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[2018] ZACAC 1
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Media 24 Proprietary Limited v Competition Commission of South Africa (146/CAC/Sep16) [2018] ZACAC 1; 2018 (4) SA 278 (CAC); [2018] 1 CPLR 56 (CAC) (19 March 2018)
THE
COMPETITION APPEAL COURT OF SOUTH AFRICA
HELD
IN CAPE TOWN
146/CAC/Sep16
In
the matter between
MEDIA
24 PROPRIETARY LIMITED
Appellant
and
THE
COMPETITION COMMISSION OF SOUTH AFRICA
Respondent
JUDGMENT:
19 March 2018
DAVIS
JP
Introduction
[1]
This appeal concerns the first application by
respondent under South African law of the principle of predatory
pricing as provided
for in s 8 of the Competition Act 89 of 1998
(‘the Act’). Predatory pricing raises complex
questions of competition
economics and law and hence represents a
challenge for a competition authority. As Professor Motta
observes:
‘
The
very nature of predatory pricing, which involves low prices for a
period, makes it difficult to analyse. To distinguish
low
prices due to a genuine and lawful competitive response to rivals
from low prices due to a predatory and unlawful behaviour
is far from
an easy task in practice. Furthermore, a very cautious approach
by anti-trust agencies and courts is needed to
avoid the risk that
firms endowed with market power keep prices high to avoid being
charged with predatory behaviour
.’
[1]
[2]
The application of predatory pricing in this case
concerns three relatively small community newspapers,
Forum
and
Vista
(both owned
by Media 24, the respondent) and
Gold Net News
(
GNN
), which was
independently owned, all of which were published in the area around
Welkom (‘the Goldfields area’) before
and during the
period January 2004 and February 2009 (‘the complaint period’).
[3]
On 31 October 2011 respondent referred a
complaint to the Tribunal in which it contended that, during the
complaint period, appellant,
through
Forum
,
had engaged in predatory pricing in the relevant market for
advertising in the Goldfields area in contravention of s 8 (d) (iv)
alternatively s 8 (c) of the Act. More specifically, the
respondent contended that appellant had maintained
Forum
in the Goldfields market as a ‘fighting brand’ to prevent
and/or inhibit
GNN
as
well as potential new entrants from entering or expanding within the
Goldfields market. It contended that the operation
of
Forum
did not make economic sense other than as a fighting brand to achieve
this predatory objective.
[4]
On 8 September 2015, the Tribunal held that
respondent had established that appellant had priced its publication
Forum
below its
average total costs; had intended to predate its competitor,
GNN
;
and had the ability subsequently to recoup what it had lost during
this predation period. Hence the respondent had established
that appellant committed an exclusionary act in terms of s 8 (c) of
the Act. The Tribunal also found that appellant’s
actions
had an anti-competitive effect and that there was no evidence of any
procompetitive gain which would outweigh this effect.
[5]
In a separate decision on 6 September 2016 the
Tribunal set out a series of remedies which flowed from its initial
finding on the
merits. Before this court, only the issue of the
merits decision was debated, the question of remedies being left for
later
determination, if necessary.
The
factual background
[6]
It was common cause that
Vista
started publication in 1971, with one its founders being Mr Hans
Steyl. Ownership of
Vista
changed several times between 1980 and 1999. What is relevant
to the present dispute is that during the complaint period,
Vista
was operated by appellant (via the Volksblad Group) which had
purchased
Vista
from
the Caxton Group in 1999. At the time of its purchase by
appellant,
Vista
had
two weekly editions, one published on Tuesdays and the other on
Thursdays. In December 2001 the Tuesday edition was
discontinued and thereafter it had only published one edition a week
on Thursdays.
[7]
GNN
had its origins in
a group called Netnuus which started in 1999, having been established
by Ms Leda Joubert. In 1999
Ms Joubert appointed Mr Steyl
to assist in establishing Netnuus Welkom. Although the Netnuus
group failed as a newspaper
group, Mr Steyl continued to publish
GNN
which he did from 2000. It operated until it exited the market
in April 2009.
[8]
Forum
was established
in September 1983 by respondent and was the second community
newspaper to enter the Goldfields market. It
ceased publication
at the end of January 2010.
[9]
During the complaint period,
Forum
was a free weekly newspaper distributed every Wednesday. Its
editorial content covered local municipal affairs, sport and
school
news with a distinct focus on “soft” human interest
issues. It featured exclusives not found in
any of the
other local newspapers. It averaged 16 pages per edition
in 2004 and between 8 to 12 pages after 2005.
[10]
Vista
averaged between
48 to 56 pages per edition and was distributed on a Thursday.
Its editorial coverage included local
news and sport with the focus
on “hard news” – municipal matters, crime, sport
and the local mining industry
as well as standard weekly features
focussing on motoring, entertainment and the housing market.
[11]
GNN
averaged between
20 to 24 pages per edition during 2004 although its pages declined
later to between 16 to 24 pages. Its editorial
content was very
similar to that of
Vista
,
the emphasis being on “hard” local news including
municipal matters, sports, crime and new relating to the mining
industry. It was distributed on a Thursday even though it
carried a Friday date.
[12]
Advertising was crucial to the success of all
three of these community newspapers. All three newspapers
carried national advertisements
although
Vista
enjoyed a significantly greater share than both
GNN
and
Forum
.
During the relevant period, the share of classified and national
advertising for the three newspapers was as follows:
Title
2005
2006
2007
2008
2009
Period
advertising
Share of classified
advertising
Vista
73.8%
70.7%
73.0%
78.1%
87.1%
74.8%
Forum
4.7%
5.2%
6.3%
4.9%
3.8%
5.3%
GNN
21.6%
24.1%
20.7%
17.0%
9.1%
19.9%
Share of national
advertising
Vista
90.3%
88.9%
84.4%
87.8%
96.0%
88.0%
Forum
2.3%
2.1%
6.7%
1.3%
1.6%
3.2%
GNN
7.3%
9.0%
8.9%
10.9%
2.4%
8.8%
[13]
During the
relevant period the following table provides the estimated prices and
differentials between
Vista
,
Forum
and
GNN
(Rands per sccm
[2]
) so far as
advertising in the respective newspapers was concerned:
Title
2002/03
2003/04
2004/05
2005/06
2006/07
2007/08
Average
Vista
R 12.15
R 13.38
R 13.83
R 14.58
R 14.54
R 14.87
R 14.02
Forum
R 8.43
R 9.16
R 9.33
R 9.60
R 9.01
R 9.83
R 9.22
GNN
R 13.81
R 15.82
R 17.2
R 16.41
R 15.85
R 17.17
R 15.98
Differential of
Forum
relative to
Vista
-30.6%
-31.5%
-32.6%
-34.1%
-38.0%
-33.9%
-34.3%
Differential of
GNN
relative to
Vista
19.7%
18.2%
23.0%
12.6%
9.0%
15.5%
14.0%
[14]
In January 2009 Berkina Twintig (Pty) Ltd, the
owner of
GNN
, lodged a
complaint against the appellant with the respondent. The
essence of this complaint was that, from 2004, appellant
had abused
its dominant position in the Goldfields to force
GNN
out of business by selling advertising at ‘grossly discounted
rates which (were) totally unrelated to production and normal
overhead costs’.
[15]
The complaint set out the following allegations:
1.
Vista
and
GNN
were direct competitors, with
Vista
which was in a dominant situation averaging 48 pages per week while
GNN
averaged between
24 to 28 per week.
2.
Vista
and
GNN
had more or less the same staff complement while
Forum
had a much smaller staff complement.
3.
Up until 2004
GNN
,
Vista
and
Forum
all sold at market related advertising rates with
Forum
always being cheaper due to its smaller print order but ‘probably
also to constitute a nuisance factor in the goldfields
market’.
4.
During 2005/06
GNN
experienced a reduction in profit as a result of ‘severe local
advertising rate cutting by
Vista
and
Forum
’.
5.
This “onslaught” by appellant
intensified in the years that followed with ’continuing rate
cutting’.
6.
GNN
advertisers had
indicated since 2004 that
Vista
’s
local single column centre metre rate was much lower than that of
GNN
.
7.
GNN
experienced
increasing losses in 2007, 2008 and 2009.
8.
At the date of the complaint
Vista
was continuing to sell at local rates comparable to its rates of 10
to 12 years earlier and ‘nowhere near current market
related
rates elsewhere in the province or the country’.
9.
Appellant
was printing
Vista
and
Forum
at or below costs and thus subsidising these publications ‘in
the broader corporate sense’ to enable them to sell at
considerably lower local advertising rates than
GNN
.
[3]
[16]
On 31 October 2011 respondent referred the
complaint to the Tribunal contending that appellant, through
Forum
,
had engaged in below-cost pricing conduct in contravention of s 8(d)
(iv), alternatively s 8(c) of the Act. In the founding
affidavit the key elements of the complaint were set out thus:
‘
The
Commission contends that Media 24, through
Forum
,
engaged in predatory pricing in the market for advertising (including
run-of-press advertising and inserts) in community
newspapers
in the Goldfields region of South Africa during the period 2004 to
2009 in contravention of s 8(d)(iv) of the Act. Alternatively,
Media
24’s conduct amounts to exclusionary below-cost pricing in
contravention of s 8(c) of the Act
.’
[17]
Respondent developed its case further by way of
two supplementary founding affidavits of 26 February 2013 and 12 July
2013.
Reading the three affidavits together its case can
be summarised thus:
1.
Appellant operated
Forum
solely as a ‘fighting brand’ in order to exclude
GNN
from the market;
2.
Forum
’
s average
revenues did not cover the average total costs of producing and
publishing the paper;
3.
Forum
’
s average
revenues did not cover its average variable costs over a 12 month
period (where all costs were considered variable and
thus could have
been avoided if
Forum
had ceased publication at this point); and/or
4.
Forum
’
s
incremental costs (calculated as
Forum
’s
total revenues reduced by the proportion of its revenues which would
have been diverted to
Vista
if
Forum
had exited
the market) did not cover its incremental costs, calculated as the
total costs that were incremental to the operation
of
Forum
based on two definitions:
(a)
all costs that could have been eliminated over a
period of one year; and
(b)
all
Forum
’s
costs.
An
overview of the Tribunal’s decision
[18]
In its determination of this case, the Tribunal
first considered whether the appellant contravened s 8 (d) (iv) of
the Act which
provides that it is prohibited for a dominant firm to
‘sell goods or services below their marginal or average
variable costs
unless the firm concerned can show technological,
efficiency or other procompetitive gains which outweigh the
anti-competitive
effect of its act.’.
[19]
Although I shall deal with the concept of average
variable costs in more detail later in this judgment, suffice it to
say that average
variable costs (‘AVC’) is defined as the
sum of all variable costs divided by output. This concept was
incorporated
into the Act. Subsequent to the introduction
of the Act a further concept was developed, in the economic
literature,
namely average avoidable costs (‘AAC’), being
the costs a firm could have avoided by not engaging in a predatory
strategy.
Unlike AVC, AAC includes an element of fixed costs
known as product-specific fixed costs.
[20]
There was a considerable debate before the
Tribunal as to whether pricing below AAC could lead to liability
under s 8 (d) (iv) of
the Act. The Tribunal found that
respondent had failed to discharge the onus of establishing that
appellant had priced
Forum
below its AAC. It reasoned that neither AAC nor the lower
figure of AVC exceeded the revenue earned by
Forum
during the complaint period.
[21]
In essence this finding was based on two
exclusions from the respondent’s calculation of costs for AAC,
namely opportunity
costs and redeployment costs:
(i) Opportunity
costs in the present context mean the profits which the appellant
allegedly sacrificed by persisting with
Forum
and thereby
allowing some advertisers, who would otherwise have advertised in
Vista
at higher advertising rates, to advertise in
Forum
at lower advertising rates. The calculation of these opportunity (or
cannibalisation) costs would require an assessment of how
many of
Forum
’s advertisers would have advertised in
Vista
if
Forum
had been closed (ie the diversion percentage) and the
extra operating costs
Vista
would have incurred to accommodate
those additional advertisers, the opportunity costs being the
diverted revenues minus the extra
operating costs.
(ii) Redeployment
costs in the present context appears to be something of a misnomer.
Many of the employees who did work
in relation to
Forum
formed
part of the pool serving Volksblad or community newspapers in general
(for example, sub-editors, advertising administrators,
artists and so
forth). The respondent’s contention was that, if
Forum
had not been kept in the marketplace, Volksblad could have
reorganised its general staff so as to save some of these costs,
whether
by reducing staff numbers or getting certain staff to work
reduced hours. The costs which could have been thus saved if
Forum
had been closed were referred to by the parties and the Tribunal as
redeployment costs.
[22]
As to the question of opportunity costs, the
Tribunal held:
‘
The
calculation of AAC, on the Commission’s version, is based on
too imprecise an assumption to be used as a basis to arrive
at a
reliable benchmark. Even if we accept that the estimate of 27%
[ie as the diversion percentage] was the figure Van Eck
intended to
convey, this version was an estimate made out at a single moment
during the complaint period. Whilst Ms van Eck,
the then sales
manager for the two publications in Welkom, and with a long history
of selling adverts in the local market, was
probably better placed
than anyone else to make this estimate, it was still more an informed
hunch than precise science.
She had to guess what advertisers
might do without knowing for certain what they would definitely do.
We know both from her
evidence and a later document that is in the
record, that advertisers on the closure of
Forum
could, if
GNN
was still in the market, have done any of the following: moved
advertising to
Vista
,
moved advertising to
GNN
,
advertised only once a week if they already advertised in both
publications, or found some other medium for advertising, such
as
pamphlets
.’
[4]
[23]
The Tribunal decided, with regard to redeployment
costs, that:
‘
Making
assumptions about re-deployment involves a judgment made on the
business requirements of the firm. Take the costs of
the
various employees at Bloemfontein who spent some small portion of
their week on
Forum
business. The evidence was that these employees were not
dedicated to
Forum
but spent some time per week on the title and then worked on the
other titles as they came to them during the course of the week.’
[5]
[24]
Having
dismissed respondent’s case under s 8 (d) (iv), the Tribunal
turned to respondent’s case brought under s 8 (c)
which
provides…… ‘it is prohibited for a dominant firm
to engage in an exclusionary act other than an act listed
in
paragraph (d) …’. Here the respondent’s case
was that
Forum
had priced below its average total costs (‘ATC’) and that
further there was an intent on the part of appellant to predate.
In this connection, the Tribunal found in favour of respondent,
holding that appellant had operated
Forum
for the duration of the complaint period below its average total
costs and that there was additional evidence, on the probabilities,
which was consistent with predatory intent. The Tribunal found
this evidence directly in the form of statements and
in the
formation and the implementation of a plan that was predatory in
nature; and indirectly, in evidence of cannibalisation,
operating
Forum
for a lengthy period, notwithstanding repeated loss making and
failure to achieve its budget forecasts; the timing of the closure
of
Forum
shortly after the exit of
GNN
,
and finally in strong evidence of recoupment.’
[6]
The
applicable law
[25]
Before evaluating the arguments raised by
appellant against the findings of the Tribunal, it is necessary to
analyse more deeply
the concept of predatory pricing and the related
principles of economics. This analysis is required to determine
the appropriate
costing benchmarks for the application of both s 8(d)
(iv) and s 8(c) of the Act.
[26]
The animating idea behind the prohibition against
predatory pricing can be stated in simple terms. A dominant firm
deliberately
reduces prices to a loss-making level when faced with
competition from an existing competitor or a new entrant to the
relevant
market. The existing competitor, having been
disciplined or having exited the market or a new entrant having been
foreclosed,
the dominant firm then raises its prices, thereby causing
consumer harm.
[27]
This simple description of the concept disguises
the complexity of the problem. Competition on the merits includes
price competition.
This may lead to the elimination of
competitors that are less efficient than the dominant firm. In
a market economy a dominant
firm has a right to compete on price.
Accordingly, the doctrine of predatory pricing has to be developed by
way of the creation
of a boundary between not prohibiting a dominant
firm from the exercise of competitive price-cutting on the one hand
and not condoning
unreasonable exclusionary predation on the other.
In negotiating this boundary, a competition authority has to be
extremely
watchful not to commit either a false positive or a false
negative. Either error would undermine the object of
competition
law and policy. If the effect of a prohibition is
that a dominant firm would choose not to compete on price for fear
that
if it did so it would be found guilty of a predatory
infringement, a vital objective of competition law, namely lower
prices and
a concomitant increase in consumer welfare, would be
undermined.
[28]
It is thus
not surprising that a number of attempts have been made to formulate
an appropriate test to determine when a price is
predatory. In
1975 Professors Areeda and Turner
[7]
argued that a price should be deemed predatory under United States
law where the price was pitched below a dominant firm’s
AVC.
Responding to what they considered to be an excessively subjective
intention-based test that had previously been applied,
Areeda and
Turner argued:
‘
These
vague formulations of the offence overlooked the fact that predation
in any meaningful sense cannot exist unless there is
a temporary
sacrifice of net revenue in the expectation of greater future gains.
Indeed the classically-feared case of predation
has been the
deliberate sacrifice of present revenue for the purpose of driving
rivals out of the market and then recouping the
loss through higher
profits earned in the absence of competition. Thus, predatory
pricing would make little economic sense
to a potential predator
unless he had (1) greater financial staying power than his rivals;
and (2) a very substantial prospect
that the losses he incurs in the
predatory campaign will be exceeded by the profits to be earned after
his rivals had been destroyed
.’
[8]
[29]
While the
authors considered the question of recoupment of losses after
successful predation, they did observe that ‘
the
prospects of an adequate future payoff, therefore, will seldom be
sufficient to motivate predation. Indeed, proven cases
of
predatory pricing have been extremely rare.’
[9]
[30]
Much of their article was devoted to the
establishment of an adequate price-cost test to apply to a case of
alleged predation without
a need for evidence about intention. They
found the appropriate measure to be AVC.
[31]
The
question of a cost benchmark was also canvassed under European law in
the case of
AKZO
v The European Commission
[10]
where the court declined to adopt the Areeda and Turner test
according to which pricing above AVC would be presumed to be lawful.
The Court of Justice established two standards to determine whether
prices are predatory:
‘
ATC
Where a dominant firm is selling at less than ATC, but above AVC, it
is guilty of predation where this is
done as part of a plan to
eliminate a competitor; such a pricing policy runs the risk of
eliminating undertakings that are as efficient
as the dominant firm
but, due to their smaller financial resources, incapable of
withstanding the competition waged against them
AVC
Where a dominant firm is selling at less than AVC, it is (rebuttably)
presumed to be acting abusively
since every sale would generate a
loss for the dominant firm.’
[11]
The
corollary of these
AKZO
tests is that a firm charging prices
above ATC is not guilty of predation.
[32]
As Whish
and Bailey note, a complicating factor in applying cost-based rules
to determine whether the prices are predatory is that
it may not
always be appropriate to apply the standards of AVC or ATC,
particularly in industries where fixed costs are very high
but
variable costs are very low.
[12]
Following these difficulties a further benchmark was developed,
namely long run average incremental costs (LRAIC).
[13]
‘
LRIC
is the change in total costs resulting from the production of an
increment in the quantity of output, which can be the whole
output of
the product in question or just the incremental output associated
with the exclusionary conduct. The EU Commission’s
Guidance refers to LRIC as ‘the average of all the (variable
and fixed) costs that a company incurs to produce a particular
product. It may be more appropriate to calculate the LRIC of
simply the additional output associated with exclusion.
Unlike
AAC, LRIC includes all product-specific fixed costs even if those
costs were sunk before the period of predatory pricing,
ie, LRIC
includes both recoverable and sunk fixed costs.
’
[14]
[33]
In
introducing s 8 (d) (iv) into the Act, the legislature adopted the
concept of AVC. Significantly, shortly before the Act
became
law, a further influential approach was developed by William
Baumol,
[15]
namely the cost
benchmark of AAC. It is probably for this reason that s 8 (d)
(iv) utilised marginal and average variable
costs as benchmarks, but
did not include AAC in the provision.
[34]
Baumol’s approach is however relevant to
the application of s 8(c), which does not specify any cost benchmark
for a case of
predatory pricing. It requires careful analysis.
Baumol contended that any individual price that is not below AAC
cannot
be predatory. Thus AAC, as opposed to marginal cost, is the
critical test in assessing predation. He argued that a set of
prices of different products of the firm can violate this test if the
revenues in any combination of the firm’s products
fall short
of the combined avoidable costs of these products. A firm’s
failure to maximise its profits during a relatively
brief period
would not
of itself
constitute legitimate evidence of predation.
Baumol went on to suggest that ATC is a figure that is undefinable
and unmeasurable in a multi-product firm and must be rejected as part
of any legitimate test of predatory pricing.
[35]
Baumol argued that a price can be defined as
predatory, if
and only
if, it meets all three of the following conditions:
1.
The choice of the price must have no legitimate
business purpose;
2.
The price must threaten the existence or the
entry of rivals that are at least as efficient as the firm that has
adopted the price
at issue;
3.
There must
be a reasonable prospect of recoupment of at least whatever initial
costs to the predatory firm were entailed in its
adoption of the
price in question.
[16]
[36]
In his article, Baumol dealt with the first two
conditions and argued that ACC is the cost test that best guides an
inquiry into
predation. Of further relevance to the present
dispute, is the question of opportunity costs. Here Baumol
writes:
‘
Turning
now to our central issue, suppose it is alleged that the price cut is
predatory and that the new price should consequently
be subjected to
an Areeda and Turner test comparing the price with avoidable costs.
Obviously the inclusion of opportunity
cost can only increase the
avoidable costs figure and make the Areeda – Turner test more
difficult to pass. Should
all the opportunity costs be included
in the calculation?
The
answer, that may be unexpected to economists, is that if the Areeda –
Turner test is used … to determine whether
the price
constitutes a threat to efficient competitors then the opportunity
costs of owner – supplied input should
be included, but
the revenues forgone as a result of the price cut should not.
The
reason the cost of the owner – supplied income should be
included is that any funds that our firm uses to produce its
pertinent input must have their counterpart if the same output is
instead produced by an efficient rival. If additional
investment is required to provide that output, the rival, too, will
have to provide such funds, either by borrowing or some other
such
means or by obtaining them from the rival’s proprietors.
If our firm’s price does not cover the costs of
its own
invested funds, it is also likely to be unable to cover the rival’s
required investment costs, even if the rival
is the more efficient
supplier and can carry out its production costs with a (slightly)
lower investment. In other words,
a price of firm that does not
cover the opportunity costs of that firm’s avoidable investment
can constitute a threat to
a more efficient rival and should be
considered to fail the generalised Areeda – Turner test.
In
contrast, the revenue the firm F foregoes by reducing its prices has
no relevance to the determination of whether the new price
constitutes a threat to the presence of an efficient rival. If,
in our example, the new price of $25 covers all of firm
F’s
pertinent and avoidable input costs, both its opportunity costs and
its other costs, then that price should by definition
cover the
corresponding costs of the lower input quantities needed by an
efficient rival to produce the output in question.
True, the
higher revenue that the higher $30 price would have offered might
also have constituted a benefit to the rival but it
is irrelevant to
whether the lower price, in itself, is or is not a threat to an
efficient rival
.’
[17]
[37]
Because AAC may well include some fixed costs and
not only variable costs, it will generally be higher than a firm’s
AVC.
[38]
It is also
necessary to examine two decisions which were raised in argument and
which were cited, in particular, by respondent as
being of assistance
in the exercise and in determining the appropriate cost benchmark.
In
Aberdeen
Journals v Office of Fair Trading,
[18]
the Competition Appeal Tribunal in the United Kingdom held that
Aberdeen Journals had sold advertising in one of its newspapers
at
less than AVC. This was contrary to the relevant legislation.
The court held that the rules are not an end in themselves
and ought
not to be applied mechanistically. The time period over which
costs are to be calculated is important.
Hence the longer
the time period the more likely it is that costs will be assessed as
variable rather than fixed, with the result
that a failure to cover
them will give rise to a presumption of predation. The longer a
dominant firm prices below total
costs, the easier it would be to
draw an inference of intention to eliminate competition, save in
exceptional circumstances.
Pricing below cost would not be
unlawful where there is an objective justification for it, although
this would be particularly
difficult to show when the pricing
occurred in response to a new entrant or is part of a strategy to
eliminate a competitor.
[39]
Further, the court held that it was a form of
recoupment for a dominant firm to engage in predatory pricing in one
market so that
it could protect its market share or supra-competitive
profits in another market and that, in the circumstances of those
cases,
further evidence of the recoupment was unnecessary.
[40]
In
Cardiff
Bus
[19]
the
Office of Fair Trading (OFT) alleged that the Cardiff City Transport
Services had engaged in predatory conduct against a new
entrant which
operated “a no frills” bus service in Cardiff. The
alleged abuse was the launch of Cardiff Bus’
own “no
frills” service on the same routes served by the new entrant.
[41]
Cardiff Bus did not deny that its new service had
been loss making but it claimed that the introduction of the service
had been
intended to test the market for “a no frills”
service. It withdrew the service when it found that there
was insufficient demand therefore.
[42]
The OFT considered two benchmark bases for
assessing costs, namely AVC and AAC, noting that in past cases these
two bases have been
shown to be very similar since any cost that is
variable over the period is also avoidable. However:
‘
where
the dominant company makes specific investments, such as expanding
capacity in order to predate, then the fixed or sunk investments
made
for this extra capacity will be included within AAC, causing AAC to
exceed AVC.
Given
the circumstances of this case the AAC benchmark is the most
appropriate. The assessment includes the costs of restoring
the
buses used on the white service routes. This preparatory work
would not be considered as variable cost. However
it is the
OFT’s view that these costs were avoidable. The costs
could have been avoided if Cardiff Bus had not restored
the buses.
Alternatively, once restored, Cardiff Bus could have recovered at
least part of the costs of restoration had the
white services not run
or ceased to run, either by transferring these, now serviceable,
buses onto other routes or leasing the
buses.
’
[43]
The OFT confirmed that pricing below AAC would
give rise to a rebuttable presumption of abuse.
‘
In
the medium term, pricing below AAC is not in the economic interest of
an undertaking, since by not providing the relevant output
it would
save more in cost than it would forego in revenue. In addition,
the longer a dominant undertaking prices below AAC,
the more likely
it is that an equally efficient competitor would be forced to exit
the market. This follows the same logic
as the AKZO test as it
has been applied in recent cases.
’
[20]
[44]
In its
published guidelines on its enforcement priorities, when relying on
Article 82 of the EU Treaty, to deal with abusive or
exclusionary
conduct
[21]
the EU, in
dealing with the appropriate benchmarks for predatory pricing, said
the following:
‘
The
costs benchmarks that the Commission is likely to use are average
avoidable costs (AAC) and long-run average incremental costs
(LRAIC). Failure to cover AAC indicates that the dominant
undertaking is sacrificing profits in the short term and
that an
equally efficient competitor cannot serve the targeted customers
without incurring a loss. LRAIC is usually above
AAC because,
in contrast to AAC (which only includes fixed costs if incurred
during the period under examination), LRAIC includes
product specific
fixed cost made before the period in which allegedly abusive conduct
took place. Failure to cover LRAIC
indicates that the dominant
undertaking is not recovering all the (attributable) fixed costs of
producing the good or service in
question and that an equally
efficient competitor could be foreclosed from the market
.’
The
application of these of principles to the Act
[45]
Section 8
(d)(iv) of the Act makes it clear that there are two tests which may
be applied in order to determine the existence of
predatory pricing,
namely a cost benchmark of marginal costs and of AVC.
Both of these concepts have an accepted meaning
in economic
literature and were incorporated by the legislature into the Act.
In its interpretation of s 8(d)(iv), the Tribunal
said in
Nationwide
Airlines (Pty) Ltd and others v South African Airways (Pty) Ltd
and others
[22]
:
‘
Our
approach is to limit the scope of the subsection by critically
construing any evidence when considering a complaint predation
under
the section. Unless the record show unequivocally that a
respondent is pricing below the prescribed cost levels the
Tribunal
should not make a finding under s 8 (d)(iv) but consider the
complaint in terms of s 8(c).
’
[46]
This
dictum
finds further support in that s 8(d) sets out a series of detailed
exclusionary forms of conduct, whereas s 8 (c) is a more expansive
“catchall” in respect of other forms of exclusionary
conduct, including predation in cases where the practice falls
outside of s 8 (d)(iv).
[47]
This leads to the question of the scope of s
8(c). Section 8 (c) provides that it is prohibited for a
dominant firm to engage
in an exclusionary act other than an act
listed in paragraph (d) if the anti-competitive effect of that act
outweighs its technological,
efficiency or other procompetitive
gain. An exclusionary act is defined in s 1 to be an act that
impedes or prevents a firm
entering into or expanding within a
market.
[48]
Section 8
(c) plays an important role in this case as the Tribunal employed the
concept of ATC in finding that appellant breached
that section..
It held that it was appropriate to adopt ATC as a benchmark in
markets which were characterised by high barriers
to entry.
[23]
It also found that ATC was a more reliable standard in dealing with a
vertically integrated or multi-product firm because
‘
the
orthodox method of costs evaluation, whether marginal costs, AVC or
AAC ‘can be obfuscated or frustrated due to information
asymmetries
’
and
further that a firm is ‘
better
placed to win the cost classification debate … because it has
command over the accounting choices’
.
[24]
[49]
Significantly, there appears to be no engagement
with the expert economic evidence presented in this case concerning
the two central
propositions adopted by the Tribunal in support of
its application of ATC. Given the manner in which the Tribunal
discussed
how, within a short period,
GNN
had gained at least a quarter of the market from the two existing
marked incumbents, the Tribunal’s premise that barriers
to
entry were high is at odds with this evidence.
[50]
If, the Tribunal had found, on the basis of clear
evidence, that the relevant market was characterised by high
barriers to
entry, then in such a market, appellant contended that
the appropriate price costs standard would not be ATC but LRAIC,
which takes
specific account of the sunk costs of entry. If
LRAIC is applied to the costs of the dominant firm where high costs
are associated
with entry, then a return on these high costs could be
allowed which would suffice to permit a rival to enter.
[51]
To return to the purpose of predation, it is
important to distinguish price competition on the merits from price
behaviour which
is subversive of the competitive process and which
falls to be prohibited, in this case, under s 8 (c) of the Act.
The EU
law which seeks to preserve the integrity of a competitive
process and therefore has close affiliation with the spirit and
purport
of the Act takes account of different cost benchmarks.
But the relevant Guidance Paper refers in particular to AAC and LRAIC
rather than AVC and ATC. The general thrust of the Guidance
Paper is that a failure to cover AAC indicates that the dominant
firm
has sacrificed short term profits and that an equally efficient
competitor cannot serve the customers without incurring a
loss.
[52]
By contrast, the Tribunal adopted the test
applied in
AKZO
to
show that where a dominant firm sells at less than ATC but
above AVC it will be guilty of predation, where this is part
of a
plan for eliminating a competitor which might be as efficient as the
dominant firm. In short, the Tribunal grafted onto
the cost
benchmark of ATC a further requirement of predatory intent. But
where is this requirement of intention to be found
in the wording of
the Act? The
AKZO
decision notwithstanding, the task for the Tribunal and the Court is
to interpret and then apply the wording as employed in the
Act.
Section 8(c) refers to an exclusionary act other than one which is
listed in s 8 (d). An exclusionary act, as I
have
indicated earlier, is defined to mean an act that impedes or prevents
a firm from entering into or expanding within a market.
This is
an objective test.
[53]
The
Tribunal and Court, if necessary, are required to examine the act of
a dominant firm and determine the effect thereof; that
is whether the
effect thereof is to prevent another firm from entering into or
expanding within the market. Intention does
not appear to be
part of the architecture of this section. In this connection it
is relevant to recall Baumol’s observation
that ATC is ‘
a
figure that is undefinable and unmeasurable in a multi-product firm
and must therefore be rejected as part of any legitimate test
of
predatory pricing’
.
[25]
[54]
Professor
Motta develops upon this theme:
[26]
‘
However,
a problem with using ATC is that it would require a firm to cover all
the fixed sunk costs, which is a very stringent standard.
Suppose for instance that an incumbents firm makes some fixed
expenditure that it expects to recover through monopoly profits.
Soon afterwards, a new firm unexpectedly enters the market, with
normal competition leading the incumbent to decrease its price
to a
level where the fixed sunk investments cannot be recovered. In
this case, a price below ATC rule would find predation
even if there
is none. This drawback is avoided by the concept of average
incremental costs (AIC), defined by Bolton et al
(2000) as
“
the
per unit cost of producing the added output to serve the predatory
sale, AIC differs from average variable costs in at least
two ways.
First, it is not measured over the firm’s whole output, but
only over that increment of output used to supply
the additional
predatory sales. Second, incremental cost includes not only
variable costs, but any fixed costs incurred in
expanding to serve
the new sales. Incremental cost is a better standard than
either average variable costs or full costs
because it most
accurately reflects the costs of making the predatory sales.
Accordingly,
these authors would presume illegal a price below AIC and lawful one
above ATC with a grey area in between.
To
sum up, a number of different cost standards have been proposed in
the literature. In particular, both average variable
cost and
average incremental costs at reasonable standards. Perhaps AIC
better matches the concept of predation, but it might
not be always
easy in practice to identify precisely the costs that are sustained
for a given output, and/or isolate the predatory
output from total
output.
However,
I would be cautious in finding predatory behaviour in cases where the
price is above average variable costs (or average
incremental costs):
the possibility that a firm is charged with predatory pricing if it
sets a price that allows it to recover
variable costs but not total
fixed costs (that is, a price above average variable cost but below
average total costs) seems too
strict and might encourage firms to
keep prices higher than they otherwise would.
Accordingly,
1.
A price above average
total costs should definitely be considered lawful, without
exceptions.
2.
A price below average
total costs but above average variable costs should be presumed
lawful, with the burden of providing the opposite
on the plaintiff or
the anti-trust authority.
3.
A price below average
variable costs should be presumed unlawful, with the burden of
proving the opposite on the defendant
.’
[55]
To sum up: the question arises as to whether it
is appropriate to include average total costs as an appropriate
benchmark for predatory
pricing under the residual exclusionary
category of s 8 (c) provided that it is supplemented by the
requirement of intention, it
being clear from the express statutory
wording of the Act that ATC cannot be employed in a predation pricing
case brought under
s 8(d) (iv) of the Act. Absent proof of
intention, the Tribunal accepted, by implication, that ATC is an
inappropriate benchmark,
even for a case brought under s 8(c) of the
Act. However the attempt to cure this inappropriateness
by way of the further
requirement of the dominant firm’s
predatory intention results in a test which is incongruent with the
very structure of
s 8, which emphasises
conduct
rather than
intention
.
The latter plays no part in a s 8 case.
[56]
There is, furthermore, a circularity in the use
of intention to bolster a predation case based on pricing below ATC.
Intention is
used by the proponents of this approach to prevent a
false positive that is a finding of predatory pricing where in
substance the
pricing represented competition on the merits. However,
on analysis intention seems unable to perform this important
function.
Where a firm, competing on the merits, reduces its prices,
its intention is to increase its market share by taking away custom
from its rivals. In a real sense, such a firm intends to ‘harm’
its rivals but in a way permitted by competition policy.
The firm may
even hope that a prolonged price war may drive its rival from the
marketplace. How then does it assist the proof of
predation to say
that such a firm ‘intends’ this result, since the
intention is as compatible with competition on the
merits as with
predation? This is another way of saying that ‘fighting talk’
in a firm’s internal documents is
an unreliable guide to
proving predation. There is no escaping the conclusion that predation
must focus on the likely economic
effect of pricing below a
particular cost measure to determine whether low prices are due to a
lawful competitive response to rivals
or to predation and unlawful
behaviour rather than on the intention with which a pricing strategy
is adopted.
[57]
For all of these reasons, ATC plus intention has
no place in the scheme of s 8 (c) of the Act. It follows
that the benchmark
of AAC must be employed when seeking to apply s 8
(c) to a case of predatory pricing as opposed to the hybrid test
which the Tribunal
sought to apply in the present case without any
attempt to reconcile its test with the manner in which s 8 promotes
an objective
test.
The
application of these conclusions
[58]
Given the finding that, the appropriate benchmark
to apply to s 8 (c) is that of AAC (which was the respondent’s
alternative
s 8(c) case if the ATC-plus-intent test was
rejected), the outcome of the appeal depends on whether the
respondent established
that
Forum
’s
AAC exceeded its revenue during the complaint period. If that
was not established, the appeal must succeed. The balance
of the
evidence concerning the intention of appellant which occupied a
considerable portion of the record and the Tribunal’s
decision
thereon thus is not relevant to the disposition of this dispute.
[59]
For this reason, it is now necessary to examine
the competing arguments with regard to the application of the
benchmark of AAC and,
accordingly, whether the appellant’s
conduct is in contravention of s 8 (c) of the Act. This, in
turn, requires an
examination of the disputes between the parties
regarding variable costs as well as product-specific fixed costs.
[60]
A number of assessments of appellant’s AAC
were produced in evidence before the Tribunal. Mr
Malherbe, on behalf
of appellant, calculated
Forum
’s
avoidable costs assuming the whole of
Forum
as the increment of output rather than a certain quantum of
advertising volumes sold over the complaint period. On this
basis, the avoidable costs would be those that appellant could have
saved from not operating
Forum
over the complaint period. This equated to all variable costs
and those fixed costs that were specific to
Forum
.
[61]
Mr Malherbe concluded that the following costs
were avoidable upon
Forum
’s
closure:
1.
all staff costs relating to employees working
specifically for
Forum
(two advertising sale staff and an editor);
2.
all consumable printing costs, including paper,
ink, chemicals and blankets, consumed in the printing of
Forum
;
3.
all distribution costs paid by National Leaflets
Distributors (NLD), appellant’s distribution division, to
subcontractors
for transporting
Forum
newspapers from the printing plant in Bloemfontein to the
distribution depot in Welkom and for distributing
Forum
within the goldfields region; and
4.
other operating costs including photography,
stationary, entertainment, postage and promotion.
[62]
Mr Malherbe contended that the following costs
would have been incurred even after
Forum
’s
closure and therefore there should be considered to unavoidable:
1.
Common costs allocated to
Forum
from the Volksblad office in Bloemfontein and the appellant’s
Cape Town head office (the allocated common costs), including
the
printing overhead costs allocated from the Bloemfontein printing
press;
2.
the shared security, property and rental costs
incurred at the Welkom office and allocated to
Forum
(the allocated shared costs); and
3.
NLD distribution overheads and profit margins
included in the NLD charges to
Forum
(this was about one-third of the amount charged by NLD to
Forum
,
the other two-thirds comprising the amounts paid to subcontractors
for distributing
Forum
.
[63]
On this basis, Mr Malherbe calculated that
Forum
’s
avoidable costs totalled R 6 658 000 over the relevant
complaint period. When this was contrasted
to its turnover of R
7 554 000 over the same period, he concluded that
Forum
had earned R896 000 in revenue over avoidable costs.
[64]
When testifying before the Tribunal, Mr Malherbe
made three adjustments to this estimate. Firstly, he reduced
the avoidable
costs estimate in respect of the transport costs
charged by NLD in respect of Forum the primary distribution leg
between Bloemfontein
and Welkom by an unavoidable portion of these
costs which amounted to R 182 000.
[65]
Secondly, he accepted that a small portion of the
costs of printing overheads in the form of repairs and maintenance
might be avoidable
on the basis of wear and tear caused by the
Forum
printing run. By taking an average of maintenance costs
over the complaint period and presuming that half related to
wear and
tear rather than scheduled maintenance, he found that this would
equate to an avoidable costs component of R 16 000
for
Forum
.
[66]
Thirdly, he acknowledged that there was a
legitimate difference of opinion in respect of the avoidability of
vehicle costs; that
is the costs of the bakkie, for quality control
purposes. Total vehicle costs accounted for 13% of distribution
overheads.
If these costs were treated wholly as avoidable,
then
Forum
’s
avoidable costs would increase by R 48 000. Making these
adjustments, Mr Malherbe suggested that
Forum
’s
revenue was in excess of avoidable costs by R 1 014 000 over the
complaint period.
[67]
Mr Dryden on behalf of respondent, initially
modelled
Forum
’s
costs on the basis of two definitions:
1.
All costs that could be eliminated over a period
of one year according to appellant’s costs classifications; and
2.
All costs of
Forum
as shown in its management accounts.
[68]
Mr Dryden contended that, for two reasons, the
first definition would understate the true magnitude of costs that
could have been
avoided during the complaint period by closing
Forum
:
(a)
The complaint period lasted five years and two
months during which there would have been additional scope for
appellant to make
changes to its business to eliminate additional
costs which were unavoidable over a period of only one year;
(b)
Based on the explanations provided by appellant
as to how costs could be varied or eliminated, he understood that
Media 24’s
definition of costs that could be eliminated over a
one year period did not include costs that could be reallocated to
alternative
productive uses within Media 24 after
Forum
’s
closure. In Mr Dryden’s view, avoidable costs should
include costs that could be eliminated or reallocated
to alternative
productive uses.
[69]
Mr Dryden contended that the second definition
overstated the true magnitude of costs that could have been avoided
by closing
Forum
if
any of
Forum
’s
costs shown in the management accounts could not be avoided over the
complaint period. Nonetheless because of the
extended length of
the complaint period, he considered this definition to be an
appropriate scenario for analysis.
[70]
By contrast to Mr Malherbe’s calculations,
Mr Dryden considered that the only costs which could be treated as
unavoidable
were:
1.
The allocated common costs covering general
management, advertising, administration, debtors/accounts receivable,
human resources,
artists and IT management;
2.
rental and property costs; and
3.
other small operating costs items such as, legal
and pre-press costs.
On
an undiscounted basis, he calculated that
Forum
’s
avoidable costs amounted to R 7 884 000, which exceeded its
revenue by R 330 000. (For the moment I exclude the
opportunity
costs which Mr Dryden likewise considered to be part of
Forum
’s
AAC. I deal separately with opportunity costs later.)
[71]
Before the Tribunal, a further test known as C1*
less cost concessions emerged. Respondent appeared to concede
that the available
evidence did not support Mr Dryden’s view
that printing overheads were avoidable. It then treated these costs
as unavoidable
along with a 15% mark-up on these costs. It also
conceded that the warehousing portion of distribution costs was
unavoidable,
thereby reducing Mr Dryden’s estimate of avoidable
costs to R 7 366 000, with the result that appellant’s
revenues
exceeded its avoidable costs by R188 000
[72]
Unless opportunity costs were also included in
AAC (which I discuss later), these concessions would have meant
failure for respondent
on the AAC test. But in argument before the
Tribunal respondent came up with a further definition referred to in
the proceedings
as the “Commission’s” definition.
It now sought to classify a range of allocated common costs,
including
general management, advertising administration,
artist/graphics and debtors/accounts receivable as avoidable.
It also reclassified
certain costs as unavoidable, which costs were
treated as avoidable on the initial C1 * costs concession definition,
including
the warehousing portion of distribution costs, printing
overheads and the 15% mark up on these costs.
[73]
The following table illustrates the differences
between the various calculations that I have described and what was
added:
ZAR
000s
2004
2005
2006
2007
2008
2009
Total
Malherbe
definition
6540
Add
transport cost adjustment
182
Less
printing wear and tear costs adjustment
-16
Less
NLD vehicle costs adjustment
-48
Initial
Malherbe definition
1215
1251
1221
1362
1414
196
6658
Add
15% uplift printing consumables
58
56
51
58
11
0
234
Add
printing overheads (Paarl Coldset)
0
0
0
0
82
14
96
Add
distribution overheads and NLD profit
82
84
66
61
61
9
362
Add
security and other small adjustments
8
6
7
5
-12
1
15
C1*
less concession definition
1362
1397
1345
1485
1557
219
7366
Add
NLD warehouse costs
5
5
4
4
4
1
22
Add
printing overheads (Volksblad)
96
112
95
98
31
0
431
Add
15% uplift printing overheads
14
17
14
15
5
0
65
C1*
definition
1478
1531
1458
1601
1596
220
7884
Add
general management
226
421
424
468
105
0
1644
Add
advertising administration
89
167
143
24
0
0
423
Add
artists/graphics
59
88
85
17
0
0
249
Add
debtors/accounts receivable
49
93
69
2
0
0
214
Less
NLD warehouse costs
-5
-5
-4
-4
-4
-1
-22
Less
printing overheads
-96
-112
-95
-98
-31
0
-431
Less
15% uplift printing overheads
-14
-17
-14
-15
-5
0
-65
Commission’s
definition *
1786
2167
2065
1997
1661
219
9896
[74]
It is
evident from this table that respondent added four critical
categories as part of
Forum
’s
avoidable costs, namely general management, advertising
administration, artists/graphics and debtors/accounts receivable.
These costs total R 2.53 m over the relevant complaint period.
In addition, respondent added, to
Forum
’s
AAC, distribution overheads and NLD profit of R362 000, a
notional 15% uplift (notional NLD profit margin) of R234 000
on
printing consumables and an amount of R96 000 in respect of
printing overheads.
[27]
[75]
Manifestly, the inclusion or otherwise of these
items is critical to the resolution of this case. It appears to
be common
cause that
Forum
’s
revenue over the relevant period was R 7 554 000 which
means that, based on the respondent’s calculation,
its
avoidable costs exceeded revenue over the period by R 2 342 000.
I shall deal with each of these critical items
separately. For
respondent to make a showing of predation, the inclusion of these
items (or at least some of them) as avoidable
was crucial unless
respondent could show that opportunity costs needed to be included in
Forum
’s AAC.
Because of the approach it followed, the Tribunal did not decide
these matters.
General
management costs
[76]
Respondent contended that there could be little
doubt that the general management costs were avoidable over a period
of less than
a year and were in fact probably avoided (redeployment)
after
Forum
’s
closure. If avoidability is assessed, as the respondent
contends, over a period commensurate with the complaint period,
whatever doubt there may be about the avoidability of these costs
over a period of only one year would disappear.
[77]
In this connection, respondent drew specific
attention to the evidence of Ms Anel Coetsee, who until 31 December
2012 was employed
by the Volksblad group as an accountant.
[78]
Respondent referred to her evidence, in
particular to Volksblad’s
Forum
12 sub-editors who reviewed 1.5 million single-column centimetres of
text per year, of which 50 000 – 55 000 were
contributed by
Forum
.
Thus one of the sub-editors, if he or she had done all of
Forum
’s
work, would have spent 44% of his or her time editing
Forum
.
It therefore was possible to reorganise a department to have 11 full
time and one part time employees. A reorganisation
of this
nature could be achieved within a year. Ms Coetsee also
testified that 27% of one advertising administrator’s
time was
spent counting
Forum
’s
advertisements. It was possible to rearrange the department so
that one person worked part time.
[79]
According to respondent, Ms Coetsee conceded that
the very substantial percentage (approximately 70%) of the work of
the administration
department would have been redeployed to
Vista
which absorbed approximately 70% of
Forum
’s
advertising revenue over the period immediately prior to and post
Forum
’s
closure.
[80]
Turning to the costs of graphics/artists and
debtors/accounts receivable, Ms Coetsee made the same concession,
accepting that
Forum
’s
work could have represented 44% of one artist’s employment
time. On the same basis
Forum
would have occupied 17% of one debtors/accounts receivable employee’s
time.
[81]
By contrast, appellant contended that the costs
which were classified as “general management” in the
management accounts
comprised costs incurred for senior management
and technical staff both in Cape Town and Bloemfontein as well as the
costs of sub-editors.
[82]
Referring to Ms Coetsee’s evidence,
appellant noted that she had testified that the allocated Cape Town
costs included charges
for common functions such as information
technology, financial assistance, personnel services, the share
trust, overseas offices,
intranet and newspaper management.
[83]
In her evidence before the Tribunal Ms Coetsee
said the following in answer to a question from respondent’s
counsel:
‘
But
why would there have been head office costs, because there would be
no services to be rendered to these community newspapers?
Volksblad would still have been there so it would have been the
Volksblad part that they would have paid for’. She
was
then asked; ‘But it would have been reduced, the head office
cost would have been reduced?’ To which she answered;
‘not
the head office costs itself, only the costs being allocated to
Bloemfontein… that would decrease then some other
title would
have to absorb that costs because the costs would remain the same on
a head office level.’
[84]
A further problem with regard to the inclusion of
these costs concerned the size of
Forum
.
Forum
represented a
very small proportion of appellant’s overall business and thus
what accrued to it was a very small amount of
revenue in relation to
total revenue earned by the firm – 1% of the revenue of the
Volksblad Group, 0.1% of the revenue of
appellant’s newspaper
division and 0.02% of the revenue of appellant as a whole.
[85]
Ms Coetsee conceded that ‘
I
did not have anything to do with that advertising administration Cape
Town
’
. However later in her evidence
she was asked the following;
‘
and
that would have been a classic instance of the relocation of
resources where instead of spending that time on
Forum
and those costs in relation to
Forum
it was spent on the additional
Vista
business correct?
’
To
which Ms Coetsee replied;
‘
In
my opinion reallocation would be to appoint somebody, all the ladies
still worked on all the titles in my opinion that is not
reallocation. Nobody was specifically allocated to
Forum
or to
Vista
.’
[86]
Employees in this department worked in a pool
which was capable of handling volume fluctuations far larger than
Forum
’s demand
in the same way as editorial volumes for
Vista
’s
advertising volumes alone fluctuated on a monthly basis by
significantly more than the total volume of
Forum
.
[87]
Turning to debtors/accounts receivable, Ms
Coetsee, when her evidence is read as a whole, testified that the
department serviced
customers that had advertised in a number of
Volksblad titles at the same time under one account for each debtor.
So far
as this department was concerned, she said,
‘
The
closing down of
Forum
did not have an impact on the productivity of any of the people in
that department… the part of their day that they spent
of
Forum
(sic) was very small.
’
Significantly
when asked by respondent’s counsel,
‘
But
as a result of the closure of Forum are you saying that the amount of
work in this department remained exactly the same?’
Ms
Coetsee replied:
‘
Yes
more or less
’
.
Printing
overhead costs
[88]
Printing overhead costs accounted for R 527 000
of the costs allocated to
Forum
over the complaint period from Volksblad and Paarl Coldset. Mr
Malherbe testified that only a portion of these costs could
conceivably be considered to be avoidable, being the wear and tear of
the printing presses. To this end he estimated that
an amount
of R 16 000 over the complaint period could be considered to be
part of avoidable costs.
[89]
The Commission accepted that it lacked evidence
to treat the Volksblad portion (R 431 000) as avoidable, albeit
that it considered
this to be a conservative approach. The commission
maintained, however, that the balance of R96 000 could properly
be allocated
to
Forum
as an avoidable cost. By contrast, Mr Malherbe was
adamant that only R 16 000 over the complaint period in respect
of wear and tear could conceivable be considered to be avoidable
costs. As Mr Malherbe noted, when a firm has space printing
capacity, the issue of redeployment falls away, for if there were
opportunities to redeploy the firm would have done so already,
a
point confirmed in the case of appellant’s business by Mr
Johannes Botha, the head of financial services of appellant which
evidence remained contested.
[90]
In addition, respondent included in its avoidable
costs calculation a notional 15% uplift on consumable printing costs
which equated
to R 234 000 for the complaint period.
[91]
This 15% cost uplift to
Forum
’s
reported printing costs over the complaint period represented a
notional cost because it was never included in
Forum
’s
management accounts prior to April 2008 and was not actually charged
to
Forum
by
respondent’s printing division. In April 2008, Paarl
Coldset and its predecessor Print 24 moved from a pure cost
recovery
charging arrangement to a pricing model that included a 15% mark-up
on costs.
[92]
The change in pricing was motivated on the basis
of the following considerations:
1.
The mark-up was applied to ensure that charges
levied to appellant’s titles reflected the market price of
obtaining printing
services, not the costs of self provision.
This would enable Paarl Coldset to obtain funds for the replacement
or additional
machinery;
2.
The uplift would enable Paarl Coldset to recover
unforeseen maintenance expenditure in a stable and consistent manner.
[93]
Apart from the notional aspect of including this
amount in the avoidable costs calculation, it failed to take account
of the fact
that prior to April 2008 maintenance costs were
automatically passed on to appellant’s titles when they were
incurred; hence
a measure of “double counting” was
involved since if the 15% uplift had in fact been charged, the actual
maintenance
costs would not have been passed on to
Forum
.
[94]
Mr Johannes Botha, Financial Manager: Shared
Service in appellant told the Tribunal the following in this regard:
‘
In
the years prior to the creation of Print 24 the costs for unforeseen
repairs formed part of the actual costs that were allocated
to the
titles on a monthly basis. As
Forum
has therefore contributed to actual unforeseen repair costs during
the complaint period, any retrospective addition of a margin
past
printing costs will double account repair costs’
.
There
was also the problem that to require a dominant firm to recover the
costs for services provided internally on the basis of
acquiring
those services from a third party would cause prices to increase as
dominant firms would not be able to realise efficiencies
of vertical
integration. Vertically integrated firms might then be required
to charge double margins.
Distribution
overheads
[95]
Forum
was distributed
by NLD, as noted, a division of appellant. It charged all
appellant’s titles for distribution and transport
and used
contractors for this purpose. NLD’s overhead costs included
central overhead charges from appellant’s head
office in Cape
Town which were allocated to each of the NLD’s regional
operations including NLD Bloemfontein which was a
small part of the
NLD’s national business. To the extent that
Forum
had any impact on NLD Bloemfontein, it would have meant losing 3.4%
of its business which could not conceivably have had any impact
on
the overhead charges of appellant’s IT system, accounting
processes or the costs of senior executives in Cape Town.
[96]
These costs would continue to be incurred after
Forum
’s
closure. With regard to NLD’s warehouse costs incurred in
Bloemfontein,
Forum
never made use of this facility nor did it make use of the casual
labour employed at the warehouse. In relation to NLD’s
staff costs, four permanent employees were responsible for the
regional administration of NLD.
[97]
As
Forum
made up only a very small part of NLD’s Bloemfontein revenue,
small fluctuations brought about by
Forum
’s
existence and closure made no difference to the costs incurred in
this regard. Fluctuations of revenue, which are
far greater
than
Forum
’s,
occurred in NLD Bloemfontein on a month to month basis and even
within a month. Mr Nortje, who had been the
national
operations manager for NLD, testified:
‘
There
were also no savings other than those incurred directly in respect of
contractors’ charges for delivering
Forum
.
The Bloemfontein infrastructure and overhead (and all the more so the
national overheads) were left unaffected by the closure.
For
NLD (and ultimately appellant), none of its infrastructure costs and
overheads were variable with a change in
Forum
’s
distribution volumes, nor were any of them avoidable with the closure
of
Forum
,
not even in the long run. All other things being equal, these
costs would continue to be incurred indefinitel
y.’
Allocated
common costs
[98]
In its final submission, respondent treated a
large portion of common costs (77%) as avoidable common costs.
Common costs
were those allocated from Volksblad and appellant’s
corporate offices and covered general management advertising
administration,
accounts receivable, human resources, artists and IT
management. These were the so-called redeployment costs which,
according to
respondent, could – if
Forum
had been closed – been saved through a reorganisation or
rejigging or redeployment of appellant’s common staff
resources.
[99]
In this regard Ms Coetsee’s evidence is of
particular significance. She explained that Volksblad had a
community’s
management department which comprised a general
manager for community newspapers, his or her personal assistant and
sub-editors
for the community newspapers; 10-12 people in total.
Their salaries, telephones, IT, equipment, stationery and rental
expenses
fell under the rubric “community’s management”
in the financial statements who were allocated to all the community
newspapers. In the area of advertising administration,
Volksblad employed about eight people and had one manager. They
were responsible for statistics, measuring column centimetres sold
and confirming the correct placement of advertisements in order
to
have invoices generated. In the Human Resources Department
Volksblad had an average of three employees, being a manager,
a
payroll clerk and an administrative clerk. The expenses
incurred in this department did not vary with
Forum
’s
volumes. In this connection Ms Coetsee testified:
‘
MS
COETZEE:
Over
a year the total community newspaper group would produce
approximately 1.5 million editorial centimetres.
MR
UNTERHALTER:
Yes.
MS
COETZEE:
And the average for
Forum
would total roundabout 50 000 / 55 000 editorial
centimetres in a year.
MR
UNTERHALTER:
Yes. So just again in percentage terms what did
Forum
makeup of the total editorial content of the community newspapers in
a year?
MS
COETZEE:
Okay, so it was 55 000 centimetres in relation to 1.5 million
centimetres which would be about 3% approximately.
MR
UNTERHALTER:
Now were the – were particular titles allocated to particular
sub-editors?
MS
COETZEE:
No, all the sub-editors worked in a pool, they weren’t
allocated specifically to a title.
MR
UNTERHALTER: I
see. Well then let me ask you the question upon the
closure of
Forum
in respect of this particular category of costs of
general management were the costs avoidable or unavoidable in your
view, and
why?
MS
COETZEE:
Since
Forum
,
if you look at their editorial centimetres was only about 4% of the
total editorial centimetres that these people had to deal
with I
cannot imagine that it would have any impact on the sub-editors
pool.’
[100]
In a memorandum to senior management dated 10
July 2006 Mr WJ Bonthuyzen, who testified on behalf of respondent,
stated:
‘
The
budgeted allocated costs of R 789 988 would not disappear from
the Volksblad Group’s expenses since most of
Forum
allocated costs consist of the following costs categories:
·
Printing press (used or
unused hours)
·
Personnel Division
·
Administration section
·
Artists’
[translation from
Afrikaans]
[101]
The Tribunal rejected respondent’s argument
for the inclusion of the redeployment costs, holding that, in a large
business
such as appellant’s, a firm would not have undertaken
reorganisation upon
Forum
’s
closure, given that the common resources apportioned to
Forum
were, from the perspective of appellant’s overall business,
trivial. The Tribunal did not consider that the evidence extracted
by
respondent under cross-examination established the contrary. Forum
To this respondent contended that it was unlikely
that
appellant would not have ‘redeployed’ its resources
in the manner for which
respondent contended: ‘The Commission’s case is simply
that it could and indeed would likely
to have done so
.’
[102]
This is hardly sufficient to sustain an argument
that this Court should find differently to the Tribunal in this
regard, based on
the probabilities and in terms of the evidence so
presented. Indeed under-cross examination, Mr Bonthuyzen,
after being
referred to the passage I have quoted from his memorandum
of 10 July 2006, testified as follows:
‘
MR BURGER:
Forum
…
Now what is debated here, am I
correct is what happens if we close
Forum
.
MR
BONTHUYZEN: That’s correct ja.
MR
BURGER:
And what you are debating now with your
staff is if we close
Forum
will there be a saving on “toegedeelde koste” on
allocated costs.
MR
BONTHUYZEN: That’s correct.
MR
BURGER:
And the conclusion you reach is the answer
is no, most of those costs
are going to stay.
MR
BONTHUYZEN: That’s correct ja.
MR
BURGER:
And that will be an argument against closing
Forum
?
MR
BONTHUYZEN: That’s correct.
MR
BURGER:
And the items you identify, which will
not disappear is “rolpers
tyd” now those are printing costs.
MR
BONTHUYZEN: That’s correct ja.
MR
BURGER:
That’s not going to disappear.
MR
BONTHUYZEN: No.’
Mr
Burger then asked Mr Bonthuyzen about additional allocated costs:
‘
MR
BURGER:
The next fixed costs, or allocated costs which would not
disappear
if you close Forum in the administrative division and again
presumably you refer here to Bloemfontein and to Bellville.
MR
BONTHUYZEN: Especially the Bloemfontein ja.
MR
BURGER:
Especially Bloemfontein yes, that’s where a 60%
component is
sitting, and then the artists, those would be the artists presumably
employed in Bloemfontein?
MR
BONTHUYZEN: In Bloemfontein and also in Welkom, because
they had their own artists at a certain stage.
MR
BURGER:
How many artists were there in Welkom?
MR
BONTHUYZEN: If I remember correct two.
MR
BURGER:
Two?
MR
BONTHUYZEN: Ja.
MR
BURGER:
Now would one of them have lost his or her job if Forum
closed or
not?
MR
BONTHUYZEN: No, not.
MR
BURGER:
So again that costs is not going to disappear.
MR
BONTHUYZEN: That’s correct ja.
MR
BURGER:
I see. You then propose in 2006 my proposal is
that we go, we
carry on with Forum in its present business configuration for the
same business reasons that had been advanced in
2003 as well as the
fact that the allocated costs would to a large extent not disappear
(of you close it). That’s what
you say there.
MR
BONTHUYZEN: That’s correct.
MR
BURGER:
That’s in fact what you believed at the time.
MR
BONTHUYZEN: That’s correct ja.’
[103]
Returning to the table set out above which
summarises the parties various avoidable costs estimations, it is it
clear that if one
excises the general management costs of R 1.64 m,
the 15% uplift for printing of R 234 000 and distribution
overheads, of
R 362 000 together with the disputed amount of R
80 000 in respect of printing overhead costs the avoidable costs
would reduce
to R7.656 million, only about R 20 000 more than
Forum
’s
revenue. Furthermore, the evidence did not satisfactorily
establish that the further so-called redeployment costs
in respect of
advertising administration, artist/graphics and debtors were
avoidable. If, as appears to be the case, on the probabilities,
these
disputed costs categories should not have been included, it would
result in the overall revenue which accrued to
Forum
exceeding the average avoidable costs over the complaint period.
Opportunity
costs
[104]
Unsurprisingly respondent argued in favour of an
approach that would include not only the costs of producing
Forum
and delivering it to market but also would include profits that could
have been earned by way of an alternative course of action.
This calculation would include profits foregone, which concept is
variously referred to as opportunity costs or cannibalisation.
[105]
The Tribunal decided to exclude opportunity costs
from its calculation of AAC. It reasoned as follows:
‘
All
the other costs relied on to calculate AAC are based on actual costs
capable for the most part of precise determination because
these
costs were actually costs incurred and there are accounting entries
to verify them. The opportunity costs contended
for in this
case are not verifiable in the same way from accounting entries.
Instead they rely on estimates of ‘what
might have been’,
made at a time when the ‘might have been’ was subject to
too many imponderables nor is the
task made easier by the controversy
over the correct net off cost alluded to above, an issue that we also
for reasons of our broader
approach need not determine. Nor is
the approach cured by adopting a more conservative approach to the
numbers – a
16% diversion and the Media 24 approach to the net
off calculation. Once the basis to the approach is accepted to
be built
on unreliable foundations it does not help to construct
something less ambitious but still suspect as a means of calculation
on
top of it.
’
[28]
[106]
I have
already indicated that key figures in the economic debate with regard
to AAC, Professors Baumol and Motta, are not in favour
of taking
account of opportunity costs as advocated by respondent.
A good reason for this reluctance can be found in
In
re: IBM Peripheral EDP Devices Anti Trust Litigation. Trans America
Computer Company Inc. v International Business Machines
Corporation
[29]
:
‘
TCC
has taken this concept one step further than the decision making
stage and seeks to subtract from the profits IBM predicted
it would
realise on a particular product the estimated profits that might have
been realised on a product that could have been
produced in its
stead. In this fashion, TCC concludes that IBM priced below
cost. But, even aside from the speculative
nature of the
alternative’s profits, the use of the concept of opportunity
costs in this fashion must be held improper as
a matter of law.
Such costs are not reflected in a profit and loss statement, and such
a theory would restrict the manufacturer
with monopoly power to
always choosing the alternative predicted to produce the greatest
monetary rewards. It would have
to blind itself to the host of
factors that influence such a decision and could quite possibly lead
to a more socially desirable
result. The unquantifiable risks
associated with a particular alternative, technological
considerations and all the non-economic
influences that affect a
manufacturer’s social responsibilities would all have to be
forgotten. Such was not the intent
of the Sherman Act and it
not what is meant by predatory pricing.
’
[107]
The difficulty in taking account of opportunity
costs, in the manner advocated by respondent, is that it can lead to
an argument
that requires firms to price at their most profitable,
therefore creating a situation that may run counter to the purpose of
the
Act; in particular by ensuring that more efficient firms pass on
their efficiency advantage to consumers by way of lower prices,
rather than being deterred therefrom.
[108]
For this reason Mr Malherbe’s justification
for excluding opportunity cost when testifying before the Tribunal is
compelling:
‘
According
to the opportunity costs view put forward by Mr Dryden, one would
then have to take those opportunity – those additional
super
margins being earned in the monopoly market, and add them – add
them to the full costs of the incumbent airline on
the route for
which it’s now competing. And force it to price at a
level that includes both the actual costs plus that
rich opportunity
cost that it could earn during to its market power elsewhere. (sic)
This
is nothing other than importing market power from one market and
enforcing it in the other market by bringing to bear a price
cushion
that would push up prices significantly above the true costs of an
equally efficient competitor.
For
this reason, a costs benchmark that includes an opportunity cost
element cannot reliably test for exclusion. It cannot
say as
soon as you are pricing above my innovated cost, which includes
profit margin I could have taken in another market, therefore
I am
capable of excluding an equally efficient competitor.
’
[109]
Having found that opportunity costs by way of
foregone profits should not be taken into account, it becomes
unnecessary to canvass
the issue of diversion estimates which were
hotly contested between the experts in their evidence before the
Tribunal.
Conclusion
[110]
For the reasons set out above, s 8 (d) (iv) of
the Act is drafted in precise terms. In order for
respondent to show
the conduct of appellant is of a predatory nature
which is sufficient to fall within the section, it had to show that
appellant
is a dominant firm involved in selling goods or services
below their
marginal
or
average variable costs
(‘AVC’). Once the test of ATC plus
intent to predate is found to have no application in s 8 (c) of
the
Act, where no specific costs benchmark is mentioned, the balance of
the evaluation of the evidence by this Court and the Tribunal,
in its
carefully considered judgment, is similar leading to a finding that
the application or AAC or AVC is of no assistance to
respondent in
proving its case, given the amount of revenue which accrued to
Forum
.
[111]
It was common cause that
Forum
’s
revenue over the complaint period exceeded a conventionally assessed
AVC. Accordingly, the case turned on the
application of s
8 (c) of the Act and the application of AAC. The idea that a total
costs standard plus intention to exclude by
way of predation as an
appropriate test for s 8 (c) is incongruent with s8 which focusses
exclusively on the act or the conduct
of the appellant as opposed to
a subjective test to determine intention.
[112]
This leaves AAC as an appropriate costs benchmark
for a predation case based on s 8(c) of the Act. The idea of
AAC as a benchmark
is that a price below AAC indicates a sacrifice by
the dominant firm as it would not have increased its cash profits by
producing
any increment during the relevant period at such prices.
At a price below AAC, a dominant firm would be capable of excluding
an equally efficient competitor because AAC captures all the costs
that the competitor already in the market has to cover during
the
relevant period so as to not make a loss. It is not necessary
to determine whether a price below AAC can be justified
given the
context of this dispute. It was for respondent to prove that
Forum
’s AAC
exceeded its revenues, and this it failed to do.
[113]
For all of these reasons, the appeal must be
upheld and the following order is therefore made:
1.
The decision of the Competition Tribunal of 8
September 2015 is set aside.
2.
The complaint referred by the Competition
Commission to the Tribunal on 31 October 2011 is dismissed.
3.
The Competition Commission is ordered to pay the
costs of this appeal, such costs to include the costs of two counsel.
_________________
DAVIS
JP
ROGERS
and BOQWANA JJA agrees
Appearances
Date of
hearing:
13
December 2017
Date of judgment:
19
March 2018
For the Appellant:
Adv D Unterhalter SC (as
he then was) and
Adv M
Norton SC
Instructed
by:
Werksmans Inc
For the
Respondent:
Adv R Bhana SC, Adv J Wilson SC and
Adv G
Marriot
Instructed
by:
Gildenhuys Malatji Inc
[1]
M Motta
Competition Law:
Theory and Practice
(2004)
at 412.
[2]
Single column per centimetre.
[3]
The quotations indicated are from the original complaint lodged in
January 2009.
[4]
Para 161 of the Tribunal’s decision.
[5]
Para 198 of the tribunals decision.
[6]
Para 598 of the Tribunal’s decision
[7]
Phillip
Areeda and Donald Turner ‘
Predatory
pricing and related practices under s 2 of the Sherman Act’
(1975) 88
Harvard Law
Review
697
[8]
at 698
[9]
At 699.
[10]
[
1991]
ECR – I 3359.
[11]
See Richard Whish
and David Bailey
Competition
Law
(8
th
ed) at 684.
[12]
Whish and Bailey at 787.
[13]
In some of the literature it is referred to as LRIC
[14]
Gunmar Niels, Helen Jenkins and James Kavanagh
Economics
for Competition Lawyers
(2011) at 193.
[15]
‘Predation and the logic of average variable cost test’
1996 (39)
Journal of the
Law and Economics
49.
[16]
Baumol at 52.
[17]
Baumol at 70-71.
[18]
[2003] CAT 11.
[19]
Decision of the Office of Fair Trading of 18 November 2008.
[20]
[2009] UK CLR 332.
[21]
2009 Official Journal of the European Union.
[22]
Case 92/IR/Oct00 at para 102 with regard to s 8 (d)(iv).
[23]
See paras 220-221 of the Tribunal decision.
[24]
Para 221.
[25]
At 50.
[26]
Competition Policy: Theory
and Practice
(2004) at 448
[27]
Initially
printing costs of R 527 000 were allocated to Forum over the
complaint period from Volksblad and Coldset.
Respondent
then conceded that there was inadequate evidence to show that the
Volksblad portion of R 431 000 was avoidable.
[28]
At para 163.
[29]
459 F. Supp 626 at 630.