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COMPETITION LAW AND ECONOMIC THEORY
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COMPETITION LAW AND ECONOMIC THEORY
AUTHORED BY - SHUBHANGI SHARMA
ABSTRACT
The research paper titled
"Relation of Competition Law and Economic Theory" explores the
intersection of competition law and economic theory. The paper analyzes the
fundamental principles of competition law and economic theory and how they are
interconnected. The paper also examines the historical evolution of competition
law and the role of economic theory in shaping its development.
The paper argues that economic theory
has played a vital role in shaping the evolution of competition law by
providing a theoretical framework for understanding the economic effects of
anti-competitive practices. Finally, the paper discusses the future of
competition law and the potential impact of new economic theories and
technologies on its development.
Overall, this research paper provides
a comprehensive analysis of the relation between competition law and economic
theory, highlighting the critical role of economic theory in shaping
competition law and its future trajectory.
Key words- Competition Law, Economic Theory,
Game Theory, Appreciable Adverse Effect on Competition, Anti-competitive
Agreements, Mergers and acquisitions, Dominant Position
INTRODUCTION
Economics plays a vital role in
competition law by offering a framework for analyzing the impact of business practices
on competition and consumer welfare and assisting in the creation of remedies
to restore market competition. Economic analysis is frequently used to examine
the probable influence on market competition to determine if a certain activity
breaches competition legislation.
In this paper, the study examines the
fundamental principles of competition law and economic theory, as well as the
ways in which they are related. The paper also deals with the historical
evolution of competition law and the role of economic theory in shaping its
development. The study believes that economic theory has influenced the growth
of competition law by offering a theoretical foundation for understanding the
economic implications of anti-competitive practices. The study goes on to
examine fundamental provisions of competition law. It then studies how
competition law is applied in practice, as well as the influence of enforcement
on economic outcomes. Finally, the paper considers the future of competition
law and the role of economic theory in guiding its evolution.
ECONOMICS
Economics is the study of how
resources in society are allocated among competing uses. In the context of
competition law, economics is critical in analyzing the competitive impacts of
business practices and evaluating their impact on market results.
Economists working in the field of
competition law apply economic concepts to determine if a certain corporate
practice, such as reducing output, raising prices, or limiting innovation, is
harmful to competition. They examine market data in order to identify relevant
product and geographic markets, assess market strength, and assess the
potential competitive results of proposed mergers or other business
arrangements. Economists contribute to the development and implementation of
competition policy, including the development of rules and regulations that
promote competition and discourage anti-competitive behaviors. They advise
competition authorities on how to assess and resolve competition issues, and
they help to enforce competition legislation by offering expert testimony in
court procedures.
EVOLUTION OF COMPETITION ACT,2000
The Monopolies and Restrictive Trade
Practices (MRTP) Act
was enacted in India in 1969 to prevent the concentration of economic power and
to regulate monopolies and restrictive trade practices in the country. However,
the MRTP Act was inadequate to address the challenges of a rapidly changing and
liberalizing economy, the MRTP Act did not adequately address issues such as
abuse of dominance, anti-competitive mergers and acquisitions, and competition
advocacy. Moreover, the Act had a narrow focus on regulating monopolies and
restrictive trade practices, which limited its scope in promoting competition
and consumer welfare.
In response to these challenges, the
Government of India enacted the Competition Act, 2002, which repealed the MRTP.
The Competition Act aims to promote competition and protect consumers by prohibiting
anti-competitive agreements, abuse of dominance, and regulating mergers and
acquisitions that have adverse effects on competition in the market. The
Competition Act also establishes the Competition Commission of India (CCI),
which is responsible for enforcing the provisions of the Act and promoting
competition advocacy in India.
SIGNIFICANCE OF ECONOMICS IN SHAPING
COMPETITION LAW
Economic theory has a significant
impact on the evolution of competition law. Economic theory offers a conceptual
framework for understanding market functioning and firm behaviour, which is
critical in the design and enforcement of competition law. Economic theory also
contributes to the development of competition law rules and remedies. Economic
theory, for example, suggests that a merger may be anticompetitive if it
results in a significant reduction in competition, and that structural remedies
should be implemented. Economic theory also provides guidance on the
appropriate level of enforcement, taking into account the costs and benefits of
competition law enforcement. The impact of competition law enforcement on
market outcomes such as prices, output, and innovation can be assessed using
economic analysis. Economic theory can also be used to assess the effectiveness
of competition law and the need for revisions and improvements to make sure it
continues to serve its intended purpose.
ANALYSING COMPETITION LAW
Competition law in India has been in
existence for over a decade, and since its inception, it has undergone
significant changes. The law is aimed at promoting fair competition and
preventing anti-competitive practices in the market. In this analysis, we will
discuss the economic aspects of Indian competition law, its key provisions, and
its impact on the Indian economy.
Ø Economic aspect of Competition Law
The economic aspect of Indian
competition law is guided by the principles of promoting competition,
innovation, and consumer welfare. It is a key tool for regulating the behavior
of market players and ensuring a level playing field for all. Through its
enforcement, the law aims to prevent market distortions and protect consumers
from the negative impacts of anti-competitive practices such as price fixing,
predatory pricing, and abuse of dominance. In doing so, it promotes the
efficient allocation of resources, encourages innovation, and ultimately
contributes to the development of a dynamic economy in India.
Ø Key Provisions of Competition Law in
India
1. Anti-Competitive agreements
Anti-competitive agreements are
agreements among competitors that prevent, restrict, or distort competition in
a market. These agreements are considered anti-competitive because they harm
other businesses or consumers by reducing competition and increasing prices.
The Competition Act, 2002, decisions, and practices that are anti-competitive.
A particularly serious type of anti-competitive agreement is made by cartels,
which are groups of businesses that collude to fix prices, allocate markets,
and restrict output.
Anti-Competitive Agreement
Prohibition: Section 3 (1) of the Act states that:
“No enterprise shall enter into any
agreement with respect of production, supply, distribution, storage,
acquisition or control of goods/provision of services, which causes or is
likely to cause appreciable adverse effect on competition within India”
Thus, there are two essential
requirements of Anti-Competitive Agreements:
i.
There
should be an agreement.
ii.
Such
agreement must cause or is likely to cause an appreciable adverse effect on
competition in a relevant market in India.
The relevant market may be a
geographical or the market of a product.
A relevant market is a market in
which a particular product or service is sold, and it is the intersection of a
relevant product market and a relevant geographic market.
The relevant product market is the
market for a specific product or group of products, whereas the relevant
geographic market is the area in which the firms involved, supply products
or services and where competition conditions are consistent. The geographic
market is a region in which the conditions of competition for the product in
question are the same for all dealers. The relevant global market considers the
location of the relevant company as well as the type of the relevant product,
and the most essential factor in defining a geographic market is the
homogeneity of competitive parameters across geographical areas. Geographic
marketplaces vary in size and definition, and they can be regions, countries,
and population density.
Section 3 mentions the term “Appreciable
Adverse Effect on Competition” (AAEC). AAEC is a phenomenon which is
observed when the provisions of the Act are contravened to negatively affect
the market players and healthy competition in market. Sub clause (3) also
mentions determining factors while having presumption of the fact that AAEC has
been caused. This presumption can be made if the agreement in question or a
mutual or multilateral decision taken between more than one market players,
leads to any of the four mentioned factors under sub clause (3)[1]
TYPES OF ANTI-COMPETITIVE AGREEMENTS
Section 2(b)[2] of
the act defines ‘Agreement’ and section 3(3) and 3(4) although not directly but
indirectly discusses two different types of agreements,
i.
Horizontal
Agreements
These are defined under section 3(3)
of the act, Horizontal agreements are agreements between enterprises group of
enterprises, persons or group of persons, engaged in trade of identical or
similar products. Horizontal agreements are entered between two or more
competitors at same level of activity, for example- producers, distributers,
manufacturers. Usually, the essence and purpose of horizontal agreements is to
generate policies regarding production, distribution and price fixation. Also,
such agreements provide a channel for sharing of information which can usually be
price sensitive and may influence the market. Such practices adversely affect
competition by prompting antitrust law violations.
ii.
Vertical
Agreements
Vertical agreements are the
agreements at different stages or different levels of market chain. Franchising
is a form of vertical agreement, where the agreement is for leasing the right
to use a brand’s business model and name by a retailer. Under the Competition
Act 2002, section 3(4) provides for agreements which are entered by entities at
different stages of production chain: The section provides for various types of
vertical agreements under sub clauses (a) to (e).
If AAEC is found to have been or is
likely to have been caused by such agreements, then it would be considered to
be in contravention to section 3(1); i.e. Such agreements shall be considered
as agreements 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.
Apart from this, Section 19(3)[3]
of the Competition Act expressly mentions the factors which the Competition
Commission shall consider while adjudging whether an agreement or an
arrangement has caused or is likely to cause AAEC
Exceptions
In the Competition Act 2002, some
agreements specifically find a mention for being exempted from the purview of
being anti-competitive in nature even if they are likely to cause an AAEC to
the competition. Section 3(4)(i) protects the intellectual property rights of a
person. Indian legal system has certain legislations mentioned under sub
clauses (a) to (f) of section 3(4) (i), which provide for intellectual property
rights. section 3(4)(i) also provides for agreements which are entered for
export related purposes to be kept out of the purview of section3(1) and 3(2)
for being adjudged as anti-competitive.
CASE LAW- FICCI Multiplex
Association of India v United Producers/Distributors Forum and Ors[4]
In the present case, the competition
commission of India imposed a penalty of 1 lakh rupees upon United
producers/distributors forum, The informant alleged that the parties were
enjoying a 100% monopolistic market position for production and distribution of
hindi films in the multiplexes in India. It was alleged briefly that the
concerted action of the said parties resulted in arbitrary price fixation,
against the interests of the multiplex owners. The commission explained the
term cartelization by stating that “Even a single series of meetings or
concerted action with the clear intent to limiting output or fixing prices is
sufficient condition for a cartel”.
Commission ordered a detailed enquiry
of the matter after which it agreed with the observations of the enquiry
regarding the infringement of section 3(3) and section 3(4) of the competition
act 2002, based upon theprinciples enlisted under section 19(3) of the said act
which lays down grounds for presumptionof the fact that an agreement or
arrangement has caused AAEC.
In the view of the commission, noneof
the opposite parties, in their replies, could justify their conduct and
successfully rebut thepresumption imposed upon them. Hence the penalty was levied, and the
association wasordered to be withheld for being engaged in anti competitive
practices.
2. Abuse of dominant position
Abuse of dominant position is a term
used in competition law to refer to a situation where a company with a dominant
market position engages in anti-competitive behavior that harms competition,
consumers, or other market participants. In general, a company is said to have
a dominant position in a market if it has a significant degree of market power,
which allows it to act independently of its competitors, customers, and
suppliers.
Section 4(2) of the Competition Act provides that
there shall be an abuse of a dominant position if an enterprise or a group:
o
directly
or indirectly imposes unfair or discriminatory conditions or prices in the
purchase or sale of goods or services;
o
restricts
or limits production of goods or services in the market; etc.
o
As
per Section 4(2)(c) of Act of the Act, there shall be an abuse of dominant
position if any enterprise indulges in a practice resulting in denial of market
access in any manner.
RELEVANT PRODUCT MARKET AND RELEVANT GEOGRAPHIC MARKET
A relevant product market is one in
which the products are interchangeable in the eyes of consumers, allowing them
to switch from one product to another without incurring major expenses or
trouble. The relevant product market is often determined by elements such as
the physical attributes, intended use, and price of the product. The relevant
geographic market, on the other hand, is the area in which businesses compete
to offer their goods or services. It is determined by characteristics such as
the geographic extent of customer demand, supplier location, the availability
of substitute products or services, and entry or expansion restrictions.
Competition authorities typically
define the relevant product and geographic markets before examining market
shares and competitive circumstances within those markets to determine whether
a company has a dominant position. Once a corporation is determined to have a
dominant position, competition authorities will investigate whether that
position has been exploited. Excessive price, discriminatory treatment of
customers or suppliers, linking or bundling products or services, or predatory
pricing aimed at forcing competitors out of the market are all examples of
abuse of dominance.
Example, a company with a dominant
position in one product market may engage in behavior that affects competition
in a related product market, such as by tying the sale of two products
together. In this case, the relevant product market may need to be defined more
broadly to include both products, in order to assess whether the behavior
constitutes abuse of dominance.
3. Regulations of Combinations
Section 6 of the Competition Act,
2002 deals with
regulation of acquisitions, mergers and amalgamations that may have an adverse
effect on competition within the relevant market in India. Under this section,
any acquisition or merger that exceeds certain financial thresholds or market
share thresholds requires the prior approval of the Competition Commission of
India (CCI).
The financial thresholds are
as follows:
ü The combined assets of the merging or
acquiring firms in India must exceed INR 20 billion, or
ü The combined turnover of the merging
or acquiring firms in India must exceed INR 60 billion.
The market share thresholds
are as follows:
ü The post-merger or acquisition market
share of the combined entity must exceed 25% in the relevant
market in India, or
ü The post-merger or acquisition market
share of the combined entity must exceed 5% in each of the
relevant markets in India.
If a merger or acquisition meets any
of the above thresholds, the parties must notify the CCI of the proposed
transaction and seek its approval before proceeding with the transaction. The
CCI will evaluate the transaction to determine whether it is likely to have an
appreciable adverse effect on competition in India.
Mergers and acquisitions can have a
substantial impact on market competition. They can improve competition and
efficiency in some circumstances, but they may also decrease competition and
establish monopolistic or oligopolistic markets in others. Antitrust laws and
regulations are in place to prevent mergers and acquisitions that would
significantly harm market competition. Authorities may mandate merging
companies to surrender specific assets or take other actions to preserve
competition, such as installing firewalls or safeguards to prevent proprietary
information from being shared between competitors.
Thus, the impacts of mergers and
acquisitions on competition are determined by the market's specific
circumstances, the size and market power of the enterprises involved, and
regulatory actions.
REMEDIES UNDER SECTION 27
Under Section 27[5] of
the Competition Act, 2002, if the Competition Commission finds that any
agreement referred to in Section 3 or action of an enterprise in a dominant
position is in contravention of Section 3 or Section 4, respectively, it may
pass orders to discontinue and not re-enter such anti-competitive agreements.
The Commission may also impose a penalty on each party involved in such an
agreement, which should not be more than 10% of the average of the turnover for
the last three preceding financial years. In addition to these remedies, the
Commission may also pass any other order or direction as it may deem fit.
Section 26 of the Competition Act,
2002, allows the Competition Commission of India (CCI) to ask for the Director
General's investigation in case of "prima facie" violations of the
Act. The result of such an investigation under no circumstance is bound to
influence the final decision. The Competition Act, 2002, has provisions for the
establishment of the Competition Appellate Tribunal (COMPAT), which is an
appellate body that hears appeals against the orders of the Competition
Commission.
GAME THEORY AND COMPETITION LAW
Game theory and competition law are
closely related because game theory can provide a framework for understanding
and analyzing the behavior of firms and markets in the context of competition
law. In India, the Competition Act of 2002 regulates competition and prohibits
anti-competitive agreements, abuse of dominance, and mergers and acquisitions
that have adverse effects on competition in the market. Game theory can be used
to analyze the behavior of firms in such situations and predict the likely
outcomes of different strategies.
For example, game theory can help
to analyze the behavior of firms in a cartel or collusion, where they
agree to fix prices or limit production to maintain their market power. Game
theory models can help to understand the incentives and payoffs for each firm
in such situations and predict the likely outcome of the cartel agreement.
Similarly, game theory can also be used to analyze the behavior of firms
in cases of abuse of dominance, where a dominant firm engages in
anti-competitive practices such as predatory pricing or exclusive dealing. By
modeling the behavior of the dominant firm and its competitors, game theory can
help to predict the likely outcome of such practices on market competition.
FUTURE OF COMPETITION LAW
According to some articles, the
government should use competition law to promote fair competition and prevent
anti-competitive behaviour. Others study the history and economic implications
of Indian competition law. There were numerous investigations into various
sectors in 2023, indicating an active competition law framework. There are also
ongoing discussions about long run India's competition law and proposed changes
that could have far-reaching consequences. Overall, it appears that India's
competition law will continue to change and adapt to shifting market and
economic circumstances.
CONCLUSION
In conclusion, economics and competition
law are closely intertwined, with economics playing a critical role in shaping
the evolution and implementation of competition law. Economics provides a
framework for analyzing the behavior of firms and markets, and competition law
relies heavily on economic theories and principles to identify anti-competitive
practices and promote market efficiency.
The evolution of competition law has
been marked by a gradual shift towards a more economic approach, this has led
to more effective enforcement of competition law and a better understanding of
the impact of antitrust regulation on market outcomes. The significance of
economics in shaping competition law cannot be overstated. Economic theories
are essential for determining the competitive effects of business practices,
and for assessing the potential impact of mergers and acquisitions on market
competition.
The key provisions of competition law
aim to prevent anti-competitive behavior, promote market efficiency and protect
consumers. The future of competition law is likely to be shaped by emerging
technologies and new business models, and will require continued collaboration
between economists, regulators, and policymakers.
REFERENCES
1. Competition Act, 2000
2. Economic analysis of law- An Indian Perspective,
Lexis Nexis
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:
[2] “agreement” includes any
arrangement or understanding or action in concert,
(i)
whether or not, such arrangement, understanding or action is formal or in
writing; or
(ii)
whether or not such arrangement, understanding or action is intended to be
enforceable by legal proceedings;
b) driving existing
competitors out of the market;
c) foreclosure of competition by hindering
entry into the market;
d) accrual of benefits to consumers;
e) improvements in production or distribution
of goods or provision of services;
f)
promotion
of technical, scientific and economic development by means of production or
distribution of goods or provision of services.
[4] FICCI Multiplex Association of
India v United Producers/Distributors Forum and Ors , 25th May, 2011
[5] Orders by Commission after inquiry
into agreements or abuse of dominant position., Where after inquiry the
Commission finds that any agreement referred to in section 3 or action of an
enterprise in a dominant position, is in contravention of section 3 or section
4, as the case may be, it may pass all or any of the following orders, namely-
(a)
direct to discontinue and not to re-enter such agreement or discontinue such
abuse of dominant position, as the case may be;
(b)
impose such penalty, as it may deem fit
(c)
award compensation to parties according to section 34;
(d)
direct that the agreements shall stand modified to the extent and in the manner
as may be specified in the order
(e)
direct the enterprises to abide by such other orders as the Commission may pass
and comply with the directions
(f)
recommend to the Central Government for the division of an enterprise enjoying
dominant position;
(g)
pass such other order as it may deem fit.
Article Information
COMPETITION LAW AND ECONOMIC THEORY
Authors: SHUBHANGI SHARMA
- Journal IJLRA
- ISSN 2582-6433
- Published 2023/04/21
- Volume 2
- Issue 7
About Journal
International Journal for Legal Research and Analysis
- Abbreviation IJLRA
- ISSN 2582-6433
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