Competition law and its significance to the consumer (Part 1)

Introduction

According to the Oxford Dictionary, the word competition means a situation in which people or organizations compete with each other for something that not everyone can have; this is the basic principle behind competition. In the context of competition law, the Organisation for Economic Co-operation and Development (OECD) states that competition refers to a situation in a market in which firms or sellers independently strive for the patronage of buyers in order to achieve a particular business objective, e.g., profits, sales and/or market share. Healthy competition often raises the standards of all the competing parties and incentivises hard work. In simple terms, competition or antitrust law regulates and promotes competition. 

The first legislation to regulate competition in India came into force as the Monopolies and Restrictive Trade Practices Act (MRTP) in 1969. The MRTP Act was enacted with the objective of ensuring that the economic system didn't result in concentration of economic power, to provide for control of monopolies and to prohibit monopolistic and restrictive trade practices. With the onset of  liberalisation, privatisation and globalisation, the MRTP Act was replaced by the  Competition Act, 2002. One of the objectives of the Competition Act 2002, (from here on referred to as Act), is to protect the interests of consumers by ensuring competition in markets. Although competition is not defined in the Act per se, the definition quoted above helps us deduce its meaning. Let us take an example to illustrate how competition works in the market:

1. In the first scenario Person “A” is starting a candle business; for the sake of simplicity, it is assumed that he can source raw materials, make the candles, and sell them. If A is the only person selling candles, then he can control the price and quality of candles. He will also be able to control the cost of production as no one else in the market is buying the raw materials. In this scenario, there is no competition; “A” becomes a monopoly and has full control over the market. He can sell his product at an unreasonably high price and consumers are at a disadvantage because there is no other seller.
2. Now let us consider the second scenario where there are multiple businesses selling candles. “A”, “B”, “C” and “D” are sellers. Each one can source raw materials, make the candles, and sell them independently. Now all three of them must compete to create a better product, to sell more candles. This is advantageous to consumers as businesses are pushed to give a lower price and improve the quality of the candle. This competition will also motivate them to innovate and create a better range of products, for example, candles that are scented, colourful, organic, etc. In this scenario, there is competition in the market. The consumer can choose between three different producers and different price options as well. We can switch the candle for any other goods/service in this illustration and it will still hold good. All markets must have competition.

As is clear from the examples above, some of the fundamental reasons why competition is seen as essential are:

Reduction in price: Companies offer better prices to get more buyers. Competing companies drive down prices to get a bigger market share- more consumers can buy products. This encourages businesses to produce and boosts the economy in general.

Superior quality: Companies will inevitably start creating goods and services of a higher quality to gain more consumers. This can be better quality of raw materials used, warranty/guarantee, making sustainable products and improved service.

Numerous choices: Identical products will be long foregone in a competitive market. Every business will try to differentiate its product from the rest. This will give the consumer a variety of choices as discussed in the start of this heading, they can choose a product that is most useful to them.

Innovation: In a quest to produce better products, businesses are forced to be innovative – in their product conception, designing of products, production methods, type of service, etc.

Better competitors in global markets

Competition within the country helps make Indian companies stronger outside too – and able to hold their own against global competitors.

The Supreme Court has opined that the main objective of competition law is to promote economic efficiency. Economic efficiency is when all goods and factors of production in an economy are given optimal usage by distribution/allocation and waste is eliminated or minimized. Competition is one of the means of assisting in the creation of a market responsive to consumer preferences. The advantages of perfect competition are threefold: 

1. allocative efficiency, which ensures the effective allocation of resources, 
2. productive efficiency, which ensures that costs of production are kept at a minimum and 
3. dynamic efficiency, which promotes innovative practices. 

These factors have been accepted all over the world as the guiding principles for the effective implementation of competition law.

What are the practices that stifle competition? (under the Competition Act, 2002)

In the second scenario of our illustration as discussed above where there are four sellers A, B, C and D, there is fair competition as seen through several sellers competing in the market and for the market. (Fair competition is defined in the Black’s Law Dictionary as open, equitable and just competition, which is fair between competitors and between any of them and their customers.) But even here,  there are certain activities that can adversely affect competition, such as:

1. “A” and “B” collude together and determine the price of all candles (anti-competitive agreement)
2. “A” enjoys a higher market share;  so he can choose very low prices to drive out competitors (abuse of dominant position)
3. “A” and “B” who enjoy a good market share decide to merge together (a combination of businesses which causes an effect on competition)

In each of the above-mentioned conditions, “C” is set up to lose his market share.  Furthermore, the consumers are also likely to lose out, with  lower quality products at  higher prices. These are termed anti-competitive practices. 

As demonstrated above, there  are three  broad categories of prohibited activities that can adversely affect competition. Let us discuss each one as listed in the Act:

1. Prohibition of Anti-competitive agreements
   Anti-competitive agreements are any agreements between enterprise, or association of enterprises, or person, or association of persons, which cause or are likely to cause an appreciable adverse effect on competition within India.  The agreements are typically with respect to  production, supply, distribution, storage, acquisition or control of goods or provision of services. Such agreements are prohibited under Section 3 of the Act.

Some of the different types of anti-competitive agreements prohibited under this Act are:

1. A tie-in agreement is when a consumer can buy a good he wants, only by buying some other good from the producer. Example: In order to get a direct-to-home (DTH) broadcasting service the consumer must also buy the set-top box from the service provider.
2. An exclusive supply agreement is when the purchaser is restricted to buying goods from only one seller and no other person. Example: When a multiplex enters an agreement to buy beverages exclusively from only one particular brand, consumers lose their right to choose other beverages and other beverage companies are completely excluded from the multiplex market.
3. An exclusive distribution agreement is when the supplier allows the distributor to sell the product only within a specific area or to a particular group of customers. Example: When an automobile distributor is allowed to sell only in one particular marked geographical area and is barred from conducting business with persons from different regions. It will lessen competition and deprive the consumer of wider choice which would have been available in the market but for this agreement.
4. A refusal to deal agreement is one which restricts or is likely to restrict a party to whom goods are sold or bought from. This is a violation of competition law because it harms the boycotted business by cutting them off from a facility, product supply, or market. Example: When a metro rail corporation deals exclusively with one company for getting rail fastening systems, and does not consider other companies to be eligible to apply for tenders. 
5. An agreement for resale price maintenance includes any agreement to sell goods on the condition that the prices (unless it is clearly stated that prices lower than the MRP  may be charged)  on the resale by the purchaser shall be the prices decided by the seller. Example: When a tyre company directs the dealers to sell at a price fixed by the tyre company, it amounts to resale price maintenance.

It is vital to understand that the above agreements have to be analysed with Section 19(3) which discusses factors such as creation of barriers to enter the market and accrual of benefit to consumers, that must  be considered to  determine whether an agreement is anti-competitive.

2. Prohibition of abuse of dominant position
   Dominant position means a position of strength  enjoyed by an enterprise. This enterprise must have a clear upper hand, which enables it to  operate: a) without being affected by any competitive forces present in the relevant market b) without being affected by  its competitors, c) without being affected by consumers or the relevant market to its own benefit. Section 4, prohibits any enterprise or group from abusing its dominant position. The Section also lists some of the acts that constitute as abuse: 
   1. Imposition of an unfair/discriminatory condition/price in sale and purchase of goods or services;
   2. Limit/restrict competition;
   3. Use its dominance in one relevant market to enter into, or protect, other relevant market
   4. Limit/restrict the production of goods or services
   5. Limit/restrict technical or scientific development relating to goods or services to the prejudice of consumers;

Example: In 2017, European Commission fined Google €2.42 billion for abusing its dominant position. Google occupies a dominant position as a search engine throughout Europe. It abused the same by displaying its  own comparison service for shopping related searches, thereby gaining an illegal advantage over rivals. The Commission  found evidence of sudden drops of traffic to certain rival shopping comparison websites by  up to   80% and more in EU nations. These sudden drops could also not be explained by other factors and were therefore attributed to abuse of its dominant position by Google.

3. Regulation of combinations
   Broadly, combination includes the acquisition of control, shares, voting rights or assets, by an enterprise or person over an enterprise where such party has control over another enterprise engaged in competing businesses. It also includes mergers and amalgamations between or amongst enterprises. Section 5 of the Competition Act sets out thresholds for enterprises and groups, in terms of assets and turnover, which if exceeded triggers a requirement to notify the CCI.
   Under Section 6, no person or enterprise shall enter into a combination which causes or is likely to cause an appreciable adverse effect on competition within the relevant market in India and such a combination shall be void.

Example: Facebook merged with GIPHY an online database and search engine that allows users to search and share Graphical Interchange Format (GIFs-short looping soundless videos). This resulted in the possibility of monopolising the world's supply of GIFs. Competition Markets Authority; the anti-trust regulatory body in the United Kingdom,  ordered Facebook to sell off Giphy.

Competition law primarily works toward preventing anti-competitive practices with minimal intervention by regulatory authorities. The competition regulatory authority in India, the  Competition Commission of India (CCI) was established in 2003 to prevent anti-competitive practices, promote and sustain competition in markets, protect the interests of consumers and ensure freedom of trade carried on by other participants in markets, and for matters connected with the above or incidental to these.  A discussion of the role of CCI and factors to be considered while investigating anti-competitive practices will follow in the next blog.