National Conference

on
State of Competition in the
Indian Economy

‘COMPETITION ASSESSMENT’
By

AUGUSTINE PETER
ECONOMIC ADVISER
COMPETITION COMMSSION OF INDIA
WWW.competitioncommission.gov.in

(Tel: 00 91 11 26701681: Email: [email protected])

BENEFITS OF COMPETITION
• On a question as to what makes a country rich or poor, the crucial
insight given by a Mckinsey study is:-

“the primary answer is the nature of competition in

product markets. Competition is the mechanism that
helps more productive and efficient companies to expand
and take market share from less productive ones, which
then go out of business or become more efficient.”

• Strong competition policy is not just a luxury to be enjoyed by rich

countries but a real necessity for the countries striving to create
democratic market economies. (JOSEPH STIGILITZ)

• Competition is a key driver to competitiveness

z Positive correlation exists between competition,
competitiveness, productivity and GDP growth
Competition the key driver

Competition Productivity

GDP
Competitiveness
Growth
 WHAT IS MEANT BY
‘COMPETITION’
• Is the market competitive ?
• The issue is that of ‘effective competition’ and
not ‘perfect competition’ in the text book sense
• Effective Competition is seen in terms of:
- Rivalry among firms
- Absence of restraints
- Where no firm can influence the market place
• In reality, however, the existence of ‘effective
competition’ has to be defined in terms of outcomes
or the effects for/on the consumers
• Absence of ‘effective competition’ results in ‘market
power’ which is likely to be abused to the detriment
of consumer interest.
 MARKET POWER
• Market power is defined as the “ability of a firm or
group of firms to raise price, through the restriction
of output, above the level that would prevail under
competitive conditions and thereby to enjoy
increased profits from the action”

> Exercise of market power leads to lower output

> The increase in price must lead to an increase in
profitability
> Market power is exercised against the benchmark
of the ‘outcome’ under conditions of effective
competition
 APPRECIABLE ADVERSE EFFECT ON
COMPETITION (AAEC)
• The philosophy guiding ‘competition analysis’
shifted from:
> Treating structure as per se bad
To

> Treating certain types of conduct as bad

To

> Judging acts based on their ‘Effects’

• Competition Act, 2002 frowns upon act(ion)s that
have ‘appreciable adverse effects on
competition’ (AAEC)
 COMPETITION
ASSESSMENT
• Competition assessment can be:
- Of a specific product, or
- Of a specific sector, or
- Of the economy as a whole
• Here we speak of specific products, in terms of relevant
market
• ‘Appreciable adverse effect’ is the what is looked at
• ‘Presumptive’ logic and ‘rule of reason’ are applied
• Assessment has to be against the bench mark set by the
law in force
• In India the bench mark is (the provisions of) the
Competition Act, 2002
 PREAMBLE OF CA 2002 STATES:
“keeping in view the economic development of the
country”,
• to prevent practices having appreciable adverse effect
on competition;
• to promote and sustain competition in trade and
industry:
• to protect the interest of consumers;
• to ensure freedom of trade carried on by the
participants in markets in India;
• Objectives to be achieved through the establishment of
the Competition Commission of India (CCI).
 MAIN FEATURES OF
COMPETITION ACT, 2002
With the above objective, the Act:
• Prohibits Anticompetitive
Agreements.
• Prohibits Abuse of Dominant
Position.
• Provides for Regulation of
Combinations, and
• Enjoins Competition Advocacy
[Sections 3, 4, 5, 6 and 49(3)]
 ANTI-COMPETITIVE
AGREEMENTS - 1
• Agreements having appreciable adverse effect on competition
in market in India are void
Presumptive logic
• Agreements between competitors - including ‘Cartels’-
(horizontal agreements) presumed to have appreciable
adverse effect on competition
• price fixing
• sharing of market
• limiting production, supply
• bid rigging/collusive bidding
• Presumption Vs per se
• Treatment of JVs; efficiency enhancing JVs:
• Treatment of Production for Exports
(Section 3)
 ANTI-COMPETITIVE
AGREEMENTS - 2
‘Rule of reason’
(i) Other Horizontal Agreements
(ii) Vertical Agreements: Agreements between enterprises at different
stages of the production, distribution etc. chain
(burden of proof of appreciable adverse effect on competition lies on the
prosecutor).
• These include:
– tie-in arrangement,
– exclusive supply agreement
– exclusive distribution agreement
– refusal to deal
– resale price maintenance
• List not exhaustive
• Treatment of IPRs in Section 3 on Agreements (3.5.1); And Exports
 APPRECIABLE ADVERSE EFFECT
ON COMPETITON (AAEC)
• While determining whether an agreement has AAEC
under Sec 3 the Competition Commission shall have due
regard for the following factors:
- creation of barriers to new entrants in the market
- driving existing competitors out of the market
- foreclosure of competition by hindering entry into the
market
- accrual of benefits to the consumers
- improvements in production or distribution of goods or services
- promotion of technical, scientific and economic development by
means of production or distribution of goods or provision of
services
 DOMINANT POSITION
• ‘Dominant position’ means 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 relevant market; or
(ii) affect its competitors or consumers or the
relevant market in its favour
• Not dominance, but its abuse is prohibited
• Dominance not based on any arithmetical figure,
but on factors prescribed in Section 19 of the Act
 FACTORS TO BE CONSIDERED IN
DETERMINING DOMINANCE - 1

Dominant position linked to a host of

factors
• Market share of enterprise
• Size and resources of enterprise
• Size and importance of competitors
• Commercial advantage of enterprise over
competitors
FACTORS TO BE CONSIDERED IN
DETERMINING DOMINANCE - 2

o Vertical integration
o Dependence of consumers
o Dominant position as a result of a statue
o Entry barriers
o Countervailing buying power
o Market structure and size of market
o Social obligations and costs
o Contribution to economic development
o Any other factor
 ABUSE OF DOMINANCE - 1

• Imposing unfair or discriminatory price

or condition in purchase or sale
• Limiting production or scientific
development to the prejudice of
consumers
• Denial of market access in any manner
• Conclusion of contract subject to
supplementary obligations
• Use of position in one relevant market
to enter into or protect other relevant
market
 ABUSE OF DOMINANCE - 2

• List of Abuses in the Act are exhaustive

• No action if an ‘act(ion)’ is not covered in ‘list’
• Abuses are of two types:
> Exploitative (predatory pricing, e.g.)
> Exclusionary
(interference with competitive process)
– No concession in case of abusive use of intellectual
property
– Appreciable adverse effect on competition (AAEC)
need not be proved
 REGULATION OF
COMBINATIONS
• Combination is a broad term: includes merger,
amalgamation, acquisition of shares, acquiring of
control
• The Act takes a liberal view
• High threshold limits – only big ticket combinations
subject to regulation
• Voluntary notification regime
• Commission to decide in 90 working days, else
combination is deemed approved
• Commission can take, upon its own knowledge or
information, action within 1 year after combination
 RELEVANT MARKET

Relevant market is based on:

• Relevant product market; and
• Relevant geographic market
 RELEVANT MARKET
Relevant Product Market - 1
• Relevant product market is the smallest
set of close substitutes

• Determination of substitutability of products:

‰Demand side substitutability- shift of demand to

competing product on price rise

‰Supply side substitutability- shift of production to meet

demand
 RELEVANT MARKET
Relevant Product Market - 2
(Competition Act, 2002)

In determining ‘Relevant Product Market’,

CCI is required to consider:
• Physical characteristics or end-use of goods
• Price of goods or service
• Consumer preferences
• Exclusion of in-house production
• Existence of specialized producers
• Classification of industrial products
 RELEVANT MARKET
Relevant Geographic Market - 1
• Relevant geographic market can be defined as
the area in which products are available at
approximately the same price given transport
costs and any increase in demand can be met
from neighbouring areas profitably
• Elzinga - Hogarty test to determine relevant
geographic market:
¾ LIFO (Little In From Outside)
¾ LOFI (Little Out From Inside)
Usually both should be at least 90% to define the relevant
geographic market – shipment data required
 RELEVANT MARKET
Relevant Geographic Market - 2
(Competition Act, 2002)

In determining ‘Relevant Geographic

Market’, CCI is required to consider:
– Regulatory trade barriers
– Local specification requirements
– National procurement policies
– Adequate distribution facilities
– Transport costs
– Language
– Consumer preferences
– Need for secure regular supplies or rapid after-sales
services
 COMBINATIONS
• Combination covers
‰Merger
‰Acquisition
‰Amalgamation
‰Acquiring control
• Any combination which causes or is
likely to cause appreciable adverse
effect on competition (AAEC) is void
 VOLUNTARY NOTIFICATION
& HIGH THRESHOLD
• While Agreements and abuse of dominance are
prohibited, combinations are regulated
• Indian Combination regulation liberal
• High threshold limits
If combining parties are in India:
– Combining parties’ assets in India > Rs 1000 cr
or turnover > Rs 3000 cr
– If combining parties are a group, assets in India > Rs 4000 cr
or turnover > Rs 12000 cr
If any of the combining parties are outside India:
• Assets in India and outside India > US$ 500 m or turnover > US$ 1500 m
• If any of the combining parties belong to a group and any one of them is
outside India, assets > US$ 2 b or turnover > US$ 6 b
 COMBINATIONS
APPRECIABLE ADVERSE EFFECT
ON COMPETITON (AAEC)

Market definition

• AAEC has to be determined in the

relevant market
 AAEC - COMBINATIONS
DETERMINING FACTORS - 1
Factors to be considered to determine AAEC
in the Relevant Market (Competition Act,
2002):
– Actual and potential competition through imports-
imports/trade agreements
– Entry barriers- sunk cost/technological lead
– Concentration level - CR, HHI
– Countervailing power
– Likelihood of increase in prices or profit margins
– Effective competition after combination
 AAEC - COMBINATIONS
DETERMINING FACTORS -2
(Competition Act, 2002)
• Substitutes – actual or potential
• Market share
• Removal of vigorous and effective competitor
or competitors in the market
• Extent of vertical integration
• Failing business
• Nature and extent of innovation
• Contribution to economic development
• Whether benefits outweigh the adverse impact
THANK YOU

Augustine Peter
Economic Adviser
Competition Commission of India
Email: [email protected]