Focal point pricing : a challenge to the successful implementation of section 10A (introduced by the Competition Amendment Act)

Abstract

Section 10A, introduced by the Competition Amendment Act, will provide the Competition Commission with powers to investigate complex monopoly conduct in a market and, allow the Competition Tribunal under certain conditions, to prohibit such behaviour. The aim of section 10A is to discourage or prohibit coordinated or consciously parallel conduct by firms that occurs without communication or agreement but which leads to a prevention or substantial lessening of competition. Examples of horizontal tacit coordination practices include price leadership, and facilitating practices such as information exchanges and price signaling. The successful implementation of the amendment poses problems for the competition authorities in assessing the competitive effects of complex monopoly conduct and in providing effective remedies. A key reason is in oligopoly markets there is mutual interdependent decision-making by firms. Consequently, independent action by firms can lead to market outcomes similar to explicit collusion. In implementing section 10A, competition authorities can reduce the ability of firms to reach cooperative outcomes in a market by making facilitating practices difficult to achieve and curbing the ability of firms to exchange information. However, a further and little noticed issue is in oligopolistic markets there are opportunities for firms to use focal points to determine coordinated strategies. In this paper we explore the nature and role of focal point pricing that can lead to prices above competitive levels, with specific reference to the South African banking industry. We find that focal point pricing is extremely hard to control, making successful implementation of section 10A even more difficult.