Abuse of Dominant Position Under the Indian Competition Act, 2002

I. A new approach to Competition Policy:

The august words of the Preamble and the directives embodied in Article 39 of the Indian Constitution in tandem with the strategy of planned economic development necessitated the promulgation of a conservative competition policy in the form of the Monopolies and Restrictive Trade Practices Act, 1969. The policies of that era were preordained to achieve state aspirations such as self reliance and social justice and were characterized by the scepter of government participation/regulation in virtually every vista of economic activity. Government intervention in the determination of prices, limiting the role of the private sector, in using industrial licensing to channel private investment and creating high tariff walls and restrictions of foreign investment stand testimony to the fact that most economic decisions were not guided solely by pecuniary considerations but also by government intervention.

The Report of the High Level Committee on Competition Laws aptly reviews the Indian economy as it was in the era of the Monopolies and Restrictive Trade Practices Act, 1969 in the following manner:

"2.2.3 Although there was a private sector in India, there were virtually no elements of economic activity that were not subject to Government intervention and control. Entry and exit were restricted, firm and plant sizes were determined by Government policy, much of production was directly in the public sector, prices in a number of important sectors were fixed by Government, the allocation of scarce financial resources was determined by formal Government policy and informal interventions, and competition from abroad was severely curtailed by quantitative restrictions (QRs), high tariff walls and restrictions on foreign investment. Thus, most economic decisions were guided by the visible hand of Government and there was no place in this system for competition policy."

Nevertheless, contemporary economic policies and realities compelled policy makers to reflect upon the relevance of the incumbent legislation. In a WTO compliant economic environment Indian enterprises have to grapple with stiff competition from foreign competitors in an unending quest to maximize profits and any competition policy must be a contrivance which allows enterprises to achieve efficient allocation of resources and technical progress, but keeping in mind consumer welfare and regulation of concentration of economic power. Contemporary competition policies on the global level increasingly indicate a paradigm shift from curbing monopolies to promoting competition.

Therefore, the Competition Act, 2002 aims at promoting and ensuring fair competition in India by prohibiting trade practices which cause an appreciable adverse effect on competition in markets within India, and for this purpose it provides for the establishment of a quasi-judicial body, namely, the Competition Commission of India. In this article the researcher aims at exploring the various nuances of “dominant position” under the Act and its effect on various aspects of the Indian economy.

II. Treatment of “Dominant Position” under the Act:

2.1 Determination of “dominant position” of an “enterprise”:

Section 4 of the Act specifically states that no enterprise shall abuse its dominant position. Dominant position has been defined as a position of strength enjoyed by an enterprise in a relevant market, which enables it to operate independent of the established competitive forces and adversely affect its competitors or the consumers in the relevant market.

2.2 Definition of an “enterprise” and “relevant market”:

At the onset one must peruse the pivotal terms of the aforementioned definition, namely “enterprise” and “relevant market.” Section 2 (h) of the Act provides an all pervading definition of an “enterprise,” which includes all companies (including government companies and foreign companies), firms, individuals, association of persons and departments of the government (subject to certain exceptions). This definition is certainly more effective in its scope in comparison with the corresponding definition in the incumbent legislation and brings within its fold all public sector undertakings with the exception of sensitive sectors. Section 2 (r) of the Act deals with the concept of “relevant market.” Determining the relevant market is crucial for the application of Section 4 of the Act, as it provides the context or background on which one may determine the dominant position of an enterprise and the subsequent abuse thereof. Relevant markets consist of ‘relevant geographic market’ and “relevant product market.” Such a division is necessary as an enterprise’s dominant position must necessarily be in relation to other enterprises in a similar business; or other enterprises operating in the same geographical area under the same jurisdiction and similar business conditions.

2.3 No Mathematical Parameters:

It is pertinent to note that there are no mathematical parameters to determine the dominance of an enterprise/undertaking in the relevant market. Prima facie this would make the provision ambiguous. However, this can be justified on the grounds that even a firm with a low market share can enjoy a position of dominance if the remaining market share is divided among a large number of competitors. While an enterprise/undertaking with only 25% market share may enjoy a dominant position on account of the remaining 75% belonging to a large number of competitors; another enterprise/undertaking with 65% market share may not enjoy the same position because the rest of the market share belongs to a single powerful competitor. Thus, the legislators have intended to give Section 4 a wider scope and make it more effective than the previous provision on abuse of dominant position. Specifying set parameters would have limited the provision and allowed genuine offenders to escape, while embroiling others in tedious litigation.

Section 19 of the Act lays down certain grounds to be considered in determining the dominant position of an enterprise. Relevant statistics regarding market share , the size and resources of the undertaking, the size of its competitors and the existence of entry barriers will be scrutinized while establishing the dominance of an undertaking.

2.4 Dominant Position not prohibited henceforth:

In consonance with the prevailing economic environment in the country the legislators have stated that, “no enterprise shall abuse its dominant position.” Thus, it can be deduced that a dominant position is no longer prohibited. This represents a shift in the legislators’ attitude towards competition law - from strictly prohibiting monopolies to encouraging and ensuring competition in the market. Only an enterprise, which uses its position in a manner that adversely affects the existing competitive forces or the consumers in the relevant market i.e. abuses its position, will be liable under this provision. Nevertheless, with the Act not in force at the time of this article, certain legitimate doubts may be raised in respect of the veracity of this conclusion.

III. Abuse of Dominant Position:

3.1 Unfair or discriminatory conditions or prices in purchase and sale:

There shall be an abuse of dominant position if an enterprise directly or indirectly, imposes unfair or discriminatory condition in purchase or sale of goods or service or price in purchase or sale (including predatory price) of goods or service. One of the most blatant forms of this abuse is manifested in discounts on the selling price. If discounts are given only to a select few customers to the peril of others within the customers’ relevant market, or to a customer who is willing to forgo its rights to purchase from another competitor, such discounts in tandem with its terms and conditions are said to be unfair and discriminatory. Moreover, if such discounts and conditions are imposed with the intention of eliminating competitors or distorting the competitive forces established within the relevant market it is abuse of dominant position. Such a discount is usually imposed by an enterprise on account of its financial dominant and might which cannot be matched by its competitors. By using its deep financial resources, certain enterprises succeed in entering into exclusionary contracts with a majority of the consumers in the relevant market. In the long run, the competitions’ incapability to give these disproportionate discounts and induce consumers into entering into such exclusionary contracts will drive them out of the market.

3.2 Restrict technical and scientific development in the market:

Any dominant enterprise, which by its actions limits or restricts the technical and scientific development within the relevant market, is said to abuse its dominant position. Incessant improvements to products and services in most markets/sectors have propelled research and development costs to reach gargantuan proportions. Thus, any dominant enterprise that uses its exceptional financial strength to develop a product and sell it at disproportionately low costs will in effect limit its scientific development in the market. The competition will be unable to sustain itself in the market in wake of an advanced and cheaper variant, with its product becoming obsolete and its returns/profits diminishing the enterprise will be driven out of the market as it cannot sell its present product and it may not have the kind of resources required to develop a new product and sell it at the disproportionately low costs. With the dominant enterprise’s product the sole product or a product facing competition from significantly weaker and handicapped rivals, such an enterprise will be able to dictate all further developments in the product and its prices, thereby stifling any scope of innovation by the rivals.

3.3 Denial of market access:

If an enterprise uses it’s dominance to enter into any agreement or arrangement resulting in the rivals right to the relevant market being denied/adversely affected, it is said to be abusing its dominant position. If an arrangement has the effect of denying a consumer the right to purchase from any other rival supplier and such an arrangement has come into force because of any inducement given on account of the enterprises dominance, it can be concluded that it is in effect denying market access (read: abuse of its dominant position).

3.4 Using dominant position in one market to enter another:

An enterprise may have ‘a marked ascendancy’ over another enterprise in a different market; this may be manifested in an enterprise exercising its dominance in a particular market to affect the competitive forces in allied/corollary markets. Any enterprise, which uses its financial or technical dominance in one market to enter another market or distort the competitive forces in that market is said to abuse its dominant position in violation of the provisions. Microsoft’s entry into the Internet Browser market serves as an apt illustration of abusing a marked ascendancy. In this example, Microsoft used its position as the overwhelmingly popular Operating System, to catapult its Internet Explorer browser software into the forefront of the Browser market. As a result of Microsoft bundling its aforesaid software for free with their OS, they entered into another product market and ran its competitors out of business.

IV.Summary of penalties under the Act:

The Competition Commission is empowered to impose penalties on a party, which fails to comply with its directions. It can impose a penalty of not more than 10% of the turnover of the enterprise. It can pass a “cease and desist” order, and pass such other orders as may be considered appropriate in light of equity and justice. It can also recommend to the Central Government for “division of dominant enterprise”. The Competition Commission has the power to direct an enterprise to disclose vital information to its competitors. It is pertinent to note that the penalties mentioned in the act are pecuniary and the act does not provide for any criminal punishments.

V. Concluding remarks:

The legislation has been enacted to ensure consumers’ right to free and fair competition. Competition policy should always be molded as an effective instrument to achieve efficient allocation of resources, technical progress, consumer welfare and prohibition of concentration of wealth. The shift from protectionism to promotion of competition in relevant markets represents the legislators’ endeavours to make the Competition Act, 2002 such an instrument.

The overall structure and scope of Section 4: Abuse of Dominant Position; adequately reflects the aforesaid objectives in the following manner:

• Inclusion of most public sector undertakings into the definition of an “enterprise” reflects a positive step away from protectionism.

• The lack of any mathematical parameters in determining dominance, too, indicates that the legislators wish to give the provision the widest scope possible.

• Section 4 does not prohibit “dominance” it only protects the market and consumers from any abuse of such dominance. Therefore, it does not limit the possibilities for expansion of an enterprise, but truly safeguards consumer rights.

Therefore, Section 4 is not against maximization of profits it merely safeguards against unfair means used to maximize profits.

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