The first company punished for price-gouging under Covid-19 disaster regulations has failed to overturn its conviction, but its fine has been scrapped.
The competition appeal court said it was regrettable that complex new provisions had been tested for the first time “in a case brought with unseemly haste at the expense of precision”.
In its ruling on Wednesday, it said Babelegi Workwear and Industrial Supplies of Pretoria was fined R76,000 even though “only 76 boxes of 20 masks per box were affected by the excessive price”.
Judge president Dennis Davis said when the scale of the offence was compared to the costs the firm incurred in defending itself against “the full force of the litigation by the Competition Commission, the minimal harm caused as a result of the small amount of sales and the short duration of the complaint period, justice ... would best be served by a decision not to impose a penalty”.
After receiving complaints from customers of Babelegi, which is owned by Daniel van Niekerk, the Competition Commission asked the competition tribunal to order a penalty of 10% of its annual turnover, or R4.9m.
In his judgment on Wednesday, Davis said masks contributed only 3% of Babelegi’s revenue in the 12 months until March, and it usually made a 23% profit on them. “However, between 31 January 2020 and 5 March 2020, it achieved significantly higher markups”, which eventually reached 1,120%.
The company sold 496 boxes of masks during this period, mostly to a sister company. Only 76 were sold to external customers.
Davis said one of the critical issues for the appeal court was whether the circumstances created by Covid-19 made Babelegi “a dominant firm with market power”, even though it was responsible for only 4.6% of SA’s mask supply.
“Consider markets for food and groceries. Normally, they are defined geographically in a broad way, because consumers can move and shop around,” he said.
“But during a period of confinement, people are obliged to buy their shopping next door, thus becoming captive of local shops.
“Even if they have very little market share in a ‘normal times’ market, these shops may be dominant during the crisis. Note that in such cases insufficient supply is not the problem ... in cases of excess demand, even a small firm may have considerable market power.”
This meant during a crisis such as a pandemic, a different conceptual framework was required than the one normally used in an excessive pricing case.
“In this case, the context is a market where market conditions have been altered by an unprecedented pandemic. It may well be that, had [Babelegi] charged high prices for a few days, or indeed a week, that may have been insufficient to sustain the arguments raised by [the Competition Commission].
It extracted a surplus that could only be achieved by virtue of the independence it enjoyed as a result of being ‘lucky’.
“That it could only sustain its high prices for a few days may have reflected a measure of market correction to the benefit of consumers.
“But in this case, while it had supplies of masks which it had acquired at a pre-Covid price, it continued to extract the maximum benefit. In the complaint period, it acted as a monopolist, no matter that other firms may have done the same. It extracted a surplus that could only be achieved by virtue of the independence it enjoyed as a result of being ‘lucky’.
“Thanks only to the outbreak of the pandemic, it possessed market power which allowed it for at least six weeks to mimic the conduct of a monopolist.”
That meant it charged the maximum price possible for masks, when prospective purchasers were anxious about the arrival of Covid-19 in SA.
“The only explanation for the customers buying from [Babelegi] at high prices is that the pandemic was causing them to believe that if they did not buy promptly they would be left without masks altogether,” said Davis.
“The excessive prices were charged at a time of crisis when the employment of a mask by every person in the country was seen as being essential to the protection of the health, safety and welfare of others and therefore as critical to the reduction of the danger posed by Covid-19.
“The high prices of such a necessity unquestionably acted to the detriment of consumers in the country.”
However, Davis said it was regrettable that the first Covid-19 cases mounted by the Competition Commission concerned a small company and only 76 boxes of masks. He dismissed Babelegi’s appeal but scrapped the penalty.
He also pointed out the National Consumer Tribunal had found its sister company, Belegi Workwear, guilty of contravening consumer protection regulations by inflating mask prices and fined it R100,000.
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