Business Interests and Competition Law and Policy
Competitiveness of firms is determined not only by the Capabilities of its managers, workers, owners and major investors, but also importantly, by the ‘business environment’ in which the firms operate. By business environment we refer to the economic-legal-regulatory policy framework, and the structure of markets and business practices of firms impacting on commercial decisions. Various studies suggest that the business environment of economies characterised by high intensity of competition in domestic markets are associated with high levels and rates of growth in per capital GDP, high levels of productivity, low degrees of dominance by few large firms, and higher rankings in the World Economic Forum’s business competitiveness index. Markets in such economies also have higher rates of entry by new firms, indicating greater investment and new-business formation.
Importance of Competition Law and Policy for Business
As part of the national economic framework, competition law and policy (CLP) has an important role to play. The objectives of an effective CLP is to protect and promote the process of competition that is, the nature and type of rivalry between firms to win and retain customers especially by preventing anti competitive and unfair business practices such as price-fixing, market allocation, bid-rigging, and other forms of cartels, monopolisation by large firms with market power, and mergers and acquisitions aimed at pre-empting or reducing competition. Also by advocating against government interventions, regulations and red tape that increase the cost of doing business and adversely impact on the efficient functioning of markets.
Effective competition pressures firms to offer better quality and greater choice of products and services at lower prices to consumers. It also pressures firms to lower costs, adopt more modern technologies, efficient production and organisational methods and engage in R&D and innovation. Michael Porter has observed (in The Competitive Advantage of Nations) that firms which do not compete in home markets are hardly likely to become internationally competitive, or be able to withstand international competition in their own domestic markets as economies become increasingly globalise. The competitive process strengthens business firms and their sustainability.
Business Attitudes towards CLP However, business attitudes towards CLP generally tend to be somewhat jaundiced. Many businessmen misguidedly view it as yet another form of government intervention in the market place that adds to their costs. Some others recognise competition as being important but it does not apply to them because they“face a lot of competition,” while it applies to others “who do not compete and engage in anti-competitive practices.” When competition does arise, especially in developing and emerging markets, its benefits need to be protected from expropriation by large, politically connected dominant firms that enjoy incumbency advantages inherited from previous ‘command and control’ economic regimes. These large firms, which also include former government-owned enterprises, usually attempt to distort competition by lobbying politicians to adopt preferential or protectionist policies in their favor. Also by registering false or undocumented allegations of anti competitive business practices against competitors to distract management and raise their rivals’ costs through unnecessary litigation. Competition agencies are advised to be vigilant against such misuse of competition law and policy. And to ensure that there is ‘competitive neutrality’ between firms competing against each other, regardless of public or private ownership or nationality. When competition agencies engage in advocacy for more coherent and consistent government policies and regulations that least distort the competitive process, reduce regulatory burden on business, or prevent unsubstantiated complaints against business, they strengthen the business environment and facilitate legitimate business strategies.
Competition is not automatic, nor can it be sustained by itself without having an effective CLP. Open economies large as the United States, or small as Singapore, have found it necessary to have a competition law regime to protect and foster competition. There are many products and services that are not traded and remain insulated from global competitive pressures. Anti-competitive business practices in such sectors adversely affect individual consumers as well as businesses.
“ Competition is not automatic, nor can it be sustained by Itself without having an effective Competition Law & Policy ”
Businesses are ‘Consumers’
While the principal objective of CLP is to protect and promote the competitive process, it does so to protect and promote ‘consumer welfare,’ and pursue other sub-objectives such as economic efficiency (or in some jurisdictions ‘public interest or benefit’). Consumers are frequently perceived as consisting of only individual persons. But businesses are also consumers. Factually, businesses account for a larger proportion of day-to-day commercial transactions through their purchases of various products and services used as intermediate inputs in production and sales activities. Indeed, casual examination of competition cases across different jurisdictions indicates that a large number of matters relate to inputs sold by businesses to other businesses. Anti competitive business practices such as illegal price fixing cartels and bid-rigging in input markets raise the costs of doing business, undermining the competitiveness of firms. For example, in Morocco a price-fixing cartel by companies providing refrigerated truck transportation increased export costs for the cut flowers industry. In South Africa, excessive prices charged by a supplier of polypropylene to downstream industries are before the Competition Tribunal for resolution. In Brazil, the competition authority has recently sanctioned and fined four companies for participating in an international air cargo cartel. In India and several other jurisdictions around the world there are collusive price fixing cases relating to cement. In Russia the Federal Anti-monopoly Service recently investigated and charged enterprises engaged in price fixing and market allocation in The coal industry. In these and many other jurisdictions there have been cases against anti competitive business practices across a wide range of products: Elysian, auto parts, industrial chemicals, steel, fertiliser, pesticides, flour, shipping, among others. Without CLP businesses would lack accessible recourse to remedy and obtain relief against such competition problems.
Businesses Role in Protecting and Promoting the Competitive Process
The responsibility for protecting and promoting the competitive process does not rest only with the competition authority. Responsibility also rests with business. Litigating competition cases is costly for both government and business. These costs can be eliminated or reduced if firms and their trade associations adopt a ‘compliance program.’ That is, ensuring business managers, sales, marketing and other staff are fully cognizant of the substantive provisions of competition law. And the risks of various sanctions and fines, and importantly the loss of business reputation with customers, suppliers and share-holders. Aside from instituting internal controls, business need to be vigilant against becoming victims of anti competitive practices by other firms, register complaints and draw such instances to the attention of the competition authority. Business can also take advantage of the competition advocacy function of the competition authority by bringing attention to the costs imposed by government interventions and regulations, and partner with it to suggest alternative policies. Competition law and policy is inherently designed to “free enterprise” from unnecessary competitive restraints by both, private business and public policies.
Competition and Competition Policy in a Globalised World
At the end of the Uruguay Round, the European Commission (EC) Urged that competition be included in the WTO negotiating agenda. A working group on Trade and Competition Policy was created din 1996 and was active from 1997 to 2004. In July 2004, the General Council of the WTO decided that the interaction between trade and competition policy (in addition to investment and transparency in government procurement) would no longer form part of the Work Programme set out in the Doha Ministerial Declaration and that, therefore, no work towards negotiations on any of these issues would take place within the WTO during the Doha Round.
The reasoning behind the European Commission proposal was that the effectiveness of trade liberalisation measures taken by WTO members can be defeated if private operators engage in practices which recreate barriers to trade or reduce competition in world markets. In spite of the elimination of competition from the work programme of the WTO, the idea that there is a need to ensure that globalised markets remain competitive and that a multilateral competition policy is a necessity has not gone away.
On the contrary, the proliferation of bilateral or regional agreements with competition clauses since the mid 2000s shows that trading nations have become increasingly aware of the link between trade and competition. As a result, a great number of developing countries, which did not have a competition law in the early 2000s, have since adopted such a law and are now more familiar with the role of competition policy for economic development. Again, Consumer Unity& Trust Society(CUTS) played a crucial-role in promoting the adoption of competition law in developing countries and in offering technical assistance.
In addition, the fact that the focus of competition law enforcement in developed countries shifted to enforcement against international cartels helped focus the attention of policy makers on the importance of the costs which such cartels can impose on developing countries. This was not entirely new as a number of studies of individual international cartels such as the study by Professor New farmer on the international heavy electrical equipment cartel in the early 80s, or the study by Professor Stieglitz on the aluminium cartel in the early 1990s) had pointed to the potential cost for developing countries of transnational cartels based in developed countries. But the increased focus on such international cartels led to more work being done on the costs imposed by such cartels (for example by Professor Connor, Professors Suslow and Levenste in and myself).
The liberalisation and deregulation movements of the 1990s and 2000s, often suggested or imposed by international donors on developing countries through conditional subsidies or bail-outs, also increased the awareness of competition issues in developing countries.
Consequently large segments of domestic industries in developing countries came under the control of foreign multinationals. Indeed, in a number of instances large foreign firms were the only ones which had sufficient capital to invest in the purchase of privatised assets and to become dominant players. As a consequence of this movement, a number of developing countries became more dependent than they had previously been on decisions made by dominant multinationals outside their borders. The cement industry in Latin America or Africa provides vivid examples of this phenomenon.
Public officials in developing countries came to realise that they were losing operational sovereignty over parts of their domestic industry and that the regional or continental strategies pursued by dominant multinational firms operating with in their borders were frequently designed to prevent or restrict competition. This increased their awareness of the necessity to develop domestic tools to fight transnational anti competitive mergers and/or abuses of dominance. Development in the beer and soft beverages industry in both Africa and Latin America are typical of examples of this.
Another issue which has received increased scrutiny over the last few years, thanks to the wide swing in the prices of commodities is that of transnational export cartels. There is less consensus at the international level about what is the proper treatment of such cartels since developing countries can, depending on their endowment in natural resources, be either on the winning side or on the losing side of such cartels. But what has become clear is that the existence of such cartels can conflict with the goals of trade liberalisation and that only a multilateral agreement on how they should be treated could bring relief from their deleterious effects.
Thus the awareness of the potential damage of transnational anti competitive practices or transactions for developing countries has risen and so has the awareness of the fact that while bilateral or even regional solutions may bring some relief, they are insufficient to deal with all the problems.
In particular, it has become obvious that voluntary bilateral or regional cooperation agreements on competition have not Allowed small developing countries which have adopted a competition law to exercise their national sovereignty over transnational anti competitive practices or transactions which impose costs on them. Indeed, developed countries are reticent to sign bilateral cooperation agreements with small developing countries because they fear that they will bear all the costs of the bilateral cooperation whereas the developing countries party to such agreements will get most of the benefits, since there are likely to be more complaints that firms located in developed countries have abused individually or collectively their market power or have entered into transactions which are detrimental to developing countries interests than vice versa. As a result, the distrust of developing countries toward competition policy and law enforcement has largely abated since 2003, and they now more widely accept the necessity to find a multilateral solution to the issue of the competitive governance of world markets. What is not yet clear is the context in which the exploration of possible options for a multilateral agreement on competition could be reopened. The WTO would be suitable because it is logical to consider trade and the competition issues together. However, since 2003, the negotiation of the Doha Development Round has achieved no significant progress. One possible reason is that multilateral trade agreements no longer bring sufficient benefits to the negotiating countries to give them an incentive to offer the concessions which would allow negotiations to be successful.
One of the ways to increase the benefits of trade agreements is precisely to ensure that their goals are not defeated by anti competitive practices or transactions in globalised markets. Thus the exploration of the issue of trade and competition policy in the WTO, which was considered a hindrance to the completion of the Doha Development Round in 2003, may now have become the best hope to save the Round.
Competition Law: A Case Study and its Implications
CUTS has a clear commitment to an economically sensible Approach. The consumer movement has its heart in the right place but sometimes it presses for solutions involving too much intervention rather than for ones that make markets work better. CUTS has since promoted the CUTS Institute for Regulation & Competition with a clear mandate of providing research based capacity building solutions to a wide variety of stakeholders in the areas of economic regulation and competition. It is good that they are collecting a number of essays in this commemorative volume to boost its resource bank. In this short paper I want to highlight some characteristics of competition law. Another is to draw attention to the links between its core elements.
Let me therefore begin with a true typical cartel story. For twenty years two major firms dominated the Australian freight express business which transports parcels and packages from one city to another. They had a secret agreement that assigned customers (called pets) exclusively to one or the other. They agreed not to poach “pets” from one another. If customers tried to switch suppliers, the competitor would quote a high price and that would usually be the end of the matter. Occasionally, however, a customer would switch supplier but then receive very bad service: urgent overnight deliveries from Melbourne to Sydney would arrive several thousand miles away in Darwin a few days later or get lost. In the jargon of the companies they were trying to “burn” customers to induce them to switch back. If burning failed the firm would try to compensate its competitor by getting rid of one of its existing customers of like size by sharply rising prices or by reducing service quality. Occasionally financial compensation to the business that lost the customer was paid instead. All this was done to avoid competition and raise prices.
The Australian Competition and Consumer Commission (ACCC) successfully broke up the arrangement and with much fanfare had the firms fined about $AUS13mn, a big amount in those days. Alas, there were no criminal sanctions then for cartels.
There were occasional attempts by new competitors to enter this profitable market. However, whenever this happened, at least one of the firms would quote prices well below that of the new entrant. They often quoted prices that were well below their costs: if the variable or marginal cost of overnight delivery between Melbourne and Sydney was $50 then they would quote at $30. This drove most competitors out of the market. Legal action to recover damages under the competition law was eventually taken by one of the surviving competitors.
After the cartel was broken up one of the players came to the Commission and claimed that there was only room for one firm in the market. Could they merge? If so they said, a great deal of duplication would be eliminated, cost savings would occur and the customer ultimately would benefit from lower prices. The combined firm would also have the scale to enter into overseas markets. However, from the ACCC’s perspective, such a merger seemed anti-competitive, and would have been likely to cause higher prices. So the ACCC opposed the suggestion. Yet as serious competition broke out the ACCC received some information from people within one of the firms which suggested that the advertised claims that packages were transported by air from one capital city to another were incorrect. The ACCC tested this by sending some packages of its own which included altimeters. On collecting the packages the altimeters showed that at no stage had the parcel been more than 300 meters above sea level indicating either that the planes tended to fly rather low or that there was misleading and deceptive conduct in breach of the consumer protection provisions of the Trade Practices Act. Action was taken via fines, publicity and court orders to stop the practice.
Let us draw some general conclusions.
Cartels secret agreements between competitors not to compete, to raise prices, to restrict service are a great temptation for business. The gains can be large. The global vitamins cartel ran for nearly a decade, raised prices by large amounts seventy five percent and made billions around the world for the conspirators. Cartels are also hard to detect, increasing the incentive to operate them. However, they do great economic harm to business customers and consumers bring no offsetting economic or social benefits, and are unethical. In most OECD countries it is unlawful for competitors to agree to share a market so that they do not compete against one another. It is also unlawful for them to agree on prices or to rig bids. Anti-cartel laws are a core component of competition law.
To cut prices in response to a new competitor is not generally unlawful. This is competition at work. However, to cut prices persistently below variable cost to eliminate a competitor is usually unlawful or “predatory”. Predatory behaviour breaches abuse of market power (or abuse of dominance) provisions of competition law. In Australia it is unlawful for a firm with a substantial degree of power in a market to take advantage of that power in order to eliminate competitors or deter them from competing where this harms competition. There is nothing wrong with being a monopoly under competition law monopoly may be the result of a business being more efficient than its competitors. It is, however, unlawful in most OECD countries to engage in acts of “monopolization” or “abuse of dominance”, that is to use market power illegitimately to prevent competition e.g.:
– by systematically pricing below variable cost to destroy small players or new entrants and thereby having competition as a whole in the market
– by refusing to supply where the purpose or effect is to lessen competition;
– by engaging in a range of restrictive practices such as exclusive dealing (supplying a customer on condition that it does not purchase from a competitor) where this is anti-competitive;
– by engaging in resale price maintenance (requiring a retail purchaser not to sell below a specified minimum price) where this is anti-competitive.
Such anti-competitive behaviour by business harms competition, efficiency, business opportunity and innovation. Such behaviour (“monopolisation” in US jargon) has been unlawful in North America since the time of Rockefeller and is still so as Mr Gates has discovered and now firms like Google and Apple are discovering. It is, however, a field in which difficult judgments are often required: when is pricing below cost a sign of intense competition and when it is a sign of damaging anti-competitive behavior? Up to a point, an abuse of dominance law has a powerful pro-competitive effect. Carried too far it can chill competition.
The merger proposal incident described above highlights the fact that some mergers can be anti competitive and that this can often be their real motivation. When Australia introduced a competition law in 1965 it prohibited anti-competitive agreements but did nothing about mergers. This put an end to some price-fixing arrangements between competitors but they then nearly all merged, achieving the same effect as the former anti-competitive arrangements. This is one reason why merger provisions are needed in competition law to prevent outlawed cartels from merging to become a monopoly. Not all mergers are anti-competitive. Moreover, unlike most cartels, they can bring efficiency benefits. Indeed it is possible under Australian law if a merger is anti-competitive to have it “authorised” if the applicants can demonstrate that the benefit to the public exceeds the harm. The job of the ACCC and its appeal body – the Australian Competition Tribunal – is to distinguish between those mergers between competitors which are of benefit to the public and those the claims for which are merely trumped up excuses for reducing competition in the Australian market. Over time, a well administered merger law has a major beneficial effect on the competitive structure of an economy.
Regarding the false claims about air transport, not only was this behaviour misleading and deceptive with respect to customers, but it was also unfair for others in the industry which were ethical. It was a form of unfair competition. It also did not enhance the industry’s reputation. It also meant that competition did not work well: competition only works well if consumers are informed properly or at least not wrongly informed about the nature of the products or services being offered on the market. Laws about misleading and deceptive conduct, and consumer protection more generally, are best regarded as a part of competition law, and in about half of the OECD countries, including Australia, they are administered and enforced by competition regulators.
I will now bring this together with a very brief overview of the basic elements of competition law.
Competition law applies to businesses (usually including publicly owned ones) and is designed to break up cartels, anti-competitive mergers, the abuse of market power (or dominance) and in many countries to misleading and deceptive conduct. It takes the form of statutory prohibitions either of:
a) general nature e.g. all arrangements between businesses which substantially lessen competition are prohibited by law, and
b) specific nature e.g. price fixing arrangements between competitors are automatically prohibited, irrespective of whether they affect competition. The reason for automatic prohibition is that the arrangements are assumed nearly always to be harmful to the economy and rarely or ever offset by any benefits to the economy. Accordingly it is considered best to ban them automatically rather than consider the economic effects of each arrangement individually before banning them. Resale price maintenance is treated similarly in most countries.
Competition law is administered and applied by an independent regulator, which has powers to investigate behaviour it believes may be unlawful.
In North America and Australia such regulators play a prosecutorial role: they collect evidence, seek to prove their case in court, and obtain court orders. In Europe the regulator itself may have power to make orders, including fines (although appeals may usually be made to a court). Competition law can only work effectively if there are credible, adequate sanctions. Courts can impose injunctions, fines, goal sentences, damages and other orders. The penalties under the Trade Practices Act take the form of fines and sometimes damages can be added on. But are fines sufficient in all situations? Recently Australia decided to join a number of other countries in having the possibility of jail sentences for collusion on prices, market sharing and bid rigging because fines alone were an insufficient deterrent.
An interesting feature of competition law in North America and Australia and to a much lesser extent in many countries, and continents, such as Europe – is that it is also possible for individuals including individual businesses to take action themselves. They can sue for damages and injunctions (but not fines) in a court. This is a very important and powerful backup to competition law that usually works well and is likely to be adopted on a much more substantial scale in Europe before long.
In Summary, Some Features of Competition Law that Emerge from this Case are:
– Most often the direct beneficiaries of enforcement action under the Trade Practices Act are businesses (especially small businesses) rather than consumers. On balance most businesses gain from competition law
– In some areas, there is a fine line between competitive and anti-competitive behaviour. An example is when a monopolist reduces prices in response to entry by a new competitor.
– In other areas, there may be a trade off between competition and efficiency e.g. some mergers may allow the achievement of scale economies at the expense of competition.
– The treatment of monopoly has some special features. As noted, monopoly itself is not unlawful. Monopoly may, after all, result from a firm being more efficient then any other competitor or potential competitor and thereby eliminating them.
– In Australia, there is no power to break up monopolies. In the United States the law goes a step further. There is power to break up a monopoly where it has actually acted anti-competitively in breach of competition law. There is, however, no power to break up a monopoly without there having been some unlawful anti-competitive behavior.
– In competition law, there is normally no prohibition on the prices which a monopoly charges even if they are considered excessive.
– The law applies to all or nearly all forms of business. However, the millions of small businesses are generally unaffected by the law and/or are exempt when there is some possibility that a technicality might catch them. Of greater importance, however, is the fact that there is pressure from nearly every sector to gain exemptions from the law on the grounds that their circumstances are special.
– In Australia we have an interesting way of dealing with claims for exemption. If someone believes that the law should not apply to them they may apply in public to the independent regulator who holds a public hearing before deciding whether they should have so called “authorization” to continue to engage in anti-competitive behavior. This is an alarming sounding exception to the competition law but in practice the regulator has been extremely strict and does not grant many authorisations. It is also a better way of dealing with exemption applications than leaving them to politicians.
– Anti-competitive behaviour can occur on a global scale but there is no global competition law or regulator. When a global cartel is detected, however, it is usually possible to obtain fines and damages at national levels: this is a reason why a domestic competition law is desirable. If the US, for example, uncovers a global cartel, a local regulator can often piggyback on its actions to obtain fines and damages where local harm has occurred providing there is a local law.
– A considerable administrative and legal apparatus is needed to apply competition law. It can take years to build u
– The law may not have much relevance to some important state-owned utilities in areas such as telecommunications, public transport, energy, and water. Very often these are monopolies protected by statute from entry by competitors. Being a monopoly there is no competition to collude with, to take over or to take monopolisation action against. But having a protected monopoly can be economically harmful. To deal with it requires more than the application of competition law. It requires a full assessment of the structure of an industry and all possible policy approaches including divestiture.
– Competition law regulates anti-competitive behavior by businesses. It does not apply to, nor override the many actions of governments that limit competition. Finally, this case study highlights the fact that, if the underlying structure of an industry is no competitive, there may be many manifestations of market power cartels, monopolisation, restrictive practices, anti competitive mergers and misleading and deceptive conduct. In an noncompetitive industry, it is necessary to focus on all forms of anti competitive conduct that may occur.
The Past, Present, and Future of Merger Control Regime in India
Be it USA, Canada or EU- history shows that competition law has always received reluctant acceptance from businesses. In India – even post enforcement-the opposition against complete implementation of the Act refused to subside, owing to sustained resistance from domestic stakeholders who viewed the Act as an added layer of Government regulation. The reasons given for continued opposition were varied, and ranged from apprehension of Competition Commission of India (CCI) sitting over and delaying mergers clearances to question over the expertise of a nascent CCI to review complex combinations.
In that backdrop, it was really remarkable that on June 1, 2011, India brought into force merger control provisions of the competition law, the Competition Act, 2002 (”Act”) for review of acquisitions, mergers and amalgamations (called ”combinations” under Indian law).1 Thus, India formally entered into the club of countries with a fully functional competition law regime. Despite enactment of the Competition Act in 2003, major provisions of the Act could not be brought in to force till as late as May 2009 on account of certain legal challenges.
The opposition against bringing into force the enforcement provisions of the Act relating to merger control had its impact. Despite the competition law having been functional in India, albeit partly, since as early as May 2009, it took over two years for merger control to be enforced. It goes to the credit of CCI for preparing the draft merger control regulations even before the enforcement could become a reality. However, the fact that the Act had certain areas which needed improvement, harmonization and, in some cases, plain typographical error removal were sufficient reasons to successfully stall the efforts to implement merger review regime in the country.
There was even a talk for first amending the Act before the provisions could be brought into force. However, good sense prevailed and the proposal was shelved. It was decided to employ the provisions of merger control and amend the same, if and when any faults were found. It was the result of this changed outlook, within the Government of India, that a beginning towards a fully functional competition law regime in India could be made.
After extensive consultations by all stakeholders in the industry, CCI issued the draft merger regulations on May 11Despite grim warnings to the contrary, June 1, 2011 came and went without any grave dangers to either the economy or the fast moving pace of the normal business transactions such as mergers, amalga-mations and acquisitions as was feared. It was business as usual. On the contrary, international antitrust community welcomed the performance of Indian merger control regime.
On account of the pressure of stakeholders, the first draft of merger regulations was made in such a way that the opponents of merger review did not get an opportunity to create unnecessary noise. The first form for merger filing was such that, effectively, it was almost discretionary to file a merger review. It was a big relief to businesses but its utility for competition assessment can be gauged from the fact that, despite being under no obligation to do so, nearly all the merger filings, voluntarily, included the details of the transaction as well as the reason why it was not to cause an appreciable adverse effect on competition (AAEC), the substantive test for evaluation of mergers in India. Despite having a mandatory merger review regime, the first filing requirements, practically, gave the merger filer entire discretion on which form to choose for filing: Form-I or Form-II? Form-I is minimalistic in the information sought. It is seen that a huge proportion of merger filings are in Form-I only.
The need for improvements in the regulations was felt soon, especially vis-a-vis intra-group filings. A large proportion of merger filings pertained to intra-group combinations which did not change the control dynamics of enterprise(s), but only served to clog the functioning of CCI merger shop (as they call in USA). Subsequently, to ease the burden on CCI, the regulations were amended to eliminate the need for CCI review of those combinations which did not result in change of control of an enterprise(s).
The highlights of the first amendments to the combination regulations, of February 2012, by CCI are as under:
– Acquisitions of shares or voting rights pursuant to buy backs or subscription of rights issue (without the restriction of their ‘entitled proportion’), not leading to acquisition of control, included in Schedule I which lists transactions exempt from filing merger review
– Exemption from merger review if the cumulative share purchase is below 25% ( earlier 15%) s Distinction for filling up Form-I and Form-II for different types of transactions was removed, leading to clarity and uniformity.
– No filing requirement for intra-group mergers or amalgamations involving enterprises wholly owned by group companies.
– The Company Secretary of the company, duly authorised by the Board, was authorised to sign Form I/II, in addition to those persons specified under the general regulations.
On gaining further experience, the combination regulations were amended once again by CCI in April 2013. The main changes were as under:
– Where one of the enterprises had more than 50% shares or voting rights of the other enterprise, filing of notice with CCI for mergers/amalgamations involving these two enterprises was not needed. Similarly, if more than 50% shares or voting rights in each of such enterprises are held by enterprise(s) within the same group, no notice was needed.
– Exemption from merger review by CCI if the acquisition is less than 5% of the shares or voting rights of the company in a financial year, where the acquirer already holds 25%-50% of the shares or voting rights of the company.
– Some rationalisation in the categories of exemption for acquisition of certain current assets like stock in-trade, raw materials, etc.
– It has been more than two years since the merger control regime was established; it seems the time is right to look at the performance of CCI in this vital area of competition law. Upon notification of combination regulations, there was great excitement as well as doubts about the rules being laid down by the competition agency of India. There was a great curiosity about CCI especially about its capability to deliver. Till that time, despite the provisions relating to anti-competitive agreements and abuse of dominant position having been enforced, orders of CCI hardly had any impact on market dynamics. The performance of CCI was relatively slow as compared to the performance to some of its neighbors. China enacted and brought into force its Anti-Monopoly law much before India. The Coca-Cola case became a flag-bearer for the development of merger control law in China. Similarly, Competition Commission of Pakistan, commendably, exposed cartels and issued government advisories within 18 months of its establishment
India opted for a mandatory filing regime. As on date, broadly speaking, with minor exceptions, the thresholds, for triggering the filing requirements, are as under:
It becomes apparent that the above thresholds are, perhaps, the highest in the world. Interestingly, even the default merger filing form, Form-I, is also, perhaps, the simplest in the world. After having faced the severe criticisms initially for having a very burdensome filing form and low thresholds, these may appear to be quite stark revelations to many. Starting from June 1, 2011, till the end of June 2013, more than 120 merger cases has been reviewed by the CCI. There have been studies which have indicated that the average time of merger review by CCI has been a little over a fortnight- speedy by any standards especially for a new agency commencing operations in the midst of questions about its effectiveness. So far, nearly, all the merger filings have been in the simple form Form-I. The primary reason for introducing this was that any procedural burden on businesses in filing could have been used as a tool by the opponents of merger control to further postpone the enforcement. The cases filed on Form-II have been extremely minuscule. These were the only cases where some horizontal overlap amongst products and services was admitted by the parties. Prior to these cases, in no case any horizontal overlap between products and services was either admitted or claimed by the CCI during the merger review.
A look at the journey of progression of enforcement of merger control in India shows a very slow movement. The prompt clearances by CCI have been widely appreciated. One possibility may be that all the cases coming before CCI really had no competitive concerns. However, where do we go from here? If we look at the Indian thresholds, nearly the highest in the world, wherein only the big ticket acquisitions, mergers and amalgamations come under CCI scanner, it is very much possible that some transactions can have influence on market dynamics and can be dealt in a detailed manner by CCI. The modification mechanism (called ”remedies” elsewhere) has not yet been tried and tested in full.
However, there is a slow upward progression. Gradually, the CCI is increasing the rigour of review. There have been exceptions where the CCI examined the agreements in detail and directed modification of certain combinations to change some of the conditions considered anti-competitive. Two cases stand out. One is Orchid Chemicals and Pharmaceuticals Ltd.
(Combination Reg. No. C-2012/09/79) and the other is Mylan Inc. (Combination Reg. No. C-2013/04/116)
In its order dated 20.06.2013, in the case of Mylan Inc. (Combination Registration No. C-2013/04/116), CCI has accepted the modifications offered by the parties under regulation 19(2) of the combinations regulations. Similarly, in the case of Orchid Chemicals and Pharmaceuticals, CCI observed ”non compete obligations, if deemed necessary to be incorporated, should be reasonable particularly in respect of (a) the duration over which such restraint is enforceable; and (b) the business activities, geographical areas and person(s) subject to such restraint, so as to ensure that such obligations do not result in an appreciable adverse effect on competition.’’
In these cases, the provisions of Regulation 19(2) of the combination regulations were put into practice. Under these regulations similar to undertakings in EU the parties to the combination can come forward with modifications to the combinations on their own which may be accepted by the CCI.
However, there may be second opinions on some of the actions of CCI. As an example, the notice for acquisition given by GSPC Distribution Networks Limited (”GDNL”) to acquire Gujarat Gas Company Ltd. (GGCL) Combination Registration No.: C2012/11/88) is also a case in point. In this case, an undertaking was taken from GGCL to modify the agreements of GGCL with its customers. Object of this exercise is not known. This kind of action is fascinating and sometimes questionable.
The question which arises is if one party is acquiring another enterprise, whether the future conduct of the combined entity is relevant or the past. If an agreement being ordinarily entered into with its clients comes to the knowledge of CCI during a merger filing, should CCI start examining it in addition to the review of merger filing? Or ideally speaking, should such cases be dealt in a different manner? In merger control, it is the counterfactual (situation where the merger has not happened) which is important for evaluating the impact of merger on competition in the market. If counterfactual does not reveal any in adverse impact on the competitive environment for the product under question, is it alright to get entangled in secondary issues. The question remains as to whether to focus on the issue at hand or let the secondary issues tag along. What the CCI did in the above case was to allow the merger but accepted undertakings to modify the agreements.
The rapid speed of CCI approvals has surely gone down well with the businesses and has helped quell the noise about CCI becoming another government regulator delaying business transactions and raising the cost of business. This has surely helped CCI win over some of its detractors. The percentage of economists working as experts in CCI (approx. 40%) shows that the importance of economic analysis has been well recognised. This compares well with even the most mature antitrust jurisdictions. One thing can certainly be said and that is the CCI is not shying away from learning from experience. As detailed earlier, two significant amendments have taken place in merger regulations till now. Both these amendments were aimed at ensuring a more workable and practical merger control review in India. On the whole, it can be said that CCI has, generally, begun on a good start on merger review. Having travelled safely so far, we hope that the functioning of CCI will only improve in future.
Business Strategies for Competition
When we visit a retail store like Easy day or More to buy goods of our daily household needs, how many of us as ordinary customers can understand why a floor cleaner is tied up with a toilet cleaner or why for buying three soaps we are getting fourth free or at reduced price or why with branded wheat flour produced by leading brands private labelled flour of More or Easy day is also displayed at the same place or why some products of a company are bundled together?
All of these are examples of business strategies of companies producing fast
moving commercial goods for selling their products to retail customers like us. To increase sales of their products companies have to adopt different strategies not only to counter competitors but also for promotional strategies to attract and retain customers. Not only companies have to make strategies but they have to revise them from time to time. Business environment has always been highly unpredictable in view of the economic policies, regulation of the business of the country where business is carried on and also on the overall pace of economic growth worldwide.
Any reform which is proposed by Government has both positive and negative effects. The Competition Act, 2002 was enforced in India in order to improve healthy competition in Indian markets to better serve public interest. The Act describes anti-competitive agreements amongst businesses, abuse of dominant position by business and combination of businesses. The Act also prescribes stringent penalties from non-contravention of the orders of the Competition Commission to those for actual commission of the offences committed by the businesses.
Although the aim of the Act is to achieve fair competition to provide ultimate benefit to the consumers but the burden of heavy penalties paid by businesses also ultimately falls on consumers. It is necessary for a business to strategies its business policies in such a manner that it can protect itself not only from imposition of such heavy penalties but also run its business profitably. For example, there are two categories of noncompetitive agreements under the Act, namely, agreements which are likely to have adverse effect on competition and those which are presumed to anti competitive.
In the first category, tie in arrangement, exclusive supply agreements, exclusive distribution agreements, refusal to deal and resale price maintenance are included. Whereas in second category, agreements relating to price fixing, output restricting, market allocation and bid rigging are included. There is also an exemption in favour of joint ventures on the condition of increased efficiencies. Therefore, it becomes necessary for a business to strategies not only to understand competition but also to have competitive advantage in effectively positioning them in the market.
All the strategies of the business whether it is cost leadership, actual or perceived differentiation, price strategy, customer retention or reliance on its USP, should be directed towards getting competitive advantage lawfully. Besides marketing strategies, business needs to be aware of consumer rights and available remedies for consumers and carefully draft its contracts to avoid falling under the unfair contract terms and restrictive trade practices.
Businesses have co-operation agreements like research and development agreements, joint production, specialisation and sub-contracting agreements, agreements for joint purchases, joint marketing, distribution and sales agreements, agreements for intellectual property rights sharing, standardisation agreements and information exchange agreements. Such agreements can always cross the line of pro-competitiveness. Businesses need to find ways through such types of agreements to meet their ultimate goals of making profits.
It may be prudent for the law enforcing agencies to keep a tab on such joint ventures. Are these joint ventures going to harm or benefit the society at large? It is necessary for businesses to see that their actions are not construed as anti-competitive by the law enforcers while forming such cooperation. The joint venture would definitely give the combined businesses a higher bargaining power and place them higher against the other players in the related industry. However, it should also be their moral duty to ensure that this joint venture does not force a customer with little or no choice and defeat the tenet on the basis of which the competition law is based.
Regional Cooperation among Competition Agencies
One day in the summer of 2004, when I was strolling the aisles of the Library at the Lahore University of Management Sciences (LUMS) in Lahore, where I came across a copy of ReguLetter, a quarterly newsletter of CUTS. I browsed through ReguLetter and one thing that stayed with me was the underlying motto (philosophy) of CUTS, i.e., “it is better to light a candle than to curse the darkness.”
The word “darkness has long been a metaphor for ignorance or evil.” Collusion or cauterization has been declared as the “supreme evil of antitrust.” Whereas in the case of cross border mergers, ignorance is perpetrated through asymmetric information supplied by merger parties to various competition agencies to get positive review. Trans-border darkness necessitates cooperation among competition agencies where cooperation is the “light”, and competition agency is the “candle.” Thus, the philosophy of CUTS has within it the idea of cooperation among competition agencies. In the following few paragraphs let us examine the rationale for cooperation both in the case of cross-border cartels and mergers.
With the proliferation of regional trade agreements, and globalisation in general, public barriers to trade are being dismantled and the national markets are being transformed into a global market. Activities that transcend national and regional boundaries are certainly beyond the ability of any single state to effectively regulate or police.
(A) state cannot exercise effective authority alone when the problems it is trying to solve or the actors it wishes to regulate are not centred within the state’s borders. To the extent that these issues are state-based, such a location usually is only temporary and easily shifted. Thus, the decrease in state-centred regulatory power is a result that flows primarily from the nature of global problems, the global reach of the technologies involved, and the relative mobility and freedom of the transnational actors to which the law would apply.
This global and regional restructuring has thus undermined the reach of national competition agencies to effectively monitor and arrest transnational anti-competitive practices.
Advances in technology, free flow of capital and liberalisation of trade allow transnational corporations (TNCs) to make decisions concerning production, finance, investment, among others, independent of direct state control. TNCs view the entire globe as a market. With a centralised mode of management, TNCs strive for flexibility and take “advantage of favourable conditions natural, financial, political and legal prevailing in each host country.” Globalisation of business results in cross-border acquisitions and mergers as well as expansion of the scope of cartel activities from national to global level.
Various multilateral-fora have is sued-recommendations and guidelines for the competition authorities to cooperate on anti-competitive practices which transcend national borders. For example, the Organisation for Economic Cooperation and Development (OECD) issued recommendations in 1995 and more recently issued best practices and revised recommendation in 2005 urging member states to cooperate when enforcing laws prohibiting hard core cartels when they affect other countries’ important interests. Similarly, the International Competition Network (ICN) in May 2007 issued a report titled “Cooperation between Competition Agencies in Cartel Investigations.” The report gave the following reasons for promoting co-operation between competition agencies in cartel-investigations:
1. Possibility that an agency may not be aware of a cartel affecting its jurisdiction, while another agency has knowledge of it.
2. For international cartels, coordination of investigation may be necessary in order to avoid the risk of destruction of evidence if one agency moves before other agencies, on whose territory evidence may be located.
3. More general discussions and comparing of notes between investigators of the same cartel in different agencies may facilitate the smooth progression of the case, and better rebutting of the arguments of the parties.
4. Information on turnover relevant for the calculation of sanctions may be exchanged.
5. Jurisdictions which can sanction individuals, extradition proceedings may also play a part in cooperation.
One prime example of cooperation in cross-border cartel case is The Marine Hoses case. The producers of Marine Hoses successfully operated an international cartel from 1986 to 2007. The companies used all sorts of covert methods for fixing price, market sharing, customer allocation, restriction of supply and bid rigging. One company simultaneously applied for leniency in Japan, the US, and the EU, “triggering coordinated actions among the investigating authorities.”
US, UK, EU, Australian and Japanese competition authorities all brought proceedings in the cartel case. The Australian Competition and Consumer Commission (ACCC) attributes the successful outcome of its proceedings to the assistance of both the [US] DOJ and [UK’s] OFT, who provided documents that were significantly important to Australia’s case. The information required was obtained informally in the case of the US-based information from the DOJ but formally for the UK-based information from the OFT under the relevant sections of the UK Enterprise Act. The ACCC and OFT had also been in close cooperation informally before the formal equest was made.
Had there been no coordination among competition agencies, Australia would not have been successful in pleading its case against the cartel. Coordination and cooperation can be effective both through formal and informal channels.
Similarly, in the case of cross-border mergers, OECD and ICN have issued recommendation and best practices for coordination and Cooperation. OECD issued Recommendations on Merger Review in 2005. Recommendations B, entitled “Coordination and Cooperation” Require Member states:
To cooperate and to coordinate their reviews of transnational mergers in appropriate cases. When applying their merger Laws, they should aim at the resolution of domestic Competitive concerns arising from the particular merger under review and should endeavour to avoid inconsistencies with remedies sought in other reviewing jurisdictions.
Likewise, ICN issued Guiding Principles for Merger Notification and Review in September 2002. Principle on coordination require “Jurisdictions reviewing the same transaction should engage in such coordination as would, without compromising enforcement of domestic laws, enhance the efficiency and effectiveness of the review process and reduce transaction costs.” Later ICN Recommended Practices for Merger Notification Procedures also has a section on Inter-agency Coordination.
In a recent USD11.85bn cross-border acquisition of Pfizer Nutrition Business of Pfizer Inc. by Nestlé S.A., the Competition Commission of Pakistan (CCP) and the ACCC coordinated their merger review. It was revealed during the coordination that the parties have given different rationale to the two agencies for the transaction. In Pakistan, it was the submitted that the reason the acquirer is giving such a high price is because it wants to keep the target’s brand name and brand following; whereas in Australia, there the acquirer does not want to the keep the target’s brand and brand following. This asymmetric rationale is clear from the undertakings which Nestlé gave to CCP and ACCC. To CCP, the Undertaking of Nestlé is to the effect that “Pfizer (Wyeth) products will continue to be available for a period of three years from the date of the closing of the transaction in Pakistan.” Whereas the Undertaking given by Nestlé to ACCC includes an obligation to divest Pfizer Nutrition business through exclusive license to a prospective purchaser to be approved by the ACCC. The cooperation between CCP and ACCC informed them of the asymmetric information supplied by the merging parties, and helped both agencies in designing the remedies.
The global scope of business and the limitation of domestic laws to arrest actions and decisions taken beyond the borders of a nation-state has made it imperative that the competition agencies cooperate with each other. Given the global reach of transnational business, competition agencies should endeavour to cooperate with all competition agencies around the globe. However, competition agencies in a specific region, formed either through naturally contiguous national borders or through a membership of a specific trade agreement, should develop a network of competition agencies of that region with a view to share experiences on a regular basis, through annual workshops, and to act as a forum to address competition issues specific to that region.
Competition Law & Business in India
Companies are juridical persons unlike natural persons. But companies on their own cannot function unless natural persons run them. Thus natural persons are the real movers in respect of functioning of companies. Natural persons are fiercely competitive and do not like to follow others unless they are forced to do so. Therefore, persons who run companies may normally not like to follow other companies unless they are forced to do so. The aim of this write-up is not to make it a complex read but to enable readers to have an overview of the law and how it poses some opportunities and challenges to businesses in India. I am aware that micro-economics is one of the core concepts behind this law, yet not being a micro-economist I would attempt a plain and simple approach to make readers understand the basic practical issues which more often than not cause difficulties for businesses in negotiating this law.
Coming back to the concept of “unless forced to follow” companies may not always follow market leaders. In case the following the market leader is free and fair there may not be any competition law concerns. Once it is established that the following a market leader is arising out of a direct or indirect use of force by the market leader then such an exercise of market power may come within the scope and scrutiny of competition law.
Businesses run on agreements. In competition law every understanding between companies are considered “agreement” between companies. The understanding can either be written or can also be common intention amongst companies without any proof of agreement as is conceived by businesses in India. Business agreements can be between companies in same level of businesses or it can be at different stages or levels of production chain in different markets, in respect of production, distribution, supply, storage, sale or price of or trade in goods or provision of services.
Thus, we may normally have two kinds of business agreements (1) horizontal; and (2) vertical. Horizontal agreements may not always be considered more serious than vertical. The illustration of Joint Venture and merger & acquisitions clearly demonstrate that horizontal agreements are pro-competitive in spite of the fact they, more often than not, are entered into between competitors. The only area of concern in competition law is that of agreements which try to fore close markets for competition by collusive actions of competitors.
Dominance, if gained by efficient business methods e.g., investments in R & D, Intellectual Property Rights and captive usage of input raw materials including power or mines etc., is not frowned upon under competition law unless proved otherwise by facts. However, once the position of strength has been achieved and the company wishes to intentionally misuse such market power to the detriment of any other company either in the same level or different levels of business then such action may come within the mischief of “abuse of dominance” and shall be declared void. We have seen in our daily lives that man by nature is anti-competitive e.g., one often sees the misdemeanor of common man while boarding a public bus or a local train or even an elevator in a public building. These misdemeanors are reflective of man’s attitude towards its competitors and such traits are inherent. We carry this mental baggage the misdemeanor – in our professional and business lives and blame the law or at times the competitors. Changing such a trait may not be possible. However, the Parliament has given all of us an opportunity to correct some of the tricks of doing business in India through the legislative process of Competition Act.
Besides natural and inherent traits of disregarding free and fair competition, common man including expert authorities face a challenge to understand as to how businesses function in India. It is unfair to believe that small, medium and large business houses commence business without carrying out due diligence. The due diligence may be ad hoc, amateurish or highly professional, depending on the need and capacity of the party for the same, yet there is always a due diligence. Ultimately it is an investment and at times a sunk cost. We have a task cut out to make our decision-makers understand as to how businesses commence in India.
At the same time we need to make businesses understand the importance of taking into consideration the substantive issues of competition law parameters in due diligence along with other business and financial laws of India. If the authorities and business associations take a small but a real step forward towards proper public awareness of this law, in my view, a great service would have been done to the country as a whole. We know that competition generates economic surpluses on both sides i.e., producers and end consumers and such surpluses would result in innovation on the part of the producers and savings on the part of the consumers.
The overall impact enhances economic growth for the nation. It may appear a tag line of a consumer activist but in reality it is not since none can refute time-tested principles. Indians have historically witnessed social and political instabilities and turmoil and that psyche perhaps has resulted in evolution of insecurity amongst Indians and may have played an important role in adopting an overall culture of grabbing economic benefits ahead of others (competitors) even if the same are to be obtained by unethical and unlawful methods. It is easier said than remedy the historical ills from the society.
Public Sector Undertakings (PSUs) are within the scope and ambit of the law. These companies over the years have been enjoying the patronage of the Government of India. Whenever any investigation had been ordered by the CCI in the earlier years of enforcement, the PSUs have taken the defence of “single economic entity” of Government of India. This argument may not be tenable in competition law. The PSUs compete with one another in the market and still believe that they are “single economic entities” with Government of India.
Common Chief Managing Director of SAIL and NMDC is a classic example of continued vertical integration between independent buyer and supplier which is prima facie a hardcore restraint in competition law against private companies who fail to compete fairly with SAIL in the same relevant market. Setting up a price band for procurement of domestic LPG 14.2KG cylinder in the tender document by BPCL with a condition that if any bidder bids below the lower price band the bid shall be rejected makes mockery of competition law. All bidders bid at the lower price band which is L1 as per CVC guidelines and all get a portion of total demand at the same price.
The CCI considers such matching of price as bid rigging and the BPCL considers the same an economic justification for its business. LPG manufacturers suffer at the interpretation. Joint purchase by competing three PSUs with nearly 95 percent combined market share amongst them is blatant anticompetitive conduct but such a business practice by PSUs goes unchallenged and unquestioned in India thereby setting a bad precedent. Business houses need not worry much on the powers of ex parte interim orders being passed against them as the CCI hardly exercises that power primarily due to a defect in the CCI (General) Regulations, 2009.
Competition Law is a new concept and aims at removing barriers to do business efficiently. We have barriers all around some are natural and others are artificial. The natural barriers can be removed by regulatory legal mechanisms but the artificial barriers can possibly be removed by enforcing competition law. Artificial barriers are man-made thus becomes a real challenge for the authorities empowered to get rid of them.
Competition Law and Nepali Businesses
Competition among businesses is essential for the functioning of a free market economy, which, in turn, is ensured by the effective implementation of competition law. Competition law regulates those practices and transactions of businesses that create or abuse market power or obstruct the free interplay of market forces. As such competition law functions as a form of market discipline. Sometimes due to its perceived regulatory nature, businesses do not favour strict competition law. For instance, Nepali businesses forced many changes in the Competition Bill, particularly in its provisions on punishment which in effect weakened the Competition Promotion and Market Protection Act 2007 (hereinafter “the Competition Act” or “the Act”). In addition, even after the promulgation of the Act, the state has shown very little interest in the enforcement of the Act. Not a single case has been filed in the last six years after the promulgation of the Act.
Reasons for Anti-competitive Practices by Nepali Businesses It is unfortunate that the businesses chose to weaken competition law, which was then conceived as a vital tool in the process of liberalising Nepali economy. Greed and inefficiency of businesses are perhaps natural explanations to the businesses scepticism towards competition law. In addition, there are a few other reasons that explain the trend. First, Nepali economy has traditionally relied on anti-competitive conducts and as such competition is a new phenomenon. Until mid-1990s, public 1 sector monopolies were promoted by the state and the very few private businesses that were in operation then also benefited from the vast barriers to entry into Nepali market. That is, anti competitive conducts became customary and competition an aberration. Transport (goods and passenger alike) syndicate in Nepal is perhaps the best explanation of this phenomenon. Transport businesses still try to vigorously defend transport cartels, price fixing, barriers to entry and other anti competitive conducts even after the Competition Act has defined all such activities as crime. Transport businesses try to provide vain justification for anti competitive conducts by arguing that such conducts help to minimise accident, ensure consumers’ comfort and avoid “unnecessary competition”. In addition, politicisation among labour forces and some entrepreneurs have meant that the political parties provide protection to the businesses engaged in anti-competitive conducts.
Second, many businesses, particularly small and new entrants, fail to understand the importance of competition law for their own interest and engage with the existing businesses to continue various anti-competitive conducts. Almost all producers and distributors belong to one or more “professional/ business” organisation; many of those organisations, in turn, take pride in being able to fix prices and other conditions of entry into market. As the prospect of absence of competition over prices is naturally very tempting for many businesses, new and small businesses that are likely to benefit the most from competition law are neither willing nor able to use competition law. Many new or small businesses also acquiesce to the anti-competitive conducts of bigger businesses. Surprisingly, up until this year new businesses had to get permission from the Federation of Nepalese Chambers of Commerce and Industries (FNCCI) in order to start their business.
Aim of Competition Law
Increasing of material welfare of society (economic efficiency and consumer efficiency) through inter-business rivalry represents the economic goal of competition law. Similarly, the role of competition law in the protection of consumers and their rights, freedom of trade, and efficient allocation of resources represent the socio-political goals. Notably, efficient allocation of resources by allowing equal opportunity of access to market or freedom to trade for businesses irrespective of their size or influence speak about the interests of the businesses themselves. Additionally, competition law not only provides safeguards regarding the entry into a market for new entrants but also ensures that efficient businesses benefit in the market by protecting them and preventing free riding by inefficient businesses.
Potential Impact on Businesses
With the opening up of the economy for foreign investment and enterprises that can exert even more market power than the local businesses, the existing businesses may find themselves at the wrong end of anti-competitive conducts. This tendency is already apparent in case of trademark and franchise licensing whereby, among twelve random franchise licenses analysed by this author in 2009, seven were found to 2 have one or more provisions that were anti-competitive . Nepali businesses agreed to exclusive grant back conditions, tying, resale price maintenance and post expiration royalty terms in their franchise agreements with foreign licensees thus losing their freedom to make their own decision and benefit from being efficient. In the same vein, the adverse impact of anti- competitive conducts on small businesses can be hardly overstated. Also, anti-competitive conducts can affect the competitiveness of Nepali goods in foreign markets.
As also explained earlier, the scepticism towards competition law stems from the fact that there is a lack of understanding and knowledge regarding competition law. Businesses have failed to understand competition law as a market discipline with objectives that are not necessarily alien to their interests.
It follows, therefore, that the businesses should not view competition only as one of the regulating tools of the state but also as a measure of an incentive to be efficient and competent in the market. Further, the state should also remedy its failure to project competition law as a tool to promote business environment. This, in turn, can be done by extensive campaigning and training on competition issues. Consumer awareness regarding the perils of anti competitive conducts can also assist this process. The consumer movement can bring to light exploitative anti-competitive conducts that affect consumers and add bottom up pressure on businesses.
Bad Sectors; Bad Companies or Bad People: Why do Firms Engage in Anti-Competitive Behaviour?
Behavioural economics has made significant inroads into the understanding of consumer behaviour in the last few decades. By hook or by crook, it has gradually made its way into the analytical approaches used by a number of competition authorities in their assessment of competition policy. While still in its infancy it is also true to say that a more behavioural approach to the approaches used by competition authorities themselves has emerged in the last few years. I made my own small contribution to this effort in Vienna in 2010 (http://www.regulation .org.uk/philevansspeech.pdf) and it has been notable that many of the translatable ideas around issues like confirmation bias within regulators have been brought increasingly into the regulatory mainstream.
However, one area of study that has not been fully explored, but is most worthy of it is the reason why executives engage in anti-competitive behaviour. There is, in essence, a good old fashioned debate about the balance between nature and nurture in the competition community about why firms engage in anti-competitive behaviour. Both approaches have their suite of evidence and ‘war stories’.
To simplify the approaches the nature brigades take a generally structuralist approach; there are certain sectors which, due to structural characteristics, are prone to buy the locus for anti-competitive behavior. Such proponents will point to the many cases in particular sectors in heavy construction, government procurement and the like as evidence that there are ‘bad’ sectors; ‘bad’ in the sense that they are structured in such a way that they are prone to the sort of activities frowned upon by competition regulators.
In contrast the nurture brigade would argue that there are individuals who drive anti-competitive behaviour, particularly cartel behaviour. I well remember a famous law professor giving a talk on how a particular individual had moved from company to company creating cartels in every company he had managed. We are also, I am confident to argue, aware of the marvellous recordings of the FBI/DoJ in cartel cases where participants happily discuss with each other the fact that customers were their enemies and competitors their friends.
It is, of course, trite to argue that both approaches have their pros and cons and That we need to take a third path between them. The exact nature of that path is however, of interest as it may help both in the detection of potential anticompetitive behaviour and in potentially deterring it.
One of the defining features of the culture of business reporting and assessment in the last few decades, strongest in the USA, is the near-cult of personality that develops around particular business leaders. It was already fairly extreme during the times of Jack Walsh and GE and probably reached its apogee in the person of Steve Jobs of Apple, who even managed to have a Hollywood movie made about him.
The importance of visionary business leaders in defining how a company grows and prospers appears to be well accepted. However, how that visionary leadership shapes how the company behaves and how that company engages with its consumers and competitors is less well accepted.
In an age with business figures apparently so dominant in their particular companies as Jack Welch, Bill Gates, Steve Jobs, Michael O’Leary, Jeff Bezos and Stelios Haji-Iannou it is easy to conclude that we are in an age where personality matters more than in the past. However, the presence of more aged figures as Rockefeller, Carnegie, Tata, JP Morgan, Ford et al remind us that having a single dominant figure in a company is not unusual.
History should also remind us that the relationship between such dominant figures and competition authorities is not always a smooth one. The early years of US antitrust attests to the importance of the ‘trusts’ and their owners for both the birth of US antitrust laws and its early years of enforcement.
Two areas of analysis may help bridge the gap between the structural and nurture models of anticompetitive behaviour. These focus on the culture within individual companies and the culture dominant within an industry.
Most cartels appear to be run on a day-to-day basis by relatively junior members of staff. It is rare for a board level member of staff to be directly involved in cartel formation or maintenance. Indeed one of the usual defences of cartelists is that they were not aware of the behavior until the competition authority had told them all about it. In such cases it is always worth looking at the incentive structures in firms, combined with the general direction given by senior executives. If, for example, one has an incentive structure based around maintaining margins and market share and This is combined with a board level indication that industry stability is important and that friendly relations with competitors is a positive aim, then it is Not too much of a stretch to argue that the conditions are likely to be conducive to cartel formation.
Another factor worth looking at quite closely is the culture prevalent in an industry. It is certainly the case that industries, like any community of individuals, develop a shared understanding of what they do and how they do it. Each industry has its own distinct cultural practices and accepted explanations for behaviours. For example, in many book publishing industries there is an acceptance of resale price maintenance and the suppression of price competition. If you chart the history of the book publishing industry you will see from its very earliest days the presence of restrictions on competition. Indeed the earliest copyright laws and the evolution of the publishing guilds underline the importance of restricted practices in the sector. Of course book publishing, like medicine and newspaper publishing have been able to wrap their restrictions in the garb of the public interest, with varying degrees of justification. But what is clear is that there is a strong strand in the culture of the industry that is comfortable with competition restrictions and is able to justify them in the interests of others.
When looking at instances of anti-competitive behaviour it is easy and rather trite to say that everyone has to be treated on a case by case basis. Every young competition authority also knows that it is more likely to turn over a few rocks in a few certain industries and find anti-competitive behavior than in others. The problem comes in repetition of offences either in firms or sectors. How do we explain such behaviour? And how do we explain pre-existing patterns of behaviour surviving significant technological upheaval? The importance of individuals at the top of companies is significant. Attitudes expressed at the top of a company; be it a dismissive attitude to customers to a welcoming attitude towards competitors, or a desire to see walled gardens erected around the firms’ dominant products all have an impact on how staff lower down the company behave.
Similarly incentive schemes that reward certain behaviours against others that help foster collusion with competitors are important. However, factors that are not as often focused on, I would argue, are perhaps just as important as the structural or individual ones we often associate with anti-competitive behaviour. These focus on the culture dominant within a firm and within an industry. Industry and firm ‘norms’ are incredibly important in allowing individuals who engage in anti-competitive behaviour to both explain and justify their behaviour. They place an explanatory system around the person involved, allowing them to internalize the poor behaviour and rationalise it as a good thing to do even when they know it to be illegal and against the interests of the wider society. While structure and executive promptings will remain core to uncovering likely anti-competitive behaviour, softer measures around culture will help dismantle the network of behaviours that deliver the harm so often seen by anti-competitive behaviour.
Portraying Implications of the Competition Law on Business in India
The introduction of Competition Law in India and recent penalties imposed by the Competition Commission of India (CCI) has sparked off new anxiety in the business community in India. This will certainly transform some of the practices being observed by business houses in India and those who would like to do business with Indian firms. Since the notification of provisions of the Competition Act, the CCI has passed final orders in more than 273 cases under anti-competitive agreements such as cartels, bid rigging, and cases related to abuse of dominance and more than 134 cases under combinations. These orders cover sectors as diverse as infrastructure, finance, entertainment, IT, telecom, civil aviation, energy, insurance, travel, automobile manufacturing, real estate and pharmaceuticals. Some cases where penalty has been imposed by CCI are:
– A penalty of Rs. 6300 crores on 11 cement firms for indulging in cartelisation
– A penalty of Rs. 52 crores on BCCI for abusing its dominant position
– A penalty of Rs. 6.18 crores on 11 shoe manufacturing firms for indulging in collusive and restrictive bidding
– A penalty of Rs. 55 crores on National Stock Exchange for abusing the
– A penalty of Rs. 630 crores on DLF for abusing the dominant position
The above list is only a small fraction of the cases decided where a penalty was imposed or an adverse order was passed. It is therefore necessary for businesses to have a brief look at the main provisions of competition law and understanding its implications for doing business in Indian market.
Highlights of Competition Act-2002 (CA-02) CA-02, based on the international practices and market reforms, regulates
the following areas:
1. Anti-competitive Agreements: Under section 3 of the Act, an agreement is prohibited if it causes or is likely to cause appreciable adverse effect on competition. This includes price fixing, market or production restrictions, bid rigging or collusive bidding, tie-in arrangements, exclusive supply or distribution agreements etc.
2. Abuse of Market Dominance: Section 4 of the Act states that no enterprise or group shall abuse its dominant position. Business with significant market position in India will therefore need to consider whether they may be found dominant and whether their business practices may be considered as abusive, if they are found dominant.
3. Combination: Under section 5 & 6, if merger and acquisitions transactions meet certain specified turnover or asset thresholds, such transactions should be notified to the CCI for approval. There are many permutation and combinations based on asset value and turnover of the acquirer or the target being acquired, so businesses have to be careful in understanding these thresholds. The CCI has to conduct an initial assessment and deliver a prima facie opinion within thirty days, as to whether the combination will, or is likely to, have an ‘appreciable adverse effect’ on competition in India
A Hypothetical Case Study
The following case study speculates about the hypothetical, yet common, commercial practices and what are the challenges under the various provisions of CA-02 that can affect the business operations.
There are many national and international car manufacturing companies in India and a number of suppliers of components that supply parts to these car manufacturers. Some of them are both manufacturers as well as component suppliers to others. Their market share is as under:
|Market Share in |
|Market Share in|
|Maru||42%||84%||Satish Agrawal||RS. 55 bn|
|Hinda||31%||Meena Chopra||RS. 40 bn|
|Tara||14%||Bindu Dubey||RS. 18 bn|
|Mahi||5%||16%||Faizal Ahmed||RS. 7 bn|
While Maru is the market leader, Hinda is close to them. Their country heads keep meeting each other during conferences and other trade meetings. In one such Auto Expo in Bangalore, Satish and Meena discussed about the gloom in the car market, current taxation on the industry affecting their input costs, and reducing margins due to adverse economic conditions. Now, the question is: Was it unethical or alright for them to discuss current economic conditions affecting the auto industry?
There is nothing unethical in discussing the current economic conditions affecting their costs or sales. The members at trade expo are doing nothing wrong in discussing such issues and share views or opinions on such platforms and they are free to express their views on such adverse conditions. Nevertheless, it is generally not advisable to talk about the commercially Sensitive information as it is somewhat not desirable. Such behaviour may be considered as ‘adverse’ in case of investigation under Indian Competition Act as it may probably be treated as sharing the information restricting future competitive behaviour in India.
After one month of their meeting, Satish had a meeting with Meena and wished if both the companies could reduce the production of cars by just 10%, there would be a perceived shortage for cars in the market and then they can fix a higher price of their cars. Meena did not respond to this oral suggestion. However, in next three months, both Maru and Hinda slowly reduced their production leading to increase in market price of their products. Now, the question is: Was their conduct amounts to collusive behaviour?
Cartelisation means a group of industry participants coming together to fix pricing of products and services. This can work against the interest of consumers. The two companies allegedly decreased production in a bid to inflate prices. Competition Commission of India ensures there is no monopoly in a sector. Domination by one or two large entities in the market leads to unfair pricing of products and services. The action by both the companies can be regarded as an attempt to fix the prices by reducing the production in a pre-determined manner. Under Price fixing cartels competitors illegally agree the price for, or discounts on, goods or services like for example what we see in this hypothetical case. In case of cartel, the Competition Act empowers the Commission to impose upon such seller, distributor, trader or service provider included in the cartel, a penalty equivalent to three times of the amount of the profit made out of such agreements by the cartel or 10% of the average of the turnover of the cartel for the last preceding three financial years, whichever is higher.
It does not matter if Meena did not respond to Satish’s suggestions. An agreement may be formal or informal or can be implied from conduct. If other evidence of an arrangement, the aim or effect of which is to restrict competition, can be established, one can empirically test the existence of the cartel in the auto industry using the structural and behavioral methodologies. The director general of competition commission has enough power to conduct dawn raids to find out the evidences though it is not clear how such a surprise inspection might be conducted in practice.
A customer of a Maru ‘premium’ car threatens to report Maru to the CCI for abusing its dominant position by imposing highly arbitrary, unfair and unreasonable conditions on the buyers through its sales and service agreements, such as , offering only its own manufactured parts to be used in the cars which are three to four times costlier than those available in the market. Now, the question is: Is Maru dominant in a relevant market?
A relevant market is delineated on the basis of a distinct product or service market and a distinct geographic market. Dominance concerns typically arise when the market share of a company is more than 40%. Maru has overall 42% share in the market while only Maru and Mahi manufacture ‘premium’ cars which can be considered as relevant market.
Maru’s position of dominance in the relevant market cannot be ignored as its advantages of over competitors in size and resources, particularly in ‘premium’ car sector, and it can be concluded that Maru operates independently of competitive forces prevailing in the relevant market (premium cars) or to affect its competitors or consumers or the relevant market in its favour. Further, Maru has an early mover’s advantage and occupies a leadership position in premium car sector.
But, merely having a dominant position is not unlawful only its abuse. The Competition Act sets out in section 4(2) a list of illustrative activities that may constitute an abuse of dominance. It includes “there shall be an abuse of dominant position if an enterprise or a group directly or indirectly, imposes unfair or discriminatory (i) condition in purchase or sale of goods or services; or (ii) price in purchase or sale (including predatory price) of goods and services”.
In the instance case, Maru has resorted to malpractice in the sale and service agreement by restricting sale of spares only through them and its acts of abuse of dominance position can be clearly seen in this case. The abuse is alleged to be committed by imposing unfair conditions on the buyer through agreement, leaving no option to the buyer to object to lopsided provisions of the agreement.
Maru proposes to buy 100% of another small company, Mahi. Now, the question is: Is it required to give notice to CCI? Under Section 5 of Indian Competition Act, The acquisition of one or more enterprises by one or more persons or merger or amalgamation of enterprises shall be a combination if both the parties jointly have in India the assets of the value of more than rupees one thousand crores (Rs. 10 billion) or turnover more than Rs. four thousand five crores (Rs.45 billion). They shall give notice to the commission on Form I. In this case, since the turnover will be above Rs. 45billion, they should file the notice on form I to the CCI.
According to the Act, 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. So, in assessing the competitive impact of this acquisition, it will be necessary to consider the effect of the transaction in the relevant market. In this particular case, only Maru and Mahi are manufacturers of premium cars in India and the proposed acquisition can eliminate the competition from the market. So, the absence of competition or possible abuse of monopoly at each level of market should be considered before deciding on the notice.
The facts narrated in the above case studies are extremely simplified and for illustrative purposes. The comments or conclusion mentioned in each case are intended to focus on the issues for further investigation rather than to give a judgement. Competition law is an economic law, so any analysis should be based on economic evidence and legal arguments.
In view of the current active role being played by CCI, It is necessary for the businesses in India to build their internal capacity to understand some basic ground rules in obvious risk areas. It will be good for businesses to develop and implement competition compliance initiatives and invest in preventive measure to avoid penalties.
What are the Benefits of Competition Reforms for Business?
Benefits of Competition Policy for Business, Development and Corporate Governance
Competition is a dynamic concept with no unique definition, except what is understood in common parlance in the context of market and trade. In a manner of speaking, competition can be likened to what is anti-thetical to monopoly. While monopoly is pernicious to consumer interest and free and fair trade, competition affords wide-ranging benefits to consumers. Adam Smith (1776) captured this altruism in his famous book “Wealth of Nations”, when he observed:
“By a perpetual monopoly, all the other subjects of the State are taxed very absurdly in two different ways, first by the high price of goods,which, in the case of a free trade, could be bought at much cheaper rates and secondly, by their total exclusion from a branch of business, which it might be both convenient and profitable for many of them to carry on”.
There is and can be no perfect competition in the real world. What one notices in the market is a set of imperfectly competitive markets, where firms engage in strategic behaviour to maximise their profits and to restrict the opportunities available to their competitors.
This kind of behaviour results in distortion of competition, exploitation of consumers and imposition of various economic and social costs on society, adversely affecting its welfare in general.
What is needed is appropriate behaviour on the part of manufacturers/suppliers and service renderers, a significant proportion of whom constitute corporate entities not only in terms of complying with the applicable laws and regulations and, in particular, complying with corporate laws and competition law but also in terms of sub-serving the large societal interest, namely, public and consumer interest.
This paper addresses the relevance of competition for business, development and corporate governance.
Competition policy or competition regime seeks to maintain and encourage the competitive process with a view to promoting economic efficiency and consumer welfare. Its objective is to spur firms and individual players in the market to compete with each other to secure the patronage of customers in terms of, inter alia, competitive prices, good quality and greater choice for them.
The most common objectives of competition policy applied with a varying emphasis in different countries are economic efficiency, consumer welfare and public interest. In his analysis of new concepts for competition policy and economic development, Singh (2002) has suggested that standard objectives of competition regime should be reconsidered to bring in notions, such as, inter alia, an optimal degree of competition as opposed to maximum competition, an optimal combination of competition and cooperation between firms, dynamic rather than static efficiency and consistency between Competition and industrial policies. For corporate governance, therefore, inhering competition principles in policy-making would appear sine qua non in the interests of consumers and economic development.
Corporate Governance and Consumer Interest
All corporate activities ultimately have at their consummating point, the consumer. Consumer welfare and interest aim at the charter of economic liberty designed for preserving free and unaffected competition as the rule of corporate governance. The premises on which the charter rests are unrestrained interaction of competitive forces, maximum material progress through rational allocation of economic resources, availability of goods and services of acceptable and good quality at reasonable prices and finally a just and fair deal to the consumers. Corporate governance has to factor these, if it has to live up to its responsibilities by the country and its subjects. The thrust of this paper is that corporate governance needs to be moulded in such a way that the markets are driven by competition and that consumer interests are protected.
Competition Correlates with Economic Development
There is empirical evidence of the benefits of competition regime vis-a-vis economic development, greater efficiency in international trade and consumer welfare listed in a report (UNCTAD, 1997). The evidence, albeit referring to experiences of developed countries, indicates substantial benefits from the strengthening of the application of competition policy principles in terms of “greater production, allocation and dynamic efficiency, welfare and growth.” It further concludes that the consumer and producer welfare and economic growth and competitiveness in international trade have all flowed out of competition policies, deregulation and surveillance over Restrictive Business and Trade Practices.
Noting that competition rewards good performance, encourages entrepreneurial activity, catalyses entry of new firms, promotes greater efficiency on the part of enterprises, reduces cost of production, improves competitiveness of enterprises and sanctions poor performance by producers, the empirical evidence in the report suggests that competition ensures product quality, cheaper prices and passing on of cost savings to consumers.
The report also observes that competition promotes two types of efficiencies, namely, static efficiency (optimum utilisation of existing resources at least cost) and dynamic efficiency (optimal introduction of new products, more efficient production processes and superior organisational structures over time). Analysing the empirical evidence, the UNCTAD report has the following to say:
“In the Netherlands, it has been calculated that the average annual consumer loss arising from collusive practices or restrictive regulations in several service sectors amounts to 4,330-5,430 million guilders (around US$2.1-2.7bn) (Hendrik P. van Dalen, 1995). Data relating to the United States show that a bid rigging conspiracy for the sale of frozen seafood which was eventually prosecuted had an average mark-up over the competitive price over a one year period of 23 percent (Luke M. Froeb et al., 1993) and the breakdown of price-fixing conspiracies in some industries has led to steep declines in manufacturing costs (Scherer and David Ross, 1990). It is true that cartels may sometimes facilitate adjustment, but vigorous competition may sometime be as or more effective in forcing rationalisation of industries, particularly in larger markets (Scherer and David Ross, 1990). An examination of some exempted rationalisation cartels in Germany (several different types of cartels are allowed under the German competition law, subject to certain conditions) found that they had promoted the viability of the producers in the industries concerned, but there was little evidence that they had contributed to productivity and efficiency improvements, while they had resulted in higher prices and less output (DavidB.Audretsch.1989)”.
There is enough testimony to underscore the benefits that flow from redesigned Government policies in favour of competition. For instance, in the European Union, the implementation of the policy of removal of barriers to trade is estimated to have increased income by 1.1 -1.5 percent over the period 1987-93 and to have created 30,000-90,000 jobs and to have decreased inflation by 1.0-1.5 percent. Around half of this is attributed to increases in competition and efficiency improvements (Commission of the European Communities, 1996). Competition therefore has a strong correlation with economic development. Corporate governance (designed to home in corporate performance leading to economic development) consequently needs to fashion itself to meet competition and to steer clear of indulging in (inadvertently or otherwise) anti-competitive practices.
Restricted Competition Impedes Good Corporate Governance Competition influences and impacts corporate governance. The MARKET paradigm drives markets for goods and services to be competition driven. But dominance, oligopoly and monopoly prejudice competition. Ownership concentration, market concentration and consolidation add to the prejudice. Compounding these are regulatory barriers (brought about by the State) and firm-level practices limiting competition in takeovers, divestiture and privatisation. The above said prejudice occurs in both developing and developed countries. In this scenario, corporate governance is the causality because of the fact that the corporates dominating the market are getting their rents and excessive profits in the sub-optimal competitive environment. If the business environment is reasonably competitive, corporate governance cannot afford to be slack or to be unmindful of competitors and potential competition. Where competition is inadequate or sub-optimal, corporate governance tends to become loose and slack, with decision-making in business matters by corporates delayed or postponed. Jensen (1993) has noted that slack governance by a corporate, even if dominant, results in decline in corporate performance impacting consumers and shareholders adversely. This was based on an analysis of the corporates in the US during the late 1980s when stringent antitakeover regulations impeded control transactions resulting in a large number of dominant and market-leading corporates failing to add economic value for their capital and R & D expenditure. The business environment suffered from sub-optimal competition and consequently, the return on capital was unsatisfactory. Restricted competition in the market for goods and services in developing countries can injure the interests of consumers and retard economic development. Good corporate governance essentially involves a reform process, which includes fostering of competition in the market.
Corporate Governance and Competition
Experience shows that large and dominant firms seek to entrench themselves and further their interests. Because of their size, dominance and financial clout, they are in a position to call the shots regarding prices, quality and output. By forming cartels, they could limit the output, create scarcity of goods and services in the market and increase the prices beyond competitive levels. Excessive profits and rents are earned by dominant and monopolistic firms leaving the consumers poorer and at their mercy. In a competitive environment, incumbent firms may not be cornering excessive profits and usurious rents. While profit making is justified and should be allowed, profiteering should be prevented. Reasonable profit-making will Allow new parties into the market resulting in more supplies (perhaps, better supplies in terms of quality) and lower prices driving down profitability. In a market driven by Competition, there is always an incentive to bring about technological advances and innovations thereby providing the consumers with better quality products and new products.
The arguments above bring into focus the need for good corporate governance. Good corporate governance does not lie in eliminating competition by seeking Government intervention and policies of protectionist nature but lies in meeting competition headlong. Meeting competition means enhanced operational efficiency, cutting costs, keeping down administrative expenses and affording quality products at reasonable prices to the consumers etc. Market power should be used constructively to sub-serve consumer interest and the national interest. It should not be misused to merely entrench oneself in the market and to make unreasonable profits. It is the responsibility of corporate governance to ensure the constructive use of market power.
Corporate governance should ensure that the corporate does not indulge in anti-competitive practices. Despite the temptation to cartelise and fix prices, a corporate entity or firm should not lend itself to join other firms in the same line of production or service with the object of colluding with them and drive the market with higher prices and lower output. In particular, corporates should avoid colliding with competitors to the detriment of consumers. Collusive practices include cartelization, price fixing, limiting outputs, bid-rigging, market allocation by territories or customers, limiting technical development etc. Enlightened corporate management will steer clear of such collusive practices and will condemn them by bringing action against colluding offenders responsible for adversely affecting competition in the market.
Khemani and Leechor (2000) in an incisive article noted that there is a positive association between competitive markets and the quality of corporate governance. They observed that countries with more competitive markets have been more successful in deepening the securities markets. Exhibit 1 below is a bar chart with market competitiveness on the X-axis and depth of securities markets on the Y-axis. Competitiveness is based on the country ranking provided in the World Competitiveness Yearbook (IMD, 1999). The metric for the depth of securities markets is the ratio of stock Market capitalisation to bank credit to the private sector (World Bank, 1999). The Exhibit shows the extent of the deepening of the securities markets in the context of increasing market competitiveness.
Likewise, Exhibit 2 below demonstrates that countries with a given quality of law and order have better minority shareholders’ participation, if the market is more competitive. The extent of participation by minority shareholders is measured by the share of widely held firms in each market.
The article of Khemani and Leechor further concludes that countries with more competitive markets are able to attract more shareholders to participate in the securities markets.
Good corporate governance in a competitive milieu is likely to serve the interests of consumers and the society. MARKET paradigm, if properly implemented has to focus on competition principles, which should inform legislative and executive policies. For buttressing domestic competition, every country needs to have a sound competition policy and an appropriate competition law to enforce the policy. The competition policy to be posited by the Government has therefore an important responsibility to ensure that the corporate sector plays a just and equitable role through good governance. Governmental policies should allow free play to market forces and promote a competition driven market. At the same time, no corporate body should be allowed to abuse its position in the market, particularly, its size, dominance and financial clout. Categorisation and abuse of Dominance need to be frowned upon by the Competition Tribunal or Agency. Offenders should be brought to book with deterrent punishments. Having said this, it is incumbent on the corporates not only to follow the rule book on competition but meet competition by way of being competitive and not by way of seeking rent and protectionist policies. Competition, Development and Corporate Governance are inter-linked and any break of the link is only at the peril of the society.
Role of Economics in Competition Assessment
Competition law is essentially concerned with the study of markets, the objective being to ensure that there is competition between the suppliers in any market and that this competition benefits consumers. At the day-to-day level, applying competition law involves identifying markets and assessing whether or not competition is working well in those markets. It involves assessing how the actions of firms will affect competition and consumers. These are essentially economic issues. As the Competition Commission of India (CCI) commences its operations with a mandate, inter-alia, to preserve and promote competition in the markets, a quick appraisal on the role economic analysis is going to play in competition assessment will be just in place.
Economists study how markets allocate goods and services to different consumers. They are interested in how consumers fare when there are more or fewer competitors, when firm merge together or when firms change their behaviors. They are also interested in why firms behave in certain ways, such as, under what conditions will firms behave in ways that benefit consumers; and, when they will behave in ways that harm consumers? Economics attempts to provide answer to these, and other, questions. Understanding economics will help to understand how markets operate, how firms will behave in particular markets, and whether their behaviours will result in competition that benefits consumers. Economics is, therefore, being recognised as an essential tool to access market power and to determine the boundaries of the market in which such market power is to be analyzed by competition authorities all over the world. It is, therefore, imperative for legal practitioners in India to develop a clear understanding of the economic issues, such as determination of the correct “relevant market”, determination of “entry barriers’ in such market which may, inter-alia, be created by behaviour of certain firms with market power etc. which are likely to be involved in competition assessment. It has been aptly stated by Brandeis J, “A lawyer who has not studied economics—– is very apt to become a public enemy.” Competition lawyers in EU and US, now regularly work together in complex cases with economists who specialise in matters such as “market definition”, the determination of ‘market power” and the analysis of particular type of business behaviour.
It will be interesting to briefly trace the growth of competition jurisprudence in US and EU.
In the US, under the “Structure- Conduct Performance” model, which prevailed in the 1930s, the focus of attention was on concentrated industries where barriers for entries were widespread. This school of thought remained popular till the 1960s and it led to an extremely interventionist antitrust enforcement policy in the U.S. The change came in the form of Chicago School of thought which produced revolution in antitrust thinking in the US. The Chicago view that pursuit of efficiency, by which it meant allocative efficiency as defined by the market, became the sole goal of antitrust. Chicago school places much belief in the ability of the market to correct and achieve efficiency itself without interference from government or antitrust law. Chicago School has changed antitrust thinking profoundly not only in the U.S. but everywhere. Greater emphasis is now being placed by the Courts in US on economic analysis of a particular behaviour to examine its likely effect on competition in the relevant market. US have entered in a less doctrinaire age, where there is more reliance on the “rule of reason” analysis, as against the earlier ‘per-se’ approach.
The European law stresses upon “effective competition” in which the emphasis is on the “effect” of competition on “consumer welfare”. Competition Policy, which has been included in the list of community activities set out in Article 3 of the Treaty of Rome, has played an important role in the achievement of single European market integration, particularly, after the enlargement of the European Union on 1st May, 2004. However, in European law, the achievement of “efficiency” has to leave a room for other considerations and cannot be said to be the sole goal of European competition policy, because competition is considered as a part of the overall scheme of community policies and has to interact with them. Thus, there is a clear distinction between the US law and the European law on the main objective of competition policy but in both jurisdictions, there is equal reliance on economic analysis in competition law.
Though India has adopted a mixed approach, but there is an equal emphasis on applicability of the economic principles. The Indian Competition Act, 2002, now in force, analyses the anti-competitive behaviour, including agreements, by the touchstone of the “appreciable adverse effect on competition’ , which is closer to the European law and in determining such “effect” it places complete reliance on the “rule of reason’ approach in regulation of vertical anti-competitive agreements as mentioned in sub-section (4) of section 3, as well as for regulation of mergers and acquisitions etc., as mentioned in section 6 of the said Act(still to be notified). Horizontal anti-competitive agreements (between direct competitors), including cartels, are, however, presumed to have such effect, which is closer to the per- se approach of the earlier US law. But, surprisingly, for examining likely “abuse of market power” by enterprises in dominant position, the Competition Act, does not follow the “effect” based test of the European law and just prohibits the five categories of “abusive conducts”, as mentioned in section 4 of the said Act, which is more stringent than even the “per- se” approach of the earlier US law. This makes market leaders in a highly vulnerable position, as unlike the European law, no individual exemptions are possible and there are no clear guidelines, like in the European law, say, under which an objectively justified “refusals to deal” by a dominant enterprise can be excused by the CCI. This remains a grey area and provides a lot of scope for economic analysis.
Benefits of Competition Reforms for Business
What is competition?
Competition the process of rivalry between business enterprises for customers is a key driver in a dynamic market economy. It is widely accepted that competitive markets are sine qua non to spur private investment and unleash energy of entrepreneurs to boost economic growth. By responding to demand for goods and services at lower prices and of higher quality, competing businesses are spurred to reduce costs, increase productivity, make investments, and adopt new technologies and organisational methods to innovate in processes and products. Both economic efficiency and consumer welfare are enhanced. Successful enterprises become stronger and more competitive, whether in domestic or international markets (Khemani, 2007). In addition, the competition provides opportunities for broad-based participation in the economy and for sharing the benefits of economic growth.
Barriers to Competition
For a market economy, measures like deregulation, liberalisation and privatisation are necessary, but not sufficient to ensure the efficient functioning of markets. An incumbent producer may gain sufficient market power that may hinder market access to new firms. Thus, effective competition in markets is essential for catalysing private sector participation. However, effective competition is not automatic. Barriers to competition stemming from (a) inappropriate government policies; and (b) anti-competitive conduct of firms are pervasive in developing countries. They reduce investment opportunities, increases business risks, harm innovation and productivity, raise the costs of essential business inputs needed to compete in domestic and international markets, and adversely impact growth.
The fundamental rationale for competition reforms lies in the proposition that competition yields social benefits. Michael Porter in The Competitive Advantage of Nations (1990) has observed that “Few roles of government are more important to the upgrading of an economy than ensuring vigorous domestic rivalry. …. Firms that do not have to compete at home rarely succeed abroad”. There is growing recognition that market reforms cannot succeed without accompanying competition reforms appropriate competition policy and law. Both theoretical and empirical research in recent years has emphasised the productive and dynamic efficiency gains from competition. Therefore, a major goal of competition reforms is to promote and protect competitive processes in order to foster allocative, internal and dynamic efficiency, encourage efficient resource allocation, provide level playing field, and curb abuse of market power and boost consumer welfare and economic growth.
Broadly, competition reforms include governmental measures that directly affect the behaviour of enterprises and the structure of industry and markets. There are two elements:
a) Policies and processes that enable a competitive environment to develop such as introducing an enhanced trade policy, freeing market entry and exit etc.
B) Competition law aimed at preventing anticompetitive business practices, abuse of market power and anti-competitive mergers. It also includes competition advocacy,” so that government policies and regulations do not unnecessarily impede the competitive process.
Dynamic business sector requires a level playing field (fair, equitable and transparent regulatory climate) and a market with a certain element of predictability. A well-designed and effectively implemented competition law-policy aims to provide a level playing field, where economic actors can freely and fairly compete, to the benefit of the consumer. It buttresses a healthy investment climate, thereby contributing to investment, productivity, and broad-based economic development. This is particularly important in a liberalisation process, where Government retreats and economic agents take over as in a market-driven economy, the bulk of economic activity would arise from private entrepreneurship. Clarke (2005) shows that competition is greater in countries with more effective competition policy and lower barriers to trade. Cloughtery (2010) found that competition policy (or at least a nation’s budgetary commitment to competition policy) plays a positive role in economic growth.
Competition Reforms in India
A substantial part of the economic reform story in India relates to the re-establishment of the freedom to compete (Virmani, 2006), which had been fettered due to complex network of controls and regulations created prior to 1991. Competition has produced many winners and has brought lower prices, better quality and wider choice to Indian consumers in diverse sectors such as telecommunications, automobiles, civil aviation, newspapers & consumer electronics. Thus, Indian growth experience clearly proves the vital role of competition in driving productivity and growth. Another round of competition reforms in India came about in 1998-99, which triggered the establishment of a High-Level Raghvan Committee. Based on its recommendations, Competition Act, 2002 was enacted to protect and promote competition in India.
The current round of competition reforms came about in 2011 with the government’s decision on opening up more sectors in India to foreign direct investment and the development of a draft national competition policy. These reforms are beneficial not only to the consumers in the long run, but also increase the competitiveness of enterprises. Committee on National Competition Policy set up by the Ministry of Corporate has stated in its report that the draft National Competition Policy Statement was aimed at promoting a competitive market structure in the economy to make the economy more competitive, boosting productivity and helping in achievement of inclusive growth. Thus, broad based competition policy is being seen by the policymakers as an important component of next round of competition reforms in India.
Benefits for Business
Competition in the world of business is mostly viewed in a negative light and may seem threatening at times, but the fact is that it provides several benefits for business, which are briefly discussed below:
Efficient allocation of Resources
Broadly speaking, promoting competition by lowering (domestic and border) barriers to entry and levelling the playing field for firms encourages the movement of resources from weak uncompetitive sectors towards the more competitive sectors. Thus, competition directs resources to their most efficient use. Companies benefit as they implement more efficient processes and reduce their costs.
Efficiency Enhancement and Innovation
Competition in the markets promote efficiency by (a) reducing prices and bringing them closer to the marginal costs; (b) ensuring that firms produce at the lowest possible costs, and (c) provides incentives to firms to undertake research and development (R&D) activities in order to introduce new products or processes in the market. In a competitive environment, firms are pushed to innovate in the form of new products and services and better and more efficient ways to produce and distribute them. This helps them to minimize the costs and adapt to the consumer taste and preferences over time. Firms that do not innovate are thrown out of business. Removal of competition barriers can play a catalytic role in driving innovations and better management practices in critical sectors of the economy. For eg, Nokia became number one in India by addressing the unique needs of Indian customers through new features on its handsets but later lost its market share to Samsung for not envisioning competition and radical innovations. Innovation is not restricted to technology and products only, but also covers business models, work practices, functions, logistics, processes and principles that define an organization. Dell’s supply chain management, Toyota’s Global Production System, WalMart’s inventory management, Starbucks’s re-imagining of the coffee shop have all been game-changing innovations. Hence, competition helps in the evolution of products&businesses through innovation.
Reduction in Business Costs and Improvement in Competitiveness
Most producers are also consumers of business inputs. Competition helps by reducing cost/raising quality of key inputs such as transport, telecommunications, energy, finance, professional services etc. Businesses benefit by paying less and getting more choice and quality for their money. For example, when electricity costs fall due to greater competition, the cost of doing business falls. This helps businesses to become more competitive. In Australia, which undertook most comprehensive competition reforms in late 80s through 90s, National Competition Council noted in a report in 1998 that “price reductions of up to 40 percent for rail freight and 60 percent for energy give a striking indication of some of the benefits available from the competition. They can substantially lower business costs and underpin business viability, particularly in price-sensitive export markets”. Lowering of business costs at various levels of supply chain has a cascading effect on efficiency at each level, which would improve overall competitiveness.
Domestic Competitiveness improves International Competitiveness
In today’s globalizing world, international competitiveness is very vital. Competitiveness in the domestic market is sine-non-qua for being competitive in the global environment. Firms typically acquire many inputs transport, energy, telecommunications, financial services in local markets. If they are not priced competitively, firms may be less competitive than their foreign rivals. An enterprise competitive in a monopolized domestic market, drawing on its market power thus gained, will not be competitive in an international environment without its market power. As competition policy increases the efficiency of the domestic market, it augments the capacity to compete with imports. Alternatively, it also allows domestic businesses to compete in export markets, thus creating opportunities for increased exports.
Enabling conducive Business Environment
A dynamic private sector requires the right enabling business environment to operate. The quality of a country’s business environment or investment climate determines the risks and transaction costs of investing in and operating a business. It also determines the mobility and speed with which resources can be redeployed from lower to higher productive uses. For this to occur effectively, the nature and degree of competition in markets play a pivotal role. There is significant economic evidence suggesting that private investment has grown faster in countries with better investment climates (Khemani et al, 2008).
Although, India has made significant progress in liberalising product markets, the extent to which regulations are conducive to the competition is still an important concern and a number of national and international surveys have highlighted weaknesses in India’s business environment. Gaur, 2012 notes that as per the ‘Doing Business Cumulative Change Index’,
India has made only modest improvement in its business environment over the last five years (2006-10) as compared to many other developing countries (Figure 1).
Several OECD studies on India find that both at national level and state level, the overall stance of product market regulation in India is less conducive to competition than in OECD member countries, including the emerging market economies within the OECD area, as well as Eastern European and Latin American countries. Conway et al. 2010 recommend that notwithstanding extensive policy and institutional reforms, further efforts are needed to improve India’s investment climate and deliver sustained and inclusive growth both at national and state levels.
Enhancement in Productivity
The theoretical and empirical literature has shown the existence of a positive relationship between product market competition and productivity. A recent publication of the UK Office of National Statistics (2007) identified five key drivers of productivity. One was competition, while another, innovation,, which is strongly influenced by competition. Several studies point out (Gaur, 2012) that competition-enhancing Policies improve productivity by facilitating the weeding out of less efficient firms; by encouraging entry of new, more efficient firms and by promoting cost-cutting investments among existing firms. This is also supported by Kitzmuller et al (2012)in a World Bank-paper. Leibenstein (1966) asserted that monopolists suffer from X-inefficiency, meaning they have low total factor productivity (TFP), and that exposure to competition eliminates this problem. Firms facing vigorous competition have strong incentives to reduce their costs, to innovate, and to become more efficient and productive than their rivals. Productivity will increasingly determine businesses’ competitiveness.
Evidence from developed and developing economies suggests that liberalising markets and increasing competition enhance productivity growth by improving resource allocation within the economy and stimulating innovation and technological diffusion from more to less productive economies. In 2005, in Australia, the Productivity Commission found that NCP and related reforms directly contributed to significant productivity gains and price reductions in key infrastructure sectors during the 1990s – such as electricity, gas, urban water, telecommunications, urban transport, ports and rail freight. Buccirossi et al.(2011) found that Aggregate CPI has a positive and highly significant effect on Total Factor Productivity (TFP) growth. Recently, few empirical studies carried out on Indian industries also indicate support positive impact of competition on growth through positive impact on productivity (Gaur, 2012). For example, Conway et al 2008 find that in India, states with regulation more supportive of competition have higher productivity growth in comparison to states with less competition supportive environment.
Boost to Small and Medium Enterprises
Competition distortions are particularly harmful for small and medium size firms that are precluded from entering markets or from growing by cartels and abusive dominant players. Competition reforms can be of significant advantage to small and medium enterprises (SMEs). It discourages abusive or another anti-competitive behaviour from large companies. For instance, markets and trade are opened up by avoiding the imposition of artificial entry barriers. Furthermore, increased competition leads to lower input costs for SMEs. Therefore, competition policy both protects SMEs from abusive behaviour as well as creates 11 opportunities in a more competitive market.
Elimination of Barriers to Investment and increased Opportunities for Entrepreneurship
The relationship between competition reforms and investment can be best summed up as complimentary. Economies with competitive domestic markets tend to attract more domestic and foreign direct investment, have higher levels and rates 13 of growth in per-capita GDP. Where competition policy is part of an open and well-regulated economy, it can help encourage both domestic investment and FDI, because it encourages investor confidence by setting a consistent framework within which the business sector operates. Foreign companies, when considering investment options in different markets, will place a high premium on the country that has the most developed legal system in terms of allowing access and protection of the investment, reducing administrative burdens and addressing distortions of the competitive process. This, in turn, strengthens the economy and opens the growth prospects. This provides business opportunities to domestic business also by way of joint ventures, increased markets for inputs/intermediates, etc
Conway and Herd (2009) find that although formal legal barriers to entry are low in India due to the reforms of the past two decades, the barriers to entrepreneurship are estimated to be relatively extensive. This includes prohibitive administrative burdens on business start-ups, other regulatory hurdles to a dynamic business environment in India’s formal sector and widespread perception of high transaction costs in dealing with governmental agencies. Sudsawasd ( 2010) found that increasing market competition has a positive and robust impact on the share of total investment in GDP per capita. Aghion et al (2008) found that after controlling for all other relevant factors, elimination of license raj in India led to 6% increase in the number of new firms.
Level playing field
Effectively implemented Competition law acts as a disciplining force on all business, helps to provide level playing field and attract domestic and foreign investment and greater opportunities for business. On the one hand, competition law would benefit foreign investors by guaranteeing them a level playing field and ensuring they do not face any anti-competitive practices. On the other, it would benefit domestic players aftermarkets are opened to competition from foreign firms. Effective competition policy also allows innovative new entrants an important role in the markets and promotes growth. More effective competition reduces opportunities for corruption and rent seeking, and creates more space for entrepreneurs and small and medium sized-enterprises. Further, to the extent that imports are subjected to anticompetitive practices either by domestic firms or by foreign suppliers of these imports, importing countries will face higher import prices. Not only are final consumers disadvantaged, but if local firms use higher priced imports in production, then their products will be less competitive both locally and in export markets. As many SMEs are active in exports, removal of anti-competitive practices in such situations would help in improving competitiveness of SMEs through cheap inputs.
Reduction in Barriers on Interstate Commerce and Development of National Markets
Over the years, national common market has been fragmented due to a large number of fiscal and physical barriers, which increase transaction costs and choke inter-state commerce. Barriers on interstate commerce need to be reduced by simplification of procedures, reduction of controls, rationalization of levies and promotion of greater coordination across states so as to facilitate the movement of goods. This would allow national markets to develop the widening reach of business and allowing reaping of scale economies. Additionally, by lowering barriers to entry, it provides opportunities for broad-based participation in the economy and sharing the benefits of economic growth(Gaur, 2012). This is covered by the National Competition Policy, which aims to build an integrated and seamless national market.
Competitive neutrality implies that no business entity is advantaged (or disadvantaged) solely because of its ownership. It is one of the key principles of proposed National Competition Policy. SOEs are still pervasive in most sectors of Indian economy and compete with private sector. These markets tend to be distorted as a result of structural advantages enjoyed by public players such as grants of subsidies or guarantees, concessional finance etc. All the commercial activities of the government come under the provisions of Competition Act in India. Experience of last 4 years shows that it is being applied in a competitively neutral manner. It is vital that they should be subject to similar competition discipline as private players, to the extent possible consistent with their public service responsibilities. However, Competition law alone is not sufficient in ensuring a level playing field and policies aimed at achieving competitive neutrality between the two have to play an essential role. Presence of competitive neutrality policies is of particular importance in recently liberalised sectors, where they play a crucial role in levelling the playing field between former state monopoly incumbents and private entrants.
Control of Anti-competitive Practices Benefits Business
Even when infrastructure availability is adequate, it may not be accessible to all players in the relevant market in a non-discriminatory way. A vertically integrated enterprise may deny access to its competitors, unless there is an effective competition authority with sufficient powers of penalty and deterrence in place. This could be due to vertical integration with one or a group of enterprises monopolising the input (infrastructure). This could also be due to inadequate rules in place. For example, unless there is transparent and clear provisions in the concession agreement regarding non-discriminatory access to infrastructure to all users, there can be discrimination in providing access. Here, the focus is on ensuring provision of essential inputs that are local in character such as localised real estate, banking, transport, distribution warehouses, communication, professional business services etc. Access to markets might be highly dependent upon access to distribution and retail networks. Vertical agreements between domestic producers and distributors might well limit the ability of importers to compete. As well, domestic firms might engage in strategic behaviour to erect new barriers. Role of competition law becomes important here in ensuring access of necessary inputs to businesses.
To sum up, competition reforms benefit business in several ways and should be fully supported by them. They are a vehicle for empowerment of entrepreneurs, investors, new and established businesses and consumers–be they individuals or firms. They minimise competition distortions, whether emanating from government enterprises and public policies and/or incumbent private sector firms. They foster Efficiency, reduces market dominance by large incumbent firms, help to attract domestic and foreign direct investment, improve international competitiveness and improve corporate governance. It acts as a disciplining force on the firms pressuring them to become more efficient and ensures exit of low productivity firms and entry of higher productivity firms. Competition pushes the businesses to pursue higher goals and profits through innovation. Given the current state of competition (or rather lack of competition) in many sectors of the Indian economy, there is need to adopt and implement widespread competition reforms so that all government policies are assessed on the competition dimension. This has the potential of yielding strong economic benefits by identifying areas where market activity is unduly restricted and suggesting policy alternatives that will continue to meet policy goals while promoting competition to the extent possible. There is also an urgent need for the lagging states in India to make regulation more consistent with competition and thereby improve economic growth.
Potash as Symbol of What can go Wrong and How to go Right
Many a battles in the geo-economic world reflects the skewed compass that favours rich countries and vested interests at the expense of peoples of the developing world. The potash battles provide a good laboratory for observing forces that deflect competition on the merits, and for contemplating what can be done. This essay looks briefly at the state of the world in antitrust and the aspirations for a fairer (and more efficient) world, and, through the window of potash, it observes strategies to preserve the status quo and blueprints for a break-through.
Competition And The State Of The World
In matters of competition and the quest for a coherent regime that would lower world prices and increase economic opportunities, the motor of the world has stalled. To be sure, national competition laws look more and more alike, and cartels are well recognised as a scourge to be stamped out; but still, no law says: You must not do unto others what you would not do unto yourself. There is no international effort with traction to embed this principle. Rather, the gaps between the countries are moats; and the law of moat is: Go ahead; exploit your neighbours. Conspire to raise their prices. Let them catch you if they can. If the targets are poor developing countries with no resources to tilt at giants, they will not be able to catch the foreign cartel. If they are a developed country, still they might be at the mercy of the price fixers if the price fixers pick a detour to market or their government simply says: Do it.
The potash story is a tale of scenarios one and two(poor country victims and indirect victims), to which we turn. The Chinese vitamins and raw materials cartels are 1 tales of scenario three.
First, a word about potash. Potash is an important ingredient in fertilisers and an important nutrient in cereals. It is exported to 150 countries, most of which are developing countries. Canada, particularly in Saskatchewan, accounts for more than 30 percent of world potash exports. The three big potash producers operate a potash export cartel in Saskatchewan Canpotex and have done so for 40 years. The cartel is strongly supported by the government of Saskatchewan. Most of the rest of the world supply comes from Russia and Belarus, whose potash firms collaborate with the Canadians.
The high cartel price of potash “has led to a decrease in the use of fertilisers in developing countries, contributing to the food crisis. It has been hugely expensive for developing countries; for example the Indian government is reported to have spent $3bn last year to help its farmers cushion the high prices of 2 potash fertilisers.” How can developing countries protect themselves from this scourge? The answer of the developed world is: “This is not our problem. Let the importing country sue.” But can Benin (with no competition law) sue? Can The Gambia (having a competition law), with a population of less than two million and scarce resources, sue? 3
Perhaps the developed countries are the best hope. Will the developed countries with big purchases of potash sue the cartelists and punish them sufficiently so they will abandon the cartel and not do it again?
This was not a vain hope. The US market for the purchase of potash is large. US Americans consumed 6.2 million tons of potash in 2008, of which 5.3 million were imports. And most of the imports came directly or indirectly from the “monopolist” countries Canada, Russia and Belarus and were sold by joint ventures of all of the big producers, who controlled 70 percent of the world’s supply. Between mid-2003 and 2008, prices of potash rose by at least 600 percent without there having been any significant change in costs or demand.
US buyers did sue. Some were direct buyers from the alleged cartelists. Others were the victims of the following strategy, as alleged in the complaint: The cartel members negotiated prices in Brazil, India and China. They used the prices thus negotiated as benchmarks for sales into theUS. “For example, inMay 2004, the cartel arrange for prices to increase by $20 per ton for some foreign customers; shortly thereafter, prices in the US went up by precisely the same 4 amount.”
The potash companies moved to dismiss this case on grounds that the complaints failed to meet the requirements of a now-famous statute. The Foreign Trade Antitrust Improvements Act (FTAIA) of 1982 which puts non-import foreign trade beyond the reach of the Sherman Act unless it has a “direct, substantial and reasonably foreseeable effect” on the US market. The district court denied the motion. The court of appeals reversed, holding that the injury to the US buyers was “indirect” and therefore beyond the reach of the Sherman Act. (But had not the cartelists purposely refrained from selling “directly” into the US to evade the Sherman Act by hiding behind the shield of the FTAIA?)
The plaintiffs, however, won a rehearing en banc; and, on the rehearing, the court of appeals reinstated the district court opinion. The appellate court had to interpret the FTAIA requirement that the US effect must be “direct.” The court, by Judge Diane Wood, determined that, in its context (the statute also imposes safeguards of for eseeability and substantiality), “direct effect” requires only a “reasonably proximate causal connection.” The effect simply must be not too remote from the cause.
The court was influenced by incentives. Canada and Russia had no incentive to rein in the cartel. They “would logically be pleased to reap economic rents from other countries; their losses from higher prices for the potash used in their own fertilisers are more than made up by the gains from the cartel price their 5 exporters collect ….”. Distinguishing Empagran, the US Supreme Court case dismissing foreign-plaintiff suits for over-priced vitamins where both the cartel and the consumers were in foreign markets, the court of appeals said about the potash situation:
It is the US authorities or private plaintiffs who have the incentive and the right to complain about overcharges paid as a result of the potash cartel, and whose interests will be sacrificed if the law is interpreted not to permit this kind of case.
The world market for potash is highly concentrated, and customers located in the US account for a high percentage of sales. This is not a House-that-Jack-Built situation in which action in a foreign country filters through many layers and finally causes a few ripples in the US. To the contrary: foreign sellers allegedly created a cartel, took steps outside the US to drive the price up of a product that is wanted in the US, and then (after succeeding in doing so) sold that product to US customers. The payment of overcharges by those customers was objectively foreseeable, and 6 the amount of commerce is plainly substantial.
The US potash litigation is not over. Simply, the complaint was not dismissed at an early stage. The companies might yet file a petition for certiorari seeking an interpretation of “direct effect” from the Supreme Court of the US. But the appellate court opinion is an important step forward. It is a step towards a world vision and away from inward-looking Balkanisation that is destined to keep the moats wide and the vested interests content. Moreover, even if the US Supreme Court and a district court at trial should uphold the US potash plaintiffs, this will not be the answer for developing countries. The US plaintiffs would then get damages based on their purchases, not on world purchases. The cost to the world potash cartelists is not likely to deter them from raising prices, starving people, and bankrupting farmers in Africa. The crime will still “pay.”
A Positive Agenda
A positive agenda becomes, more and more, just a fanciful hope. Nations have shrunk from the global visions of the 1990s, when coherence and community were tabled as shared objectives. In these times of economic hardship, nations retreat.
Nonetheless, we can and must have aspirations. At least we can image, aspirationally, one-world without cartels, especially without cartels that make the least well off worse off. We can shine sunlight on the costs of offshore cartels, especially those that target people on the edge of a decent life (and worse). And for those not motivated by altruism, the message might be driven home that the case is not only a moral one; it is an economic one. A successful battle against world cartels will improve the economic welfare of the world.
Meanwhile, there are smaller bridges to be built across the moats. The home lands of the cartels should agree, in bilateral, plurilateral and multilateral agreements, 7 to cooperate in discovery with the offshore victims. And the victims’ competition authorities might productively team up regionally to prosecute suit.
Governance Constraints To The Effective Implementation Of Competition And Regulatory Laws Benefitting The Business In Egypt
The operation of the competition process is rather like survival of Tthe fittest-except that those firms that do survive are fit to survive in the broadest social sense of being good social citizens. All firms should have an equal opportunity to succeed in a market- but no firm should be guaranteed success, unless it is consistently efficient, innovative and responsive to consumer demands. Most developing countries have, until recently, operated without a formal competition Policy. Until 1990, only 16 developing countries had a formal competition policy. With encouragement and technical assistance from international financial institutions and the WTO, fifty countries have completed legislation for competition laws in the 1990s, and another twentyseven are in the process of doing so. It should, however, be borne in mind that it takes about ten years for countries to acquire the necessary expertise and experience to implement such laws effectively.
I: The Egyptian Case:
I-A: Competition Law In Egypt: Factors Underlying The Necessity For A Competition Policy In Egypt
Egypt has various factors that inhibit integration with the external world as: high import tariffs, continued high level of public ownership in the economy inhibiting competition and innovation, underdeveloped social and physical infrastructure inhibiting productivity, bureaucratic and time consuming administrative formalities causing high transaction costs at all levels of the economy. Those factors are barriers against enhancing export capabilities.
– The trend in Egypt toward adopting deeper regional and multilateral trade and investment integration, as well as trade disciplines, implies that national firms must become more competitive on a global scale. As more market-friendly regulatory mechanisms are introduced and tariffs are gradually eliminated in regional economies and worldwide, Egypt must follow by implementing a competition policy.
– Moreover Egypt is in the process of encouraging multinational companies to enter in the Egyptian market. Enforcing competition policies at the national level was regarded as a prerequisite of entry into the host countries by some multinationals. It is also required to counterbalance the impact of international mergers and acquisitions undertaken by the multinationals.
– In the case of absence of legal legislation organizing competition, Egypt will be obliged to implement the treaty of Rome concerning competition which doesn’t take in consideration developing countries’ market conditions.
– Moreover after the signature of the Partnership between Egypt and EC, Egypt has to accept the adoption of certain competition rules of the EU as far as they affect trade between the EU and Egypt. These competition rules deal with collusive behaviour, abuse of dominant position and competition distorting state-aid.
– Dealing with companies that have international activities in addition to the effect of merger activities on local market raises the need for a competition policy.
– The growing role of the private sector in the national economy raises the need for legal referential for the assessment of harmful monopolistic activities especially for the increasing merger and acquisition cases.
I-B: Stakeholders Responsible For The Implementation Of The Competition Policy In Egypt
There are three main agents dealing in the Egyptian economy with conflicting interests:
The Government :
A major constraint against the early implementation of competition laws in Egypt has been the heavy state intervention in the economy. As Egypt was characterised by large government intervention there is new fear that the competition law might lead to new forms of government intervention. Two factors were used to examine the appropriate role of government The first considers the government’s size through measuring government consumption as a percent of GDP, the highest marginal tax rate on corporate income, and the share of corporate tax receipts in government revenues. The second factor considers the role of government in the state-owned enterprise (SOE) sector using the following criteria: output of SOEs as a percent of GDP, investment of SOEs as percent of GDP, privatization of SOEs, proceeds from privatisation of SOEs.
Other factors that measure government involvement in the economy indicate that Egypt still has a large public sector compared to many other countries. The public sector capital/output ratio is one of the highest among the developing countries, primarily because of the substantial role of the public sector in infrastructure development in Egypt. Value added of state owned enterprises as percent of GDP was estimated at 30% over the period 1986-1996, while SOE’s investment as percent of gross fixed investment was estimated at 63.3% over the period 1986-96. This explains the government continues adopting of protectionist trade policy, as it can be used as a tool to redistribute income or to keep SOE protected from foreign competition. As monopoly positions are deregulated, the application of anti-trust law may be insufficient and may need to be complemented by regulation, especially when there are powerful dominant firms at the outset of deregulation.
The business sector: which is mainly divided in Egypt into industrialists and importers and both have conflicting goals. Where industrialists would like to enjoy tariff protection for their domestic products, on the other hand, importers want to enjoy full tariff exemption or the lowest level possible. So, there is no incentive for the business sector to change the status quo, since the resolution of such conflict needs collective action which entails the sacrifices on the part of certain groups. However, we can notice a great involvement of the businessmen in the decision making process, so it can be argued that the lax of enacting a competition law in Egypt was because the pressure coming from the private sector.
Consumers: may have no role in enacting competition policy because the role of consumer protection agencies is so weak and lack collective action initiatives.
I-C- Competition Policy And Law
To enforce any policy, a national law is needed to enable the country to influence effectively the behaviour of the companies and the people to prevent the artificial barriers to entry and to facilitate market access to competitors. National Competition Law can be defined as the set of rules and disciplines maintained by governments relating either to agreements between firms that restrict competition or to the abuse of a dominant position. The prerequisite of having an efficient law is to assure a suitable business environment as well as an appropriate mechanism for implementation and firm enforcement in a market economy. The law should be an adequate regulatory framework affecting both efficiency and consumers’ welfare, equity among all producers and better access to markets by smaller firms.
Unlike most emerging economies which adopted competition legislation in the early 1990s, Egypt’s has been in the making and has just issued the new competition law. Egypt has never had a comprehensive competition legislation. It had heavy state intervention in the economy through the state owned enterprises (SOEs) and its control on the economic activities. With the presence of financial repression, price control and subsidies, import bans and quotas, exchange rate control, the Egyptian government was a source of monopoly power. In this environment, one cannot expect that any government would adopt competition policy to discipline its activities.
I-D: Problems Facing The Implementation Of Competition Policy In Egypt
– Since the mid 1970s, Egypt has had a mix of institutional changes that included new policies which opened sectors for private investment (infitah), new laws and amendments which protected private ownership and set the stage for the rationalisation of public sector management (laws of investment, companies, intellectual property), new laws and law amendments which allowed for some competition in some sectors (e.g. tourism, agriculture, telecommunication), as well as laws which perpetuated state control especially of civil society. Other forms of continuous state control manifested themselves in the discretionary powers given to the Prime Minister. The result of a quarter of a century of institutional reform has become an assortment of institutional arrangements encompassing partial competition (since the Egyptian market is still largely oligopolistic) and expansive regulation without performance benchmarks. All organisational communications are originated centrally from the prime minister’s office and flows vertically downwards. The same mechanistic and hierarchical structure applies to the organisational charts of all state institutions.
– The executive authority in Egypt is massive and intricate in structure and disproportionate in volume as compared to other countries. It has 28 ministries and 5 ministers of state, in addition to more than 100 general authorities (out of which 44 percent operate in the economic sector and 56 percent in the services’ sector), which overlap in their functions and redundantly conduct similar tasks and operate in the same fields.
– All the previously mentioned institutions portray a pattern of significant power distance where the society accepts that the unequal distribution of political and economic power is also reflected in an unequal distribution of power and authority in state institutions.
– SME suffer from biased macroeconomic policies which favour large enterprises. Profits of an industrial company employing 50 or more employees and established after the enactment of the Income Tax Law are exempt from income tax for a period of 5 years from the date of commencement of Business.
– Inadequacy of Dispute Settlement significantly increases the time needed in courts and thus increases the cost of litigation; litigation in Egypt is expensive in terms of time rather than monetary costs. Monetary costs of litigation if pursued in a speedy manner- are lower than in many other countries. A survey conducted by the Egyptian Center for Economic Studies in 1998, showed that the main reasons for disputes were bankruptcy, broken agreements, problems with the tax authority and quality of supplies-ranked according to their order of importance.
– It takes about 410 days to enforce a contract in Egypt. This is a high rate compared to other countries in the region like Tunisia which scores the least number of days (27 days). However, Egypt is better than other countries in the region like Oman (455 days) and Lebanon which has the highest number of days in the region (721 days).
– Introducing competition legislations in Egypt is a complex task. Egypt after thirty years of adopting the characteristics of a centrally planned economy moved to a liberalised economy. Egypt over this period was characterised by a complicated system of price controls and subsidies and was implementing import bans and quotas as well as exchange rate control. The transitional movement of the Egyptian economy creates its own difficulties due to many aspects, such as, structural deficiencies in the market; lack in its regulatory, technical and financial abilities to gradually shift to a new status.
– The development of a legal infrastructure in Egypt compatible with the development of a market economy involves re-conceptualizing the entire legislative framework, re-training of legal personnel and reforming or building institutions capable of implementing the new policies. Since drafting and implementing such legislations mainly requires the involvement of economists and lawyers. Thus lawyers involved in competition law should acquire the skill of combining elements of both law and economics.
– The enforcement of competition practices may lead to the exit of uncompetitive firms and hence the possibility of increasing unemployment. In a country like Egypt with an unemployment rate of 8% in accordance to official data and 12% in accordance to unofficial data, this might have several social implications.
– As all laws in Egypt, this law will be implemented only on the formal registered companies. Another important characteristics of Egyptian private investment is the large informal sector. A recent study on the private sector in Egypt classified it into three sub-sectors: the formal sector, the informal sector, and the investment sector. In this study it was also claimed that the private investment sector is larger than the private formal sector, while at the industrial activity level the investment sector is smaller than the formal sector due to the latter’s involvement in mining. In a survey conducted in Greater Cairo it was indicated that the informal sector is 50- 80% of the private sector, depending on the criteria used to identify the private sector. This phenomenon was seen by several writers as a real constraint against the enforcement of the law as almost 99% percent of these enterprises are small in size. The agglomeration through informal activities in informal markets to control the market is a dangerous activity in this respect.
– There is a shortage of efficient experts to implement the law. It is important to simplify the rules of this new competition law and to avoid complications in case by case analysis. There is also the problem of judges in emerging economies who often lack the necessary training to enforce sophisticated laws that require economic analysis.
– The institutional corruption and profiteering are main obstacles against the implementation of laws in many societies. Corruption Index was estimated at 2.9% for Egypt in 1998. Corruption has been regarded as one of the most important obstacle distorting the business environment in Egypt.
I-E: Main Features Of The Egyptian New Competition Law
The Egyptian Parliament is in the final stage of issuing the long awaited competition law. This law has been designed to respond to domestic pressure concerning the regulation of monopolistic practices, and also to comply with the terms of the Egyptian-European partnership agreement. The latter explicitly prohibits anti-competitive practices more particularly those related to state aids. The law covers several issues as highlighted hereunder:
The law will be applied to all economic activities exercised in Egypt with the exception of certain activities of the public sector, which are labeled as “strategic” (such as gas, water and electricity).The three key areas regulated by the law are:
(i) Agreements concluded between market players that have the object or the effect of harming competition
(ii) unilateral conduct of dominant firms that amount to abuses as defined by the provisions of the law and
(iii) merger activities.
Any breach of the competition law, depending on the nature of the incriminated act, would result into nullity of the agreements in part or as a whole, a fine of up to EGP one million, confiscation of goods, and a ban from commercial activities for a period up to three years
(i) The Law Prohibits The Following:
– Agreements between market players that limit competition in any relevant market. A relevant market is defined by the law either as the relevant product market, which includes interchangeable products, or the relevant geographical market that includes areas having homogeneous competition conditions.
– Agreements entered between two competitors (horizontal agreements) directly or indirectly fixing prices, sharing markets or sources of supply, or limiting and controlling production, markets, technical development or investment.
– Agreements entered between two companies operating on two different levels of the market (vertical agreements) that limit competition or impose minimum resale prices. Details will largely depend on the definition of the criteria for “harming competition” which will most probably be left for the executive regulations to clarify.
(ii) Abuse Of A Dominant Position:
The law condemns the abusive unilateral conduct of dominant firms. Therefore being dominant per se is not punished by the law but rather the abuse of this dominant position. From now on, dominant firms must behave in the Egyptian market with caution: a transgression of the provisions of the law in this regard may lead to a fine up to EGP one million and possibly the imposition of certain internal, structural or corporate reforms. The law defines dominance as the ability of a person controlling over 35 percent of the market share to prevent effective competition being maintained on the relevant market and the power to behave independently of its competitors. A person controlling over 65 percent of the market will automatically be presumed dominant. Under this threshold, the burden of proof lies on the competition authority. A dominant firm which imposes a non-manufacturing or non-distribution provision for a defined period of time, refuses to deal with another undertaking, imposes tie-in arrangements, discriminates between two commercial partners, and refuses to supply a strategic good or refuses to allow a competitor to use its or its subsidiaries facilities or services will be declared abusing its dominant position and be susceptible to fines and other penalties prescribed by the law.
In light of the law, a company wishing to merge must notify the competition authority in advance. The authority will then proceed to examine the notification as to its compatibility with the competition rules. However, assessing the anticompetitive effects of a merger is a rather complicated economic forecast exercise. Undoubtedly, this law marks a welcomed move towards a more liberal competition in Egypt’s Economy; however, practice will reveal whether Egypt is serious and ready for such a step. In any event, market players should be aware of the law both as a tool against unfair competitors and when drafting their future agreements. (www.ahkmena.com, 2005)
(iv)The Regulatory Committee
The Competition Commission is the authority which conducts investigations into suspected competition violations, implements the decisions of the specified Minister, coordinates with other authorities in different countries with respect to the same subjects, issues rulings, assesses penalties, monitors the market and studies prevailing conditions in the search for price irregularities. It is also an advisory body for the government on the effectiveness of competition policy during privatization (with costs not exceeding 10,000 L.E). In taking decisions, the authority takes into consideration the benefits and the costs of any deal with respect to: whether deals will lead to a decrease in the costs of production and a decrease in the price for the consumer, the time frame of the deal, whether the deal will lead to an improvement in the goods or to innovations, whether the deal is of an economic nature liked to the development of the market in general. Also, the authority is committed to formulating a database about economic activities to serve its role and for supporting transparency. The authority will publish a periodical report on its activities to the specified Minister. Secrecy of all information regarding entities, goods, persons, deals and penalties is a precondition for an efficient regulatory commission. (The penalty for the violation of secrecy ranges from 5,000 LE to 20,000 L.E.)
Today, Egypt faces a greater challenge in convincing investors that they can earn adequate returns on their investment than in combating monopolists that are earning profits that are too high. The prominent monopolies or price-fixing arrangements in Egypt are sanctioned by government, although private collusive arrangements no doubt exist as well. It appears at this stage in Egypt’s development that government policies are more likely to be the cause of economically destructive competitive restraints than private collusion.
The viability of competition requires some measures, such as the awareness of the public, disclosure of information, disclosure of information and implementation of bankruptcy laws. Competition policy may have adverse effects. In some cases, competition policy can be used to hinder competition by lowering prices of one efficient firm and would then press charges against it. Competition authorities in Egypt must be proactive, means that the competition authorities must have an advocacy role to ensure both the enforcement of the law and the implementation of a whole new competitive process in the market. For example, as Egypt has taken serious steps towards liberalising trade, the competition authorities must play an active role in the implementation of different economic policies conducive to competition such as trade policies and schemes aiming at increasing consumer awareness, as well as in the creation of conditions facilitating access to markets and in enhancing privatisation. These last activities are important to be able to maintain the competitive environment in Egypt rather than just to create it and to achieve consistency in the policy as a whole.
– HebaNassar,“CompetitionPolicyandLawinEgypt” August 2001, first draft – –
– Allan Fels, November 2001, “Competition policy: Lessons from international experience” paper submitted for conference organized by ECES and the Australian Embassy entitled Competition Policy : the road Ahead for Egypt , WP No. 62.
– Essay, 2005, “ Egypt Moves Toward a competition Law” www.ahkmena.com.
– The Egyptian Competition Law, 2004.
– Judy Goans, 2003, “Commercial law: Providing framework for economic growth” paper submitted for conference organized by (CEFRS) in collaboration with USAID entitled” Institutional and Policy Challenges Facing the Egyptian Economy.
– Fatma H. El Said, April 2004, “Innovation in Public Administration: The Case of Egypt”, The European University Institute, Florence Italy
– Jacques Morisset§, Olivier Lumenga Neso, May 2002, “Administrative Barriers to foreign investment in developing countries”
– Ajit Singh, 2002, “Competition and Competition Policy in Emerging Markets: International and Developmental Dimensions”, Faculty of Economics and Politics, University of Cambridge, Cambridge CB3 9DD
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Central and State Government, Private sector officials involved in activities related to public-private-partnership projects, officials of Municipal Corporations, Lawyers, Management. Consultants and other professional as well as students to acquire relevant professional skills.
Competition Law Compliance: Agenda For CCI
Business strategies in a country need to be formulated keeping in View the regulatory structure of the economy. Global trend shows a proactive enforcement of competition laws. Though consensus regarding international rules for competition law has gained strength, there is divergence not only in enforcement procedures but also in substantial matters and objectives of competition laws in respective economies.
Although, there can be slight variations in the competition law enforcement in different jurisdictions, yet there are broad common principles which are emerging across jurisdictions. There is no doubt that competition law needs to be tailored according to the specific needs of an economy and there needs to be a calibrated approach in enforcing various limbs of competition law. Competition law compliance is now gaining impetus in newer jurisdictions due to proactive enforcement strategy adopted by competition authorities. Awareness generation and achievement of competition culture can be said to be the two extremes of the continuous process of competition reforms; with compliance and competition culture being the avowed goal of a competition regime. In this continuous process, role of the competition authority is pivotal.
Gears For Competition Law Compliance
Compliance, necessarily, is a step ahead of awareness regarding benefits of competition law, and involves concrete steps by market players to ensure that their organisations do not engage in anti-competitive conduct. UKs Office of Fair Trading (OFT) compliance manual has a four-step competition law compliance process that includes risk identification; risk assessment; risk mitigation and review. Commitment to competition compliance throughout the organisation lies at the core of this four step process. Figure 1 is self-explanatory and describes the steps involved in the cycle of competition compliance.
Creating awareness regarding benefits of Competition Law is important for promoting compliance by the market players. This role of creating awareness also includes educating and apprising market players of likely effects of violating the provisions of the Competition Law. As will be discussed later this role of competition authority is not limited to these awareness generation activities
Why Gear up for Competition Law Compliance
Firms worldwide follow a risk based approach to competition law compliance. It has been seen that fear of reputational damage and financial penalties act as the key drivers for competition law compliance for businesses. There is no doubt that there can be serious implications for infringing the provisions of the Indian Competition Act, 2002 (CA02). Such implications include heavy fines, damage to reputation of the business, division of the dominant enterprise in case of abuse of dominant position, loss of business to potential investors. Proactive compliance on the part of companies is the key to avoid such risks.
Significance given to Competition Compliance Programmes (CCPs) is reflected by the enforcement and advocacy practices followed by the competition authority. Actions of competition authorities in form of competition advocacy, orders, guidelines, regulations and other measures are the signposts for the businesses to gear up for the competition compliance. Businesses take cues from these varied signposts in deciding not only to review the CCP but also in deciding in the first instance whether to go for CCP or not. There are sunk costs tied up with such decisions and thus clarity in the actions of competition authority helps businesses deciding future course of action.
Delineating Competition Commission of India’s (CCI’s)Role:
The Act chalks out a wide mandate for CCI as has also been affirmed by decision of the Supreme Court in CCI v. SAIL case. Even section 27 of CA02, empowering CCI to issue orders, is worded in general language and CCI can pass any order which it deems fit in a case. In relation to competition compliance, till now, the role of CCI has been restricted to limited awareness generation without proactive advocacy. CCI in some orders directed the infringers to submit undertakings to follow the directions given in the order. Such type of orders to submit an undertaking and not to repeat the conduct is different from directing to under go training for competition compliance or to institute a competition compliance programme in the governance frame work of the infringe company. Although in some cases CCI has given directions to the parties to amend their contracts, yet there seem to be no case where CCI has advocated training and adoption of a competition compliance programmer to an enterprise.
Interestingly, the advocacy booklet provided by CCI on its website notes that a competition compliance programme helps benefit from ‘leniency’ provisions in the Act. This booklet is general advocacy material issued by CCI even before enforcement of the CA02. It is also worthwhile to mention here that Chairman, CCI has suggested to corporates to set up a high level Competition Compliance Committee in their respective organizations to review competition compliance. We have yet to see takers of this limited advocacy by CCI in the market.
Lessons From Other Jurisdictions
Brazilian law (Ordinance No. 14/2004) provides guidance on how to design a compliance programme by setting out the requirements and conditions for the relevant Brazilian antitrust authority (SDE) to issue a Compliance Certificate. To obtain a certificate (valid for two years), the company must provide a description of the programme, disclosing the standards and procedures which employees have to follow, and the designation of managers to coordinate and supervise the programme’s proposed objectives. Recognising the fact that depending on the size and risk profile of the company, different components will need to be included in a compliance programme to ensure that it is effective in achieving compliance. There are four different templates prepared by the Australian Competition and Consumer Commission (ACCC) for different sizes of companies ranging from Level 1 for micro-businesses and Level 4 being designed for large corporate entities.
In Japan, the infringing companies were ordered to prepare and amend the guidelines to comply with the Antimonopoly Act including by establishing the rules concerning the punishment of the directors and employees responsible for a violation of the Japanese Antimonopoly Act. In one case in Japan, the infringing companies were ordered to provide training on the Japanese Antimonopoly Act for sales staff and to conduct periodic audits by legal affairs personnel.
In South Africa, the Commission often requires the companies to give an undertaking to implement a compliance programme in the context of enforcement action. Sentencing guidelines in US, a jurisdiction which criminalises antitrust violations, indicate that an effective compliance and ethics programme might reduce the fine that will be imposed. Further, US sentencing guidelines also note that effective compliance and ethics programme need to promote an organisational culture that encourages ethical conduct and a commitment to compliance with the law.
Need to Move from Unidirectional to a Multi directional Approach
Approach It is the role and responsibility of CCI to provide a clear and unambiguous set of rules and guidelines that can easily be understood and adhered to by the businesses. There is no doubt that CCI needs to play a pivotal role in bringing out a culture of competition compliance in India. Currently, CCI follows a unidirectional approach of imposing fines and passing cease and desist orders and very general advocacy literature. A multidirectional approach, amongst other measures, can incorporate guidance in the form of publicly available material, directions for compliance training and compliance audit, and special sector specific reports. Leniency as a tool for cartel busting has failed to attract a single taker. Leniency programme’s success will spur corporates to introduce compliance programmes to find out if an employee is an infringing law which can attract heavy penalties. Making compliance part of corporate philosophy will work if this is included in yet to be formulated sentencing guidelines of CCI. In absence of any specific guidelines on competition compliance, ineffective leniency programme and absence of sentencing guidelines; the businesses have to fall back on the orders passed by the CCI. The orders of CCI, as has been the view of some scholars, even in similar cases, follow inconsistent approaches, there by adding to the problem.
Compliance training is necessary to incorporate compliance programme in corporate governance framework. Compliance Manual is quite common in the developed jurisdictions like EU and US, but cannot be prepared except in very generic terms in absence of any guidance from the agency. How will business know what to include in their compliance manual or training material in the current prevalent scenario where there is no guidance for businesses? Thus, a shift is needed in the current unilateral approach towards inculcating a compliance culture in India.
To sum up, competition authorities worldwide are following multiple approaches to create and promote a culture of competition compliance. These approaches include: advocating competition compliance through various media, tailoring compliance programmes, certifying compliance programmes, considering effective compliance programmes in reducing fines and so on. Unilateral approach of awareness generation will not yield the desired benefits. These lessons from various jurisdictions can be helpful for CCI to develop a multipronged approach for promoting a culture of competition compliance in India. There is no doubt that such measures should be economy specific and calibrated accordingly, yet the need is to adopt a multidimensional approach for ushering in a competition culture and competition law compliance in India.
Competition Policy Reforms in the East African Community: What are the Benefits for Business?
The East African Community (EAC) is a regional economic Tcommunity comprising five countries namely Burundi, Kenya, 1 Rwanda, Tanzania and Uganda: with a combined total GDP of US$79.2bn, population of approximately 133.5 million and total trade with the world 2 US$37bn. The EAC is a Customs Union and launched the Common Market 3 ratified in 2010. The idea is that as the market becomes more competitive, firms will try to enter into strategic agreements to keep their profit level at a sufficiently high level. In particular, in the case of deep forms of regional integration such as customs union and common markets, the need for a common competition policy approach 4 is stronger.
Competition policy is a set of measures by the government to protect and Promote the process of competition by preventing restrictive business practices which artificially restrict supply and raise prices of goods and services, and reduce or eliminate unnecessary regulations and government policies which adversely affect the competitive process and raise 5 the cost of doing business. A dynamic private sector requires the right enabling environment or investment climate in which to operate. And an effective competition policy is an important constituent of a good overall regulatory 6 and business environment. The EAC adopted a harmonized approach in designing its regional enforcement approach to competition law. Partner States are required to enact and enforce national competition laws in line with the 7 principles in the regional law
Status Quo of Competition Policy Reforms in EAC
The EAC Competition Act, 2006 (herein after the Act) provides inter alia that it applies to all economic 8 activities and sectors having a cross-border effect. This implies that anti-competitive concerted practices of a domestic nature shall be handled by National Competition Authorities. The five EAC partner states are at different levels of development and implementation of competition policy and law. They fall broadly into three categories as follows: Category I: countries with operational competition regimes; 9 Kenya and Tanzania ; Category II: countries that have passed laws that have not yet gone into effect; Burundi 10 and Rwanda and Category III: a country actively 11 preparing competition laws; Uganda.
Benefits for Business by Implementing Competition Policy Reforms
The EAC Partner States’ trade regimes have been significantly liberalised and integrated over the last two decades. The EAC Customs Union in particular 12 catalysed remarkable trade expansion. Intra-EAC 13 trade grew by 40 percent between 2005 and 2009. The growth in trade was complemented by the significant growth in cross-border investment in the services sectors cutting across banking, insurance and tertiary education among others. Cross-border investments, mergers and acquisitions have become major drivers and contributors to growth of investments in the 14 region.
For investors and producers, they want a fair chance of doing good business and this where competition 15 policy and law become relevant and necessary.
The operationalization of EAC competition policy and law will play a key role in the construction of a single market by guaranteeing a level playing field for firms operating in the region by promoting an open 16 market. EAC Partner States are implementing an integrated common market therefore anti-competitive concerted practices must not replace government implemented restrictive schemes within the EAC 17 integrated market if the initiative is to bear fruit.
Mergers and Acquisitions have a regional dimension in the EAC, for example, Lafarge in the cement sector, Illovo sugar, South African Breweries, East African Breweries Limited, Kenya Airways to mention a few businesses undertaking mergers and acquisitions with a cross border effect will make a “one-stop notice”merger notification at the EAC Competition Authority which 18 has a lot of merit and justification.
Abuse of market dominance has emerged in the EAC region in the air transport, brewery, cement and sugar industry among others. While dominance in itself is not bad, it is the likelihood of abuse of that dominance which is of concern to the region. The entry and expansion opportunities for SMEs will be safeguarded ensuring investment and technological change because competition law lays down rules for fair competition where small and big firms (especially MNCs) co-exist in a market controlled by market forces. Due to the delay to operationalise competition law, big firms are driving small firms out of the market through practices that harm the competitive position of competitors on downstream and upstream markets by refusal to deal, refusal to access essential facilities and tying arrangements among others.
In general the law prohibits all concerted practices between undertakings which are intended to be implemented within the community, may affect trade between Partner States and have as their object or effect the prevention, restriction or distortion of 20 competition within the community.
Restraints by enterprises results in consumers paying higher prices without any extra benefits and undermine the competitiveness of Partner States Economies. The law protects the competitive process by ensuring that products and services are competitively priced, of good quality and innovative. This benefits consumers, businesses and Partner States’ economies as a whole.
The EAC competition policy and legal framework is intended to enhance a rule-based trading system by promoting economic efficiency in the single market, predictability of the trading regime, good corporate governance and fairness among economic operators. The business entrepreneurial spirit will be stimulated encouraging entrepreneurship development thereby enhancing domestic and international competitiveness of businesses due to level playing field for players.
Challenges of Implementing Competition Policy Reforms
There is resistance by industry and some vested interest groups due to government-business relations connections. The political and business relationships are such that the people in power make decisions based on their personal choice and connection, rather than on merits. Such action of the government leads to inefficiency and creates entry barriers for the new players from entering the market, which hampers the 21 entrepreneurship spirit of prospective entrants
The prevalent lack of a competition culture means that SME entrepreneurs are often not even aware of 22 competition policy reforms. Impliedly the majority of the business fraternity cannot link competition policy and law to economic development. The lack of an effective enforcement mechanism to implement the law in some Partner States complicates the challenge.
Limited resources at the national level allocated to implementation of the regulations has led to institutional and human constraints resulting into weak enforcement capabilities in Partner States were competition laws are operational. Lastly, EAC Partner States’ are either members of COMESA or SADC raises a question of choice of jurisdiction for an anticompetitive business practice affecting EAC and COMESA countries.
Recommendations and Conclusion
The EAC Secretariat should continuously support capacity building programs for countries that are in initial stages of developing their competition regimes, awareness and advocacy activities with a view to improving compliance to the EAC Competition Act.
Partner States should fast track establishment of their National Competition Authorities and if they do so, this will lead operationalising the EAC Competition Authority.
Competition policy and lawis scheduled to be discussed under the COMESA-EAC-SADC tripartite negotiations. This will have material influence on future cooperation 23 and consultation under the proposed Tripartite Competition Forum.
In conclusion, competition policy and law are being introduced at EAC Secretariat and in Partner States presenting numerous capacity constraints. The lack of enforcement mechanisms at national level in some Partner States has delayed operationalisation of the EAC regional competition framework. On a positive note, Partner States recently adopted a roadmap towards implementation of regional competition law and a number of activities are being undertaken to achieve the set objectives.
What are the Benefits of Competition Reforms for Business?
A. The main rationale of Competition Policy
Writing an essay about the possible benefits of competition policy from the perspective of private companies is a real challenge. It must be mentioned from the start that the main pursuit of the competition policy is not the protection of competitors, but the protection of competition as an instrument of public governance. The most effective allocation of economic resources and an enhanced welfare for the consumer might be achievable only by preserving a climate favourable to competition.
Moreover, in the EU, the European integration project has been supported by trade and competition reforms. Trade creates bridges between people and builds new common identities worldwide. In this sense, the free competition opens a gate to new opportunities but also implies a permanent reconsideration of own priorities and strategies.
Competition means to stimulate flexibility, creativity, adaptability, innovation and mobility. However it is also very important to recognise that a space of trade characterised by free competition cannot be free from regulation. My personal opinion is that we no longer can talk about state and market as distinct regulators of trade. The liberalisation of trade sectors previously belonging to the public patrimony and the enhanced role played by non-governmental trade regulators brought about a new situation, in which markets incorporate elements of public governance, while states no longer get involved in strategies prone to place the national public interest above competition and freedom of trade in an entrenched manner.
The available choice is not, as understood before, one between free markets and state intervention. A controlled form of market freedom is the only choice and the control task does no longer belong to one level of governance. The national states have to share their control authority with various other actors: supranational bodies, international trade organisations, private self-regulating associations and standard setting bodies. In this context it is easy to comprehend that the multinational corporations have a bigger role to play and can exercise a significant influence on redefining free-market economy as a social construction.
Antitrust law is construed to maintain the balance between the quest for increased market power on the one side and the consumer welfare, innovation, the protection of the SMEs and a free market access on the other. The main philosophical dictum of European antitrust policy relates to competition on the merits and non-tolerance against cartel activities.
B. The Protection of Business Interests
After revealing that the main pursuit of competition policy relates to the protection of public interest it can be discussed in subsidiary that the private actors also have a role to play in the equation of competition law. Their interests are though protected merely in an implicit manner. I will give some economic examples in relation to the concrete modalities in which private actors can benefit from competition law enforcement. As a guiding line it must be said that competition law neither allows the use of market power for anticompetitive purposes nor the cooperation between already established undertakings in a manner that may cause damages to competition.
Undertakings compete against each other on a certain market, but in the meanwhile they share a common interest namely the one of maintaining a high market price. In this case private businesses, but also public institutions as customers of illicitly cooperative undertakings, would have to pay an exceedingly high price and in the long run the survival of these businesses on the downstream market may be endangered. Competition law protects the customers injured by a cartel agreement and grants them the right 1 to claim damages against their supplier .
Another situation concerns the vertical relations, where a customer becomes part of a system of similar agreements having a cumulative effect on competition such as the case of beer supply agreement via German 2 pubs . Any agreement concluded in breach of the prohibition in Article 101 TFEU is deemed void. Therefore a customer who has been constrained to enter into an illegal distribution contract can both benefit from the ineffectiveness of the vertical agreement and apply for damages.
A third situation is the one of abuse of dominance. It must be underlined that the notion of abuse is an open one, the list of abuses being illimitable. Some of the first cases of abuse of dominance concerned predatory 3 4 5 prices , excessive prices and refusal to supply . The second generation of cases referred to more sophisticated methods such as tying and bundling. The tying of Microsoft Media Player to its own product, the OS Windows, in connection with the refusal to grant access to interoperability information 6 is maybe one of the most famous examples .
Most recently the nature of abuses has become much more intricate and therefore also more controversial. These cases are situated on the borderline between IP protection and competition law definitions of the permissible use of IP rights. Astra Zeneca is one of these complicated new cases, where the withdrawal of marketing authorisation for an original medicinal product based on omeprazole incurred simultaneously with the transmission of unclear representations on the pursuit of obtaining supplementary protection 7 certificates for omeprazole. By using an analogy with US antitrust law and the prohibition against abuse of dominance stipulated by 15 USC § 2 in relation to the 8 Hatch-Waxman Act the trend towards more sophisticated versions of abuse, such as the reverse 9 payment settlement agreement, can be confirmed .
Abuse of dominance may lead to two different forms of practices: exploitative or exclusionary. European authorities expressed the opinion that the exploitative practices are enabled by the implementation of exclusionary practices. Once competitors have been eliminated or annihilated, a dominant undertaking is able to adopt exploitative practices such as excessive 10 pricing . In this sense it becomes obvious that the protection offered against exclusion is beneficial for private businesses competing on the same market as the dominant undertaking.
The fact that the public enforcers constantly adopt a very exigent position in relation to antitrust violations leads to the maintenance of a business environment propitious to new entries and expectantly to a gradual disconcerting of the anti competitive mind set. The reforms of competition policy do not only refer to a more effective enforcement, but also to increasing the legal certainty of the antitrust framework and the clarity of the conditions under which a certain exemption from the named prohibition may be obtained.
As mentioned earlier the main beneficiary of the competition policy is the consumer, not the businesses in their quality of customers or competitors. Therefore, a clear distinction must be drawn between the protection of competition, which e.g. contends with the elimination of a competitor to the detriment of consumers and the protection against unfair competition, which i.a. deals with misleading the public to the detriment of a competitor.
Competition Boosts Corporate Governance
Without effective competition, it is not possible to build a culture of good corporate governance. Incumbent firms under restricted competition generally lack the incentives to use financial and operational resources efficiently. They also often possess considerable market power, which enables them to earn excess profits and wield political influence to tilt public policy in their favor. Sound competition policy helps firms focus on efficiency, reduces price distortions, lowers risk of misguided investments, promotees greater accountability and transparency in business decisions and promotes better corporate governance.
The dark cloud of recent financial turmoil in several developing and emerging market economies has a silver lining. There is now a better appreciation of corporate governance and its role in national economies. Corporate governance is increasingly considered essential encouraging investor confidence, improving the quality of investment decisions, preventing a buildup of excess capacity and fostering the resiliency of the corporate sector. Major efforts to upgrade corporate governance have been made across countries, from Malaysia to Czech Republic to Chile.
To assist in this undertaking, the international community (including the OECD, the World Bank, APEC and the IOSCO) has provided guidelines on the principles and practices of corporate governance. Much of the attention, however, is focused on the firms and the regulations that protect shareholder rights and govern the conduct of managers and directors. However, attention needs to be also given to the environment in which business is conducted, including the degree of competition among firms, entry and exit rules, and the openness of the economy. This type of business environment has a major impact on firms’ incentives to seek out and implement competitive practices and strategies. Unfortunately, the competitive business environment essential for fostering good corporate governance is not generally in place in many countries facing economic and financial stress.
In most developing countries, a few incumbent firms usually account for a very large share of the markets for goods and services (market concentration.) These firms, in turn, are typically owned and controlled by a few large shareholders (ownership concentration.) Corporate disclosure seldom complies with generally accepted standards, making independent monitoring of firms’ performance very difficult. In addition, corruption is pervasive and the judiciary is generally unpredictable. Under this constellation of business factors, a few firms may still make heroic efforts to practice good corporate governance, but most will not.
Governance under Limited Competition
To appreciate the influence of competition on the practice of corporate governance, it’s useful to first look at the risks associated with markets where competition is restricted.
While the liberalisation of markets for goods and services is on the rise, the market for corporate control is generally left out of this trend. Regulatory barriers and firm-level practices have tended to limit the scope of competition in takeovers, divestiture and privatisation, both in industrial and developing countries. The experience of more advanced markets shows that, as regulatory barriers are imposed on corporate control transactions, managerial efforts and board supervision become more slack. Firms tend to postpone addressing business problems. Corporate performance generally declines, with adverse consequences for shareholders.
A study of the US corporate sector during the late 1980s, when sharply intensified anti-takeover regulations brought control transactions to a halt, found that a very large number of the leading firms failed to produce any economic value added (the increase in shareholder value less the cost of capital) for their capital and R&D expenditures (Jensen, 1993). Although many firms produced satisfactory results despite the deteriorating business environment, the average return on invested capital was surprisingly low.
Among developing countries, a more prevalent constraint arises from restricted competition in the market for goods and services. Impediments to competition are diverse, ranging from anticompetitive practices by firms to policy restrictions on ownership and entry. Frequently, entry barriers are disguised as regulation purportedly designed to serve the “public interest.” In fact, these policies usually give the preferred producers and service providers profits in excess of competitive returns. Such profits, however, come from distorted prices — a hidden tax on consumers.
With easy if not ensured profits and preferential treatment, incumbent firms have little or no incentive to use resources efficiently. At any given time, firms insulated from competition generally incur costs which are higher than possible under the best technical and managerial practices (X-inefficiency). Over time, these losses are compounded by the misallocation of resources as the distorted price and profit signals lead firms to make poor investment decisions. In spite of inefficient practices, the incumbent firms may still produce satisfactory operating and financial results. High prices mask high costs. And the resulting burden is borne by society as a whole.
The commercial advantages of large incumbent firms are not lost on banks, which play a predominant role in financial inter-mediation in developing countries. Banks maintain cozy relationships with established and often well connected businesses — a natural outcome in a protected and profitable business environment in which both the borrowers and the lenders operate. In some countries, commercial firms also own and control major domestic banks, creating business conglomerates with “in-house” sources of easy financing for themselves. Moreover, bank lending is often determined by political directives, which generally favor large incumbent firms. Some of these practices contributed to the high leverage of leading firms in East Asia, as well as the widespread corporate distress and banking failures in the recent financial turmoil. More generally, preferred access to bank credit significantly reduces the need of incumbent firms to rely on securities markets where external financiers often demand transparency and accountability of corporate insiders.
The lack of competition also accentuates ownership concentration. Owners of incumbent firms have an incentive to retain control of profitable domestic operations. They may choose to remain a private firm or may go public, but without giving up control (by retaining a controlling stake or issuing non-voting shares.) Available data suggest that a higher share of the leading firms remain private in less competitive markets. Even within the group of publicly traded companies, a higher proportion of closely held firms is observed in less competitive economies. (See the charts below.)
While concentrated ownership in individual firms is not necessarily an issue of concern, there is nonetheless a greater risk of abuse committed by corporate insiders. Unless this risk is mitigated, it is difficult to attract minority shareholders. Taken to the extreme, ownership concentration and the reliance on internal resources can undermine the development of securities and capital markets.
Economic Power and Political Influence
Regulatory and private restraints on the competitive process have deeper ramifications. Existing firms tend to be relatively large in size and few in number. They have a definite organizational and financing advantage in influencing the legislative and regulatory agenda. In more advanced countries where there is a depth of informed opinions, competing interests and independent media, powerful commercial interests may not always prevail. But, in most developing countries, competing opinions are more limited. In this context, interest groups are more likely to succeed in furthering their own agendas.
The close connection between economic power and political influence is generally recognised. The successful resistance of public enterprises to privatisation programs is an example that has been encountered over a wide spectrum of cultural and economic environments, ranging from Ghana to India and Thailand. Another example is the successful opposition of domestic bankers in many countries to the competition of foreign banks. Even under the stress of a crisis, major conglomerates in East Asia were able to water down unfavorable reforms and stretch out the onset of implementation.
Incumbent firms often use their political influence to entrench the position of management and corporate insiders. In many jurisdictions, they can freeze-out minority shareholders at unfavorable prices, dilute the voting power of minority shareholders by issuing new shares in private placements or use poison pills that allow them to reject takeover bids without shareholder approval. In spite of the obvious risk to investors, change is not easy to come about.
The ability of existing corporate elite to resist policy reform is a cause for concern. For one thing, inadequate competition limits the access to capital by new or small businesses. Lenders and investors understandably prefer more established firms with significant business advantages. Over time, the industrial structure may be skewed, with a few large conglomerates dominating, and a large number of small firms struggling with little prospect for growth. Another concern is, with distorted prices that guide business decisions, the pursuit of profits may be detrimental to social welfare. Profitable operations based on domestic prices may actually produce a loss when the inputs and outputs are valued at world prices. This certainly has been the case with many commodity monopolies in Africa and politically connected conglomerates in East Asia.
Competition Boosts Corporate Governance
In a competitive environment, firms generally cannot expect to earn excess profits. An industry that generates above-average profits tends to attract new competitors, which bring forth additional supply and drive down profitability. Where natural barriers to entry are high, excess profits may persist and interim regulation may be needed to protect consumers. Over time, however, technological advances and entrepreneurial innovations tend to chip away the natural barriers, unless they are prevented by regulations.
To withstand competition, firms need to rely on operational efficiency. Unless their production and administrative costs are kept below prevailing market prices, which may be determined by efficient competitors at home or abroad, they cannot service their debt and meet shareholders’ expectations. Investors need to evaluate the viability and cash flows of projects, rather than relying on preferential treatments or on market power. Under effective competition, preferential treatment can be quickly detected and brought to light by those who suffer adverse consequences.
Where competition is intense and global in scope, more firms realize that corporate governance makes good business sense. Investors seek out firms that run the business efficiently, treat shareholders equitably and comply with high standards of disclosure, even when they are not mandatory. By applying good governance, a firm can earn a good reputation and efficient access to finance, which in turn enhances their ability to compete. In effect, good governance becomes an instrument of competitive strategies.
Ultimately, the key role of competition is to enhance economic freedom. It provides opportunities for new entrepreneurs and firms to compete on economic merits, and not on the ability to garner political favors. More business ideas get to face the market test. Over time, firms with good governance are more likely to succeed, while those without it will be shunned and weeded out.
Available data show a positive association between competitive markets and the quality of corporate governance. First, there is a clear indication that countries with more competitive markets have been more successful in deepening the securities markets. 1 (See the left-hand panel. ) Since direct measures of governance quality are not currently available, the growth of securities markets is used as a proxy. In addition, there are indications that countries with more competitive markets have been able to attract more shareholders to participate in the securities markets. The right-hand panel below shows that, for a given quality of lawand order, market competitiveness generally raises the extent of minority shareholders’ participation
In most developing countries, the goal of improving corporate governance can be significantly advanced by strengthening the competitive process. Certainly, the first step in this direction is widen the scope of deregulation, as well as trade and investment liberalisation. However, these measures need to be buttressed with more domestic market competition via adoption of a sound competition policyand establishment of an effective competition agency Of particular importance to the practice of corporate governance is to ensure adequate competition in the corporate control market. In this regards, securities and capital market regulations are necessary to promote public disclosure and accountability of corporate insiders. Experience shows that a specialized agency, like the securities commission, can play a key role in deterring frauds or self-dealing and inbuilding investor confidence.
In most developing countries, the goal of improving corporate governance can be significantly advanced by strengthening the competitive process. Certainly, the first step in this direction is widen the scope of deregulation, as well as trade and investment liberalisation. However, these measures need to be buttressed with more domestic market competition via adoption of a sound competition policyand establishment of an effective competition agency Of particular importance to the practice of corporate governance is to ensure adequate competition in the corporate control market. In this regards, securities and capital market regulations are necessary to promote public disclosure and accountability of corporate insiders. Experience shows that a specialized agency, like the securities commission, can play a key role in deterring frauds or self-dealing and in building investor confidence.
– A mechanism for ensuring that public policy generally does not unnecessarily inhibit competition;
– A reliable judiciary and a legal system which permits private enforcement; – Independent media to check the misconduct of firms and public officials.
– International Institute of Management Development (IMD), 1999, World Competitiveness Yearbook.
– Jensen, M. C., 1993, The Modern Industrial Revolution, Exit and the Failure of Internal Control Systems, Journal of Finance 48:831-85.
– Khemani, R.S., 1994, Competition Law, Viewpoint (#14), World Bank.
– La Porta, R., F. Lopez-de-Silanes and A. Shleifer, 1999, Corporate Ownership Around the World, Journal of Finance 54:471-517.
– Leechor, C., 1999a, Protecting Minority Shareholders in Closely Held Firms, Viewpoint Number 190, World Bank.
– Leechor, C., 1999b, Reviving the Market for Corporate Control, Viewpoint (Number 191), World Bank.
– World Bank, 1999, World Development Indicators.
Why do Big Businesses Dislike Competition Law?
It is a natural desire for any business to maximise its profits in its product Ioffers. This desire ignites a certain kind of behaviour that may harm other competing interests in the market. Monopolies for example, have the ability to maximise profits and frustrate new entrants which depicts behaviour that reduce consumer welfare. Competition law contains prohibitions, fines and other penalties, which obviously affects big business and their undue profits. Big business will thus try everything possible to discredit such a law that interferes with their self-serving interests, i.e., big money and personal prestige forthe shareholders, directors and managers. This article tries to argue why big businesses dislike competition law
The Desire To Set Fire To The Competition
Competition law safeguards the greater public interest in the market place against the sectarian interests of big business. Big business loath being subject to the high levels of transparency and accountability that competition laws demand. Competition authorities desire to see competition thrive and they will strive to protect the competition process from being hijacked by big business. A 1 blogger has made a noteworthy insight :
But competition is challenging. First, when you have strong competitors, you will lose business to them, often frequently. That increases sales costs, time to close, and makes it harder to grow rapidly… Competitors can also strike business deals with powerful allies and gatekeepers who can make it hard and at times impossible to enter certain parts of the market. Competitors are a pain in the rear and make operating a business harder in many ways. Clearly, big business does not like to lose. Competition law intrusions through cease and desist orders as well as fines can make them lose their profit margins.
We are the Champions, My friend!
In developing countries, big businesses have always profiled themselves as the 2 ‘national champions’ to drive industrial and economic growth, the ultimate channels of employment, higher tax revenues for the State, poverty reduction agents, etc. Some businesses consider and or have a disposition that the country owes them more than they owe the country. They are the national champions who fund the government budget and are involved in several corporate social responsibility programmer. At a time when Zambia was establishing its competition law, the country was undergoing an extensive industrial restructuring through privatization and commercial station of formerly State Owned Enterprises (SOEs). With the new competition law having had no retroactive effect, former monopoly and dominant SOEs were transferred from State monopolies into private monopolies and dominant firms. This includes Chilanga Cement (now Lafarge Zambia), Zambia Sugar (now owned by Associated British Foods), Zambian Breweries (owned by South African Breweries), BP Zambia. All these enterprises have been involved in anti-competitive conduct and have maintained sustained corporate social responsibility programmed and highlighted their tax remittances to the treasury and employment creation.
In some countries, the law has been couched in such ways that fines and penalties may be preferred on smaller businesses but not on big ones. For instance, there are possible defenses for abuse of dominance in Botswana. However, even where abuse is established, there are no penalties. Under section 30(2) of the 3 Competition Act of Botswana, it is required that when determining whether an abuse of dominant position has occurred, the Authority may have regard to whether the agree mentor conduct in question:
(a) maintains or promotes exports from Botswana or employment in Botswana;
(b) advances the strategic or national interest of Botswanainrelationtoaparticulareconomicactivity;
(c) provides social benefits which outweigh the effects on competition;
(d) occurs within the context of a citizen empowerment initiative of the Government, or otherwise enhances the competitiveness of small and medium-sized enterprises; or
(e) in any other way enhances the effectiveness of the Government’s programmes for the development of the economy of Botswana, including the programmes of industrial development and privatization.
What this means is that a dominant enterprise may actually use the foregoing as defences for abusing their dominance. On the other hand, smaller firms engaged in a horizontal agreement, which is a per se prohibition, have no defence and can actually be fined up to 10 percent of their turnover. However, even for cartels, the Authority and Commission would have to demonstrate that the conduct was engaged in 4 ‘intentionally and negligently’ . Still on abuse, in the absence of penalties, there is a remedial approach under section 44 of the Act, which provides that where upon the conclusion of an investigation and a hearing the Commission determines that an abuse of dominant position has occurred or is occurring and the provisions of section 30 do not apply to the matter or do not apply sufficiently to offset the adverse effects on, or absence of, competition, the Commission shall give the enterprise or enterprises concerned such directions as the Commission considers necessary, reasonable or practicable. The Commission may direct the enterprise concerned to remedy, mitigate or prevent the adverse effects on competition that the Commission has identified; or any detrimental effects on users and consumers to the extent that they have resulted from, or may be expected to result from, the adverse effects on, or absence of, competition
There is also no penalty for engaging in a merger that meets the notification thresholds without the 5 Authority’s authorisation . On the other hand, any form of collusion or concerted practice is punishable up to 10 percent of the turnover of an enterprise. The same applies to resale price maintenance.
Is Competition Law a Scarecrow to Investors?
In most countries, big businesses are close to policy makers and a ‘harsh’ competition law may be classified as a scarecrow to investors. Enterprises that have for some reason been under investigation and/or have had a decision turned against their interest will always trumpeter Competition Authority’s scaring away investors and/or destroying business. This is a classical strategy to create an anti-competitive diversion.There is no empirical evidence anywhere in the world to demonstrate that competition policy interventions have collapsed any economies. If anything, the lack of effective implementation of competition policy’s one of 6 the causes of market failure .
Why is Business Afraid of Competition Reforms?
The virtues of competition cannot be sufficiently emphasised for Tmany reasons. First, competition gives consumers the advantage of a wider array of choice. Second, consumers will also have the benefit of lower prices when there is greater competition. Third, there would, generally, be a more level playing field for companies in that they can enter the industry more easily, there being fewer barriers to entry. Of course, such barriers as result from, say, the high cost of capital for setting up a company in a specific line of business would still be present. But barriers that are imposed due to the monopoly power of a firm would not be a problem if the principle of competition prevails. Finally, and perhaps most importantly, the welfare of the economy, as a whole, will be higher with competition.
With all these advantages being available if competition is allowed to prevail, it would be surprising why anyone would be afraid of competition reforms. Surely consumers would welcome competition policy and law. Many firms would be eager to see the introduction of competition reforms because they will not be subject to the exercise of monopolistic power by the bigger firms and those that are extant in the market. The abuse of the dominance of big firms will not be a threat to new entrants in the presence of a competition framework. But those firms that are in a position to take improper advantage of their dominance would, certainly, like to hinder the introduction of competition.
In other words, being a big firm is not a negative issue in itself, neither is dominating a market bad in itself. However, the abuse of one’s share of the market can impede competitive practices. This would be to the favour of some of the firms that wish to engage in unfair practices, but it would have the unfortunate effect of adversely affecting the economy as a whole. As has been mentioned, the welfare of the economy considered in overall terms would decline, in the process benefitting only a few companies.
Firms, if left to their own devices, would attempt to take advantage of their power and reap profits through unfair practices. This is where government intervention is necessary, and it will take the form of introducing and implementing the right institutions. This implies putting in place competition policy and law; it also requires reviewing the manner in which the policy and law is implemented, revising it where necessary.
It is not sufficient if the right policies and legal framework is introduced it also has to be effectively implemented; and this requires political will. Firms that wish to adopt anti-competitive practices and abuse their position in the market will, of course, be afraid of competition because, then, they will not be able to earn supernormal profits.
It would be useful to illustrate what has been discussed up to this point with a few examples.
The president of an association of floriculturists in Malaysia, the Cameron Highlands Floriculturist Association, publicly announced that the association’s members had agreed to increase the prices of flowers by 10 percent. This amounts to price fixing and is an anti-competitive practice that contravenes Section 4(2) of the Competition Act 2010.
The Malaysian Competition Commission (MyCC) did not approve of the association’s act and issued a “proposed decision” against the florists. Although florists are may not be big business magnates, it was clear that MyCC would not tolerate anti-competitive practices, even if practiced by small floriculturists. Obviously, the members of this association had been engaging in price fixing in the past and they, probably, assumed that the competition law would not be applied to their public announcement. Thus, it can be noted that even those engaged in the floricultural activity, regardless of size of activity, can misuse their power if it is not curbed, and these farmers would have been happier either if the Competition Act was not in place or if it was not applied.
A more momentous example concerns the share swap between Malaysian Airlines System (MAS) and AirAsia. For many years, AirAsia and MAS were engaged in a battle for the local and regional air market share. MAS’s wholly owned Firefly offered low cost flights into Sabah and Sarawak, two states that are separated by sea from Peninsular Malaysia. This was in competition with AirAsia. Firefly was losing money on these routes because it was offering full services at low-cost fares. To reduce competition both airlines decided to cooperate. As part of the collaborative agreement a share swap deal was entered into, with AirAsia’s parent company, Tune Air, taking up a 20 per centequity stake in MAS. For its part, Khazanah Nasional, which has a 70 percent stake in MAS took a 10 per cent stake in AirAsia. Further, senior management in AirAsia sat on the MAS Board with representatives from Khazanah sitting on AirAsia.
Again, MyCC, imposed a “proposed decision” on both AirAsia and MAS for infringing Section 4(2)(b) of the Competition Act. MyCC did not approve of the comprehensive collaboration framework between the two airlines companies and fined both of them to the tune of RM10 million each.
This illustrates why business may not like competition reforms. Simply put, business has a tendency to accumulate power and act in its own interests and in the interests of its shareholders. By its nature, business is not interested in looking at the economy-wide perspective of the consequences of its actions. In the MAS-AirAsia case, the companies were willing to sacrifice the principle of competition in return for a more stable arrangement between both companies, something that would assure them of a predictable share of the market and of profits.
Business would prefer to take its own course of action. But it is the responsibility of governments to lay down rules to ensure that business does not violate the principles of competition. To do this, governments need to have the political will. The links between governments and business are well-known. No less worrisome are government-linked companies that are supported directly or indirectly by the government, acting in ways that encourage anti-competitive practices. Policy makers should be aware of the need to pursue development with competition; beyond a point it may not be possible to achieve greater development without embracing competition and instituting competition reforms.
Monopolistic Competition as the Right Benchmark for Competition Assessment and Its Implications to Business
Whenever there is a complaint (or initiation) against a Want-competitive behavior/ conduct prevailing in the market, competition agencies treat/address such problems as they are perceived to be deviations from the (perfect) competition. But perfect competition is an ideal market situation that seldom exists in reality. Down ward sloping demand curve for any product dictates market structure to be anything less than perfect competition. In the absence of a true benchmark, I propose ‘Long Run Monopolistic Competition’
The diagram above depicts the typical monopolistic competition and Dl and show the actual sales of the firm at each price after accounting for the adjustments of the prices of other firms in the so-called ‘Relevant Market’. Dl and Dell are sometimes called actual sales curves or share of the market curves since they incorporate the effects of actions of competitors to the price changes by the firm. The Dl curve,for instance, shows the full effect upon the sales of the firm which results from any change in the price that it charges, it is thus the locus of points of shifting actual demand curve (AR curve) as competitors, acting simultaneously, change their price. It should be clear that the change in the price does not take place as a deliberate reaction to other firms’ actions, but as an independent action aiming at the profit maximisation of each firm acting independently of others.
The Dl curve shows a constant share of the market, and as such it has the same elasticity as the market demand at any one price. Clearly, Dl curve is steeper than actual demand curve (AR curve) because the actual sales from a reduction in the Pare smaller than expected as all the other firms reduce their price and expand their own sales simultaneously. A movement along Dl shows changes in the actual sales of existing firms as all of them adjust their price simultaneously and identically, with their share remaining constant. A shift in the Dl is caused by the entry of new firms or exit of existing firms from the industry and shows a decline or increase in the share of the firm. Chamberlin argues that if the demand curve is downward sloping and firms enter into active price competition while entry is free in the industry, then Q cannot be considered as the socially optimal level of output unlike perfect competition with the horizontal demand curve. Consumers desire a variety of products and product differentiation reflects the desire of the consumers’ willingness to pay higher prices in order to have a choice among differentiated goods. The higher costs resulting from producing to the left of the minimum average cost is hence socially acceptable. Thus, the difference betweenQ* and Qx is not the right measure of excess capacity but rather a measure of the social cost of producing and offering greater variety.
However, Chamberlin argues that, if firms avoid price competition and enter into a non-price competition, there will be excess capacity in each firm and inefficient productive capacity in the industry. In this event, the firm ignores the actual demand curve and concern itself only with its market share. In other words, Dl becomes the relevant demand curve and the long-run equilibrium is reached only after entry-exit has shifted the Dl curve to a new position oftangencywithAC curve. According to Chamberlin excess capacity is the difference between Q* and Ql and not Q* and Qx. If the market is mono politically competitive the output is lower than society would ideally like it to be and the socially desired P = MC cannot be achieved with downward sloping demand curve and market equilibrium is dictatedbyMC=MR.
Given the nature of the benchmark market as stated above there is inherent excess capacity in the firms, in the industry and in the markets. A pertinent question that arises given the background is whether maintaining excess capacity is anti-competitive or not. Or does it indicate some anti-competitive intent? Or what is the optimum level of capacity utilization?
By default in Monopolistic Competition, even when P = AC, P > MC and there are inherent profits which are driven by market equilibrium condition at MC = MR. Do these profits indicate anti-competitive intent? Or what is the optimum profit that a firm should make? Again the pricing (and profits) as a matter of fact is dictated directly by nature of demand curve (elastic, less elastic, inelastic, etc.). The demand elasticities are driven by the following factors -number of close substitutes for a good/uniqueness of the product; the cost of switching between different products; the degree of necessity or whether the good is a luxury; the percentage of a consumer’s income allocated to spending On the good; the time period allowed following a price change; whether the good is subject to habitual consumption; peak and off-peak demand; the breadth of definition of a good or service etc.
Often the benchmark markets are so difficult to find especially when some markets are a natural monopoly, natural duopoly…..natural oligopoly where one cannot expect the industry to behave in monopolistic competition let alone perfect competition. Very important to note is that the presence of multi-sided markets where the market share of their gest firm can easily be multiple of the market share of the second largest, the second largest firm’ market share can be a multiple of the market share of the third; it cannot accommodate many firms naturally; there are inherent inequality and high concentration etc. On the other side, is it always in the interest of firms to compete? Or is it easier not to cooperate than compete? Any new entrant can be welcomed with predatory pricing gift were not to cooperate or to stay, a monopoly; a new entrant can be drawn into existing cartel set up; any non-cartel member can also follow the cartel pricing patterns without having to face trigger pricing, etc. Every business wishes to establish its market power in terms of non-decreasing market share, market presence, brand-loyalty….but achieving this goal fairly is very difficult especially when there are easy ways/temptations to behave less than fairly.
Most economic agents let alone business entities, for instance, trade associations still believe that it is their fundamental (economic) right to stand united to behave even in an anti-competitive manner. Be it business or other labor unions like those of lawyers, bankers, etc., they most likely engage in discussion (information exchange)to protect their’self-interest’ first. These are not driven by rules but temptations to protect self-interest in the face of competition. In other words, anti-competitive conducts are less of a deviation from monopolistic competition but rather a reality and competition agencies often try to discipline firms to operate as if they are in monopolistic competition but the deviations are natural and are the mainstream business activities. Moreover, competition laws are often ambiguous to the less informed businesses charging more are subject to excessive pricing; charging less are subject to predatory pricing; charging in the same band are subject to collusive pricing, etc. However proof based and case-by-case investigations they could be, these are sufficient to confuse the self-interest temptations to deviate.
Why is Business Afraid of Competition Reforms?
Abstract: The firms operate in an External environment which is comprised of different forces that may have substantial effect on business operations. The forces which are part of business environment include the parties to business transactions at the firm level, the factors such as innovations, technical developments and government regulations at industry level and the macro factors such as the state of the economy etc. The most significant aspect of business environment is its ever changing state and its impact on the fortunes of businesses. The businesses constantly need to think on continuing to being relevant in this very dynamic environment. While some changes may be recognized and efforts to adapt to these can be made, there is always the factor of uncertainty as to recognition or on the process or success of adaptation. This article is an attempt to bring out this uncertain nanosecond quint fear of changes in external environment resulting from competition reforms. The views expressed in the article are personal and do not represent the views of the Commission. Business always welcomes reforms but generally is averse to regulation. Competition laws are aimed at ensuring the maintenance of process of competition.
The objective of competition laws is ensuring the healthy and developed Markets rooted in competitive forces. This objective is aligned with the goals of the market constituents viz. business and the consumer. It allows business a platform to grow and at the same time allows the consumer to benefit from competition in markets on the aspects of product choice and prices. The achievement of this objective requires regulating the conduct of market players to prevent the abuse of the competition process. The fear of business is rooted in this aspect of regulation while the reforms and pro-business approach that competition laws envisage is ignored. The basic reasons for negative business perceptions can be discussed as under.
Lack of Understanding
The first and most obvious reason of fearing competition reforms is lack of understanding the rights and obligations that form part of the law. Competition laws are designed to interfere by exception, rather than a norm. In other words, competition laws are meant to ’empower the invisible hands’,i.e. support the process of free market operations. However, there is a general tendency to be afraid of some obligations cast by the law and not appreciating the rights accorded.
Competition Advocacy is included in the mandate of most of the modern competition laws and it is precisely aimed to reduce the fear in business circles emanating from lack of knowledge.
There is always an element of resentment of business firms to regulation. Regulation is viewed as creation of hurdles and against the liberal business policies. Competition laws also prescribe certain procedures to be followed, approvals to be received, especially in merger and acquisition cases. These guidelines invoke fear of regulatory permissions being denied and causing derailment of business plans. What is misunderstood is that competition laws in themselves have changed over time to adapt to the changing business environment. In India, MRTP Act 1969 was repealed by progressive Competition Act 2002. The competition laws which were against creation of monopolies are now centred only on abuse of market power, while tacitly recognising significance of big players. These reforms address the concerns of business firms and must be viewed positively.
All pervasive: Conflict with Business Strategies
Competition laws are designed in such a manner that these touch upon every aspect of business activity. The laws are broad enough to cover the agreements entered into between competitors, suppliers and distributors on various aspects of business viz. production, distribution, sale, supply, storage, etc. The unilateral conduct of a firm, which has the market power, may also be scrutinized for alleged abuse of dominant position.
Both these aspects of agreements and unilateral conduct are looked into on an ex-post basis. In addition to these aspects, a very important part of competition laws is regulating the combination transactions and these Regulations are applied on the ex-ante basis, i.e. the pre-approval of competition agency Would be required if the transaction meets the thresholds that may be prescribed by the respective agency. The above reading suggests that competition laws in some way or the other may hinder the ‘business strategies’ that might have been planned or operationalized by the firms. Business strategies encompass the external business environment and are Aimed to build an acompetitive advantage. With the enactment of competition laws, a new element is added to business strategies i.e. ‘Fairness’.
The word fairness here denotes that the strategies should not be designed to impede the process of competition in the Market. The competition laws raise the bar for survival; you can grow big, but the growth cannot be achieved by acts which are exclusionary or causes foreclosure of markets.
This condition, for obvious reasons, may limit the otherwise very broad array of strategies that could have been perused by the firms to take over the markets and is thus one potent reason for business firms to be concerned.
Uncertainty as to Philosophy in Application of Competition Laws
This is a concern area for those firms who are aware of their obligations under the competition laws, but are not clear as to how a particular jurisdiction may interpret the conduct. Like every economic law, there are a number of areas in competition law which are subjective. For example, the term very frequently used in competition literature is ‘appreciable adverse effect on competition or substantial lessening of competition’, while the term suggests that every anti competitive activity may not find foul of the Act, yet there is limited knowledge on how to ascertain degree of competition harmed as appreciable or substantial. Different jurisdictions have different standards on how they perceive and apply theory of competition harm. These differences in jurisprudence over similar issues further add to the uncertainty and to resulting fear of the laws.
Licensing of IP: Business Strategy & Competition Regime
Exploring the Attribute of Licensing
Manifestations of human Mcreativity in the form of ideas and expressions are converted into private property and protected by law through the intellectual property (IP) system. These forms of property like copyright, patents, trademarks, trade secrets and designs are tradable and licensing is one important way of trading in them whereby the owner grants rights to another to use that property while continuing to retain ownership over it.
The fundamental character of IP is intangibility; therefore, its use by one does not detract from its use by another. In other words, it can be used simultaneously by many users for the same or entirely different purposes without impacting on its independent use by the owner. This basic nature of IP makes its licensing possible and profitable. Consequently, the owner of IP could potentially license the use of his property to many licensees, thereby maximising the profitability of his property.
Law gives exclusive rights to owners of IP allowing them to exclude all others from the exploitation of their property. Exclusive rights are a sort of monopoly.
But the same principle of exclusivity can be used to invite others to exploit one’s intellectual assets. This way, licensing can be seen as moving away from the traditional and narrow use of the concept of exclusivity to a broader, modern and creative use of the same concept. Generally, IP lawyers have three tasks obtaining rights, protecting rights through various means including litigation and transacting business in them. Licensing law exists where laws of contract and IP converge. It is born out of the interplay of the doctrine of contract and the principles of IP.
Role of Licensing in Business Strategy
Licensing has a vast impact on our economy. The greatest economic value of IP comes from its use in licensing. It has aptly been said that IP is the currency of the twenty first century and those who own and/or control it control the marketplace. However, IP is not wealth in itself but only a tool or source of it. And this reservoir of wealth is made to flow only when IP is used to produce and market goods and services, which in most cases depends on effective licensing. Business transactions in IP are highly ubiquitous. The contracts on which we click “I agree” while downloading computer software or using online information are mostly in the form of licenses. From off-the-shelf software to complex technology transfer arrangements, all depend on the same licensing law principles. Similarly, creative fields such as music, film and books thrive on licensing arrangements. Virtually every business today is confronting licensing issues on ever increasing scales.
The activity of licensing always involves two parties. One brings in his property and the other brings in his means to exploit that property. So, in that sense it is always a joint venture. The secret to success of this joint venture is that each party perceives the other as a partner in a fruitful collaborative process. Licensing enables one to concentrate on one’s core competence and leave the rest to the other party to the license. For example, an author, a university or an R&D company may not have the will or resources to commercialise their works or inventions themselves. So, they can invite others by licensing out their IP to them while continuously engaging themselves in developing new technologies or works. On the other hand, the licensee may have core competence in localisation, logistics, distribution and risk management. He can concentrate on his core competence while combining it with the licensor’s IP. Licensing also helps the owner of IP to explore new markets through the licensees and thus expand his business.
There is no one single universal response to an IP infringement. Infringers could be pursued, sued, persuaded or ignored and each one of them will leave the parties with multiple issues. As such, suing the infringer is not the only remedy with the owner of IP and it may sometimes be counterproductive to do so. Infringements could be utilised as business opportunities by thoughtful licensing which is often a precious tool in mitigating the probability of expensive disputes. Therefore, licensing can be creatively used as a means of turning an infringer into an ally.
Licensing vis-a-vis Competition Regime
Competition laws throughout the world regulate the conduct of business relationships and are aimed at promoting competitiveness and making unlawful anticompetitive practices that may, for example, have the effect of lessening competition. While fostering competition in the market, competition law interacts with IP and has a significant impact on various practices which are within the domain of IP.
Whatever is granted by IP is not inherently in conflict with the norms of competition law and is not per se anti-competitive or excessively exploitativeit only becomes anti-competitive when the owner of IP seeks to extend it beyond its intended and proper scope. In other words, competition law comes into picture only when such monopolies are abused. An example of such abuse would be when the owner of IP tries to impose anti-competitive obligations on the licensee.
Since a license of IP allows a third party to exploit the rights, allowing him to do what would otherwise be unlawful, the grant of a license opens up markets and does not restrict competition. Therefore, the effects of licensing are generally pro-competitive and beneficial to consumer welfare. Licensing means introducing competition in one’s own backyard. Though competition law does not require the owner of IP to create competition in its own property but nonetheless competition concerns may arise particularly when a licensing arrangement harms competition among entities that would have been actual or likely potential competitors in a relevant market in the absence of the license. Therefore, licensing law, like other fields of commercial contract law, is influenced by competition law. In fact, competition law, as a contract limiting doctrine is extremely relevant to licensing practices as it is to other commercial practices.
Competition laws create certain constraints on IP licensing. These constraints are worthy of being considered at the time of negotiating and drafting the license contracts, otherwise they could threaten the very enforceability of the license should a dispute arise. While it is best to iron out the differences of views between licensors and licensees through negotiations, there will be situations where licensees may be tempted to rely on competition rules to seek redress against what they perceive as unfair terms in the license contract.
Competition Law and Intellectual Property Rights
Intellectual Property is a creation of the intellect which is owned by an Iindividual or an organization who can then choose to share it freely or to control its use as an asset. It is protected by giving the creator of a work or inventor exclusive monopoly rights to commercially exploit his creation or invention for a limited period of time. As these rights can be sold, licensed or otherwise disposed of by the right holder like any other property, these rights often form the basis of a company’s competitive advantage.
Intellectual Property Rights and Competition Policy has been argued to be possessing diametrically opposing rationales. Whereas competition is seen to be essential to curb market distortions, promote efficiency in the use of resources, maintain prices at fair level, prevent monopolistic profits and conduct and promotion of consumer interests and welfare, an IPR is seen as a privilege granted in recognition of the need of the holder to recoup costs incurred in the research and innovation process, so as to maintain incentives for further innovation. Thus an IP entails an exclusive right for a limited time, enabling the holder to charge a higher price than the marginal cost of production. That higher price reduces access of consumers to the product, and access of other producers to production inputs and methods. The monopoly granted prevents or deters competition from rivals that can sell at lower prices.
This legal monopoly provided by the relevant IPR statutes may sometimes lead to market power and even monopoly as defined under the competition law. It may also be possible that unreasonable anti-competitive conducts are carried on by IPR holders which pose a concern under the competition law.
There is thus a balancing required between the monopoly privilege granted to the IP holder and the public interest (including consumer welfare, the competition from other producers, and national development prospects). The appropriate balance requires the right policies that enable that IP be appropriately given for correct reasons and to the correct parties, and that they be of an appropriate period, and that flexibilities and exemptions and exclusions are provided to safeguard vital public interests.
Anti-Competitive conducts an area of interplay under the Competition Act, 2002:
The competition act,2002providesthefollowingconducts which may pose concern under the competition laws:
(a) Anti-Competitive Agreements
(b) Abuse of Dominant Position 1
(c) Mergers and Combinations
I. Anti-Competitive Agreements and Intellectual Property:
The Competition Act, 2002 provides that no enterprise or association of enterprises or person or association of persons shall enter into any agreement in respect of production, supply, distribution, storage, acquisition or control of goods or provision of services, which causes or is likely to cause an appreciable adverse 2 effect on competition within India. The act further lays down that any agreements made in contravention 3 to the aforesaid are void in nature.
However,the samedoes not apply to an act/ agreement made in furtherance to an Intellectual Property in view of the exception provided in Section 3 (5) (1) of the Act, which provides that:
“Nothing contained in this Section shall restrict- (1) The right of any person to restrain any infringement of, or to impose reasonable conditions, as may be necessary for protecting any of his rights which have been or may be conferred upon him under:
a. The Copyright Act, 1957;
b. The Patents Act, 1957;
c. The Trade Marks Act, 1957;
d. The Geographical Indications of Goods (Registration and Protection) Act, 1999;
e. The Designs Act, 2000;
f. The Semi-Conductor Integrated Circuits Layout Design Act, 2000;.”
This exception defines the interface between the domains of Competition Law and Intellectual Property for anti-competitive agreements wherein the Act while recognising the statutory monopoly provided by the IP statutes and the free will of the Intellectual Property holders to impose conditions on the use of his property so created, qualifies the exception to be ‘necessary’ and ‘reasonable’ in nature. The terms ‘necessary’ and ‘reasonable’ have not been defined under the Competition Act, 2002 and the Context of their usage has to be seen in light of the entire provision of Section 3(5) which seems to suggest that these terms should be interpreted in view of the rights conferred by the various IP statutes.
Each of the individual IP statute lays down the specific rights conferred upon the holder including limits, if any, on such rights which can be utilized to assess the 4 conditions of necessity and reasonability. At the same time, the Competition Commission of India (CCI) may move beyond the traverse of the IP statutes to judge 5 the agreement under the ‘rule of reason’ doctrine. The complex matter for CCI would be to determine at what point, if at all, the exercise of an intellectual property right could be so harmful to consumer welfare that competition law should over-ride the position as it would be on the basis of intellectual property law alone. This tipping point is difficult to define or specify and would depend on the facts and circumstances of every such agreement.
The overlap of IP and Competition law is generally observed in IP licensing and collaboration agreements wherein terms of license/collaboration may be tested from a competition law perspective. Internationally, various jurisdictions have each issued rules and guidelines as to when agreements concerning the licensing of IP rights are likely to be problematic from a 6 competition law perspective. An analysis of the European Commission and the U.S. Department of Justice (DOJ) Guidelines reveal that both the jurisdictions encourage an economics-based approach that weighs the pro-competitive and anti-competitive effects of IP licensing. In addition, both jurisdictions have created safe harbors where such agreements will not raise competition law issues provided:
(i) no specified hardcore restrictions are included in the agreement, such as price fixing or market allocation, and
(ii) The parties’ market shares are not too high.
Till the time Competition Commission of India (CCI) does not come out with precedents and/or guidelines concerning the licensing of IP rights, it is likely that CCI may rely on precedents from established jurisdictions such as USA and the EU.
Examples of provisions of licensing/collaboration agreements which may raise anti-competitive concerns may include territorial exclusivity and export bans, field of use and quantity restrictions, payment of royalties beyond the term of the protection of intellectual property, non-compete clauses, no challenge clauses, grant-backs and improvements clauses, tying and bundling, cross-licensing and ip pools, refusal to deal etc.
Apart from the licensing terms, other agreements pertaining to Intellectual Property which may raise anti-competitive concerns may include IP settlement agreements, trademark co-existence and delimitation agreements, joint acquisition of IP rights by competitors etc.
II. Abuse of Dominant Position and Intellectual Property Rights:
Unlike the anti-competitive agreements, an act done in furtherance to an Intellectual Property Right is not an Exception to the provision of abuse of dominant 7 position under Section 4 of Competition Act, 2002. In this relation, while a mere ownership of Intellectual Property cannot be attacked under the said section, it Would apply to an abusive exercise of the right in question by a dominant undertaking. The assessment of ‘dominance’ and ‘abuse’ would be determined, as in any such instance, in the relevant market in accordance with Explanation (a) of Section 4, Section 19 (4) and Section 4 (2) of the Act.
Thus, whether an IP creates market power and raises potential competition law disputes would depend on the availability of substitutes for the product incorporating the intellectual property, physical characteristics of the goods, the prices, intended use and nature of the buyers.
While there have been instances where such issues have been raised before CCI, as of today, there is no binding precedent yet. Hence, precedents from established jurisdictions such as US and the EU may be a relevant point of reference.
Internationally, examples of abuse of dominant position in relation to intellectual property have been seen in the cases of refusal to license by an IPR Holder (the extent and conditions of abuse have however differed in 8 9 different jurisdictions) ,demanding excessive royalties , 10 bring vexatious litigation etc.
The plea of any abuse of the dominant position is often raised in cases where a dominant undertaking controls 11 an ‘essential facility ‘ that may be required to provide its competitors with access to the essential facility or 12 where such an access is necessary for ‘interchangeability ‘ or where such an access is necessary in view of the 13 public interest and social welfare
In such scenario, the dominant undertaking may raise competition law concerns by unilaterally refusing to deal with a party requiring such access. Internationally, there have been differences in approaches between European and U.S. antitrust officials to govern Refusal to License as an abuse of 14 dominance. The European Commission is observing higher standards and is strict on dominant companies refusing to license their IP rights. Therein, the Commission has set out three conditions wherein such refusal to license would constitute an abuse of dominant position:
1. The refusal must relate to a product or service indispensable to the exercise of activity on a neighboring market;
2. The refusal must be of such a kind as to exclude any effective competition on that market;
3. The refusal must prevent the appearance of a new product for which there is potential consumer demand.
As against this, the United States seems to have adopted a more lenient approach in the Refusal to License issue as the authorities therein are of the view that IP rights create a rebuttable presumption that a refusal to license is permissible.
How the same will be dealt within the realms of the Competition Act, 2002 would again be based on the assessment of the point wherein the exercise of an intellectual property right is determined to be so harmful to consumer welfare that competition law should over-ride the position as it would be on the basis of intellectual property law alone.
III. Remedies that can be granted by CCI for an AntiCompetitive Agreement / Abuse of Dominant Position wherein IP is involved:
Section 27 of the Competition Act, 2002 provides the orders that can be given by CCI as remedies for anti Competitive agreements or abuse of dominant Position Undertaken by entity/entities. Accordingly, any remedy in relation to anti-competitive agreement/ abuse of dominant position wherein IP is involved would also be provided within the realm of the said section alone. The section empowers the Commission to provide remedies of the nature of ‘cease & desist’ orders, penalties, etc. At the same time, it also provides CCI with extensive powers to issue an order/direction 15 as it deems fit. It may be argued that the same may include the power of the CCI to grant compulsory licensing of IP which hitherto is within the domains of 16 the specific IP sector regulator. It is of relevance to note that such grant of such compulsory licensing by the IP sector regulator is based on certain conditions 17 precedent, beyond the scope of which compulsory licensing cannot come into being under the Intellectual Property Laws. However, Section 27 of the Competition Act does not prescribe CCI to be bound by any conditions precedent before and it shall be required to determine the grant of compulsory licensing based on competition law assessment. The CCI may in such situation take reference from the Controller of Patents or the Copyright Board as the 18 cases maybe under Section 21Aofthe CompetitionAct, which may be considered by the CCI before giving its findings.
It is of further relevance to note that while the assessment and grant of compulsory licenses under the Intellectual Property regime and the Competition law regime are based on different assessment/ justification, it may give rise to the possibilities of multiple jurisdictions and forum shopping. Overlapping jurisdictions may lead to inconsistencies, legal uncertainties, duplicate administrative burdens on the private sector and increased litigation thereby increasing administrative costs for companies and having a negative impact on consumer welfare.
Such a scenario has not yet been tested in India however the rising awareness of Intellectual Property, competition law, social and consumer welfare may require that such an overlap is tested soon. Internationally, the possibility and remedy of compulsory licensing has been brought into the competition law remedies in particular as an application of the essential facilities doctrine to intellectual property rights.
It would be interesting to see how these aspects and their understanding are applied to what may still be termed as ‘grey areas’ of the Competition and the Intellectual Property law regimes. A key role will be played by how these are interpreted from by CCI, Compact and other judicial bodies while adjudicating the rights of the parties before them and to arrive at balancing the lacunae which the legislation may have brought about.