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8133 Et ET PDF
8133 Et ET PDF
COMPETITION LAW
Module Overview:
This module is an introductory module on horizontal agreements covered under the
competition law. It will deal with the basics of horizontal agreements, types of such
agreements, reasons for collusion by businesses and regulation of such agreements
by the competition authority. It will also cover horizontal agreements like market
allocation, controlling production and bid rigging. The module will also discuss
cartelisation and the ways to detect and prevent cartelisation.
Pre-requisites:
Competition law is an economic law and thus an understanding of various market
structures like monopoly and oligopoly will help readers better understand the
reasons for businesses colluding to gain market power. Basic knowledge about
microeconomics will also help in appreciating the adverse effects the horizontal
anticompetitive agreements can have on economy and consumers and the reasons
for regulating such conduct.
Objectives:
After reading this module, the readers will be able to appreciate as to why the
anticompetitive effects of the horizontal agreements and practices need to be
regulated by the competition law. Further, the readers will learn regarding the
different types of horizontal agreements. A reader will realise as to why cartels which
are a form of horizontal agreements are given stern treatment under the competition
laws worldwide. Further, the reader will also understand as to why there is more
international convergence and consensus in dealing with hard-core cartels which
have anticompetitive effects on consumers across the borders.
Learning outcomes:
Through this module, the readers are expected to learn:
Definition and nature of Horizontal Agreements
Types of Horizontal Agreements
Cartels, bid rigging, price fixingagreements
Detecting cartels
Leniency programme to detect cartel
1. Agreements in restraint of trade
A restraint of trade is simply some kind of agreed provision that is designed to
restrain another's trade or prohibiting agreements that ran counter to public
policy, unless the reasonableness of an agreement could be shown.One of
the earliest instances of trade restraints has been recorded in the English
Common Law system in the doctrine of ‘Restraint of Trade’ which
became the precursor to modern competition law.
There is always a possibility that market players can coordinate their actions
to achieve a position so that they can indulge in anticompetitive practices.
Thus the firms can collude and control production and raise prices. Collusion
can be defined as a situation where firms coordinate their actions to reach
anti-competitive outcomes and gain higher profits. Collusion can be explicit or
tacit. Some anticompetitive agreements may be open, but most are secret.
Sometimes they can be in form of less formal agreements and can also form
part of “agreement between companies” or in the decisions or rules of
professional associations.
Figure 1: Competition Law, Policy and Economic Development (Source: UNCTAD (2010))
1. Horizontal Agreements
Horizontal agreements are those between competitors, i.e., entities at the
same level of distribution. Vertical agreements are those between parties on
different levels of the chain of distribution, such as between a manufacturer
and a distributor, or between a wholesaler and a retailer. Agreements through
which restraints are imposed between competitors have traditionally been
denominated as horizontal agreements, and those imposed by agreement
between firms at different levels of distribution as vertical
agreements.Horizontal agreements can prompt violations of competition law
because such agreements may include clauses which restrict competition.
It can be said that all anticompetitive effects are of necessity horizontal, since
all competition is horizontal, but that such horizontal effects can result from
either horizontal or vertical agreementsii. Figure 2 depicts the horizontal and
vertical relation between different players in tyre market.
V V
E Tyre HORIZONTAL Tyre Manufacturer E
R Manufacturer R
T T
I I
C C
A Tyre Wholesaler Tyre Wholesaler A
HORIZONTAL
L L
From the figure 2, it is clear that the vertical agreements are between firms in
a purchaser–seller relationship, whereas, the horizontal agreements are
between the competitors. Generally it has been seen that vertical agreements
are givena lenient treatment than the horizontal agreements under the
provisions of the Competition law. The reason for such differential treatment
is that the horizontal agreements are more likely to reduce competition than
the vertical agreements. Horizontal agreements like price fixing and market
sharing are agreements which by their nature are almost always considered
detrimental to the competition. Generally, horizontal agreements are
synonymously referred to as cartels in competition law terminology across the
world.
a. Price fixing
Agreements through which the companies mutually set the prices that they
want to charge in the market are called price fixing agreements. Imagine a
market where four firms manufacturing cement agree to sell their products at
a fixed price. Although, sometimes a slight increase in the price of each
product hardly matters to a consumer;such price fixing will ultimately generate
huge profits for the colluders. Other types of price-fixing agreements include
agreements that jointly predetermine the size of profit margins, the extent of
discounts andthe level of price increases. Price fixing agreements can take
various forms including the following:
Agreement on price increase
Agreement to adhere to published prices
Agreement not to sell unless it is on the agreed price terms
Agreement on a standard pricing formula
Agreement regarding providing, eliminating or establishing
methodof providing discounts
Agreement on credit terms that will be offered to customers
Agreement to eliminategoods and services offered at low
prices from the market, thereby limiting supply and raising the
prices
Agreement between cartel members not to change or reduce
prices without notifying each other
As is evident from the nature and objectives of the price fixing agreements
described above, such horizontal anticompetitive agreements are aimed at
furthering the goal of members of the cartelof earning huge profits at the
expense of the consumers.
b. Market Sharing
Another common horizontal agreement amongst competitors is market
sharing. These are also called market allocation and market division
agreements. Under such agreements, the competitors agree to divide
amongst themselves specific territories, customers, or products. Such
market allocating actions are restrictive in nature because they leave no
room for competition in the market. For example, an agreement amongst
competitors to allot certain customers to particular sellers and toallocate
or divide sale territories would be anticompetitive.
c. Bid-rigging
Bid rigging takes place when bidders collude and keep the bid amount at
a pre-determined level. Such pre-determination is by way of intentional
manipulation by the members of the bidding group. Bidders could be
actual or potential ones but they collude and act in concert. Bid rigging is
the way that conspiring competitors effectively raise prices where
purchasers-- often various departments and authorities of the
Government acquire goods or services by soliciting competing bids.
There can be different forms of bid rigging:
Subcontract bid-rigging: Under this type of bid-rigging the
conspirators agree not to submit bids, or to submit cover bids that
are intended not to be successful, on the condition that some
parts of the successful bidder's contract will be subcontracted to
them.
Complementary bidding: It is also known as cover bidding or
courtesy bidding. It involves a situation where some of the bidders
bid an amount which is too high or contains unacceptable
conditions. Thus, in essence, cover bidding might give the
impression of competitive bidding. In reality, suppliers agree to
submit symbolic bids that are unreasonably high to succeed.
Bid suppression occurs where some of the conspirators agree not
to submit a bid so that another conspirator can successfully win
the contract.
Bid rotation occurs where the bidders take turns being the
designated successful bidder, for example, each conspirator is
designated to be the successful bidder on certain contracts, with
conspirators designated to win other contracts. This is a form of
market allocation, where the conspirators allocate or apportion
markets, products, customers or geographic territories among
themselves, so that each will get a "fair share" of the total
business, without having to truly compete with the others for that
business.
It has been seen generally that the above discussed forms of bid-rigging
are not mutually exclusive of one another. One can see two or more of
these practices occurring at the same time in a tender process. For
example, if one member of the bidding ring is designated to win a
particular contract, that bidder's conspirators could avoid winning either
by not bidding (which will be bid suppression), or by submitting a high bid
(which implies cover bidding).
Bid Rigging
Consider a situation where two firms X and Y bid for supplying products to a
government department which has floated a tender for the same. In a
competitive scenario, both the firms X and Y will submitcompeting bids. Later
on, these firms decide together that Firm Y will submit a bid superior to Firm
X’s and that if Firm Y is awarded the government tender, it will subcontract
part of the work to Firm X. This conduct of determining the winner before the
competitive process of bidding will be illegal under competition law because
Firm X and Firm Y have agreed not to compete for the tender, thereby
hampering competition. Here, both the firms are colluding and if successful
will gain extra illegal profits at the expense of the government department.
d. Output limitation
There can be a scenario where competitors agree to restrict and control
the production thereby controlling the supply in the market. Output
restrictions can take place through various forms including agreements
on production volumes and agreements on sales volumes. The objective
of controlling and limiting supplies is to create scarcity in the market and
subsequently raise prices in the market. Such output restriction
agreements lead to dead weight loss in the society.For example, in a US
Lysine Cartel caseiii, five competing Lysine producers met and allocated
the annual ‘sales volume’ quotas among themselves, they acknowledged
the provision as being of ‘vital importance to overall scheme to control the
industry.
People of the same trade seldom meet together, even for merriment
and diversion, but the conversation ends in a conspiracy against the
public, or in some contrivance to raise prices. It is impossible indeed to
prevent such meetings, by any law which either could be executed, or
would be consistent with liberty and justice. But though the law cannot
hinder people of the same trade from sometimes assembling together,
it ought to do nothing to facilitate such assemblies; much less to render
them necessaryiv.
The 1998 OECD Recommendation proclaimed that cartels are “the most
egregious violations of competition law v .” Thus, cartels are considered as
most pernicious form of anticompetitive activities and cartels exist at national
and international level also. Cartels harm consumers, businesses and the
economy by increasing prices, reducing choice and distorting innovation
processes. Thus, businesses forming cartels achieve greater profits for less
effort to the detriment of consumers and the economy as a whole.
The definition of hard core cartel as given by OECD is: ‘an anticompetitive
agreement, anticompetitive concerted practice or anticompetitive
arrangement by companies to fix prices, make rigged bids (collusive tenders),
establish output restrictions or quotas or share or divide markets by allocating
customers, suppliers, territories, or lines of commerce… the most egregious
violations of competition law’vi.
6. Standard of Proof
Generally, horizontal agreements are dealt more sternly than the vertical
agreements as, prima facie, a horizontal agreement is more likely to affect
competition than a vertical agreement. The presumption is that
anticompetitive horizontal agreements do not serve any pro-competitive
purposes and hence are per se illegal.Horizontal agreements are presumed
to have adverse effect on competition. In many jurisdictions, hard core cartel
conduct is per se illegal because of its pernicious effect on competition and
lack of redeeming economic value. This provision of per se illegality is rooted
in the provisions of the U.S. law and has a parallel in most of the modern
legislations on the subjectix. This means that no argument can justify a cartel
agreement and no proof of harm is required. Harm is presumed, because this
type of agreement always raises prices and never provides any significant
benefits to consumers.
The existence of a cartel may be proved by direct evidence, indirect
(circumstantial) evidence, or a combination of both. Direct evidence includes
written agreement among cartel members, statement of a cartel member who
attended a meeting and reached an agreement with competitors, a
memorandum written within a company to report a meeting with competitors
where an agreement was reached, records of telephone conversations with
competitors, an electronic mail conversation or a statement of a person who
was approached by the cartel to join it. Generally, direct evidence is scarcely
found.Cartel members tend to conceal their activities and agree orally instead
of entering into an agreement. Circumstantial evidence may be useful in
supporting direct evidence. It may also prove the existence of a cartel by
itself, but it is important to be careful in interpreting indirect evidence.Finding
evidence in cartel cases is tough and most of the times the investigation
begins with a ‘smoking gun’ and has to end establishing a case knitting
circumstantial evidences together to prove the existence of cartel.
There can be cases where coordinated behaviour of the companies may
impede competition even without any explicit agreement. For instance,
conscious price parallelism implies a practice whereby sellers in a given
market raise their prices within a short time without any explicit agreement
amongst each other. Some jurisdictions have adopted a “parallelism plus”
approach in cases of price parallelism. This implies that the existence of “plus
factors” beyond merely the firms’ parallel behaviour needs to be shown in
order to prove the anticompetitive conduct.
In most of the jurisdictions horizontal agreements are presumed to have an
adverse effect on competition.Due to this presumption, the focus of the
competition authority is on proving the existence of the anticompetitive
arrangement itself rather than demonstrating the anticompetitive impact of the
cartel on the market.
As per ICN reportx, the fight against cartels is a legally and practically
demanding task due to the following reasons:
a) Cartels are secretive about their illicit behaviour, and therefore
agencies have to undertake great efforts to detect concealed cartels.
b) Competition authorities need extraordinary powers and skills to
collect sufficient evidence to mount a viable case against
sometimes uncooperative defendants.
c) In the cartel area competition authorities operate sophisticated
leniency programmes to destabilise such conspiracies, which is
practically difficult to implement.
d) The investigation of international cartels tests the limits of competition
authority jurisdictional reach.
e) Last but not least, the growing trend to criminalise cartel behaviour
obliges many agencies to work to a particularly high standard of
procedure and proof.
It has been seen in many cases worldwide that cartel participants take active
steps in concealing their activities. Thus the focus of the competition authority
is to gather evidence to prove the cartel activity. Recently competition
authorities are making use of improved technological evidence gathering
techniques of IT forensics while making use of traditional methods like on-site
searches, unannounced raids,seizureof records and taking of witness
statements.
Lysine Cartel
Amino Acid Lysine cartel is one of the landmark cases decided in the US. Two
Japanese, two South Korean and one US company agreed not to compete on
price.Price of lysine rose on account of collusion from 68 cents per month to 98
cents in 1990 and continued at that level until detection in 1995. Evidence
collected by DOJ with the assistance of FBI included documents/ transcripts of
secretly recorded conversations which was helpful in prosecution of the cartel
participants.
7. Exemptions
It has been seen in many jurisdictions that some types of horizontal
agreements are kept out of purview of application of competition law and thus
are exempted. These exemptions are generally qualified and time bound.
Exemptions are generally based on domestic policy objectives that differ
from jurisdiction to jurisdiction and sometimes reflect historical conditions
or perceptions in an economy. For example, some jurisdictions have specific
exemptions for certain collective bargaining agreements, agricultural
cooperatives, research and development activities, and under certain
circumstances small or medium enterprises are also exempted. Here we will
briefly discuss two types of exemptions.
9. Summary
This module dealt with the regulation of horizontal agreements from the
perspective of competition law. Horizontal agreements are agreements
between the market players at the same level of interaction in the market and
can have serious effects on competition. Imposingnaked restraints through
practices including price fixing and market allocation is presumed to illegal.
Cartels which are horizontal agreements are focus of competition authorities
worldwide due to adverse effects caused by them on businesses, consumers
and the economy. The module described various types of anticompetitive
horizontal agreements and the anticompetitive effects such agreements
generate. In light of anticompetitive effects of cartels across different
economies and emergence of international cartels, it has been seen that in
recent years competition authorities are devising new cartel enforcement and
detection policies and international cooperation has increased manifold in this
area.
i
UNCTAD, ‘The role of competition policy in promoting economic development: The appropriate
design and effectiveness of competition law and policy.’ (2010).
ii
Business Electronics Corp. v. Sharp Electronics Corp., 485 U.S. 717 (1988)
iii
US v. Andreas, 216 F.3d. 645, 668 (7th Circuit 2000).
iv
Adam Smith, An Inquiry into the Nature and Causes of the Wealth of Nations (1776)
v
OECD Council, Recommendation of the Council Concerning Effective Action Against Hard Core
Cartels (1998).
vi
OECD Council, Recommendations Concerning Effective Action Against Hard Core Cartels, 1998 part
A2(a).
vii th
Mario Monti former EU Commissioner for Competition, speech of 11 September, 2010.
viii
US Supreme Court in Verizon Communications Inc v. Law Offices of Curtis V Trinko, 540 US 398
(2004)
ix
High level committee on Competition Law,Raghavan Committee, 2002, Government of India.
x
International Competition Network, ‘Defining Hard Core Cartel Conduct Effective Institutions Effective
Penalties’ Building Blocks for Effective Anti-Cartel Regimes, Vol.1 (2005)