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August/September 2010

Paying the Price –

Suggested price vs price-fixing

PriceFixing
BEVAN FRANK discovers some of the general legal principles aimed at preventing price-fixing and anti-competitive trading

Just like in many other industries, it seems that there will always be sports and outdoor retailers and wholesalers who are going to lose out as a result of anti-competitive trading, or trading that is perceived as being anti-competitive, but is legitimate.

For example, customers can walk into a specialist store and get an expert to discuss their desired product, only then to leave the store and purchase the item on the internet, all thanks to the knowledge and expertise conveyed from the specialist store. These specialist stores would have then lost the sale to a store that might be purely based in cyberspace, and is able to generate more profit without worrying about the usual rent payments, stock, warehouses, etc. that a bricks and mortar store has to contend with.

Another example is the rebates that mass chain stores can negotiate with suppliers, which enable them to charge much less than perhaps the small independent sports retailer.

If one looks at the bicycle industry as an example, volume sales of entry level bicycles are predominantly through discount stores, while the expensive top end cycles (used for racing, etc.) are bought from specialist stores. For some time now, cycling specialist retailers have been under pressure when it comes to sales, owing to the slowing economy amidst the backdrop of a recession. It can be said that these retailers are therefore under pressure to try and offer better prices, which they can obviously only do if they get a good wholesale price.

Last year the Competition Commission launched an enquiry into alleged price-fixing by the cycle retail industry. The Competition Commission referred its findings of price-fixing against 28 bicycle wholesalers and retailers to the Competition Tribunal for adjudication on 25 June 2010. It is alleged that the firms colluded to set the wholesale and retail prices of cycles and accessories, as well as excluding competitors from the market.

Wholesalers on a regular basis sent retailers a price-list with the wholesale price and the recommended retail price. The retail price included a mark-up of 35% for bicycles and 50% for accessories.

It is alleged that bicycle retailers colluded to exclude competitors like internet retailers from the market. The stratagem employed was to ask the wholesaler to sell to these retailers at a higher price (see box opposite).

The Commission said that this conduct is likely to harm competitors and consumers, as the consumers are forced to pay the higher price. The Commission asked the Tribunal to levy an administrative penalty of 10% on the annual turnover of each of the firms involved.

Principles of competitive trading

So, on a general level, what behaviour can be seen to be akin to price-fixing or anti-competitive? We asked competition law expert Tamara Dini, a partner at Bowman Gilfillan Attorneys, to shed some light on the legalities.

Can a supplier ever “suggest” a price, or may they never make a suggestion?

A supplier may indeed provide a recommended retail price to a distributor or reseller. Dini points out that the recommendation must be just that — a recommendation — and it must not be binding on the distributor or reseller.

The Competition Act specifically provides that the practice of minimum price maintenance is prohibited, but that a supplier or producer may recommend a minimum resale price to a reseller, provided that

  • the supplier or producer makes it clear to the reseller that the recommendation is not binding; and

  • if a product from the supplier has its price stated on it, the words recommended price must appear next to the stated price.

  • “In South Africa, minimum resale price maintenance is a per se contravention of the Competition Act, meaning that it cannot be defended by demonstrating technological, efficiency or other pro-competitive gains that outweigh or off-set the anti-competitive effects,” says Dini.

    What happens when suppliers try to enforce a suggested retail price by refusing to supply a store because they sell below the suggested price?

    In many industries suppliers have previously provided recommended retail prices to their distributors but, in effect, they have imposed their recommendations on their distributors or resellers, says Dini.

    The competition authorities have prosecuted a number of manufacturers and suppliers for imposing a so-called recommended price. This conduct is prohibited in terms of the Competition Act.

    She cites the well-known Federal Mogul case (Competition Commission of South Africa v Federal Mogul Aftermarket Southern Africa (Pty) Ltd and Others, Case No: 08/CR/B/May01), where the supplier of parts had reduced the complainant distributor’s rebate as a result of the distributor’s failure to comply with the recommended price.

    On the evidence presented, the Competition Tribunal found in that case that the reduction of the distributor’s rebate was as a result of the distributor selling at a price lower than the recommended price, and the Tribunal held that this constituted minimum resale price maintenance.

    The effect of the Tribunal’s judgment in the Federal Mogul case is that a firm is considered to have engaged in resale price maintenance in contravention of the Competition Act where

  • the party to whom the goods are supplied knows the price at which his supplier expects the reseller or distributor to on-sell the goods; and

  • this expectation is coupled with a sanction or penalty for noncompliance, so that the reseller is induced to comply with the recommended price.

  • On appeal, the Competition Appeal Court agreed with the Tribunal’s finding that the reduction of the complainant’s rebate was intended to show the complainant and other would-be transgressors the consequences of not playing by the rules.

    “The sanction need not take any particular form,” says Dini. “In particular, a sanction need not be a direct financial penalty. In the Federal Mogul case, the distributor’s rebate was reduced, but a sanction may include refusing to supply a reseller because the reseller does not comply with a so-called recommended price.”

    May a supplier refuse to supply certain products to certain retailers, if that is their marketing strategy?

    A supplier is not under any obligation to supply its products to all potential resellers. Dini states that in the ordinary course of business, a supplier’s marketing strategy may be to supply certain products to certain retailers only, and that is not unlawful.

    “A case of prohibited price minimum resale price maintenance may, however, be brought if a supplier stops supplying a retailer with its products, or with some of its products, because the retailer sells at a price which is lower than the recommended price,” says Dini.

    “The reason for a supplier stopping its supplies to a retailer is a factual enquiry which must be established on a balance of probabilities.”

    May a supplier refuse to supply a retailer because it will be detrimental to another retail customer?

    A supplier is not under an obligation to supply its products to all potential retailers and is entitled to select certain retailers only to sell its products.

    Dini maintains that the reasons for the supplier’s selection may include having retailers placed in strategic locations: typically, for marketing or brand perception reasons, suppliers do not want to supply too many retailers in the same location. It is not unlawful for suppliers to be selective about who they want to contract with and to make a unilateral decision in this regard.

    Having said that, the appointment of only one retailer or a limited number of retailers may have an anti-competitive effect and may contribute to higher prices, where there is limited competition in the relevant market.

    “In the ordinary course, if a supplier and one of its retailers agree that the retailer will be appointed on an exclusive basis, or the supplier appoints a limited number of retailers, this is not per se unlawful — but it could be challenged as having an anti-competitive effect,” Dini explains.

    “In order for such a challenge to succeed, the party challenging it would need to show that the effect of the arrangement is to substantially prevent or lessen competition in a correctly-defined market. It is then open to the parties defending the arrangement to show that

  • the arrangement does not substantially prevent or lessen competition; or

  • even if it does, that there are technological, efficiency or other pro-competitive gains arising from the arrangement that outweigh or off-set its anti-competitive effect.”

  • Dini says that if a supplier stops supplying a retailer because the retailer is selling the supplier’s products at a price lower than other retailers, this may be challenged as minimum resale price maintenance, because the refusal to supply would constitute a sanction against the retailer for failing to follow the recommended resale price.

    May a supplier refuse to supply a discounter because they believe it will be detrimental to the image of their brand or product?

    A supplier is not under an obligation to supply its products to all potential resellers. It is the supplier’s prerogative to select retailers to whom it wishes to supply its products.

    “Again, however, if a supplier stops supplying a retailer, the reason for stopping to supply may be considered anti-competitive,” says Dini. “This will necessitate a factual enquiry.”

    Tamara Dini can be contacted at 021 480 7800 or Email: t.dini@bowman.co.za

    *Contact the Competition Commission on:

    Tel: 012 394 3200 or

    Fax: 012 394 0166

    Email: ccsa@compcom.co.za or visit www.compcom.co.za


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