South African Competition Commission vs. Media 24

Transcription

1 The views presented herein are my own. Not those of the SACC or Compass Lexecon. South African Competition Commission vs. Media 24 Dr. Robin Rander Senior Economist ACE 2015, Milan

2 Background (i) This is a predation case The South African Competition Commission (SACC) contended the following: Media 24 (M24) was operating the newspaper Forum below cost as a fighting brand The Forum brand was being operated below cost as a vehicle for exclusion This excluded rivals from the market, in particular the rival Gold Net News (GNN) 2

3 Background (ii) Market for community newspapers, i.e. newspapers distributed for free to readers, funded by advertising in Welkom, South Africa At the turn of the century there were three community newspapers Forum (M24) Vista (M24) GNN (independent) Forum consistently performing below budget, making negative or marginal contributions to overhead costs (on an accounting basis) GNN exits market in April 2009 GNN brought complaint to SACC in January 2009 alleging that M24 was selling advertising below cost Forum exits market in January 2010 No new entry since Forum s exit 3

4 The South African Competition Act SACC s case rested on two different provisions of the South African competition act Section 8(d)(iv): prohibition against dominant firm selling goods or services below AVC/marginal cost unless there are technological, efficiency or other pro competitive gains Section 8(c): general prohibition against exclusionary conduct, if conduct is anti competitive and unless there are technological, efficiency or other pro competitive gains Section 8(c) finding would require pricing below cost plus additional evidence to show conduct was anti competitive 4

5 The SACC s case Section 8(d)(iv) Forum was pricing below AAC AAC should include costs of sales that were diverted from Vista to Forum Less clear Forum was operating below AAC if cost of diverted sales excluded As the case was long run (>5 yrs) all product specific costs of running Forum were variable hence AAC=AVC Section 8(c) Forum was pricing below AAC (as above) and there has been an anticompetitive effect (GNN had left market, reputation in other markets); or Forum was pricing below total cost and there was evidence of intent to exclude GNN As case was long run, it could be that ATC=AAC 5

6 Key issues Cannibalisation costs (diverted sales) Intent to exclude Anti competitive effect 6

7 Diverted sales Incremental profit! Diverted revenue Vista Forum 7

8 Forum incremental profitability: role of diverted sales Vista was the M24 flagship in the Welkom market largest community newspaper Internal M24 documents suggested that 27 30% of Forum s revenue would transfer to Vista Assessment of the incremental profit of keeping Forum in the market (operating on its actual strategy) relative to a counterfactual scenario in which Media 24 closed it down should include the cost of cannibalisation M24 counter arguments: The cannibalisation evidence was not reliable The cannibalisation evidence has been mis interpreted Cannibalisation cost is not informative of exclusion If this opportunity cost forms part of the incremental profit, then surely we must also look at the opportunity cost of closing Forum 8

9 Intent Documentary evidence could be interpreted as there being a strategy to use Forum to price aggressively in order to foreclose market Reference to Forum as a stopper in the market Media 24 had acknowledged Forum cannibalising Vista revenues in internal documents Former manager explained that there had been a strategy to use Forum to meet or beat GNN s pricing Forum consistently failed to meet its budget, as opposed to Vista 9

10 Anti-competitive effect No new entry in the market following the exit of first GNN and then Forum witness complained that prices had gone up and quality gone down Media 24 argued that Forum could not have been the cause of GNN s exit Conduct could therefore not have had an anti competitive effect There were several other candidate explanations GNN s costs were too high GNN had problems with its distribution, with copies ending up in derelict buildings instead of with readers There had been an economic downturn in Welkom Taking on a market leader such as Vista in head to head competition was not realistic 10

11 The Tribunal s findings Tribunal found that Media24 had infringed Section 8(c) Basis for finding: intent and pricing below average total cost Tribunal did not dismiss inclusion of cannibalisation cost in AAC in principle Evidence on degree of cannibalisation was not sufficiently reliable Evidence on which costs were avoidable was not sufficient for Tribunal to conclude that Forum had been pricing below AAC if cost of cannibalisation omitted It did however accept the cannibalisation evidence showed intent 11

12 My comments Is pricing below ATC a relevant benchmark? Tribunal was facing a dilemma: Mixed evidence on what costs were avoidable Evidence on magnitude of cannibalisation cost was not sufficiently precise for it to be included in AAC Yet evidence that Media 24 had wilfully incurred losses for the purpose of excluding a rival was convincing Evidence that GNN s exit had produced worse outcomes for consumers Predation policy is about balancing risk of over enforcement against risk of under enforcement If Tribunal had endorsed AAC as the one benchmark, would there not be a risk of under enforcement? 12