The Competition Economics of Excessive Pricing and its Relation to the COVID-19 Disaster Period

Abstract

The declaration of a state of national disaster in South Africa, due to the Covid-19 pandemic, was followed by pricing regulations pertaining to the pricing and supply of certain consumer and medical products and services. The regulations raise several questions that relate to the economic analysis of excessive pricing and its accompanying competition policy. As market power is key to competition analysis, how should it be assessed and is there a role for a focus on temporary market power? What is the benchmark against which a price is to be compared in order to infer its excessiveness - that is, what is an appropriate test for excessive pricing? What are the empirical tools required for an assessment of excessive pricing? During Covid-19 disaster period, how would the test and empirical tools differ? More fundamentally, why do we expect excessive pricing to be more likely during this period - that is, how may the disaster period affect market power and its abuse? This paper studies these questions, focusing on the economic and legal basis for a retrospective benchmark, specifically when responding to a demand surge is considered the basis of market power abuse. International experience and the associated economics literature support a retrospective benchmark as preferable to other benchmarks, including cost-based benchmarks, when a structural shift is available to delineate competitive and less competitive periods. The paper distinguishes price-gouging and excessive-pricing benchmarks, and situates the South African excessive-pricing benchmark during the Covid-19 regulations between these benchmarks. It also evaluates the relevant duration of the benchmark period. The analysis relies on econometric terminology to elucidate important principles, which apply equally to (most) cases where sophisticated econometric analysis is not possible.