The conflict in the Middle East has created a ripple effect in global markets, particularly regarding fuel and essential commodities. Focusing on this conflict, it is essential to bridge the gap between initial fuel price hikes and their second-round effects on food inflation.
This is a big priority for the Competition Commission as these costs move through the agricultural and logistics sectors. In the present climate we are likely to see companies increasing prices at retail level in circumstances where there has been no corresponding increase at the wholesale or manufacturing level.
Firms are also likely to charge prices substantially higher than preconflict levels at the expense of consumers. This practice must be guarded against.
Mechanics of price gouging
Price gouging is typically characterised by an abnormal increase in demand or a decrease in supply of an essential product. These “abnormal market disruptions” ― whether caused by a heavy snowstorm, power grid failures or international war ― create a temporary shortage in which short-term demand cannot be met by short-term supply.
During these periods supply elasticity diminishes. Sellers may find themselves with “temporarily enhanced market power”, allowing them to raise prices on existing inventory simply because consumers have fewer alternatives. When a firm lifts prices based on consumer inflation expectations rather than actual cost increases it contributes to an upward price spiral that harms the most vulnerable and destabilises the economy.
The Babelegi lesson
The Babelegi judgment serves as a vital guide for South African firms during crises. It established that market power (and hence dominance) can be inferred simply by the fact that a respondent firm was able to charge an excessive price.
Traditionally, firms might argue they are not “dominant” under section 7 of the Competition Act if their market share is low ― that is below 35% ― in fact, Babelegi’s pre-Covid share was less than 5%. However, a firm that is not dominant in ordinary times may well be found to be dominant due to exceptional circumstances, such as the ones brought by the present global conflict.
Defining excessive pricing
Presumably, any firm that increases prices during a crisis beyond what is directly proportional to its costs runs the risk of being found guilty of excessive pricing. Key indicators of anticompetitive price gouging include increasing margins or mark-ups when input costs remain stable, raising prices due to a surge in demand, anticipatory pricing (hiking prices before input costs actually rise) and maintaining high prices even when input costs have decreased.
Price gouging isn’t just a “retail-to-consumer” issue; it can occur at any point in the supply chain, from manufacturers to logistics providers and wholesalers.
While price gouging might temporarily inflate a balance sheet, boosting current assets and retained earnings through higher margins, the long-term consequences are severe. Beyond being exposed to administrative fines, firms face reputational damage long after the Middle East conflict settles.
Jurisdictional thresholds
A general exemption based on firm size may apply to ensure that small players are not unfairly targeted as “dominant”. The jurisdictional threshold for prosecution before the Competition Tribunal was previously set at R5m in turnover or assets, though firms must remain cautious as the commission’s reach continues to evolve during market disruptions.
Excessive pricing is no longer just a pandemic-era concern; it is a permanent regulatory priority. Firms must recognise that temporary market power during global disruptions does not grant a licence to inflate margins. While price hikes may offer short-term balance sheet gains the long-term cost of legal prosecution and reputational damage far outweighs these benefits.
• Tlhong is director: corporate commercial at TGR Attorneys Inc.
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