Module 1

MODULE 1
COMPETITION LAW

1.1. WHAT IS COMPETITION LAW?

Competition law is a branch of law which deals to thwart anti-competitive policies and
agreements between companies and people. The primary objective of competition law is to
protect small companies and traders from unethical practices of big and established
companies. Since competition is necessary for almost everyone in today’s market including
producers, consumers and economy of a country, it is necessary that a law is present to
regulate various practices of companies in the market.
Thus, the ulterior objective of Competition law remains to be that of promoting competition
in the market and ensuring the upholstery of consumer interest, keeping in mind the idea of a
free flowing and developing market.

1.2. ANTI-COMPETITIVE PRACTICES
There are various practices which are termed as anti-competitive practices under the subject
matter of competition law in India. Competition law aims at preventing the proliferation of
such practices in order to ensure that competition prevails in the market and that no
organization or enterprise can exercise monopoly and abuse its dominant position.
Some of these anti-competitive practices are:

Entering into anti-competitive agreements or concerted practices with others.
Competition law applies not only to formal agreements but also to any sort of
informal arrangement between businesses, whether written or verbal, which has an
anti-competitive object or effect.

Fixing of prices
Limit on production of certain goods and services.
Applying different conditions to equivalent transactions with other trading parties and
placing them in a competitive disadvantage
Abusing one’s dominant position.

Creation of entry barriers.
Market foreclosure.

It is not an anti-competitive practice to sway the buyers from a small rival because of their
less efficiency and influence, as long as such practice does not influence consumer
preferences and choices.

1.3. GOALS OF COMPETITION LAW

The primary goal of competition law is to reduce the monopolistic tendencies of companies
and to prevent unethical practices which might be practiced in the absence of a relevant law
specialised to cater such anti-competitive and abusive tendencies. It aims at creating a set of
broad policies that enhance and encourage competition and uphold consumer interest keeping
in mind the idea of a free flowing and developed market. Competition policies are intended to
promote efficiency, maximize consumer interest and help in the creation of a business
environment which is based on fairness leading to to efficient resource allocation but in a
manner that instances of abusive conduct do not take place. Such policies usually include
relaxed industrial policy, liberalized trade policy, conducive entry and exit conditions,
reduced controls and greater reliance on market forces.

The Preamble of the Competition Act, 2002 uplifts the true spirit and purpose of competition
law. It clearly reiterates the rationale behind the formation of the legislation. It reads as
follows:

“An Act to provide, keeping in view of the economic development of the country, for the
establishment of a Commission to prevent practices having adverse effect on competition, to
promote and sustain competition in markets, to protect the interests of consumers and to
ensure freedom of trade carried on by other participants in markets, in India, and for matters
connected therewith or incidental thereto”

1.4. ANTI-COMPETITIVE AGREEMENTS

There are various agreements which are termed as anti-competitive as they try to eliminate
competition from the market and drive other rivals out of the competition so that the
dominant businesses may cement their position among the consumers. These agreements may
be between firms that are not competitors but are connected through a chain of distribution,
for example, manufacturers and distributors and distributors and retailers. Other anti-
competitive agreements may be between competitors that reduce competition by co-
ordinating behaviour thereby preventing new competition or discouraging aggressive
competition. Conduct or practices which are likely to cause Appreciable Adverse Effect on
Competition (AAEC) in the market are regarded to be anti-competitive.

Section 3 (1) of the Act prohibits any agreement with respect to “production, supply,
distribution, storage and acquisition or control of goods or services which causes or is likely
to cause an appreciable adverse effect on competition within India.1

While looking into the appreciable adverse effect on competition (AAEC) of an anti-
competitive agreement, the factors enumerated under Section 19(3) of the Competition Act,
2002 are looked into. These include both anti-competitive and pro-competitive factors. Thus,
while looking into the appreciable adverse effect of a cartel, the CCI balances these anti-
competitive and pro-competitive factors before arriving at a definitive conclusion.

While the anti-competitive factors include - creation of entry barriers, driving out existing
competitors out of the market and market foreclosure, the pro-competitive factors include –
accrual benefits to consumers, improvements in production or distribution of goods or
services and promotion of technical, scientific and economic development by means of
production or distribution of goods or provision of services.

While the Competition Act does not specifically make a two-part bifurcation, a close reading
of Section 3 reveals that anti- competitive agreements under the Competition Act can be
classified under two broad heads. They are:

a. Horizontal Agreements
b. Vertical Agreements


1 Section 3(a), Competition Act, 2002.

1.4.1.1. Horizontal Agreements

Section 3(3) of the Competition Act lays down that “any agreement entered into between
enterprises or association of enterprises or persons or associations of persons or between
any person and enterprise or practice carried on or decision taken by, my association of
enterprises or association of persons of persons, including cartels engaged in identical or
similar trade or provision of services, which:

a. Directly or indirectly determines purchase or sale price
b. Limits or controls production, supply, markets, technical development,
c. Investment or Provision of services
d. Shares the market or source of' production or provision of services by way of

allocation of geographical area of market, or types of goods or services or number of
customers in the market or any other similar way.
e. Directly or indirectly results in bid rigging or collusive bidding” 2 shall be presumed
to have appreciable adverse effect on Competition

Horizontal agreements are those agreements that are entered into by competitors operating at
the same level in the economic process, i.e., entities that are engaged in operating in broadly
the same activity. These are the agreements between producers or between whole sellers or
between retailers, dealing in similar kinds of products who share the same kind of market. As
per Section 3(3), these exists a presumption that horizontal agreements are anti-competitive.
Hence, such agreements are governed by the per se rule and are presumed to have an
Appreciable Adverse Effect on Competition. This presumption is however rebuttable and the
burden of proof therefore lies on entities that are parties to horizontal agreements. The major
reasons for entities to enter into horizontal agreements is price stability and protection from
recession, and to shield themselves from international competition.
However, exemptions have been given to joint ventures agreements promoting efficiency in
production, supply, distribution and export arrangements and reasonable restrictions forming
part of protection or exploitation of intellectual property rights. Cartels

These are one of the most common ways to get engaged in practices detrimental to the
competition in a market. Cartels are a unique form of anti-competitive agreement. Cartels can


2 Section 3(3) of the Competition Act, 2002

formulate without any written agreement or covenant. Oral agreements are sufficient to create
a cartel. Section 2(c) of the Competition Act, 2002 define Cartel as:

“an association of producers, sellers, distributors, traders or service providers who, by
agreement amongst themselves, limit, control or attempt to control the production,
distribution, sale or price of, or, trade in goods or provision of services”.

Cartels fall under the purview of horizonal agreements which are per se regarded to be anti-
competitive as per Section 3(3) of the Competition Act, 2002.

1.4.1.2. Vertical Agreements

Vertical agreements are agreements between firms at different levels of a supply chain. Most
goods and services travel through a chain of production before a product actually reaches the
consumer, and these agreements operate between entities located at different positions on
such a chain. These agreements, indispensable to any economy, often create long term
relationships with various obligations paced on parties. The regulation of vertical agreements
under the Competition law regime has evoked substantial amount of controversy. While these
may many a time be beneficial to the market economy, problems arise in the context of
competition, if an agreement between a supplier and a buyer restrains either. Their impact on
competition is, by and large, mixed, and such agreements therefore have to be judged on the
basis of the reasonableness of the restraint created.

Vertical agreements fall within the ambit of Section 3(4) of the Competition Act, 2002 and
are not per se regarded to be anti-competitive. The rule of reason operates towards
establishing the anti-competitive nature of a vertical agreement. The onus of proving that a
vertical agreement is anti-competitive is upon the competition regulator i.e. the Competition
Commission of India.

Vertical agreements affect competition most significantly in situations where the firm or
entity imposing the restraint has a sizable influence upon the market. In these cases, there
exists negligible inter-brand competition, making it desirable that there exists enough
competition between the distributors and retailers of the same product - a phenomenon
termed “intra-brand competition.” Vertical restraints in such cases make it difficult for
retailers to distinguish themselves on price or quality of service, and can also lead to the
creation of entry barriers. Further, negative effects of vertical restraints are reinforced when

multiple suppliers and their buyers conduct business in a similar fashion, leading to
“cumulative effects.” In situations wherein the enterprises in question do not have substantial
or sizeable affect on the competition in the market, vertical arrangements may actually have
efficiency enhancing impacts and subsequently have long term consumer benefits.

The agreements mentioned under Sec 3 (4), are five types of vertical agreements and the
same is not an exhaustive list. These are:

(a) Tie-in arrangement;

(b) Exclusive supply agreement;

(c) Exclusive distribution agreement;

(d) Refusal to deal;

(e) Resale Price maintenance

1.5. ABUSE OF A DOMINANT POSITION

When an enterprise holds a dominant position in a particular relevant market, it is very
important that such dominant enterprise does not abuse its position of strength to the
detriment of consumers and competitors in the market. It is important to note that mere
position of dominance does not attract antitrust scrutiny, however abuse of such dominant
position does. The chronology of alleging abuse is as follows: Identify the relevant market
(relevant geographic market + relevant product market)

Prove that the enterprise in question is in a position of dominance3.

Only when the dominant position of an entity is established can allegations pertaining
to its abuse be entertained and consequently established.

Section 19(4) of the Competition Act, 2002 lists certain indicative criteria that may help the
Commission reach a decision on whether an entity is dominant. These are:


3 Please note that in India there is no concept of “collective dominance”, so in a particular relevant market there
can be only one established dominant entity.

a) Market share of the enterprise;
b) Size and resources of the enterprise;
c) Size and importance of the competitors;
d) Economic power of the enterprise, including commercial advantages over

competitors;
e) Vertical integration of the enterprise or sale or service network of such enterprise;
f) Dependence of consumers on the enterprise;
g) Monopoly or dominant position whether acquired as a result of any statute or by

virtue of being a Government company or a public sector undertaking or otherwise;
h) Entry barriers including barriers such as regulatory barriers, financial risk, high

capital cost of entry, marketing entry barriers, technical entry barriers, economies of
scale, high cost of substitutable goods or service for consumers;
i) Countervailing buying power;
j) Market structure and size of market;
k) Social obligations and social costs; and
l) Relative advantage, by way of the contribution to the economic development, by the
enterprise enjoying a dominant position having or likely to have an appreciable
adverse effect on competition.
m) any other factor which the Commission may consider relevant for the inquiry.

As per Section 4 of the Competition Act, 2002, an enterprise or group would be regarded to
be abusing its dominant position if it directly or indirectly imposes any unfair or
discriminatory:

§ ‘condition in purchase or sale of goods and services’, and
§ ‘price in purchase or sale of goods and service’4.

Also, an enterprise or group would be regarded to be abusing its dominant position if it limits
or restricts:

§ ‘the production of goods or provision of service or market in question’, and
§ ‘technical or scientific development in relation to goods or services to the prejudice of

consumers’.


4 Note: Unfair or discriminatory pricing is deemed to include “predatory pricing”.

An enterprise or group indulging in practices resulting in denial of market access or market
foreclosure would also be regarded to be contravening provisions of Section 4 of the Act.
Also, enterprises which use its dominant position in one relevant market to enter into or
protect its other relevant market, would be liable for contravention of provisions under
Section 4 of the Act. Also, if an enterprise or group makes a conclusion of contracts subject
to acceptance by other parties of supplementary obligations which by their nature or
according to commercial usage have no connection with the subject of such contracts, it
would lead to an abuse of such enterprise’s dominant position.

It is important to note even if an enterprise imposes unfair or discriminatory condition it
should not per se be considered as an abuse of dominance. The explanation to Section 4(2) of
the Act makes it clearer as it aptly points out that if unfair or discriminatory condition is
imposed to meet competition, such act would then not be considered as abuse of dominance.
Therefore, we can see that not every unfair or discriminatory condition would amount to an
abuse, and such abuse would only take place if it has some relation with the competition
prevalent in the Indian market.

For proper adjudication on abuse of dominance cases, the Raghavan Committee Report
provided certain important questions5:

§ How will the practice harm competition?
§ Will it deter or prevent entry?
§ Will it reduce incentives of the firm and its rivals to compete aggressively?
§ Will it provide the dominant firm with an additional capacity to raise prices?
§ Will it prevent investments in research and innovation?
§ Do consumers benefit from lower prices and greater product and service availability?

There has been no specified classification of abusive conduct under the Act, however under
the existing global competition laws, abuse of dominant position can be categorized under:

§ Actions which exploit customers or suppliers. (e.g. Excessively high prices, restricting
quantities).

§ Conduct which amounts to exclusionary behavior and protection of dominant position,
because it removes or weakens competition from existing competitors or tends to
strengthen entry barriers, thereby removing potential competition.


5 Dominance and Its Abuse – Dr. S. Chakravarthy (Page 8) (http://www.circ.in/pdf/CPS-06-Abuse-Dominance-
Ethiopia-Workshop_May08.pdf).

1.6. COMPETITION POLICY

Competition policy aims at making sure that competition is not impeded in any way due to
the anti-competitive measures and agreements entered into by different companies. Its goal is
to ensure that competition is used in the most optimum way and that it is not used in a
detrimental manner by different businesses who may enter into different agreements and
contracts which would defeat the whole purpose of competition.

Competition policy emerged in the United States in the late nineteenth century, when it
became apparent that competition was letting the larger firms to try to lessen competitive
pressures through the formation of cartels, which used to have detrimental effects on smaller
firms and consumers. Consequently, in the United States, competition policy is referred to as
antitrust policy. Since the 1990s, competition policy has gained importance , both in its
spread to even more segments of the economy and in its prominence as a policy tool.

Competition Policy focuses mainly on three areas namely Restrictive practices, Monopolies
and Mergers. It tries to limit the proliferation of these three practices which are a threat to
healthy competition in the market and might be detrimental for the interests of the buyers and
consumers. Competitive policy prohibits restrictive practices like collusion by firms which
compete against each other and fix prices in contravention to the competition law in the
respective country.

With respect to monopolies, it is not the presence of monopolies which is prohibited by
competition policy but it is the abuse of this dominant position which competition policy tried
to erase.

Mergers have constantly been the most controversial and the most politicized area of
competition policy because the judgment required as to whether a particular merger will
result in a damaging reduction in competition that outweighs any potential benefits is often a
topic of debate.

The main objectives of competition policy are to promote competition and make markets
more efficient and vigorous. It aims to ensure:

Technological innovations that promotes dynamic efficiency in various markets

Effective price competition between suppliers

Safeguard and promote the interests of consumers through increased choice and lower
price levels

Some of the Examples of competition policy are De-regulation, Privatization, Laws on anti-
competitive behaviour and reductions in import controls.

1.7. HISTORY OF COMPETITION LAW
The history of modern competition law can be traced back to two acts namely Sherman Act,
1890 and the Clayton Act, 1914 of the U.S.A. The Sherman Act was enacted to regulate anti-
competitive practices at that times and to assuage the effect of cartels which were prevalent at
that time. It aimed to sustain the competitive process. The Sherman Act, 1890 contains two
broadly constructed substantive sections of importance. Under Section 1 of the Sherman Act,
1800, "every contract, combination in the form of trust or otherwise, or conspiracy, in
restraint of commerce among the several States, or with foreign nations, is declared to be
illegal." Section 2 of Sherman, 1890 makes it a felony for "every person who shall
monopolize, or attempt to monopolize, or conspire with any other person or persons, to
monopolize any part of the trade or commerce among the several states or with foreign
nations." Fines for such violations now include up to $350,000 for individuals and/or three
years imprisonment. In the case of companies, they can be fined up to $10 million.

The Clayton Act was passed in order to limit the discretion of courts in the year 1914. The act
expanded on the general prohibition of the Sherman Act, 1890 and also at the same time
addressed problems of the nature of anti-competition in their nascent stage. It provided for
enforcement of antitrust laws and price discrimination and also mergers and acquisitions. The
Clayton Act, 1914 extended the prohibition of the Shaman Act, 1890 to price discrimination,
exclusive dealing and mergers. In 1914 the Congress passed another Act, viz., Federal Trade
Commission Act, 1914, to impose a general ban on "unfair' acts, practices and methods of
Competition."

The Congress created Federal Trade Commission (FTC) Act (1914), a new federal agency to
watch out for unfair business practices—and then gave the Federal Trade Commission the
authority to investigate and stop unfair methods of competition and deceptive practices.

Today, the Federal Trade Commission's (FTC's) Authority of Competition and the
Department of Equity's Antitrust Division implement these three centre government antitrust
laws... Each state has antitrust laws, as well; they are authorized by each state's lawyer
general.