3 Importance of Competition Policy and Law in a Liberalized Market Economy

Prof. S. Radha

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 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 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.

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

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

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.

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.

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.

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.

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 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.

References/cases:Competition Act, 2002

The UNCTAD Secretariat: 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

Sanoussi Bilal, Trade and Competition Policy: Perspectives for Developing Countries THE REGULATORY FRAMEWORK OF GLOBALISATION, Barcelona, Spain 5 – 6 October 2001, Overseas Development Institute, London

Mark R.A, Palim: The Worldwide Growth Of Competition Law: An Empirical Analysis The Antitrust Bulletin/Spring 1998

MCX Stock Exchange v National Stock Exchange of India Limited

DLF v. Competition Commission of India(CCI)

Dhanraj Pillai v Hockey India

Reliance Big Entertainment Private Ltd V Tamil Nadu Film Exhibitors Association

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

M/S International Cylinder (P) Ltd. And Ors. V. Competition Commission of India and Ors., 2013