TOPIC: NEED FOR COMPETITION LAW

CONTENTS

1. INTRODUCTION
2. COMPETITION LAW
3. NEED FOR COMPETITION LAW
ANTI-COMPETITIVE AGREEMENTS
ABUSE OF DOMINANT POSITION
ANTI-COMPETITIVE COMBINATIONS
4. CONCLUSION
5. BIBLIOGRAPHY

INTRODUCTION

Competition is a process of economic rivalry between market players to attract customers. These
market players which include multinational companies, domestic companies, wholesalers, retailers etc
adopt both fair and unfair ways to become better than other players in the market. Competition not
only comes from existing players but new entrants to the market can also contest in the market. One
appropriate definition of competition is as follows a situation which ensures that markets always
remain open to potential new entrants and that, enterprises operate under the pressure of competition.
The World Bank has given a definition to competition as a situation in a market in which firms or
sellers independently strive for the buyers patronage in order to achieve a particular business
objective for example profits, sales or market shares

In the period prior to liberalisation, India's annual growth rate was low at around 3.5%, only a few
licenses were given out for important sectors like steel, electrical power, energy and communication,
and these licence owners built up powerful corporate empires. India at that time was a socialistic
economy with excessive government control. Core industries were directly managed by the govt. as
public sector enterprises,and banking and airline industries were nationalised. A huge public sector
emerged and state-owned enterprises made large losses. There was public sector monopoly and
investment in infrastructure was poor.Government ofIndia began the process of privatisation in 1991.
Privatisation means having private ownership, management and control into public sector
undertakings. The purpose of privatisation is to improve the efficiency of public undertakings and to
raise funds for public investment. As a result financial institutions have become more active, working
culture is improving and management is being professionalised, there is improvement in technology,
better investment behaviour of Indian entrepreneurs and companies are aware of the significance of
human capital.The banking, financial services & insurance (BFSI) and airline sectors have become
extremely competitive.

India Report by Astaire Research states: "A Balance of Payments crisis in 1991 pushed the country to
near bankruptcy. In return for an IMF bailout, gold was transferred to London as collateral, the rupee
devalued and economic reforms were forced upon India. That low point was the catalyst required to
transform the economy through badlyneeded reforms to unshackle the economy. Controls started to be
dismantled, tariffs, duties and taxes progressively lowered, state monopolies broken, the economy was
opened to trade and investment, private sector enterprise and competition were encouraged and
globalisation was slowly embraced. The reforms process continues today and is accepted by all
political parties, but the speed is often held hostage by coalition politics and vested interests."

Thus due to an IMF bailout in the year 1991 and its aftermaths, the then closed Indian market was
opened and more entrants were allowed to play in the market. It was the need of the day as Indian
economic growth was stagnating and the consumers were left with no choice than to buy the least
variety of products available. The long wait for a Bajaj scooter or a Premier Padmini car changed as
competition was established by virtue of Liberalisation, Privatisation and Globalisation. So
Competition has forced manufacturers to be innovative and responsive to customer needs.
COMPETITION LAW

Competition Law is one form of law that is specifically intended to shape market conduct; it is also
known as antitrust law. Competition laws are intended to protect the process of competition from
restraints that can impair its functioning and reduce its benefits. Competition law can both contribute
to the efficiency of markets and embed them in society. It can aid efficiency by increasing incentives
to compete and eliminating obstacles to innovation and expansion. 1

It is being increasingly recognised that the markets have an important role to play in any economy. As
the role of the market expands, the role of the state also undergoes a change. In any economic system,
the state can play three roles:

1. as a producer of marketable goods and services,

2. as a producer of public goods and merit goods, and
3. as a regulator of the system.

As the state reduces its role in the production of marketable goods and services and yields to the
market, its role as regulator and facilitator gets enhanced 2. Among other things, the regulatory role
of the state demands action to maintain competitive conditions in the market. Efficiency is associated
with competition and the markets can fulfil their functions efficiently only if they remain competitive.
Legislation is, therefore, required to prevent the degeneration of the markets to a monopolistic or a
near monopolistic situation. Competition Law is a framework of legal provisions designed to maintain
competitive market structures.

NEED FOR COMPETITION LAW

The purpose of competition law is the control in the public interest of the actual or potential market
power of business firms. This power may arise either from the dominant market position of a single
firm or from agreements between a number of firms which have the effect of reducing or eliminating
competition. Inthe European Commissions words 3: Competition is the best stimulant of economic
activity since it guarantees the widest possible freedom of action to all. An active compensation policy
pursued in accordance with the provisions of the Treaties establishing the Communities make it easier
for the supply and demand structures continually to adjust to technological development. Through the
interplay of decentralised decision-making machinery competition enables enterprises continuously to
improve their efficiency, which is the sine qua non for a steady improvement in living standards and
employment prospects within the countries of the community. From this point of view competition is
an essential means for satisfying to a great extent the individual and collective needs of our society.

1 David J Gerber: Global Competition,Law, Markets and Globalisation, Oxford

University Press.

2 Vinod Dhall: Competition Law Today, Concepts, Issues, and the Law in
Practice,Oxford University Press.

3 First Report on Competition Policy, (1971), p.11. cp.n.53

Although the process for competition forces firms to become efficient, and offer a greater choice of
products and services at lower prices and higher quality, these may not be the sole reasons for the
governments to enact competition legislation. Competition law in several countries is based on a
multiple set of values that are neither easily quantifiable nor reduced to a single economic objective.
These values may reflect the societys wishes, culture, history, institutions, and other factors that
cannot nor should necessarily be ignored.

The objectives and scope of competition law-policy tends to vary across countries and overtime. For
instance, in countries such as Canada and New Zealand, the primary objective of the competition
legislation is to maintain and encourage competition with emphasis being placed on the promotion of
economic efficiency. In the United Kingdom, emphasis is placed on public interest-broader concept
than that of competition alone. In the United States, the enforcement of competition laws has
increasingly focussed on the consumer welfare and economic efficiency. In the Economic Union,
priority is given to economic or market integration and prevention of dominance by large firms. In
Germany preserving or ensuring the freedom of individual action and economic freedom are viewed
as being important among the objectives of competition law-policy.4

In India, the objectives of competition Act are ...keeping in view the economic development of the
country...to prevent practices having an adverse effect on competition, to promote and sustain
competition in markets, to protect the interests of consumers and to ensure freedom of trade...

Generally an effective and efficient competition law is needed for various purposes, which includes:

Prohibition of anti-competitive conduct

Liberal international trade policies;
Free movement of all factors of production(labour, capital, etc.) across internal borders;
Removing government regulation that unjustifiably limits competition, e.g., legislated entry
barriers of all kinds, professional licenses, minimum price laws, restrictions on advertising,
etc.;

Conventional competition law prohibits anti-competitive conduct by business enterprises. It prohibits

cartel behaviour, monopolization, anti-competitive mergers, and other anti- competitive practices and
may extend to prohibitions on false advertising and misleading and deceptive conduct.

The Competition Act was enacted in 2002 keeping in view the economic developments that resulted
in opening up of the Indian economy, removals of controls and consequent liberalisation which
required that the Indian economy be enabled to allow competition in the market from within and
outside.

Competition law, almost everywhere, prohibits three kinds of activities, namely anti-competition
agreements,abuse of dominant position, and regulate anti-competitive mergers and acquisitions

ANTI-COMPETITIVE AGREEMENTS

4 Chapter I of the World Bank and OECD A Framework for the Design and
Implementation of Competition Law and Policy (1999)
Anti-competitive agreements between enterprises that restrict competition fall into two categories:
horizontal agreements which are those between enterprises at the same stage of the supply chain
and vertical agreements which are between enterprises at different stages of the supply chain.
Usually it is the horizontal agreements that cause the greatest concern to competition authorities.

A Cartel is a horizontal agreement to fix prices, allocate customers or territories, restrict output or rig
bids. A Cartel is regarded as the most pernicious form of violation of competition law since it
unequivocally damages competition and causes loss to the economy and to the consumers.

ABUSE OF DOMINANT POSITION

The traditional definition of dominance is that it relates to a position of economic strength enjoyed
by an enterprise in the relevant market which enables it to prevent effective competition by affording
it the power to behave independently of competitors and of consumers 5. Thus dominance incorporates
two characteristics: exploitative abuse and exclusionary abuse. The former denotes the ability of
the enterprise to behave independently of customers or competitors, thereby allowing it to exploit
customers and the latter to exclude competitors. An enterprise abuses its dominant position when it
resorts to an anti-competitive practice to maintain or increase its position in the market, especially
when such practice is not a response to the market, and when it has a significant effect on
competition.

However it is important to note that competition can also sow the seed ofits
owndestructioni.e. when encouraged to compete, successful entrepreneurs may achieve positions
where they are able to prevent others from competing and there by damage the process as a whole.
Therefore the primary aim of competition law is to remedy some of the situations where the activities
of one firm or two lead to the breakdown of the free market system, or to prevent such a breakdown
by laying down rules by which businesses can rival with each other.

ANTI-COMPETITIVE COMBINATIONS

Broadly, combination under the Act means acquisition of control, shares, voting rights or assets,
acquisition of control by a person over an enterprise where such person has direct or indirect control
over another enterprise engaged in competing businesses, and mergers and amalgamations
between or amongst enterprises when the combining parties exceed the thresholds set in the Act.
The thresholds are specified in the Act in terms of assets or turnover in India and outside India.

Entering into a combination which causes or is likely to cause an appreciable adverse effect on
competition within the relevant market in India is prohibited and such combination shall be void.

Horizontal combinations are those that are between rivals and are most likely to cause
appreciable adverse effect on competition.

Vertical combinations are those that are between enterprises that are at different stages of the
production chain and are less likely to cause appreciable adverse effect on competition.

Conglomerate combinations are those that are between enterprises not in the same line of business or
in the same relevant market and are least likely to cause appreciable adverse effect on competition.

The combination under the Act is usually expected to take place before it comes into effect with an
idea of preventing a possible anti-competitive behaviour which may adversely affect the
consumers. Combinations likely to have an anti-competitive effect can be permitted after such effects
are removed by modifications.
5 See United Brands and United Brands Continental BV v. Commission of the
European Communities[1978] 1 CMLR 429
Competition Act 2002 seeks to ensure fair competition in India by prohibitingtradepractices
which cause appreciable adverse effect on competition in markets within India and for this purpose
provides for establishment of a quasi-judicial body to be called the competition commission of
India which shall also undertake competition advocacy for creating awareness and imparting training
on competition issues. The act aims at curbing negative aspects of competition through the medium of
CCI. Various other regulators such asSEBI, TRAI, IRDA etc,are present to ensure its implementation.

CONCLUSION

Competition is the backbone of Economy. Lack of competition results in a massof complacency

which leads to poor products that destroy creativity and thus ultimately hold back the progress in the
markets. Competition is necessary for high economic growth and low unemployment. The need
arises because market can suffer from failures and distortions and various players can resort to
anticompetitive activities such as cartels, abuse of dominance which adversely impact economic
efficiency and society welfare. Fierce competition between companies both locally and globally is
like a life ventilator support system of strong and effective markets. It encourages firms to
replenish, rejuvenate and innovate. Competition reduces slack, putting downward pressure on costs
and providing incentives for efficient organization of production. It helps improving quality standards.

Competition is a necessity for every economy to flourish to its highest. But at the
same time competition kills competition. If the competition is not healthy and is followed in an
uncontrolled manner, then it can destroy an economy. Here comes the need and importance of
acompetition law. An effective competition law ensures the fair play of companies in a market place.
It helps the consumers, government and the society as a whole from the adverse effects of unhealthy
competition by prohibiting Anti-competitive practices.

A good competition policy, along with a sound competition law should help infostering competition,
economic efficiency, consumer welfare and freedom of trade. This would enable the government in
meeting the challenges of globalization by increasing competition in local and international markets.

BIBLIOGRAPHY

Vinod dhall, Competition Law Today, Concepts, Issues and the Law in Practice, Oxford
University Press.
T.Ramappa, Competition Law in India, Oxford University Press.
David J Gerber,Global Competition, Law, Markets and Globalisation, Oxford University
Press.

WEBLIOGRAPHY
 Competition Law & Practice in India, Prepared by Competition Commission of India, June
2004
An introduction to Competition Policy and Law, Carl Buik, Senior Advisor, Competition and
Consumer Policies Branch, UNCTAD, 13 April 2010.
When world at large is a single platform for carrying out trade and commerce, the need for
Competition Act 2002, Legal Environment of Business Group assignment report