Anti-competitive agreements

3. (1) No enterprise or association of enterprises or

person or association of persons shall enter into any
agreement in respect of production, supply,
distribution, storage, acquisition or control of goods or
provision of services, which causes or is likely to cause
an appreciable adverse effect on competition within
India.
(2) Any agreement entered into in contravention of the
provisions contained in subsection (1) shall be void.
(3) Any agreement entered into between enterprises or associations of
enterprises or persons or associations of persons or between any person
and enterprise or practice carried on, or decision taken by, any
association of enterprises or association of persons, including cartels,
engaged in identical or similar trade of goods or provision of services,
which—
(a) directly or indirectly determines purchase or sale prices;
(b) limits or controls production, supply, markets, technical development,
investment or provision of services;
(c) shares the market or source of production or provision of services by
way of allocation of geographical area of market, or type of goods or
services, or number of customers in the market or any other similar
way;
(d) directly or indirectly results in bid rigging or collusive bidding, shall
be presumed to have an appreciable adverse effect on competition:
 Exception

 Any agreement entered into by way of joint ventures if

such agreement increases efficiency in production,
supply, distribution, storage, acquisition or control of
goods or provision of services.
(4) Any agreement amongst enterprises or persons at
different stages or levels of the production chain in
different markets, in respect of production, supply,
distribution, storage, sale or price of, or trade in goods or
provision
of services, including—
(a) tie-in arrangement;
(b) exclusive supply agreement;
(c) exclusive distribution agreement;
(d) refusal to deal;
(e) resale price maintenance,
shall be an agreement in contravention of sub-section (1) if
such agreement causes or is likely to cause an appreciable
adverse effect on competition in India.
(a) “tie-in arrangement” includes any agreement
requiring a purchaser of goods, as a condition of such
purchase, to purchase some other goods;
The product or service that is required by the buyer is
called the tying product or service and the product
that is forced on the buyer is called the tied product or
service.
A product or service is subject to tie-in arrangement
when it is made to buy out of compulsion that he does
not need and is forced to incur unnecessary cost.
Exemption
Tie-in arrangements need not necessarily be anti-
competitive; tying cannot be per se illegal. In case the
tied product is being sold at a lower price or at the
same price at which it is available in the market or if
the tied product is required by the purchaser, then
such tie-in arrangement cannot be said to be anti-
competitive. It is for this reason that tie-in
arrangement cases are decided on the basis of rule of
reason after taking into consideration the benefits and
detriments of the arrangement on the market
 Northern Pacific R. Co. v. United States
land was leased for one purpose or another. And many plots were
sold. In a large number its sales contracts and most of its lease
agreements, the Railroad had inserted "preferential routing"
clauses which compelled the grantee or lessee to ship over its
lines all commodities produced or manufactured on the land,
provided that its rates (and, in some instances, its service) were
equal to those of competing carriers. Since many of the goods
produced on the lands subject to these "preferential routing"
provisions are shipped from one State to another, the actual and
potential amount of interstate commerce affected is substantial.
Alternative means of transportation exist for a large
portion of these shipments, including the facilities of two
other major railroad systems.
In 1949, the Government filed suit under section 4 of the Sherman
Act seeking a declaration that the defendant's "preferential
routing" agreements were unlawful as unreasonable restraints of
trade under section 1 of that Act
Held:
“undisputed facts established beyond any genuine question
that appellant possessed substantial economic power by
virtue of its extensive landholdings, which it used as
leverage to induce large numbers of purchasers and lessees
to give it preference, to the exclusion of its competitors, in
carrying goods or produce from the land transferred to
them, and that a "not insubstantial" amount of interstate
commerce was and is affected. The essential prerequisites
for treating appellant's tying arrangements as
unreasonable per se were conclusively established”
Thus Court observed that, they deny competitors free
access to the market for the tied product, not because
the party imposing the tying requirements has a better
product or a lower price but because of his dominant
power in another market.
Tying can be classified into two :-
Static tying- In a static tied sale, the buyer who wants to
buy products “A” must also purchase product “B”. It is
possible to buy product B without product “A” which
explains why it is a tie. Thus, the items for sale are
products “B” alone or an A-B package.
Dynamic tying- In this type, in order to purchase
product ‘A’ the customer is also required to purchase
product ‘B’. In dynamic tying the quantity of product B
vary from customer to customer. Thus, the item for
sale is a package of A-B, A-2B, A-3B etc.
Types of tying
Contractual Tying – the tie may be the consequence of a specific
contractual stipulation.
Refusal to supply – the effect of tie may be achieved where a dominant
undertaking refuses to supply the tying product unless the customer
purchases the tied product.

Withdrawal of a guarantee – a dominant supplier may achieve the effect

of a tie by withdrawing or withholding the benefits of a guarantee
unless the customer uses the supplier’s components as opposed to
those of a third party.

Technical tying – this occurs where the tied product is physically

integrated in to the tying product, so that it is impossible to take one
product without the other. This is what happened in the Microsoft
case.
 Tetra pak case
RESTRICTIVE CONTRACTS : Tetra Pak obliged customers,
mainly dairies, to stay loyal to its products, at the expense
of actual or potential competitors, through the use of
restrictive clauses in its contracts. These included an
obligation on users of Tetra Pak packaging machines to
use only cartons made by Tetra Pak and supplied under its
direct control. This enabled Tetra Pak to assure customer
loyalty artificially, thereby excluding carton competitors
and securing revenue on the sale of cartons for as long as
each machine is in operation. In all cases, Tetra Pak made
its product guarantees dependent on this commitment.
Tetra Pak's contracts also prohibited customers from
modifying or moving its machines or attaching any
apparatus to them. It reserved the exclusive right to
maintain and supply spare parts for its machines, both
those it sold and those it rented out.
Held: Commission held that this behavior created an
“artificial and unjustified” link between Tetra Pak and
its customers. The Commission also stated that using
tied sales in such a manner was a violation of article 82
of EEC, since the obligations had no connection to the
purpose of the contract itself, i.e. selling or leasing
machines
 Hilti vs Commission of EC
Hilti, is the largest European producer of nail guns,
nails and cartridge strips. Eurofix/complainant alleged
that Hilti was refusing to supply independent dealers
or distributors of Hilti products with cartridge strips
without a corresponding quantity of Hilti nails.
Eurofix further stated that in order to sell its own nails
for Hilti nail guns it had tried to obtain supplies of
cartridge strips itself.
 Held
The Court finds that the Commission was quite entitled to take the
view that the infringements held to have been committed were
particularly serious. They sought to eliminate small undertakings
which were doing nothing more than exercising their rights,
namely the right to produce and sell nails intended for use in
Hilti nail guns. Such behaviour does indeed represent a grave
impairment of competition. Furthermore, it is common ground
that the infringements continued for about four years, which is
an appreciable period. In addition, the documents produced by
the Commission show that Hilti was aware that its actions were
liable to infringe Community rules on competition but was not
thereby persuaded to put an end to them, so that it deliberately
committed the infringements of which it was accused.
Appeal by Hilti dismissed by COURT OF FIRST INSTANCE.
(b) “exclusive supply agreement” includes any agreement
restricting in any manner the purchaser in the course
of his trade from acquiring or otherwise dealing in any
goods other than those of the seller or any other
person;
Eg; SAIL vs CCI
(c) “exclusive distribution agreement” includes any
agreement to limit, restrict or withhold the output or
supply of any goods or allocate any area or market for
the disposal or sale of the goods;
(d) “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;
(e) “resale price maintenance” includes any agreement to
sell goods on condition that the prices to be charged
on the resale by the purchaser shall be the prices
stipulated by the seller unless it is clearly stated that
prices lower than those prices may be charged.
 While determining whether an agreement has an AAEC,
the competition commission of India gives due regard to all
or any of the following factors provided under section 19(3)
of the competition Act, 2002-
 Creation of barriers to new entrants in the market
 Driving existing competitors out of the market
 Foreclosure of competition by hindering entry into the
market
 Accrual of benefits to 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 service.
 HORIZONTAL ANTI-COMPETITIVE AGREEMENT

In Horizontal Agreements the parties to the agreement

are enterprises at the same stage of the production
chain engaged in similar trade of goods or provision of
services competing in the same market.
For e.g. agreements between producers or between
wholesalers etc.
Horizontal Anti-Competitive Agreements are entered
into between rivals or competitors.
Horizontal Anti-Competitive Agreements are per se void.
The ‘rule of presumption’ is applied to Horizontal anti-
competitive agreement
Horizontal Anti-Competitive Agreements that determine
prices or limit/control production or share market/sources
of production by market allocation or result in bid rigging
or collusive bidding are presumed to have an appreciable
adverse effect on competition.
The burden of proof is on the defendant to prove that the
agreement is not anticompetitive.
Examples of Horizontal Anti-Competitive Agreements are
cartels, bid-rigging, collusive tendering etc.
 VERICAL ANTI-COMPETITIVE AGREEMENT

In Vertical Agreements the parties to the agreements are

non-competing enterprises at different stages of the
production chain.
For e.g. agreements essentially between manufacturers and
suppliers i.e. between producers and wholesalers or
between manufacturers and retailers etc.

Vertical Anti-Competitive Agreements are entered into

between parties having actual or potential relationship of
purchasing or selling to each other.
Vertical Anti-Competitive Agreements are not per se void.
The ‘rule of reason’ is applied to vertical anti-competitive
agreements.
Vertical Anti-Competitive Agreements are not presumed to have an
appreciable adverse effect on competition and automatically
prohibited. Whether a vertical agreement is anti-competitive or
not is to be decided on a case by case basis considering the
consequences of the agreement and whether they substantially
restrict competition or not.
The burden of proof is on the party alleging the anti-competitive
practice to prove that the agreement is anti-competitive.
Examples of Vertical Anti-Competitive Agreements are resale price
maintenance, tie-in agreements, exclusive supply and
distribution agreements etc.
 PREDATORY PRICING
 Predatory pricing is the practice of a dominant firm
selling its products at low prices so as to drive the
competitors out of the market, prevent new entry, and
successfully monopolize the market. Predation is a
strategic behavior whereby an undertaking
deliberately incurs losses in order to eliminate a
competitor so as to charge excessive prices in the
future.
Explanation to Section 4 (b) of Act, 2002
Predatory prices as per defined in the Act means ‘the
sale of goods or provision of services, at a price
which is below the cost, as may be determined by
regulations, of production of the goods or
provision of services, with a view to reduce
competition or eliminate the competitors
 Imposing Penalty by CCI
While making the analysis, the commission will
examine the relevant market and the position of
the enterprise in that market i.e. whether it holds a
dominant position or not. After this the commission
will look into the cost factor, whether the prices of
the products or the services provided by the
enterprise are below its cost and once below cost
pricing has been established, evidence has to be shown
for the intention to reduce, whether it is to eliminate
the competition.
 Issues which are relevant for assessment of whether
Predation is taking place or has taken place
 Pricing below the cost;
 Intention to eliminate a competitor; and
 The feasibility of recouping the losses.
 Phases in the practice of the Predatory pricing by an
enterprise:
a. Sacrifice phase: In this phase the enterprise suffer from
heavy losses due to the predatory pricing which it has
resorted to in order to drive away its competitors from the
market.
b. Recoupment phase: In this phase the enterprise make up
for the losses which was caused to her in the sacrifice
phase.

First is the recoupment of the losses after successfully

eliminating the competitor and second is to have a
monopoly in the market rather than going for the mergers
with the competitors.
 Requirements
 1. Dominant Position: ‘dominant position’ has a
specific meaning under section 4 of the Act, and in the
European Community Law, in Article 102, on which
both the Indian Competition Act and the Competition
Act 1998, UK, are based. The substance of the
definition is that a dominant enterprise is the one that
has the power to disregard market forces, that is,
competitors, customers and others and to take
unilateral decisions that would benefit itself and also,
in the process, cause harm to the process of free
competition, injuring the consumers by saddling them
with higher prices, limited supplies, etc
 2. Barriers to entry and re-entry: Successful predatory pricing
requires certain level of entry barriers to the market. Otherwise
other potential rivals would immediately reenter the market
once the predator raises its prices and by adding their output to
that of the predator drive the prices back to competitive level.
Entry barriers exist when a new market entrant costs that the
incumbent firm need not bear or no longer faces, i.e., fixed cost
investments etc. The entrant on the other hand must incur such
costs and hence faces the risk of under-pricing by an incumbent
with sunk costs, the latter acting as a barrier to entry, giving the
incumbent the power to raise prices above the competition level.
Reentry barriers on the other hand exist when a firm that has left
a market bears significant costs in seeking to reopen its business.
In the absence of re-entry barriers the firm which has been
forced to exit the market because it was unable to sustain the
artificially low prices dictated by the predator could enter the
market again once prices are raised to monopoly level, thus
being able to undermine the predators pricing policy.
 3. Excess Capacity: One of the fundamental requisite
for predatory pricing is the production capacity of the
enterprise. When the dominant enterprise indulges in
predatory pricing then the prices of its products
reduces and therefore the demand for their products
increases automatically. Even the customers of the
competitor shifts to the product of the dominant
enterprise. If the enterprise will not be able to cope up
with the increasing demand in the market, then the
price of product will increase which will eventually
help the rivals and the strategy of the enterprise will
not work.
 4. Strong Financial Reserve: Only the enterprises
which have strong financial reserves can indulge in
predatory pricing. Although it is not one of the main
pre-requisites of predatory pricing but it is important
for the simple reason that if the enterprise will not
have more financial resources than its rival then it will
not be able to eliminate him from the market and in
that process he himself will get destroyed.