Adverse Effect under Competition Law

In every market, the companies producing similar products or offering similar services compete to gain maximum consumers, profits and market control.

It is good to have a competitive market than a monopoly because:

1. It ensures better products at cheaper price
2. It ensures wide range of products in the market
3. It gives customers to choose from the available products
4. It ensures consumers are not violated and they get the best products.

The earlier legislation was the Monopolies and Restrictive Trade Practices (MRTP) Act, 1969. In 1991, following the liberalization we changed from command and control economy to a competitive and free play economy and thus Competition Act, 2002 came into force.

Appreciable Adverse Effect on Competition (AAEC)

When some practices restrict competition in market, they are said to have AAEC. There can be AAEC in 3 ways:

1. Anti-competitive agreement
2. Abuse of dominance
3. Combinations

1. Anti-competitive agreement

(i) No one 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 AAEC. The Competition Commission of India (CCI) determines AAEC on the following factors:

• Creation of barriers to new entrants in the market
• Driving existing competitors out of the market
• Foreclosure of competition by hindering entry into the market
• Accrual of benefits to the consumers
• Improvements in production or distribution of goods or provision of services.

(ii) Agreements entered by enterprises involved in identical business including cartels which:

• Determines purchase or sale prices;
• Limits or controls production, supply, markets, technical development, investment or provision of services;
• Shares the market or source of production or provision of services by way of allocation of geographical area of market, or type of goods or services, or number of customers in the market or any other similar way;
• Results in bid rigging or collusive bidding

(iii) Vertical and Horizontal agreements

Vertical agreements occur between persons at different levels of production (producer, distributor, seller etc) while horizontal agreements occur between persons at same level of production (seller-seller, producer-producer etc) and are classified into:

• Tie-in arrangements: agreement imposing on purchaser of goods, as a result of such purchase, to purchase some other goods. (e.g. Microsoft required purchasers to buy all MS Office products with Windows; this was held anti-competitive U.S. courts).
• Exclusive supply agreement: agreements restricting purchaser from acquiring or otherwise dealing in goods other than those of the particular seller.
• Exclusive distribution agreement: agreements to limit, restrict or withhold the output or supply of goods or allocating market for sale of goods.
• Refusal to deal: agreements restricting by any method the persons  to whom goods are sold or from whom goods are bought.
• Resale price maintenance: agreements to sell goods on condition that the prices to be charged on the resale by the purchaser shall be the prices stipulated by the seller unless it is otherwise clearly stated.

There are some agreements which are considered anti-competitive per se like bid rigging, cartels etc. while other agreements are determined to be anti-competitive on the basis of facts and circumstances of each case. This is the presumption rule e.g. Joint ventures, combinations etc.

2. Abuse of Dominance

When an industry grows to such an extent that it practically rules out all other competitors in the market and acquires complete control over the market and consumers it is said to have acquired dominance. When ituses position of strength, in the relevant market to:

1. Operate independently of competitive forces prevailing in the relevant market,
2. Affect its competitors or consumers or the relevant market in its favor, it is said to have abused its dominant position

The CCI determines abuse of dominance by enterprise if it:

• Imposes unfair or discriminatory price or condition in purchase or sale
• Limits production or scientific development
• Denies market access in any manner
• Concludes contract subject to supplementary obligations
• Uses position in one relevant market to enter into or protect other relevant market

A relevant market is where the adverse effects have to be determined. It is divided into 2 categories:

1. Relevant geographic market: Market comprising the area in which the conditions of competition for supply of goods or provision of services or demand of goods or services are distinctly homogenous and can be distinguished from the conditions prevailing in the neighboring areas.
   It is determined on following factors:

a. Regulatory trade barriers

b. Local requirements

c. Distribution facilities

d. Consumer preferences

2. Relevant product market:  Market comprising all those products or services which are regarded as interchangeable or substitutable by the consumer, by reason of characteristics of the products or services, their prices and intended use.
   It is determined on following factors:

a. Physical characteristics or end-use of goods

b. Price of goods or service

c. Consumer preferences

d. Classification of industrial products

In the famous DLF case, the imposition of unfair conditions on payment of sales price and deposition of maintenance, limitations on filing objections and claiming timely delivery etc., on the consumers were held abusive of dominant position.

Predatory Pricing

It means “to sell goods or provision of services, at a price which is below the cost, as may.…with a view to reduce competition or eliminate the competitors”. Reliance Jio alleged for predation but since it did not have dominant position, allegations failed.

3. Combinations

Combination includes merger, amalgamation, and acquisition of shares and acquiring of control. Enterprises entering into combinations have to notify the CCI, which has to decide within 90 working days either to permit or deny such combination else combination is deemed to have been approved.

The CCI checks combinations on following factors:

a. Likelihood of increase in prices or profit margins

b. Effective competition before and after combination

c. Market share

d. Removal of competitors from market

e. Contribution to economic development

CCI is empowered under the act to issue directions, orders and levy penalty to ensure fair competition in market.