When Nobel Prize winning economist Amartya Sen was asked if markets were good or bad for development, he said: “Markets are as good as the company they keep.”
Competition policy is about making markets work by ensuring that firms “keep good company”, that is, not by co-operating with each other against consumers but rather by competing to win customers.
If markets are to keep good company and function in a healthy way, certain types of business conduct cannot be tolerated. Cartels are the prime example due to their negative effect on prices and consumers. But there are also plenty of examples of single-firm conduct showing that dominant firms, when left to their own devices, can abuse their market position.
This is where effective competition regulation comes in. A classic example would be the Competition Commission’s referral of a case against six companies in the glass manufacturing industry this week.
Cartels usually take the form of agreements among competing firms to avoid competition by agreeing to fix the price of their product at a higher level than the price that would be determined in a competitive market. This is effectively theft.
Because cartelists have not had to compete for their profits there is little incentive for them to be efficient or to innovate. This is not only bad for consumers but ultimately for the economy as a whole.
Monopolies and dominant firms can also have a negative impact on a market.
South Africa’s economy is shaped by its historical political landscape. Being isolated due to apartheid, race-based policies provided for strong protectionist links between the government and business. Monopolies were created, agricultural boards were formed and major industries such as telecoms, electricity and steel were developed and controlled by the state. The state even allowed cartels to exist in some markets, such as the cement industry.
Prior to 1994, South African markets were highly concentrated with very few firms controlling a large part of the economy. High barriers to entry prevented new firms from entering certain markets.
Against this backdrop, the new government looked for ways to transform the economy. The Department of Trade and Industry spearheaded the consultation that lead to a new Competition Act, which became effective in 1999.
Drafters of this act considered international best practices but also focused on the more pressing issues uniquely concerning South Africans. The act addressed previous economic injustices and looked to spread the ownership of business to historically disadvantaged people and gave a voice to public interest concerns, such as employment. To achieve this, the act created three institutions that were independent of each other and the state.
The Competition Commission was set up as the investigative body where complaints would be laid. The Competition Tribunal and the Competition Appeal Court were set up as adjudicative bodies that would follow the due-process rules laid out by the act and the constitution.
It is no surprise that, since 1999, there have been a many penalties against cartels and firms that abused their dominance. More importantly, competition has been restored in several markets where it was previously stifled, leading to lower prices and better products for consumers.
In a country with high unemployment, the competition authority has also managed the delicate balance between promoting efficiency while protecting jobs through the act’s public interest provisions.
To illustrate: a 2012 study by the commission showed how the break-up of the concrete products cartel impacted the market. This had been a long-running cartel, set up in the early 1970s, and only ended thanks to the commission’s corporate leniency policy, which led to Rocla (a subsidiary of Murray & Roberts) coming forward and telling all. The cartel was mainly focused on precast concrete pipes and culverts. The members had agreed not to compete in each other’s territories or in each other’s products. The study found that:
n Southern Pipeline Contractors, which during the cartel period did not make any culverts, started supplying the whole product range that was covered by the cartel and far outside the 150km radius around Gauteng within which it had agreed to stay under the cartel.
n Cobro, which had agreed to compete only within the Durban area, started delivering to parts of the Eastern Cape. Cobro also extended its product range after having agreed not to make culverts.
n Concrete Units, which under the cartel was limited to the regions around Johannesburg and Cape Town, started competing as far as Limpopo, Mpumalanga and the Free State, and added concrete pipes to its product range in the Western Cape.
n Five new players entered various product and geographic markets that were previously the reserve of the cartel. This showed that the stability of any cartel lay in its ability to prevent new entry.
n While concrete pipe prices in the Durban and Johannesburg areas continued to rise for some 18 months after the uncovering of the cartel, from mid-2009 to June 2011, the study estimated that prices fell by 37 percent in the Durban area and 27 percent around Johannesburg.
n Under the cartel, customers were overcharged by an estimated 51 percent to 57 percent in the Durban area and an estimated 16.5 percent to 28 percent in Johannesburg. These figures were very high by international comparison and suggested that this was a very damaging cartel.
In another example, which showed how single-firm conduct could hurt consumer welfare, an investigation and subsequent settlement helped to significantly reduce the prices of HIV/Aids drugs. During 2002, the commission investigated a complaint of excessive pricing against GlaxoSmithKline (GSK) and Boehringer-Ingelheim (BI). Both had patents on antiretroviral drugs for the treatment of HIV/Aids.
The Treatment Action Campaign and other complainants alleged that GSK and BI’s pricing of the drugs was excessive and in violation of the Competition Act.
The commission found that their pricing was indeed excessive. After it referred the case to the tribunal, both reached settlements and agreed to issue seven voluntary licences to generic manufacturers.
A 2006 study showed a significant price decrease, across drug brands, of between 52 percent and 85 percent as a result of the competition introduced by the settlement.
In the Metropolitan/Momentum merger, the merging parties argued before the tribunal that they had committed to certain cost savings, through the merger, to their shareholders. These cost savings depended, in part, on the merged entity retrenching up to 1 500 employees from both firms – a figure which represented about 9.5 percent of both firms employees.
The merging parties later reduced this to 1 000. They argued that the proposed job losses were necessary and were a last resort in their bid to save cost. In addition to reducing the number of job losses, the parties also offered to provide support, such as core skills training to affected unskilled and semi-skilled employees, outplacement support and counselling, and to try their best to redeploy affected employees within the merged entity. After a hearing into the case, the tribunal found that the job losses had not been fully justified and therefore imposed a moratorium on job losses for two years from the merger date.
This was a landmark decision as the tribunal made it clear that job losses had to be fully justified in order to be accepted as necessary for a merger.
These are just some examples of cases that left consumers and the economy better off. Yet, since all regimes are open to abuse, it’s also good to know that the competition authority has a system of checks and balances to safeguard firms that land up on the wrong end of a competition inquiry.
Kasturyi Moodaliyar lectures on competition law at the Wits University School of Law.