Decoding Anti-Competitive Agreements
Anti-competitive agreements are collaborations among market forces that negatively impact market competition. These agreements weaken fair competition in the market by implementing various restrictive practices such as creating entry barriers for new businesses, fixing prices, limiting or controlling production and supply, or dividing the markets amongst competitors. These agreements and restrictive practices have detrimental effects on consumers, which forces them to pay higher prices or reduces their choices in the market. Stifling competition disrupts the natural balance of the market, which in turn creates an inefficient and unfair market environment that benefits the market entities.
The Competition Act 2002 under Section 3 prohibits anti-competitive agreements and broadly categorizes them into two heads: Horizontal Agreements and Vertical Agreements. These agreements are classified based on their nature and the effect they have on market competition. According to the Competition Act, any agreement entered between associations, enterprises, or individuals that has an Appreciable Adverse Effect on Competition (AAEC) within India falls under the category of anti-competitive agreements and is, therefore, prohibited. By restricting such agreements, the main aim of the Act is to maintain and promote healthy competition and protect consumers affected by such collaborations.
Horizontal Agreement: Competitors on the Same Level
Section 3(3) of the Competition Act 2002 describes Horizontal agreements as collaborative arrangements or understandings between entities operating at the same stage of production or supply chain. These agreements are formed when competitors within the same market sector coordinate their activities to manipulate or control the market dynamics in their favor. The Competition Commission of India (CCI) closely monitors such arrangements as they involve the collaboration of direct competitors. This heightened vigilance is essential as horizontal agreements commonly result in anti-competitive behavior such as price manipulation, dividing the markets, or collusion in bidding processes.
Types of Horizontal Agreements
Horizontal agreements that adversely affect market competition are divided into four categories:
Price Fixing: These are agreements made between direct competitors to fix or control the prices at which they sell their products or services. Such price fixing activities eliminate natural competition in the market which leads to artificially inflated prices, eventually affecting consumers.
Supply Control: These agreements are entered into when competitors agree to deliberately restrict, limit or control, the production and distribution of their products, creating scarcity in the market, which ultimately leads to artificial inflation of demand. Such types of agreements prevent innovation, reduces options for consumers and hikes up the prices excessively creating an unstable market.
Market Allocation: Agreements between competitors to divide and allocate the market amongst themselves, either geographically, based on product type or according to the customer base is another way to drive competition out of the market. After entering into such agreements, competitors operate exclusively out of their allocated areas, agreeing not to compete, which ultimately restricts customer choice and interferes with fair competition.
Bid Rigging: Agreements between competitors where they conspire to manipulate the results of auctions or tenders by pre-arranging who will win the bid or by creating a facade of competitive bidding while controlling the actual outcome of the bid behind the scenes. Such agreements undermine transparency and fairness in the bidding process, increase the cost for purchasers, specifically government bodies and public institutions and restrict fair competition.
It is presumed by law that these horizontal agreements have an AAEC without requiring additional proof. However, joint ventures that aim at achieving specific goals and genuinely improve efficiency and enhance competition in the market are exempt from such presumptions.
Vertical Agreements: Competitors Across Different Levels
Section 3(4) of the Competition Act 2002 defines Vertical Agreements as arrangements formed between entities or parties that operate at different levels of production, distribution, or supply chain. These agreements are entered into by entities such as manufacturers, distributors, wholesalers, or retailers. Unlike Horizontal agreements, which involve competitors on the same level within the same market segment, vertical agreements are made when different enterprises from various levels of the supply chain collaborate to control the production, distribution or sale of their products and services in the market.
Vertical Agreements are not automatically deemed anti-competitive. Instead, they are evaluated by using the "rule of reason" which analyses their potential drawbacks against their probable benefits. While such agreements can be favourable for the market by boosting the supply chain efficiency, reducing costs, and enhancing market coordination, it can also have AAEC in the market by restricting competition.
Rule of reason is a legal mechanism used to determine whether an agreement is anti-competitive in nature by analyzing its impact on market competition. Both the positive and negative effects of the agreement are assessed deeply to identify whether such an agreement will increase or suppress competition in the market. The assessment is dependent on the details of each case, the marketplace, active competition in the market or any current or possible restrictions the agreement may inflict upon the market. The evaluation under the rule of reason ensures that such agreements are not presumed to be anti-competitive but are classified based on their actual impact on market competition.
Types of Vertical Agreements
There are various types of vertical agreements recognized by the Competition Act 2002 that adversely affect market competition:
Tie-in Arrangements: Such an arrangement occurs when a seller imposes a condition on the sale of one product (tying product), only allowing its purchase when the buyer agrees to also buy another product (tied product) along with it. Such agreements reduce choices for the buyers, ultimately decreasing competition in the market.
Exclusive Supply Agreement: In such types of agreements, a buyer agrees to exclusively purchase goods and services from a specific supplier and the supplier also agrees to exclusively supply its goods and services to the buyer. This limits opportunities for the buyer to purchase similar products from competitive suppliers in the market, which affects competition.
Exclusive Distribution Agreement: Such agreements occur when a supplier gives exclusive rights to sell its products or services to a distributor in a particular geographical area, and the distributors, in return, agree not to distribute other competitive products. These agreements are only considered illegal if they have AAEC in the market.
Refusal to Deal: This occurs when a leading company in the market refuses to supply its products or services to specific distributors, in order to eliminate competitors from entering the market or reducing market competition overall.
Resale Price Maintenance (RPM): It is a type of arrangement where a manufacturer sets minimum prices at which the retailers can sell their products. The retailers cannot sell the products lower than the price set by the manufacturer or supplier if they want to continue dealing with the manufacturer. This prevents competitive prices in the market ultimately affecting the consumers.
Section 3(5) of the Act lays down a few exceptions to the restrictions imposed on vertical agreements. It states that any vertical agreement will not be considered anti-competitive if they are made to prevent violation of an individual or entity's proprietary rights and to impose reasonable restrictions to protect such rights conferred upon them under the Copyright Act,1957, the Patents Act, 1970, The Trade and Merchandise Marks Act, 1958, or the Trade Marks Act, 1999, The Geographical Indications of Goods Act, 1999, The Designs Act, 2000 and The Semi-Conductor Integrated Circuits Layout-Designs Act, 2000.
Insights
Anti-competitive agreements, be it horizontal or vertical, weaken fair competition and consumer welfare in the market. While horizontal agreements are termed anti-competitive right from their origin, vertical agreements on the other hand, are not per say anti-competitive. They need to undergo the "rule of reason" assessment to be classified as anti-competitive agreements. These anti-competitive practices, if not monitored regularly, can have a negative impact on progressive markets and destroy competition completely which ultimately leaves the consumers with restricted choices and exploits them.
Market entities should be cautious when entering into agreements and should carefully structure their collaboration in a way that it falls within the boundaries of competition law. Vigilance and commitments to ethical business practices not only protect the entities from facing penalties, but also ensures their long-term sustainability in a competitive market.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
