Antitrust & Industrial Organisation Theory

In the United States, antitrust legislation has a long history dating back to the passage of the
Sherman Act in 1890. Even before this, economists like Adam Smith recognized the dangers
of monopoly power, discussing collusion among competing firms and the harmful effects of
monopolies in his seminal work, "The Wealth of Nations," published in 1776. Smith famously
observed that people in the same industry often conspired to raise prices or manipulate
markets.

During the Jacksonian era, a significant public sentiment against monopolies emerged, and
by the late 19th century, this sentiment had grown strong enough to give rise to political
parties explicitly opposing monopolistic practices. In 1884, a national Anti-Monopoly Party
was formed alongside similar parties in various states.

Many Americans at this time believed that large firms and trusts, such as Standard Oil and
American Tobacco, were abusing their market dominance, aligning with Adam Smith's
predictions. There was a consensus that some legal framework was necessary to preserve
competition in the marketplace. This sentiment, influenced by Smith's insights, led to the
enactment of the first U.S. antitrust law, the Sherman Act of 1890. Remarkably, the concerns
voiced by Adam Smith closely mirror the key provisions of the Sherman Act:
➔ Section 1 of the Sherman Act prohibits contracts, combinations, and conspiracies
that restrain trade.
➔ Section 2 makes it illegal to attempt to monopolize a market.

The belief that government intervention was required to safeguard competition was further
solidified with the passage of subsequent legislation, including the Clayton and Federal
Trade Commission Acts.

The Sherman Antitrust Act, approved on July 2, 1890, was a landmark federal law that
marked the first official effort to outlaw monopolistic business practices. It was named after
Senator John Sherman of Ohio, who played a key role in its development. The act differed
from earlier state laws, as it had a broader scope, applying to interstate commerce. It
received strong bipartisan support, passing the Senate with a vote of 51-1 on April 8, 1890,
and the House unanimously with a vote of 242-0 on June 20, 1890. President Benjamin
Harrison signed it into law on July 2, 1890.

Section 1 of the Sherman Act, which was enacted by the U.S. Congress, makes it illegal to
engage in contracts, combinations (such as trusts), or conspiracies that restrain trade or
commerce among states or with foreign nations. Those found guilty of such actions can face
misdemeanour charges and be subject to fines up to $5,000, imprisonment for up to one
year, or both, at the court's discretion.

Section 2 of the Sherman Act deems it unlawful for any person to monopolize, attempt to
monopolize or conspire with others to monopolize any part of trade or commerce among
states or with foreign nations. Similar penalties of misdemeanour charges, fines, and
imprisonment can be imposed.

Section 3 extends these prohibitions to contracts, combinations, or conspiracies that restrain

trade or commerce in U.S. territories, the District of Columbia, or between these regions and
states, foreign nations, or within the District of Columbia itself. This section also carries
penalties of misdemeanour charges, fines up to $5,000, imprisonment for up to one year, or
both.

During the Jacksonian era and the latter half of the 19th century, a significant public
sentiment against monopolies emerged. Political parties opposing monopolistic practices,
known as the Anti-Monopoly Party, emerged in various states and even formed a national
party in 1884. Many Americans believed that large companies like Standard Oil and
American Tobacco were abusing their market power, aligning with Adam Smith's predictions.
A consensus formed that a legal framework was necessary to maintain competition in the
marketplace.
This sentiment, coupled with insights from Adam Smith, led to the enactment of the first U.S.
antitrust law, the Sherman Act of 1890. It is noteworthy how closely the concerns raised by
Adam Smith are mirrored in the two primary sections of the Sherman Act: Section 1 prohibits
actions that restrict trade, while Section 2 makes attempts to monopolize a market illegal.
The belief that government institutions were required to achieve these aims later influenced
the creation of the Clayton and Federal Trade Commission Acts.

Trusts, which were arrangements where stockholders in multiple companies transferred their
shares to trustees in exchange for certificates representing a share of consolidated earnings,
became dominant in several major industries toward the end of the 19th century. For
example, the Standard Oil Trust was formed in 1882, allowing it to function as a monopoly by
centralizing control through trustees.

The Sherman Anti-Trust Act empowered the federal government to take legal action against
trusts to dissolve them. Any combination or trust that restrained trade or commerce among
states or with foreign nations was declared illegal, subjecting those involved to fines and
imprisonment. Individuals and companies suffering losses due to trusts were allowed to sue
in federal court for triple damages.

However, the Sherman Act was not precise in its definitions and terms, leading to a Supreme
Court ruling in 1895 (United States v. E. C. Knight Company) that limited its effectiveness.
The ruling stated that a company's control of manufacturing did not necessarily constitute
control of trade.

Despite public perception that many large firms were abusing their monopoly power, it took
twelve years for the first prosecution under Section 2 of the Sherman Act, which focused on
monopolization. The Standard Oil Company of New Jersey was eventually prosecuted in
1911, leading to a Supreme Court ruling that it had illegally monopolized the petroleum
refining industry. Other trusts, including the Tobacco Trust, faced similar findings.

These monopolization decisions, however, were less specific about what actions were
illegal. The courts adopted a "rule of reason" framework, which required an examination of
the market context and business practices related to the formation of a monopoly. Only if an
explicit intent to monopolize or blatant exploitation of monopoly power was found, was a
violation established.

To address concerns that this legal framework might weaken antitrust enforcement,
additional reforms were pursued. In 1914, the Clayton Act was passed to limit certain
business practices like rebates and exclusive contracts, and Section 7 aimed to prevent
anti-competitive mergers.

The Federal Trade Commission Act of 1914 created the Federal Trade Commission (FTC),
an administrative agency with investigative and adjudicative powers to handle violations of
the Clayton Act. This act also prohibited "unfair methods of competition" and "unfair and
deceptive acts or practices." The FTC became an additional enforcer of antitrust policies
alongside the Department of Justice (DOJ).

Antitrust Law in India - The (un)known Sword of Damocles

In the context of investments in India, antitrust laws often appear to take a back seat. This
perception stems from the dominance of large Indian conglomerates like Tata, Adani, Bajaj,
and Reliance in the country's economy. However, this does not reflect the true effectiveness
of competition laws in India.

Legal Framework

Indian antitrust laws are primarily governed by the Competition Act of 2002 (the "Act"). The
Act prohibits agreements between companies, individuals, or associations that could harm
competition. The term "agreement" is broadly interpreted.
Sections 3 and 4
Section 3(3) of the Act defines hardcore cartels, including bid rigging, assuming a
competition-restricting effect. Section 4 regulates the prohibition of abuse of a dominant
position.

Bid Rigging

Bid rigging (or collusive tendering) occurs when businesses, that would otherwise be
expected to compete, secretly conspire to raise prices or lower the quality of goods or
services for purchasers who wish to acquire products or services through a bidding process.
Public and private organizations often rely upon a competitive bidding process to achieve
better value for money. Low prices and/or better products are desirable because they result
in resources either being saved or freed up for use on other goods and services. The
competitive process can achieve lower prices or better quality and innovation only when
companies genuinely compete (i.e., set their terms and conditions honestly and
independently). Bid rigging can be particularly harmful if it affects public procurement.1 Such
conspiracies take resources from purchasers and taxpayers, diminish public confidence in
the competitive process, and undermine the benefits of a competitive marketplace. Bid
rigging is an illegal practice in all OECD member countries and can be investigated and
sanctioned under the competition law and rules. In a number of OECD countries, bid rigging
is also a criminal offence.

Bid-rigging conspiracies can take many forms, all of which impede the efforts of purchasers -
frequently national and local governments - to obtain goods and services at the lowest
possible price. Often, competitors agree in advance who will submit the winning bid on a
contract to be awarded through a competitive bidding process. A common objective of a
bid-rigging conspiracy is to increase the amount of the winning bid and thus the amount that
the winning bidders will gain. Bid-rigging schemes often include mechanisms to apportion
and distribute the additional profits obtained as a result of the higher final contracted price
among the conspirators. For example, competitors who agree not to bid or to submit a losing
bid may receive subcontracts or supply contracts from the designated winning bidder in
order to divide the proceeds from the illegally obtained higher-priced bid among them.
However, long-standing bid-rigging arrangements may employ much more elaborate
methods of assigning contract winners, monitoring and apportioning bid-rigging gains over a
period of months or years. Bid rigging may also include monetary payments by the
designated winning bidder to one or more of the conspirators. This so-called compensation
payment is sometimes also associated with firms submitting “cover” (higher) bids.

Section 4 of the Act regulates the prohibition of abuse of a dominant position. Section 4 (2)
of the Competition Act defines standard examples of conduct that may constitute an abuse
of a dominant position.

The legal structure of Indian antitrust law is very similar to European legislation in the field of
antitrust law. The interpretation and application of antitrust regulations and patterns of
behaviour in violation of antitrust law are also strongly based on the European application of
the law. For example, a large international IT company recently accused the Indian antitrust
authority of largely “copying” the line of argumentation of the EU Commission. The Indian
application of the law is also dogmatically oriented to the European application practice –
especially in the area of determining the relevant product market definition.

Indian Antitrust Law Framework

Antitrust law in India is, on the one hand, a relatively young piece of legislation. On the other
hand, India's overall economic picture is shaped by a dominant squad of Indian global
market leaders.

The business practice embedded in the Indian DNA partly contradicts the antitrust law logic.
Thus, territorial agreements, price adjustments, and similar patterns of behaviour contrary to
antitrust law are in part classified as socially and economically adequate behaviour in India.
After the introduction of the new Indian antitrust law, there was astonishment in the business
and consulting community, particularly to the effect that price agreements are actually
pro-competitive because they do not lead to price increases.

With the establishment of industries and businesses in the market, the government felt the
need to regulate monopolistic practices and formed the Monopolies Inquiry Commission in
1965 to report on the conditions of the monopoly of a particular company in the market and
suggest measures in this regard. On the suggestion of the Commission, the Parliament
enacted The Monopolies and Restrictive Trade Practices Act, 1969 (MRTP Act). The aim of
the Act was to prevent a monopoly and ensure an equal distribution of resources to all
industries.

However, the act was vague and ambiguous and could not serve the purpose at large and
could not prevent practices like cartelisation, predatory pricing, and other such strategies.
Moreover, it required a lot of paperwork, licences, and permission to set up one industry in
the country. There were specified sectors in which a private industry could not be set up and
the government held the monopoly. This restricted the growth and expansion of the market.

In India, the MRTP Act dealt with such problems, but with the expansion of industrialisation
and urbanisation, the Parliament felt the need to have a whole new Act that could deal with
increasing unfair trade practices and keep a check on the businesses. Thus, the Competition
Act was enacted in 2002. It was further amended in 2007 and NCLAT was established for
the speedy disposal of cases.

Challenges in the Indian Market

Indian antitrust law faces challenges due to the dominance of large corporations and cultural
business practices. In India, some practices deemed anticompetitive elsewhere may be
viewed as socially and economically acceptable. For instance, price agreements may not
lead to perceived price increases.

Historical Perspective

The Monopolies and Restrictive Trade Practices Act of 1969 was enacted to address
monopolistic practices but had limitations. The Competition Act of 2002 replaced it to
regulate unfair trade practices and encourage competition. It was amended in 2007, and the
National Company Law Appellate Tribunal (NCLAT) was established for swift case
resolution.

Post-Liberalization Era

Previously, the government focused on preventing monopolies in the market but forgot about
the effectiveness of competition. Industries controlled by the state were not competitive and,
hence, did not believe in the improvement of products and services. After liberalization, the
economy's nature changed from one controlled by the state to one regulated and driven by
the market. This era also witnessed foreign companies and investors investing in the Indian
market and industry. The government decided to make the procedure easy in order to attract
foreign investment. However the MRTP Act could not fulfil the objective, and so the
Raghavan Committee was organised to work on the same. The Committee recommended
repealing the Act and framing new laws in this regard. Thus, the said Act was repealed by
the government.

Scheme of the Competition Act, 2002

The Act follows the effects doctrine, giving jurisdiction to the Competition Commission of
India (CCI) over anti-competitive agreements, abuse of dominant market positions, and other
matters. The Act defines conduct constituting an abuse of dominant positions, including
unfair pricing, limiting production, market access denial, imposing unnecessary contract
conditions, and gaining advantages in other markets.
➔ If a position is used to impose any unfair prices or conditions, which includes
predatory prices as well,
➔ If it is used to limit production or development,
 ➔ Denies access to the market,
➔ To conclude the contract over unnecessary conditions,
➔ To gain an advantage in other markets.

Challenges for CCI

With the expansion of businesses and industries in the market, the dangers of companies
using unfair means to earn money and generate profit at the instance of others are
increasing. The Commission is facing regular challenges due to an increase in ventures and
companies. More companies imply more competition in the market, which also implies that
they will misuse their position and create a situation leading to a monopoly in the market.
Also, there is a pendency of cases and complaints in the Commission due to less number of
members. The Commission must be made efficient enough and should be given more staff
to deal with investigations and hear cases in a speedy manner so that they can deal with
such situations and prevent violations of rules and provisions of the Competition Act.

Another challenge faced by the Commission is related to e-commerce and the digital
economy. The Act currently does not deal with the digital economy and e-commerce due to
which the interests of consumers are at stake. Provisions relating to network issues,
accessibility of online data, and prevention of unfair practices to earn profit while dealing with
a client online, etc., must be included in the Act to deal with the loopholes and drawbacks of
the digital economy and e-commerce.

Limit Pricing Definition

Limit Pricing refers to a strategy to restrict the entry of new suppliers into the market by
reducing the price of the product, increasing the level of output of the product, and creating
such a situation that becomes unprofitable or very illogical for the new supplier to enter into
the market and grab the existing market customer base.

Limit pricing is a pricing strategy used by firms to deter entry into a market by potential
competitors. The idea is that the incumbent firm sets its prices at a level that is low enough
to discourage new firms from entering the market, but high enough to still be profitable for
the incumbent firm. This strategy can be effective if the incumbent firm has a significant cost
advantage over potential competitors, or if the market is not very price-sensitive.

There are a few reasons why a business might use limit pricing as a strategic tool. One
reason is to protect market share and maintain a dominant position in the industry. Another
reason is to deter potential competitors from entering the market, which can help to reduce
competition and increase profits. A third reason is to create a barrier to entry for new firms,
which can help to preserve the incumbent firm's competitive advantage.