Abuse of Dominance under the Indian Competition Regime

“Abuse of Dominance Under the Indian Competition Law: A Detailed Overview”

Abuse of Dominance under the Indian Competition Regime

1. Introduction
   Fairness and a level playing field for all market participants are essential for the sustainability and growth of any market. In a perfectly competitive market, consumers hold the ultimate power, as their welfare is maximized. However, in reality, markets are often imperfect, and the “invisible hand” described by Adam Smith does not always favor the interests of consumers. Consequently, an external regulatory framework is necessary to ensure competition and fairness within markets.
   Modern competition laws, therefore, contain specific provisions against anti-competitive and monopolistic behavior. For example, the Sherman Act of 1890, which laid the foundation for competition law, prohibits monopolization. Similarly, Article 82 of the EU Treaty prohibits the abuse of dominance. The Competition Act, 2002 (hereinafter referred to as the “Act”), like competition regimes around the world, seeks to detect and prevent abusive conduct by dominant enterprises.

2. Abuse of Dominant Position
   Section 4(1) of the Act prohibits abuse of a dominant position by an enterprise or a group. To fully understand this section, we must first define the terms “enterprise” and “group.”

2.1 Enterprise Definition
The Act provides an extensive definition for the term “enterprise.” It refers to a person or a government department engaged in any activity related to the production, storage, supply, distribution, acquisition, or control of goods or services. Additionally, it includes investment activities or business transactions involving shares, debentures, or other securities of any other corporate body. This definition encompasses not only individual persons but also artificial legal entities and government departments engaged in business activities. Notably, sovereign activities like those relating to defense, atomic energy, currency, and space are excluded.

In simpler terms, an “enterprise” can be any individual or government body involved in economic activity, such as production, distribution, and investment.

2.2 Group Definition
The term “group” is defined under the Act as two or more enterprises that, directly or indirectly, are able to:

• Exercise 26% or more of the voting rights in another enterprise, or
• Appoint more than 50% of the board of directors in another enterprise, or
• Control the management or affairs of another enterprise.

The concept of “group” was introduced to the Act through a 2007 amendment, reflecting the Western concept of “collective dominance.” This idea acknowledges that dominance can be exercised by multiple entities acting together. Since the amendment, such collective dominance is also considered within the scope of Section 4 of the Act.

It is essential to understand that being in a dominant position is not illegal in itself. A dominant enterprise has the right to compete on merits. However, judicial decisions have established that enterprises in a dominant position have a special responsibility not to distort competition in the relevant market. To successfully prove abuse of dominance, three critical questions must be answered:

1. What is the scope of the relevant market for the alleged undertaking?
2. Does the alleged undertaking hold dominance in that market?
3. Can the conduct of the alleged undertaking be considered abusive?

If the answers to the last two questions are affirmative, the undertaking can be prosecuted for abuse of dominance under Section 4 of the Act.

3. Relevant Market
   The first step in addressing abuse of dominance is to define the relevant market in which the alleged dominant enterprise operates. The term “market” is not defined under the Act but is commonly understood as the place where buyers and sellers interact to exchange goods and services. In the context of competition law, the relevant market refers to the segment of the market that can be influenced by the conduct of the alleged dominant enterprise.

It is important to note that the relevant market does not exist in an abstract form; it is defined in relation to the particular undertaking. The process of market definition involves identifying alternative sources of supply for customers, considering both products/services and geographic location.

The European Commission’s guidelines on defining the relevant market outline three methods for determining the relevant market:

• Demand Substitution: This method involves identifying products that consumers might substitute for the product in question if there is a slight, permanent price increase. If consumers would switch to alternatives, these alternatives are included in the relevant market.

• Supply Substitution: This method considers products that suppliers can switch to producing without significant costs or delays. If producing alternatives requires considerable adjustment, investments, or time, they are not considered part of the relevant market.

• Potential Competition: Potential competition typically does not factor into the market definition at the initial stage. It is considered only after determining the positions of firms in the relevant market.

Section 2(r) and 19(5) of the Act define “relevant market” as the combination of the relevant product market and the relevant geographic market. The Supreme Court of the United States defines the relevant market as the area of effective competition within which the defendant operates. It is important to note that the Commission is not required to consider both product and geographic markets when defining the relevant market. It may choose to define the relevant market using only one of these aspects.

3.1 Relevant Product Market

The Relevant Product Market (RPM) refers to the products or services that consumers perceive as interchangeable or substitutable. The key point is that the market should include all reasonably substitutable products or services, where consumers would switch without significantly compromising their needs.

An example provided is toothpaste and tooth powder – although they are different, they can act as substitutes for one another.

The Act lists several factors that can be considered by the Commission to define the relevant market:

• Physical characteristics or end-use of goods.
• Price of goods or services.
• Consumer preferences.
• Exclusion of in-house production.
• Existence of specialized producers.
• Classification of industrial products.

Hoffman La Roche Case:

• The court considered the market for Vitamins C and E, which had distinct uses: one for bio-nutritive use (as additives) and the other for technological use (as anti-oxidants). The court held these should be placed in separate markets due to their distinct functions.

Continental Can Case:

• The court applied supply-side substitution when defining the relevant market. Despite the defendants arguing that light containers for canned meat, canned seafood, and metal closures were separate, the court concluded they all fell under one light metal container market, as producers could easily switch production.

3.2 Relevant Geographic Market

This concept pertains to the geographical scope of competition, which can vary from local to global depending on the specifics of the market. The geographical market considers factors like:

• Transportation costs (e.g., cement’s local market due to high transport costs).
• Consumption and shipping patterns.
• Regulatory trade barriers.
• Local specifications and consumer preferences.

Some factors relevant in determining the geographic market include:

• Regulatory trade barriers, transport costs, distribution facilities, and language.

4. Dominant Position

Once the Relevant Market is defined, the next step is determining whether an enterprise holds a dominant position in the market. Dominance is not just about having economic power over price but about being able to operate independently of market forces or influence competitors and consumers.

Definition of Dominant Position:

Dominance refers to a position of strength where an enterprise can either:

1. Operate independently of competitive forces.
2. Affect competitors or consumers to its advantage.

Even firms with a small market share (e.g., 20%) could have dominance if competitors are highly fragmented. Meanwhile, a firm with a 60% market share may not abuse dominance due to competition from others.

The European Court of Justice in United Brands defined dominance as “a position of economic strength that enables an undertaking to prevent effective competition in the market and act independently.”

Factors for Determining Dominance:

The following factors can be assessed:

1. Market share of the enterprise.
2. Size and resources.
3. Competitors’ size and importance.
4. Economic power, vertical integration, or commercial advantages.
5. Dependence of consumers on the enterprise.
6. Barriers to entry (e.g., high capital cost, economies of scale).
7. Countervailing buying power of customers.

These factors are broadly categorized as:

1. Market power and ability to influence the market.
2. Market structure and conditions.
3. Discretionary factors, which allow flexibility in applying certain criteria.

5. Abusive Conduct

Once dominance is established, abusive conduct needs to be evaluated. Abusive conduct involves dominant enterprises using their power in a manner that undermines competition, deters entry, or exploits consumers.

The Raghavan Committee outlines key questions to determine if conduct harms competition:

• Does it deter entry into the market?
• Does it reduce incentives to compete?
• Does it give the dominant firm the ability to raise prices or reduce innovation?
• Does it harm consumers?

Types of Abusive Conduct:

1. Exploitation of consumers or suppliers (e.g., high prices, restricting supply).
2. Exclusionary behaviour, which harms competitors or strengthens entry barriers.

The Act outlines specific abusive conducts, including:

• Imposing unfair pricing (e.g., discriminatory prices).
• Predatory pricing (pricing below cost to eliminate competitors).
• Limiting production or innovation.
• Refusal to deal or denial of market access.
• Tying contracts or supplementary obligations unrelated to the contract subject.
• Using dominance in one market to enter or protect another.

5.1 Discriminatory or Unfair Pricing and Conditions:

Pricing is deemed unfair when it is excessively high without justifiable reasons. Discriminatory behavior is also prohibited if consumers or competitors are treated unequally without legitimate reasons.

5.2 Predatory Pricing:

Predatory pricing involves selling below cost to drive competitors out of the market and prevent new entrants. It is difficult to distinguish from legitimate competition, but if a dominant enterprise engages in such conduct, it can be considered abusive. The NSE Case is an example where the National Stock Exchange was found to have used predatory pricing to eliminate competition in the currency derivatives market.

5.3 Limiting Production or Innovation:

Any conduct that limits production, technical, or scientific development to the detriment of consumers is considered an abuse.

5.4 Denial of Market Access:

This refers to practices where a dominant player prevents competitors from entering or competing effectively in the market.

5.5 Supplementary Obligations:

Forcing unrelated supplementary obligations onto a contract is also prohibited. This could be a form of tying arrangements that restrict competition by forcing buyers to accept unrelated products or conditions.

5.6 Using Dominance in One Market to Enter Others:

Dominant players are prohibited from leveraging their position in one market to enter or protect another market unfairly.

6. Remedies

When abusive conduct is proven, the Competition Commission can impose several remedies:

1. Cease and desist orders.
2. Fines (up to 10% of the annual turnover).
3. Compensatory measures, like damages or compliance orders.
4. Division of the dominant enterprise.
5. Other orders as deemed fit to promote competition.

7. Conclusion

The 1991 liberalization reforms in India set the stage for increased reliance on market competition. However, markets are often imperfect and prone to failure, so competition law plays a vital role in ensuring fair competition. The prohibition of abuse of dominance is essential, particularly in a developing economy like India, to foster fair competition and protect consumers.

nformation 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.