At a glance

  • First formal action against price gouging in the UK
  • Case will be a test of the fitness of the current legal framework to tackle price gouging
  • Approach to establishing dominance and excessive pricing in the COVID-19 context will impact future enforcement in the UK and possibly in other jurisdictions

Amongst the initial images from around the world as COVID-19 spread was the panic-buying of essential items. As demand outstripped supply for certain products – including hand sanitiser, toilet paper, and personal protective equipment such as face masks – further reports indicated that some businesses were taking advantage of consumers by significantly increasing prices. Charging an artificially inflated price for high-demand goods or services during a period of emergency, such as the current COVID-19 pandemic, is often referred to as price gouging.

Significance of the CMA investigation

On 18 June 2020, the Competition and Markets Authority (CMA) launched investigations under Chapter II of the Competition Act 1998 (abuse of dominant position) into suspected breaches of competition law by four pharmacies and convenience stores in relation to the suspected charging of excessive and unfair prices for hand sanitiser products during the pandemic. This is the first formal action that has been commenced in the UK against price gouging. The CMA has not yet reached a view on whether there is sufficient evidence of an infringement for it to find a breach of competition law by any of the parties under investigation. It is currently gathering information before considering the future course of its investigation. However, the importance of this investigation cannot be underestimated in the context of the COVID-19 crisis and the UK regulatory landscape.

The CMA has made clear that it will have no tolerance for businesses that seek to take advantage of the crisis by engaging in conduct that breaches competition and consumer laws. However, the suitability of the CMA’s current enforcement tools to address price gouging is debatable since there is no specific prohibition on price gouging, as exists in some other jurisdictions. The CMA has reportedly lobbied the government for time-limited emergency legislation to tackle price gouging and address this enforcement gap. This approach has been taken in some other countries, for example, in France, where emergency legislation has been introduced which limits the price that can be charged for facemasks and hand sanitiser. The UK government has not, to date, acted on the CMA’s request.

Abuse of dominance and excessive pricing – the right tools?

In the absence of specific price gouging rules, the CMA has based its investigation on excessive and unfair pricing through the UK’s abuse of dominance rules. This potentially presents the CMA with two hurdles to overcome.

Abuse of dominance

The CMA’s first hurdle will be establishing that the pharmacies and convenience stores that are being investigated enjoy a dominant position in the hand sanitiser market. This issue is interesting because in the ordinary course of events, it is unlikely that these individual stores would be considered dominant, even in the local markets that they serve. The CMA will therefore need to demonstrate that the COVID-19 crisis has led to a change in market circumstances, with shortages in supply elsewhere rendering these stores temporarily dominant. The CMA will no doubt seek to rely on the European Commission’s guidance on its abuse of dominance enforcement priorities that indicates that a company “which is capable of profitably increasing prices above the competitive level for a significant period of time does not face sufficiently effective competitive constraints and can thus generally be regarded as dominant”. A potential hurdle for the CMA will be the concept of a “significant period of time”. While the European Commission’s guidance notes that this will depend on the circumstances, it also references a period of two years as likely to be sufficient. It will be interesting to see how the CMA addresses this if the case is pursued to a decision.

Excessive pricing

If an organization is found to be dominant, the second hurdle for the CMA will be establishing that the prices charged by the retailers in question were ‘excessive’.

Generally, a price is considered excessive where it bears no ‘reasonable’ relation to the economic value of goods or services. In such circumstances, the CMA may look into the difference between the actual costs incurred by the dominant company and the price actually charged. It will also consider whether the price was either unfair in itself or would be unfair when compared to the price of competing products. During its investigation, the CMA will analyse whether the criteria is applied on a consistent basis and whether the prices are ‘significantly’ and ‘persistently’ above the competitive level.

While it may seem self-evident that charging a multiple of the typical retail price is excessive, even where very large price increases have occurred in the past, UK and other European competition regulators have struggled to convince courts that the prices are excessive. In the recent Pfizer/Flynn case, the CMA imposed a fine of £89.4 million for an abuse of a dominant position through excessive and unfair pricing. However, both the Competition Appeal Tribunal and the Court of Appeal overturned the decision on the basis that the methodology used to demonstrate the excessive price was flawed. The CMA will no doubt have learned from this case, but it serves to highlight the detailed assessment the CMA will be required to carry out if it is to find an infringement of competition law.

Concluding remarks

There is a common recognition that some retailers have sought to take advantage of consumer demand and shortages due to the pandemic. The CMA is only the latest in a string of competition and consumer protection authorities around the world to launch an investigation into price gouging practices, with cases ongoing in more than 20 countries. The current CMA investigation represents a significant step in its quest to deal with the problem, but it is not without potential difficulties. The CMA acknowledged that the current regulatory framework is not designed to address price gouging when it asked the government for specific legislation to tackle this issue. The current investigation will be a real test of the theory that a company, which is able to price gouge, by definition has market power.