Competition Commission of South Africa v Media 24 (Pty) Limited 2019 (9) BCLR 1049 (CC) – PREDATORY PRICING AND COMPETITION LAW
This is a pioneer Constitutional Court case dealing with the South African Law and legislation which prohibits predatory pricing. For context it is important to understand what predatory pricing is from a legal perspective. Predatory pricing is “conduct which involves a dominant firm (Business) setting process for goods or services at such a low level that a) the firm incurs losses relative to alternate non-predatory conduct in the short term (referred to as “sacrifice”) and b) the pricing has the effect of eliminating, or being likely to eliminate, one or more of the firm’s actual or potential competitors; and, in turn, c) the pricing has the further effect of strengthening or maintaining the firms market power, thereby causing consumer harm.”
The Competition Act 89 of 1998 (“the Act”) prohibits predatory pricing as follows:
- Section 8(d)iv states, “It is prohibited for a dominant firm to engage in any of the following exclusionary acts, unless the firm concerned can show technological, efficiency, or other pro-competitive, gains which outweigh the anti-competitive effect of its act:
o sellinggoodsorservicesbelowtheirmarginaloraveragevariable cost ”
- Section 8(c) contains a more general provision and states that, “It is prohibited for a dominant firm to engage in an exclusionary act, other than an act listed in paragraph (d), if the anti-competitive effect of that act outweighs its technological, efficiency or other pro-competitive, gain”
The case revolves around a complaint which was filed on behalf of Gold Net News with the Competition Commission, that Media 24 via two Welkom community newspapers, Vista and Forum, had abused its dominant position in the Welkom area by drastically cutting its rates to advertisers between 2004 and 2009. The rates charged were allegedly below market price. It was alleged that this anti-competitive behavior forced Gold Net News to close down as it could not compete with the low rates and continue to make the necessary profit to sustain the business. In 2011 the Competition Commission investigated the complaint and thereafter referred a case of predatory pricing by Media 24 to the Competition Tribunal.
The case presented by the Competition Commission was that Media 24 had used the newspaper, Forum, as a fighting brand which is essentially means that Forum was
allegedly kept in the market by Media 24 with the express purpose of charging prices that were lower than its competitors, who were then forced to leave the market. Once the competitors had left the market the fighting brand/Forum was closed down.
The Tribunal held inter alia the following:
- Media 24 had not priced its advertising below its average avoidable cost and thus the Competition Commission failed to establish that Media 24 priced below the lower standards of average variable cost or marginal cost and as a result the Tribunal made its determination using section 8(c) and not section 8(d)iv.
- That the Competition Commission had established that the average total cost was an appropriate cost standard to use to evaluate predatory pricing in this case, that Media 24 had charged advertising rates for Forum below its average total cost, that it had intended to predate Gold Net News, that Media 24 had the ability to recoup what it had lost during the predation period and that Gold Net News had not been excluded due to its relative inefficiency.
- The Tribunal accordingly ultimately held that the Media 24 was guilty of predatory pricing in terms of section 8(c) of the Act.
This decision was then taken on appeal to the Competition Appeal Court which made inter alia the following findings:
- The test envisage in section 8(c) determines whether specific conduct amounts to an exclusionary act as defined in the Act. This is an objective test and accordingly subjective evidence of intent should not be examined in proving predatory pricing and once this evidence is excluded, the average total cost was not an appropriate cost standard to illustrate that predatory pricing occurred.
- “There is no escaping the conclusion that predation must focus on the likely economic effect of pricing below a particular cost measure to determine whether the low prices are due to a lawful competitive response to rivals or to predation and unlawful behavior rather than on the intention with which pricing strategy is adopted”
- Accordingly and after the court having rejected average total cost plus intention, it concluded that the only appropriate benchmark that had been relied on by the Competition Commission was average avoidable cost. (the Court also noted that this does not mean that it is the only appropriate benchmark to apply to section 8(c) in all cases but rather that in this particular case it was the only remaining appropriate test)
- By virtue of the Court having rejected the average total cost plus intention test the court did not have to consider the balance of the evidence relating to the intention of Media 24.
- The appeal was accordingly upheld by the court as I could not be established that Media 24 had violated section 8(d)iv or 8(c).
This case was then brought on appeal before the Constitutional Court and both the Competition Commission as well as Media 24 contended that this case raised a constitutional issue.
The Constitutional Court had to deal with inter alia two aspects namely, whether it was in the interest of justice to grant the applicant leave to appeal to this court and secondly whether the appeal should be granted which would involve determining an appropriate benchmark for determining predatory pricing under section 8(c) of the Act.
Four judgements were ultimately handed down by the Constitutional Court, the effect of which were inter alia that:
- the application did raise an arguable point of law of general public importance within the Constitutional Court’s Jurisdiction and accordingly leave to appeal against the judgment and order of the Competition Appeal Court was granted
- the appeal itself was however dismissed with costs for inter alia the following reasons:
o given the finding that a dominant firm’s average total cost is an inappropriate benchmark for predatory pricing under section 8(c), the Commission had failed to demonstrate that the process charged by Forum violated section 8(c) in that the only standard against which the Commission tests the Forum’s pricing in this application was its average total cost.
o Itispossiblethatwhenacompetitivefirmreducesitspricesitispossible that it intends to increase its market share by taking away customers from its rivals but in a way permitted by competition policy. The firm may even hope that a prolonged price war may drive its rival from the marketplace. It accordingly follows that the consideration of a dominant firm’s intention when assessing whether it has engaged in prohibited predatory pricing under section 8(c) is inappropriate.
o Unlike a complaint of predatory pricing pursued against a dominant firm in terms of section 8(d)iv, the Commission bears the onus under section 8(c) of demonstrating that a dominant firm has engaged in an exclusionary act by implementing a predatory pricing strategy. The Commission is afforded significant scope under this catch-all section to advance an appropriate cost standard against which to measure a dominant firms pricing practices and in the present matter the commission failed to advance such a test.