Q.

1 Need for competition law

Objectives of the competition Act 2002 are;

1. To protect the interests of the consumers by providing them good products
and services at reasonable prices.

2. To promote healthy competition in the Indian market.

3. To prevent the interests of the smaller companies or prevent the abuse of

dominant position in the market.

4. To prevent those practices which have adverse impact on competition in the

Indian markets

5. To ensure freedom of trade in Indian markets.

6. To regulate the operation and activities of combinations (acquisitions,

mergers and amalgamation).

The Act mainly covers these aspects;

1. Prohibition of anti competitive agreements

2. Prohibition of abuse of dominance

3. Regulation of combination (acquisition, mergers, and amalgamation of

certain size)

4. Establishment of the competition commission of India

5. Power and functions of the competition commission of India

The Act identifies three ways which can have adverse effect on the
competition

1. Anti competitive agreement (vertical agreement, horizontal agreement)

2. Abuse of dominant position; enjoying a dominant position will not be crime

but its abuse will be a crime

3. Elimination/reduction of competitors in the market achieved

through acquisition, mergers, and amalgamation
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Indeed many competition laws have development as one of their objectives.
We have had a competition law since 1969 by the name of Monopolies and
Restrictive Trade Practices Act. But, that law has become redundant for several
reasons. Therefore a new law has been drafted and is likely to come up before
the current session of Parliament.
The new draft legislation will take care of many of the problems that could not
have been dealt with earlier.
For example, in the case involving a US export cartel in the soda ash sector,
American Natural Soda Ash Corporation (ANSAC), the MRTP Commissions stay
order was set aside by the Supreme Court on two grounds: a cartel has not
been defined properly under the MRTP Act, and it also doesn’t contain extra-
territorial jurisdiction. These two lacunae, among others, have been taken care
of under competition law.

The MRTP Act doesn’t have provisions to deal with them. The new law has
proposed three things to deal with such situations effectively:

a) Providing a strong deterrent by the power of levying fines upto 10% of the
turnover;

b) Providing amnesty to co-operating member firms, and

c) Protecting the whistle-blower, if someone spills the beans.

Another significant change is to cover the abuse of intellectual property rights,

though it is not what is desired. Earlier, the MRTP Act excluded any IPR issues,
assuming that these are natural monopolies granted by law, and hence not
challengeable.
Not only do many developed and developing countries have such provisions in
their competition laws, but the TRIPs agreement also asks countries to design
competition laws to cover them. Unfortunately, the proposal of the
Department of Company Affairs(in charge of competition law) has been diluted
by the legislative department.
It says that the law can examine any unreasonable conditions that maybe
imposed by the right holder. That clearly is insufficient, and the law should
explicitly cover any practice which will be abusive as a result of the monopoly

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rights under any IPR law to be violative and challengeable.

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Q.2 HISTORY OF COMPETITION ACT
Since attaining independence in 1947, India for the better part of half a
century thereafter, adopted and followed the policies comprising what are
popularly known as "command and control" laws, rules, regulations and
executive orders During those days, Government intervention and control;
provided almost all areas of economic activity in the country. Government
determined the plant sizes, location of the plant, prices in a number of
important sections and allocution of scarce financial resources. Fierce
competition in the market during that period was under severe fetters
primarily because of Govt policies and strategies. It was in this setting that the
MRTP Act, 1969 was brought into force. It was in 1991 that widespread
economic reforms were undertaken and consequently the march from
'command and control' economy to an economy based more on free market
principles commenced its stride.

In the following years, various attempts were made to break monopolies and
set laws to encourage competition and free trade. But those with good
intentions often found that traders maintaining monopolies had the kind of
wealth that bought themselves a favoured position with authorities. Other
developments that eventually led to modern competition law included laws
relating to restraint of trade. As the term suggests, restraint of trade prevents
parties from setting up, or engaging in, similar activities in opposition to one
another. Modern day competition law is generally accepted to have had its
foundations in the Sherman Act (1890) and the Clayton Act (1914) – both
instituted in the United States.5 At the time, European countries had various
forms of rules and laws to regulate monopolies and competition, but further
developments, particularly after World War II and the fall of the Berlin wall in
1990, have elements of the Sherman and Clayton Acts as their foundation.6
With the rapid development of international trade going into the 21st century,
competition and anti-trust laws have had to keep pace. It was following WWI
that other countries started to implement competition policies along the lines
of those introduced by the United States. Competition regulators were formed
to ensure that competition and antitrust policies and laws were adhered to.
Following the 2nd World War, the Allies introduced regulations to break up
cartels and monopolies that had formed during the war years. At the time, this

4
was mainly aimed at Germany and Japan.7 In the case of Germany, it was
feared that large industry cartels were manipulated in a manner that gave total
economic control of the country to the Nazi regime. With Japan, big business
was a hotbed of nepotism resulting in multi-industry conglomerates that
controlled the Japanese economy. However, the surrender of both Germany
and Japan to the Allied forces at the end of WWII allowed for tighter controls
to be enforced, and these controls were based on the principle of those being
used in the U.S.8 In the U.S., the term 'antitrust' is more commonly used when
referring to laws preventing the formation of cartels, also referred to as
'business trusts'.9 Although antitrust laws are generally separate from
consumer protection laws, they do offer consumers a measure of protection
from unscrupulous suppliers who seek to monopolize a market sector. Mergers
and acquisitions undergo a rigorous screening process in line with antitrust and
competition laws before being given the go ahead. Since attaining
Independence in 1947, India, for the better part of half a century thereafter,
adopted and followed policies comprising what are known as Command-and-
Control laws, rules, regulations and executive orders. The competition law of
India, namely, the Monopolies and Restrictive Trade Practices Act, 1969 (MRTP
Act) was one such.10 It was in 1991 that widespread economic reforms were
undertaken and consequently the march from Command-and-Control
economy to an economy based more on free market principles commenced its
stride. As is true of many countries, economic liberalisation has taken root in
India and the need for an effective competition regime has also been
recognised.

MRTP
The Constitution of India in its quest for building up u just and humane society
has mandated the State to direct its policy towards securing that end. Articles
38 and 39 of the Constitution of India, which are a part of the Directive
Principles of State policy mandate, inter alia, that the State shall strive to
promote the welfare of the public by securing and protecting us effectively, us
it may, e social order in which.- social, economic and political shall inform all
the institutions of the national life, and the State shall in particular, direct its
policy towards securing the following:

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  That the ownership and control of material resources of the community
are so distributed as best to sub serve the common good; and
 That the operation of the economic system does not result in the
concentration of wealth and means of production to the common
detriment

.The MRTP Act, 1969 was brought into force for realizing the explicit
mandate set out in the Directive Principles envisaged in Part-IV of the
Constitution of India, namely, prevention of concentration of economic
power.

TRIGGER CAUSES FOR THE MRTP ACT 1969

The Government was aware of its responsibility under the Directive Principles
of State policy. When the draft for third five years plan was being prepared in
1960, the Government was interested in knowing the benefits of the
implementation of the first five year plans and how it increased national
income and its distribution among population.

There are essentially three enquiries studies which acted as the loadstar for
the enactment of the MRTP Act, 1969. The first study was by a Committee
headed by Dr. R. K, Hazari, which studied the industrial licensing procedure
under the Industries (Development and Regulation) Act 1951: The Committee
concluded that the working of the licensing system had resulted in
disproportionate growth of some big business houses in India. 'This finding was
apparently not consistent with the Directive principles. The second study was
by a Committee set up in October 1960, under the chairmanship of Professor
Mahalanobis to study the distribution and levels of income in the country. The
Committee noted that big business houses were emerging because of "Planned
economy" model practiced by the government and suggested the need to
collect comprehensive information pertaining to the various aspect of
concentration of economic power. The third study was known as the
Monopolies Inquiry commission(MIC), appointed by the Government in April,
1964 under the chairmanship of Mr.Gupta The appointment of MIC was in fact
prompted by a report of the Mahalonobis Committee. The Committee was
enjoined to enquire into the extent and effect, of concentration of economic
power in private hands and the prevalence of Monopolistic and Restrictive
Trade Practices in important sectors of economic activity, except in agriculture.

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The Committee presented its report in October, 1965, highlighting therein that
there was concentration of economic power in the form of product wise and
industry wise concentration. It also noted that a few industrial houses were
controlling a large Number of companies and that there existed in the country
large scale Restrictive and Monopolistic Trade Practices.

As a corollary to its finding, the MIC drafted the Monopolir3 and Trade
Practices Bill to facilitate that the operation of economic system doesn't result
in the concentration of economic power to the common detriment. The Bill
also provided for the control of monopolies and prohibition of Monopolistic
and Restrictive Trade practices, which are prejudicial to public interest.

The Bill drafted by the MIC, as amended by the Committee of the Parliament
became the MRTP Act, 1969 and was enforced from I" June, 1970. The Act
drew its inspiration from the mandate enshrined in the Directive principles of
State in the Constitution. The MRTP Act drew heavily upon the laws embodied
in the Sherman Act and the Clayton Act of the United States of America, the
Monopolies and Restrictive Trade Practices (Inquiry and Control) Act, 1948, the
Resale Prices Act, 1964 and the Restrictive Trade Practices Act, 1964 of United
Kingdom. The [IS Federal Trade

METAMORPHOSIS FROM MRTP TO COMPETITION ACT 2002

The MRTP Act was found to be ineffective owing to a host of reasons, apart
From its incongruity with the changing economic scenario. Further, a perusal of
MRTP Act 1970 will demonstrate there is neither definition nor even a mention
of certain offending trade practices which arc restrictive in character. Some
examples of these are: abuse of dominance, cartels, collusion and price fixing,
Bid Rigging, Boycotts and refusal to deal and predatory pricing. Further, MRTP
Act was found to be lacking in teeth in dealing with cross border restrictive
trade practices having adverse effects on the Indian economy. But the MRTP
Act has become obsolete in certain respects in the light of international
economic development, relating more particularly to competition laws, and
there is a need to shift our focus from curbing monopolies to competition. In
this context, a question arose regarding the amends to be made in the MRTP
act. To address this issue a new committee was made.

The committee was entrusted with the under mentioned terms and reference
for its recommendation.

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 I. A suitable legislative framework, in the light of international economic
development, and the need to formulate and put it in practice a competition
for establishing an effective competition regime there under, including law
relating to mergers and de-mergers. Such a line of work could entail the new
law or amendments to the existing MRTP Act.

2. Changes pertaining to provisions of restrictive trade practices after

reviewing the existing provisions, clear demarcation between the MRTP
commission and consumer courts established under the consumer protection
act, COPRA

3. Suitable administrative measures required to implement the proposed

recommendations, including reconstructing the MRTP commission, location of
benches outside Delhi for speedy disposal of cases pending before the
Commission. 'The Raghavan committee submitted the detailed report on 22d
May 2000. On the basis of the recommendation of the committee competition
law came into force.

In succinct, the factors that gave rise to the trigger, for the transformation
from MRTP Act, 1960 to Competition Act. 2002 are

1. The recommendations of the expert group

2. The recommendations of high level committee

3. The consumers among those who put forward their opinions before the
high level committee for repealing the MRTP act into substituting it with a new
competition law

4. Appreciation of the fact that the MRTP act was more concerned with
curbing monopolies rather than with promoting competition

5. Appreciation of the fact that the MRTP ACT to serve the need of the
command and control economy and that a new law was needed.

6. Appreciation of the fact that law cannot stand still like muddy water in a
cesspool and needs to change with the changing times and more for becoming
responsive to societal needs.

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 7. Appreciation of the fact that there is an unbridgeable mismatch between
the MRTP Act, 1969 and the changing economic environment brought about
by the policies of LPG.

8. The recommendation of the Standing Committee of the parliament

9. Recognition that Indian undertakings are small size and need to merge and
grow to become competitive globally in the rules based International trade
Regime established by the WTO

10. Lastly, the failures and deficiency of the competition regime established
under the MRTP Act, I969 have made the policymakers to address the issue
and draw right lessons to remedy the situation.

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Q.3 RESTRAINT OF TRADE
Introduction It is a well settled notion in common law that agreements which
impose restraints on trade are not enforceable. This notion was developed
further in the late 19th century and late 20th century and made applicable to
what we call ‘competition law’ in the USA. It is important to note that the
enactment of the Sherman Anti-trust Act, 1890 was a reason for this
development.

What is the correlation between ‘restraint of trade doctrine’ and ‘modern

competition law’? This article seeks to examine the relationship between the
two by tracing back cases when the Sherman Act was newly enacted and the
interpretation given by the US Supreme Court. The article has two parts. Part I
deals with the doctrine of restraint of trade in order to have a clear
understanding of it before stepping into part II where the correlation between
the doctrine and competition law is analysed. Part III discusses the various
provisions in different legislations enacted in India which deal with agreements
in restraint of trade.
Part- I the Common Law doctrine of ‘Restraint of Trade’
Limitations on freedom of contract: Public Policy imposes certain limitations on
the freedom of persons to contract. An ostensibly valid contract may be
tainted with illegality. The source of the illegality may arise by statute or by
virtue of the principles of common law.
Agreements in Restraint of Trade: The doctrine of restraint of trade is a rule of
public policy developed by the common law. It is a general principle of the
common law that a person is entitled to undertake a lawful trade when and
where he wishes. The common law does not favour agreements that prohibit
or restrain a person in the exercise of a lawful trade, employment or
profession. It protects the right of individuals to work and prevents them from
disabling themselves from earning a living by an unreasonable restriction by
the doctrine of restraint of trade. A principal aim of this doctrine is to prevent
agreements which unreasonably restrict competition.
Defining agreements in restraint of trade: An agreement in restraint of trade
has been defined as ‘one in which a party (the convenantor) agrees with any
other party (the convenantee) to restrict his liberty in the future to carry on
trade with other persons not parties to the contract in such a manner as he
chooses.’

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Reasonableness as a test to justify restraints: All restraints of trade, in the
absence of special justifying circumstances, are contrary to public policy and do
not give rise to legally binding obligations, and in that sense are void. It is a
question of law for the decision of the Court whether the special
circumstances adduced do or do not justify the restraint; and if a restraint is
not justified, the Court does not enforce such agreements as they go contrary
to public policy.
A restraint can only be justified if two conditions are satisfied:
1 The restraint has to be reasonable in the interests of the contracting parties
2 The restraint has to be reasonable in the interest of the public.

The Competition Act, 2002

The Competition Act does not specifically use the term ‘agreement in restraint
of trade’ anywhere. However, it has to be noted that the scheme of the
Competition Act is different from that of the Sherman Act of the USA.
Whereas, the Sherman Act merely provides for agreements in restraint of
trade, leaving ample scope for the Court to interpret the provision, the
Competition Act is a very detailed Act legislated with the sole intention of
regulating competition.
We therefore, find the different subsets of restraint of trade enumerated and
dealt with, instead of a single provision sweeping over all possible forms of
restraint of trade. Section 3 of the Act deals with Anti-competitive agreements,
which by its name itself suggest that it deals with agreements which restrain
trade. Section 4 of the Act deals with ‘abuse of dominant position’, which
envisages cases where a dominant player restrains others from carrying on
their trade by abusing his position. The third and final limb of the Act pertains
to another form of trade restraint, one concerning ‘combinations’ (covered in
sections 5 and 6).
These three limbs of the Competition Act make the Act one comprehensive
piece of legislation dealing with the major types of restraints on trade.
Conclusion The common law concept of restraint of trade is based on the
philosophy that no contract shall be made enforceable which has the effect of
preventing a person from carrying on a particular trade or profession whereby
he earns his livelihood. Further, it is also said that the larger public interest will
suffer if a person is not allowed to carry on his business.

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The modern competition law clearly finds its roots in the common law doctrine
of restraint of trade. The relationship is evident in the object that the two
aspire to fulfill. The object is basically to allow every person to carry on his
trade in the manner he wants while at the same time preserving every other’s
right to do the same. Further, both competition law and the doctrine of
‘restraint of trade’ leave scope for businesses to impose reasonable restraints
on others provided some benefit accrues to the public and it is justified for
both the parties in question as well as the public at large.
The American Courts, which were faced with the task of determining the
relationship between the previously disjoint concepts, finally came to a
conclusion based on sound reasoning. This has led to a gradual appreciation of
the relationship between competition law and the trade restraint doctrine and
has made future applicability of the latter to the former’s development
possible.
From the analysis of the Indian legislations, it clearly comes to light that there
is a close relationship between the doctrine of restraint of trade and
competition law. The three limbs of the Competition Act are clearly inclusive of
the major types of agreements in restraint of trade. The Act clearly
incorporates the per se rule and the rule of reason that were expounded by
the American Courts while interpreting the restraint of trade provision of the
Sherman Act. Undoubtedly, the evolution of competition law can be traced
back to the common law doctrine of restraint of trade.

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Q.4 RAGHAVAN COMMITTEE
Report of High Level Committee on Competition Policy and Law (Raghavan
Committee Report)
In the wake of economic liberalization and reforms introduced by Government
of India since 1991 with a view to meet the challenges and avail of the
opportunities offered by the globalization, the Ragavan Committee was set up
in 1999 to assess the need to evolve India s competitive regime. The
Committee in its report of 2000 recommended setting up of a modern
competition law and phasing out of the MRTP Act. The Committee was set up
under the Chairman ship of Shri SVS Ragavan in 1999. The Committee
highlighted the point that economic reforms found certain provisions of the
MRTP Act obstructive to private investment. The Ragavan Committee noticed
that the word ‘competition’’ has been used sparsely in the MRTP Act124 and
effectively finds place only at two places; while defining restrictive trade
practice in Section 29(o) and in sec38 (1)(h). while a generic definition of
competition is provided in Section 2(o) of the MRTP Act , precise definitions of
anti –competitive practices like abuse of dominance, cartel, collusion, boycott,
refusal to deal, bid rigging, predatory pricing etc are necessary to effectively
detect such behaviour and impose sanctions against them. Lack of precise
definitions had led to different judicial interpretations, sometimes
contradictory. These judicial pronouncements are binding precedents for
future amendment to the MRTP Act. The Ragavan Committee noted that
‘Cartels, to give another illustration, are not mentioned or defined in any of the
clauses of Section 33(1) of the MRTP Act, though the MRTP Commission has
attempted to fit such offences under one or more clauses of Section 33(1)
Moreover the existing law was found to be inadequate to deal with
implementation of the WTO agreements. The MRTP Act does not have the
merger control provisions since 1991 The Commission recognized the necessity
of having specific merger control provisions at par with other modern
competition laws. Provisions dealing with the unfair trade practices overlap
with similar provisions in the Consumers Protection Act, 1986 and in the MRTP
Act. The Ragavan Committee found that MRTP Act to be falling short of
squarely addressing the Competition and Anti –competitive practices. It
emphatically stated that the MRTP Act, in comparison with the other
Competition Law of many countries, is inadequate or fostering Competition in
the market and trade and for reducing, if not eliminating anti –competitive
practices in a country s domestic and international trade”. Based on this
analysis, the Ragavan Committee found it expedient to have a new
competition law. The Committee desired the focus of the new law to be on
13
preventing anticompetitive practices that reduce welfare. While free markets
produce desired outcomes, they do so only when protected from the abuses.
Therefore, The only legitimate goal of the competition law is the maximization
of economic welfare. The committee further desired that the competition
authority should be governed by established competition principles. The
committee was aware of the pitfalls and recommended a cautious approach to
achieve a balance between over- intervention and exemption from sanction in
the name of “public interest”. The role of industrial organization theory in
competition analysis was recognized and it recommended incorporation of a
host of factors to be considered by the competition authority in competition
assessment. The Ragavan Committee was determined to have merger control
provisions in the new legislation. It sought to make a distinction between
horizontal mergers, vertical mergers and conglomerate mergers on the basis of
their differing degrees of impact on competition. But it chose to opt for a soft
regime which has voluntary notification for mergers above rather high
threshold limits and time bound decisions to reduce transaction cost.
The main recommendations of the Committee are:
1. The enactment of an Indian Competition Act, the setting up of a
Competition Commission of India (CCI), the repeal of the Monopolies and
Restrictive Trade Practices (MRTP) Act, 1969, and winding up the MRTP
Commission. The pending cases in the MRTP Commission may be
transferred to the concerned consumer Courts under the Consumer
Protection Act, 1986. The pending MTP and RTP Cases in MRTP
Commission may be taken up for adjudication by the CCI from the stages
they are in.
2. State monopolies, government procurement and foreign companies
should be subject to the Competition Law.
3. Competition law should cover all consumers who purchase goods or
services, Regardless of the purpose for which the purchase is made.
4. The Committee recommended that the unfair trade practice cases may
be transferred to the consumer courts concerned under the Consumer
Protection Act, 1986.
5. The pending monopolies and restrictive trade practices cases in the
MRTPC may be taken up for adjudication by the CCI.
6. The Committee also believed that the repeal of the various laws
mentioned would constitute the prerequisites for laying the foundation

14
 over which the edifice of the Competition Policy and the Competition
Law needs to be raised.
7. The Industries (Development and Regulation) Act, 1951 may no longer be
necessary Except for location (avoidance of urban-centric location), for
environmental protection and for monuments and national heritage
protection considerations, etc.
8. The Industrial Disputes Act, 1947 and the connected statutes need to be
amended to provide for an easy exit to the non-viable, ill-managed and
inefficient units subject to their legal obligations in respect of their
liabilities.
9. The Board for Industrial Finance& Restructuring (BIFR) formulated under
the provisions of Sick Industrial Companies (Special Provisions) Act, 1985
should be abolished.
10. There should be necessary provision and teeth to examine and
adjudicate upon anti competition practices that may accompany or
follow developments arising out of their implementation of WTO
Agreements. Particularly, agreements relating to foreign investment,
intellectual property rights, subsidies, countervailing duties, antidumping
measures, sanitary and technical barriers to trade and Government
procurement need to be reckoned in the Competition Policy/Law with a
view to dealing with anti-competition practices.

11. The competition law should be made extra territorial. It is pertinent to

note that this High Level Committee only discussed the comparative
approach with respect to existing laws in other countries in their
recommendations in the report. It however does not mention the subject
of imposing criminal sanctions on Individuals as a penalty. The High level
Committee mentioned about the existing criminal penalties with
reference to other jurisdictions only in passing reference.

15
 Q.5 Sherman Act, 1890
Sherman Act declared illegal all contracts, combinations or conspiracies in
restraint of trade or commerce among the states or territories or with foreign
nations. The basic requirement is that there should be an agreement or mutual
commitment to engage in a common course of anticompetitive conduct. Under
the law, price-fixing and bid-rigging schemes are per se violations of the
Sherman Act. This means that where such a collusive scheme has been
established, it cannot be justified under the law by arguments or evidence
that, for example, the agreed-upon prices were reasonable, the agreement
was necessary to prevent or eliminate price cutting or ruinous competition, or
the conspirators were merely trying to make sure that each got a fair share of
the market.

Monopolize and Conspiracy to monopolize:

Section 229 of the Sherman Act outlawed (a) Monopolization (b) attempt to
monopolize (c) conspiracies to monopolize This section has two basic elements

1.) Possession of monopoly power in relevant market

2.) The wilful acquisition or maintenance of the power.

A person is not guilty of monopolization unless he has monopoly power i.e.

power to control prices and exclude competition. Therefore offence of
monopolization requires monopoly power and intention to monopolize, but
there is no monopolization if the defendant‘s monopoly power grows as a
consequence of superior product, business acumen or historical accident. The
competition act has included monopolization but it has not included
conspiracy to monopolize. Sherman Act proscribes even attempt to
monopolize. The difference between actual monopolization and attempt to
monopolization is that in actual monopolization general intent to do act is
required but in attempt to monopolize specific intent, which can be
established by evidence of unfair tactics on part of defendant, is required. To
establish conspiracy to monopolize three basic things are to be proved :
(a)proof of conspiracy (b) specific intent to monopolize (c) An overt act in
furtherance of conspiracy and there is no need to establish the market power.

Price Fixing
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Competition Act has included the term association of price i.e. price fixing but
it hasn‘t elaborated the vertical and the horizontal price fixing. If a
manufacturer, by using his dominant position, fixes the price with retailer then
it is vertical price fixing but if manufacturer fixes price with other manufacturer
then it is horizontal price fixing. Vertical price fixing is also knows as price
maintenance e.g. Agreement between a film distributor and exhibitor is illegal.
A patentee cannot control its resale price through price maintenance
agreements. Generally prices are fixed when they are agreed upon. Section
132 of Sherman Act also mentions that dissemination or exchange of price
information does not itself establish a violation of section 1 rather price
information coupled with criminal intent to fix the price violates section 1 of
Sherman act. However a combination or conspiracy within section 1 is
established where an agreement exists between competitors to furnish price
information upon request.

Tying Agreement

The Competition Act, 2002 has not elaborated the various sorts of tying
agreement. It has only defined tie-in agreements as "tie-in arrangement"
includes any agreement requiring a purchaser of goods, as a condition of such
purchase, to purchase some other goods. But in the Sherman Act it has been
very well explained. Sherman Act defines Tying Agreements as an agreement
by a party to sell one product but only on the condition that the buyer also
purchase a different product or agree that he will not buy that product from
another supplier. Tying agreements are not illegal per se. An illegal tying
agreement takes place when a seller requires a buyer to purchase another, less
desired or cheaper product, in addition to the desired product, so that the
competition in the tied product would be lessened. Sherman act also pointed
out that there should be separateness of products which are tied because if
the products are identical and market is same then there is no unlawful tying
agreement.

Group Boycott
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 Sherman Act has a special category under refusal to deal called as Group
Boycott. Under the Competition Act, 2002 refusal to deal is defined in
section 3(4)(d) as "refusal to deal" includes any agreement which restricts,
or is likely to restrict, by any method the persons or classes of persons to
whom goods are sold or from whom goods are bought.35 However
Sherman Act has explained various conditions of Group Boycott. In case of
Horizontal restraints per se rule is applicable but in case of Vertical
restraints majority court view is that per se rule is not applicable. There are
many sorts of Group Boycott:
• Group Boycott of competitor i.e. joint effort by a firm with dominant
market position to disadvantage competitors violates section 1 of Sherman
Act.
• An agreement among competitors to stop selling to certain customers is
illegal.
• Boycott by physicians, doctors, advocates of a particular customer is
unlawful.
• Customer boycott of supplier may or may not, on the basis of
circumstances, violate Sherman Act

Amalgamation

Competition Act has used the word amalgamation many times but it hasn‘t
explained much about it. As per the Sherman Act an Amalgamation is
unlawful in two ways firstly if the amalgamation eliminates substantial
competition and secondly if it created a monopoly. Basically there are two
types of amalgamation horizontal and vertical. In Horizontal amalgamation
for example two companies are major competitive factors in a relevant
market a merger or consolidation between them violates the Sherman Act
if such action ends competition. However if a company is losing money and
has decided to wind up then its horizontal amalgamation is not illegal. In
vertical amalgamation it is not illegal unless its illegality turns on:
(a) The purpose or intent with which it was conceived
(b) The power it creates in the relevant market.

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Clayton Act

After the Sherman Act to supplement the Sherman Act there was another
act enacted in 1914 named as Federal Antitrust Laws: Clayton Act.

Mergers

Act has defined vertical and horizontal mergers. Vertical merger is a merger
of buyer and seller and Horizontal merger is a merger which is of direct
competitors. A merger which is neither vertical nor horizontal is
conglomerate merger. Competition Act has not mentioned about the
conglomerate mergers. As per the Clayton Act a pure Conglomerate merger
is one in which there is no relationship between the acquiring and the
acquired firm.

Amalgamations

Clayton Act has also defined the horizontal and vertical, amalgamations,
product extension mergers and joint ventures. Amalgamations between
firms performing similar functions in the production or sale of comparable
goods and services are known as the Horizontal Amalgamation. Now
Clayton Act has also mentioned about the burden of proof in Horizontal
Amalgamation. It points out that by showing that a horizontal acquisition
will lead to undue concentration in the market for a particular product in a
particular market; the government establishes a presumption that the
transaction will lessen the competition. The burden of producing evidence
to rebut this presumption then lies with the defendants. Clayton Act does
not outlaw all vertical amalgamations but it forbids those whose effect may
be substantially to lessen competition or tend to create monopoly in any
line of commerce in any section of the country. The acquisition of the
largest producer, in product extension mergers, by a firm dominant in
positioning producing other products violates the Clayton Act because it
reduces the competitive structure of the industry by raising entry barriers
and dissuading the smaller firms from aggressive competition and because
it eliminates the potential competition of the acquiring firm. Competition

19
Act, 2002 holds that joint ventures are legal as far as they increase
efficiency in production, supply, distribution, storage, acquisition or control
of goods or provision of services. In Clayton Act it is given consideration
whether the joint venture eliminated the potential competition of the
corporation that might have remained at the edge of the market
continually threatening to enter.

Intention

Competition Act, 2002 has not given any place to intention or motive
whereas both Sherman Act and Clayton Act has mentioned about the
intention of the parties. As per Sherman Act good intentions of parties is no
defence to a charge of violating the act and thus will not validate an
otherwise anticompetitive practice. Similarly according to Clayton Act it is
not required to show that lessening of competition or a monopoly was
intended

20
Q.6 MRTP ACT
Introduction

Competition is inevitable in today’s modern world. Its presence can be felt in

almost all the countries across the globe and India is not an exception to it.
During the nineteenth century, both law and economics began to develop
theories of competition as well s ideological defences of competition as a social
good. These were the socio-economic settings in which the founding fathers
had to chart out a programme of nation-building. To eliminate poverty and to
raise the level of development through rapid industrialization, they adopted
the method of economic planning. The planning commission was set up80 and
India adopted five year plans for the development of the economy. The
framers of the independent India were deeply influenced by Socialism and the
same is reflected in the manner in which India followed the Soviet style of
industrialization that required extensive State intervention along with import
substitution. The Government of free India wanted rapid industrial
development and equitable distribution of wealth. The same is reflected under
the Constitution of India as adequate provisions were made in the Directive
Principles of State Policy.

In order to attain the paramount goals of equality of distribution of wealth and

resources economic concentration and to check this government appointed
the committee called Mahalanobis Committee, on distribution of Income and
levels of Living in the year 1960 which highlighted growing income inequality in
India in the post –Independence period. The Government appointed the
Monopolies Inquiry Commission (MIC) for the following purposes

(a) To investigate the extent and effect of concentration of power in the

private sector, i.e. its factor and social consequences, and

(b) To suggest necessary legislative, or other measure in light of the findings.

The purpose is to earn maximum profit at the cost of the consumers and rival
competitors, more than the natural profit which the fair and free competition
endures. It also destroys efficiency and discourages innovation. Monopoly
power was defined by the MIC as the ability to dictate price and to control the
market. The committee also set out the objectives for the legislative

21
recommendations in terms of achieving the highest possible production with
least damage to people at large while securing maximum benefits. Thereafter,
the planning Commission of India, appointed Hazari Committee86 to review
the operation of the existent industrial licensing system under Industrial (
Development and Regulation ) Act 1951. The report echoed previous concerns
regarding the skewed benefits of the licensing system and also concluded that
the working of licensing system had resulted in disproportionate growth of
some of the big business houses in India. After a heated parliamentary debate
over the report, the Government of India appointed the committee under the
chairmanship of Mr. Subimal Dutt known as Industrial Licensing Policy Inquiry
Committee – to enquire into the working of the licensing system in India
(ILPIC), Which was asked to look into the licensing and Financial Structure. The
ILPIC submitted its report two years later, which suggested that;

(1) No specific instructions had been given to licensing authorities , for the
purpose of preventing concentration and monopolistic tendencies and that;

(2) The procedures, in fact, nurtured the growth of large industrial houses

The Industrial Licensing and Policy Inquiry Commission (ILPIC) felt that
licensing was unable to check concentration, and suggested that the
Monopolies and Restrictive Trade Practices (MRTP) Bill (as proposed by the
MIC) be passed to set up an effective legislative regime. The establishment of
the MRTP Commission included the recommendation to tackle concentration
in various sectors of the economy. However, public sector enterprises,
cooperative societies and agriculture were exempt from the purview of the
proposed Act

The model of the Act was given by the Monopolies Inquiry Commission set up
by the Government of India in 1964. Substantial departure was, however,
made at the time of its enactment, retaining only the skeleton. The provisions
on restrictive trade practices, including the resale price maintenance, are
substantially based on the UK legislations and particularly the Restrictive Trade
Act, 1956 and the Resale Price Act, 1964. Likewise, the newly introduced
provisions on unfair trade practices are influenced by the UK. Fair Trading Act,
1973. The anti-trust legislations in USA, notably the Sherman Act, the Clayton
Act , and the Federal Trade Commission Act , as also the Australian and

22
Canadian legislation on the subject have also been a guide in framing the
provisions relating to Monopolistic , Restrictive and Unfair trade practices.

The principle basis’s of MRTP

The major premises of the MRTP is behavioural and reformist in nature. In

terms of the behavioural doctrine, the conduct of the entities, undertakings
and bodies which indulge in trade practices in such a manner as to be
detrimental to public interest is examined with reference to whether the said
practices constitute any Monopolistic, Restrictive or Unfair Trade Practice. In
terms of reformist doctrine, the provisions of the MRTP Act provide that if the
MRTP Commission, on enquiry comes to a conclusion that an errant
undertaking has indulged either in Restrictive or Unfair Trade Practice, it can
direct such undertakings to discontinue or not to repeat the undesirable trade
practice. Thus, the primary concerns of the Act are disciplining and regulating
the trade practices or market forces and behaviour so that there is no
concentration of economic power, to prohibit all attempts to stifle competition
and to protect consumers from being exposed to unfair trade practice.

Objectives of the MRTP Act

The main objectives of the MRTP Act are as follows;

1. Prevention of concentration of economic power to the common detriment;

2. Control of monopolies;

3. Prohibition of monopolistic trade practices;

4. Prohibition of restrictive trade practices

5. Prohibition of unfair trade practices.

The Act was designed to avoid economic concentration of the power in the
Indian economy by exercising surveillance and adopting proper measure in
case the economic concentration proves to the common detriment of general
public. Concentration was measured in terms of the prescribed value of the
assets owned or controlled by any undertaking, singly or along with
interconnected undertakings or as a dominant undertaking. The objective that
was sought to be achieved at that time through the MRTP Act was ensuring

23
that large industrial houses, which were covered by the definition under
section 20 of that Act97, in terms of the value of the assets they controlled, did
not deprive smaller enterprises of their share of the resources of the country
and that large industrial houses fell in line with the country s planning priority.
The main purpose of the MRTP Act was, containment of concentration of
economic power not issues relating to competition, through prohibition of
monopolistic and restrictive trade practices restraining competition was also
within the scope of the Act. The MRTP Act deals and regulates Trade practice.
There must be a trade practice in relation to the goods or services. The word
‘trade’ in the Act has been defined to mean any trade, business industry
relating to the production, supply or control of goods and includes the
provision of services. If the trade practices are restrictive or unfair, the MRTP
Act intervenes .The primary concerns of the Act are disciplining and regulation
of trade practices are market forces and behaviour so that there is no c protect
consumers from being exposed to unfair trade practices. The MRTP Act seeks
to regulate three kinds of trade practices there are, Monopolistic trade
practices, Restrictive trade practices and unfair trade practices that hamper
competition in India or are prejudicial to public interest. Monopolistic trade
practice means a trade practice which has or is likely to have the effect of
maintaining the prices of goods or services at an unreasonable level, or limiting
technical development or capital investment to the common detriment.

Restrictive trade practices

The Restrictive trade practice is defined to mean a trade practice which has or
may have the effect actual or probable of restricting, preventing, lessening or
destroying competition, it is liable to be regarded as restrictive trade practice.
If a trade practice merely regulates and thereby promotes competition, it
would not fall within the definition of ‘restrictive trade practice”, even though
it may be to some extent, in restraint of trade. Therefore whenever, a question
arises as to whether a certain trade practice is restrictive or not, it has to be
decided not on any theoretical or a prior reasoning , but by inquiring whether
the trade practice has or may have the effect of preventing , distorting or
restricting competition102. Further , the trade practice which tents to obstruct
the flow of capital or resources into main stream of production or to bring
about manipulation of prices, or condition s of delivery or to affect flow of

24
supplies of goods or services so as to impose unjustified cost or restriction s on
consumers , is also a restrictive trade practices .The MRTP Act lists out certain
types of agreements, which are deemed to be agreements relating to
restrictive trade practices and required to be registered with the Director
General of Investigation and Registration .certain common types of Restrictive
Trade Practices enumerated in the MRTP Act are

a) Refusal to deal
b) Tie-up sales
c) Full line forcing
d) Exclusive dealing
e) Price discrimination
f) Re-sale price maintenance
g) Area restriction

The trade practices does not ipso facto becomes a restrictive trade
practice because it falls within one of the illustrations under section 33
and it has also to fulfil the definition of restrictive trade practice as
defined under section 2(o) of the MRTP Act, restrictive trade practice
means a trade practice which has , or may have , the effect of preventing
, distorting or restricting competition in any manner and in particular ,(i)
which tends to obstruct the flow of capital or resources into the stream
of production ,or (ii) which tends to bring about manipulation of prices
or conditions of delivery or to affect the flow of supplies in the market
relating to goods or services in such a manner as to impose on the
consumers unjust costs or restrictions;. The special feature of the MRTP
Act had been that inquiry into restrictive nature of the trade practice is
related to the effect on competition.

25
26
Q. 7 ANTI COMPETITION AGREEMENT
The Act under Section 3(1) prevents any enterprise or association from
entering into any agreement which causes or is likely to cause an appreciable
adverse effect on competition (AAEC) within India. The Act clearly envisages
that an agreement which is contravention of Section 3(1) shall be void.

How to determine AAEC?

The Act provides that any agreement including cartels, which-

 Directly or indirectly determines purchase or sale prices;

 Limits production, supply, technical development or provision of
services in market;
 Results in bid rigging or collusive bidding

Shall be presumed to have an appreciable adverse effect on competition in

India

Proviso to Section 3 of the Act provides that the aforesaid criteria shall not
apply to joint ventures entered with the aim to increase efficiency in
production, supply, distribution, acquisition and control of goods or services.

HORIZONTAL AGREEMENTS-

Horizontal agreements are arrangements between enterprises at the same

stage of production. Section 3(3) of the Act provides that such agreements
includes cartels, engaged in identical or similar trade of goods or provision of
services, which-

1. Directly or indirectly determines purchase or sale prices

2. Limits or controls production, supply
3. Shares the market or source of production
4. Directly or indirectly results in bid rigging or collusive bidding

27
Under the Act horizontal agreements are placed in a special category and are
subject to the adverse presumption of being anti-competitive. This is also
known as ‘per se’ rule. This implies that if there exists a horizontal agreement
under Section 3(3) of the Act, then it will be presumed that such an agreement
is anti-competitive and has an appreciable adverse effect on competition.

Horizontal agreements refer to agreements among competitors, i.e.,

agreements between two or more enterprises that are at the same stage of
the production chain and in the same market. A distinction is also made
between cartels – a special type of horizontal agreement – and other
horizontal agreements. The Act provides for the following four kinds of
horizontal agreements, which are presumed to be anticompetitive:

a. Agreements regarding prices: Agreements that directly/indirectly fix

purchase/sale price;

b. Agreements regarding quantities: Agreements aimed at limiting/ controlling

production, supply, markets, technical development and investment;

c. Agreements regarding market sharing: Agreements for sharing of markets by

geographical area, types of goods/services and number of customers; and

d. Agreements regarding bids (collusive tendering and bid rigging): Tenders

submitted as a result of joint activity or agreement.

Such agreement may lead to a cartel, which is pernicious. The Act defines
‘cartel’ as including “an association of producers, sellers, distributors, traders
or service providers who, by agreement amongst themselves, limit, control or
attempt to control the production, distribution, sale or price of, or, trade in
goods or provision of services.”The aforesaid agreements are, therefore,
considered to be illegal per se and do not require to be tested under the ‘rule
of reason’. The CCI in the FICCI Multiplex case has observed that, “with
reference to the horizontal agreements specified in Section 3(3) of the Act, the
rule of presumption of appreciable adverse effect on competition contained
therein shall apply. In fact, this rule of presumption shifts the onus on the

28
opposite party to rebut the said presumption by adducing evidence and in that
context the factors mentioned above may be considered by the Commission.
Moreover, if a horizontal agreement is not covered by Section 3(3) of the Act,
even then the factors contained in Section 19(3) may be relevant and can be
considered.” The observations of Supreme Court on the term ‘cartel’, which
have been cited on various occasions by High Courts in different cases, are
notable. Recently, the Orissa High Court in Jagdamba Packaging found that
observations of the ACAG that petitioner had formed and indulged in cartel
formation were irrelevant in the context of a tender floated by the Ordinance
Factory. The tender had to be considered on the basis of tender conditions and
until the price bid was opened, the mere use of the letterhead of another
company participating in the tender by petitioner, could not substantiate the
ground that they had entered into a cartel

VERTICAL AGREEMENTS-

Vertical agreements are those agreements which are entered into between
two or more enterprises operating at different levels of production. For
instance between suppliers and dealers. Vertical agreements are agreements
between enterprises at different stages or levels of the production chain and,
therefore, in different markets. Generally, vertical agreements are treated
more leniently than horizontal agreements as, prima facie, a horizontal
agreement is more likely to reduce competition than an agreement between
firms in a buyer-seller relationship. Therefore, in these cases there is no
presumption available as in cases of horizontal agreements, which means a
higher level of proof and analysis is required. The Act is more closely in tune
with the competition law of the European Commission. It may, however, be
noted that the Act somewhat followed US law on vertical agreements. In fact,
the law has summarised the major findings of the US Supreme Court to
provide for the following kinds of agreements under this category: -:

 Exclusive supply agreement & refusal to deal

 Resale price maintenance
 Tie-in-arrangements
 Exclusive distribution agreement

29
The ‘per se’ rule as applicable for horizontal agreements does not apply for
vertical agreements. Hence, a vertical agreement is not per se anti-
competitive or does not have an appreciable adverse effect on competition.

Shri Shamsher Kataria v. Honda Siel Cars India Ltd. & Ors- Important case law
on Anti-competitive Agreements

In the case of Shri Shamsher Kataria v. Honda Siel Cars India Ltd. & Ors 3, the
concept of vertical agreements including exclusive supply agreements,
exclusive distribution agreements and refusal to deal were deliberated by the
Commission.

Facts– The informant in the case had alleged anti-competitive practices on part
of the Opposite Parties (OPs) whereby the genuine spare parts of automobiles
manufactured by some of the OPs were not made freely available in the open
market and most of the OEMs (original equipment suppliers) and the
authorized dealers had clauses in their agreements requiring the authorized
dealers to source spare parts only from the OEMs and their authorized vendors
only.

CCI’s decision– The Commission held that such agreements were in the nature
of exclusive supply, exclusive distribution agreements and refusal to deal
under Section 3(4) of the Act and hence the Commission had to determine
whether such agreements would have an AAEC in India

30
Q 8 PER SE RULE AND RULE OF REASON

PER SE

First, the tying arrangement must involve two different products.

Manufactured products and their component parts, such as an automobile and
its engine, are not considered different products and may be tied together
without violating the law.

Second, the purchase of one product must be conditioned on the purchase of

another product. A buyer need not actually purchase a tied product in order to
bring a claim. If a vendor refuses to sell a tying product unless a tied product is
purchased, or agrees to sell a tying product separately only at an unreasonably
high price, a court will declare the tying arrangement illegal. If a buyer can
purchase a tying product separately on nondiscriminatory terms, however,
there is no tie.

Third, a seller must have sufficient market power in a tying product to restrain
competition in a tied product. Market power is measured by the number of
buyers the seller has enticed to enter a particular tying arrangement. Sellers
expand their market power by enticing additional buyers to purchase a tied
product. However, sellers are prohibited from dominating a given market by
locking up an unreasonably large share of prospective buyers in tying
arrangements.

Fourth, a tying arrangement must be shown to appreciably restrain commerce.

Evidence of anticompetitive effects includes unreasonably high prices for tied
products and unreasonably low prices for competing products in a tied market.

So the example shows for establishing liability in cases relating to

anticompetitive activity, while treating the activity with rule of reason, the
procedure is longer, more elaborate, more expensive and more technical. If
the competition agencies can identify certain activities as more harmful than
the other ones, those activities can be broad under the per se rule scanner.

31
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 effect on competition within India, is an anti
competitive agreement.Such agreements are void agreements. The term
‘agreement’ includes any arrangement or understanding or action in concert
whether or not formal or in writing or is intended to be enforceable by legal
proceedings In Registrar of Restrictive Trade Agreements v. W. H. Smith and
Sons, the court observed, ‘people who combine together to keep up prices do
not shout it from the house tops. They keep it quiet. They make their on
arrangements in the cellular, where no one can see. They will not put anything
into writing nor even into words. So it includes not only an ‘agreement’
properly so called but any ‘agreement’ however informal’. However, in the EU
in some recent cases, for example, Bayer and Volkswagen the court disagreed
with the EC’s expansive interpretation of ‘agreement’ and has effectively
toughened the standards for proof of agreement in cases or restrictive
distribution.

To bring in the application of Section 3, it is pertinent that the effect on

competition must be ‘appreciable’. The term ‘appreciable adverse effect on
competition’, used in section 3(1) has not been defined in the Act. The
determination of ‘appreciable’ has proved to be a main problem under the
Competition Act. Section 19(3) of the Act states that while determining
whether an agreement has an appreciable adverse effect on competition
under section 3, the commission shall give due regard to all or any of the
following factors:

 creation of barriers of 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 consumers;
 improvements in production or distribution of goods or provision of
services;
 Promotion of technical, scientific and economic development by means
of production or distribution of goods or provision of services.

The first three relate to the negative effects on the competition while the
remaining three relate to beneficial effects. In Automobiles Dealers

32
Association v. Global Automobiles Limited & Anr., CCI held that it would be
prudent to examine an action in the backdrop of all the factors mentioned in
Section 19(3). The agreement should be the cause of the adverse effect on the
competition. Even if such a consequence is probable, the agreement is anti-
competitive. The probability and not mere possibility of its consequence as
appreciably affecting competition is the requirement.

Cartelization

Cartels are agreements between enterprises (including association of

enterprises) not to compete on price, product (including goods and services) or
customers. The purpose of a cartel is to raise price above competitive levels,
resulting in injury to consumers and to the economy. For the consumers,
cartelization results in higher prices, poor quality and less or no choice for
goods or/and services. In the European Union, Mario Monti, the former
commissioner for Competition, once described cartels as “cancers on the open
market economy”, and the Supreme Court in US has referred to cartels as “the
supreme evil of antitrust”.

The Indian Competition Act, 2002 covers cartels under Section 3(3). According
to the section, it is presumed that such agreements causes appreciable adverse
effect on competition. Thus the burden of proof in any cartel case is on the
defendant to prove that the presumption is not causing appreciable adverse
effect on competition. A specific goal of Competition Act is the prevention of
economic agents from distorting the competitive process either through
agreements with other companies or through unilateral actions designed to
exclude actual or potential competitors.

“Cartels” are included in the category of agreements, which are presumed to

have appreciable adverse effect on competition. The term “Cartel” is explicitly
defined in the Act as:-

There are three essential factors have been identified to establish the
existence of a cartel, namely

1. Agreement by way of concerted action suggesting conspiracy;

2. The fixing of prices
3. The intent to gain a monopoly or restrict/eliminate competition

Parity of prices coupled with a meeting of minds has to be established to prove

a cartel. The test for concerted practice is that the parties have co-operated to

33
avoid the risks of competition, and this has culminated in a situation which
does not correspond with the normal conditions of the market.

RULE OF REASON
The rule of reason applies to a restraint that is not deemed a naked restraint.
Per Section 1, “every contract, combination, or conspiracy” is illegal if it
constitutes undue or “unreasonable” restraint of trade. The test for
reasonableness concerns whether the challenged contracts or acts
unreasonably restrict competitive conditions in the market or industry.
Unreasonableness can be based upon the nature or character of the
agreement or surrounding circumstances. The rule of reason balances pro-
competitive and anti-competitive effects. In determining whether a restraint of
trade is reasonable, the court would consider:A contract, combination or
conspiracy that unreasonably restrains trade and does not fit into the per se
category is usually analyzed under the so-called rule of reason test. This test
focuses on the state of competition within a well-defined relevant agreement.
It requires a full-blown analysis of

(i) definition of the relevant product and geographic market,

(ii) market power of the defendant(s) in the relevant market,

(iii) and the existence of anticompetitive effects. The court will then shift
the burden to the defendant(s) to show an objective precompetitive
justification.

This analysis distinguishes between restraints with an anticompetitive effect

(or resulting in conduct likely to cause such injury) that are harmful to the
consumer, and restraints stimulating competition that are in the consumer’s
best interest)).

Most antitrust claims are analyzed under this test, according to which courts
must decide whether they impose an unreasonable restraint on competition.
In doing so, judges consider a variety of factors, including (i) intent and
purpose in adopting the restriction; (ii) the competitive position of the
defendant—specifically, information about the relevant business, its condition
before and after the restraint was imposed, and the restraint’s history, nature
and effect;

34
None of the factors are decisive and courts must balance them to determine
whether a particular restraint of trade is competitively unreasonable (Leegin
Creative Leather Products Inc. v. PSKS Inc. 127 S. Ct US (2007).

Under Rule of Reason the effect of competition is found on the facts of the
case, the market, and the existing competition, the actual or probable restraint
on competition. Tata Engineering and Locomotive Co. Ltd v. Registrar of
Restrictive Trade Agreement, was the case where Supreme Court of India
interpreted rule of reason. It was held that to determine the question 3
matters are to be considered, (a) What facts are peculiar to the business to
which the restraint is imposed, (b) what was the condition before and after the
restraint is imposed, (c ) what is the nature of the restraint and what is its
actual and probable effect. In case of rule of reason test, the pro-competitive
effects are balanced with the anti-competitive effects, and after that if the
pernicious effect is considered higher the activity if prevented by the
competitive agency of the respective jurisdiction.

In certain jurisdictions where criminal sanctions are there, the competition

agencies try most of the cases with rule of reason approach because the
criminal liability in cases like cartelization the evidence to be adduced is
measured by proof beyond reasonable doubt. Where doubt is raised before
the courts, the doubt goes in favour of the accused and the competition
agencies don’t want to take risk in losing cases before the respective courts for
lack of collateral evidence.

A legal approach by competition authorities or the courts where an attempt is

made to evaluate the pro-competitive features of a restrictive business
practice against its anticompetitive effects in order to decide whether or not
the practice should be prohibited. Some market restrictions which prima facie
give rise to competition issues may on further examination be found to have
valid efficiency enhancing benefits. For example, a manufacturer may restrict
supply of a product in different geographic markets only to existing retailers so
that they earn higher profits and have an incentive to advertise the product
and provide better service to customers. This may have the effect of expanding
the demand for the manufacturer’s product more than the increase in quantity
demanded at a lower price. The opposite of the rule of reason approach is to
declare certain business practices per se illegal, that is, always illegal. Price
fixing agreements and resale price maintenance in many jurisdictions are per
se illegal.

35
Q. 9 ABUSE OF DOMINANT POSITION

It is a well recognized principle of modern competition law that holding a

dominant position, jointly dominant position, a monopoly, or a position of
substantial market power is generally not abusive or illegal. Some behaviour by
such firms may nonetheless be seen as anti-competitive. The provisions
regulating abuse of dominant position reflects the actual change from MRTP
Act to competition law. The Act mandates that no enterprise or group shall
abuse its dominant position and provides for situations in which the conduct of
a dominant firm would be treated as contravention of S 4 of the Act

The Competition Act prohibits an enterprise, which enjoys a “dominant

position” in a relevant market from abusing its position of dominance. Under
the Competition Act, “dominant position” is defined as a position of strength,
enjoyed by an enterprise, in the relevant market in India which

(a) enables it to operate independently of competitive forces prevailing in the

relevant market or

(b) to affect its competitors or consumers or the relevant market in its favor.

The Competition Act does not specify any single criterion for determining
whether an enterprise or group enjoys a dominant position in a relevant
market; instead it provides a list of several factors, which may be considered
by the CCI when determining such dominance. These factors include market
share, size and resources of an enterprise, size and importance of competitors,
market structure and size of market, and countervailing buying power. The
Competition Act provides an exhaustive list of practices, which, when carried
out by a dominant enterprise or group, would constitute an abuse of
dominance and any behaviour by a dominant firm which falls within the scope
of such conduct is likely to be prohibited. These include:

 imposing unfair or discriminatory conditions on sale or purchase of

goods/services, including predatory pricing;
 limiting or restricting:
 production of goods or provision of services of a market; or
36
  technical or scientific development relating to goods or services to
the prejudice of consumers;
 indulging in practice or practices resulting in denial of market access,
in any manner;
 making the conclusion of contracts subject to acceptance by other
parties of supplementary obligations, which, by their nature
according to commercial usage, have no connection with the subject
of such contracts; and
 Using one’s dominant position in one relevant market to enter into or
protect another.

The prohibition on imposing “unfair” or “discriminatory” pricing, however,

does not apply to dominant enterprises when such conduct is employed to
meet competition. Interestingly, the terms “unfair” or “discriminatory” have
not been defined under the Competition Act. The CCI has so far issued
decisions in abuse of dominance cases pertaining to sectors such as the stock
exchange, real estate, specialty glass, sports regulation, etc. One of the
interesting trends in the CCI’s enforcement pertains to the determination of
the “relevant market” in investigations into potential abuse of dominance. So
far, the CCI seems inclined to define the relevant market in the narrowest
possible way. For instance, in the DLF decision, when assessing alleged abuse
by DLF (a real estate company), the CCI adopted a fairly narrow definition of
the relevant market. The primary question was whether “high-end” residential
apartments in a small geographical region (Gurgaon) would constitute a
relevant market. In its analysis, the CCI distinguished between the markets for
high-end and low-end apartments and found that these form two separate
product markets, as consumer preferences for each were different. Similarly,
in the recent auto-parts decision, the CCI considered each brand of cars to
qualify as a separate relevant market for the supply of spare parts and after-
sales services. The language used in section 4 (1) of the Competition Act seems
to suggest that abuse of a dominant position is subject to a per se prohibition.
In other words, the CCI is not required to carry out a market effect analysis for
abuse of dominance cases. Nevertheless, from a review of the decisions of the
CCI, it appears that the CCI is inclined to analyze market effects as well while
dealing with abuse of dominance case

37
 1. Determining Relevant Market

Dominance and the alleged abuse have to be established or found in the

context of relevant market. The determination of the relevant market is
one of the most complex tasks to be accomplished by a competition
authority. This involves not only analysis of legal provisions, but also
economic analysis of market concerned, determining substitutability,
and many such factors. In the US, monopoly power has been
traditionally defined as the power to control prices and exclude
competition.To determines whether a monopoly exists, it is necessary to
define the relevant market in which the power over price or competition
is to be appraised. Without a definition of that market, there is no way
to measure a defendant’s ability to lessen or destroy competition. The
determination of the relevant market is, therefore, a key to most abuse
of dominant position cases. Now the question arises whether the CCI
should itself explore to arrive at the right key or leave it for the DG to
explore on its own and open the lock. In a case before the High Court of
Bombay, the issue was as to the stage at which the relevant market has
to be identified by the CCI. It was held that “it was not necessary for the
Commission to first find out the relevant geographic market, relevant
products market or relevant market. Such things can be found or
concluded upon investigation and not necessarily before that.”

• Assessing Relevant Market

The market share that a particular undertaking has in a relevant market is one
of the most important factor to be taken into account to determine whether it
is in a dominant position. In Hoffman La Roche & Co.AG vs. Commission of the
European Communities, it was observed that existence of dominant position
may derive from several factors, which taken separately, are not necessarily
determinative but among these factors a highly important one is the existence
of very large market shares and that substantial market share as evidence of
the existence of the dominant position is not a constant factor and its
importance varies from market to market according to the structures of these
markets, especially as far as production, supply and demand are concerned. In

38
United States vs Microsoft it was observed that together the proof of
dominant market share and the existence of substantial barriers to effective
entry create the presumption that Microsoft enjoys market power.

There are primarily three stages in determining whether an enterprise has

abused its dominant position, they are-

1. Relevant Market

2. Degree of Market Power/Monopoly Power in that relevant market

3. Determining whether the undertaking in a dominant position has engaged in

conducts specifically prohibited by the statute or applicable law

Relevant Market-

Before assessing whether an undertaking is dominant, it is important, as in the

case of horizontal agreements, to determine what the relevant market is.
There are two dimensions to this – the product market and the geographical
market. On the demand side, the relevant product market includes all such
substitutes that the consumer would switch to, if the price of the product
relevant to the investigation were to increase. From the supply side, this would
include all producers who could, with their existing facilities, switch to the
production of such substitute goods. The geographical boundaries of the
relevant market can be similarly defined. Geographic dimension involves
identification of the geographical area within which competition takes place.
Relevant geographic markets could be local, national, international or
occasionally even global, depending upon the facts in each case. Some factors
relevant to geographic dimension are consumption and shipment patterns,
transportation costs, perishability and existence of barriers to the shipment of
products between adjoining geographic areas. For example, in view of the high
transportation costs in cement, the relevant geographical market may be the
region close to the manufacturing facility.
According to Black Laws dictionary the product market is that part of relevant
market that applies to a firm’s particular product by identifying all reasonable
substitutes for the product and by determining whether these substitutes limit
the firms ability to affect prices. The relevant geographical market is a market
comprising that area in which conditions for the supply of goods and services
are distinctly homogenous and can be distinguished from the conditions
prevailing in the neighbouhood areas.

39
The Indian Competition Act, 2002, expressly provides in Section 19(5) that
Competition Commission shall have due regard to the relevant product market
and geographical market in determining whether a market constitutes a
relevant market for the purposes of the Act. The definition of relevant product
market provided by Section 2(r) of the act states "relevant market" means the
market which may be determined by the Commission with reference to the
relevant product market or the relevant geographic market or with reference
to both the markets. Section 2(t) defines the relevant product market as a
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. Section 2(s) defines
relevant geographical market as a 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 neighbouring area.

The Act posits the factors that would have to be considered by the adjudicating
Authority in determining the “Relevant Product Market” and the “Relevant
Geographic Market”, reproduced herein below:

Relevant Product Market

The first stage in determining whether an undertaking is dominant is to

determine the relevant product market, based on the interchangeability and
substitutability of products. Where products are regarded as interchangeable
or substitutable from a consumer's standpoint, they are considered to belong
to the same product market. Interchangeability is measured on the basis of the
intended use of the products, the price of the products and their physical
characteristics. Once the relevant product market is defined, the relevant
geographical market can be analysed.

· physical characteristics or end-use of goods;

· price of goods or service;
· consumer preferences;
· exclusion of in-house production;
· existence of specialised producers;
· classification of industrial products.

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Relevant Geographic Market

It is also necessary to define the relevant geographical market when

determining a dominant position of an undertaking. The relevant geographic
market is the area in which the undertakings concerned are involved in the
supply of relevant products or services, in which the conditions of competition
are sufficiently homogenous, and that can be distinguished from neighbouring
geographic areas because conditions of competition are appreciably different
in those areas.

· regulatory trade barriers;

· local specification requirements;
· national procurement policies;
· adequate distribution facilities;
· transport costs;
· language;
· consumer preferences;
· need for secure or regular supplies or rapid after-sales services.

The determination of ‘relevant market’ by the adjudicating Authority has to be

done, having due regard to the ‘relevant product market’ and the ‘relevant
geographic market’ According to World BankOWCD Glossary, “If a market is
defined too narrowly in either product of geographic terms, meaningful
competition may be excluded from the analysis. On the other hand, if the
product and geographic market are too broadly defined the degree of
competition may be overstated. Too broad or too narrow market definitions
led to understanding or overstating market share and concentration measure.

Relevant product market is defined as a 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.

Relevant geographic market refers to a 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.

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M/s Saint Gobain Glass India Ltd. v. M/s Gujrat Gas Company Limited– In this
case, the CCI in order to determine the ‘relevant market’ took note of factors
to be considered while determining relevant product market and relevant
geographic market. The CCI stated that to determine the “relevant product
market”, the Commission is to have due regard to all or any of the following
factors viz., physical characteristics or end-use of goods, price of goods or
service, consumer preferences, exclusion of in-house production, existence of
specialized producers and classification of industrial products, in terms of the
provisions contained in .

To determine the “relevant geographic market”, the Commission shall have

due regard to all or any of the following factors viz., regulatory trade barriers,
local specification requirements, national procurement policies, adequate
distribution facilities, transport costs, language, consumer preferences and
need for secure or regular supplies or rapid after-sales services, in terms of the
provisions contained in Section 19(6) of the Act.

Section 19(6) enlists the factors to be considered by CCI while determining

‘relevant geographic market’:

1. Regulatory trade barriers;

2. Local specification requirements;

National procedure policies;

1. Adequate distribution facilities;

2. Transport costs;

3. Language;

Consumer preferences;

Need for secure or regular supplies

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Section 19(7) of the Act enlists the factors to be considered by the CCI while
determining ‘relevant product market’:

1. Physical characteristics or end-use of goods;

2. Price of goods or services;

Consumer preferences;

1. Exclusion of in-house production;

2. Existence of specialized producers;

3. Classification of industrial products;

When does an enterprise engage in an abusive conduct or abuse its dominant

position?

An undertaking in a dominant position is entitled also to pursue its own

interests. However, such an undertaking engages in abusive conduct when it
makes use of the opportunities arising out of its dominant position in such a
way as to reap trading benefits which it would not have reaped if there had
been normal and sufficiently effective competition. For the purposes of this
section, the conduct of a party would be tested on the basis of the end effect
i.e. whether access to a market has been denied not. In other words, the same
conduct by different parties may attract provisions of Section 4(2) of
Act depending on whether the conduct of the parties results into denial of
market access in any manner. As per Section 4(2)(c) of Act of the Act, there
shall be an abuse of dominant position if any enterprise indulges in a practice
resulting in denial of market access in any manner.

In the case of Jupiter Gaming Solutions Pvt. Ltd. v. Government of Goa &
Ors , the CCI while determining alleged abuse of dominance by Government of
Goa stated that dominance per se is not bad, but its abuse is bad in

43
Competition Law in India. CCI further opined that abuse is said to occur when
an enterprise uses its dominant position in the relevant market in an
exclusionary or /and an exploitative manner. In the case the Government’s
tender bid of lottery contained certain conditions which apparently restricted
the size of bidders such as, minimum gross turnover of the participating entity,
participating entity should have experience of at least three years. The CCI held
that the Government of Goa by imposing such conditions abused its dominant
position denial/restriction of market access to the other parties in the relevant
market.

2. Determining Dominance

‘Dominant position’ has been defined in the Explanation to the S 4, and the
definition is similar to the definition given by European Court of Justice in
United Brand’s case,states: “Dominant position” means a position of
strength, enjoyed by an enterprise, in the relevant market, in India, which
enables it to— (i) operate independently of competitive forces prevailing in
the relevant market; or (ii) affect its competitors or consumers or the
relevant market in its favour.”

The CCI shall be guided by the thirteen factors provided under S 19(4) in
determining the dominant position of an enterprise or group. It may be noted
that in a few jurisdictions, dominance is objectively defined in terms of
prescribing market share with other conditions.In India, however, it was felt
that specifying a threshold or arithmetical figure (i.e., market share) for
defining dominance may either allow the offenders to escape or result in
unnecessary litigation. The provisions under Indian law therefore provide
greater flexibility to the CCI in finding market distortions in the context of
abuse of dominance provisions. The CCI is not circumscribed by the market
share requirement. Determing when a firm’s behaviour is an abuse of market
power, as opposed to a competitive action, is one of the most complex and
controversial areas in competition policy. Competition laws typically contain
provisions prohibiting abuse of market power by dominant firms or attempts
of not yet dominant firms to monopolise markets.
However, there is considerable divergence among jurisdictions about the
precise definition of dominance, the range of practices and conducts that

44
should be condemned as anti-competitive, and finally the choice of remedies
that should be imposed.

3. Establishing the Abuse

Once the relevant market and dominance of an enterprise has been

established, evidence has to be found as to the abuse. The Act provides
for the following situations, which qualify as abuse by a dominant firm:

a. Directly or indirectly imposing unfair purchase or selling prices

including predatory prices;

b. Limiting production, markets or technical development to the

prejudice of the consumers;

c. Indulging in action resulting in the denial of market access;

d. Making contracts with obligations which have no connection with the

subject of such contracts; or

e. Using dominance in one market to move into or protect other

markets.

Examples of abusive practices typically include:

 predatory pricing
 loyalty rebates
 tying and bundling
 refusals to deal
 margin squeeze
 excessive pricing

A proper understanding of when a firm’s actions could be considered abusive

is important for competition authorities because consumers ‘and the economy

45
would be harmed by an incorrect intervention. A firm with a large market
share, which might be considered dominant, also needs to understand the law
and economics in this area, which is not always easy.

To promote effective enforcement of competition laws in the area of abuse of

dominance and monopolisation, the OECD Competition Committee holds
roundtable discussions, typically with the participation of businesses,
academics and other interested participants. As a result, Best Practice
Roundtables proceedings are published to provide some guidance to best
practices in this area, at the cutting edge of applied competition law and
policy.

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Q 10 DIFFERENCE BETWEEN MONOPOLIZATION AND ABUSE OF
MONOPOLY

Antitrust law does not mandate either that markets be competitive, or that
they contain some predetermined number of participants/competitors; it is
concerned, rather, with the operation of markets, on the assumption that a
properly functioning market (i.e., one in which there is an opportunity for
viable competition, and is not skewed by the predatory actions of participants),
will best protect consumers. "Monopoly" and "monopolist" are, therefore,
merely descriptive terms, used to illustrate situations in which a single entity
(or group of entities) possesses effective control of the market in which it
operates; neither term implies anything about the lawfulness of the monopoly
possessed. "Monopolization," on the other hand, is the term used in antitrust
law to characterize as unlawful a situation in which a monopolist—irrespective
of whether his monopoly has been lawfully achieved—couples his monopoly
status with behavior designed to unfairly exploit, maintain, or enhance his
market position. Similarly, "attempted monopolization connotes a situation in
which an entity unlawfully or unfairly attempts to secure a market monopoly.
The long-standing, judicially created Rule of Reason, which involves balancing
an anticompetitive action with any pro competitive results, underscores those
facts.
Whether a market participant who is a monopolist must deal with anyone who
desires to deal with it continues to be largely governed by the so-
called Colgate doctrine. In 1919, in United States v. Colgate & Co. (250 U.S.
300), the Supreme Court recognized the unfettered "right" of a private vendor
"to exercise his own independent discretion as to parties with whom he will
deal ...." Colgate notwithstanding, the existence of an "essential facility" (i.e., a
necessary component of a potential competitor's business and which is both
unavailable from any source other than the alleged monopolist and cannot be
reasonably duplicated), once established, has generally been thought to
impose a duty to deal with the actual or potential competitors of even a lawful
monopolist. The continuing viability of the so-called "essential facilities"
doctrine, however, was called into question by the Supreme Court's 2004
ruling in Verizon v. Trinko (540 U.S. 398).

MONOPOLIZATION
In order to be found guilty of either "monopolization" or "attempted
monopolization" one has first to be determined to be a "monopolist." As was

47
observed earlier at footnote, the existence of "monopoly power" is generally
conceded if a market participant possesses the power "to control prices or
exclude competition." A finding of monopoly power, by itself, however, will
not support a "monopolization" charge. In addition, a monopolist must
generally also be guilty of "the wilful acquisition or maintenance of [monopoly]
power as distinguished from growth or development as a consequence of a
superior product, business acumen, or historic accident." That having been
said, however, courts have had to evaluate actual business conduct in order to
distinguish between lawful (e.g., that having a "legitimate business purpose,"
or that which is merely indicative of aggressive competition) and unlawful (that
which is predatory—i.e., seemingly economically irrational except for its
adverse effect on competition, or exclusionary) conduct by a monopolist.
Throughout its analysis a court must be mindful of the consumer protection
purpose of the antitrust laws, which protect competition, not competitors; as
we noted at the beginning of this report, the viability of individual competitors
is relevant only to the extent their fates affect marketplace competitiveness.
Understanding Monopolies
Monopolies typically have an unfair advantage over their competition since
they are either the only provider of a product or control most of the market
share or customers for their product. Although monopolies might differ from
industry-to-industry, they tend to share similar characteristics that include:

 High or no barriers to entry: Competitors are not able to enter the

market, and the monopoly can easily prevent competition from
developing their foothold in an industry by acquiring the competition.
 Single seller: There is only one seller in the market, meaning the
company becomes the same as the industry it serves.
 Price maker: The company that operates the monopoly decides the
price of the product that it will sell without any competition keeping
their prices in check. As a result, monopolies can raise prices at will.
 Economies of scale: A monopoly often can produce at a lower cost than
smaller companies. Monopolies can buy huge quantities of inventory,
for example, usually a volume discount. As a result, a monopoly can
lower its prices so much that smaller competitors can't survive.
Essentially, monopolies can engage in price wars due to their scale of
their manufacturing and distribution networks such as warehousing and
shipping, that can be done at lower costs than any of the competitors in
the industry.

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KEY TAKEAWAYS

 A monopoly refers to when a company and its product offerings

dominate one sector or industry.
 Monopolies can be considered an extreme result of free-market
capitalism and are often used to describe an entity that has total or
near-total control of a market.
 Natural monopolies can exist when there are high barriers to entry; a
company has a patent on their products, or is allowed by governments
to provide essential services.

Pure Monopolies

A company with a pure monopoly means that a company is the only seller in a
market with no other close substitutes. For many years, Microsoft Corporation
had a monopoly on the software and operating systems that are used in
computers. Also, with pure monopolies, there are high barriers to entry, such
as significant start-up costs preventing competitors from entering the market.

Monopolistic Competition

When there are multiple sellers in an industry with many similar substitutes for
the goods being produced and companies retain some power in the market,
it's referred to as monopolistic competition. In this scenario, an industry has
many businesses that offer similar products or services, but their offerings are
not perfect substitutes. In some cases, this can lead to duopolies.

In a monopolistic competitive industry, barriers to entry and exit are typically

low, and companies try to differentiate themselves through price cuts and
marketing efforts. However, since the products offered are so similar between
the different competitors, it's difficult for consumers to tell which product is
better. Some examples of monopolistic competition include retail stores,
restaurants, and hair salons.

A monopoly is characterized by the absence of competition, which can lead to

high costs for consumers, inferior products and services, and corrupt behaviour

. A company that dominates a business sector or industry can use that

dominance to its advantage, and at the expense of others. It can create

49
artificial scarcities, fix prices, and circumvent natural laws of supply and
demand. It can impede new entrants into the field, discriminate and inhibit
experimentation or new product development, while the public—robbed of
the recourse of using a competitor—is at its mercy. A monopolized market
often becomes an unfair, unequal, and inefficient.

Mergers and acquisitions among companies in the same business are highly
regulated and researched for this reason. Firms are typically forced to divest
assets if federal authorities believe a proposed merger or takeover will violate
anti-monopoly laws. By divesting assets, it allows competitors to enter the
market by those assets, which can include plant and equipment and
customers.

50
 Q.11 PREDATORY PRICING

Predatory pricing is the illegal act of setting prices low in an attempt to

eliminate the competition. Predatory pricing violates antitrust law, as it makes
markets more vulnerable to a monopoly.

However, allegations of this practice can be difficult to prosecute because

defendants may successfully argue that low prices are part of normal
competition, rather than a deliberate attempt to undermine the marketplace.
And predatory pricing isn't always successful in its goal, due to the difficulties
in recouping lost revenue and successfully eliminating competitors.

Effects of Predatory Pricing

A price war spurred by predatory pricing can be favorable for consumers in the
short run. The heightened competition may create a buyers’ market in which
the consumer enjoys not only lower prices but increased leverage and wider
choice.

However, should the price battle succeed in slaying all, or even some, of the
market competitors, the advantages for consumers may quickly evaporate—or
even reverse. A monopolistic marketplace might allow the company that holds
the monopoly to raise prices as they wish, perhaps reducing consumer choice
in the bargain.

Fortunately for consumers, creating a sustained market monopoly is no simple

matter. For one, eliminating all rival businesses in a given market often comes
with considerable challenges. For instance, in an area with numerous gas
stations, it's usually daunting for any one operator to cut prices low enough,
for long enough, to drive out all competitors. Even if such an effort worked, the
strategy would succeed only if the revenue lost through predatory pricing
could be recouped quickly—before many other competitors might enter the
market, drawn by a return to normal price levels.

KEY TAKEAWAYS

 In predatory pricing scheme, prices are set low in an attempt to drive

our competitors and create a monopoly
 Consumers may benefit from lower prices in the short term, but then
suffer if the scheme succeeds in eliminating competition, and prices rise
and choice declines

51
  Prosecutions for predatory pricing have been complicated by the short-
term consumer benefits and the difficulty of proving the intent to create
a market monopoly

Predatory Pricing and the Law

The same factors that make predatory pricing beneficial to consumers, at least
in the short run— and often of dubious benefit to the predators, at least in the
long run—have tended to hamper prosecution of supposed predators under
U.S. antitrust laws.

The Federal Trade Commission says it carefully examines claims of predatory

pricing. In turn, the Department of Justice, in a paper updated as recently as
2015, has asserted that economic theory based on strategic analysis supports
that predatory pricing is a real problem, and that courts have adopted an
overly cautious view of the practice.

The U.S. judiciary has indeed often been skeptical of claims of predatory
pricing. Among the high bars set by the U.S. Supreme Court on antitrust claims
is the requirement that plaintiffs show a likelihood that the pricing practices
will affect not only rivals but also competition in the market as a whole, in
order to establish that there is a substantial probability of success of the
attempt to monopolize. Further, the Court established that for prices to be
predatory, they must be not simply aggressively low but actually below the
seller's cost.

That said, it is not a violation of the law if a business sets prices below its own
costs for reasons other than having a specific strategy to eliminate
competitors.

In common parlance, Predatory pricing may be defined as pricing below

an appropriate measure of cost for the purpose of eliminating
competitors in the short run and reducing competition in the long run. It
is a practice that harms both competitors and competition. Normally
price cutting is aimed simply at increasing market share, predatory
pricing has as its aim the elimination of competition and creating
monopoly.

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 Concept and determining Predatory Pricing
The concept of predatory pricing is difficult to define in precise
economic terms. In simple terms it is sacrificing of present revenues for
the purpose of driving competitors from the market with the intent of
recouping lost revenues through monopoly profits thereafter.

Determining Predatory pricing

In order to prevail as a matter of law, a plaintiff must at least show that
either (1) a competitor is charging a price below his average variable cost
in the competitive market or (2) the competitor is charging a price below
its short-run, profit-maximizing price and barriers to entry are great
enough to enable the discriminator to reap the benefits of predation
before new entry is possible.

It was further clarified that, the standard of profit maximization price

should be applied only when the barriers to entry are extremely high i.e.
if the barriers for an entry in a specified are lower the firm set the price
closer to the marginal cost. For instance, Entry barriers for setting food
outlet are very low, hence the prices charged for edible food at these
food outlet is nearly close to the marginal cost.

MERITS AND DEMERITS

The various advantages of adopting predatory pricing are as follows-

1. Dominant position – The predatory pricing helps the company to gain a

dominant position in the market
2. Minimizes competition – The rival companies who are unable to bear the
loss because of continuously lowered prices start bowing out of the
market one-by-one. It ultimately helps to minimize the competition to a
greater degree
3. No place for new entrants – The predatory pricing is a dead-end for the
new entrants as it will not be able to sustain its business in such hard

53
 conditions. This strategy acts as a barrier that deters them from entering
new markets
4. High adoption and diffusion: Penetration pricing allows a product or
service to be quickly accepted and adopted by customers.
5. Marketplace dominance: Competitors are typically caught off guard in a
penetration pricing strategy and are afforded little time to react. The
company is able to utilize the opportunity to switch over as many
customers as possible.
6. Economies of scale: The pricing strategy generates high sales quantity
that allows a firm to realize economies of scale and lower marginal cost.
7. Increased goodwill: Customers that are able to find a bargain in a product
or service are likely to return to the firm in the future. In addition, the
increased goodwill creates positive word of mouth.
8. High turnover: Penetration pricing results in an increased turnover rate,
making vertical supply chain partners such as retailers and distributors
happy.

The disadvantages of using predatory pricing are as follows-

1. Illegal practice – It is considered an illegal practice in several countries

and is frowned upon
2. Not feasible in the long run – The predatory pricing seems like a viable
concept in the short term but will become impossible to maintain over a
longer period.
3. Pricing expectation: When a firm uses a penetration pricing strategy,
customers often expect permanently low prices. If prices gradually
increase, customers will become dissatisfied and may stop purchasing
the product or service.
4. Low customer loyalty: Penetration pricing typically attracts bargain
hunters or those with low customer loyalty. Said customers are likely to
switch to competitors if they find a better deal.
5. Damage brand image: It may affect the brand image and cause
customers to perceive the brand as cheap.

54
6. Price war among competitors: It results in retaliation from competitors
trying to maintain their market share. Pricing war may decrease
profitability for the overall market.
7. Inefficient long-term strategy: It is not a viable long-term pricing
strategy. In many cases, firms that use the strategy face a loss of profits.
In this case, the firm may not be able to recover its cost if it uses
penetration pricing over an extended timeframe.

55
Q 12 DISCRIMINATORY PRICING

Price discrimination is one of the most complex areas. There are several
reasons for this. First, the concept of price discrimination covers many
different practices (discounts and rebates, tying, selective price cuts,
discriminatory input prices set by vertically-integrated operators, etc.) whose
objectives and effects on competition significantly differ. From the point of
view of competition law analysis, it is thus not easy to classify these practices
under a coherent analytical framework. Second, there is a consensus among
economists that the welfare effects of the (various categories of) price
discrimination are ambiguous. It is hard to say a priori whether a given form of
price discrimination increases or decreases welfare. The response to this
question may indeed depend on which type of welfare standard (total or
consumer) is actually pursued.

“Price discrimination is a term that economists use to describe the practice of

selling the same product to different customers at different prices even though
the cost of sale is the same to each of them. More precisely, it is selling at a
price or prices such that the ratio of price to marginal costs is different in
different sales.

This definition is helpful in that it provides an objective criterion, i.e. the

presence of different ratios of price to marginal costs (i.e. rates of return), to
identify the occurrence of price discrimination. It also suggests that different
prices for the same product do not necessarily amount to price discrimination
as such difference may be justified by cost variations.

It is generally admitted that several conditions must be present for price

discrimination to occur:

- A firm must have some market power (i.e., the ability to set supra-
competitive prices) to be able to price discriminate. Otherwise, it cannot
succeed in charging any consumer above the competitive price. As scenarios of
perfect competition are extremely rare, most firms enjoy some degree of
market power and thus price discrimination can be observed even in highly

56
competitive markets. Dominance is not essential for price discrimination to
occur, although it is only in situation of dominance that price discrimination
may be considered abusive in EC competition law

. - The firm must have the ability to sort consumers depending on their
willingness to pay for each unit. The level of information enjoyed by a firm over
its customers may in turn determine the forms of price discrimination it
decides to put in place. Firms enjoying only imperfect information about its
customers' willingness to pay will only be able to imperfectly price
discriminate.

- The firm must be able to prevent or limit the resale of the goods or services
in question by consumers paying the lower price to those who pay the higher
price. In some cases, resale is impossible due to transaction costs (e.g.,
transport costs from high to low price areas), while in others firms adopt
contractual or other measures to prevent arbitrage between consumers (e.g.,
prohibition of resale as part of terms of sale). 4 Absent one or several of these
conditions, price discrimination is impossible or at least unlikely to succeed.

Different forms of price discrimination

all methods of price discrimination is to “capture as much consumer surplus as

possible”. But this can be achieved through different forms of price
discrimination:

- First degree price discrimination occurs when a firm is able to perfectly

discriminate between consumers, that is when it enjoys the ability to charge
the maximum each consumer is willing to pay for each unit of a given product
or service. Most economists, however, agree that this scenario can almost
never be observed in practice as first degree price discrimination assumes that
the firm has perfect knowledge of its customers’ willingness to pay, an
assumption which is unlikely to be met in most markets.

- Second degree price discrimination occurs when a firm sets a price per unit
which varies with the number of units the customer buys. This can be achieved

57
through volume discounts whereby the price of a unit varies depending on the
quantity purchased by the buyer or the adoption of a two-part tariff whereby
the consumer pays a flat fee independent of the quantity purchased plus a
variable fee which depends on the quantity purchased.

- Third degree price discrimination takes place when a firm charges different
prices to different groups of customers depending on their elasticity of
demand. Consumers with high elasticity of demand will be charged higher
prices than those with low elasticity of demand (Ramsey pricing). The
distinction between first, second and third degree discrimination is only of
limited relevance in the competition law analysis context as it tells little about
the effects of competition generated by the different forms of price
discrimination it distinguishes

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Q. 13 REFUSAL TO DEAL

The practice of refusing or denying supply of a product to a purchaser, usually

a retailer or wholesaler. The practice may be adopted in order to force a
retailer to engage in resale price maintenance (RPM), i.e., not to discount the
product in question, or to support an exclusive dealing arrangement with other
purchasers or to sell the product only to a specific class of customers or
geographic region. Refusal to deal/sell may also arise if the purchaser is a bad
credit risk, does not carry sufficient inventory or provide adequate sales
service, product advertising and display, etc. The competitive effects of refusal
to deal/sell generally have to be weighed on a case-by-case basis.

59
Q. 14 ESSENTIAL FACILITIES DOCTRINE

The term "essential facilities doctrine" originated in commentary on United

States antitrust case law and now has multiple meanings, each having to do
with mandating access to something by those who do not otherwise get
access. The variance in definitions is great. Indeed, commentators cannot even
agree on which U.S. cases come within the purview of "essential facilities."1
Among countries, the variance is even larger. Hence, one purpose of this note
is to make readers aware of that variance. An "essential facilities doctrine"
(EFD) specifies when the owner(s) of an "essential" or "bottleneck" facility is
mandated to provide access to that facility at a "reasonable" price. For
example, such a doctrine may specify when a railroad must be made available
on "reasonable" terms to a rival rail company or an electricity transmission grid
to a rival electricity generator. The concept of "essential facilities" requires
there to be two markets, often expressed as an upstream market and a
downstream market. (The case of two complementary products is logically the
same, but confusing in exposition.) Typically, one firm is active in both markets
and other firms are active or wish to become active in the downstream market.
(See below for a fuller discussion of the market configurations found by some
commentators to be relevant to an EFD.) A downstream competitor wishes to
buy an input from the integrated firm, but is refused. An EFD defines those
conditions under which the integrated firm will be mandated to supply.2 While
essential facilities issues do arise in purely private, unregulated contexts, there
is a tendency for them to arise more commonly in contexts where the
owner/controller of the essential facility is subject to economic regulation or is
State-owned or otherwise State-related. Hence, there is often a public policy
choice to be made between the extension of economic regulation and an EFD
under the competition laws. Further, the fact of regulation of pricing through
economic regulation, State-control, or a prohibition of "excessive pricing" in
the competition law, has implications for the nature of an EFD. The remainder
of the note proceeds as follows. Section 2 presents concise formulations of the
EFDs in the United States, Australia, and the European Union, illustrating the
variation found within the OECD area. Section 3 presents a basic economic
analysis of the issues. Section 4 is a discussion of some other relevant issues.
Section 5 concludes the note.

60
Essential facilities doctrines vary significantly among legal regimes. They may
vary according to the types of "facilities," ownership and market structures to
which they may apply, and according to who makes the determination that a
facility is "essential." This section very briefly looks at three of the EFDs that
apply within the OECD area. The first one examined is that of the United
States, where the term originated and on which much commentary is
available. The relatively uncrystallized EFD of the European Union is examined
second. The third EFD presented is that of the "Hilmer Report" of Australia,
which is a recent re-examination of the Australian approach to competition
and regulation.

61
Q. 15 NEW PRODUCT INTRODUCTION AND PROMOTION

The Chamberlinian models of monopolistic competition assume many singIe-

product firms in the market that produce a different product variety. Firms can
freely enter the market in the long run, but are not allowed to choose a
particular variety (brand) since the latter is assigned to them randomly as they
enter the market. Also, the market has a representative consumer with an
insatiable desire for product variety who perceives all different varieties
symmetrically, since the elasticity of substitution across varieties is assumed to
be constant. Usually, a Constant Elasticity of Substitution (CES) utility function
is used to represent a consumer's preference over a numeraire product and a
large number of different varieties of another product of interest. Finally, the
intensity of product differentiation (substitutability) across product varieties is
exogenously given and does not depend on the number of varieties available in
the market. On the other hand, the locational models of monopolistic
competition assume many singleproduct firms, with each firm selling a
different variety of a given product in the market. Entry is free in the long run,
and firms face a fixed cost in introducing a new variety. Thus, entry of new
firms produces new product varieties. The locational models are suitable for
analyzing the economics of product variety, since firms can choose the specific
variety to offer by simply positioning themselves along the product-
characteristics space. At the same time, the distance among neighboring firms
determines the degree of product differentiation in the market.

New Products and Market Competition The mechanism discussed in this paper
depends on the notion that market demand expansions attract new entry that
brings along new products, shrinking the distance between two neighboring
product varieties in the product-characteristics space. Within the context of
the locational models, product differentiation becomes weaker and market
competition among firms more intense. Thus, PCMs drop due to market
demand expansions moving hence in the opposite direction with market
demand and new product introductions. For that, consumers' attitude toward
the adjustments in the degree of product differentiation due to new entry
plays an important role. Specifically, if consumers are not too attached to their
ideal product variety (low brand loyalty)--and thus, substitutability among

62
different varieties is rather easy and costless to them--then firms, and in the
presence of new product introductions, must compete intensively, since their
price elasticity of demand increases due to new product varieties in the market
that finally results in lower PCMs.

new product introductions on the intensity of market competition, which is a

neglected element in the literature. It presents a theoretical discussion of the
idea and empirical evidence supporting it, using novel data on new product
introductions that span 10 years and come from five U.S. 2-digit Standard
Industrial Classification (SIC) manufacturing industries. It shows that new
products intensify market competition, as it is measured by industry-specific
price-cost margins (PCM). Also, more new products in the market make PCMs
less procyclical (and therefore, the intensity of market competition more
procyclical). Finally, the inclusion of new product introductions in the empirical
estimations weakens the impact that other factors, such as import penetration
and market demand, have on the intensity of market competition. Market
competition plays a pivotal role in companies' pricing decisions. However,
measuring the intensity of market competition is not an easy task.
Traditionally, researchers proxy the intensity of market competition with its
implications on certain measurable economic variables. I The most common
variable is the level of the average PCM in a given industry. Strong market
competition forces companies to be aggressive in their pricing and therefore,
to set low PCMs. Consequently, they identify the intensity of market
competition with the level of the average price markup in a given industry.
Economists have pointed out various factors that influence the intensity of
market competition in various industries. Domowitz, Hubbard, and Petersen
[1988] emphasize industry concentration, while Field and Pagoulatos [1997]
identify product differentiation, capital intensity, and import penetration as
factors influencing market competition and PCMs.

Products still in early developmental stages also provide rich opportunities for
product differentiation, which with heavy research costs holds off competitive
degeneration. But aside from technical factors, the rate of degeneration is
controlled by economic forces that can be subsumed under rate of market
acceptance and ease of competitive entry.

63
Ease of competitive entry is a major determinant of the speed of degeneration of
a specialty. An illustration is found in the washing machine business before the
war, where with little basic patent protection the Maytag position was quickly
eroded by small manufacturers who performed essentially an assembly
operation. The ball-point pen cascaded from a $12 novelty to a 49-cent “price
football,” partly because entry barriers of patents and techniques were
ineffective. Frozen orange juice, which started as a protected specialty of Minute
Maid, sped through its competitive cycle, with competing brands crowding into
the market.

At the outset innovators can control the rate of competitive deterioration to an

important degree by non price as well as by price strategies. Through successful
research in product improvement innovators can protect their specialty position
both by extending the life of their basic patents and by keeping ahead of
competitors in product development. The record of IBM punch-card equipment
is one illustration. Ease of entry is also affected by a policy of stay-out pricing (so
low as to make the prospects look uninviting), which under some circumstances
may slow down the process of competitive encroachment.

Estimate of Demand

The problem at the pioneer stage differs from that in a relatively stable
monopoly because the product is beyond the experience of buyers and because
the perishability of its distinctiveness must be reckoned with. How can demand
for new products be explored? How can we find out how much people will pay
for a product that has never before been seen or used? There are several levels
of refinement to this analysis.

The initial problem of estimating demand for a new product can be broken into
a series of subproblems: (1) whether the product will go at all (assuming price is
in a competitive range), (2) what range of price will make the product
economically attractive to buyers, (3) what sales volumes can be expected at
various points in this price range, and (4) what reaction will price produce in
manufacturers and sellers of displaced substitutes.

The first step is an exploration of the preferences and educability of

consumers, always, of course, in the light of the technical feasibility of the new
product. How many potential buyers are there? Is the product a practical device

64
for meeting their needs? How can it be improved to meet their needs better?
What proportion of the potential buyers would prefer, or could be induced to
prefer, this product to already existing products (prices being equal)?

Sometimes it is feasible to start with the assumption that all vulnerable

substitutes will be fully displaced. For example, to get some idea of the
maximum limits of demand for a new type of reflecting-sign material, a
company started with estimates of the aggregate number and area of auto
license plates, highway markers, railroad operational signs, and name signs for
streets and homes. Next, the proportion of each category needing night-light
reflection was guessed. For example, it was assumed that only rural and
suburban homes could benefit by this kind of name sign, and the estimate of
need in this category was made accordingly.

It is not uncommon and possibly not unrealistic for a manufacturer to make the
blithe assumption at this stage that the product price will be “within a
competitive range” without having much idea of what that range is. For
example, in developing a new type of camera equipment, one of the electrical
companies judged its acceptability to professional photographers by technical
performance without making any inquiry into its economic value. When the
equipment was later placed in an economic setting, the indications were that
sales would be negligible.

The second step is marking out this competitive range of price. Vicarious pricing
experience can be secured by interviewing selected distributors who have
enough comparative knowledge of customers’ alternatives and preferences to
judge what price range would make the new product “a good value.” Direct
discussions with representative experienced industrial users have produced
reliable estimates of the “practical” range of prices. Manufacturers of electrical
equipment often explore the economic as well as the technical feasibility of a
new product by sending engineers with blueprints and models to see customers,
such as technical and operating executives.

In guessing the price range of a radically new consumers’ product of small unit
value, the concept of barter equivalent can be a useful research guide.

The third step, a more definite inquiry into the probable sales from several
possible prices,starts with an investigation of the prices of substitutes. Usually
the buyer has a choice of existing ways of having the same service performed;
an analysis of the costs of these choices serves as a guide in setting the price for
a new way.

65
Comparisons are easy and significant for industrial customers who have a
costing system to tell them the exact value, say, of a forklift truck in terms of
warehouse labor saved. Indeed, chemical companies setting up a research
project to displace an existing material often know from the start the top price
that can be charged for the new substitute in terms of cost of the present
material.

The fourth step in estimating demand is to consider the possibility of retaliation

by manufacturers of displaced substitutes in the form of price cutting. This
development may not occur at all if the new product displaces only a small
market segment. If old industries do fight it out, however, their incremental costs
provide a floor to the resulting price competition and should be brought into
price plans.

Promotional Strategy

Initial promotion outlays are an investment in the product that cannot be

recovered until some kind of market has been established. The innovator
shoulders the burden of creating a market—educating consumers to the
existence and uses of the product. Later imitators will never have to do this job;
so if the innovator does not want to be simply a benefactor to future
competitors, he or she must make pricing plans to recover initial outlays before
his or her pricing discretion evaporates.

Estimation of the costs of moving the new product through the channels of
distribution to the final consumer must enter into the pricing procedure, since
these costs govern the factory price that will result in a specified consumer price
and since it is the consumer price that matters for volume. Distributive margins
are partly pure promotional costs and partly physical distribution costs. Margins
must at least cover the distributors’ costs of warehousing, handling, and order
taking. These costs are similar to factory production costs in being related to
physical capacity and its utilization, i.e., fluctuations in production or sales
volume.

Hence these set a floor to trade-channel discounts. But distributors usually also
contribute promotional effort—in point-of-sale pushing, local advertising, and
display—when it is made worth their while.

These pure promotional costs are more optional. Unlike physical handling costs
they have no necessary functional relation to sales volume. An added layer of
margin in trade discounts to produce this localized sales effort (with retail price

66
fixed) is an optional way for manufacturers to spend their prospecting money in
putting over a new product.

In establishing promotional costs, manufacturers must decide on the extent to

which the selling effort will be delegated to members of the distribution chain.
Indeed, some distribution channels, such as house-to-house selling and retail
store selling supplemented by home demonstrators, represent a substantial
delegation of the manufacturers’ promotional efforts, and these usually involve
much higher distribution-channel costs than do conventional methods.

Rich distributor margins are an appropriate use of promotion funds only when
the producer thinks a high price plus promotion is a better expansion policy in
the specialty than low price by itself. Thus there is an intimate interaction
between the pricing of a new product and the costs and the problems of floating
it down the distribution channels to the final consumer.

67
Q. 16 MERGERS AND AQCUSITION

Mergers and Acquisitions are primarily a domestic Competition Law issue. In

some cases, however, Mergers and Acquisitions affect international trade. An
enterprise may acqui~ o foreign competitive firm to block the importation of
competing products. If it happens there is an impact on international trade
apart from affecting domestic competition.

Mergers and acquisitions are increasingly becoming strategic choice for

organizational growth and achievement of business goals including profit,
empire building, market dominance and long term survival. The ultimate goal
of this strategic choice of inorganic growth is, however, maximization of
shareholder value. The phenomenon of rising M&A activity is observed world
over across various continents, although, it has commenced much earlier in
developed countries (as early as 1895 in US and 1920s in Europe), and is
relatively recent in developing countries. In India, the real impetus for growth
in M&A activity had been the ushering of economic reforms introduced in the
year 1991, following the financial crisis and subsequent implementation of
structural adjustment programme under the aegis of International Monetary
Fund (IMF). In recent times, though the pace of M&As has increased
significantly in India too and varied forms of this inorganic growth strategy are
visible across various economic sectors. The term mergers and acquisitions
encompasses varied activities of stake acquisition and control of assets of
different firms. Besides, there are several motives for different types of
mergers and acquisitions seen in corporate world. This chapter provides an
understanding of the concept of mergers and acquisitions from industry and
regulatory point of view and motives for mergers and acquisitions.

Meaning of Mergers and Acquisitions:

The term mergers and acquisitions are often interchangeably used although
together they include more than one form of transaction of acquiring
ownership in other companies. Specific meaning of these different forms of
transactions is discussed below. Mergers: Sherman and Hart (2006) define
Merger as "a combination of two or more companies in which the assets and
liabilities of the selling firm(s) are absorbed by the buying firm. Although the
68
buying firm may be a considerably different organization after the merger, it
retains its original identity." In other words, in a merger one of the two existing
companies merges its identity into another existing company or one or more
existing companies may form a new company and merge their identities into a
new company by transferring their businesses and undertakings including all
other assets and liabilities to the new company (hereinafter referred to as the
merged company). The shareholders of the company (or companies, as the
case may be) will have substantial shareholding in the merged company. They
will be allotted shares in the merged company in exchange for the shares held
by them in the merging company or companies, as the case may be, according
to the share exchange ratio incorporated in the scheme of merger as approved
by all or the prescribed majority of the shareholders of the merging company
or companies and the merged company in their separate general meetings and
sanctioned by the court.

Acquisitions and Takeovers

"An acquisition", according to Krishnamurti and Vishwanath (2008) "is the

purchase of by one company (the acquirer) of a substantial part of the assets
or the securities of another (target company). The purchase may be a division
of the target company or a large part (or all) of the target company's voting
shares." Acquisitions are often made as part of a company's growth strategy
whereby it is more beneficial to take over an existing firm's operations and
niche compared to expanding on its own. Acquisitions are often paid in cash,
the acquiring company's shares or a combination of both. Further, an
acquisition may be friendly or hostile. In the former case, the companies
cooperate in negotiations; in the latter case, the takeover target is unwilling to
be bought or the target's board has no prior knowledge of the offer.
Acquisition usually refers to a purchase of a smaller firm by a larger one.
Sometimes, however, a smaller firm will acquire management control of a
larger or longer established company and keep its name for the combined
entity. This is known as a reverse takeover.

Amalgamation

69
 The term "amalgamation" contemplates two or more companies deciding to
pool their resources to function either in the name of one of the existing
companies or to form a new company to take over the businesses and
undertakings including all other assets and liabilities of both the existing
companies. The shareholders of the existing companies (known as the
amalgamating companies) hold substantial shares in the new company
(referred to as the amalgamated company). They are allotted shares in the
new company in lieu of the shares held by them in the amalgamating
companies according to share exchange ratio incorporated in the scheme of
amalgamation as approved by all or the statutory majority of the shareholders
of the companies in their separate general meetings and sanctioned by the
court. In other words, in amalgamation, the undertaking comprising property,
assets and liabilities of one or more companies are taken over by another or
are absorbed by and transferred to an existing company or a new company.
The transferor company merges into or integrates with the transferee
company. The transferor company losses its legal identity and is dissolved
(without winding up). Both the existing companies may form a new company
and amalgamate themselves with the new company. The shareholders of each
amalgamating company become the shareholders in the amalgamated
company

Types of Mergers and Acquisitions

Mergers appear in three forms, based on the competitive relationships

between the merging parties.

Horizontal Merger

Horizontal mergers occur when two companies sell similar products to the
same markets. The goal of a horizontal merger is to create a new, larger
organization with more market share. Because the merging companies'
business operations may be very similar, there may be opportunities to join
certain operations, such as manufacturing, and reduce costs. However, an
interesting observation by Weston (1990) is that not all small firms merger
horizontally to achieve such economies of scale. Horizontal mergers raise three

70
basic competitive problems. The first is the elimination of competition
between the merging firms, which, depending on their size, could be
significant. The second is that the unification of the merging firms' operations
might create substantial market power and might enable the merged entity to
raise prices by reducing output unilaterally. The third problem is that, by
increasing concentration in the relevant market, the transaction might
strengthen the ability of the market's remaining participants to coordinate
their pricing and output decisions. The fear is not that the entities will engage
in secret collaboration but that the reduction in the number of industry
members will enhance tacit coordination of behaviour.

Vertical Merger

A vertical merger joins two companies that may not compete with each other,
but exist in the same supply chain. Vertical mergers take two basic forms:
forward integration, by which a firm buys a customer, and backward
integration, by which a firm acquires a supplier. Replacing market exchanges
with internal transfers can offer at least two major benefits. First, the vertical
merger internalizes all transactions between a manufacturer and its supplier or
dealer, thus converting a potentially adversarial relationship into something
more like a partnership. Second, internalization can give management more
effective ways to monitor and improve performance.

Vertical integration by merger does not reduce the total number of economic
entities operating at one level of the market, but it might change patterns of
industry behavior. Whether a forward or backward integration, the newly
acquired firm may decide to deal only with the acquiring firm, thereby altering
competition among the acquiring firm's suppliers, customers, or competitors.
Suppliers may lose a market for their goods; retail outlets may be deprived of
supplies; or competitors may find that both supplies and outlets are blocked.
These possibilities raise the concern that vertical integration will foreclose
competitors by limiting their access to sources of supply or to customers.

71
Vertical mergers also may be anticompetitive because their entrenched market
power may impede new businesses from entering the market.

Conglomerate Mergers

Conglomerate mergers occur when two organizations sell products in

completely different markets. There may be little or no synergy between their
product lines or areas of business. The benefit of a conglomerate merger is
that the new, parent organization gains diversity in its business portfolio.
Conglomerate transactions take many forms, ranging from short-term joint
ventures to complete mergers. Whether a conglomerate merger is pure,
geographical, or a product-line extension, it involves firms that operate in
separate markets. Therefore, a conglomerate transaction ordinarily has no
direct effect on competition. There is no reduction or other change in the
number of firms in either the acquiring or acquired firm's market.

Conglomerate mergers can supply a market or "demand" for firms, thus giving
entrepreneurs liquidity at an open market price and with a key inducement to
form new enterprises. The threat of takeover might force existing managers to
increase efficiency in competitive markets. Conglomerate mergers also provide
opportunities for firms to reduce capital costs and overhead and to achieve
other efficiencies.

Motives for Mergers and Acquisitions

Mergers and acquisitions are resorted to by the corporate entities due to

more than one reason. Some of the significant motives for mergers include the
following:

Growth

Broadly there are two alternatives available for growth of a corporate entity as
long as investment opportunities exist. The first is through the internal growth
where the firm invests its own resources in creating facilities for expansion.
This can be slow and ineffective if a firm is seeking to take advantage of a

72
window of opportunity in which it has short term advantage over
competitors.The faster way to achieve growth in such case would be to merger
and acquire necessary resources to achieve competitive goals. In this process,
the acquirer will pay premium for acquisition of other company or assets, but
ideally, the strategy would not be as expensive as that of internal growth.

Operating Synergy

Synergy is one of the most commonly cited reasons to go for mergers. Synergy
is simply defined as 2+2=5 phenomenon. The value of the company formed
through merger will be more than the sum of the value of the individual
companies just merged.This maximization of firm's value is based on premises
Expansion through a merger or acquisition increases the size of the company
and hence may lower per-unit costs. Synergy takes the form of revenue
enhancement and cost savings. By merging, the companies hope to benefit
from reduced staff costs, economies of scale, acquisition of new technology to
maintain or develop competitive edge and improved market reach and
industry visibility.

Financial synergy

The following are the financial synergy available in the case of mergers :

Better credit worthiness: This helps the company to purchase the goods on
credit, obtain bank loan and raise capital in the market easily.

Reduces the cost of capital: The inverstors consider big firms as safe and
hence they expect lower rate of return for the capital supplied by them. So the
cost of capital reduces after the merger.

Increases the debt capacity: After the merger the earnings and cash flows
become more stable than before. This increases the capacity of the company
to borrow more funds.

73
Increases the P/E ratio and value per share:The liquidity and marketability of
the security increases after the merger. The growth rate as well as earnings of
the firm will also increase due to various economies after the merged
company. All these factors help the company to enjoy higher P/E in the
market.

Low floatation cost: Small companies have to spend higher percentage of the
issued capital as floatation cost when compared to a big firm

Diversification of risk

When a company produce single product then the company's profits and cash
flows fluctuate widely. This increases the risk of a firm. Diversification reduces
the risk of the firm. The merger of companies whose earnings are negatively
correlated will bring stability in the earnings of the combined firm. So
diversification reduces the risk of the firm.

Empire building: Managers have larger companies to manage and hence more
power. Manager's compensation: In the past, certain executive managemefit
teams had their payout based on the total amount of profit of the company,
instead of the profit per share, which would give the team a perverse incentive
to buy companies to increase the total profit while decreasing the profit per
share (which hurts the owners of the company, the shareholders); although
some empirical studies show that compensation is linked to profitability rather
than mere profits of the company.

74
Q. 17 IPR AND COMPETITIVE LAW

Intellectual Property Rights may generator contribute towards a position of

market power."' The IP holders typically engage in licensing agreements with
firms in different countries. The territorial nature of property rights, in such
agreement, means that frequently the national law enables them to be used
by rights holders in order to prevent parallel imports. In many case it has also
been observed that cartels were built around patent cross licensing scheme.

IPR and competition Intellectual Property Rights involve grant of exclusive

license to the right holders to exploit the result of their inventions for a limited
period of time. Section 3(5) of the Indian Competition Act exempts reasonable
use of such inventions from the purview of competition law. But Section 4(2)
says that actions by enterprises that shall treated as abuse be equally
applicable to IPR holders as well. Section 3 prohibits anticompetitive practices,
but this prohibition does not restrict “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 conferred under IPR laws like
Copyright Act, 1957, Patents Act, 1970, the Geographical Indications of Goods
(Registration and Protection) Act, 1999 (48 of 1999), The Designs Act, 2000 and
the Semi-conductor Integrated Circuits Layout-Design Act, 2000. It means that
an IPR holder cannot put any unreasonable conditions while licensing his
intellectual property which will be considered as violating the competition law.
It includes any restrictions between the licensor and the licensee to restrict
production, distribution, exclusivity conditions, restricting quantities and
prices, patent pooling and tiein arrangements. In such cases the competition
commission can pass a variety of orders like cease and desist, changes to the
licensing agreements as it deems fit.

Section 3(5) is incorporated in the Competition (Amendment) Act, 2007 to deal

with intellectual property and anticompetitive practices. This provision
generally excludes IPR protection, but this is subject to “reasonable” condition
and the unreasonable conditions or abuse of dominant position will attract
Section 3. Abuses are explained in section 4 as follows:

75
• Imposition of unfair or discriminatory conditions on price

• Limiting or restricting the production of goods or services or market

• Limiting or restricting technical or scientific development to the prejudice of

consumers

• Concluding of contracts subject to acceptance by other parties of

supplementary obligations which have no use or no connection with such
contracts.

• Denying market access in any manner

• Using dominant position to protect or enter into another market

The merger or forming consortiums for R&D may also affect effective
competition. The exclusive licensing and cross licensing may give rise to
competition issues in the case of grant back clause and market dominance.
Patent pooling can be another restrictive practice which may be used to
facilitate price collaboration.

The conflict between Competition law and IPRs came before Monopolistic and
Restrictive Trade Practices Commission (MRTP Commission, predecessor to the
Competition Commission) in the case of Vallal Peruman and Others versus
Godfrey Phillips India Limited. The commission observed:

“Trademark owner has the right to use the trademark reasonably. This right is
subject to terms and conditions imposed at the time of grant of trademark. But
it does not allow using the mark in any unreasonable way. In case, trademark
owner abuses the trademark by manipulation, distortion, contrivances etc., it
will attract the action of unfair trade practices.” While presenting the goods
and merchandise for sale in the market or for promotion thereof, the holder of
the trademark certificate misuses the same by manipulation, distortion,
contrivances and embellishments etc. so as to mislead or confuse the
consumers, he would be exposing himself to an action of indulging in unfair

76
trade practices. Licensing arrangements likely to affect adversely the prices,
quantities, quality or varieties of goods and services will fall within the
contours of competition law as long as they are not in reasonable juxtaposition
with the bundle of rights that go with IPRs. Unreasonable conditions under
Section 3(5) of the Indian law is thus prohibits the unreasonable use or
exploitation of intellectual property rights.

Competition policy of India, states that “all forms of intellectual property have
the potential to violate the competition”. Intellectual property is not
differentiated from other tangible properties for the purpose of competition
law. So CCI can adjudicate matters relating to IPRs. The competition
commission can decide constitutional, legal and even jurisdictional issues
except the validity of statute under which tribunal is established. In the case of
Amir Khan Productions Private Limited v. Union of India, the court ruled that
competition commission has the power to deal with intellectual property
cases. What can be contested before copyright board can also be contested
before Competition Commission Competition Act, 2002 has overriding effect
over other legislations for the time being in force

Patent pools are another area of conflicting stage with competition law. A
patent pool is an agreement between two or more patent owners to license
one or more of their patents to one another, or to license them as a package to
third parties. Under the patent pool the entire group of patent is licensed in a
package to produce a product. The co-operative arrangement becomes a
bundle of rights hold by a group of people, those patents which are necessary
for the development of the process or product. Patent pools have history of
innovation and developing new products.

In 1856, the Sewing Machine Combination formed one of the first patent pools
consisting of sewing machine patents. Another example of a patent pool is the
Manufacturers Aircraft Association formed in 1917 to license a number of
patents necessary for the manufacture of airplanes. But patent pools may have
anti-competitive effects as well. One of the recent patent pools formed in 1997
was the formation of MPEG-2 compression technology. If the poolers are
downstream users of the patent and they refuse to license the technology to

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third parties causes downward societal welfare which is per se anticompetitive
in nature. An agreement between two firms to restrict competition in the
market in any form is prohibited by competition laws of countries. One of the
most famous US case on the subject is the bursting of patent pool on glass
manufacturing through the case Hartford-Empire Co. v. United States.

The patent pooling can have pro-societal effects when it integrates complex
technologies for the production of new products. It reduces transaction cost
and patent infringement litigation between companies and promotes
innovation and transfer of technology. Such patent pooling is anticompetitive if
the excluded firms cannot actively compete in the market and the patent
poolers actively dominate the relevant market and the object of such pooling is
not for the efficient development and dissemination of the technology.So
patent pools have social and economic benefits and abuse of such patent
monopoly is anticompetitive in nature and the competition law has to counter
such abuses

Competition in the market has to consider the IPR rights of innovators which
always boost the market. After analysing the legislations and cases reveals that
competition law is not sufficiently equipped with the analytical tools necessary
to find out the IPR protection implications, both the set of laws (Competition
and IPR protection) share the same basic objectives, promotion of innovations
and welfare of society. A comprehensive competition policy for IPR is required
in the field of licensing agreements, control of market dominance and mergers
in all jurisdictions. Long term efficiency should be promoted rather justified
from a short-term point of view. The IP and competition law objectives are
consistent and compatible. The competition law intervention is required only
when there is an abuse of monopoly rights. Many of the IP licensing practices
like tying, grant backs and pooling are not intrinsically restrictive in nature.

There is far reaching evolution of the approaches to IP licensing and patent

pooling by understanding the role of IP rights and the importance of IP
licensing. The restrictive practices in the era of “Nine no Nos” has given way for
the “rule of reason” approach. The new enforcement approaches to patent
thickets are taken to the need of new economies. The jurisdictions under

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discussion, the US and EU markets, competition law enforcement have
strengthened. India is in a normative stage and competition law has to get
more teeth to deal with Competition policy is an effective counterbalance to
protecting intellectual property rights. The TRIPs Agreement provides a basic
framework of intellectual property protection as well as enforcement of anti-
competitive licensing practices in intellectual property. Article 8(2) of the
Agreement gives a general direction that appropriate measures may be
needed to prevent the abuse of intellectual property rights by its holders.
Article 40(1) recognizes that the licensing practices that restrain competition
may have adverse effect on trade or impede abuses technology transfer.
Article 40(2) permits the members to specify anticompetitive practices
constituting abuse of IPRs and to adopt measures to prevent or control such
practices. Such practices can included exclusive grant backs, clauses in the
agreement preventing validity challenges and coercive package licensing.
Article 31(k) clearly provides that a practice determined after judicial or
administrative process to be anti-competitive, a compulsory license can be
granted. But the TRIPs unanswered certain questions like the standard of
practices under which actionable abuses determined. India enacted its
competition law in 2002 and amended in 2007 in order to give full effect to the
Act and in order to cope with the changing needs of the Indian business
scenario and economy. If the Competition Commission of India found
dominant position made out under Section 27(g), Commission can hold an
enquiry and pass appropriate orders. But licensing and other IP issues has yet
to come before the Commission and the Appellate Tribunal Specially
Constituted for competition cases under the 2007 amendment to the Act.
When comparing the provisions of US, EU and Indian provisions of competition
law, Indian law has followed European model. Article 85 of the Rome Treaty
and Section 1 of the Sherman Act prohibits agreements in restraint trade

The objective of competition law throughout the world is consumer welfare.

The extra territorial jurisdiction (US, EU and India) of competition commissions
in three jurisdictions are recognized when such transactions affects the local
market. Each jurisdiction has a mandatory merger notification procedure
where large transactions are involved with domestic or foreign companies. The
competition Act has not fully emerged to the level of developing jurisprudence

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on the subject with regard to the conflict between competition and intellectual
property. The difficulties in implementing the provisions are yet to be
encountered by the Commission

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Q 18 COMPETITION COMMISSION

Composition of the Commission

The Competition Commission shall consist of a Chairperson and not less than
two and not more than ten other members to be appointed by the Central
Government. The Chairperson and the members are appointed by the Central
Government from the panel of names recommended by the selection
committee consisting of; The Chief Justice of India or his nominee (
chairperson of the committee);

 Secretaries in the Ministries of Corporate Affairs and Law and Justice;

 Two experts of repute having special knowledge of and professional

experience in

 international trade, economics, business, commerce, law , finance,

accountancy, management, industry , public affair or competition matters
including competition law and policy in international trade , economics,
business, commerce, law , finance, industry;

 RBI Governor

The Chairperson and every other member shall hold office as such for a term
of five years from the date on which he enters upon his office and shall be
eligible for reappointment. The Act provides that the salaries of the staff and
other expenses shall be met by the Competition Fund. The Central
Government is empowered to remove the chairperson and any member of the
commission on certain specific grounds and the procedure as specified in the
Act The ‘Persons’ appointed shall be whole time Members. The Act prohibits
Chairperson and the members to accept employment in or connect with the
management or administration of any enterprise which has been party to the
proceedings before the Commission, within two years of demitting the office.
The Chairperson and the members of the commission have been given
protection of the service in as much as their salary, allowance and other terms

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and conditions of the service will be varied to their disadvantage after their
appointment. The Chairperson and the other staff of the Commission are
deemed to be public servants within the meaning of section 21 of the Indian
Penal Code. No suit or proceedings shall lie against Central government,
Commission or the officers/ staff of the commission for anything done in good
faith or intended to be done under this Act or the rules or regulations framed
there under. The Chairperson has general power of superintendence, direction
and control over the administrative matters of the Commission. The
Competition Commission will also have suo moto powers for initiating action
against any perceived infringement. The Commission shall be assisted by a
Director General (DG) appointed by the central government.

Powers duties and functions of the Competition Commission of India

Chapter IV of the Competition Act, 2002 deals with the duties, powers and
functions of the Competition Commission of India. The said chapter comprised
of 23 Sections originally out of which 6 have been omitted by the Competition
(Amendment) Act, 2007. Section 18 of the Act deals with the duties of the
commission. It provides that subject to the provisions of the Act, it shall be the
duty of the Commission to eliminate practices having adverse effect on
competition, promote and sustain competition, protect the interests of
consumers and ensure freedom of trade carried on by other participants, in
markets in India. Thus, it can be said that the Act mandates the Commission to
do all what is necessary to carry out the purposes of the Act stated in the
Preamble of the Act. While performing its aforesaid duties the Commission
may, with the prior approval of the Central Government and for the purpose of
discharging its duties or performing its functions under this Act, enter into any
memorandum or arrangement, with any agency of any foreign country. It may
be further said that the purpose of this section is to carry out the objectives of
the Article 38 i.e State to secure a social order for the promotion of welfare of
the people and Article 39 of The Constitution of India i.e certain principles of
policy to be followed by the State, of the Constitution of India.

Duties

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The Commission has the investigative and decision –making power. In order to
enable it to exercise that power effectively, the Act empowers the Commission
to penalize who obstructs the investigation, contravenes orders, destroys or
falsifies documents, supplies misleading information. In context of the needs of
economic development of India, the Competition Commission is entrusted
with the following duties;

 Eliminate practices having adverse effect on competition;

 Promote and sustain competition

; Protect the interests of the consumers; and;

 Ensure freedom of trade carried by other participants in markets, in India

Powers and Function of CCI

The CCI can exercise power subject to the Act and the Rules. It should be
guided by the principles of natural justice and provisions of the act

1. The Commission shall have the powers to regulate its own procedure.
[Section 36 (1)]

2. Commission has a power of civil court [ Section 36 (2) ] A. Summon &

Enforcing Attendance of any person on oath B. Requiring the Discovery and
production of Document C. Receiving evidence as affidavit D. Issue commission
for examination of witness or documents E. Requisitioning any public record on
document or copy of such document form any office F. Power to conduct
enquiry

3. Commission may call the experts on respective field i.e Economics’,

Commerce, Accountancy which may be necessary [ Section 36 (3)]

4. Direct any person [ Section 36 (4)] I. Produce Book , Accounts or other

documents

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II. Furnish information about trade in procession of such persons

5. Issue cease and desist orders

6. Impose fines and penalties (Section 27)

7. Declare agreement having Appreciable adverse effect on competition

(AAEC) void

8. Pass orders modifying agreement

In case of abuse of dominance

9. order for division of dominant enterprise (Section 28)

In case of combinations: (Section 31)

10. Approve Combination

11. Approve with modifications

12. Direct that combinations shall not take effect

13. To order demerger Other Powers

14. In case of companies, individuals may also be held liable if consent,

connivance or neglect is proved

15. CCI has extra-territorial reach

16. To order cost for frivolous complaint

Functions of CCI

1. Make the markets work for the benefit and welfare of consumers.

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 2. Ensure fair and healthy competition in economic activities in the country for
faster and inclusive growth and development of economy.

3. Implement competition policies with an aim to effectuate the most efficient

utilization of economic resources.

4. Develop and nurture effective relations and interactions with sectorial

regulators to ensure smooth alignment of sectorial regulatory laws in tandem
with the competition law.

5. Effectively carry out competition advocacy and spread the information on

benefits of competition among all stakeholders to establish and nurture
competition culture in Indian economy

Competition Advocacy [sec 49]

• Central government may obtain opinion of CCI on the possible effect of the
policy on competition while formulating competition policy

• On receipt of deference, commission is required to give its opinion to central

Government within 60days

• The role of commission is advisory

• Opinion given by commission is not binding upon the central Government

The commission has also been assigned the role to take following suitable
measured for:

o Promotion of competition advocacy

o Creating awareness about competition

o Imparting Training about competition issue

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Q .19 PRIVATE ACTION FOR DAMAGE

“action for damages” means an action under law by which a claim for damages
is brought before a court by an alleged injured party, or by someone acting on
behalf of one or more alleged injured parties where law provides for that
possibility, or by a person that succeeded in the right of the alleged injured
party, including the person that acquired the claim;

The Act empowers the Competition Commission of India (CCI) with

multifarious penal powers to ensure compliance with the legal regime.
However, such provisions are predominantly directed towards penalising the
violators rather than compensating the parties affected by the anti-
competitive behaviour of one or more market players. To ensure that the
victims of anti-competitive behaviour receive their dues, the Act also lays
down a mechanism for such parties to seek compensation for the losses that
they may have suffered due to the anti-competitive behaviour.

The private damages regime under the Indian competition law, which came
into force in 2009, lays down the legislative foundation for consumers and
competitors to sue for compensation in relation to the damages suffered as a
result of the anti-competitive behaviour. Considering that the Competition Law
is still in nascent stages in India, there has been no ruling pronounced in this
space until date. While the case involving the National Stock Exchange (NSE)
and the MCX Stock Exchange (MCX- SX)remains the sole case to utilise the
private enforcement provisions of the Act, the matter remains sub judice.
Curiously, in the celebrated case involving DLFwhile private damages litigation
was drawn up against DLF, it was consequently withdrawn.

The Act, as drafted and amended, is significantly forward looking and provides
for remedial actions, such as class action suits, which are at par with global
best practices. In a situation where a group of persons have the same claim
against the defaulter of the substantive provisions of the Act, a class action suit
can be instituted to seek remedy. Although the Act allows one or more persons
to file the application on behalf of all interested parties, this is subject to the
Civil Procedure Code, 1908

On the procedural front, though the Act does not stipulate the time period
within which an application is to be filed for private compensation, guidance
may be sought from the erstwhile monopolies and restrictive trade practices
(MRTP) cases. In Director General (Investigation and Registration) v. Thermax
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(P) Ltd. and M.S. Shoes East Ltd. v. Indian Bank the MRTP Commission referred
to the Supreme Court case of Corporation Bank v. Navin J. Shahwhich lays
down the “doctrine of laches” i.e., if a claim is to be made, the same must be
done within a reasonable time period. Although the scope of “reasonable
time” is a matter of factual consideration, in the above- mentioned precedents
of the MRTP, the private compensation claims were rejected since they were
brought after a delay of more than 5 years.

Background to the NSE case

In the 9 years of the Act being in force, several landmark CCI decisions are
pending in appeal before the Supreme Court of India for final adjudication.
The NSE case was one of the first major abuse of dominance cases examined in
the country and though the violation of the Act was upheld by the CCI and the
COMPAT, it is presently sub judice before the Supreme Court

However, since the violation was upheld by the CCI and the COMPAT, under
the scheme of the Act, a private damages claim was permissible to be brought
before the COMPAT and the same was done by MCX-SX

By way of context, MCX-SX had filed an application against the NSE, alleging
that NSE had abused its dominance in the market by engaging in predatory
pricing to drive MCX-SX out of the market in the currency derivative (CD)
segment. The CCI noted that NSE was dominant in the CD market and
accordingly ordered NSE to modify its zero price policy in the relevant market
and to cease and desist from its unfair pricing, exclusionary con- duct and
unfairly using its dominant position in the other market(s) to protect its own
CD market with immediate effect. Additionally, a penalty of INR 55.5 crore was
also imposed on NSE.

In the appeal, the COMPAT upheld the CCI’s finding that NSE had abused its
dominant position, as well as the penalty and directions given by the CCI.

Further, considering that punitive claims are not specifically envisaged under
the scheme of the Act, it remains to be seen whether the compensation
provided under the Act makes this remedy a viable one compared to the costs
incurred (in terms of time and money for achieving so); or whether this
provision will remain a paper tiger in the statute book. In either scenario,
the NSE case will continue to remain under sharp scrutiny and will lay the road
map for the efficiency and mobility of the private damages regime in India.

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