Big suppliers could be in hot water with Competition Commission over price discrimination

Rules are designed to protect SMEs, as well as historically disadvantaged groups

If big suppliers give discounts on the bulk supply of input products which are more than a 10% difference between what smaller companies pay, they could soon find themselves in hot water with the Competition Commission.

The commission recently published two sets of guidelines on price discrimination and buyer power for comment in the Government Gazette.

These rules are designed to protect small and medium enterprises (SMEs), as well as historically disadvantaged groups, against dominant companies that give bulk discounts or that negotiate more favourable conditions with preferred clients.

The draft guidelines which have been published in terms of the Competition Act, would drastically alter the statutory regime:

• Previously, the commission would have become involved only if price discrimination had a general negative effect on competition. The new proposal would entitle it to act after a single complainant showed that it had been disadvantaged; and
• The guidelines establish a reverse onus of proof, said Daryl Dingley, a partner in the competition team at Webber Wentzel. When a complainant proves that there is a prima facie case of price discrimination, the onus is on the dominant firm to show that it has not acted unlawfully.

Dingley said this would make it easier for the authorities to prosecute and increases risks for companies which will have to ensure that they do not fall foul of the law.

The guidelines dictate that price discrimination must be substantial.

It will be regarded as “substantial” if the price difference is more than 5% for critical inputs and more than 10% for all other inputs.

A critical input is a product or service that constitutes more than 20% of the final product’s costs.

When it comes to bulk buyers, said the commission, SME’s and historically disadvantaged businesses’ relatively weak bargaining power are sometimes exploited to impose unfair low prices and trading conditions.

This has the effect of passing unnecessary costs or risks to smaller suppliers.

The guidelines also contain purchasing provisions for specific sectors, namely agriculture, wholesalers and retailers in the groceries’ sector, as well as online intermediary platforms.

Some of the trading conditions that would be regarded as unreasonable in the groceries and agricultural processing sectors include:

• Payment terms of longer than 30 days for perishable goods and 60 days for other products;
• Cancellations of orders for perishable goods on short notice; and
• Buyers that require the complainant to cough up for wastage or complaints that are not a result of the supplier’s negligence.

For online intermediary services, unreasonable trading conditions include limitations on the sale of the same product through different channels and the use of data that is acquired through the supplier’s sales to compete with that supplier.

If a complaint is received, the commission will first attempt to mediate the dispute.

Respondents against whom various complaints have been received, and who have a clearly discriminatory policy, will be prioritised for investigation and possible prosecution, said the commission.

Legal experts are of the opinion that the guidelines could be in effect by early next year.

Ahmore Burger-Smidt, director of competition at Werksmans, said there would be a heavy burden on companies to defend themselves because they would essentially find themselves in an information vacuum.

This was because they were not allowed to insist on seeing the costing structures of smaller firms.

Jennifer Finnigan, from Shepstone & Wylie Attorneys, said dominant firms should revise their acquisitions and price structures to ensure that they comply with the new legal requirements.

For multinational companies with standard prices based on volume, the additional complexity and risk associated with buying from or selling to the designated groups – with the fact that you can be penalised if it appears that you have attempted to be avoiding trade with these groups – could be just a further compliance headache when it comes to doing business in South Africa.

Stakeholders have until November 7 to comment.

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