Abuse of buyer power
Buyers with excessive leverage can be problematic and this article shows us why
Say, the sole Tesla service center in Uganda needs to source spare parts to service the cars of their clients. So, they contact a few suppliers who fit the bill. The first person contacted (‘A’) gives a certain price. Too high, they think. So, they go to someone else (‘B’). Even higher. But now, they tell B that A could supply the parts for cheaper, in an attempt to influence B’s pricing. It works—so well that B decides to undercut A’s price. Great success.
In that situation, the service center essentially used their bargaining power to get a discount. And under certain circumstances, that strategy—of leveraging on bargaining power to obtain lower prices—could amount to an abuse of buyer power.
The remainder of this article will describe this practice, and then finish off with considering how it has been dealt with in Kenya and South Africa.
So, on that note, let’s start with a definition. Buyer power is where a purchaser of certain goods or services exhibits great influence, and is in a stronger bargaining position over suppliers. They can use this to alter the market or even to obtain favourable terms to the detriment of suppliers. A situation which would otherwise not be possible under normal competitive conditions, i.e., if there were more purchasers competing in the given market.
Buyer power typically takes two forms. The first is monopsony power. Here, while there are many upstream suppliers in the market, there is a single buyer who represents a substantial share of purchases from these suppliers. Such a buyer has ‘power’ as they can dictate their demand of the product, and effectively, dictate the price of the product in question. A monopsonist can push prices so low—at times even below the cost of the product—and the small fish have no option but to agree to sell, in order to keep swimming in the competitive marketplace.
The second form of buyer power is more common and arises where a buyer in the market has an upper hand, which can be used to negotiate favourable terms with a supplier. In this case, rather than influencing the market by purchasing less, they use their bargaining strength to threaten suppliers, in a bid to obtain the best terms possible. This may be through clauses that provide for long credit periods, discounts, exclusivity in stocking goods, or even transferring risk that should typically be the buyers onto a supplier. In other words, just like in a high school setting, the big, tall, and mighty bully (buyer), can corner the powerless geek (supplier), and force him to surrender his packed sandwich (rights). Well, previously, all a supplier could do was cry the loss away, but there are new prefects by the name of competition authorities.
Buyer power is in itself acceptable, thus, the authorities merely aim to restrict its abuse. Among the key reasons abuse of buyer power is restricted is to create a business landscape that is fair to both large and small players. In such a regulated market, smaller players are not subjected to high barriers to entry, nor is their ability to invest in their existing business curtailed, and in turn they have an equal chance of success. In other jurisdictions, the catalyst has been the need to ensure consumers are protected through fair pricing, an array of options and better quality of products in the market.
In their pursuit of restricting buyer power, different jurisdictions across the continent have taken varied approaches. For instance, the Competition Authority of Kenya (‘CAK’) requires that a relevant market must first be identified to assess abuse of buyer power. And importantly, the CAK is free to find abuse of buyer power in any Kenyan market. It is also quite interesting that the CAK, according to its guidelines on buyer power, does not actually need to establish that a buyer is dominant in a relevant market. So, in other words, a buyer can possess buyer power without being a dominant player. All that is required is a buyer with the ability to credibly threaten to impose a long-term opportunity cost on a single supplier.
Meanwhile, the Competition Commission of South Africa (‘CCSA’) has restricted any findings of abuse of buyer power to a few select sectors—namely, agro-processing, grocery wholesale and retail, eCommerce, and online services. The CCSA must also establish the dominance of the buyer in question. And for this, a player is without a doubt considered dominant if it controls more than 45% of the market. Nonetheless, the CCSA may still hold a firm with less than 35% of the market share, to be a dominant player if it has market power. This is in situations where the said company has a high level of influence over prices or is able to restrict competition, despite their overall market share being on the lower side.
The rationale behind the differing approaches is grounded in the unique motivations in establishing the buyer power regimes. In Kenya, the CAK was motivated by an emerging trend where buyers failed to honour their contractual obligations with suppliers. This was revealed with the collapse of supermarket chains such as Nakumatt, which brought to light the detriment faced by suppliers in the hands of powerful buyers. On the other hand, the objective in the South has been to counter slow economic growth, which has partly been caused by the high barriers to entry for smaller companies. This has necessitated keen monitoring on dominant firms and particularly restricting their actions when dealing with Small and Medium Enterprises (‘SME’) and firms controlled or owned by Historically Disadvantaged Persons (‘HDP’). In executing this aim, the CCSA has identified sectors in which the practice occurs and has slowed down the progress of SME’s and firms controlled or owned by HDPs.
As we move to explore emerging cases in this field of competition law, we shall continue to see the individualities that exist in each country and the intricacies that emerge in assessing an abuse of buyer power.
Before you go…
…here are some recent developments in the world of competition law:
Public interest: For the very first time, the CCSA blocked a merger solely on public interest grounds, with no competition concerns. ECP Africa intended to acquire Burger King and Grand Foods from Grand Parade, which would have reduced HDP ownership over Burger King and Grand Foods from 68% to 0%. We’ll stop here for now, because Munene will delve deeper on this decision in a subsequent post.
Lionel Messi: A Barcelona member has filed complaints with a French court and the European Commission to block Messi’s move to PSG. He is arguing that the move is anti-competitive, because the French football authorities failed to enforce financial fair play (‘FFP’) rules to help PSG dominate European football. From a competition perspective, this could amount to ‘state aid’, which is when a country gives a company an unfair advantage over competitors. However, PSG president, Nasser Al-Khelaifi, insisted that the club has followed FFP rules.
Facebook/Giphy: The UK’s competition authority has provisionally found that the Facebook/Giphy merger will harm competition between social media platforms—as Facebook could deny other platforms access to GIFs. And it could lead to the removal of an online advertising competitor; where Giphy uses a paid ad model, which competes with Facebook’s free ad model. Note: these findings are provisional. If confirmed, the merger will be broken up. And this would be the first reversal of a Big Tech merger, paving the way for other reversals, such as, Facebook/WhatsApp, Facebook/Instagram, and Google/DoubleClick.