LAW

COMPETITION LAW Importance of Competition Policy and Law in a Liberalized Market Economy

Q1: E-TEXT

Module ID: 3

IMPORTANCE OF COMPETITION POLICY AND LAW IN A LIBERALISED

MARKET ECONOMY

Module Overview

The purpose of this module is to understand the features of Globalisation, liberalization and

gearing up industrial production and market towards achieving these goals with the objectives

of growth with stability. Liberalization of the economic policies of the eighties, and the

globalization of the development cmodels of the participating countries in the nineties saw the

world entering into broad spectrum of changes viewed with the strength of competitive

capabilities of the respective domestic markets. The objective of Competition Policy and Law

is to sustain such reforms in the collusive world. The need of the hour is Global

competitiveness; Enhanced investment; Technological capabilities; and Consumer welfare.

Competition policy sets guidelines to the working of the competition in the market with

objectives of growth with producers-consumers welfare. The Competition Act, 2002 is

satisfactorily employed in the desired direction since then. The Act envisage consumer

welfare and small firms’ competitive strength vis-à-vis the big corporate giants. The Act

embark on the abuse of dominance; anti-competitive agreements and undesired combinations.

Pre-requisites

Knowledge on the features of Globalization and consequent liberalization and privatization

goals are presumed to be obtained

Objectives

To make the students understand the features of globalization and the consequent

liberalization of the industrial development and the market.

To highlight on the importance of competition policy and law for the regulation of the

behaviour of the market under liberalization.

To make the students to understand the protection and enhancement of competition for the

growth and

development of the economy.

Keywords

liberalization, Competition Policy, Competition Law, Competition Act, 2002, efficiency of

the market, abuse of dominance, anti-competitive agreements, combinations, producer

welfare, consumer welfare

Introduction

Liberalization of the economic policies of the countries began in the eighties, and the nineties

saw the world entering into globalization of the development models of the participating

countries. The challenges brought with them a broad spectrum of changes viewed with the

strength of competitive capabilities of the respective domestic markets. Market oriented

reforms became imperative to continue with the objectives of development and growth by the

developed and developing countries. The objective of Competition Policy and Law is to

sustain such reforms in the collusive world. The need of the hour is, Global competitiveness;

Enhanced investment; Technological capabilities; and Consumer welfare.

Competition policy sets guidelines to the working of the competition in the market with the

macro economic objectives of growth with stability and micro economic objectives of

producers-consumers welfare. The Competition Act, 2002 is satisfactorily employed in the

desired direction since then. The Act envisage consumer welfare and small firms’

competitive strength vis-à-vis the big corporate giants. The Act embark on the abuse of

dominance; anti-competitive agreements and undesired combinations.

Learning outcomes

The purpose of this module is to understand the features of Globalisation, liberalization and

gearing up industrial production and market towards achieving these goals with the objectives

of growth with stability. The Competition Policy and law are intended towards protection

and enhancement of competition for consumer and producer welfare and the control and

regulation of abuse of dominance, combinations and anti-competitive agreements.

2.1 Liberalisation and challenges

Liberalisation of the economic policies of the countries began in the eighties, and the nineties

saw the world entering into globalization of the development models of the participating

countries. The challenges brought with them a broad spectrum of

changes viewed with the strength of competitive capabilities of the respective domestic

markets. Market oriented reforms became imperative to continue with the objectives of

development and growth by the developed and developing countries. The objective of

competition policy and law is to sustain such reforms in the collusive world.

The scarcity definition of resource availability vis-à-vis the demands of development and the

consumer welfare maximization are the driving forces of production management and market

enhancement beyond borders. The paradigm shift of public to private sector growth with its

efficiency rationale is sought to find answers to international anti-competitive practices ,

cross border mergers and acquisitions leading to market dominance and restrictive trade

practices. Within the country in the pre-reform era various restraints to healthy competition

existed. The License Raj, the state monopoly in infrastructure building, product reservation

for small-scale sector, the lackadaisical MRTP Act provisions, the catastrophic FDI ventures

are some of the pitfalls.

The need of the hour is 1. Global competitiveness 2. Enhanced investment 3. Technological

capabilities, and 4. Consumer welfare. It is not market protection, but market promotion; not

market concentration and market power but market empowerment; not exploitative market

but an all encompassing market which are required to be part of the global race. Accordingly

Restraints to healthy competition

Catastrophic FDI

ventures

The License Raj state monopoly in

infrastructure building

product reservation

for small-scale

sector

lackadaisical MRTP

Act provisions

competitive policy relates to trade comprising of market access, both domestic and

international, investment aspects and technology development like the IPRs, and the R &D

technology licensing. The financial and the labour sectors are integral to the whole exercise of

empowerment of the economy and form part of the objectives of the competition policy and

law in India.

Competition policy directly affecst the behavior of enterprises and the structure of industry.’

The clear objectives are the balancing of the producers-consumers surplus keeping in mind

the macro economic objectives of ‘growth with stability’. Competition law is ordained to

prevent any anti-competitive behaviour of the firms affecting market access and abuse of

market power. Liberalisation alone cannot create a level playing field, both domestic and

international, but has to be inextricably supported by competition policy and law.

Competition Policy :

Competition policy is at the tail end of the body polity of the Government consisting of a

whole array of the industrial policy, sectoral growth of the economy, public-private

partnership, monetary and fiscal policy, trade-national and international policy, land-labour-

capital use policy and monitoring of all the above said.

2.2 Trade liberalization and its effects-a common view

Trade liberalization is the cause and effect of globalization. The meeting point of all

countries –both developed and developing is trade in goods and services in which the

movement of resources (factors of production)is also part of the transactions. Trade between

countries is the higher form of market in reciprocity. The players evolve strategies based on

different levels of economic development of the participating countries, the competitive

entrepreneurship and asymmetric information flow in which the transaction costs are high.

The obvious result is exploitation of the market (for resources and goods and of people) of the

underdeveloped countries which do not enjoy the economies of scale and whose consumers

have no knowledge of consumer rights but live under consumer protection. There is the

possibility of high level of market concentration among the few rich in the domestic front and

structure of industry

behavior of enterprises

Government measures

among the developed over the underdeveloped countries in the global arena. The abuse of

dominance is with inherent price elasticity of demand. Higher the degree of price inelasticity

higher is the possibility of abuse of dominance.

Other issues also arise. Anti-competitive forces may be dampen or reverse the benefits of

trade liberalisation. The complex entry regulations have a negative impact on larger countries

and the import restrictions affect the competition in the small countries. The vertical

agreements between domestic producers and distributors can effectively restrict market

access to foreigners. Sometimes the anti-competitive agreements in the foreign countries may

also victimize the domestic producers. As observed in recent times, the MNCs with their

access to capital influence the market access due to economies of scale and are better placed

in the acquisition game, highlighting the institutional gaps. The MNCs may dump their

Indian partners once they establish themselves in the local market.

Under the Open General License (OGL) of product reservation, the foreign firms compete

directly with the small firms only. The Vendor development necessary for getting skilled and

unskilled labour from the small firms is also denied access due to the OGL.

Anti-competitive arrangements are intended to operate as substitute for government-imposed

barriers following trade liberalisation. These practices that affect market access to imports

include domestic import cartels, international cartels that allocate national markets among

participating firms, exclusionary abuses of a dominant position, undue obstruction of parallel

imports, control over importation facilities, vertical market restraints that foreclose markets to

foreign competitors, certain private standard-setting activities and other anti-competitive

practices of industry associations.1

2.3 Trade Liberalisation- A Global action

Recent trends toward convergence in the scope, coverage and enforcement of competition

laws and policies worldwide is due to (a) the widespread trend towards liberalization of

markets and adoption of competition policies; (b) greater emphasis upon consumer welfare,

efficiency and competitiveness objectives in the provision or application of competition laws;

(c) greater similarity in economic analyses and enforcement techniques; (d) the universal

condemnation of collusive practices; (e) tightening up of enforcement; (f) a more prominent

role for competition authorities in advocating competition principles in the application of

1 www.odi.org.uk

other governmental policies; and (g) the strengthening of international consultations and

cooperation.2

Important differences among competition laws and policies, do exist in the (a) the priority

attached to competition policy vis-à-vis other policies; (b) the importance attached to

objectives other than consumer welfare or efficiency under many competition laws; (c) legal

approaches to the control of anti-competitive practices; (d) analytical techniques utilized; (e)

substantive rules applicable in particular to vertical restraints, abuses of dominant positions,

mergers, joint ventures and interlocks; (f) the structure or scope of de minimis, intellectual

property or other types of exemptions; (g) enforcement capabilities and actual strength of

enforcement; (h) the legal doctrines under which competition laws are applied outside

national territory; (i) the actual ability to apply them or frequency of application; (j) the extent

to which different countries participate in international cooperation in this area; and (k)

regulatory restrictions upon market entry.3

2 Sixth United Nations Conference to Review All Aspects of the Set of Multilaterally

Agreed Equitable Principles and Rules for the Control of Restrictive Business

Practices Geneva, 8–12 November 2010 Item 6 (a) of the provisional agenda Review

of application and implementation of the Set The role of competition policy in

promoting economic development: The appropriate design and effectiveness of

competition law and policy Note by the UNCTAD secretariat 3 ibid

the priority attached to competition policy vis-à-

vis other policies

the importance attached to objectives other than

consumer welfare or efficiency under many

competition laws

legal approaches to the control of anti-

competitive practices

analytical techniques utilized

substantive rules applicable in particular to vertical restraints, abuses

of dominant positions, mergers, joint ventures

and interlocks

The appropriate design of competition policy and law and their institutional framework in

developing countries and economies in transition, requires

1. careful pre-reform assessment of existing conditions in the country

2. attention to how the country will implement the competition policy.

3. Understanding the distinctive features of their economic, social and cultural environment

to avoid mismatch between policy and expectations

4. Understanding institutional capabilities for effective implementation of policy and law,

which include the protection of property rights, setting up a system of enforcing contracts,

creating legal frameworks for the establishment and dissolution of business entities and

enhancing financial institutions and banks and the like.4

2.4 Trade liberalization and cross border trade

The nineties have brought waves of cross border trade in commodity, services and capital

movements. The differences in the levels of development of the countries engaged in this

have led to asymmetrical demand and supply situations fuelling market distortions and

greed replacing need. The effect is anti-competitive practices of exploitative nature not

only on the terms of trade but also in the plundering of the natural resources of the

developing countries which the economists are worried about.

4 ibid

The cross-border effects of various forms of restrictive practices therefore should

encompass the following elements: (a) clear identification of the main objectives of the

agreement; (b) some core principles related to transparency and non-discrimination; (c)

an agreement on a general common approach to competition; and (d) a setting for

international cooperation.5

Cooperation between countries, either at a bilateral, regional or multilateral level, may

take various forms. The simplest form of cooperation is the sharing of information

amongst the countries on enforcement activities of a competition authority. A higher level

of cooperation may involve consultation among competition authorities with respect to

enforcement issues, when common interests are at stake.

The issues before us are that the developing countries develop their own actions to

strengthen their competition laws, but the absence of clear perspectives on a possible

WTO agreement on competition prevent any coherent action.6 The Organization for

Economic Cooperation and Development (OECD) has said, “Developing and transition

economies may have structural weaknesses that make them particularly vulnerable to

private anticompetitive conduct. Added to it are the following factors, where they are

found, are likely to have a negative impact on competitive pressure: (a) Greater

proportion of local markets insulated from trade liberalization measures; (b) Limited

access to essential inputs; (c) More limited distribution channels; (d) More dependence on

import (basic industrial inputs) and/or exports (for growth); (e) Greater incidence of

administrative/institutional barriers to imports; and(f) Weak capital market.7

2.3 Liberalisation and Competition Law in India-some landmark cases

Competition law works in coherence with the competition policy which sets guidelines to the

working of the competition in the market with the macro economic objectives of growth with

stability and micro economic objectives of producers-consumers welfare. The erstwhile

MRTP Act, 1969 was a beginning to the protection and promotion of competition, set into

momentum by the globalization and the consequent privatization and liberalization. The

5 ibid 6 www.odi.org.uk 7 www.UNCTAD.org

inadequacy of the role of the MRTP Act to sustain the healthy competition has led to the new

Act to tackle the ills of the emerging new issues and challenges. The Competition Act, 2002

is satisfactorily employed in the desired direction since then. The Act envisage the consumer

welfare and small firms’ competitive strength vis-à-vis the big corporate giants. The role of

all the three players however, is important in the achievement of growth with stability.

The Act embark on the abuse of dominance; anti-competitive agreements and undesired

combinations. The extent of dominance can be defined as the position of strength enjoyed by

an undertaking that enables it to operate independently of the competitive pressures in the

relevant market and also to affect the firms and consumers connected therein. It should be

noted that the competition law does not prohibit the mere possession of a dominant position,

but only its abuse. The superior economic performance of a firm may sometimes enable it to

reach a dominant position.

Section 4 of the Act details on the Abuse of Dominance to include imposition of unjust

conditions; imposition of unfair pricing, predatory pricing, create hindrance to entry of new

operators and abuse of market positioning.

In the BCCI V. Competition Commission of India case, the Competition Commission of India

held that the Board of Control for Cricket in India had abused its dominant market position

and violated section 4 (2) of the Competition Act, 2002. The CCI conducted an enquiry on

whether the BCCI had abused its dominant position under section 4 of the Act and had

committed irregularities in the grant of franchise rights for team ownership and in the grant of

media rights, sponsorship rights and other local contracts related to organization of the Indian

Premier League. Based on the report of this investigation, the Commission arrived at its

decision.

In the MCX Stock Exchange v National Stock Exchange of India Limited case, The CCI’s

analysis of predatory pricing and leveraging on the basis of a complaint by MCX Stock

Exchange Limited against the largest stock exchange in India, the NSE , was one of the first

significant cases relating to abuse of dominance. The CCI’s assessment of pricing strategy in

the currency derivatives segment led to the conclusion that NSE’s zero pricing policy

amounted to ‘unfair pricing’, a new variant to the predatory pricing concept. The CCI also

held that the NSE was leveraging its power in other segments of the stock exchange, where it

is an established player, in order to strengthen its position in the CD segment. The CCI’s

finding of abuse of dominance and penalty is currently under appeal before the COMPAT.

In the DLF v. Competition Commission of India(CCI) case, the CCI imposed a headline

penalty and gave rise to several complaints against real estate companies and also

investigation into the real estate sector. The CCI found the DLF to be abusing its dominance

in relation to the ostensibly unilateral terms and conditions of the apartment purchase

contracts, on the basis of a complaint filed by the Apartment Owners’ Association. The CCI

held that the conduct of DLF in arbitrarily changing the terms and conditions of the apartment

purchase agreements was unfair and, owing to the lack of countervailing buyer power and its

position of dominance, its conduct amounts to an abuse of dominance. While the issue in the

matter could also be characterised as a consumer complaint, the CCI brought competition

concerns to the fore by imposing the highest penalty it had ever imposed at the time.

In the Dhanraj Pillai v Hockey India case, the CCI absolved Hockey India, a hockey

federation, of abuse of dominance. The CCI examined Hockey India’s conduct with respect

to, first, precluding other competing private professional hockey leagues from entering into

the market, on account of its rules relating to the sanctioning of events; and secondly,

restricting hockey players from participating in unsanctioned hockey events, which included

disqualification from the national team for such participation. Even though the CCI

determined that Hockey India was dominant in the relevant market for ‘the organisation of

private professional hockey leagues in India’, the CCI used an effects-based approach to

absolve Hockey India of having abused its dominance, as there was no substantive evidence

to demonstrate that Hockey India was, in fact, restricting both hockey players and rival

hockey leagues (especially given that the rival hockey league in question had never

approached it for sanction). The CCI also went so far as to state that the restrictive conditions

imposed on hockey players were ‘intrinsic and proportionate’ to Hockey India’s objectives

and therefore did not amount to an abuse of dominance.

In the Reliance Big Entertainment Private Ltd V Tamil Nadu Film Exhibitors Association

case, the Reliance Big Entertainment Private Limited (‘the informant’) obtained distribution

rights for film titled ‘Osthi’ in Tamil language, which was a remake of Hindi film (Dabbang),

from Balaji Real Media Private Limited. The informant granted the said exclusive distribution

rights of the film for the Territory of Tamil Nadu, Kerala and Karnataka to M/s Kural TV

Creations Pvt. Ltd. Further, the informant assigned the Satellite Rights of the said film to Sun

TV Network Ltd. The Opposite party association directed its member theatre owners not to

screen this film since SUN TV was owing certain sum to the OP. The DG was asked to make

an investigation on the matter. The report said that TNFEA being the biggest and most

powerful distributor in the market in the area was abusing the dominant position to restrict the

market of Reliance Big entertainment and Sun TV which was held to be in contravention of

section 3 (3)(b).

Sec. 3(3) of the Competition Act prohibits formation of cartels. In the Varca Drugs &

Chemists and Ors. v. Chemists & Druggists Association and in Goa and Santukha

Association Pvt. Ltd. v. AIOCD, it was held that “association, formal or informal, becomes

cartel if members of association take joint decisions in respect of maintaining prices or refuse

entry into market to others and thereby limit supply of drugs in market.”

The High Court of Gawhati in the case of Jai Balaji Industries Ltd. v. UOI held that the

primary purpose of the competition law is to avoid/ restrict those situations where the

activities lead to formation of cartels.

The Competition Commission of India (CCI) in the case of FICCI Multiplex Association of

India v. United Producers/ Distributors Forum held that “controlling and fixing of market” is

one of the essential factors in the formation of cartel.

Section. 3 of the Competition Act prohibit agreements which are anti- Competitive in nature.

In the M/S Gulf Oil Corporation Ltd V. Competition Commission of India, 2013 case,

Electronic Reverse

Auction was held by the Coal India Ltd. There was a bid for the supply to CIL in 2012 where

a cartel was formed between the oil company and certain explosive suppliers. The CCI held

that the bid was a mock and the 26 suppliers had already formed a cartel in contravention to

section 3 (3) of the Act read with section 3 (1). This was an appeal against the order of the

CCI, imposing penalties. The ceiling price was already known to all of them and this was a

concerted action between the Appellants to save their business interests. They were after all

competing with each other and had to stay in the market and any individual decision would

have been fatal under the circumstances. On the question of price fixing it was held that a

company cannot be stated to enter into an anti-competitive agreement with its subsidiary as

the subsidiary is the same entity as CIL. There will be no competition between CIL on one

part and the subsidiary on the other and thus there is no price fixing. As regards Section 4 also

by merely setting a ceiling price, there was no question of abusing its dominance by a

monopoly. There was no evidence to suggest that this price was unfair or discriminatory for

purchase. There were presence of mitigating circumstances such as trying to delay the

auctions and even in the second auction that was held and where the appellants participated,

no supplier was affected. In view of the above mitigating factors the punishments were

diluted.

In the M/S International Cylinder (P) Ltd. And Ors. V. Competition Commission of India and

Ors., 2013,

the question before the Commission was whether the Commission had erred in holding that

LPG cylinders were in contravention of Section 3(3)(d) read with Section 3(1) of the Act.

Wrong exoneration of some parties did not entitle others who were decidedly guilty of breach

of provisions and incorrect exoneration of some did not create any right to others particularly

when exoneration was incorrect and party claiming such treatment was proved to be guilty.

There was no reason to disbelieve that parties had access to each other through their

association and prior meetings. There was concerted agreement between parties on the basis

of which identical or near identical prices came to be quoted in tenders for supply of cylinders

to 25 States. There was presumption about appreciable adverse effect on competition in the

wake of mere proof of agreement under Section 3 of the Act. The turnover of immediate three

years was not considered in a number of concerns on the ground that companies had not

provided financial details of the previous year. The court held the parties guilty of forming

anti competition agreements but taking into consideration the large no. of parties involved did

not impose penalties till it had heard all the parties.

In the All India Tyre Dealers’ Federation v Tyre Manufacturers case, J K Tyres stated that it

is engaged in the manufacturing and selling of tyres produced at the factories located in

different parts of the country. It also stated that it imports tyres (Bias/Radial) for the purpose

of testing, product evaluation, benchmarking etc. It further stated that it sells its products in

different parts of the country through dealers and it does not enter into any written agreement

with the dealers and goods are supplied to dealers under invoice which contains the terms and

conditions of the sale. It was declared in the reply that natural rubber is procured domestically

or through imports on daily basis. It was submitted that CEAT has established a network of

sales offices across India and it sells the goods on a principal to principal basis to the major

customers, viz., government accounts, fleet accounts, state transport undertakings, vehicle

manufacturers and to over 3000 dealers in different parts of the country who, in turn, sell the

same to the consumers. It is also stated that these dealers also sell the competitors' products

and CEAT does not enter into any agreement for the sale of its products with the dealers and

the supplies affected under an invoice which contains the terms and conditions. CEAT

submitted that for manufacturing tyres/tubes it uses basic raw materials, viz., natural rubber,

synthetic rubber etc. The raw material prices fluctuate on a day to day basis with changes in

crude oil prices, foreign exchange rates, international raw material prices etc. Pricing of the

products was stated to depend upon raw material prices, landed price of competitive products

(imported), demand & supply.

Section 5 of the Competition Act, explains methods of business combination and the

meaning of combination. S 6(1) prohibits any person or enterprise to enter into a combination

which causes or is likely to cause appreciable adverse effect on competition within the market

in India

Summary

The discussions above explain the working of the Competition Policy and Law on the control

and regulation of market power and protect the interests of the consumers and the producers.

The abuse dominance by the big corporate and the MNCs, the anti-competitive agreements

and combinations are the main focus of the Competition Law to be dealt with to realize the

objectives of liberalization. The cross border trade is being discussed to work on the need and

the modalities of implementing appropriate international and domestic competition policy

and law.