US internet giant Google has moved the Competition Commission of India (CCI) to urge an all-clear for its Rs 33,737 crore investment in Jio Platforms for a 7.73% stake and manufacture a replacement smartphone in India. The tussle between tech giant Google and payments unicorn Paytm has put the main target back on India’s competition laws concerning digital markets.
A committee of experts appointed by the Ministry of Electronics and knowledge Technology has recently published a report that proposes a governance framework for non-personal data.
But, this is often the very mandate of the Competition Commission of India, a pan-sectoral regulator established under the Competition Act, 2002, tasked with promoting and preserving competition within the Indian market. as long as the first objective of the report overlaps with the jurisdiction of the CCI, it becomes imperative to think about the report’s proposals against the time-tested principles that derpin India’s competition law and policy.
With all the rising news regarding the Competition Law, let us explore and understand in simple words all the aspects of it.
Competition law is like a very ancient law. And we have seen the development of competition law since 1890 source around like 125 years and in this article we will be covering the historical, legal and economic aspects of competition law.
We will be talking something about the us antitrust law, EU competition law and benefits of the competition law and we will give some very specific focus on the economics of competition law. Why economic? Because in real life situations you will see the competition law affecting the economy more than other aspects.
Competition is not a new word in our life. We do competition with our colleagues, with our friends but when we talk about competition under the competition law, we are talking about the commercial houses. Commercial enterprises which are doing competition, which are doing businesses to make more profit and make more commercial development.
The whole process of this commercial benefit is self-interested. They like to grow. However, the outcome of this competition process is good for the society. We also need to understand one thing that this competition process is not just an event but a process. So competition law does not happen in events. It’s a continuous long term process.
There are many situations where the competition is not happening and in some it’s happening rapidly. So it’s a whole process and we need to see this situation in a very holistic manner. And the important thing is that it doesn’t happen automatically then we cannot say that the competition is there and it will happen.
It is there in our day to day life but in business houses it is not automatic. The stakeholders in competition are many like the state regulatory authority or like the Competition Commission of India. Lawyers, economists, philosophers even the students they all need to work together to assess whether we are creating the competitive process or not so before we move forward to some more understanding about the competition law we should ask few questions to ourselves.
Why firms compete with each other and why they should do it?
So the first question is that why they are competing. So basically as we have already seen that the ultimate objective of any commercial entity is to give profit benefits and incentives to the stakeholder’s. Companies are doing business to the benefit.
They are not doing any charity, they are not doing any not-for-profit activity so the ultimate goal is to make profit and transfer better dividends to their stakeholders as well as to attract more investment in their business. And the second question is why they should do this and we all know that they are looking for profit but it’s not necessarily that they should make profit through competition there are different options.
If they compete what is their benefit? So legally and morally what to believe that a forum can only survive and grow when they are focusing on competition because if you are not doing competition, if you are not thinking how you can excel from your competitors then, you don’t survive in market. So to survive and grow you need to compete.
Why they should compete?
I think it’s not necessary, legally and morally there are two different things. But we all know that law and morals doesn’t happen all the time in real life. And that’s why we have loans. But because we don’t like to follow some rules and regulations and they have their own views about their life and their commercial activities, so it’s not necessary that all the time companies or commercial enterprises they like to compete. Because that they want to make profit and the easiest way to make profit is not to compete but to collaborate or in a very unlawful term – “collude”
So like for example in a competitive market if there are five players and all of them are making a profit in the range of five to ten rupees per item or per service- it’s a competitive market. The profit range is between five to ten rupees. So if one day, they decide to meet for a cup of tea or coffee or a drink and they talk – “Instead of competing if we collaborate with each other and we can do much better”
Because we are the only players in this market. So let’s collude and do something different activity. So now we fix our prices and we divide our market and we ensure that everyone is making a minimum profit of thirteen to fourteen rupees for the same service for the product. This is possible and it happens. It has happened and it is happening. This is a very common situation wherein the people like to collude.
The other situation when you have a dominant position and you are a very big player. All the time you think about – how can I exploit my customers and how can I exclude my competitors from the market. I don’t want to compete with them.
I don’t want to give them this opportunity to compete with me and then I will adopt few business practices whereby I will exclude or I will kick out them from the market because I am a big player. However in few cases not all the time but in few cases companies they don’t want to compete either they collude all or they abuse their dominant position.
Historical aspects of competition law
We all know that any law does not come from a vacuum. It must be something in our civilization or in our history where people are talking about a concept. Similar to the modern law but there must be some references. So when we talk about the competition law reference we find some features in the ancient civilizations like Indian and Roman.
They were talking about some concept of competition. However, we also need to understand one thing that due to the different political and legal circumstances in those realizations they were not talking about competition among the different market players. They were talking about how a king or a state shouldn’t run.
They were more concerned about their thrones that business enterprises and how they should not harm the consumer by increasing the prices. So in that sense we can say that they were talking about consumer but they were not talking about consumers in terms of the economic welfare.
They were talking about from the political angle that if the prices go up then it’s not easy for anything to survive. After having some understanding of ancient civilizations and references of competition of principles it’s better to understand it how this modern competition was started.
Competition law and the Modern civilisation:
In our modern civilization, the competition was started in US in 1890. When we talk about the US antitrust law we need to understand little bit about the historical aspect. So until the late 80s the central or the federal government in the US always increased the big business houses.
These big business houses by the end of the century emerge is a powerful organization to intervene in the U.S. political and economic environment they started creating a special legal tool which we called trust and by creating this special legal tool they started exploiting the customer as well as they starting excluding competitors from the market.
When we talk about the trust we can see the name of the law is ‘antitrust’.
A Competitive market is healthier than formation of trusts.
In a simple language what is the trust. For example- there are 10 companies and they should compete. But instead of competing with each other if they put their shares in one particular legal entity that they call ‘common trust’. They put all shares in their particulars and the trust is governed and managed by a few people. So all the profit coming out from those 10 companies are agreed to distribute among them.
So in that scenario now those 10 companies are not competing and they have created a special legal tool which they call trust. It was completely legal under the US law at that time so they started forming different type of trust in US and the first and the most important trust was formed in 1882 in the Standard Oil Trust.
Attorneys of the Standard Oil Trust had the idea of interest. So basically it’s a very unique legal concept because the trust is not a new concept in the common law. Instead of competition we can form a common pool of over resources and common pool of our profits.
So they form this trust the Standard Oil Trust and subsequently we found that all the profit of this Standard Oil Trust were transferred to a common trustee and group of common trustee was giving profits to those companies. So that Trust allowed the Standard Oil to function as a monopoly. The Standard Oil controlled the whole American oil market through this trust. The Standard Oil Trust was a great success and it motivated other market players to create the interest in their specific industries.
Inspired by them the old type of industries and old market players started to frame their own trust and they started doing the same activity.
However, the outcome of this trust business was that now those trusts were in a position to charge very excessive price from the market and they couldn’t make more profit. But the decisions were taken saying this was the outcome of distressed business.
That now these consolidate trust houses could influence the political power at the state as well as the national level. And because of that influence or intervention in the political power they could get more benefits or discriminatory railroad rails or rebates so the overall environment in 1819.
By the end of 18th century, these trusts were controlling our economy. Consumer’s workers and farmers they were directly hurt by these monopolies. We also need to understand one thing which is very important in the US antitrust law history.
That during that time the US economy was based on the agriculture and because of the new technologies like the railroad and other means of transport oil steel the farmer community was mostly suffered because of this monopolization and it was a huge issue during their presidential election.
How can we create more competitive environments and equal access of financial and economic resources?
In the US economy, finally the US government decided to connect very specific law which is called Sherman Antitrust Act 1890 to regulate anti-competitive activities in the U.S. so one thing which is important in this story that the in the US antitrust law was originated through a huge political movement.
It was not like a regulatory or an economic concern where people were talking about how competition law can help in their economic activities or development. But the day to day life of the citizen was influenced or hurt by these type of monopolies. So the US was the first country in our modern civilization who implemented an efficient competition market principle in their legal system.
The Indian Competitive law strongly inspired by the European System
European competition law is more important for an India’s competition of taxation. Because more or less our competition system in India is highly influenced either in the structure or the implementation from the European competition. So let’s understand how things happen in Europe in terms of competition.
We all know that the modern Europe is outcome of two great world wars. There was no competition law research, especially in big countries like UK and France. They used to have some references of competition law in their domestic legislatures on how they were few countries like Germany, Norway and Sweden, they used to have any efficient competition law principle in their loans. Especially the Germany.
The European competition law was enacted in 1957. So it’s almost 67 years and in those 67 years of misery, countries did not implement competition law.
The European law gives freedom and liberty to all European citizens as well as commercial institutions to move around Europe freely without any legal restriction. So what was the outcome. Because of these free movement of goods services capital and people now, it was easier for commercial enterprises to involve in anti-competitive practices because earlier there were a lot of legal restrictions.
For example, like one French company can’t do business in Germany. So that was the first outcome of the European Union law and the second and the contrast objective of the European policy scholars was that the competition should be promoted among individual business houses and even among member states.
So there were two situation- one the European policy owners – they wanted to promote competition. They wanted to promote internal market. At the same time outcome of the internal market was promoting more anti-competitive practices. So to address the anti-competitive practices they had to implement an efficient mechanism of competition law.
In EU the competition law is based on the old liberal theory. For this old liberal theory originated in Germany during ninety twenties and fifties when they found that- if we don’t have a proper legal and economic system then that structure can help to rise few political forces which is not good for people.
Basically they were mentioning about the rise of Hitler and this story says that the state must create a proper legal environment for the economy and maintain a healthy level of competition through measures that adhere to market principles.
So after the Second World War what they have learned from the history. That we cannot have any economy. We can have a planned economy. That how you can produce how can you supply and what should be the price and who will be the player in the market. So they decided that now we will go for a market economy. In the market economy, the major decisions are taken by the market forces and market forces are driven by economics.
So now we are coming to a conclusion that why economics is very important in competition law:
Because the competition law is based on the market economy and market economy principles are based on principles of economics. We need to understand a little bit about the economics. What is economics and what are the principles in economies which we use in competition law.
We often hear a lot of economic terms which we normally don’t use in other types of laws like contract law or company law or any type of commercial and business law. So when we talk about the competition economics or economic principles in competition law we talk about the economic benefits or goal of competition that why we have competition. But what are the objectives of competition in terms of economies and the objectives can be perfect competition.
The perfect competition is in theory; it doesn’t exist in real life. Fair competition is the highest goal of any competition or authority. That we want a fair society but the efficient competition is the possibility in real life. Instead of looking for fairness because it’s very hard to understand and measure quantify the fairness in economics it is possible to say something more clearly about the efficiency and then we talk about the monopoly or oligopoly.
These two terms are very important in competition law. The monopoly situation means only one form is dominating the market and the other forms- the competing forms they are having very less market share. The monopolistic form can do whatever they want to do in terms of prices quality and other services and they don’t care about the customer or their competitor.
However, there is a different situation where we have oligopolistic market. With oligopoly we believe that there are few forms like two or three firms. They are having the same level of market power and they are the same type of market share and instead of competing they start colluding (collaborating unlawfully).
Even they have some policies where they decide, they don’t compete at the same level. They are not colluding but they won’t compete because they know it will be a ballistic market. When we have our one market share why should we compete.
That concept is a joint dominance or collective dominance principle. In EU they follow this collective dominance that few firms can be collectively dominant and collectively abuse their position.
However, in India we don’t have this position right now. We have proposed a new amendment in our acts where we are proposing to introduce oligopoly situation in Indian markets. We need to understand that these are two different things and they can produce the same result which is abuse of dominant position.
The whole competition law is based on three efficiencies- Productive, Allocative and Dynamic. Ultimately any competition Authority is aiming at them to improve the either productive, allocative, dynamic or combination of these three efficiencies.
Now understand little bit very briefly about the law and economics approach in competition law. Because competition law is based on the low end economics approach law and economics approach basically deals with the economic analysis of the law and it based on the basic concept of economics which says that- economics is an approach to understanding behaviour based on the assumption that individuals have objective and tend to choose the correct way to achieving them rationality.
So the whole aspect of economics is rationality. We are all rational players and we want to have maximum output from our commercial and business activities.
How we use rational economics in current scenarios:
Let’s take a hypothetical example: a policeman has some evidences which can convict a criminal. The situation is like this- conviction will cost the criminal $50,000 and benefits the policeman career by $10,000.
So if policeman gives those evidences before the court, he will get $10,000 and if it happens the criminal will pay $50,000. So in that scenario what should be the ground reality. Should he submit before the court OR take $20,000 from the criminal as bribe? In that scenario he is making more $10,000 and the criminal is also spending only $30000 and saving $20000. So in that situation it is a win-win situation for the policeman as well as the criminal. However, because of this arrangement the society or the justice system can suffer.
So in the same manner, in the competition law when we talk about the abuse of prominence or collective dominance let’s put them as a criminal and a policeman. They are maximizing their profit and commercial benefits.
However, the society is suffering. That’s why we need a law or a system which can benefit the whole scenario. So we don’t want that the criminal should pay fifty thousand because there’s a too much for him and at the same time, we don’t want an honest policeman should get only $10,000.
We need to create an environment in legality and economic environment where both players can get the maximum output at the same time. The society should not suffer. So it’s a very tricky situation. I do understand and it’s not an easy target.
For example, if one firm knows that from cartels, I can make 10 crore rupees and if I’m caught by the competition authority, I will pay 50 crore rupees as bribe. In that scenario maybe they would not like to enrol in any type of legal actions. However, if the economics says that they can make 10 crore rupees first of all they will never be caught and even if they are caught they will pay 8 crore rupees in debts. We are giving economic incentive to a forum to engage into a cartelization activity.
The competition law objective is to create competitive environments where the players can have their maximum output from their business activities. In this scenario, this low-end economics approach plays an important role that how we define the rationality of a player. When we talk about the competition law until and unless economic rationality is not there we won’t be able to achieve our objective defined in our competition law.