Introduction
What if businesses secretly join hands to fix prices, restrict your choices and divide the market?
Competition, as we all know, is a rivalry between two or more businesses that have the same goal. Having a healthy competition in the market is essential. However, it is important to ensure that this competition is fair, and for this, the Competition Act 2002 (‘the Act’)is in play. The Act helps in preventing anti-competitive practices and makes sure that all have freedom of trade.
As per the Act, an agreement can be as simple as a handshake deal. Surprised right? Different from what contract law says. But yes, this is true. If two businesses are acting together in a coordinated way when it comes to increasing or decreasing the prices, it’s an agreement too!
What are anti-competitive agreements?
All agreements that negatively impact competition are prohibited in India. Anti-competitive agreements are agreements made between two or more parties with the same goal of restricting competition. This can be done through bid rigging, market allocation, price fixing, etc.
Recently CCI (Competition Commission of India) has launched an investigation into many advertising agencies. There are allegations that these advertising agencies are involved in price fixing and bid rigging. In the last month itself raids at around 10 different locations were carried out. This highlights the importance of ensuring a sustainable and fair market in India!
Anti-competitive agreements are classified into two types:
- Horizontal agreements
- Vertical agreements
Horizontal Agreements in Competition Law
When agreements are made between individuals and businesses which are in the same distribution or production chain. These agreements usually take place between the distributors or manufacturers.
Legal provision governing horizontal agreements
Horizontal agreement is mentioned under Section 3(3) of the Act. The provision states that any agreement between:
- Enterprises or associations of enterprises,
- Person or association of persons, or,
- Any person or enterprise.
will be considered a horizontal agreement. The provision also further states that all the decisions made and practices carried out by the association of enterprises/persons will also be considered as horizontal agreements. This includes cartels or anything which is similar or identical in nature.
There will be an appreciable adverse effect if the horizontal agreements result in:
- Controlling or limiting the output, services, technical development, etc;
- Direct or indirectly determining the selling or purchasing prices;
- Indulging in conclusive bidding or bid-rigging;
- Divide or share markets.
Types of horizontal agreement
There are a few types of horizontal agreements present, which are:
| Type of horizontal agreement | Provision under the Competition Act, 2002 | Explanation | Result on consumers |
| Price-Fixing Agreements | Section 3(3)(a) | Under this agreement, competitors set a fixed price or decide to maintain a fixed range of prices, or increase the prices of the goods/services. | The consumers are forced to pay a fixed amount for goods/services. There are no options available for them as per their earning capacity. |
| Market Allocation Agreements | Section 3(3)(c) | The markets are divided among the competitors under this type of agreement. They agree that they will not compete in a certain location, type of goods, etc. | The consumer’s choices are restricted due to this type of agreement. They do not get many options to choose from. |
| Output Restrictions | Section 3(3)(b) | The competitors agree to limit or control their supply in the markets and try to manipulate the demand and supply of the goods/services. | Due to this type of agreement, the consumers are forced to pay higher prices for goods/services. |
| Bid Rigging | Section 3(3)(d) | The tenders and auctions are manipulated by the competitors in this type of agreement. The competitors agree to bid specific amounts in the bid and decide the winner beforehand. | This gives unfair advantages to the competitors, and consumers do not get a fair chance of choosing the best available option |
Exceptions to the horizontal agreement
However, there is one exception to horizontal agreements. The joint ventures between two or more businesses will not be considered anti-competitive if they aim to increase production, storage, efficiency, etc. If two automobile companies join hands to launch an EV vehicle in India, it will not be considered a horizontal agreement. The agreement will limit certain factors for the companies in the market, but the main aim behind this agreement is to increase production, launch a new product, collaborate, and increase the efficiency of the goods.
Non-compliance and its results
If any person or enterprise, or association of persons or enterprises, violate the provisions related to horizontal agreements, then they can be liable to penalties up to ten percent of the turnover in the last three financial years. The individuals who are involved in this violation can also face penalties up to Rs. 1 crore.
Case laws
| Builders Association of India v. Cement Manufacturers’ Association & Ors, 2016 | Builders Association of India filed a case against 11 cement companies and the Cement Manufacturers Association in 2010 for cartelization. A hefty penalty was imposed by CCI for price fixing. The case was heard again in 2016, where CCI again penalised the companies based on circumstantial evidence. It was observed that companies had abnormal profits, coordinated behaviour and correlation in price increases. |
| Federation of Hotel & Restaurant Associations of India and Another v. MakeMyTrip India Private Limited and Others (2019) | A complaint was filed against Oravel Stays and MakeMyTrip by the Federation of Hotel & Restaurant Associations. It was observed that MakeMyTrip agreed to list only Oravel Stays hotels and delist their competitors. This restricted the market access for other competitors. CCI had rules against MakeMyTrip as it acted in an unfair manner. |
Vertical Agreements in Competition Law
The agreements between persons and enterprises at different levels of production in different markets are referred to as vertical agreements. The vertical agreements happen between suppliers and manufacturers, or between producers and wholesalers etc.
Legal provision governing vertical agreements
Under Section 3(4) of the Act, the vertical agreements are explained. Any vertical agreement which has an appreciable adverse effect is considered to be anti-competitive in nature. Exceptions to the vertical agreements. Similar to horizontal agreements, there are different types of vertical agreements as well.
Types of vertical agreement
| Type of vertical agreement | Provision under the Competition Act, 2002 | Explanation |
| Exclusive Supply Agreement | Section 3(4)(b) | In this type of agreement, the supplier has agreed to supply only to one specific distributor.. |
| Tie-In Agreement | Section 3(4)(a) | In this type of agreement, the seller puts a condition on the sale to the buyer who is buying something else. |
| Refusal to Deal | Section 3(4)(d) | This type of agreement restricts to whom the goods are being sold. |
| Resale Price Maintenance | Section 3(4)(e) | Under this agreement, the supplier sells the goods with the condition to sell them again at the stipulated price. |
| Exclusive Distribution Arrangement | Section 3(4)(c) | While in this type of agreement, the distributor agrees to sell only to one specific seller his goods. |
Non-compliance and its results
If any individual or business does not comply with Section 3(4), then they are liable to a penalty amounting to 10 percent of the average turnover of the last three preceding financial years.
Case laws
In the case of Shamsher Kataria v. Honda Siel Cars India Ltd (2014), CCI imposed penalties on manufacturers of automobiles because they entered into anti-competitive vertical agreements. The automobile manufacturer and the authorised dealers entered into an agreement which restricted the sale of automobile spare parts to any third party. CCI stated that this agreement would result in competition of the brand on the intra-level.
Key difference between horizontal and vertical agreements
| Basis | Horizontal Agreement | Vertical Agreement |
| Operation level | This agreement happens on the same level of the production line. | On the other hand, these agreements take place on different levels of the supply or production line. |
| Legal presumption | There is no need to prove that the agreement has an appreciable adverse effect separately. It is presumed to be anti-competitive in nature. | These agreements are assessed under the rule of reason. The actual impact of the agreement on the markets is seen. |
| Impact on competition in the market | The competition is directly eliminated when a horizontal agreement is present. | In vertical agreements, there is a chance that it will improve efficiency, however, it will also restrict the competition. |
| Treatment under the law | Horizontal agreements are illegal. | The vertical agreements differ on a case-by-case basis. |
| Exceptions | Joint ventures | Intellectual property rights protection. |
| Types of agreement | Bid rigging, price fixing, supply control, market allocation. | Exclusive supply/demand distribution, tie-in agreements, refusal to deal, resale price maintenance. |
Recent amendments and changes
With the Competition (Amendment) Bill, 2022, some amendments and changes were made concerning horizontal and vertical agreements.
- The definition of the relevant product market now also gets a supplier perspective. Now the services and products will be interchangeable from the side of the supplier if:
- There is no significant risk or extra cost
- The supplier can very easily change marketing/production
- The response to long-lasting and small changes in prices is now feasible.
- The current provision under Section 3(3) prohibits any cartel situation in the markets. With the amendment now, the non-competing facilitators are also added. Like distributors, trade associations, etc. The entities do not need to be in the same line of production to be presumed as cartels anymore. The burden of proof lies on the enterprise to prove that they are not a part of the cartel.
- The scope of Section 3(4) is also broadened. The definition, which previously included formal agreements, now covers any other form of arrangement. The section now covers both goods and services.
- The vertical agreements will not apply to agreements which are made between the end consumer and the enterprise.
- The ‘exclusive supply agreement’ was renamed to ‘exclusive dealing agreements’.
Conclusion
So the next time you see two businesses oddly in sync in terms of market control or price control, you will know that there is more to it. Both the vertical and horizontal can harm the fairness in the competitive market. And to keep things in check, we have the Competition Act, 2002. If there is a fair market, it will benefit all of us whether as consumers or as business owners. So it’s important to stay aware, observe and follow all the policies laid down by the authority.
