Assessing the Effectiveness of Kenya’s Competition Laws in curbing Predatory Practices in light of the China Square Debacle

Background

The China Square debacle has produced heated discussion and debate over the past two (2) weeks. Traders in Kenya have been up in arms over the market entry of the China Square mall, in what has been termed the ‘China Invasion’. Shortly after its entry into the Kenya market, the China Square mall temporarily closed its doors amid complaints that it was selling counterfeit products. The mall has since reopened, upon the conclusion of investigations by the Kenya Anti-Counterfeit Authority, ultimately dismissing the complaint on a finding that there is no evidence proving the products are fake.

While China Square has been vindicated of claims that it is selling counterfeit goods, the business has also been accused of engaging in anti-competitive behaviour by dumping products at below-market prices, a phenomenon that is known as “predatory pricing”. If this is indeed the case, then the China Square business may be engaging in a predatory strategy to cut prices below cost to drive out its trade competitors, intending later to raise prices and exploit consumers.

Concerns over China’s low pricing of goods is not new and has been a topic of conversation in international trade. The low pricing on Chinese products can be attributed to several factors such as economies of scale, lower labour costs and government subsidies among other factors. However, these practices have garnered criticism for Chinese companies, who have been accused of engaging in anti-competitive behaviour in foreign countries, placing trade and competition at jeopardy.

Regulatory Framework on Predatory Practices

Antitrust law condemns conduct that restrains trade, with the objective of protecting competition in the marketplace. In Kenya, antitrust law is contained under the Competition Act, No. 12 of 2010, which prohibits anti-competitive practices that may have an adverse effect on competition, including predatory practices.

As alluded to earlier, the practice of selling goods and services at below-market prices to drive out competitors is known as predatory pricing. Predatory practice is defined in the Competition Act as “the practice or strategy of seeking to drive competitors out of business or to deter market entry.” This practice is considered anti-competitive for its harmful effects on the market, such as business closures or monopolisation of the relevant market. The rationale underpinning this prohibition is that it has a knock-on effect on trade and investments, as well as ultimately being harmful to the consumer.

Regulatory Ability to Prevent Predatory Practices

Trade competition in Kenya is regulated by the Competition Authority of Kenya, whose mandate is to enforce the provisions of the Competition Act. The Competition Authority has a wide mandate to regulate market conduct by investigating abuse of dominance, including commandeering markets through predatory pricing, among other unfair trade practices, which are likely to prevent, distort or lessen competition in the Kenyan economy.

More specifically, predatory practices are prohibited under Section 24 of the Competition Act, which prohibition seeks to limit the abuse of dominance by a market-player. A business is deemed to have a dominant position in the market if it produces, supplies, distributes or otherwise controls at least one-half of the total goods of any description that are produced, supplied or distributed in Kenya. This position is guided by the potential harmful effects that may be occasioned on markets by a dominant business in the relevant market. Some consequences that may arise from an abuse of market dominance include restricting production, market outlets or market access, investment, distribution, technical development or technological progress. Consequently, the abuse of dominance can have far-reaching negative consequences on the local economy and international trade relations.

If a business is deemed to be operating in abuse of its dominant position in the market, through predatory practice for instance, the Competition Authority may impose penalties on the business. These penalties include financial penalties and orders to cease and desist from anti-competitive conduct.

Be that as it may, the ability to restrain predatory practices is constrained under the Competition Act. From the definition of dominant position at Section 23 of the Act, it is clear that China Square does not meet this threshold. It would therefore be impossible to pin predatory practices, if proved as alleged, on the China Square mall since the Act confines predatory practices to dominant market-players. While dominant businesses are in a greater position to abuse their power by adopting unfair trade practices, it is also possible for a non-dominant market-player to threaten markets through unfair trade practices. As observed in the China Square debacle, new market entrants can engage in predatory pricing and undercut competitors in order to gain a foothold into the market.

Unfortunately, the limitation provided at Section 24 of the Competition Act highlights an issue with our current regulations, which only regulate predatory practices when carried out by a dominant market-player. This limitation potentially creates an opportunity for smaller companies intending to engage in predatory practice, as they may not face the same regulatory scrutiny as their larger counterparts.

The existing limitation in the regulation of predatory practices may be informed by the dilemma occassioned by predatory pricing. Predatory pricing can be an instrument for abuse, but simultaneously presents tangible benefits for competition and consumers in promoting price reductions. However, our laws should consider the significant negative impacts that predatory pricing may have on investment and economic growth. By stifling competition, a predator may end up undermining investment, lowering the quality of goods in the relevant market, and deterring innovation. Predatory pricing also poses a significant threat to the survival and growth of local businesses which can disincentivise entrepreneurship.

Given these risks, it is important for our competition regulatory framework to adequately prevent predatory pricing and ensure fair competition by all traders.

Conclusion

In light of this discussion, it may be worth considering whether the Kenya competition laws should be updated to include provisions that address predatory practices by businesses, regardless of their market position. This could help ensure fair competition and a level playing field for businesses and create an environment that encourages local businesses to grow and thrive.?

Authors: Esther Omulele & Joy Muya