Searching for the Goal of the Indian Competition Act, 2002

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Hrishika Jain*

The Competition Commission of India [‘CCI’] and the Supreme Court [‘SC’], in decisions like Arun Tyagi[1] and Excel Crop,[2] have indicated both consumer welfare and efficiency to be the goals of the Competition Act, 2002 [‘Act’]. However, neither this, nor the Preamble of the Act provide a satisfactory resolution to the frequent circumstances where these goals may generate conflicting outcomes. This incompatibility between the different stated goals of competition policy make it imperative to study the overriding goal of Indian competition policy – to introduce consistency to competition jurisprudence.

In this post, through an analysis of the Act, I claim that the overriding goal of Indian competition law is enhancement of end-consumer welfare, (as distinguished from buyer-welfare). It is this that must consistently determine appreciable adverse effect on competition [‘AAEC’] and dominance analysis, in CCI decisional practice. To make this argument, I examine various aspects of the Act, concerning predatory pricing, monopsony power, mergers, the treatment of AAEC in horizontal/non-horizontal agreements – in light of the statutory text, or its legislative history. Intending for this to be a statutory analysis, I resort to CCI’s decisional practice only where the text and its legislative history do not resolve a point of uncertainty. Before I proceed with my argument, a small terminological clarification is due. Henceforth, I have used ‘consumer-welfare’ to mean end consumer-welfare, for convenience. Wherever I intend to convey intermediate-buyers, I have specified it.

The Raghavan Committee and Parliamentary Standing Committee Reports on the Act enumerate multiple, divergent goals. However, the Raghavan Committee Report clearly states consumer welfare to be the ‘raison detre’of competition law.[3]However, later in the same Report, the goal is claimed to be welfare, further defined as ‘total welfare’ (Paragraph 2.1.1). This creates an ambiguity in the way the Act’s goal was expressly envisaged, necessitating further inquiry into the Reports’ treatment of their own purpose. The idea that their self-perceived goal was consumer-welfare is further reflected in the justifications offered in the Standing Committee Report for shifting away from the MRTP regime. For example, the move to subject PSUs to competition was justified on consumer welfare grounds. Similarly, concerns about the impact on small-scale industries were rejected citing the harm to end-consumersfrom poor economies-of-scale (Paragraph 7.24).[4] It is pertinent that equally applicable total or producer welfare justifications were not placed at the forefront by the Reports.

This de-prioritization of a concern for a producer-welfare goal is also evident from the shift in the understanding of ‘dominance’. MRTP understood dominance only through market share, and subjected firms to scrutiny due to their size per se, for avoiding concentration of economic power in the hands of few firms – reflecting a concern for competition for its own sake, and for other producers. On the other hand, the Act foregoes this concern with concentration of economic power per se, reflecting a move away from producer-welfare being the overriding goal. Instead, the Act now understands dominance through its effects, looking at market power instead of market share, and frowning at abuse of such dominant position using such market power.[5]

Further, any vague goals of ‘public interest’ stated in the Statement of Objects and Reasons of the MRTP were categorically eschewed by the Act’s drafters. The Standing Committee Report expressly recognized the conflict between consumer and public interest, and chose the former (Paragraph 7.16). This choice manifests in S.54 which exempts application of the Act on grounds of ‘public interest’ – indicating that public interest is not captured within the Act.

In light of the above discussion, I will now examine certain specific aspects of the Act, and attempt to examine their ultimate goal.

Section 4(2) of the Act, dealing with predatory pricing, prohibits below-cost pricing by dominant firms even at pre-recoupment stages. Since consumers benefit from low costsat stages before recoupment, this may be taken as aimed at producer-welfare or efficiency, instead of consumer-welfare. A deeper look, however, alters this implication.

The Act defines predatory pricing as “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” [emphasis mine]. The definition seems to be geared towards protecting competitors. However, first, it is notable that the definition merely requires a subjective intent to eliminate competition, and does not make the regulation of predatory pricing contingent on actual, or even objectively provable potential, harm to competitors. The phrase ‘with a view to reduce competition…’, thus, is merely to filter out those instances of below-cost pricing fueled by economic necessity rather than a desire to monopolise. This phrase, thus, indicates nothing about the goal the definition is aiming at. Second, the provisions on predatory pricing must be read in light of the context of the Act, as well as its legislative history.

The two-step test for proving predatory pricing laid down in the Raghavan Report provides important insight (Paragraph 4.5.2). The first requirement is below-cost pricing; the second requirement is to prove thatrecoupment from consumers should be eventually possible in the given market structure. If it is not possible, predatory pricing is not considered to be a problem.[6] This test reflects concern for preventing consumer harm exante, and not for loss to competitors – considering that, if recoupment from consumers is impossible, below-cost pricing was not considered actionable regardless of objective potential harm to existent competitors.[7] This is perfectly consistent with the definition’s requirement that the firm subjectively intended harming competition. This reading is further strengthened by the fact that non-dominant firms are now free to price predatorily, regardless of harm to competitors and to economic efficiency – since they are unlikely to be able to recoup. This is unlike in the MRTP regime, where predatory pricing was regulated as a restrictive trade practice regardless of the firm’s dominance. Similarly, efficiency also cannot be the goal as that would necessitate discouraging sales at sub-optimal prices, regardless of recoupment potential.[8]

Mergers are largely regulated due to the resultant future increase in market power and ability to create AAEC through anti-competitive agreements or abuse of dominance, and not for actual AAEC or impact on consumer-welfare. Thus, Section 6 of the Act, by regulating mergers, goes into the domain of incipient violations. Arguably, condemning incipient violations or the build-up to monopoly power may be indicative of a concern for protecting competitors/small businesses, since consumers often benefit at this stage – seemingly making the regulation of such incipient violations incompatible with a consumer-welfare goal.[9] However, it is notable that mergers, unlike gradual monopolization attempts like predatory pricing, do not lead to any short-term consumer gains while building-up to monopoly power. Thus, regulating mergers, even though these are incipient violations, is at least not incompatible with a consumer-welfare goal – given that, typically, mergers, unlike other gradual monopolization practices, do not cause any short-term consumer gains at the incipient stage where they are regulated. Further, the Raghavan Report explains that the rationale for pre-notification requirements and ex-ante prohibition of certain mergers is the high social-cost of ‘unscrambling’ the merger after it starts harming consumers (Paragraph 4.7.5). This further confirms my thesis that the merger regulations are not just compatible with, but are in fact aimed at, the end-goal of consumer-welfare.

Another counter-argument often made against the argument of consumer-welfare as the goal is the relatively lenient treatment accorded to non-horizontal over horizontal agreements under Section 3 – since lenient treatment to non-horizontal agreements is usually justified on grounds of efficiency. However, Section 3(4) merely removes the presumption of AAEC, in case of non-horizontal agreements. Thus, while the burden of proof changes, the standard for what conduct is considered to be anti-competitive still remains AAEC, as in the case of horizontal agreements under Section 3(3). The difference, thus, is one of procedure, not the substantive treatment of horizontal and non-horizontal agreements. It is thus a natural implication that this difference in burden of proof is not due to the recognition of efficiency as a substantive goal. Rather, it is due to the acknowledgement of the fact that there may be strong pro-competitive motivations and effects for most non-horizontal agreements – thus, warranting a sort of ‘presumption of innocence’. The same analysis also explains why exempting joint ventures that create efficiencies from this presumption of AAEC, as provided for in proviso to Section 3(3), is also compatible with the consumer welfare goal. While the burden of proof is certainly changed, for efficiency-creating ventures, the substantive standard of their regulation remains the same. Further, the Raghavan Report clarifies that non-horizontal agreements are a violation only where one of the parties have market power. Where the firms do not possess market power, agreements that contribute to productive and dynamic efficiencies are treated leniently as the competitive firms pass on a “fair share of the benefits” from the efficiencies to the consumers (Paragraph 4.4.0-4.4.2). This demonstrates how the efficiencies-justification for lenient treatment of non-horizontal agreements, is also ultimately contingent on these efficiencies enhancing consumer welfare. This nexus between efficiencies and their ultimate impact on consumer-welfare is not just useful here – but may also inform how the factors that go into the assessment of AAEC are understood.

Admittedly, Sections 19(3) and 20(4), in formulating the factors that go into an AAEC assessment, include a wide variety of factors – some of which include, inter alia, the effect on producers, on competition, on innovation in the market, and on efficiencies. A direct concern for consumer welfare or pricing for consumers is, admittedly, only one of the factors mentioned in these provisions. However, to say that this means that all of these divergent factors are all the goals of competition law, is to say nothing. As mentioned above, these factors often conflict with each other – for example, a merger may perhaps improve market-innovation, and create efficiencies, but still harm consumer welfare, if the merged entity has enough market power to not pass on the benefits to the consumer. This clearly illustrates the need to understand Sections 19(3) and 20(4) in light of the ultimate goal of Indian competition law – which, as I have argued above and further substantiate below, is consumer-welfare. This ultimate, overriding goal is what will determine the way the numerous, divergent factors will be weighed in the final AAEC calculus. Thus, while the factors in Section 19(3) do incorporate efficiency gains,[10] these must be read along with the first three factors assessing market power and the fourth factor assessing accrual of benefits to consumers.[11] These together, in light of the rest of the statutory text and legislative history, indicate a concern with the ability of the market structure (as assessed by the first four factors) to allow the fair flow of the same efficiency gains to end-consumers.

The Act’s treatment of monopsony power further strengthens this understanding. Agreements between end-consumers are excluded from the ambit of S.3 by qualifying the term ‘agreements’ that are prohibited by the provision, with various markers of economic activity. Further, arguably, intermediate-buyers’ cartels are also excluded from ‘cartels’. Instead of using the broader term ‘enterprise’ that is used in other parts of the Act, and includes intermediate-buyers by including the activity of acquisition – the Act lists “producers, sellers, distributors, traders or service providers” in Sections 2(c), 27 and 46 which define, penalise and create leniency provisions for cartels, respectively. All these terms, including trade as defined under S.2(x), exclude buyers – and this omission has been made thrice in the Act, perhaps reflecting something more than an inadvertent error. Reasoning similar to this was adopted by CCI in Pandrol Raheeto even hold that intermediate-buyers are not subject to the entirety of S.3(3) at all, since it uses the term ‘engaged in identical or similar trade,’ to qualify the broader term ‘enterprise’. For cartels specifically, albeit notfor all agreements under S.3(3), this reasoning seems to have been further affirmed by legislative action – the Draft Competition (Amendment) Bill, 2020 has recognised this position as the existing one by seeking to change it through amending the definition of ‘traders’ to include buyers.

However, it is also equally arguable that this amendment is merely clarificatory (though nothing in the Amendment itself expressly suggests so) and thus, need not mean an acknowledgment that the current provisions exclude buyers’ cartels. This is plausible – the Act’s provision for bid-rigging uses the term ‘enterprise’, instead of the terms used in Sections 2(c), 27 and 46; and the definition of ‘trade’ is interpretable to include intermediate-buyers in the definition of cartels. Legislative history offers no further certainty – with the Raghavan Report being silent on this question. Thus, turning to CCI’s decisional practice, it is seen that the CCI itself has held an ambiguous position with respect to the inclusion of buyer’s cartels under the definition of ‘cartel’. In XYZ v. IOC, going against the decision in Pandrol Rahee, CCI held that Sections 3(1) and 3(3)(a) include both buyers’ and sellers’ cartels – implicitly considering these provisions as independent of and unencumbered by the definition of cartels under other provisions like S.2(c). However, even in XYZ, the CCI added that –

“…generally cartels are comprised of the sellers who agree to fix prices and/or output and since such agreement is to raise the price above the competitive levels or bring the output below the competitive levels, the same is considered to be anti-competitive. It needs to be recognised that the creation of ‘buyer power’ through joint purchasing agreements may rather lead to direct benefits for consumers in the form of lower prices bargained by the buyers. Thus, though the Act covers buyers’ cartel within the purview of Section 3(1) read with Section 3(3) of the Act, treating buyers’ arrangement/cartel at par with sellers’ cartel may not be appropriate. For assessment of such cases, it is imperative to first, look at the potential theories of harm and then the conditions necessary for infliction of competitive harm need to be examined.”

My purpose here is not to resolve this statutory ambiguity inherent in the Act. However, given that cartelization by buyers impacts competition and efficiencies in the buyer market as much as seller-cartels do in the seller market – the exemption or in any case, the relatively lenient treatment of buyers’ cartels can only be explained through the fact that buyer’s cartels, as opposed to seller’s cartels, have the effect of lowering end-consumer prices.

However, before this is accepted as an argument for end consumer-welfare being the ultimate goal of Indian competition policy, it needs to be reconciled with the fact that the Act and CCI subject intermediate-buyers to other provisions in the Act at par with sellers. It must be noted that exercising intermediate-buyer power can create “successive selling power for the powerful buyer firms in the downstream end-consumer market, particularly by increasing differentials in market powers between sellers downstream. For example, exercise of buyer power in the upstream buyer market to gain discriminatory, lower prices consistently can lead to a “waterbed effect”[12] and thus, an increase in barriers to entry and incentivizing exit of rivals. This would then reduce competition, enhance the firm’s relative selling power in the downstream market selling to end-consumers, and thereby harm consumer welfare. This would be the case where an intermediate-buyer enters into a merger likely to cause AAEC, or abuses its dominant position in the upstream buying market – thus, increasing its market power relative to other buyers. Thus, in light of a consumer welfare goal, it makes sense to subject intermediate-buyers to the provisions on combination and abuse of dominance.

Cartelization among intermediate-buyers, however, presents a different situation that may warrant exemption or lenient treatment if the goal is consumer welfare. A buyer’s cartel will not cause significant changes in the downstream selling powers of the cartelizing firms relative to each other, as the very definition of a cartel requires that lower prices are claimed as a collective. It is the differentials in the relative market power of the buying firms that distorts entry/exit incentives, reduces competition, and enables exploitation of successive selling power. If their relative positions with respect to each other is unchanged, market structure will remain more or less the same, and competition will not reduce significantly – assuming most major firms are part of the cartel (which is required for the cartel to be effective). At worst, cartelization upstream may set the stage for and facilitate further co-operation downstream in the selling market – however, if this does happen, it is separately actionable as an exercise of monopoly power/seller’s cartels. This explanation reconciles the distinct and relatively more lenient treatment of monopsony power over monopoly power, and demonstrates how this treatment is a result of competition policy ultimately aiming at consumer welfare. Through the above analysis, the welfare of end-consumers emerges as the overriding goal of Indian competition law. I hope that this paper initiates further conversation on the need for identifying the overriding goal of competition law, to enable competition law jurisprudence which is theoretically consistent and alive to its broader goal.


* Hrishika Jain is a graduate from the NLSIU, currently working as law clerk-cum-research assistant in the Supreme Court

[1] Arun Tyagi v. Software Engineering Institute, 2011 SCC OnLine CCI 61, Para 7. “The Competition Act, 2002 is an economic law which seeks to promote and protect competitive forces in the market because free and fair competition is in the interest of consumers… Thus, in essence, microeconomic theory concludes that competition results in greater consumer welfare and at the same time it enhances producers’ efficiencies. The preamble of the Act as well as the definition of “enterprise” should be read in the context of this economic thought.”

[2] Excel Crop Care Ltd. v. Competition Commission of India, Civil Appeal No. 2480 of 2014, Para 17.

[3] Report of High-Level Committee on Competition Policy and Law, Paragraph 1.1.9, chaired by S.V.S. Raghavan (May, 2000).

[4] “…should be exposed to competition as it will be in the larger interest of the consumers. Similarly, small-scale sector is also not proving beneficial to the consumers because of…poor economy of scale as well as technological obsolescence.”

[5] Section 4, 19(4), Competition Act, 2002.

[6] CCI has deviated from this in some instances, holding that recoupment is immaterial to the test for predatory pricing. However, here, I only deal with the overriding goal suggested by a reading of the Act and its preceding Report, and ignore CCI’s implementation of the same, except where the Act and its legislative history provide no certainty on the question.

[7] S. Salop, ‘Question: What is the Real and Proper Antitrust Welfare Standard? Answer: The True Consumer Welfare Standard’, 22 Loy. Consumer L.Rev. 336, 341 (2010).

[8] Id.

[9] Robert H. Lande, ‘Wealth Transfers as the Original and Primary Concern of Antitrust: The Efficiency Interpretation Challenged’, 34 Hastings L.J. 65, 121 (1982), footnote 212.

[10] Section 19(3)(e), (f) require gains in productive and dynamic efficiencies to be considered towards AAEC.

[11] Section 19(3) (a), (b), (c) introduce creation of barriers to new entrants, driving out competitors, and foreclosure of competition, while Section 19(3)(d) introduces accrual of benefits to consumers – as elements in the calculation of AAEC.

[12] P. Dobson, R. Inderst, ‘The Waterbed Effect: Where Buying and Selling Power Come Together’, 2008 Wis. L. Rev. 331 (2008). Waterbed effect is the possibility that the exercise of buyer power by powerful buyer firms upstream, lead to worsening of terms of weaker buyers upstream, which in turn may decrease downstream competition and resultantly harm end consumer welfare.

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