industry associations).
 Section 12A(2)(d): the extent to which the merged entity’s conduct may be constrained by
countervailing buyer power is also a relevant factor.
o Countervailing buyer power in this context means the power of the merged entity’s
customers (or even a single customer) to constrain the merged entity from
exercising market power by, for example, raising its prices or reducing output.
 Section 12A(2)I: the nature of the market is a relevant factor in the assessment of a
proposed merger.
o The dynamic characteristics of the market are important considerations. These
include factors such market growth, the levels of innovation and product
differentiation. Markets that are characterised by high levels of innovation,
fluctuating market shares and differentiated products are less likely to result in
collusion between rivals than static markets with homogeneous products and a
history of stable market shares.
 Section 12A(2)(f): the nature and extent of vertical integration in the relevant market may be
an important factor.
o Vertical integration in this context means the merging of businesses at different
levels of the supply chain. For example, an upstream producer of widgets (A) may
acquire a downstream distributor of widgets and sprockets (B). A may acquire the
ability to control an important route-to-market of widgets (which it produces) and
sprockets, which may be produced by a rival. Markets characterised by a significant
degree of vertical integration may create an environment that enables the
foreclosure of rivals, or even the collusion between competitors.
 Section 12A(2)(h): whether or not a proposed merger will remove an effective competitor
may also be a relevant consideration.
o Markets often have a ‘maverick’ – a firm that typically leads the way in innovation or
price-cutting, thereby disrupting the market for ultimate benefit of consumers.
Where a merger will result in the removal of a maverick, this will remove an
important competitive constraint on the merged entity
 12A (2) (g)- failing firm; (i) and (j)- degree of presence elsewhere in market; (k) mergers over
a specific time period
 N.B. relevance of the above factors depends on the facts of the case, apply them based on
available evidence.
 Competition authorities must be satisfied that there is a causal link between the merger and
the anti-competitive (or pro-competitive) effects that it produces.

Section 12A (3)

 Non-efficieny considerations, the substantial public interest factors which are important for
us are listed below:
 The competition authorities must conduct an assessment of the effect of the proposed
merger on the public interest grounds listed in section 12A(3), regardless of the outcome of
the competition analysis conducted under section 12A(2).
 The consideration of the public interest grounds is limited to merger-specific consequences
that are substantial (that is, if a merger does not raise public interest concerns of the nature
 described in section 12A(3) and if they are not of a ‘substantial’ nature, the competition
authorities do not have jurisdiction to address them).
 There is no requirement on merger parties to show that a merger can be justified on public
interest grounds. It is only where it is shown that prima facie a merger is not justifiable on
substantial public interest grounds that the merger parties bear an evidential burden to
rebut this.
 The import of section 12A(3) is that the competition authorities may prohibit a merger (or
impose conditions) on public interest grounds alone (that is, even where there is no
substantial prevention or lessening of competition under the competition analysis). Equally,
a merger with anti-competitive effects that would otherwise be prohibited may be approved
on the legislated public interest grounds.
 Public interest considerations may conflict with one another and thus must be weighed up
against each other in order to determine the net public interest of a proposed merger. In
circumstances where different public interest considerations point in different directions,
every public interest ground asserted must be viewed in isolation to determine whether it is
substantial. If more than one contradictory public interest factor is found to be substantial,
then the competition authorities must attempt to reconcile them. If no reconciliation is
possible, then the conflicting aspects must be balanced and a net conclusion reached.
 The conclusion on the public interest assessment must have regard to the conclusion on the
competition law assessment. That being said, the competition law assessment and the net
public interest assessment need not point in the same direction before a merger can be
approved or prohibited; although, to the extent that they do, the determinations can be
used to bolster the decision

HORIZONTAL MERGERS

 merger between competing firms gives rise to unilateral effects or co-ordinated effects

Unilateral effects:

 theory of unilateral effects is premised on the fact that a merger between competitors may
impede effective competition because it leads to the loss of competition between the
merger parties
 Competition authorities are particularly concerned about horizontal mergers in
concentrated markets where the merger will result in the merged entity acquiring or
strengthening a position of dominance, which would enable the merged entity to exercise
market power and profitably increase prices or reduce output
 how does one assess whether a merger will give rise to unilateral effects? Certain of the
factors set out in section 12A(2) of the Competition Act assist in this regard

Market shares and market concentration

 It is generally accepted that the point of departure in determining whether or not a

horizontal merger is likely to result in unilateral effects is the assessment of the merger
parties’ market shares
 The manner in which market shares are calculated will depend on the nature of the market.
For example, market shares may be calculated with reference to the total value of goods or
services sold; the number of units sold; or with reference to the output capacities of firms in
the market
  Where a merger will result in a merged entity with a high market share it is likely that it will
be able to exercise market power, particularly where its market share is higher than that of
its rivals. By contrast, where the merged entity will have a small market share post-merger,
it is generally accepted that the merger is unlikely to give rise to unilateral effects

 Concentration levels, like market shares, are useful indicators as to whether or not a
horizontal merger is likely to substantially prevent or lessen competition in the relevant
market. They are not, however, determinative of the issue, and must be considered together
with other factors (such as those discussed below) as part of what the Tribunal has termed a
‘deeper qualitative enquiry’ to determine whether a horizontal merger will substantially
lessen or prevent competition.

Entry and expansion

 the ease with which potential competitors can enter the market, or existing competitors can
expand within it, are potentially highly relevant to the assessment of horizontal mergers
 If firms are able to enter the market relatively easily, or expand their existing positions in the
market, there is a greater likelihood of the merged entity facing competitive constraints
post-merger, and thus not being able to exert market power
 the higher the barriers to entry, and the more difficult it is for existing firms to expand within
the market, the more likely it is that a horizontal merger will result in the substantial
prevention or lessening of competition. This is particularly the case where the merged entity
controls the essential inputs in the market, key routes to market (distribution channels),
intellectual property (such as trademarks and patents) which constrains existing rivals from
expanding and competing more effectively with the merged entity, and reduces the prospect
that potential competitors will enter the market.
 In addition to considering the threshold question of whether entry is possible (given any
entry barriers that may exist), they will consider whether entry will be timely, whether it
would likely be profitable and whether it will be sufficient to constrain the merged entity.2
o If timely, then more likely to constrain activities of merged entity
 o If profitable, more likely for firms to enter, therefore more potential constraints on
market power
o Entry will be regarded as sufficient where it will practically be able to deter the
merged entity from exercising market power
 Expansion delas with whether compeitiors can cost effectively expand their output to
counter any reductions in output by merged firm to raise prices.

Import Competition

 S12A(2)(a)- competition authorities may in appropriate cases have regard to the ‘actual or
potential level of import competition in the market’.
o The principal consideration is whether, and to what extent, the merged entity may
face competition post-merger from imported goods or services. For example, certain
markets may be international in their geographic dimension, and thus competition
from overseas firms may be a relevant consideration in assessing the competitive
constraints on the merged entity post-merger

Countervailing buying power

 Section 12A(2)(d) of the Competition Act refers to ‘countervailing power’ as a potentially

relevant consideration in substantive analysis. The reference to countervailing power is
commonly referred to as ‘countervailing buyer power’, which describes the ability of the
purchaser to exert sufficient competitive pressure on a merged entity to neutralise any
market power it may acquire in consequence of the merger to unilaterally raise prices or
reduce output
 it is more likely that buyer power will act as a constraint where it is exercised by a large
customer. For example, a national supermarket chain may be able to exert significant buyer
power (given the volume of purchases countrywide) over its suppliers (assuming that
alternative sources of supply exist in the market). Thus, if a particular supplier were to
attempt to exercise market power post-merger by raising prices, the national supermarket
chain could notionally act as a disciplining constraint by threatening to purchase stock from
a different supplier if prices were to increase
 it is important not only to ascertain the ability of a firm to exercise buyer power, but
whether it will have the incentive to do so, or whether, as the Tribunal found in the Nestlé
case, the supermarkets could simply pass on price increases to end-consumers

removal of an effective competitor

 Section 12A(2)(f) of the Competition Act provides that a relevant factor in the substantive
analysis of a merger is whether or not the merger results in the removal of an ‘effective’
competitor.
 The rationale underpinning this consideration is that where pre-merger the merged entities
are engaged in fierce competition – as opposed to being competitors in the weak sense –
then the merger will result in the loss of this competition between them.
 Depending on the nature of the market, this may result in the merged entity being able to
exercise market power absent any effective competitive constraints. It is also more likely
that a merger will impede competition where one of the merging parties is a ‘maverick’ in
the market, likely to keep rivals in check through aggressive and unpredictable conduct in
the market

Co-Ordinated Effects
  A horizontal merger in an already concentrated market may ultimately substantially prevent
or lessen competition because it increases the likelihood that the remaining firms in the
market post-merger will be able to co-ordinate their conduct without the need to enter into
any restrictive horizontal agreements, or engage in concerted practices as contemplated in
section 4(1)(b) of the Competition Act
 This concern is expressly articulated in section 12A(2), which enjoins the competition
authorities to consider ‘the probability that the firms in the market after the merger will
behave competitively or co-operatively’. Central to this probabilistic enquiry is the structure
of the market, and if post-merger firms will find it possible, economically rational ‘and hence
preferable to adopt on a sustainable basis a course of action on the market aimed at selling
at ncreased prices

Failing Firm Doctrine

 the doctrine is premised on the notion that if a party to a merger will, but for the merger,
inevitably exit the market in the short-term, the merger can have no adverse impact on
competition
 Section 12A(2)(g) of the Competition Act does not couch it as a ‘defence’, but rather
provides that a relevant consideration in determining whether or not a merger will
substantially prevent or lessen competition is whether the business of one of the merger
parties (or part of its business), ‘has failed or is likely to fail’. The relevance of this distinction
goes to the approach to the doctrine.
 In jurisdictions where it is invoked as a ‘defence’ there will be a two-stage enquiry:
o first, a determination of whether or not the merger will impede competition;
o and second (and if so), whether one of the merger parties is a ‘failing firm’, in which
event the merger should nevertheless be approved.
 The Tribunal explained that in terms of section 12A(2)(g) it is a factor to be considered in the
overall assessment of the merger, but may not necessarily lead to the approval of a merger
that has been found to substantially prevent or lessen competition
 It is incumbent on the merger parties to make out a case on the facts that the factors
relevant to the failing firm doctrine are satisfied

VERTICAL MERGERS
  unlike horizontal mergers, vertical mergers (and conglomerate mergers), do not entail the
loss of competition between the merger parties in the relevant market. This is because in a
vertical merger the merger parties operate at different levels of the production or
distribution chain
 There are, however, circumstances in which vertical mergers can lead to anti-competitive
effects. In Mondi the Tribunal stated that:
o ‘There are three broad theories or sets of concerns that inform anti-trust evaluation
of vertical mergers. The first is best characterised as “raising rivals’ costs” pursued
by means of “foreclosure” – either by foreclosing access on the part of downstream
customers to key inputs (“input foreclosure”) or else through foreclosing access on
the part of upstream competitors to key customers (“customer foreclosure”).
o The second set of concerns centres on the vertical transaction’s ability to promote
co-ordinated conduct between competitors (horizontal co-ordination) through
facilitating an exchange of competition sensitive information.
o The third – not relevant to this transaction – is concerned with the ability of a
vertically integrated firm to evade price regulation.’

Foreclosure effects

 The principal competition concern in vertical mergers is whether or not a merger will lead to
the foreclosure of competition. This is just another way of saying that vertical mergers may
in certain cases impede effective competition, either because the vertical merger prevents
rivals of one of the merger parties from competing, or raises their costs
 A conceptual distinction is often drawn between input foreclosure (also referred to as
upstream foreclosure) and customer foreclosure (also referred to as downstream
foreclosure).
o Input foreclosure will occur where the merged entity is in a position to restrict rivals’
access to products or services that they require in order to compete – thereby either
preventing them from competing (if they are unable to obtain access elsewhere), or
raising their costs of competing (that is, forcing them to seek alternative access to
the input at a higher cost).
o Customer foreclosure will occur in cases where an upstream supplier merges with a
downstream customer that is of such a significant size (or is of such significant
importance in the market) such that the upstream supplier’s rivals will no longer
have access to an important customer downstream.
 Foreclosure essentially depends on the existence of three factors:
o The first is the ability of the merged entity to foreclose access to an important input
or downstream market. Central to this is that the merged entity must have market
power to do so. Foreclosure is not possible without market power
o The second is that the foreclosure must be profitable – the merged entity must have
the incentive to engage in foreclosure.
o The third is that the foreclosure must be likely to have an adverse effect on
competition, for example, in the case of input foreclosure by leading to increased
prices – through the raising of rivals’ costs or impeding the ability of rivals to
compete at all.

Other potential anti-competitive effects

  Vertical mergers may increase the prospect of collusion or co-ordination between rivals in
the upstream or downstream markets. This is because firms may share competitively
sensitive information, thereby increasing market transparency, this may be problematic in
concentrated markets with few firms (oligopolies), where this kind of transparency may
facilitate co-ordination or outright collusion. Vertically integrated firms may ‘self-deal’ – in
other words supply themselves – as well as supply rivals upstream or downstream. In doing
so, the vertically integrated firm will come to learn about its competitors’ businesses,
including potentially information regarding output and pricing, thereby potentially
facilitating co-ordination.
 Vertical mergers may also raise barriers to entry in the upstream and downstream markets.
This is particularly problematic in markets characterised by extensive vertical integration –
that is, where a new entrant at either end of the market would confront a rival that is
vertically integrated

CONGLOMERATE MERGERS

 conglomerate merger is one involving two or more firms that conduct business in unrelated
markets.
o For example, an investment firm may own various other firms that operate
independent businesses in the property management, logistics, retail and tourism
sectors.
 These firms may not operate as competitors (in a horizontal relationship), or in vertically
related markets. It is for this reason that the cases will be rare in which a conglomerate
merger raises competition concerns
 However, concerns may arise where
o One of the merger parties is a potential competitor to the other (or one of the other
firms that comprise the conglomerate’s portfolio of companies). However, potential
competition is only relevant when it is likely, timely and will be able to create a
sufficient competitive constraint in the relevant market; or
o It would afford an opportunity to a firm with market power to leverage this market
power into other markets, for example through tying or bundling. This may occur
where, for example, Firm A is dominant in market X and merges with Firm B which
sells a product into market Y, but which could be tied or bundled with Firm A’s
product. This may notionally afford Firm A the opportunity to leverage its
dominance in market X by tying or bundling its product with Firm B’s, and selling the
tied or bundled product into market Y to foreclose competition in that market

THE EFFICIENCY DEFENCE