What is Antitrust law? | Threat of Monopolization and Cartelization in Indian market

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This article is written by Amritesh Panda, student of Symbiosis Law school, Pune 

The Collins English dictionary gives an interpretation of antitrust laws as those laws that are intended to stop large firms taking over their competitors, fixing prices with their competitors, or interfering with free competition in any way. In other words these laws protect the consumer, by promoting Competition Environment and taking actions against the monopolists. It’s derived from the word ‘trust’. A trust was an agreement by which stakeholders in several companies transferred their shares to a single set of trustees.

While competition laws vary from nation to nation, there are certain core provisions underpinning nearly all competition law regimes. These may be classified into three broad categories. The first consists of agreements or concerted practices between otherwise independent competitors that serve to reduce competition between them. The second group of anti-competitive practices stems from the acquisition of a dominant position in a market by a single enterprise. The third group of regulated anti-competitive conduct relates to mergers and acquisitions.

The genesis of Antitrust laws

The history of competition law is usually traced back to the enactment of Sherman Act in 1890 in the US. The act made it illegal for competitors to make agreements with each other that would limit competition. So, for example, they can’t agree to set a price for a product—that’d be price-fixing. The Act also makes it illegal for a business to be a monopoly if that company is cheating or not competing fairly.

India’s antitrust law, The Competition Act, 2002, was fully constituted on March 1, 2009 – replacing the Monopolistic and Restrictive Trade Practices Act of 1969. The Competition Act monitors any economic activity that monopolizes competition within the market; it aims to protect consumers and small enterprises and ensures the freedom of trade. The Act also regulates acquisitions, mergers, and combinations in India.

The Competition Commission of India has also been established by the Central Government, which aims to create and sustain fair competition in the economy that will provide a ‘level playing field’ to the producers and make the markets work for the welfare of the consumers.

Growing Threat of cartelization and monopolization in the Indian market

Monopolization

The dictionary definition of monopoly is “a market situation where one firm, or a group of firms acting in concert, controls the supply of a good or service”. Historically, the economic implication of this has been synonymous with high prices and the restriction of output. The intent and structure of regulation around the world has therefore attempted to mitigate or break up monopolies in an attempt to negate this abusive pricing power.

Competition policy in India is governed by the Competition Act of 2002. This Act establishes the Competition Commission as the arbiter of any activities that may have an “adverse effect on competition in India”. The Act is now inadequate to deal with the changing business environment in telecommunications, technology and e-commerce, and the government’s own role in distorting competition. The same deficiency that plagues the rest of the world, namely a requirement of “dominance” and a test of price “increases” restricts the commission from challenging abuse.

Today, consumer data and behavior is the “asset” around which a monopoly or an oligopoly can exist. Private corporations or the government can abuse this asset by monopolizing it to deliver a range of goods and services. A government may abuse its power to regulate by preferring large domestic corporations over foreign ones, or by interfering in pricing.

How monopolization could affect the consumer/end-user?

The Indian aviation sector is a quintessential example

In the early ’90s, India’s aviation industry, which was then a duopoly between Indian Airlines and Air India, was opened to private enterprise in a bid to democratize air travel. While seven private air operator permits were issued, by 2005, only two airlines—Jet Airways and Air Sahara—had survived the open skies policy.

Fast forward to 2019 and there is a clear indication of where the aviation industry is headed. Nearly three-fourths of the market is dominated by low-cost carriers (LCC), which offer cheap fares. With this enormous market share, the industry becomes prone to price-fixing.

The competition commission of India imposed penalties on three dominant domestic airlines namely jet airways, spice jet, and indigo airlines for inter alia colluding to fix the uniform rate of Fuel Surcharge for cargo transportation. The penalty was imposed at 3% of the average relevant turnover from cargo operations.

The Indian telecom sector

Several years ago, India had one of the world’s most competitive telecom markets, with numerous players vying for business. Now, there is a serious risk of monopoly Or duopoly of jio telecommunication and Bharti Airtel.

It is a major consensus that after the arrival of Jio the telecom sector has witnessed whirlwinds from left, right, and center. Many companies left the Indian telecom market like Telenor, MTS and Aircel and many went bankrupt like reliance telecom. Currently the market is shared by three giant players namely JIO, Bharti Airtel, and Vodafone Idea. But analysts observe that it could soon change to a single-player market.

A monopoly’s potential to raise prices indefinitely is its most critical detriment to consumers. Because it has no industry competition, a monopoly’s price is the market price, and demand is market demand. Even at high prices, customers will not be able to substitute the goods or services with a more affordable alternative.

Some argue that monopolies are beneficial because highly-profitable companies tend to pump more funds into research and development. Because the monopoly is in a dominant position, it can comfortably bear the risks associated with innovation. However, a highly-profitable monopoly also may have little incentive for improvement as long as consumers still demonstrate a need for their current product or service. In comparison, businesses in a competitive market can compete by making changes to existing products and services and lowering prices.

Cartelization

Another pernicious restrictive trade practice that hinders the competition in the free market is cartelization. Collusion among independent firms in the same industry to co-ordinate pricing, production or marketing practices in order to limit competition, maximize market power, and affect market prices is referred to as a “cartel”. Cartels tend to increase the price of goods and services and reduce the choice of consumers thereby leading a setback on the consumer’s rights and choices.

Cartels are prohibited under section 3(1) read with Section 3(3) of the Competition Act, 2020. To establish the existence of a cartel, the CCI must find that competitors had entered into an agreement to fix prices, limit supply, share markets, or rig bids.

Indian markets evidence cartels mainly in the cement, steel, tire sectors at the domestic level and in petrol, soda ash, bulk vitamins etc at the international level. Cartels tend to increase the price of goods and services and reduce the choice of consumers thereby leading a setback on the consumer’s rights and choices.

Cartels diminish social welfare, create allocative inefficiency, modify output and prices. Cartels are harmful in the long run. Engaging in cartels to avoid the rigors of competition can result in the creation of artificial, uneconomic, and unstable industry structures, lower productivity gains or fewer technological improvements and sustained higher prices. Furthermore, the weakening of competition leads to a loss of competitiveness and threatens sustainable employment opportunities

Conclusion

Prime Minister Narendra Modi inter alia spoke about working on fair competition as one of the four pillars to achieve India’s target of a $5 trillion economy.

In order to attain such an ambitious goal, it is clear that the government needs to design and adopt laws and policies that deliver economic democracy and competitiveness. In terms of laws, the government proposed far-reaching amendments to the Competition Act, including critical changes to the scope and functioning of the Competition Commission of India (CCI).

It is hoped that with these proposed changes, the Act will prove to be an effective tool of realizing the dream of making India a $5-trillion economy and protecting the interest of the consumers at large by ensuring healthy competition in the economy, leading to efficiency and sustainable economic growth.

References

[1] American Bar Association Sections of Antitrust Law and International Law and Practice, Report On The Internationalization Of Competition Law Rules: Coordination And convergence 4 (1999).

[2] Peter T. Muchlinski, Multinational Enterprises & The Law 385-86 (2007)

[3] Consumer.ftc.gov

[4] Antitrust-law-India-primer-foreign-companies

[5] https://www.mondaq.com/india/antitrust-eu-competition-/769324/cci-imposes-penalty-on-domestic-airlines-for-price-fixing-in-air-cargo-operations

[6] EU XXXII Report on Competition Policy-2002

[7] Collin dictionary for the definition

[8] Section 3(3) of the Competition Act, 2002

[9]https://globalcompetitionreview.com/insight/the-asia-pacific-antitrust-review-2019/1188992/india-cartels

[10] https://www.forbesindia.com/article/leaderboard/indian-aviation-from-duopoly-to-monopoly/52993/1

[11] image from here

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