Perfect Competition And Abuse Of Dominant Position

By Sneha Singh and Syed Ahmed, KIIT School of Law, Bhuvaneshwar

EDITOR’S NOTE:-

Competition law has been relatively under-developed in India.The need for the Competition Act,2002 was felt because of the inadequacy of the MRTP Act to deal with the contemporaneous issues pertaining to cartels, predatory pricing and abuse of dominant position. The Indian markets are fast evolving and therefore the need for a stringent law to protect the interests of the competitors, buyers and customers is acutely felt.This article analyses the aspect of dominant position in relevant markets and its characteristics features. It also discusses the issue of abuse of dominance in light of recent incidents.

PERFECT COMPETITION

Competition can be described as a process of rivalry between firms seeking to win the customer’s business over time. [i] Competition is a strong motivator in a market and is essential for a healthy market since it leads to better quality products made available for lower prices, more choices for the consumer.

“Pure” or “perfect” competition is a theoretical market structure. It is used as a benchmark against which real-life market structures are compared. [ii] In such a situation, neither the buyer nor the seller has influence over the price of the product or services; instead the prices reflect the supply and demand. The price is established based on independent bargaining of multiple buyers and suppliers. No participants are large enough to have the market power to set the price of a homogeneous product. Free entry and exit and large number of buyers and suppliers for a homogenous product make up the model of a perfect competition. Producers constantly innovate and develop new products in the continual battle for striving for costumer’s business.[iii] The market thus stimulates technological research and development while providing the maximum benefit to the customers.

THE MRTP ACT, 1969

The earlier law which was in force was the Monopolies and Restrictive Trade Practices Act, 1969 (MRTP).It was the first law that regulated free and unbound trade in India. [iv]

After changes in the trade policy of the nation and inflow of foreign investors into the economy, there was a need for a better regime of law. It was felt that the MRTP law had become obsolete and lost its sustainability. Therefore, a paradigm shift was made from curbing monopolies to preventing the misuse of dominance of power.[v] Under the MRTP Act, no provision for abuse of dominant position was defined. The bare bones however were laid by restricting anti –competitive practices. The MRTP Act did not prescribe a mechanism to deal with cartels, predatory prices, bid rigging, collusion and price fixing, all of which were equally pertinent.

By virtue of the Competition Act, 2002, a comprehensive restriction on abuse of dominant position was imposed. India, in line with international trend, bid farewell to the arithmetical criteria of 25 per cent market share (as it exists in the MRTP Act, 1969) to label an undertaking as “dominant”. [vi]

DOMINANT POSITION IN THE RELEVANT MARKET

The dictionary meaning of the word ‘dominant’ is ‘overriding’, or ‘influential’ while ‘ predatory’ has been defined as exploitation for financial purposes. Dominant position has been defined under Section 4 of the Competition Act, 2002.
The elements that constitute a dominant position are : (i) a position of strength; (ii) that position being enjoyed in a relevant market in India(both product and geographical markets) (iii) and such a position that gives the enterprise the power to ‘operate independently of competitive forces in the relevant market’,[vii] meaning that it can at will, disregard market forces and conditions and impose its own trading conditions, which will include the prices at which it is prepared to supply goods or services.

The definition does not contain the commonly understood connotations of dominant position, as constituted by size or market share of an enterprise, though they are relevant in ascertaining dominant position.

The substance of the definition is that a dominant enterprise is one that has the power to disregard market forces, that is, competitors, customers and others and to take unilateral decisions. Dominant position in the relevant market enables operation that is independent from the prevailing forces. The enterprise is in a position to affect its competitors, consumers or the relevant market in its favour and therefore can appreciably affect the relevant market.

There are three crucial steps to establish whether an enterprise holds a dominant position and whether it is abusing it-

  1. Defining the relevant market.
  2. Assessing the market strength to ascertain whether the enterprise holds significant power.
  3. Consider whether the conduct of the undertaking amounts to abuse.[viii]

To ascertain whether or not an enterprise holds a dominant position, the relevant market should be specified since dominance does not occur in an abstract market. A dominant position is always in reference to a relevant product and relevant geographical markets.

A geographical market is that part of the territory where the conditions of competition for supply of goods or services are distinctively homogeneous and can be distinguished from the conditions prevailing in neighbouring areas.[ix] Only that part of the geographic territory where uniformity of composition is present should be considered the geographic market. Relevant products or services are all those products that are interchangeable in the minds of the consumer. All substitutes of one product or service therefore compete with each other and form one relevant product market.

  • Market Share- An enterprise holding high market shares does not necessarily enjoy dominant position. Different parameters are employed to measure market share depending upon the nature of sector and the issue under investigation. As the Raghavan Committee reported, “a firm with a low market share of just 20 per cent with the remaining 80 per cent diffusedly held by a large number of competitors, may be in a position to abuse its dominance, while a firm with say 60 per cent market share with the remaining 40 per cent held by a competitor may not be in a position to abuse its dominance because of the key rivalry in the market. Specifying a threshold or an arithmetical figure for defining dominance may either allow real offenders to escape or result in unnecessary litigation. Hence, in a dynamic changing economic environment, a static arithmetical figure to define “dominance” will be an “aberration.”[x] The Competition Act, 2002, therefore does not state a percentage of market share as the measure of dominance. However, a high market share usually indicates limited ability of the customer to shift to other undertakings.
  • Size and Importance of Competitors- Not only the size and value of the enterprise but also the size and importance of its competitors are crucial when determining dominance. The largest firm’s market share should be evaluated relative to its competitors; the smaller the shares of the competitors, the largest firm is more likely to have dominance.
  • Dependence of Consumers on the Enterprise- Customers have a bargaining power and influence the pricing and conditions of the market. If in the relevant market, the dependence of consumers on the enterprise is high for example a specific medicine that is non-substitutable; the enterprise providing that medicine will be determined as dominant. Likewise, a consumer of electricity in India, at present, does not have a choice of supplier.
  • Entry Barriers – Barriers to entry, exit or expansion and durability to market power have been identified as very important factors in the assessment of dominance. If entry barriers faced by the rivals are low, the undertaking which have high market share may not be able to continue with significant market power for long.[xi] The barriers could be structural, regulatory or strategic one. Common barriers to entry a specific markets includes legal patents as well as first mover strategic advantages.
  • Countervailing Buying Power – In a market, the buyer also has bargaining power which affects the price of a product. A strong buyer affects the dominance of an enterprise just as much as a strong competitor.
  • Market Structure and Size- Market structure can be characterised by a sole supplier of goods/services either on stand-alone basis or by virtue of common ownership.

These factors individually or collectively may result in an enterprise being determined as having “dominance” over the relevant market.

ABUSE OF DOMINANCE

Just because an enterprise holds a dominant position does not mean it is violating the law. The “bigness” of a few enterprises is natural and even preferred as this bigness is essential to industrial efficiency and innovation in production and marketing.[xii] The provisions of the Competition Act of 2002 exist to intervene in situations where the size of the enterprise stifles competition. The oligopolistic market requires these provisions under Section 4 to prohibit these giants from driving out independent businesses from the market as well as from dictating prices.

An enterprise is said to abuse the dominant position when it directly or indirectly imposes unfair and discriminatory conditions and hence eliminates competitors. In other words, it strengthens its position by resorting unfair means outside the scope of a merit driven competition and the basis of equality.

For example: X is a businessman and enjoys a dominant position in the food market as he keeps huge stocks of vegetables and most of the retailers get supplies from him, which is the reason for which he enjoys a dominant position. And one day X purchases about 80 percent of the total produce of onions and then refuses to supply the same to the retailers, as a result the supply of onions in the market has diminished and demand for onion has increased, as onions form the base of Indian cooking. As the demand for onions has increased the price of onion has gone up as well, so when the price of onion increased X sold all of the onions at a premium rate and made a huge profit. This act done by X is called as abusing of one’s dominant position. The consumers in need of onions will buy them at whatever price X will dictate.

A few types of abuse of dominant position are analysed as under-

  1. i) Predatory Pricing- Section 4(b) of the Act defines it 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.”[xiii]
  2. ii) Refusal to supply- This leads to a serious interference with the independence of small and medium sized firms and their commercial relations. This has a heavy negative impact on the state of fair competition in the relevant market.

iii) Limiting Supply- A perfect example of this is the diamond market. Even though large quantities of them are in storage, only a small quantity is polished and made available to the buyers, resulting in its high price.

  1. iv) Barriers to entry or denial of market assess- Barriers to entry includes patent as well as strategic first mover advantages.
  2. v) A group of colluding suppliers appreciably affecting the relevant market.

The European Union Microsoft Competition case can be used to further illustrate the effect of the abuse of dominant position on competition in the market. In 2004, Microsoft abused its dominant position in the market of computer operating systems.[xiv] The company froze out the competing companies by not allowing their software to run on Microsoft operating systems. Microsoft at this time had almost complete dominance over the desktop operating system. This freezing out other software would have resulted in the people using Microsoft OS being left with limited options and non-dynamic products. The users would be left with no feasible option but to use only Microsoft software. The European Commission’s judgement stated that Microsoft cannot regulate the market by imposing this products and services on people thus restoring a merit driven competition in the software market. The users not therefore get to pick from more innovative and dynamic software at more competitive prices.[xv]

While “perfect competition” is a not a wholly realistic model but a theoretical one, it shows the optimal state for all relevant markets. A large number of buyers as well as suppliers freely entering and exiting the market without having a serious impact on the relevant market as independent bargainers has many benefits. The enterprises will be continually striving for their client’s as well as prospective client’s business.

When an enterprise begins to abuse its dominant position, the relevant market is inevitably impacted negatively in the long run. Not only the consumers, but even the competitors suffer setbacks that disincentivise them from investing in the market.

 Edited by Raghavi Viswanath

[i] Competition Commission Guidelines, (June 2003, CC2), Para 1.20, www.competition-commission.org.uk (Last accessed 30/1/2015).

[ii] Investopedia, Perfect Competition, http://www.investopedia.com/terms/p/perfectcompetition.asp (Last accessed 30/1/2015).

[iii] Competition Policy and Economics.

[iv] The Business Line, “Competition Law Report: An evasive document”, August 1, 2000. Available at http://www.hindu.com/businessline/2000/08/01/stories/040120ru.htm. (Last accessed on 31st January, 2015)

[v] The intent of enacting a new law on competition was disclosed by the Government through the Finance Minister’s Budget Speech. 1999-2000(dated 27-2-1999). As a follow up of this Budget initiative, the Government decided to constitute a committee to examine the existing MRTP Act, 1969.

[vi] G.R. Bhatia, Assessment Of Dominance: Issues And Challenges Under The Indian Competition Act, 2002, http://www.manupatrafast.com/articles/PopOpenArticle.aspx?ID=8de19f8a-5bbd-42b6-a96a-692a0f376625&txtsearch=Subject:%20Commercial, (Last accessed 30/01/2015).

[vii] Section 4,The Competition Act, 2002.

[viii] Taxmann, Competition Law and practice, 3rd Edition, D.P. Mittal,2011.

[ix]T Ramappa, Competition Law in India Policy, Issues and Development, Oxford India Paperbacks, 2nd Edition. 2009.

[x] Raghvan Committee report on Competition Law, Paragraph 4.4-4.8

[xi] G.R. Bhatia, Assessment Of Dominance : Issues And Challenges Under The Indian Competition Act, 2002, http://www.manupatrafast.com/articles/PopOpenArticle.aspx?ID=8de19f8a-5bbd-42b6-a96a-692a0f376625&txtsearch=Subject:%20Commercial, (Last accessed 30/01/2015).

[xii] Taxmann, Competition Law and practice, 3rd Edition, D.P. Mittal,2011.

[xiii] Section 4(b), The Competition Act, 2002.

[xiv] European Comission, http://ec.europa.eu/competition/sectors/ICT/microsoft/ (Last assesses 2/02/2015)

[xv] Taxmann, Competition Law and practice, 3rd Edition, D.P. Mittal,2011.

 

 

 

One Reply to “Perfect Competition And Abuse Of Dominant Position”

  1. Hii
    I found the article interesting. Nice illustration using examples. I have one doubt. As per Robinson Patman Act, a manufacturer cannot price discriminate between his retailers. In other words, the manufacturer should offer the product at the same wholesale price to all the retailers. My doubt is whether we have such a law in India. if yes which law?
    Kindly answer my query

Leave a Reply

Your email address will not be published. Required fields are marked *