Abuse Of Buyer Power

Traditionally, the market has always viewed balance of bargaining power as tilted in favour of sellers as opposed to purchasers. This is because more often than not, the sellers are the ones who set the terms of sale including the consideration for which goods and services are bought or procured. Additionally, the market is more saturated with buyers and this further tilts the scales in favour of the sellers. This is however not always the case especially where the buyer has a significant market share and sources its goods from multiple suppliers as is the case with large supermarkets and other large consumers.  

Buyer power is defined to mean the influence exerted by a purchasing undertaking to obtain from a supplier more favorable terms; or to impose a long term opportunity cost including harm or withheld benefit to the supplier(s). Buyer power enables an entity to influence the terms and conditions on which it purchases goods and services from its suppliers. Ideally, the market would resolve such a situation through the forces of demand and supply. However, in a situation where a market has a powerful buyer, the buyer is able to manipulate the forces of demand and supply as it can withhold or threaten to refuse to procure services from its suppliers. This threat or actualization of threat would cause a significant impact to the suppliers’ business, thereby forcing them to alter their terms to comply with what the buyer is demanding. Buyer power is therefore the ability of a buyer to obtain terms of supply more favorable than a supplier's ordinary contractual terms. A buyer is said to possess this power if it can force sellers to reduce prices or impose other terms and conditions below those that prevail in the market. 

Types of Buyer Power 

There are 2 types of buyer power: 

• Monopsony Power - a firm has monopsony power if it is a dominant buyer dealing with multiple sellers and its share of purchases in the upstream input market is sufficiently large enough that it can cause the market price to fall by purchasing less and cause it to rise by purchasing more. Similar to the case of a monopoly, if the buyer is a ‘large buyer’ its decisions and actions significantly affect the market. 
• Bargaining Power- this power refers to the bargaining strength a buyer has with respect to its suppliers, that is if for example, the buyer has a bigger balance sheet than its suppliers. Such a buyer would obtain a lower price or more favorable conditions from a supplier by threatening to purchase less. 

Below are the considerations borne in mind by the Competition Authority of Kenya (“the Authority”) in determining whether an entity has buyer power: 

1. the contract terms – the Authority looks at the terms of the supply contract noting the listing fees, volume rebates, exclusivity requirements etc.; 
2. the payment requested for access to infrastructure; and 
3. the price paid to suppliers. 

The Authority would also address itself to the position and the number or concentration of buyer undertakings in the market and the commercial significance of the buyer in relation to the supplier. If for example, the buyers of a product within a market are few and any action by the buyer would significantly affect the suppliers within that market or if the supplier solely or largely relies on the buyer to purchase its products, then the buyer is likely to be powerful.   

It is important to note that an entity does not have to be dominant for it to have buyer power and one does not therefore, have to prove dominance to allege abuse of buyer power. 

Abuse of Buyer Power 

Buyer power is not in itself a negative thing. Pressure exerted from buyers with buyer power often results in more favourable terms for the customers and increases competition. Abuse of buyer power, however, negatively affects the market and is prohibited under law.  

An undertaking with buyer power often has a higher bargaining power. This means that the buyer’s bargaining strength with respect to its suppliers, by virtue of factors such as market concentration in both the upstream and downstream markets, is high. The undertaking exerts a higher degree of control at the expense of the suppliers, often leaving them no choice but to accept the demands of the one with the upper hand at their own expense.  

Abuse of buyer power therefore arises through conduct by a buyer, motivated solely by the hope of gaining a competitive advantage that is likely to lessen suppliers' ability to invest in new capacity, products and production processes, which is ultimately detrimental to the interests of consumers and to competition in the market. 

Below is an in indicative list of conduct that amounts to abuse of buyer power: 

1. delays in payment of suppliers without justifiable reason in breach of agreed terms of payment; 
2. unilateral termination or threats of termination of a commercial relationship without notice or on an unreasonably short notice period, and without an objectively justifiable reason; 
3. refusal to receive or return any goods or part thereof without justifiable reason in breach of the agreed contractual terms; 
4. transfer of costs or risks to suppliers of goods or services by imposing a requirement for the suppliers to fund the cost of a promotion of the goods or services; 
5. transfer of commercial risks meant to be borne by the buyer to the suppliers; 
6. demands for preferential terms unfavourable to the suppliers or demanding limitations on supplies to other buyers; 
7. reducing prices by a small but significant amount where there is difficulty in substitutability of alternative buyers or reducing prices below competitive levels; or 
8. bidding up prices of inputs by a buyer undertaking with the aim of excluding competitors from the market. 

An example of abuse of buyer power can be illustrated in the Majid Al Futtaim Hypermarkets Limited and the CAK and Orchards Limited Case (Majid Al Futtaim owns and operates the hypermarket brand “Carrefour” in Kenya). In this case, the retail giant was cited for abusing its buyer power by imposing listing fees, forcing its suppliers to offer a variety of rebates for stocking in existing stores; offering further rebates for introduction of products to new stores of the retail chain; offering a “progressive rebate” from the annual sales of the supplier as well as compelling suppliers to supply staff at the stores. The Authority, and on appeal- the Competition Tribunal, found that their conduct amounted to abuse of buyer power.   

Buyer Power and the Law 

Section 24A of the Competition Act prohibits the abuse of buyer power. This scope covers any conduct that amounts to abuse of buyer power in a market in Kenya, or a substantial part of Kenya. Contravention of the above section attracts a penalty on conviction to imprisonment for a term not exceeding five years or to a fine not exceeding ten million shillings or to both. 

The Authority not only deals with actual cases of abuse of buyer power, but also provides for anticipated abuse of buyer power. Where the Authority establishes that a sector or an undertaking is experiencing or is likely to experience incidences of abuse of buyer power, it may monitor the activities of the sector or undertaking and ensure compliance by imposing reporting and prudential requirements. The Authority may also require industries and sectors, in which instances of abuse of buyer power are likely to occur, to develop a binding code of practice.  

The Authority gazetted the Retail Trade Code of Practice (“the Code”) for this purpose. The Code states that parties to a supply contract must adhere to the principle of fair dealing, record the terms of their engagement and any variation of the same, and establishes the Prompt Payment Committee and the Retail Trade Dispute Settlement Committee to oversee the implementation of the Code and handle trade disputes respectively. 

Should you, as a supplier, suspect that you are a victim of this abuse, please note that at CM Advocates, we have a team of lawyers who are eager to advise you on how to implement your rights as against the buyers abusing their buyer power. Additionally, we are available to advise powerful buyers on how to properly structure their contracts and arrangements so as to fully comply with the law and avoid the sometimes draining process of investigations by the Authority or the hefty penalties that may be imposed thereafter. Feel free to contact the advocates below or any member of the Competition Law and Consumer Protection Practice Group for more information.