By Lebohang Mabidikane Monday, March 23, 2020

In the wake of the recent COVID-19 outbreak, retailers and pharmaceutical companies in South Africa have seen a surge in sales of particular products due to ‘panic buying’. While economic theory indicates that high demand drives price increases, it seems even more so, when the rapid spread of a virus of this nature sends consumers into panic mode. This, as allegations abound of surging prices in respect of products that consumers are seeking out.

The Consumer Goods Council of South Africa has recently urged consumers to lodge complaints (presumably against retailers as well as other companies active in the fast-moving consumer goods markets) with the Competition Commission (the Commission) in the event that they perceive a surge in prices of goods.

From a competition law perspective, the most likely complaints to arise from panic buying are excessive pricing complaints, which the Commission is empowered to regulate in terms of section 8 of the Competition Act (Act).  

Pursuant to this provision, the Minister of Trade and Industry has (on 19 March 2020) issued Regulations specifically prohibiting the excessive pricing of goods such as toilet paper, hand sanitizer, disinfectants, facial masks, rice, maize meal, pasta, long life milk and canned and frozen vegetables (specified goods), among others, for the duration of the national disaster declared by the President on 15 March 2020.

It is important to note, however, that price increases that may be unwarranted, or even opportunistic, do not necessarily constitute excessive pricing in terms of the Act.  The Act prohibits a dominant firm from charging excessive prices of goods to the detriment of consumers. This means that a complainant or the Commission would need to establish that the firm charging the prices complained about holds a dominant market position, and that the prices charged are ‘excessive’, for purposes of the Act.  Essentially, in terms of the Act an ‘excessive price’ can be said to be a price so high, that it exceeds what ought to be competitive and reasonable within the context of the cost incurred to produce the relevant goods.

Therefore, in determining whether the price of goods is excessive in the ordinary course, the Commission must consider factors such as the company’s price cost margin, internal rate of return, return on capital invested and profit history, among others.

With specific reference to the duration of the national disaster, however, an increase in the net margin of the specified goods, which is above the average margin or mark-up over a three-month period preceding 1 March 2020, such an increase will constitute a prima facie case of excessive pricing.  

Once the Commission has established a prima facie case of excessive pricing, which is a high hurdle, the respondent company bears the onus to disprove the Commission’s case.  While it may not be easy to bring a successful excessive pricing case, if the Commission makes out a prima facie case, a respondent firm seeking to defend itself could face protracted litigation, which may have a negative impact on the reputation of a company and, in the event that the Competition Tribunal confirms the Commission’s findings, substantial penalties could be imposed.

Companies are therefore warned that although profit maximization is desirable, it must be always be pursued within the confines of the Act.