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Esc1601 Assignment 4 U

ECS4862/103/0/2017 Tutorial letter 103/0/2017 Advanced Microeconomics ECS4862 Year Module Department of Economics Lecturers: Prof B Moyo Ms A Breytenbach South African Competition Policy (summary) Define tomorrow. Dear Student To date you should have received the following tutorial matter for ECS4862. Tutorial Letter 101/2017 – First tutorial letter In both the above tutorial letters we promised to provide you with study material on South African competition policy. This TL (103/2017) contains that material. The material is prescribed for section 5.3 of the syllabus, along with Lipczynski et al (2009), chapter 21. Please read the material from Lipczynski et al (2009) BEFORE you read this TL. Consider the extent to which the principles discussed in Lipczynski et al (2009) have been incorporated in South African competition policy. Wishing you every success with your studies. Prof B Moyo Club One Building 2.27 Cnr Dely Road & Pinaster Street, Hazelwood Tel: 012 433 4621 Email: moyob@unisa.ac.za 2 Ms A Breytenbach Club One Building 1.11 Cnr Dely Road & Pinaster Street, Hazelwood Tel: 012 433 4706 Email: breyat@unisa.ac.za. . ECS4862/103 SOUTH AFRICAN COMPETITION POLICY TABLE OF CONTENTS 1 OUTRIGHT PROHIBITIONS VERSUS RULE OF REASON ........................................................ 3 2 IMPORTANT ELEMENTS OF THE 1998 ACT ............................................................................. 4 2.1 Restrictive practices prohibited outright......................................................................................... 4 2.2 Restrictive practices subject to the rule of reason ......................................................................... 4 2.3 Merger control............................................................................................................................... 5 2.4 Instances of abuse of dominance prohibited outright .................................................................... 6 2.5 Instances of abuse of dominance subject to the rule of reason ..................................................... 7 3 CONCLUSION.............................................................................................................................. 7 BIBLIOGRAPHY ...................................................................................................................................... 8 South African competition policy contains both outright prohibitions and courses of action that are subject to the rule of reason. In this paper, these concepts are described and the current South African competition policy is presented with reference to them. 1 OUTRIGHT PROHIBITIONS VERSUS RULE OF REASON An outright prohibition occurs when an action is defined in legislation and prohibited "as such". Outright prohibitions are also known as "per se" prohibitions, “per se” being the Latin for "as such". When applying an outright prohibition, the court or other relevant authority would simply investigate whether or not a particular action conforms to the definition of the offence in the legislation. If it does, the person or persons carrying out the action would be automatically guilty of a criminal offence. The term "rule of reason" means that human reasoning or judgement must be applied in order to reach a decision. The relevant Act would define the action, but leave up to human judgement the question of whether or not that action indeed leads to unacceptable consequences. If a particular instance of the action conforms to the definition, but has beneficial effects or at least does not have negative effects, that action would be condoned and the actor would not be guilty of a criminal offence. Judging from Holmes (1994:206–221) the distinction between per se rules and the rule of reason is more complicated than this, at least in United States (US) case law. These complications are set aside in this paper. The test of "the public interest" often goes hand in hand with a rule of reason approach. The court or other relevant authority would be instructed to consider "the public interest", which would not necessarily be defined in the relevant Act. The authority would then be able to consider factors that the legislator did not foresee when the Act was drawn up. 3 The legislator might place the onus on the authority to show that the defined action is "against the public interest" before declaring the actor guilty. In other words, there would be a presumption on the part of the legislator that the action usually IS NOT against the public interest. If the legislator presumes that the action usually IS against the public interest, the onus would be placed on the actor to convince the authority that the defined action "may be justified in the public interest". One of the arguments in favour of per se prohibitions is that such prohibitions are said to bring about greater legal certainty. This argument is difficult to accept, however, since a large measure of uncertainty remains, as in any court case. The downside of per se prohibitions is the possible loss of beneficial effects that were not foreseen when the legislation was drawn up. As far back as 1962, Alan Greenspan (1962:70) stated that "the very existence of [US antitrust law, which was characterized by per se prohibitions] ... inhibits businessmen from undertaking what would otherwise be sound productive ventures. No one will ever know what new products, processes, machines, and cost-saving mergers failed to come into existence, killed by the Sherman Act before they were born. No one can ever compute the price that all of us have paid for that Act which, by inducing less effective use of capital, has kept our standard of living lower than would otherwise have been possible. No speculation, however, is required to assess the injustice and the damage to the careers, reputations, and lives of business executives jailed under the antitrust laws". The choice between per se rules and the rule of reason depends on how strongly the policymakers accept the theory underlying the competition legislation. Strict acceptance of the theory would lead to a policy composed of per se rules, whereas weak acceptance would support a policy subject to the rule of reason. 2 IMPORTANT ELEMENTS OF THE 1998 ACT 2.1 Restrictive practices prohibited outright A number of specific "restrictive horizontal practices" are prohibited per se (s 4(1)(b)), namely    directly or indirectly fixing a purchase or selling price or any other trading condition dividing markets by allocating customers, suppliers, territories or specific types of goods or services collusive tendering A "restrictive vertical practice", namely resale price maintenance (but not mere recommendation of minimum resale prices) is also prohibited outright (s 5(2) & (3)). 2.2 Restrictive practices subject to the rule of reason In addition to the prohibited horizontal practices, other agreements between firms, concerted practices by firms and decisions by associations of firms, where the parties are "in a horizontal relationship" (ie a relationship between competitors), are prohibited if they substantially prevent or lessen competition and the parties cannot prove that certain other benefits outweigh this effect on competition (s 4(1)(a)). Agreements, other than resale price maintenance, between parties "in a vertical relationship" (i.e. between a firm and its suppliers, its customers or both) are prohibited under similar conditions as the nonspecific restrictive horizontal practices (s 5(1)). 4 ECS4862/103 The 1998 Act does not refer to the public interest in respect of restrictive practices. Instead, it prohibits a restrictive practice (ss 4(1)(a) & 5(1)) … if it has the effect of substantially preventing or lessening competition in a market, unless a party to the … [practice] can prove that any technological, efficiency or other pro-competitive gain resulting from … [that practice] outweighs that effect. Whereas the previous Acts referred to the "public interest", the 1998 Act instructs the competition authorities to consider specific factors, namely "technological, efficiency and other pro-competitive" gains. Where the Act empowers the Competition Commission to grant a firm an exemption from the prohibition of a practice (s 10), it also does not refer to the public interest. Instead, it states that the Competition Commission MUST grant conditional or unconditional exemption for a specified term if the practice serves one or more specific objectives (s 10(2)(a) & (3)), namely:     maintenance or promotion of exports promotion of the ability of small businesses, or firms controlled or owned by historically disadvantaged persons, to become competitive change in productive capacity necessary to stop a decline in an industry the economic stability of any industry designated by the Minister of Trade and Industry, after consulting the minister responsible for that industry Some of these objectives are strongly reminiscent of the factors constituting "the public interest" in the case of mergers (see below). In addition, the Competition Commission MAY exempt a practice that relates to the exercise of a right acquired or protected in terms of the various Acts on copyright, patents, trademarks and other intellectual property rights (s 10(4)). Similar exemptions were granted in terms of the 1955 and 1979 Acts. Whereas the previous competition authorities could consider any factor they regarded as constituting "the public interest", the Competition Commission may no longer consider factors other than the above when it contemplates an exemption from the prohibition of a practice. 2.3 Merger control Section 13A of the 1998 Act (as amended) requires any party to an intermediate or large merger to notify the Competition Commission of that merger. The party must provide a copy of the notice to the relevant trade union or, in the absence of a trade union, to the employees themselves. The parties must not implement the merger before receiving approval from the Competition Commission, the Competition Tribunal or the Competition Appeal Court. The control of mergers is subject to the rule of reason. The Competition Commission must evaluate each intermediate merger and approve the merger by issuing a clearance certificate, approve the merger subject to any conditions or prohibit the implementation of the merger (s 14(1)). Parties to intermediate mergers may appeal to the Tribunal against decisions of the Commission. The Commission must refer notices of large mergers to the Competition Tribunal for consideration. Parties may appeal to the Competition Appeal Court against decisions of the Tribunal (s 14A(1)). 5 In terms of section 11, the Minister of Trade and Industry must publish thresholds to indicate which mergers are "intermediate" and "large". Currently, an intermediate merger occurs when the combined annual domestic turnover of the acquiring firms and the transferred firms is at least R560 million and the annual turnover of the transferred firms exceeds R80 million, but is less than R6,6 billion. Alternatively, the domestic assets should fall within these margins. A large merger occurs when the combined annual domestic turnover of the acquiring firms and the transferred firms is at least R6,6 billion and the annual domestic turnover of the transferred firms is at least R190 million. Alternatively, the domestic assets should reach or exceed these figures. In the evaluation of mergers, the authorities must initially determine whether or not the merger is likely to substantially prevent or lessen competition by assessing certain factors set out in the Act (s 12A(1) & (2)). If the answer is yes, further factors must be considered. The 1955 and 1979 Acts prescribed consideration of "the public interest" in respect of all investigations, while the 1998 Act refers to the public interest only in the case of mergers. The Act instructs the competition authorities to consider the possible justification of mergers that are likely to substantially prevent or lessen competition on "substantial public interest grounds" (s 12A(1)). The authorities must consider specific factors in this respect [s 12A(3)], namely, the effect that the merger will have on     a particular industrial sector or region employment the ability of small businesses, or firms controlled or owned by historically disadvantaged persons, to become competitive the ability of national industries to compete in international markets 2.4 Instances of abuse of dominance prohibited outright Various practices by dominant firms are prohibited. According to section 7, a firm is dominant in a market if it has at least 45% of the market, or at least 35% but less than 45% and cannot show that it does NOT have market power, or less than 35% but has market power. Section 6(1) requires the Minister of Trade and Industry to indicate thresholds below which a firm would not be deemed dominant. The first thresholds were indicated in General Notice R1942 of 20 August 1999. The website of the Competition Commission indicates that another, slightly reworded, notice came into effect on 1 February 2001. According to this unnumbered notice the relevant provisions only apply to a firm whose annual turnover in, into or from the Republic of South Africa is valued at or above R5 million, or whose assets in the Republic are valued at or above R5 million. Market power (s 1(1)) means 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 The following instances of abuse of dominance are prohibited outright (s 8(a) & (b)):   6 charging an excessive price to the detriment of consumers refusing to give a competitor access to an essential facility when it is economically feasible to do so ECS4862/103 These prohibitions apply only to dominant firms and dominance relates to structure. However, the legislator clearly concedes that dominance itself need not be bad. Certain instances of ABUSE of dominance, that is, certain types of CONDUCT, are prohibited. 2.5 Instances of abuse of dominance subject to the rule of reason The following exclusionary acts by dominant firms are prohibited, unless the dominant firm can show that certain other benefits outweigh their anti-competitive effect (s 8(d)):      requiring or inducing a supplier or a customer not to deal with a competitor refusing to supply scarce goods to a competitor when supplying those goods is economically feasible selling goods or services on condition that the buyer also purchases unrelated goods or services, or forcing a buyer to accept a condition unrelated to the object of a contract selling goods or services below their marginal or average variable cost buying up a scarce supply of intermediate goods or resources required by a competitor Other exclusionary acts are prohibited "if the anti-competitive effect of that act outweighs its technological, efficiency or other pro-competitive gain" (s 8(c)). In this case, the burden of proof is not explicitly placed on the dominant firm to show that the other benefits outweigh the anticompetitive effect. Price discrimination, as defined in section 9, is also prohibited "if it is likely to have the effect of substantially preventing or lessening competition" and the dominant firm cannot show that the differential treatment resulted from certain legitimate commercial considerations, some of which relate to dynamic factors (s 9). While specified practices by dominant firms are prohibited outright (s 5.3), other more vaguely defined practices by such firms are made subject to the rule of reason. A specific firm may, on application, be granted an exemption from any of these prohibitions (s 10). This "prohibit, then exempt" approach is the opposite of the "exempt, then prohibit" approach that was originally followed in South Africa. The 1998 Act does not refer to the public interest in respect of abuse of dominance. 3 CONCLUSION South Africa’s current competition policy consists of actions subject to the rule of reason, as well as per se rules. However, there would seem to be a movement towards per se rules. This movement is not necessarily in the public interest. Nobody knows how many innovations in business activity have been prevented by the fear that the innovator would fall foul of outright prohibitions. One can only hope that ultimately reason will rule. 7 BIBLIOGRAPHY Competition Act 89 of 1998. Government Notice R1942 of 20 August 1999. Greenspan, A. 1962. Antitrust, in Rand, A (Ed.), Capitalism: the unknown ideal. Bergenfield, NJ: New American Library. Holmes, WC. 1994. Antitrust law handbook: 1994 edition. Deerfield, Ill: Clark Boardman Callaghan. Maintenance and Promotion of Competition Act 96 of 1979. Mouton Commission. 1977. Report of the Commission of Inquiry into the Regulation of Monopolistic Conditions Act, 1955. RP 64/1977. Pretoria: Government Printer. Regulation of Monopolistic Conditions Act 24 of 1955. 8

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This Study Group has an in-house Academic Lecturer

ECS1601 Economics 1B provides insight into macroeconomic theory and variables such as total production and income of a country, economic growth, unemployment, inflation and the balance of payments.

Prescribed Book for ECS1601-ECS1028 Economics 1B

AuthorMohr, PJ; Fourie,L & Associates
TitleEconomics for South African Students
Year Published2008
Edition4th
PublisherVan Schaik
Book NotesOok in Afrikaans beskikbaar (Ekonomie vir Suid-Afrikaanse Studente)
Course Notes
AuthorMohr, PJ; Fourie,L & medewerkers
TitleEkonomie vir Suid-Afrikaanse Studente
Year Published2008
Edition4th
PublisherVan Schaik
Book NotesAvailable in English as well (Economics for South African Students)
Course Notes

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