Opinion | Reviewing the Competition Act
Network economies, virtual markets, the internet of things and the like call for a modern regulatory framework
The Union ministry of finance has constituted a panel of experts to review the Competition Act/rules/regulations. This is timely; indeed, an urgent requirement. Change was in the offing ever since the size of the Competition Commission was reduced from seven to four followed by rumours of limiting the Commission’s jurisdiction.
Periodic reviews of the Competition Act are important. There has been no review of the current Act (2002) since its enactment. The Raghavan Committee that formulated the need for a proactive competition law in lieu of the Monopolies and Restrictive Trade Practices Act (MRTP), 1969, is of 1999 vintage. In fact, the review is overdue if the Act has to remain relevant.
Network economies, platforms, virtual markets, the internet of things, the increasing importance of non-tangible capital like patents—these call for a modern regulatory framework “in view of changing business environment” as the press release points out. A few illustrations of the constraints imposed by the Act would help show how the prevailing legal framework can be a barrier when it comes to applying the economics of modern business to antitrust abuse. It is a major concern for the kind of globalized knowledge-based economy that India wishes to be.
At the outset, the clarity in objectives that necessitated the replacement of the MRTP by the Competition Act has been diluted. While the Raghavan Committee had highlighted competition and consumer welfare as the twin objectives of the Act, the preamble, in asserting competition and consumer interest, includes the rider, ‘keeping in view the economic development of the country”.
Innocuous as the statement is, it is open to interpretation in a way that protects domestic producers. This is strengthened by the definition of consumer in section 2(f) of the Act. The section includes both producer and the end consumer in the category of ‘consumer’ when a purchase is “either for commercial use or for personal use”. Consequently, most cases of antitrust abuse—roughly over 50%, in fact—have been filed by producers. To claim that these filings are on behalf of the end consumer is stretching the definition.
A wide definition of consumer has had two outcomes. Firstly, it has encouraged producers to ‘fire from the shoulders of the Commission’ as a strategy for meeting competition. Secondly, it has led to the emergence of perverse situations where ‘maximization of producer welfare’ is equated with maximization of total welfare. This is against the well-established tenet of competition economics, maximization of consumer welfare. As a result, pricing schemes, be they predatory or unfair pricing, (MCX-SX Vs NSE), are viewed from the perspective of a producer rather than that of the benefits/harm accruing to end consumers.
The optimal pricing solution is best arrived at by the interaction of demand and supply. The revenue model for an aggregator is from advertising. Intervention in market pricing structures by the authority may end up protecting the competitor at the cost of competition.
The gains from network economies for advertisers in search of sustainable business models depend on innovation, including innovative pricing mechanism. This also calls for redefining dominance, which is now measured by standard metrics of market share. To associate market power with dominance rather than look for the presence of entry barriers is a sure way to kill the emergence of business on platforms. Domination need not be associated with anti-competitive behaviour given the rapidly changing nature of technology where new innovation may disrupt the entire existing ecosystem. Thus, the prevailing debate is on networks and lock-in effects, looking at new entry barriers such as access to data—and on the sustainability of these barriers in a competitive environment.
The Act defines dominance and market power in terms of the “ability to operate independently of competitive forces prevailing in the relevant market” (section 4 explanation) while section 19 (4) lists 13 factors that define dominance, including any other factor the Commission wishes to consider. Seen with section 4, the operative section for ‘Abuse of Dominance’ the conditionality for market power is reduced to one of mere dominance.
If an enterprise is dominant, market power is considered inevitable. This is dangerous for investment flows to digital markets where dominance is the norm.
Arguments of dominance ultimately depend on defining the ‘relevant market’ of antitrust abuse. The relevant market (product) is with reference to substitutability or inter-changeability in terms of characteristics, their prices and intended use (section 2(t)).
My concern is slightly different. The definition has no reference to the concept of the market as a place or mode for transacting business. As a result, there have been decision of antitrust violation in a ‘non-market’. The classic example is the Bharat Matrimony, CUTS v Google case. Google is a search engine. It is not in the business of travel trade, the market where abuse was found on the “probability of possibilities”.
The agenda before the expert committee is vast and complex, as the examples mentioned here show. And here is a provocative question: is a detailed Act necessary when business conditions are so fluid?
Geeta Gouri is a former member of the Competition Commission of India.
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