Competition Law
What it is and Why it Matters

Competition law is meant to promote free and fair competition in markets and traces its origins to worker and agriculturalist rebellions in the early 1900s. Where can we situate competition law in the context of our democracy, why is it important, and what role can people play in strengthening it? 

At the Grocery Shop

What is Competition Law?

Most of the world runs on ‘free markets’ where companies fight it out amongst themselves to get people to buy their goods/services. The economic theory of the ‘invisible hand’ in the free market assures us that this push & pull of market forces creates a system where society’s best interests are taken care of.

The invisible hand, however, operates in a particular context– when competition is free and fair. That stops happening when markets become concentrated, i.e. when a few companies account for large percentage of the total market. This can happen by a couple of ways. Companies can collude together by forming cartels and rigging bids. Companies can merge together to become larger, more dominant. It also stops when one company dominates an entire industry (monopoly), or if two companies do (duopoly) or where a handful of companies do (oligopoly).

Once such dominance is established, these entities can start dictating terms which may not be good for you, the consumer. And it’s not just the cost of goods & services that takes a hit– quality, variety and innovation also become casualties of high market concentration. In an increasingly digital world, when your data is voluntarily placed in the hands of BigTech, data privacy concerns also become very real. But you can’t do much about it because no alternatives remain. The ‘invisible hand’ couldn’t do enough to ensure that viable alternatives exist to these companies. What do you do then?

This is where competition law (or antitrust law as it is called in the United States) comes into the picture. This law is made to ensure that healthy competition is maintained and we don’t end up in a situation where a few companies can choose to dictate, say, how much you pay for your internet connection or your coffee. Or even if we do reach that stage, we can do something about it.

 

How did it come about?

The law originated in the United States in the 1890s. You may have heard of the original capitalist billionaires – JD Rockefeller or JP Morgan? They minted an obscene amount of money at the cost of their workers and consumers using something called ‘trusts’, through which shares of stockholders of various companies were transferred to a single set of trustees. This set of trustees would get to coordinate and control everything. So if their business was meeting opposition, they’d simply buy the competitor. Or, they would drive them out of business by forming ‘cartels’ or drive prices down so low that competitors would run out of business. The second approach is known as ‘predatory pricing’, and the loss suffered by low prices is recovered by price hikes when the monopoly is established, because the competition has already been wiped out. Sounds familiar, even today?

This was part of the laissez faire economic policy where the government won’t interfere with the market, and monopolists would justify their behaviour saying that were trying to bolster the nation’s economy. They were dominant, not only in markets but also in the Congress and Senate (through intense lobbying supported by piles of cash) so that they could pass laws that made it easier for them to monopolise. How did this nightmare end?

It ended because the workers rebelled. It ended because the agriculturalists rebelled. It ended because the people saw what was happening around them and decided that enough was enough. At some point, lawmakers had to side-line the lobbyists and respond to the electorate in order to win their elections. Thus was born ‘anti-trust’ law – literally, a law against the trusts. In the early 1900’s, nearly every major industry in the US was being controlled by a single monopolist. Slowly but surely, by the 1930’s, these huge monopolies were dismantled one by one. This engaging history has been captured by Tim Wu in ‘The Curse of Bigness’.

Democrat Senator Amy Klobuchar too recently traced this history in her book, ‘Antitrust: Taking on Monopoly Power from the Gilded Age to the Digital Age’. Her central idea is that ‘political candidates actually used to run and win on the issue of antitrust’. It is only when the idea of ensuring healthy competition in the market caught on in public imagination that the wheels of politics moved.

 

Where is India on this?

When India gained its independence in 1947, its initial policy over business was of control. The Indian economy had to be developed from ground up, and the approach of the government and leading industrialists was of public sector control over key industries. Between the establishment of the Planning Commission and two 5-year plans, a ‘socialist pattern of society’ was sought to be established, with three buckets for industries: (a) strategic (govt. owned); (b) incrementally state owned; and (c) consumer (privatised), kept in check through license raj. There was no ‘free market’ as such, and the government was the monopoliser. War and change of hands at the helm altered the status quo, and Lal Bahadur Shastri as Prime Minister envisioned a larger role for private companies. A detailed history of this is here.

The election of Indira Gandhi in 1967 really turned the tide against private enterprises. The famous incident from 1969 is the Bank Nationalization move, by which 14 private banks were taken over by the government. The move was to open up more credit to the agricultural sector, which was otherwise being cornered by the bigger private players.

The lesser known major event of 1969 was the passage of the heavy-sounding Monopolies and Restrictive Trade Practices (MRTP) Act. The purpose is clear from the title itself: it was meant to end monopolies and put a leash on unfair trade practices. India of the 1970s was still not globalised and with license raj rampant, private companies had limited scope to abuse their market positions. In that backdrop, the MRTP Act did its job but was essentially a toothless tiger: there were no penalties for abusing market positions. ‘Dominance’ was decided by how much part of control of production/supply/distribution the company had in India. Essentially, the MRTP Act had the limited objective of breaking up monopolies.

The economy developed over time, and corporate structures didn’t remain as simple as they were. As India liberalized and globalized, competition within the country and from outside increased and market consolidation was rampant. For this, the MRTP Act didn’t have enough arrows in its quiver to address the hydra-headed issue at hand.

In comes the Competition Act in 2002. Its scope was fundamentally different: to shift focus from curbing monopolies to promoting and sustaining competition in Indian markets and protecting consumer interest. Presently, anti-competitive practices are those that have an ‘appreciable adverse effect on competition’ (abbreviated to ‘AAEC’) within India. The Competition Commission of India (CCI), a quasi-judicial body, is the competition law enforcer in India.

The Act focuses on the following areas, with AAEC being the common thread between them:

  • Anti-competitive Agreement (Section 3)

Two kinds of agreements are illegal: Horizontal (when multiple competitors selling the same goods or services collude) and Vertical (when suppliers or distributors within the same goods or services business collude). Horizontal arrangements cover anti-competitive conduct such as price fixing, coordinating output to control the market, colluding in bids to secure contracts, etc. Vertical arrangements cover conduct through which suppliers control distribution through exclusive arrangements with distributors, ‘tie-in arrangements’ (linking the sale of your goods/services if customers buy some other good/service in a separate relevant market), etc.

  • Abuse of Dominance (Section 4)

A dominant players is prevented from abusing its market power by either restricting competition or by imposing unfair terms and conditions on its customers.

  • Regulation of Combinations (Section 5 & 6)

Mergers, acquisition of shares, etc. (called ‘combinations’) are regulated on the ‘prevention is better than cure’ philosophy. The law requires mandatory filings with CCI when certain thresholds involving the propose combination are met. This is essentially a preventive measure against the proliferation of monopolies.

[Two simple explainers – here and here- talk about these concepts in a little more detail. CCI makes strident efforts to make such concepts more accessible for a non-specialist through publication of explainer booklets.]

The CCI is an empowered and well-funded body equipped with the power to prohibit mergers, levy penalties for contravention of its orders, divide dominant enterprises and even power to order demerger of merged/amalgamated companies, if so required. Basically, it has the law’s sanction to tackle on powerful companies with the mandate of ensuring fair competition. That said, the law in its present form faces many challenges with companies getting smarter about skirting the law. BigTech throws up challenges that the law didn’t even contemplate at the time of drafting. We will be addressing some of these emerging concerns in later articles and discussions.

 

Why should I care?

Because it directly affects you. Maybe not today, though in some cases even today, but definitely sometime.

The Competition Act is not simply a consumer welfare legislation. Looking at it through that lens severely restricts the scope of its operation and goes against the intent of its framers. It is a broader legislation meant to keep competition in the markets alive and kicking, so that the ‘invisible hand’ can do its job better. The stakeholders in this process are also not just the consumers of the final product, but the workers, suppliers, distributors– up and down the entire chain. The process through which those really low prices are offered to you is important because a dominant company may provide you the cheapest option in every category of a product today, but in doing so, it may be using anticompetitive practices which causes the competition to die out. When that monopoly is established, even assuming it continues with the low prices (which is a big assumption), it may hollow out the quality. Also, in the process, variety and innovation may well die out because the company won’t need to innovate in order to maintain its dominance, especially if the entry barriers into the market are high. Today’s limited enjoyment will be at the cost of a fairer tomorrow. Obviously, the near-term end result alone cannot possibly justify an unfair process taken towards that end. Competition law seeks to nip such unfair behaviour in the bud.

What can you do?

The purpose of this article is to introduce competition law into mainstream political discourse. While the law is complex, the purpose it seeks to achieve goes to the very heart of free markets as well as a free and fair democratic process, shielded from private coercion and industrial oligarchies. Our attempt is to simplify the law as it stands and present the issues it needs to address so that you are enabled to ask the right questions of policy makers canvassing for your vote. This cannot be done without your active involvement.

Presently, the role of the general public in competition law enforcement is limited to reporting information about suspected anti-competitive behaviour to the CCI through the process explained here and in this format. This is referred to as information under Section 19(1)(a) of the Competition Act, 2002. The process provides an option for the informant to maintain their confidentiality.

The Secretary of CCI reviews this information and points out defects within 15 days. After correction of defects, the information is put up before the CCI which is expected to decide within 60 days whether on first impression, the information indicates anti-competitive practice. If it is found to be so, an investigation is launched.

There are two limitations in this public engagement: 1) The information can be related only to Section 3 or 4 related matters, and not to mergers/amalgamations; and 2) It costs ₹5,000 for an individual, Hindu undivided family (HUF), NGO, Consumer association, Co-operative Society, or Trust to register a file information with the CCI. The costs are higher if the informant is a company.

We are in the process of sharing more about this law, canvassing for a greater direct role of citizens and also explaining the emergent challenges the law needs to meet. We hope that you partner with us in this endeavour.

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The author is co-founder, Mandate Project and is an advocate based out of New Delhi.