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SIMON BROWN: I’m chatting with James Hodge. He is the chief economist at the Competition Commission. James, price gouging – I’ve been seeing memes going around about diesel and the like. They, to be clear, are memes. They are not actual prices. No one is yet charging R45/litre.
Before we talk around the process, is there a sort of legal or economic definition for price gouging? It is one of those things – we see it, we recognise it. But what is the actual definition behind it?
JAMES HODGE: Well, price gouging is almost opportunistic and exploitative behaviour in a crisis, where people use the crisis – either when there’s a shortage of supply or, in this case, a major spike in the oil price – to profiteer.
In this case, our concern is really that consumers and even other businesses will be expecting some price increases, obviously at the pump, but also beyond that.
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Fertiliser uses ammonia, which comes from your refineries. Plastic’s the same. And then, of course, your transport services and then even down to food. So you are expecting a price increase, but you don’t know how big it’s going to be.
You therefore easily accept a price increase, but you can be exploited in the process. It’s that profiteering out of a crisis that generally people find unpalatable.
SIMON BROWN: You make a great point there because I’m expecting prices to go up. I know that if I caught an aeroplane there would be a surcharge, and that wouldn’t surprise me in the least. It’s just the abuse of that extra price increase that is the concern. We are happy for businesses to make their money; we just don’t want them to go overboard.
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JAMES HODGE: Precisely. We know the cost is going to go up and we accept that, but it should be fair. So of the two main instances we see, first we see jumping the gun – putting up the prices before you’ve actually faced any cost increase.
You’re sitting with stocks at the old price, which you could sell at the old price, but you choose to sell at the new price.
The second is increasing by far more. We have precedents on this in the courts that say both of those are considered price gouging.
Of course, there’s a third category, which is, if this Iran war abates and the price comes down, is that cost decrease then passed on and passed on fairly quickly?
Those are the categories we look at. But the commission has the powers to summon financial information on cost margins and to make that assessment, whereas a consumer doesn’t know if that surcharge is fair or not.
SIMON BROWN: That’s a great point, because the way we would spot this would be in the margin. In a business – again, they make a profit, that’s the purpose of the business – there’s a margin before the increase. There’s a margin post the increase.
It’s about keeping that margin essentially the same. As I say, we can’t spot it. You can. But that’s what we’re looking for from industries.
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JAMES HODGE: Absolutely. We sort of call on consumers to say, “That looks like a big increase” or “I’m seeing this particular retailer or shop really going high when others are not, and this could be price gouging.” But what we often forget is that within the value chain, with businesses buying from other businesses, they’re experts in this as well, and have a keen eye on what may be unreasonable.
So we are calling on consumers, but also on businesses, on farmers that see their fertiliser price go up – do they question it?
Do they give us a call so we can investigate? The investigation is very quick, as you pointed out. Let’s look at the margins before; let’s look at the margins after.
If they haven’t changed we’ll move on. But if they have increased substantially then we are interested in why. This could be price gouging, which is an offence.
SIMON BROWN: I’m interested in that part, because I appreciate that the Competition Commission, like many organisations, hasn’t got tens of thousands of inspectors. But the listeners out there, as you say, are smart; they see things and can contact you and act as eyes and ears on the ground.
JAMES HODGE: Absolutely. So it’s essential that consumers are active in this whole process, and businesses. When we’ve had price gouging in the past, it has precisely been consumers and businesses that alert us and point us in the right direction.
Often, the companies are a bit surprised that they’ve been contacted so quickly. But it’s consumers exerting their rights and businesses exerting their rights.
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SIMON BROWN: Another very important point – and you’ve alluded to this already – we already know prices are going up. We know we’re getting a frankly terrifying fuel increase at midnight on Tuesday.
At some point oil prices [should] come down, diesel prices come down. We need to see a commensurate decline in price post the event as well. That’s the other side of the price gouging coin.
JAMES HODGE: Exactly. We’ve talked about this in the past through Covid and the supply chain shocks that followed the Ukraine war. We have seen what we call the rocket-and-feather effect, which is prices being too quick to go up and very slow to come down.
We are facing a serious price increase on a basic commodity. It is going to harm the economy. It is going to harm growth. Obviously, we try and mitigate that, but we don’t want this all exacerbated by price-gouging behaviour by businesses. They must cover their costs but not exploit.
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SIMON BROWN: It’s like that – don’t exploit. You also make a really good point there. This is a basic commodity. This isn’t fine red wine, which truthfully is a niche product I can live without.
This is diesel. This goes, as you said up front, into absolutely everything – my transport to work, my plastics, my food ultimately as well. This really is a broad swath of the populace who are going to be impacted – if not everybody.
JAMES HODGE: Yes. Look, not all of that effect will happen on Wednesday. That happens at the pump. But any feed through – say to a food price increase – may be quite delayed and that’s why I think consumers and businesses that see almost derived products going up quite quickly may rightly question whether that is really the fuel price or something else and exploitative.
The other area, Simon, that we have seen in the past is in the transport industry – air, land and sea – where fuel surcharges are applied. That is the form it takes because they’re directly impacted as a transport service.
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But there is quite a long record of what we call ‘umbrella pricing’ or tacit collusion, where someone moves first and says this is a surcharge, and everyone follows. That’s also something we’re looking out for in this period, because that’s the form it’s going to take in your transport industries rather than further downstream.
SIMON BROWN: Absolutely. And that further downstream – if we’re talking fertiliser, my Christmas lunch is probably being planted in the next month or so, so the impact might be quite far down the line.
We’ll leave it there. James Hodge, chief economist at the Competition Commission, I appreciate the time.
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