MODULE 1

Key Definition- Agreement, Enterprises, Persons, Relevant

Market, Consumer, Goods, Services

1. Agreement: In legal and business contexts, an agreement is a mutual

understanding or arrangement between two or more parties, which is
intended to be enforceable by law. It can be written, verbal, or implied and
outlines the terms and conditions of the relationship or transaction.

2. Enterprises: These are organizations or businesses engaged in

commercial, industrial, or professional activities. An enterprise can be a
sole proprietorship, partnership, corporation, or any other form of
business entity.

3. Persons: In a legal or business context, "persons" refers to individuals

or entities (such as companies or organizations) that have legal rights and
responsibilities. In the context of competition law, "persons" often includes
both natural persons (individuals) and legal persons (entities).

4. Relevant Market: This is the market in which the products or services

of a particular company or entity compete. It includes the product market
(the range of products or services) and the geographic market (the area
where competition occurs). Defining the relevant market is crucial for
analyzing competition and market power.

5. Consumer: A consumer is an individual or entity that purchases goods

or services for personal use, rather than for resale or commercial
purposes. Consumers are the end users of products or services and their
preferences and behaviors can influence market dynamics.

6. Goods: These are tangible products that can be bought or sold. Goods
are physical items that satisfy human wants or needs, such as clothing,
electronics, or food items.

7. Services: Unlike goods, services are intangible and involve the

performance of tasks or activities for the benefit of another person or
organization. Examples include consulting, repair work, healthcare, and
education.

8. Trade: The exchange of goods and services between individuals or

entities. It can occur on a domestic (within a country) or international
(between countries) level. Trade involves buying, selling, and distributing
products and services and is a fundamental aspect of economic activity.
Anti-Competitive Agreements (Section 3 of the Competition Act,
2002)

The term "anti-competitive agreements" refers to arrangements between

businesses that restrict competition in violation of competition laws. In the
context of the **Competition Act, 2002** of India, which is the primary
legislation governing competition law in India, these agreements are
addressed under Section 3

1. Definition and Scope:

- Section 3 of the Act prohibits any agreement that causes or is likely to

cause an appreciable adverse effect on competition in India. This includes
both horizontal agreements (between competitors) and vertical
agreements (between entities at different levels of the supply chain).

2. Horizontal Agreements:

- These are agreements between competitors operating at the same

level of the market, such as price-fixing, output restriction, market-
sharing, or bid-rigging. Such agreements are typically deemed to have a
significant negative impact on competition.

3. Vertical Agreements:

- These are agreements between entities at different levels of the supply

chain, such as manufacturers and distributors. While not all vertical
agreements are anti-competitive, certain practices like resale price
maintenance may be considered anti-competitive if they harm
competition.

4. Exemptions:

- Some agreements might be exempt from scrutiny if they contribute to

improving production or distribution of goods or promoting technical or
economic progress, and if they do not eliminate competition in a
substantial way.

5. Regulatory Authority:

- The **Competition Commission of India (CCI)** is the regulatory

authority responsible for investigating and adjudicating matters related to
anti-competitive agreements. The CCI has the power to impose penalties,
direct modifications to agreements, and take other corrective actions.

6. Penalties:
 - Companies found to be engaged in anti-competitive agreements may
face significant penalties. The CCI can impose fines based on a
percentage of the company’s turnover or the profit earned from the anti-
competitive activity.

7. Leniency Program:

- The Act also provides for a leniency program where companies

involved in anti-competitive practices can receive reduced penalties if
they cooperate with the CCI by providing evidence against other
participants.

The **Competition Act, 2002** aims to promote and sustain competition

in the market to benefit consumers, ensure fair market practices, and
enhance economic efficiency. Anti-competitive agreements are a key focus
of this legislation as they can undermine market competition and harm
consumers.

Horizontal and Vertical Agreement

Horizontal Agreements

Definition: Horizontal agreements are arrangements between

competitors operating at the same level of the market, such as between
manufacturers, wholesalers, or retailers.

Examples:

- Price-Fixing: Competitors agree to set prices at a certain level, which

can lead to higher prices for consumers.

- Market Sharing: Competitors divide markets among themselves by

geographical area, customer base, or product line to avoid competition.

- Output Restriction: Competitors agree to limit the production or supply

of goods or services, which can lead to reduced market supply and higher
prices.

- Bid-Rigging: Competitors collude to fix the outcomes of bids or tenders,

undermining the competitive bidding process.

Legal Status:

- Per Se Illegal: Horizontal agreements that significantly reduce

competition are generally deemed to have an "appreciable adverse effect
on competition" and are considered anti-competitive. They are usually
prohibited under Section 3(3) of the Competition Act, 2002, without the
need for a detailed market analysis.

- Exceptions: Such agreements may be exempt if they contribute to

improving production or distribution, or promoting technical or economic
progress, and do not eliminate competition substantially.

Regulatory Focus:

- The Competition Commission of India (CCI) scrutinizes these

agreements closely due to their potential to harm competition and
consumer welfare directly.

Vertical Agreements

Definition: Vertical agreements are arrangements between entities

operating at different levels of the supply chain, such as between
manufacturers and distributors or wholesalers and retailers.

Examples:

- Resale Price Maintenance (RPM): A manufacturer sets the minimum

price at which a distributor or retailer must sell its products.

- Exclusive Distribution Agreements: A manufacturer agrees to supply

goods only to a specific distributor or retailer, potentially limiting the
product’s availability through other channels.

- Tie-in Sales: A seller requires buyers to purchase a secondary product

or service along with the primary product.

Legal Status:

- Rule of Reason: Vertical agreements are not automatically considered

anti-competitive. They are evaluated based on their actual or potential
effects on competition. If the agreement leads to significant anti-
competitive effects, it may be prohibited under Section 3(4) of the Act.

- Assessment Criteria: The CCI assesses these agreements based on

factors such as market share, market power of the parties involved, and
the specific effects on competition in the relevant market.

Regulatory Focus:

- The CCI examines vertical agreements to determine whether they

enhance efficiency and benefit consumers or whether they restrict
competition and harm market dynamics.

Key Sections of the Competition Act, 2002:

- **Section 3(3)**: Prohibits horizontal agreements that have an
appreciable adverse effect on competition.

- **Section 3(4)**: Prohibits vertical agreements that cause an appreciable

adverse effect on competition.

- **Section 19(3)**: Outlines the factors to be considered by the CCI when

assessing the impact of an agreement on competition.

In summary, the **Competition Act, 2002** distinguishes between

horizontal and vertical agreements based on the nature of the parties
involved and their impact on competition. Horizontal agreements are often
viewed as more likely to harm competition directly and are thus more
strictly regulated. Vertical agreements are assessed on a case-by-case
basis to determine their impact on market competition.

Rule of Per se and Reason

In the context of the **Competition Act, 2002** of India, the concepts of

**"Per se"** and **"Rule of Reason"** are used to evaluate the legality of
different types of agreements and practices based on their impact on
competition. Here’s a breakdown of these concepts:

Per Se Rule

Definition:

- The "Per se" rule implies that certain types of agreements are deemed
anti-competitive without the need for a detailed analysis of their actual
effects on the market. The agreement is considered harmful to
competition by its very nature.

Application under the Competition Act, 2002:

- **Horizontal Agreements**: Section 3(3) of the Act specifies that

certain horizontal agreements between competitors are considered anti-
competitive per se. These include:

- **Price-Fixing**: Agreements to fix prices at a certain level.

- **Output Restriction**: Agreements to limit production or supply.

- **Market Sharing**: Agreements to divide markets or customers.

- **Bid-Rigging**: Agreements to rig bids or tenders.

- **Legal Implications**: Such agreements are prohibited outright. They

are presumed to have an appreciable adverse effect on competition, and
parties involved cannot justify them based on their potential benefits or
efficiencies.

**Reasoning**:

- These types of agreements are generally viewed as having a substantial

and direct negative impact on competition and consumer welfare. As a
result, the law does not require a detailed examination of their effects;
their very nature is sufficient to deem them illegal.

**Rule of Reason**

**Definition**:

- The **"Rule of Reason"** involves a more detailed assessment of the

actual effects of an agreement or practice on competition in the market.
Instead of being deemed illegal per se, these agreements are evaluated
based on their context and impact.

**Application under the Competition Act, 2002**:

- **Vertical Agreements**: Section 3(4) of the Act deals with vertical

agreements, which are evaluated under the Rule of Reason. These
agreements are:

- **Resale Price Maintenance**: Where a manufacturer imposes

minimum resale prices.

- **Exclusive Distribution**: Where a manufacturer or supplier

restricts distribution to certain distributors or retailers.

- **Tie-in Sales**: Where a seller requires buyers to purchase additional

products or services.

- **Legal Implications**: The CCI assesses whether the vertical

agreement has an appreciable adverse effect on competition. Factors
considered include:

- **Market Share**: The relative market shares of the parties involved.

- **Market Power**: The ability of the parties to control prices or

exclude competitors.

- **Effects on Competition**: Whether the agreement enhances or

restricts competition, benefits consumers, or promotes efficiency.

**Reasoning**:

- Vertical agreements are not automatically deemed illegal because they

can have varying effects on competition. For example, they may improve
market efficiency or benefit consumers by promoting distribution or
innovation. Therefore, a detailed analysis is required to determine their
actual impact.

### **Summary**

- **Per Se Rule**: Applied to horizontal agreements that are inherently

anti-competitive, such as price-fixing and market-sharing. These
agreements are prohibited without the need for detailed market analysis.

- **Rule of Reason**: Applied to vertical agreements where the potential

anti-competitive effects are assessed based on their specific context and
impact. The CCI evaluates whether these agreements harm or benefit
competition and consumer welfare.

Both rules are designed to balance the need to prevent anti-competitive

practices while allowing beneficial agreements that enhance market
efficiency and consumer welfare.

Factors causing Adverse effect on competition (AAEC) in India

Under the **Competition Act, 2002** of India, an **"Appreciable Adverse

Effect on Competition" (AAEC)** is a key concept used to assess whether
certain agreements, practices, or conduct restrict or distort competition in
the market. The Act, specifically through Section 19(3), outlines various
factors that the **Competition Commission of India (CCI)** considers when
determining whether an agreement or practice has an AAEC. Here’s an
overview of these factors:

### Factors Causing Adverse Effect on Competition (AAEC)

1. **Creation or Enhancement of Market Power**:

- Market power refers to the ability of a company or group of companies

to control prices, exclude competitors, or reduce the quality of goods or
services. An agreement or conduct that significantly increases or
strengthens market power can lead to an AAEC.

2. **Foreclosure of Competition**:

- If an agreement or practice effectively excludes competitors from the

market or reduces their ability to compete, it can have an adverse effect
on competition. This might include exclusive dealing arrangements that
prevent rivals from accessing necessary inputs or distribution channels.

3. **Harm to Consumer Welfare**:

 - The impact on consumers is a critical consideration. Agreements or
practices that lead to higher prices, reduced choices, lower quality, or less
innovation are likely to have an adverse effect on competition and
consumer welfare.

4. **Reduction in Output or Innovation**:

- Practices or agreements that lead to a reduction in the production or

supply of goods and services can adversely affect competition. Similarly, if
such practices stifle innovation by reducing incentives for companies to
develop new products or improve services, they can be deemed anti-
competitive.

5. **Increase in Prices**:

- If an agreement or practice results in higher prices for consumers, this

can be an indicator of an AAEC. Price increases that are not justified by
increased costs or other legitimate factors may signal a reduction in
competitive pressure.

6. **Restriction on Market Entry**:

- Barriers to entry that prevent new competitors from entering the

market can lead to an AAEC. Agreements or practices that create or
reinforce such barriers, either through exclusive agreements, control over
essential resources, or predatory tactics, are scrutinized.

7. **Elimination or Reduction of Competition**:

- Any agreement or practice that results in the elimination of existing

competition or reduces competitive constraints on the remaining players
can lead to an AAEC. This includes mergers or acquisitions that
significantly reduce the number of competitors in the market.

8. **Effects on Market Dynamics**:

- The overall impact on market dynamics, including changes in

competitive structure, market shares, and competitive behavior, is
assessed. Agreements or practices that disrupt the competitive balance in
the market can be considered to have an AAEC.

### Practical Considerations

- **Evidence and Analysis**: The CCI evaluates these factors based on

available evidence and a thorough analysis of market conditions. This may
include examining market shares, financial data, and competitive
behavior.
- **Balancing Factors**: The CCI also considers any pro-competitive
effects or efficiencies that may result from the agreement or practice. For
example, an agreement that leads to technological advancements or cost
savings may offset some of the adverse effects on competition.

- **Case-by-Case Assessment**: Each case is assessed individually,

considering the specific circumstances and market context. There is no
one-size-fits-all approach, and the determination of AAEC depends on the
particulars of the agreement or practice in question.

In summary, the **Competition Act, 2002** uses a comprehensive

approach to identify and assess factors causing an **Appreciable Adverse
Effect on Competition**. The CCI considers the creation of market power,
harm to consumer welfare, reduction in output and innovation, price
increases, barriers to entry, and overall market dynamics when
determining whether an agreement or practice violates competition law.

Prohibition of Anti-Competitive Agreement/ Cartel/ Bid Rigging

Price Fixing etc

Under the **Competition Act, 2002** of India, anti-competitive

agreements, including cartels, bid rigging, and price fixing, are strictly
prohibited. The Act provides specific provisions for dealing with these
practices to ensure fair competition and protect consumer welfare. Here’s
a detailed look at how these issues are addressed:

### **Prohibition of Anti-Competitive Agreements**

**1. Definition and Scope**:

- The Act prohibits agreements that have an appreciable adverse effect

on competition in India. This includes both horizontal and vertical
agreements.

**2. Section 3 of the Competition Act, 2002**:

- **Section 3(1)**: Prohibits any agreement that causes or is likely to

cause an appreciable adverse effect on competition within India.

- **Section 3(2)**: Provides that agreements between enterprises or

persons in different markets (vertical agreements) are also subject to
scrutiny.

- **Section 3(3)**: Specifically targets horizontal agreements that are

per se anti-competitive.
### **Types of Anti-Competitive Agreements**

**1. **Cartels**:

- **Definition**: A cartel is a formal agreement between competing firms

to control the market by fixing prices, limiting production, dividing
markets, or engaging in other practices that reduce competition.

- **Prohibition**: Cartels are considered per se anti-competitive under

Section 3(3) of the Act. This means they are prohibited regardless of their
effects or justifications. Cartels are typically involved in:

- **Price Fixing**: Agreements among competitors to set prices at a

certain level.

- **Output Limitation**: Agreements to restrict the quantity of goods or

services produced or supplied.

- **Market Sharing**: Agreements to divide markets or customers

among competitors.

- **Legal Action**: The **Competition Commission of India (CCI)**

investigates and takes action against cartels. Penalties can include fines,
and the CCI may order the dissolution of the cartel.

**2. **Bid Rigging**:

- **Definition**: Bid rigging involves collusion among bidders to fix the

outcome of a bidding process, usually to ensure that one of the colluding
parties wins the contract at a predetermined price.

- **Types**: This can include:

- **Cover Bidding**: Where some bidders submit intentionally high bids

to ensure that a pre-determined bidder wins.

- **Bid Rotation**: Where bidders agree to take turns winning

contracts.

- **Prohibition**: Bid rigging is treated as a per se violation under

Section 3(3) of the Act, and is subject to strict penalties.

**3. **Price Fixing**:

- **Definition**: Price fixing is an agreement between competitors to set

prices at a certain level, rather than letting competition determine prices.

- **Prohibition**: As with cartels, price fixing is per se illegal under

Section 3(3) of the Act. This prohibition aims to prevent price manipulation
and protect consumers from inflated prices.

### **Investigation and Enforcement**

**1. **Competition Commission of India (CCI)**:

- The CCI is the regulatory authority responsible for enforcing the

Competition Act, 2002. It investigates cases of anti-competitive
agreements, including cartels and bid rigging.

- The CCI can initiate investigations suo motu or based on complaints

filed by individuals or organizations.

**2. **Penalties and Remedies**:

- **Fines**: The CCI can impose significant monetary penalties on

companies involved in anti-competitive agreements. The fines are
calculated based on a percentage of the company’s turnover or the profit
earned from the anti-competitive activity.

- **Cease and Desist Orders**: The CCI can issue orders requiring
companies to cease anti-competitive practices and take corrective
measures.

- **Imposition of Remedies**: The CCI may also impose remedies to

restore competition, such as requiring structural changes or prohibiting
certain practices.

**3. **Leniency Program**:

- The Act provides for a leniency program where companies involved in

anti-competitive practices can receive reduced penalties if they cooperate
with the CCI by providing evidence against other participants. This
encourages whistleblowing and assists in the detection and prosecution of
cartels.

### **Summary**

Under the **Competition Act, 2002**:

- **Anti-Competitive Agreements**: Any agreement that restricts or

distorts competition is prohibited.

- **Cartels**: These are per se illegal and involve collusion among

competitors to fix prices, restrict output, or divide markets.

- **Bid Rigging**: Collusion in bidding processes is prohibited and

treated as a per se violation.

- **Price Fixing**: Agreements to set prices are also per se illegal.

- **Enforcement**: The CCI investigates, enforces, and imposes

penalties for violations.
These provisions are designed to promote fair competition, prevent
market manipulation, and protect consumer interests.