posted 13 Nov 2007 in Volume 10 Issue 6

Excessive pricing - the decision of the Competition Tribunal in the Mittal Steel Case

by Anthony Norton and Paul Russell, partners, Webber Wentzel Bowens

THE DECISION by the South African Competition Tribunal (‘the tribunal’) in the Mittal Steel matter earlier this year has set a high threshold for a finding of “excessive pricing” in terms of section 8(a) of the Competition Act, 1998 (‘the Competition Act’).
The tribunal decided that, in order for there to be a finding of excessive pricing in a particular market, that market must possess certain characteristics. In particular, it must be established that the relevant market is uncontested (i.e. monopolised or “super-dominated”), incontestable (i.e. subject to insurmountable barriers to entry) and unregulated (i.e. not subject to price regulation). In addition, there must be some sort of “ancillary conduct” on the part of the super-dominant firm to achieve its pricing ambitions.
It is questionable whether this approach, which is based almost entirely on an assessment of the structure of the market, is consistent with the language used in section 8(a). It also seems to be at odds with the approach to excessive pricing taken in other comparable jurisdictions, where the approach has generally been first to establish the cost of a product or service, and then to determine whether the price charged is actually excessive, or reflective of a monopoly price.

Background to the dispute
Harmony Gold and Durban Roodepoort Deep, two gold mining companies that purchase a range of flat steel products, filed a complaint against Mittal Steel alleging, inter alia, that:

Mittal Steel is dominant in the domestic market for flat steel products; and
Mittal Steel had abused its dominance by charging excessive prices for its flat steel products in contravention of section 8(a) of the Competition Act 89 of 1998, as amended (‘the Competition Act’).

Section 8(a) of the Competition Act
Section 8 (a) of the Competition Act provides that it is prohibited for a dominant firm to charge an excessive price to the detriment of consumers.
An “excessive price” is defined in section 1 of the Competition Act as:

“a price for a good or service which - bears no reasonable relation to the economic value of that good or service; and is higher than the value referred to in subparagraph (a).”

Section 8(a) is a per se prohibition, meaning that offending conduct cannot be justified by reference to efficiency or other pro-competitive gains. An administrative penalty of up to 10 per cent of the assets/turnover of the offending firm can be levied for a first offence.

The tribunal’s approach to section 8(a) of the Competition Act
The tribunal was of the view that section 8(a) requires a judgement “not of the price level but rather of the market conditions that generated the price level”. The tribunal stated that “Our judgement of the relationship between price and economic value rests on our evaluation of the market conditions that underpin price” (our emphasis).
The tribunal rejected the view that the concept of economic value in section 8(a) is cost-based and, instead, adopted the approach that where the structure of the market is not competitive, prices in that market will not be competitive. The tribunal went further to state that “[o]ur view of pricing is that a price that is ‘reasonable’ in relation to economic value is one that emerges from...the ‘free interaction of demand and supply in a competitive market’.”
The tribunal went on to identify certain market characteristics that would be necessary for a finding of excessive pricing in contravention of section 8(a) of the Competition Act. According to the tribunal, section 8(a) is precisely intended to apply in those rare markets that are:

Uncontested (i.e. monopolised or ‘super-dominated’);
Incontestable (i.e. subject to insurmountable entry barriers); and
Unregulated (i.e. not subject to price regulation).

The tribunal acknowledged that these market conditions are “rarely encountered in competition analysis” (our emphasis).
The tribunal found that there must, in addition, be some sort of “ancillary conduct” on the part of the super-dominant firm to achieve its pricing ambitions.

The tribunal’s findings on the merits
The tribunal found that the relevant market was the domestic market for flat steel products and that Mittal was, by virtue of its overwhelming market share, the extent of entry barriers and the recent history of state support, super-dominant in that market.
As far as Mittal’s conduct was concerned, the tribunal established that Mittal had set its base price for flat steel products in the domestic market by calculating the notional cost of importing those products, and then adding a five per cent ‘hassle factor’, to reach an IPP.
In essence, the tribunal found that Mittal SA had pre-selected a target price in its domestic market, imposed this predetermined market price (i.e. the import parity price) on most of its domestic market, and withheld supply to the market in order to support this price.
The tribunal concluded that the cumulative impact of Mittal SA’s structural advantage (i.e. its super-dominance), together with its ancillary conduct aimed at maintaining the segmentation of the lateral withholding of supply from the domestic market, had allowed it to charge excessive prices in contravention of section 8(a) of the Competition Act.

The penalty
In September the tribunal imposed an administrative penalty of R692 million on Mittal for contravening section 8(a) of the Competition Act and also imposed certain behavioural remedies on Mittal aimed at reducing the segmentation that Mittal SA’s pricing regime has created in the market for flat steel products.

The approach in other comparable jurisdictions
It is clear that the language used in section 8(a) of the Competition Act owes a large debt to European law, where the test for excessive pricing is whether the price is excessive in relation to the economic value of the product or service provided. This test was originally formulated by the European Court of Justice in General Motors Continental NV [1975] ECR 1367, [1976] 1 CMLR 95 and confirmed in United Brands Co and United Brands Continental v EC Commission [1978] ECR 207, 1 CMLR 429. In the UK, it was also the test that was adopted by the Court of Appeal in its recent judgement in the case of Attheraces Ltd & Anor v The British Horseracing Board Ltd & Anor [2007] EWCA Civ 38.
Essentially, the European approach and the language used in section 8(a) of the Competition Act require a comparison between the economic value of the product or service and the price actually charged for it. The question posed by section 8(a) is whether the two bear any reasonable relation to one another.
The European approach to excessive pricing is generally to first establish the actual cost of the product or service and then to determine whether the price actually charged is excessive, or reflective of a monopoly profit. This typically involves detailed economic analysis regarding issues such as the actual cost of the product or service, as well as the level of a ‘reasonable’ profit. In its recent judgement in the Attheraces case, the Court of Appeal in the UK found that the extent to which the price departs from a reasonable profit is merely an indicator of what may be a competitive price and is not, by itself, determinative. The Court of Appeal found it necessary to look at all relevant circumstances.
What the European cases demonstrate is the importance of economic analysis in carrying out the comparison between price and economic value that is expressly required by section 8(a) of the Competition Act. Possibly in order to avoid such analysis, the tribunal in the Mittal case expressly rejected the European approach to excessive pricing, finding instead that “[t]he judgment that we are required to make is not of the price level itself but rather of the market conditions that generated the price level”.

Conclusion
Section 8(a) of the Competition Act expressly requires a comparison between the price changed for a product or service and the economic value of that product or service.
In the Mittal case, the tribunal carried out no such comparison, relying instead on the structure of the relevant market, combined with certain “ancillary conduct” by Mittal, in order to find that Mittal had charged an excessive price in contravention of section 8(a) of the Competition Act.
In our view, this approach is not justified by the language used in section 8(a) of the Competition Act and is also inconsistent with the approach taken by the courts in Europe, where the test for excessive pricing is materially similar to that in section 8(a). We are accordingly of the view that the tribunal’s decision in the Mittal case may well be overturned on appeal.
If nothing else, the fine imposed on Mittal by the tribunal signals a significant change in the competition authorities’ attitude to abuses under the Competition Act.