Abuse of Dominance under the Indian Competition Regime

Abuse of Dominance under the Indian Competition Regime

1. Introduction
Fairness and level playing fields for all the participants in the markets are absolutely essential for its sustainability and development. When there is perfect competition in the market, the consumer is sovereign, as his welfare is maximised. However, in reality the markets are imperfect and the invisible hands in the Adam Smith theory not always favours the consumer interest. Consequently we require a external regime to maintain contestability and fairness in markets.
Thus all modern competition laws contain specific provisions against anti-competitive and monopolistic behaviour. The Sherman Act, 1890, to which the origin of competition law is traced, contains specific prohibition against monopolisation. Again Article 82 of the EU treaty prohibits abuse of dominance. One of most important objective of The Competition Act, 2002 (hereinafter referred as the Act) like other competition regimes in the world is to detect and prevent abusive conducts by dominant enterprises .
2. Abuse of Dominant Position
Section 4(1) of the Act prohibits abuse of a dominant position by an enterprise or group. In order to completely understand this section, we first need to address the issue what the terms enterprise and group means?
2.1 Enterprise Definition
The Act provides a quite lengthy definition been for the term in the following words Enterprise means a person or a department of the Government, who or which is, or has been, engaged in any activity, relating to the production, storage, supply, distribution, acquisition or control of articles or goods, or the provision of services, of any kind, or in investment, or in the business of acquiring, holding, underwriting or dealing with shares, debentures or other securities of any other body corporate, either directly or through one or more of its units or divisions or subsidiaries, whether such unit or division or subsidiary is located at the same place where the enterprise is located or at a different place or at different places, but does not include any activity of the Government relatable to the sovereign functions of the Government including all activities carried on by the departments of the Central Government dealing with atomic energy, currency, defence and space .
In simple language the term means a person (including an individual and every artificial judicial person) or a government department engaged in any kind of business activity. The definition can be explained using the following diagram

2.2 Group – Definition
On the other hand the term group is defined under the Act to mean two or more enterprises which, directly or indirectly, are in a position to
(i) Exercise twenty-six per cent. or more of the voting rights in the other enterprise; or
(ii) Appoint more than fifty per cent. of the members of the board of directors in the other enterprise; or
(iii) Control the management or affairs of the other enterprise ;
The term group was introduced in the Act by an amendment in 2007, with a view to incorporate the concept of Collective dominance quite prevalent in the west. Under this concept a dominant position need not be held by a single undertaking. Separate undertakings may be found to hold a dominant position together where certain conditions are met. After this amendment the conducts of such undertakings enjoying collective dominance also comes under the purview of section 4 of the Act.
It important to understand that, it is not in itself illegal for an undertaking to be in a dominant position and such a dominant undertaking is entitled to compete on the merits. However, according to many case decided by the courts it is clearly established that the undertaking enjoying a dominant position has a special responsibility not to allow its conduct to impair genuine undistorted competition on the relevant market . In order to successfully establish the claim of abuse of dominant position, three questions need to be answered, viz.-
What is the scope of relevant market for the alleged undertaking?, and
Whether the alleged undertaking enjoys dominance in such relevant market or not?, and finally
Whether the conduct of the alleged undertaking can be considered as abusive or not?
If the answer to the last two questions are in affirmative, the undertaking can be prosecuted for abusing its dominant position, prohibited by section 4 of the Act.
3. Relevant Market
From the point of abuse of dominant position, the first and foremost step is to define the scope of relevant market in which the alleged firm competes. In order to do that the term market has to be understood first. The term market has not been defined under the Act but in common parlance it means the place where sellers and buyers meet and includes the whole mechanism through which exchange of goods and services takes place for consideration. The relevant market for an undertaking is that part of whole market, which can influence or be influenced by the conduct of an undertaking.
It important to understand that relevant market does not exist in abstract; it exists in relation to an undertaking. Basically, the exercise of market definition consists in identifying the effective alternative sources of supply for the customers of the undertakings involved, in terms both of products/services and of geographic location of suppliers. The European Commission’s Notice on the Definition of relevant market for the purposes of Community competition law prescribes three methods for defining relevant market, these methods are

Demand substitution
Under the method of demand substitution, a list of products capable of acting as substitutes for the product in question is prepared. Thereafter, the commission tries to find out whether the consumers of the product in question would switch to other alternatives if the relative price of such product is increased by a hypothetical small but permanent amount, generally in range of 5 % to 10 %. If the increase in relative price result in product substitution then the entire range of alternatives the consumers have relied upon are included in the relevant market.

Supply substitution
The method of Supply substitution may also be taken into account when defining the relevant markets in those situations in which its effects are equivalent to those of demand substitution in terms of effectiveness and immediacy. Under this method all those product substitutes are included in the relevant market, suppliers of which are able to switch production to these substitutes and market them in the short term without incurring significant additional costs or risks in response to small and permanent changes in relative prices. However, under this method if producing alternatives would require significant adjustment to existing tangible and intangible assets, additional investments, strategic decisions or time delays, these alternatives will not be included in the relevant market.

Potential competition
The third source of competitive constraint, potential competition, is not taken into account when defining markets, since the conditions under which potential competition will actually represent an effective competitive constraint depend on the analysis of specific factors and circumstances related to the conditions of entry. If required, this analysis is only carried out at a subsequent stage, in general once the position of the companies involved in the relevant market has already been ascertained, and when such position gives rise to concerns from a competition point of view.

The expression relevant market on the other hand has been defined under section 2(r) and 19 (5) to mean a market which may be determined by the Competition Commission of India (hereinafter referred as the Commission) with reference to either or both
Relevant product market, or
Relevant geographic market.

Thus, the Act defines relevant market as the combination of relevant product and geographic markets. The Supreme Court of United States defines the relevant market as the area of effective competition within which the defendant operates .
It is pertinent to note that it is not mandatory for the commission to consider both the aspect while determining the relevant market. The commission can even consider, either relevant product market or relevant geographic market while defining the relevant market for a firm.
3.1 Relevant Product Market
The expressionrelevant product market has been defined under the Act as market comprising all those products or services which are regarded as interchangeable or substitutable by the consumer, by reason of characteristics of the products or services, their prices and intended use .
Relevant product market thus includes all reasonable substitutable products or services of nearby competitors, to which consumers could turn without compromising substantially with their needs. A good example of this would be the market of toothpastes and tooth powder. Even though they are quite different products but acts as a competitive restrain on each other and thus part of same relevant product market. The Act prescribes certain factors and all or any of them can be considered by the Commission while defining the relevant product market. These factors can be listed as follows
(a) physical characteristics or end-use of goods;
(b) price of goods or service;
(c) consumer preferences;
(d) exclusion of in-house production;
(e) existence of specialised producers;
(f) classification of industrial products.
Hoffman La Roche Case –
In this case, the defendants were seller of inter alia Vitamins C and E. These two products were mainly used for two purposes
Bio- nutritive use or additives to food stuffs, under which both the products performed different functions and could not substitute each other in respect of function.
Technological use, under which their use as anti-oxidant and fermentation agent were interchangeable.
The defendants contested that due to the technological use Vitamins C and E are part of much larger market comprising of other products suitable for the same and the Commission has exaggerated its share in the said market. The court did not agree and held that each of these groups must be placed in separate market, one comprising of vitamins for bio-nutritive use and other vitamins for technological use.
Continental Can Case –
In this case the court applied the supply side substitution while defining relevant market. In this case the defendants contended that the market for light containers for containers for canned meat products, the market for light containers for canned seafood and the market for metal closures for the food packing industry, other than crown corks are different from each other and must be considered separately. The court rejected their contention and held that all these market formed part of one light metal container market and not there different types of market applying the supply side substitution.
The court further observed that In order to be regarded as constituting a distinct market, the products in question must be individualized, not only by the mere fact that they are used for packing certain products, but by particular characteristics of production which make them specifically suitable for that purpose. Consequently, a dominant position on the market for light metal containers for meat and fish cannot be decisive, as long as it has not been proved that competitors from other sectors of the market for light metal containers are not in a position to enter the market, by simple adaption, with sufficient strength to create serious counter weight.
3.2 Relevant Geographic Market
Geographic dimension involves identification of the geographical area within which competition takes place. Relevant geographic markets could be local, national, international or occasionally even global, depending upon the facts in each case. Some factors relevant to geographic dimension are consumption and shipment patterns, transportation costs, perishability and existence of barriers to the shipment of products between adjoining geographic areas. For example, in view of the high transportation costs in cement, the relevant geographical market may be the region close to the manufacturing facility. The Act defines the term relevant geographic market to mean a market comprising the area in which the conditions of competition for
(a) Supply of goods or provision of services, or
(b) Demand of goods or services
are distinctly homogenous, and can be distinguished from the conditions prevailing in the neighbouring areas. The Act also prescribes some factors and any or all of these factors can be considered by the Commission while defining the scope of relevant geographic market, these factors are
(a) regulatory trade barriers;
(b) local specification requirements;
(c) national procurement policies;
(d) adequate distribution facilities;
(e) transport costs;
(f) language;
(g) consumer preferences;
(h) need for secure or regular supplies or rapid after-sales services.
4. Dominant Position
After determining the scope of relevant market the next question which needs to be answered is whether the alleged enterprise or group enjoys dominance in that relevant market? The concept of dominance is broader than economic power over price. It is not the same as economic monopoly, although a monopoly would clearly be dominant . The Act first provide a definition of dominant position and also list some factors, all or any of which can be considered by the Commission while inquiring whether an enterprise enjoys a dominant position or not under section 4.
4.1 Definition
The Act defines dominant position to means a position of strength, enjoyed by an enterprise, in the relevant market, in India, which enables it to
(i) operate independently of competitive forces prevailing in the relevant market; or
(ii) affect its competitors or consumers or the relevant market in its favour.
This definition has two aspects first defines the dominance in terms of ability of an undertaking to conduct its business irrespective of competitive force or restraints in the market and the other aspect defines the dominance in terms of ability of an undertaking to influence the competitors, consumers or relevant market in its economic interests.
As observed in Report of High Level Committee on Competition Policy and Law This definition may perhaps appear to be somewhat ambiguous and to be capable of different interpretations by different judicial authorities. But then, this ambiguity has a justification having regard to the fact that even a firm with a low market share of just 20 per cent with the remaining 80 per cent diffusedly held by a large number of competitors may be in a position to abuse its dominance, while a firm with say 60 per cent market share with the remaining 40 per cent held by a competitor may not be in a position to abuse its dominance because of the key rivalry in the market. Specifying a threshold or an arithmetical figure for defining dominance may either allow real offenders to escape (like in the first example above) or result in unnecessary litigation (like in the second example above). Hence, in a dynamic changing economic environment, a static arithmetical figure to define “dominance” will be an aberration. Hence with such broad definition, the authorities or Tribunals concerned have the freedom to fix errant undertakings and encourage competitive market practices even if there is a large player around.
The European Court of Justice in the case of United Brands case has defined the term dominant position to mean “a position of economic strength enjoyed by an undertaking which enables it to prevent effective competition being maintained on the relevant market by affording it the power to behave to an appreciable extent independently of its competitors, its customers and ultimately of the consumers. This definition has been reiterated and relied upon in a number of subsequent decisions.
4.2 Factors for Determination of Dominant Position
While assessing the dominance of an undertaking it is important to consider all the constraints present in the market, which hinders its ability to act independently and affect the relevant market in its favour. The Act lists some factors, all or any of which can be considered by the Commission while inquiring whether an enterprise enjoys a dominant position or not. These factors help the Commission to precisely and accurately assess the dominance of alleged undertaking under the relevant market by providing an objective point of view. These factors are
(a) market share of the enterprise;
(b) size and resources of the enterprise;
(c) size and importance of the competitors;
(d) economic power of the enterprise including commercial advantages over competitors;
(e) vertical integration of the enterprises or sale or service network of such enterprises;
(f) dependence of consumers on the enterprise;
(g) monopoly or dominant position whether acquired as a result of any statute or by virtue of being a Government company or a public sector undertaking or otherwise;
(h) entry barriers including barriers such as regulatory barriers, financial risk, high capital cost of entry, marketing entry barriers, technical entry barriers, economies of scale, high cost of substitutable goods or service for consumers;
(i) countervailing buying power;
(j) market structure and size of market;
(k) social obligations and social costs;
(l) relative advantage, by way of the contribution to the economic development, by the enterprise enjoying a dominant position having or likely to have an appreciable adverse effect on competition;
(m) any other factor which the Commission may consider relevant for the inquiry.
These factors can be classified into three broad categories:
Ability to influence the relevant market, and
Features and structure of market, and
Discretionary factor
The first category includes the factors from clause (a) to (h). This category objectively analyse inter alia, the market power of an undertaking, its ability to influence the market and restrain the competition. On the other hand the factors under clause (i) to (l) fall in the second category. In order to completely understand the effects of an alleged dominant undertaking on the relevant market, it is necessary to understand the conditions and structure of the relevant market in which the dominant undertaking operates, the second category seeks to do the same. The last but certainly not least, third category which consists of only clause (m) seeks to provide certain extent of discretionary power to the commission, to include certain factors relevant for assessing dominance of an undertaking but not included in the preceding clauses.
It is pertinent to note that dominance of an undertaking in relevant market is a question of fact and selection of above mentioned factors for assessing dominance will depends solely upon facts and circumstances of each case. Some factors quite relevant in a case can be futile in other.
5. Abusive Conduct
After the dominance has been established the next question which needs to be answered is whether the conducts of the alleged enterprise or group can be considered as abusive? The Act places a special responsibility on any enterprise which enjoys dominant position not to conduct its business in a manner prohibited under the section 4(2).
In a layman language abusive conducts includes all the acts of dominant undertaking which are a deviation from normal practice and result in hindering the maintenance or development of the level of competition still existing in the market. It must be noted that the acts prohibited under the section are not punishable per se, as the same acts will not amount to contravention of section 4 if committed by a firm not dominant in the relevant market. It also pertinent to point that list of acts under section 4(2) is exhaustive in nature and no action can be taken if the conduct of an undertaking does not fall within the subsection. It is not necessary to show that the abuse was committed in the market which the undertaking dominates. In certain circumstances, prohibition under section 4 may apply where an undertaking that is dominant in one market commits an abuse in a different but closely associated market. This principle was set out by the European Court in the case of Tetra Pak II.
The concept of abuse is an objective concept relating to the behaviour of an undertaking in a dominant position which is such as to influence the structure of a market where , as a result of the very presence of the undertaking in question , the degree of competition is weakened and which , through recourse to methods different from those which condition normal competition in products or services on the basis of the transactions of commercial operators , has the effect of hindering the maintenance of the degree of competition still existing in the market or the growth of that competition.
Raghavan Committe Report provided some key questions for adjudication on abuse of dominance, and include :
How will the practice harm competition ?
Will it deter or prevent entry ?
Will it reduce incentives of the firm and its rivals to compete Aggressively ?
Will it provide the dominant firm with an additional capacity to raise prices ?
Will it prevent investments in research and innovation ?
Do consumers benefit from lower prices and/or greater product and service availability ?
Although there is no classification of abusive conducts under the Act, but under the existing competition laws across the world, abuse of dominant position are generally categorised under the following heads
The first relates to actions which exploits customers or suppliers (for example excessively high prices, restricting quantities etc.), or
The second relates to conducts which amounts to exclusionary behaviour and protection of dominant position, because it removes or weakens competition from existing competitors, or establishes or strengthens entry barriers, thereby removing or weakening potential competition.
Under the Act following conducts of a dominant enterprise or group are considered abusive –
Imposing unfair or discriminatory price or condition in purchase or sale
Predatory Pricing
Limiting production, technical or scientific development to the prejudice of consumers
Denial of market access in any manner
Conclusion of contract subject to supplementary obligations, which by their nature or according to commercial usage have no connection with the subject of such contracts.
Use of position in one relevant market to enter into or protect other relevant market.
5.1 Discriminatory or Unfair Pricing and Conditions of Sale
The term unfair has not been defined under the Act, but in common parlance means something which is not fair and cant be justified. The Act prohibits unfair pricing and conditions in sale. The European Court of Justice in the United Brands case held that charging excessive prices which has no reasonable relation to the economic value of the product supplied is unfair pricing.
The Act also provides that when some enterprises or consumers are given some favourable treatment without any proper justifications, it is illegal and anti-competitive. This type of discriminatory behaviour can be of any form like price, terms of sale, quality, quantity, and may in some circumstances extend to refusal to deal.
5.2 Predatory Pricing
The traditional theory of predatory pricing is that the predator, already a dominant firm sets prices so low for a sufficient period of time that its competitors leave the market and others are deterred from entering and the losses incurred due to the low prices, which like any investment, will be recovered by future gains. This theory was later supplemented by the argument that the benefits of predation were not limited to the market where it predated .
Predatory Pricing has not been mentioned specifically in the competition laws of most of the jurisdictions across the world as amounting toan abuse of dominance. However, under the Act, predatory pricing of goods or services has been expressly mentioned as amounting to an abuse of dominance if engaged in by a dominant enterprise. Distinguishing predatory behaviour from legitimate competition is difficult. The distinction between low prices which result from predatory behaviour and low prices which result from legitimate competitive behaviour is often very thim and not easily ascertainable .
The term has been defined under the Act to mean the sale of goods or provision of services, at a price which is below the cost, as may be determined by regulations, of production of the goods or provision of services, with a view to reduce competition or eliminate the competitors. So there are two essential conditions for establishing predatory pricing
Sale of goods or provision of services, at a price which is below the cost, and
With an intention to reduce competition or eliminate the competitors.
Now this definition does not prescribe any specific type of cost per se but leave it to be determined by regulations made under the Act. This issue is addressed by the Competition Commission of India (Determination of Cost of Production) Regulations, 2009. The regulation provided that Cost in the Explanation to section 4 of the Act shall, generally, be taken as average variable cost , as a proxy for marginal cost . Provided that in specific cases, for reasons to be recorded in writing, the Commission may, depending on the nature of the industry, market and technology used, consider any other relevant cost concept such as avoidable cost, long run average incremental cost, market value.
NSE Case
In this case the Commission acting on a complaint by the MCX Stock Exchange (hereinafter referred to MCX-SX), ordered an investigation into the alleged misuse of dominant position by the National Stock Exchange(hereinafter referred to as NSE), the country largest bourse. The investigation, carried out by a director general (DG) of CCI, has found that NSE violated Section 4(2)( a)( ii), and Section 4(2)( e) read with 4(1) of the Act.
The MCX-SX had alleged that NSE was indulging in unfair practices or predatory pricing by waiving the transaction fee on currency derivatives. The MCX-SX contended that NSE has waived its transaction fee on currency derivatives and instead, charges a fee of Rs 2/ Lakh on the turnover in its derivatives segment. Due to NSE waiver MCX-SX is also unable to levy such a fee leading to significant losses and new investors are not likely to be attracted in the market of currency derivatives.
NSE, in its reply to the commission, contended that the intention to eliminate competition is an important ingredient of predatory pricing, and the fee waiver in the new currency derivative segment, referred to in the allegation, is in the nature of introductory pricing with no intention to eliminate competition .
The commission in its decision observed that based on evidence and after considering the arguments of both information provider (MCX-SX ) and NSE, it is proved beyond reasonable doubt that NSE has the design of eliminating competition, the commission said in its concluding remarks . The NSE had used every tactics to harm competition by using its dominant position in the relevant market (stock exchange space) and has also protected its dominant position in CD (currency derivatives) segment by using its monopoly revenues from other segments .
5.3 Limiting Production, Technical or Scientific Development
Under the Act a conduct of an enterprise which results in limiting production, technical or scientific development to the prejudice of consumers is prohibited.
5.4 Denial of Market Access
A dominant undertaking with a view to exclude competition from the market and conducting its business in a way other than legitimate competition on the merits is a violation of section 4 of Act. In the case of United States v. Griffith et al , four affiliated corporations operating motion picture theatres in numerous towns and having no competition in some of these towns used their buying power to obtain exclusive privileges from the film distributors which prevented the competitors from obtaining enough first or second run films to operate successfully. Subsequently the Supreme Court of the United States held it unlawful for the operator of a circuit of motion picture theatres to use his monopoly in towns he has no competitors to obtain exclusive rights to films for towns in which he has competitors.
5.5 Supplementary Obligations having no Connection with the Subject Matter of Contracts
Under the Act forcing supplementary obligations by their nature or commercial usage have no connection with the subject matter of the contract are anti-competitive prohibited by section 4 of the Act.
In the case of Jefferson Parish Hospital v Hyde the Supreme Court of United States observed that tying arrangements need only be condemned if they restrain competition on the merits by forcing purchasers that would not otherwise be made.
5.6 Using Dominance to Enter into other Relevant market
The Act prohibits an undertaking from using its dominant position in one relevant market to enter into, or protect, other relevant market. In NSE case, the Commission held that by monopolistic revenue from other relevant market, the NSE has tried to protect the relevant market of currency derivatives.
6. Remedies
After the abuse of dominance has been established the competition authorities can pass any of the order listed below
1. A cease and desist order,
2. Impose penalty which may be up to 10% of the annual turnover,
3. Direct the enterprises concerned to abide by such other orders as the authority may pass and comply with the directions, including payment of costs, if any,
4. Pass any other order as it may deem fit,
5. Direct the division of a dominant enterprise, and
6. Awarding compensation but applicable only on Competition Appellate Tribunal.
7. Conclusion
After adopting substantial structural adjustment in 1991, India embarked on the path of market liberalization, and consequently it increasingly relies upon market rivalry as the organizing principle for economic activity. The seminal role of markets in ensuring allocation of resources has generally been understood to be efficient. Nevertheless, considering that markets are imperfect and many a time prone to failures, the role of competition law and policy can hardly be overemphasized. In the end, to conclude it can be said that prohibition on abuse of dominant position is absolutely necessary for preserving fair competition in economy and especially for a developing economy like ours.