The Story Behind The Story: Policy Ambition Or Competition Concern In The Competition Commission’s Draft Guidelines On Repair, Service And Maintenance Aftermarkets?

The objectives of the Competition Commission’s (Commission) Draft Guidelines on Repair, Service and Maintenance Aftermarkets (Draft Guidelines) are, at face value, difficult to take issue with. Internationally, the so-called “right to repair” has gained traction as a consumer protection principle requiring manufacturers to provide access to spare parts, tools, software and other resources needed by consumers and independent service providers (ISPs) to repair products.

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In its background note, the Commission points to growing volumes of e-waste as evidence that consumers are increasingly replacing, rather than repairing, their electronics and appliances. It suggests that original equipment manufacturers (OEMs) may have an incentive to restrict ISPs’ access to parts, tools and software, thereby steering consumers towards OEM repair networks and limiting aftermarket competition. The concern is that consumers become effectively “locked in” after purchasing a product, allowing OEMs to exercise market power in repair and servicing aftermarkets despite facing competition in the primary product market.

While this rationale underpinning the Draft Guidelines may be intuitively appealing, the Commission typically intervenes when there has been an outright prohibited form of conduct that is accepted to reduce competition, or it is based on economic analysis that points to anti-competitive outcomes based on a strong market position by a market participant in one or more duly defined markets. Here, the Draft Guidelines could benefit from more robust empirical evidence of actual competition harm in the relevant aftermarkets. More generally speaking, many suppliers of products requiring aftermarket services will not find themselves in these classic positions of market power (and ignoring cartel conduct or other per se conduct for current purposes) due to their respective brand being one of many in the market in question. In other words, when defining aftermarket services markets these markets should be analysed generally in respect of the goods in question rather than in relation to aftermarket services for a particular brand (e.g. Looking at aftermarket services for repairing cell phones rather than a repair market for a particular brand of cell phone). Defining a market on a brand level results in market power as a result of “relational dominance” on account of contractual relationships between OEMs and repairers, which has been expressly rejected by South African competition authorities. This lens may make it difficult to establish a basis for intervention in many aftermarkets on classic competition law principles.

Against this backdrop, the Commission appears to have drawn from international precedent finding an obligation to deal for even smaller market participants on the basis that their aftermarket customers may be “locked in” by their initial purchase. The foundation for this theory of harm can be traced back to Eastman Kodak Co. v Image Technical Services Inc, where the US Supreme Court recognised that a firm’s lack of market power in a primary product market does not necessarily preclude the existence of market power in a related aftermarket for parts and servicing.

By relying on this decades-old case, the Draft Guidelines seem to contemplate circumstances where a firm with a modest share of the primary product market (i.e. the product itself) could nonetheless be treated as possessing market power, or even dominance, in the aftermarket for repairing its own products. This is a robust proposition – and one that the Supreme Court in Kodak made clear required a fact-specific inquiry into commercial realities, including switching costs and information asymmetries, rather than a per se rule. This robust proposition may lead to outcomes where small brands, who have invested heavily into creating an exclusive skilled aftermarket services network of ISPs, may be subjected to abuse of dominance provisions of the Competition Act 89 of 1998 (Competition Act). These provisions would, for example, go against entering into exclusive agreements between OEMs and ISPs, which would dampen the incentives of these ISPs to make the required investments to provide adequate aftermarket services. 

Other aspects to consider

There are also other aspects of the Draft Guidelines that warrant closer scrutiny:

First, they are broad in scope and market participants may benefit from greater certainty given the wide range of markets they seek to regulate (including electronic devices, appliances, equipment and other durable goods that require repair and maintenance throughout their useful lives). Although not binding, the Draft Guidelines are likely to influence the Commission’s enforcement approach and will be considered by the Competition Tribunal when adjudicating disputes.

Next, its expansive definition of an OEM includes representatives and importers. This risks exposing local distributors and representatives to scrutiny for aftermarket practices that may have been designed and implemented at a global level.

Thirdly, and as noted above, it is not entirely clear where the competition issue arises. If the Commission’s concern is that OEMs are engaging in vertical foreclosure by restricting downstream ISPs’ access to an essential input, the question becomes whether such conduct by a firm with market power forecloses competing ISPs from the market. While the Draft Guidelines acknowledge that conduct by non-dominant firms remains subject to the vertical restraints prohibition in section 5 of the Competition Act, overbroad reliance on the approach in the Kodak case may result in unintended consequences, such as placing onerous stocking and supply obligations on smaller market participants, which may in fact increase costs for OEMs that are likely to be passed on to consumers in any event.

If, instead, the Commission’s concern is market power arising from consumer lock-in within the relevant aftermarkets, the evidentiary basis becomes more complicated. The Draft Guidelines could usefully clarify how the Commission will assess whether competition in the primary market constrains competition in the aftermarkets. Similarly, it would assist market participants to understand on what basis competition law may require a firm that is not dominant in either market to provide competitors with access to parts, tools or software.

This leads to perhaps the most difficult conceptual question raised by the Draft Guidelines. There is a risk of “bootstrapping” market power from the very conduct under scrutiny. The logic risks becoming circular: an OEM restricts access; the restriction makes the aftermarket less competitive; the resulting lack of competition is relied upon to define a narrow brand-specific aftermarket and establish market power; and that market power is then used to characterise the original restriction as unlawful. To be fair, the majority in Kodak rejected this characterisation, holding that evidence of actual harm – forced switching, raised prices and excluded competitors – could suffice. However, that conclusion was contested by a substantial dissent, and the risk of circularity remains a concern where evidence of actual anticompetitive effect is thin.

Conclusion

The central critique remains: has the Commission identified a competition problem before designing a competition law solution? To its credit, the Draft Guidelines do contemplate efficiency justifications under sections 5 and 8 of the Competition Act, including intellectual property protection, consumer safety and quality assurance. However, the Draft Guidelines would benefit from drawing a clearer distinction between a legitimate policy objective and anticompetitive conduct. Without that distinction, there is a risk that the Draft Guidelines expand competition law beyond its traditional boundaries in pursuit of broader policy objectives.