A plea for an equitable distribution of misery

 Without question, the Covid-19 pandemic will result in massive economic hardship, regardless of the ultimate human toll in SA.

It is also clear that this hardship will not be distributed equally over the economy or society more broadly. At a macro level, some industries, like the food chain, continue to operate even in lockdown, while others like airlines and tourism could face ruin as the effects will be felt for a long time to come.

How the economic misery is distributed within each of these industries and value chains, as well as between companies and consumers, will also not be equitable and will be affected by who has economic power. Ensuring a more equitable distribution of misery has become the new challenge for competition law and its authorities.

Price gouging by certain retailers and distributors of essential products, especially face masks and hand sanitiser, has been the most visible public face of exploitative behaviour. That effect is not equitable as wealthy households can still afford these even at the higher price. In contrast, high prices can cut poor households off from items essential for maintaining their health and safety during the disaster. Stockpiling by those with cash also denies access to those who lack savings.

Regulations and subsequent enforcement action prioritised by the Competition Commission and National Consumer Commission have sought to contain this behaviour. This has required a mix of enforcement and industry engagement that is unprecedented. It has been greatly aided by an equally unprecedented public vigilance over consumer rights that has been lacking until now. Let’s hope it remains once the crisis is over.

What is less visible to the public is some of the business-to-business conduct that is occurring. At a time when all firms are facing hardships, one way to reduce that burden is to shift it onto your business partners. This is more easily done by large firms with economic power along the supply chain, with the victims most often smaller firms. We are already seeing complaints about large firms making unilateral changes to contractual prices, imposing cost levies on their suppliers to pay for their own higher operating costs, or invoking force-majeure provisions to get out of contracts entirely.

This is rarely done against other large firms because they can protect themselves, which means it is often directed against small firms that lack bargaining power or lawyers. The result is an unfair distribution of misery that heightens the risk of small firm failure and a far more concentrated economy post-crisis. The mere fact that firms are facing hardship does not mean the usual Competition Act provisions against buyer power or customer abuse no longer apply. The only difference is how enforcement is focused on the fair division of misery.

Another concerning trend is the large number of industries beating a path to the Competition Commission’s door asking for exemptions from the Competition Act, especially for co-ordinated conduct. There are instances where this is warranted and necessary, such as the narrow exemptions granted to banking and health care, which were praised in this paper’s editorial last week. However, there are many more cases of industries looking to take advantage of co-ordination among themselves to help escape the hardship created by the crisis.

Seeking to save themselves hardships will inevitably result in the industries finding ways to push some of that burden onto business partners or customers. These cases must be resisted as they just contribute to the inequitable distribution of misery, unless it is small firms seeking protection from larger ones.

There is also the risk that this period of co-ordination is used to create permanent changes to market dynamics that make for less competitive outcomes into the future. Finally, there are those industries that do provide essential services and use this fact to argue that it can only be effective if done through industry co-ordination. These too need to be resisted, because co-ordination is not required in most circumstances and simply opens the door to potential abuse of other customers.

The economic crisis created by Covid-19 does not mean competition is no longer relevant in achieving optimal social outcomes, or that competition laws must be suspended. What we have seen is that competition law is needed more than ever to ensure the crisis is not exploited by opportunistic firms and that those with economic power do not shift their burdens onto others.

The objective of a more equitable economy, even if at this stage it is a more equitable distribution of misery, remains an important objective for the law and its enforcement.

• Hodge is chief economist at the Competition Commission.