Competition means a struggle for superiority and in the corporate world. The term is generally understood as a process whereby the economic enterprises compete with each other to secure customers for their product. The enterprises compete to outsmart their competitors, sometimes to eliminate the rivals. The benefits of having competition in the market are lower prices, better products, wider choice and greater efficiency than those existing under conditions of monopoly. Competition law is a tool through which the government controls and regulates the producers/players in the market. So, the competition law and policy relates to matters of competition and competitiveness so that goods and services are sold at competitive prices and the consumers have a choice as to the products they wish to purchase. Competition law has grown at a phenomenal rate in recent years in response to the enormous changes in political thinking and economic behavior that have taken place around the world. Competition law is now applied to many economic activities that once were regarded as natural monopolies or the preserve of the state: energy, transport, postal services, sports, media etc. Thus, competition law touches every sector of the economy.
HISTORICAL BACKGROUND OF COMPETITION LAW
The development of competition law started with the grant of individual freedom against existing guilds in the Europe in early 18th century. The first traceable event of origin of competition law can be regarded as the book of Wealth of Nations by Smith, where he gave the metaphor of invisible hands. Smith argued that those who seek wealth by following their individual self-interest, stimulate the economy and assistsocietyas a whole. According to him, competition performed three functions:
Competition explained how prices, wages and rents would be set provided all were free to enter any occupation. Competition ensured that wages and prices of goods would be naturally set.
The idea of competition explained how economic relations would function without state interference.
Competition provided a theory that justified whatever prices, wages and rents were received.
Smith s idea was that competition legitimated the distribution of wealth and income that resulted from market exchange. This was criticized by Kenneth Arrow and Gerard Debreu, who received a nobel prize in economics for their development of general equilibrium theory, which is another landmark in development of modern competition law. In this theory, they claimed that any socially desirable outcome can be achieved by a competitive market provided the initial distribution of rights and resources is appropriate.
The Sherman Act, 1890 is considered as the first attempt in the drafting of modern competition law, which was an attempt to promote and preserve competition. The Act was enacted in response to the growing number of trusts, which uses their power to oppress individuals and injure the public. The Act contained the well-established principles of common law contracts or conspiracy in restraint of trade is void.
Horizontal Agreement is an agreement for cooperation between two or more competing businesses operating at the same stage of the production chain and in the same market. These are the agreements between producers or between wholesalers or between retailers, dealing in similar kind of products. For example, two companies, both manufacturing a particular automobile part like tyres or axles, are aid to operate at the same stage of the production of the goods. According to Merriam-Webster s Dictionary of Law, horizontal restraint is a restraint of trade involving an agreement among competitors at the same distribution level for the purpose of minimizing competition. Horizontal restraints can affect the market price of goods in a variety of ways. Some of the ways through which market price can be affected is through a joint venture between two companies. These two companies, through their joint venture, can engage in price fixing by creating a market driven not by supply. Such agreements have direct impact on prices which is achieved through price fixation(raising, depressing, fixing or stabilizing the prices), reduction of production and sales by establishing quotas, division of markets or restrictions on investments. Therefore, such agreements are void per se. Section 3(3) of the Competition Act, 2002, provides for certain category of agreements that s qualify as anti-competitive horizontal agreements.
Section 3(3) of the Competition Act, 2002 provides as follows:
Any agreement entered into
Between enterprises or associations of enterprises or persons or associations of persons, or
Between any person and enterprise, or
Engaged in identical or similar trade of goods or provision of services, which-
Directly or indirectly determines purchase or sale prices;
Limits or controls production, supply, markets, technical development investment or provision of service;
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.
Directly or indirectly results in bid rigging or collusive bidding.
Shall be presumed to have an appreciable adverse effect on competition. So, section 3(3) of the Act mentions four types of horizontal agreements that are presumed to have an appreciable adverse effect on competition.
Price-fixing agreements [Clause (a) of section 3(3)]
Price-fixing agreements are the most common form of anti-competitive agreement which directly or indirectly determines purchase of sale price. Price fixing can occur at any level in the production and distribution process. It may involve agreements as to price of primary goods, intermediary inputs or finished products. It may also involve agreements relating to granting of discounts and rebates and exchange of price information. Price fixing is a per se prohibition. It may be direct or indirect. It may relate to prices or pricing methods. Price fixing is not used in the sense of it being uniform and inflexible.
In Arizona v. Maricopa County Medical Society, 457 U.S. 332 (1982), court observed that the aim and object of price-fixing agreements, is the elimination of one form of competition. Such agreements are made by way of informal understandings as to prices for preventing competition and keeping the prices up. The power to fix prices, whether reasonably exercised or not, involves the power to control the market and fix arbitrary and unreasonable prices.
Limiting and Controlling Production and Investment [Section 3(3)(b)]
Agreements which limit or control production, supply, markets, technical development, investment or provision of services are considered to be anticompetitive for two reasons.
By controlling production, the supply is kept low as compared to demand and thereby creating artificial scarcity.
The agreement in effect restricts competition between the parties themselves so that the efficient ones among them could not go ahead with further production and elbow out the less efficient.
The central idea of competition is that the efficient enterprise which is able to supply goods at prices acceptable to consumers will increase while the less efficient will reduce their production and if necessary will go out of it.
VERTICAL AGREEMENTS [Section 3(4)]
Vertical agreements are agreements or concerted practices entered into between two or more companies each of which operates at a different level of production or distribution chain, and relating to the conditions under which the parties may purchase, sell or resell certain goods or services.
These agreements generally are not treated as anti-competitive per se as in the case of horizontal agreements.
The vertical agreements are have to be judged under the ‘rule of reason’ test deciding the matter on the basis of facts and features of such agreements.
Such agreements are considered illegal only if they result in unreasonable restriction on competition.
TYPES OF VERTICAL AGREEMENTS UNDER COMPETITION ACT, 2002
Tie-in-Arrangement [Section 3(4)(a)]
It means imposing a condition on the purchaser of goods, to purchase some other goods and selling goods which is not of purchasers choice. For example, requiring the buyers of cars to pay towards the servicing of cars with the sale, a newspaper publisher requiring subscribers to subscribe to both its morning and evening papers etc.
In United States v. Microsoft Corporation 258 F, 3d (DC Cir, 2001), one of the allegations was that Microsoft used its dominance on personal computer operating systems to push the sale of its other products, specially its internet browser and media player systems.
The Act aims to prevent practices by parties that have AAEC in India. This can ensure freedom of trade and would protect the interest of all the parties including consumers. But such an aim would not be achieved unless the parties doing business follow the principles laid down in the Act. It is important for the parties while doing business in India to keep a check on retaining any anti-competitive element in the agreements between them. Enterprises should be proactive and diligent to identify the existing anti-competitive elements from their current agreements. The employees can be trained to understand the implications of anti-competitive agreements and how to avoid that. If need be persons and enterprises can always consult experts who can guide them to a safer option.
Written by: Sanah Sethi is a final year law student at Amity Law School, having interest in corporate laws.