BY ABDI ALI
The basic tenets of competition law as highlighted in the Kenyan Competition Act 2010 are to promote consumer welfare and encourage competition in the economy by prohibiting restrictive and predatory trade practices, controlling monopolies, concentrations of economic power and prices for connected purposes…” However, the emerging acts of competition have put to test the doctrine of lex mercatoria (law of merchants) that begs the question: is it laid down laws that regulate the code of business practice, or is it the rules of trade, derived from practice of merchants, that have demanded for a set of business laws?
In the circumstance, predatory pricing is generally defined as the practice of a dominant firm selling a product at a price lower than the production cost in order to drive some or all competitors out of the market, or create a barrier to enter into the market for potential new competitor since the predator occupies a dominant position in the relevant market. These acts require close attention as it is often difficult to distinguish between reduction of prices for purposes of fair competition and predatory reduction of prices with intent to monopolise.
In Kenya, an entity which drives out or excludes rivals by selling at unremunerative prices is not competing on the merits, but engaging in behaviour that may properly be called predatory. There is, therefore, good reason to include in the Competition Act 2010 a “predatory pricing” offense within the prescription of monopolisation or attempts to monopolise the market. The Kenyan Competition Act 2010 is not explicit on the regulations that provide clarity on the practical application of the statute on what conduct is prohibited. The Act is not more specific about conduct that may be illegal, but only when such conduct substantially limits competition, or tends to create a monopoly in any line of commerce. It, therefore, left the courts to develop the substance of the law and to ultimately determine what should or should not be deemed illegal.
Generally, low pricing is seen as a benefit of successful competition. Predatory behaviour, however, is an anti-competitive form of conduct which leads to pricing that is low enough to eliminate all competition. This practice is a recent development in competition law – in the earlier days, usually a seller would not be held liable for under-pricing a rival and putting him out of business as this was considered to maximise consumer benefits. Gradually it has come to be viewed as an anticompetitive practice adversely affecting consumers in terms of choice and price.
Under the Kenyan law, Section 10 of the Restrictive Trade Practices, Monopolies and Price Control Act (RTPA) provides for predatory trade practices. Predatory prices, too, are provided for under Section 10 (3) (a), which states that a price will be considered predatory if the Minister considers that the price or certain prices at which a person sells and or supplies goods and services are below their average variable cost, if these prices drive a competitor out of business or if they deter a person from establishing a competing business in Kenya. The above section gives the Minister the discretion to determine what amounts to a predatory price. The Act bestows the authority to control predatory prices in Kenya that is whatever price the Minister fixes, as being below the average variable cost will stand and hence it will be a predatory price. Such an authority depicts a lack of judicial decisions concerning competition law in Kenya and, more importantly, none covering predatory prices.
Predatory prices under the RTPA are per se illegal – that is, they are illegal and economic evidence need not be adduced to prove it. In such an instance, the judicial system must intervene in an attempt to analyse what conduct is illegal; therefore in attempting such, the courts must apply either (1) a per se analysis, or (2) the rule of reason analysis to evaluate whether such conduct violates Competition Act 2010. A per se rule does not look at the circumstances, rather looking at the pure facts of conduct to judge whether it is legal or illegal based purely on facts, with no regard to the economic reality or setting of the conduct in question . At times, some businesses constitute anticompetitive behaviour and, at other times, encourage competition within the market. For these cases the court applies the reasonable rule test and asks whether the challenged practice promotes or suppresses market competition.
To understand the perspective application of these rules with regard to the Competition Act 2010, the Courts must highlight the basics of predatory behaviour. Predatory behaviour occurs in two phases: the “predation phase” where extremely high values are offered to the consumers to overthrow competition, followed by the “recoupment phase” where consumers are provided lower values in terms of the product, as competition has been overthrown.
In other jurisdictions such as the United States, predatory pricing is provided in their antitrust laws. This is evident in the “Areeda and Turner” case, which set the test to determine whether a price is predatory. It suggested that a price should be deemed predatory where it is below a firm’s short run marginal cost or average variable cost. Areeda and Turner postulate a test where predation is assumed where pricing is below marginal cost or average variable cost. That is where a price is below marginal cost it is a predatory price. However, this case suggested that prices above the marginal cost were presumed legal.
Not anticipated
This case developed a different way of viewing predatory pricing since it introduced not only the basic way of viewing a predatory price as that which was below the average variable cost but one that was also below the short run marginal costs. This is a control that is not provided for under the Kenyan jurisdiction.
Another test employed in the US in respect of predatory pricing that is not considered under the Kenyan laws is recoupment. It recognises that short term losses sustained during the period of predation will be recouped by monopoly profits in the future. Courts in the US require the element of the offence of predatory price-cutting, that is, so it can be shown that the predator has the ability to recoup any losses incurred. Under the recoupment approach, it is only if market structure makes recoupment possible that courts in the US need to consider the relation between price and cost. The plaintiff must demonstrate that the competitor had a reasonable prospect or a dangerous probability of recouping its investments in below-cost prices.
The main reasons why predatory pricing should be looked at is that predatory pricing clearly disrupts competition. It is used by monopolists, or companies with a high market share that want to become market dominants. Such dominance refers to a position of economic strength in a particular market. Locally, there have been recent claims in the air transport sector that the national carrier, Kenya airways, has made a 50 per cent reduction of their fares on the Nairobi-Mombasa route, which, rivals claim, is an act of predatory pricing since they are charging below the cost basically with the sole intention of killing competition in the market. Jetlink and AirKenya might consider reducing their flights in the in the said route in order to cut costs. These acts clearly damage the market and disrupt competition.
The spirit of competition lies in firms competing for custom and the business of people through means such as reduction of prices and innovation. This requires that a cautioned approach be adopted while determining the occurrence of predation in a firm‘s conduct as, very often, the line between fair competition and unfair predation wears thin. The law on predatory pricing must maintain a fine distinction between competitive behaviour and anti-competitive conduct. A great burden is placed on the law as it is responsible to protect competitive reduction of prices by dominant firms, preventing situations where they refrain from reducing prices for fear of being charged with abuse of dominance, and simultaneously detect instances of anti-competitive reduction of prices. The absence of objective standards, which makes the evaluation of predation difficult, has led to several debates regarding the appropriate test for establishing the existence of price predation.
The determination of predatory pricing appears to be a daunting task due to the grave effect of the conduct on competition. The Competition Act 2010 is, therefore, burdened with the responsibility of protecting consumers as well as rival competitors from the ill effects of predatory pricing, while simultaneously ensuring that those enterprises enjoying dominance in a particular market are not dissuaded from competitively reducing prices due to the stringent law applicable in these cases. This leads to the requirement to create an appropriate all-encompassing test to detect instances of price predation.
Therefore, under the Competition Act, certain guidelines need to be created to place predatory pricing within the scope of the two rules – Per Se and Rule of Reason – in order to tackle the real scope of predatory pricing with the aim of stabilising the markets and protecting investors, large and small, as well as consumers in general. Therefore, the need of the hour is to lay down certain and comprehensive laws to curb and prevent such predatory acts. It is only through better management of risk and proper regulations on predatory pricing that the financial sector will benefit from all walks of investors.