A poster of the Patek Philippe Ref 96 Quantieme Lune timepiece, once owned by Aisin-Gioro Puyi, the Chinese Qing dynasty's last emperor, is seen on display in Phillips auction house in Hong Kong on May 23, 2023 ahead of its auction in the territory on the same day. The most expensive watch ever sold at auction was a Patek Philippe "Grandmaster Chime", which sold for US$31 million in 2019. (Photo by Peter PARKS / AFP)
Luxury brands such as Hermès, Ferrari and Patek Philippe have long been associated with scarcity and exclusivity.
Their high-demand products—like the Hermès Birkin bag or Ferrari’s limited-edition cars—serve as symbols of status, with demand often outstripping supply.
To maintain their aura of exclusivity, these brands sometimes engage in tying practices, where consumers are required to buy other products before being permitted to purchase the coveted items.
While these strategies have raised concerns, the question remains whether they genuinely distort competition or reflect the natural workings of a market based on consumer choice and brand differentiation.
In South Africa, tying is regulated under the Competition Act, No. 89 of 1998, specifically Section 8(d)(iii), which prohibits dominant firms from engaging in “tying or bundling” practices that may substantially prevent or lessen competition.
This provision aims to ensure that businesses do not exploit their dominance to limit consumer options or harm competitive dynamics.
To be deemed anti-competitive under South African law, tying practices must meet this criteria: The firm must require consumers to purchase a related or unrelated product before they can access the desired item. The practice must substantially prevent or lessen competition in the market.
While luxury goods brands like Hermès, Ferrari, and Patek Philippe may not dominate their broader markets (such as fashion, automobiles, or watches), they certainly hold significant market power within their exclusive, niche categories.
For instance, the Hermès Birkin bag is one of the most coveted luxury handbags in the world, and customers often find themselves compelled to purchase ancillary products in order to even be considered for a chance to buy one.
This “pre-spend” model is not unique to Hermès; Ferrari similarly requires customers to purchase lower-end models before they can access limited-edition supercars, while Patek Philippe expects potential buyers of high-end watches to build up a history of significant purchases.
Under the Competition Act, these practices could be seen as tying, as they meet the requirements of dominance and conditioning.
The key concern is whether such practices undermine competition in the luxury market and beyond.
From a purely legal perspective, the issue hinges on whether these practices prevent new competitors from entering the market or limit consumer choice in ways that would justify regulatory intervention.
From a market-centric viewpoint, tying practices can be understood as a natural consequence of brand strategy.
Luxury brands rely on exclusivity to maintain their status, and consumers willingly participate in this ecosystem.
The requirement to purchase additional items could be seen not as coercion, but as a mechanism that rewards consumer loyalty and commitment. This form of market behaviour respects individual consumer choice—each buyer voluntarily engages with the brand in exchange for access to coveted products.
Rather than imposing broad restrictions on successful firms, it is crucial that the law preserves the opportunity for newer or smaller brands to compete on their own merits.
This could be achieved by refining competition law to focus not just on specific practices like tying, but also on ensuring that smaller entrants can access market opportunities.
The focus could shift to encouraging competition by addressing any unfair barriers to entry that may arise, such as overly restrictive entry requirements or market power abuses.
It may be more effective for regulators to create an environment where competition thrives by promoting transparency and consumer information, rather than directly dictating the strategies of well-established brands.
In this context, it’s important to recognise that competition law does not always require strict intervention.
Rather than blanket bans on certain business practices, the emphasis should be on ensuring that market dynamics remain fair and that consumers retain freedom of choice. While tying practices may limit options in specific cases, they are a reflection of how demand for exclusivity drives competition within a luxury market.
Should these practices become too exclusionary, market forces—through shifts in consumer preferences or new entrants offering alternatives—will naturally force brands to reassess their strategies.
The luxury sector, by its very nature, encourages the development of new brands and the innovation of alternative business models that challenge the dominance of existing players.
This approach ensures that competition law can strike a balance between protecting consumers and allowing businesses the freedom to innovate. The goal should not be to eliminate tying practices altogether, but to monitor their impact on the market, ensuring that they do not stifle new competition or unfairly limit consumer choice.
South Africa’s Competition Act can be adapted to protect the integrity of the market while allowing businesses to use their competitive advantages to satisfy the demands of an informed and voluntary consumer base.
Thus, while tying practices in the luxury goods market may raise valid concerns about competition, they should not automatically be deemed anti-competitive without a thorough analysis of their broader market effects.
Regulatory intervention should aim to ensure that new competitors are not unfairly excluded from the market, while maintaining the freedom for established brands to implement strategies that reflect consumer desires and market realities.
By focusing on transparency and fostering fair competition, South Africa’s competition law can safeguard the principles of a dynamic and evolving marketplace, where both established and new brands can coexist and thrive.
Mukundi Budeli is a BA(Law) student at the University of Witwatersrand and an Associate of the Free Market Foundation.