Dominance

Over a period of at least a decade, South African Airways offered travel agents commissions for the sale of SAA tickets.

The structure and amount of commission paid had the effect of :

• Setting target volumes for individual travel agents to meet;
• Setting growth targets for sales by each travel agent in each year;
• Setting loyalty targets for travel agents to sell an ever growing percentage of SAA tickets as compared with those of other airlines

Because of the high market share of SAA in the market for domestic airline travel, these incentives had the effect of inducing travel agents to sell SAA tickets to customers, even in circumstances where the prices of competitor airlines’ tickets were cheaper. Other airlines could simply not match the SAA incentive in Rand terms, however large their incentives were as a percentage of their sales.

Dominance itself is not problematic: Abuse of dominance is unlawful

What is “dominance”?

The Competition Act sets out that a firm is dominant if:

• It has a market share exceeding 45% of a market; or
• It has 35% – 45% share of a market unless it has no market power; or
• It has less than 35% share of a market if it has market power.

What is “market power”?

Market power is defined as the power of a firm to

• Control prices; or
• Exclude competition; or
• Behave independently of competitors, customers or suppliers.

Which brings us to : what is an “abuse of dominance”?

There is an additional burden placed on dominant firms because as market participants with large market shares these companies are able to significantly affect competitive conditions. Companies with smaller market shares are allowed to do some things which dominant companies may not.

An action by a dominant firm is abusive only if it has an anti-competitive effect. This is where the conduct results in –

• Harm to consumer welfare (through for example higher prices or less choice); or
• A significant exclusionary effect (through keeping competitors out of the market);

Of the various forms of abuses of a dominant position, some of the common manifestations are:

• Exclusionary Acts – these are any forms of behaviour by a dominant company which have the effect of impeding or preventing another person or firm from entering or expanding in any market.
  
  SAA’s incentive schemes were found to have the effect of materially increasing the difficulties experienced by actual and potential competitors to enter and expand within the domestic air travel market. The exclusionary effect of the incentive structure and quantum was held to be illegal and SAA paid fines in total exceeding R60 million plus monetary damages to parties harmed by its conduct.
• Refusals to deal – these are acts which either directly or indirectly induce or prevent another from dealing with a competitor, supplier or competitor. These are agreements which restrict, or are likely to restrict, by any method the persons or classes of persons to whom goods or services are sold or from whom goods or services are bought.
  
  The SAA incentive schemes were found to have the effect of unlawfully inducing travel agents to sell SAA airline tickets. All of the components, including growth targets, loyalty targets and total sales targets were found to prevent travel agents from selling competitor airline tickets and thus unlawful.
• Buying up scarce inputs – this is conduct in terms of which a dominant firm buys stock for purposes of preventing a rival or potential rival from purchasing them and so prevents that undertaking from competing.It is acceptable to buy up stock for legitimate use.
• Tying – a dominant firm may not leverage its dominance in one market to secure additional market share in another market by insisting on selling the dominant product only together with other, unrelated product/s.
• Predatory pricing – it is forbidden for a dominant undertaking to charge at below the marginal or average variable cost of production.The reason for this prohibition is that a dominant company can usually weather losses for some time, while its smaller competitors try to compete with the loss making prices being charged. Sooner or later, the smaller players will be forced out of the market and the dominant firm, being the sole survivor, will then be able to charge monopoly prices and recoup all its losses and more, to the detriment of consumers.
• Price discrimination – this is the offence committed by a dominant enterprise which discriminates between buyers in terms of
  • prices charged;
  • discounts, allowances, rebates or credit given;
  • the provision of services
  • payment method

  unless those differences only –

  • make reasonable allowance for cost differentials;
  • comprise acts in good faith to meet a price/benefit offered by a competitor;
  • respond to changing conditions in the market.

In the case of Nationwide Poles in 2005, a small buyer of creosote (to be used by him to treat wooden poles) complained to the Competition Commission that the dominant seller of creosote (Sasol) was charging him more than other customers. After long and acrimonious litigation, the Competition Appeal Court held that price differences are ok where they make allowance for efficiencies and cost saving through, for example, size of order. The protection of a single competitor who was unable to compete with larger undertakings was not a legitimate competition law consideration. Pricing need not be identical in all circumstances. And competition law is about protection of competition and not competitors.