The danger posed by a dominant firm is that it is able to conduct its business without any consideration of its customers or competitors, and potentially act in a way which is detrimental to competition.
The Competition Act (89 of 1998) includes a number of provisions aimed at preventing abuses by dominant firms. Along with preventing collusion between suppliers of goods and services, preventing abuse of dominance is what most people understand as the role of competition regulation, and certainly it is a foundational aspect of competition law. The purpose of competition regulation is to create an environment in which firms, large and small, can compete in their relevant market fairly.
Criteria of a dominant firm
Section 7 of the Act sets out the criteria which are used in determining whether or not a firm is dominant. The Act states that a firm is dominant if:
it has at least 45% of the market;
it has at least 35% of the market, but less than 45% of the market, unless it can show that it does not have market power; or
it has less than 35%, of the market but has market power.
Market power is defined as "the power of a firm to control prices, to exclude competition or to behave to an appreciable extent independently of its competitors, customers or suppliers". Simply put, market power is the ability of a firm to set prices or other trading conditions without having regard to market forces or conditions and in doing so, earn more profit than it would have in a competitive market.
The danger posed by a dominant firm is that it is able to conduct its business without any consideration of its customers or competitors, and potentially act in a way which is detrimental to competition. A firm may abuse its dominance by using its influence and power in the market to impose commercial deals favourable to it with suppliers and unilaterally increase its prices charged to customers and consumers, for example. In order to curb this, the Act contains a number of prohibitions which apply to dominant firms.
Prohibitions of a dominant firm
A dominant firm is per se (outright) prohibited from:
charging an excessive a price for goods or services (i.e. one which bears no reasonable relation to the economic value of that good or service and which is higher than such value); and/or
refusing to give its competitors access to an essential facility when it is in fact economically feasible to do so.
Unless a dominant firm can show pro-competitive gains which outweigh the anti-competitive effect of its conduct, it may not engage in any exclusionary conduct such as:
inducing or requiring any of its suppliers or customers not to deal with its competitors;
selling goods and services at predatory prices; and/or
refusing to supply scarce goods or services to a competitor or customer when doing so is economically feasible.
Dominant firms are also prohibited from engaging in price discrimination and exerting unfair buyer power. Recently, these provisions have been amended to include specific protections for small and medium sized businesses. Amongst the provisions are:
section 9, which prohibits a dominant supplier from discriminating on prices between purchasers of similar goods or services on any grounds other than those commonly applied in commercial practice, such as differences in cost of manufacture or distribution or meeting prices charged by competitors, if the effect of such discrimination is to substantially prevent of lessen competition, or to impede the ability of small and medium businesses to sustain themselves in the market;
section 8(4) prohibits a dominant buyer of goods and services in certain designated sectors to impose unfair prices or other trading conditions on a supplier that is a small or medium business, or a firm controlled or owned by historically disadvantaged persons.
Should a firm be dominant, further restrictions apply to the way in which it may conduct its business with other firms in the upstream (suppliers and producers) and downstream (buyers and distributors) markets. Given the number of restrictions, dominant firms must be aware of these restrictions and how they affect the way a firm conducts business, or run the risk of falling foul of the Act.
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