October 2009
19
Companylaw
Counties Securities Ltd v Jackson and Steeple Ltd [1974] 2 All ER 625
(Ch) where the judge held that "a shareholder in a company may have
more than one capacity, and that in each capacity he is entitled to act as
necessitated by such capacity, appears to be consistent with my view that
in relation to matters here in question, a director who is, as a director,
bound to take one course, may as an individual shareholder take quite
another".
Members are bound by the decisions of the majority if those decisions
are arrived in accordance with the law:
Members in general meeting and the board of directors exercise their
powers by resolution which are passed by a majority vote.
Accordingly minority shareholders are bound by the decisions of the
prescribed majority provided those decisions are taken in accordance
with the law and the directors of the company and the majority
shareholders have behaved with fairness towards the minority shareholders..
In circumstances where a member believes the directors of a company
or the majority shareholders have acted in a manner which is
"unfairly prejudicial, unjust or inequitable", the aggrieved member/
shareholder may seek relief in terms of s252 of the 1973 Companies
Act. ◆
Bhengu is a senior associate with Werksmans Incorporating Jan S. de Villiers
Competitionlaw
Unravelling complex monopoly conduct1
NEIL MACKENZIE
C
hapter 2A of the Competition Act, introduced by the
Competition Amendment Act 1 of 2009 gives the
Competition Commission wide powers to investigate and prosecute firms that engage in ‘complex monopoly
conduct.’ This note explains the basic economics underlying complex monopoly conduct and how Chapter 2A is likely
to apply in practice.
Prior to promulgation of the Amendment Act, the Commission could only
successfully prosecute cartel conduct if an ‘agreement’ or ‘concerted practice’ between participants was proved. Regardless of the anti-competitive
effect of the conduct, unless overt coordination can be shown, a conviction
could not be secured.
Chapter 2A is aimed at two scenarios, which previously fell through the
competition enforcement net:
First, where cartel participants successfully conceal the agreements
between them. This results in the Commission stumbling at the ‘agreement hurdle’ when attempting to prosecute the conduct before the
Competition Tribunal. Under the provisions of the Amendment Act
the Commission may sidestep this problem.
Second, where strategic interdependence between major players in concentrated industries results in coordinated outcomes, without any agreement between the competing firms2.
In the Commission’s and the DTI’s view, the South African economy is
rife with examples of these scenarios.
The Amendment Act confers extremely broad investigative powers on
the Commission. If the Commission has ‘reason to believe that complex
monopoly conduct subsists within a market’ it may investigate ‘any conduct
within that market without initiating or having received a complaint.’ The
Commission’s usual suite of search and seizure powers is available in pursuance of the investigation.
If the Commission wishes to obtain an order against firms which conduct their affairs in a ‘conscious parallel or coordinated manner,’ only a narrow band of conduct is ‘punishable.’ Punishment does not appear to be the
real outcome desired by the legislature. The intended outcome is a restructured and competitive market. Once complex monopoly conduct is
proved, formulating remedies that achieve the intended result is likely to
be the greatest challenge in enforcing the Amendment Act.
’Complex monopoly conduct’ is not explicitly defined in the Act.
However, in the likely event that the Tribunal adopts an interpretation
which is consistent with conventional economics, the principles set out
will be key to determining what conduct is covered.
basic Economics
Distinguishing between firm behaviour that is competitive from that which
can be characterised as ‘complex monopoly conduct’ is an exceedingly slippery task. This is primarily because markets may possess multiple coordinated and non-coordinated equilibria. Moreover, outcomes may display
features of both coordinated and non-coordinated behaviour. Such out-
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Competitionlaw
comes appear not to be readily defined as either coordinated or non coordinated in their entirety, but instead appear to fall within a grey area
between the two. Complex monopoly could be full tacit coordination or
somewhere between tacit coordination and non-coordination.
Non-coordinated conduct
Non-coordinated conduct may be characterised by firms attempting to
maximise their own profits while taking their competitors’ responses as
given. There is nothing repugnant about this kind of behaviour, even if it
were to give rise to outcomes that might appear similar to those that would
arise had coordination taken place.
For example a firm, taking rivals’ responses as given, may decide that it
will maximise its profits by setting its price at the same level as its competitor. The competitor may similarly decide that leaving its price at that
level will maximise profits3. Provided the firms decide to price at that level
of their own accord, there can be no competition concern even though
pricing in parallel may also have occurred had the firms chosen to coordinate. Independent profit maximising decisions are perfectly acceptable.
Coordinated Conduct
Firms are considered to be acting in concert when one firm does not take
its rivals’ responses as given but instead bases its behaviour on how it
believes its rivals will respond to any changes in its own behaviour, and its
rival does the same. The two firms’ conduct is said to be coordinated.
By means of an example, consider two competing firms, Firm A and
Firm B. Both price at R100. Firm A works out that it could dramatically
increase market share and sales and thereby increase its profits by reducing
its price to R80. However, Firm A knows that if its reduces its price, Firm
B is likely to respond, possibly by reducing its price to R70 in order to
undercut Firm A’s price. Firm A decides that the price war that would
ensue would destroy its profit margins in the long run, and so decides to
leave its price at R100.
Firm B goes through an identical decision making process. If it undercuts Firm A’s price, Firm A would probably respond and Firm B’s profits
would be less in the long run. So Firm B also decides to leave its price at
R100. Both firms act contrary to their short run incentives (which are dictated by competitive dynamics), and leave their prices unchanged. The
result is a coordinated equilibrium at a price of R100 – a price which is
higher than that which would result in under competitive conditions4.
In this particular example, the outcome is in fact identical to that which
would have arisen had the two firms engaged in an overt cartel, fixing their
prices at R100. The difference is that at no stage have firms A and B
explicitly agreed on a price. However, the rationale underlying the decision by the two firms to behave in a coordinated way is the same as that
underlying the decision to form an overt cartel with the object of fixing
prices. In both cases firms simply wish to avoid the long run cost of competing with one another.
Occasionally, ‘uncartelised’ oligopolies will settle on a ‘price following’ pattern. One firm assumes the role of ‘price leader’ and its competitors become
‘price followers.’ It is important to note that under Chapter 2A, neither price
leading nor price following may be prosecuted independently. The price
leader must increase its price on the understanding that the followers will follow, acting contrary to its incentive to leave its price unchanged. The price
follower must increase its prices to a similar level to that set by the leader, contrary to its incentive to either leave prices unchanged or undercut the leader’s
price. Only where there is a reciprocal understanding between firms as to how
the collusive outcomes are to be achieved, can a finding of complex monopoly conduct be made.
Coordination is not limited to price increases. Tacit understandings
may develop between firms as to when prices should be increased,
decreased, or left unchanged and the extent of any price adjustments. In
fact, coordination need not necessarily be in respect of price at all. Firms
may act contrary to short-run incentives to entice each other’s clients or
expand in markets where the other is dominant, or reach tacit understanding about volumes to be released into the market.
Note that firms which coordinate on price may compete vigorously in
other respects, such as research and development and product quality.
Where firms only collude in one facet of their business but compete in all
others, a finding of complex monopoly conduct will probably depend on
the effects of the coordination on competition.
Implications of Chapter 2A
Chapter 2A’s predominant effect will be to increase the frequency and
breadth of investigations into markets where coordinated outcomes are
observed and considered to be
similar to those that would be
expected to arise as a result of
coordinated conduct. Because
the Commission may use search
and seizure powers, in investigations under Chapter 2A, these
are likely to be preferred to
investigations under Chapter
4A, which provides a formalised
‘market enquiry’ regime for
instances where anti-competitive actions of a particular firm
cannot be pinpointed.
The Commission is likely to
experience difficulty in securing
an order correcting complex
monopoly conduct from the
Mackenzie
Tribunal, primarily because of
the subtleties involved in distinguishing coordinated from non-coordinated conduct. Appropriate
remedies will be difficult to formulate. More often than not the kind of
outcomes that concern us are borne from structural issues rather than
behavioural ones, so in order to solve these issues it will be necessary to
employ some form of structural remedy. These remedies are unlikely to be
straightforward to implement or even identify.
However, the following guidelines may be extracted from the text of
Chapter 4A combined with the relevant economic principles:
complex monopolies generally exist within oligopoly structures;
firms cannot be guilty of complex monopoly conduct when acting independently. A degree of reciprocity in the tacit understanding between
participants will be necessary to secure a conviction;
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October 2009
Competitionlaw
only one of the participating firms needs to have a significant market
share. Small players who engage in price following behaviour may be
guilty of complex monopoly conduct, and
it is likely to be irrelevant whether the complex monopoly conduct is
‘rational’ or ‘irrational’. Rather, the critical criterion is whether the conduct results in particular outcomes, which are restrictive or harmful to
competition.
Considering the likely difficulties in proving the elements required to
secure conviction and finding an appropriate remedy, and the lack of success of similar provisions in other jurisdictions, the new provisions may
rightly be criticised. Notwithstanding that, the Amendment Act promises
to have a welcome positive effect on competition in the South African
economy, if only indirectly.
1
This article was written with assistance of RBB Economics (see www.rbbecon.com). The authors
are grateful to Simon Baker and Richard Murgatroyd of RBB for their review and comments.
2
This is likely to be particularly prevalent in industries where cartels operated prior to promulgation
of the Competition Act, at which time the coordinated conduct became covert.
3
Undercutting a competitor’s price does not necessarily result in increased sales and therefore
increased profits. In markets for goods or services which are relatively demand inelastic, a small
The message sent to businesses is that comfortable arrangements and
understandings between competitors which circumvent competitive incentives are no longer acceptable. Firms can no longer hide behind the
absence of an explicit agreement to coordinate. Conduct will be judged by
its effect on competition, rather than on conventional notions of ‘cartel
behaviour’. In addition, the craftiest and most evasive of cartels now face
the prospect of investigation, despite the absence of a whistleblower or
complainant.
Firms must actively compete or face intervention by the competition
authorities. ◆
Mackenzie is a candidate with Bell Dewar. The supervising partner was
Stephen Langbridge
decrease in price below that of a competitor is unlikely to lead to a worthwhile increase in sales.
4
For more information on the distinction between coordinated and non-coordinated conduct, and
the economic considerations around complex monopoly provisions, see the presentation delivered
by Simon Baker of RBB Economics at conference entitled, Competition Law and Economics: South
African Developments in Light of European Experience on 17 June 2009 (http://www.rbbecon.com/saconference/)
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