What is the difference in the legal treatment of a horizontal price fixing agreement and a non-horizontal price fixing agreement? Which one is more li

Question 1.

What is the difference in the legal treatment of a horizontal price fixing agreement and a non-horizontal price fixing agreement? Which one is more likely to be punished? Explain by giving an example of a CCI order dealing with each of a horizontal and a non-horizontal price fixing agreement. [10 marks, 600 words]

Price fixing occurs when companies agree to set prices for their products collectively. Imagine four battery manufacturers deciding together to sell their products at a fixed price. While a small price increase might not seem like a big deal to consumers, these agreements can lead to significant profits for the manufacturers. However, these arrangements not only sets market prices, but can also include pre-planned profit margins, discounts, delivery charges, promotional offers, and limits on product supply and production to increase prices. The aim of these anticompetitive agreements is to help participants increase profits, often to the detriment of consumers.

Price fixing can happen between manufacturers and retailers (non-horizontal price fixing) or between direct competitors (horizontal price fixing). Horizontal and non-horizontal price fixing agreements involve different types of coordination among competitors, and their legal treatment can vary. Section 3 of the Competition Act (Act) divides anti-competitive agreements into Horizontal and Vertical or Non-horizontal agreements.

Horizontal Price Fixing Agreements:

Horizontal agreements, defined under Section 3(3) of the Act, involve coordination or collusion between direct competitors at the same level of production/supply chain, usually involving firms that would otherwise be competitors, to fix prices, coordinate business strategies, allocate market portion, etc. Price fixing among direct competitors is considered to be a grave violation of competition law and assumed to have appreciable adverse impact on competition (AAEC) as it completely eliminate the competition among the rivals. Some key components:

Serious Violation: Horizontal price fixing agreements are presumed to be anticompetitive without any detailed analysis. They are considered to be serious violation of competition law.

Effect on Competition: These agreements weaken the market conditions and have direct effect on competition leading to complete elimination of the competition between direct competitors leading to increased prices, reduced innovation and market supply.

Likelihood of Punishment: Horizontal price fixing agreements directly disrupt competition among rivals and are seen as serious violations. They're quickly judged to be anticompetitive without a deep look into the details.

In Builders Association of India v. Cement Manufacturers Association & Ors, the Builders' Association of India (BAI) filed a complaint with the Competition Commission of India (CCI) against Cement Manufacturers' Association (Association) and 11 cement companies, claiming that these were engaged in anti-competitive practices such as cartelization, price fixing, deliberate reduction of cement production and supply, and zonal market division. The CCI, after establishing an initial assessment, directed investigations and found the parties guilty of violating section 3(3) of the Act by engaging in collusive price-fixing, restricting cement production and supply to increase prices, exchanging commercially sensitive information, and other coordinated actions leading to cartelization.

The CCI observed the following:

1. Circumstantial Evidence: CCI used circumstantial evidence in proving cartelization, considering how secretive cartels can be.

2. Conduct: The CCI observed that there is no need for an explicit agreement to exist between the parties to prove cartelization, and that it can be proved merely by the conduct of parties. The CCI checked the conduct of cement companies to find out the section 3 violation and potential misuse of their strong market position.

3. Market Structure: The CCI observed that In an oligopolistic market, market players are more likely to be aware of each others actions and influence each others decisions, and collusion is more likely, leading to non-competitive outcomes. Due to the presence of just 11 cement companies, the existence of collusion was believable.

4. Exchange of Information: The companies were exchanging commercially sensitive information such as production data, price information, sales, etc. The CCI concluded mere exchange of commercially sensitive information as anti-competitive practice.

5. Role of Association: The CCI noted that Association was facilitating the cartel among the cement companies through allowing exchange of commercially sensitive information and coordinating their actions.

6. Price Increase: As the demand was still the same, the companies intentionally reduced cement production and supply in the market to charge high prices. The CCI also observed that there was no reason for the companies to produce less cement as there was enough demand in the market with construction industry doing well during that time.

7. Price Parallelism: The DGs report revealed a huge similarity in the prices of cement companies highlighting some form of coordination between them. The CCI noticed that such pricing similarities cannot be a result of healthy market competition but rather indicates a collusive behavior among the companies to influence and set the market prices together.

8. Huge Profits: The companies made significantly high profits over their expenses in the relevant years of potential collusion as compared to previous years.

9. Price Signaling: It happens when a couple of large companies in an industry show or tell the market about how they plan to set prices through the media. Basically, they establish the pricing standard and other companies follow them. This arrangement helps different companies have similar pricing strategies. In this case, some cement companies gave price signals through media highlighting the coordinated actions.

10. Meetings: The cement prices went up after high power committee meetings with Association highlighting possible collusion and coordination between the companies.

11. Restricting Production and Supply: Despite having the capacity, the companies restricted the cement production ultimately affecting its market supply. They also have raised their prices at the same time in all five zones, despite having different production and transportation costs. The CCI observed that such price increase doesnt seem to be connected to the higher costs of making cement. These acts again highlighted coordinated actions.

12. Impact on Consumers: Such coordinative behavior among the cement companies leading to high prices and restricted competition created AAEC and ultimately harmed consumers.

Decision: The CCI found the cement manufacturers guilty of violating section 3(3) of the Act through coordinated efforts, including collusive price-fixing and restricting cement supply. The CCI directed the companies to immediately cease anti-competitive practices and asked the Association to refrain from collecting and sharing information about prices and production. It also imposed fine of 6,700 crores, which decision was upheld by NCLAT. When the case reached the Supreme Court, the Court asked the companies to pay 10% of the fine amount while awaiting a final decision on the appeal.

Non-Horizontal Price Fixing Agreements:

These agreements, defined under Section 3(4) of the Act, involve coordination between firms at different levels of the production/supply/distribution chain such as manufacturers and distributors or suppliers and retailers. Imagine manufacturers fixing either minimum or maximum resale prices for their products, with the former often referred to as resale price maintenance. These vertical price fixing practices can also include exclusive supply and distribution arrangements and tie-in arrangements, all aimed at influencing downstream pricing. While horizontal agreements are prima facie considered anti-competitive, these agreements are evaluated through rule of reason approach on case-by-case basis as they do not directly eliminate competition between the competitors and may be beneficial in some cases. The authorities adopt the rule of reason approach here whereby these arrangements are subject to more subtle analysis as authorities evaluate the overall negative impact on the competition by considering factors such as entry barriers, market dynamics, market conditions, consumer protection. Unlike horizontal agreements, there is no prima facie assumption of AAEC in vertical arrangements.

Likelihood of Punishment: Non-horizontal price fixing agreements undergo a rule of reason analysis and are looked at more closely to see how they affect competition overall. They might not be punished as harshly as horizontal agreements, but it depends on the details of each case and how they impact the market. Punishments can include fines to corrective measures.

Resale Price Maintenance: It is a business practice when a manufacturer sets the minimum or maximum price at which retailers or distributors must sell its products. This could have both positive and negative effects on competition. Usually, maximum non-horizontal price-fixing is considered as pro-competitive as it usually keep the prices in check. Therefore, it is always decided on case-by-case basis unlike minimum price fixing which is prima facie anti-competitive, subject to certain exceptions such as consumer benefit. It may limit intrabrand competition but encourage interbrand competition.

In the case of In Re: Alleged anti-competitive conduct by Maruti Suzuki India Limited in implementing discount control policy vis--vis dealers, an anonymous complaint was filed with CCI alleging that Maruti violated competition Act provisions by restricting dealers from giving discounts without consent and levying monetary penalties on the dealers for not following the order. The DG investigated the relevant geographic markets for sale and distribution of passenger cars in India, and found that Maruti was indeed engaging in resale price maintenance through its discount control policy (Policy) imposed on its dealers. This policy was monitored by its mock customers or mystery shopping agencies to check whether the dealers were following the instructions or not. The DG concluded that this act violated section 3(4) of the Act as it created an AAEC by reducing competition among different car brands manufacturers and among dealers, ultimately leading to high market prices and less choices for consumers.

The CCI rejected Marutis contention that there was no formal agreement citing the broad ambit of the agreement under the Act, and concluded that Marutis Policy acted as an agreement and restricted the efficient competition between the car brands (interbrand) and between the various dealers (intrabrand). The CCI noticed that Maruti imposed prior consent condition on dealers and also imposed penalties for non-compliance. The CCI held that resale price maintenance reduces market competition by decreasing pricing pressure among the rival manufacturers and increasing prices for the consumers. The CCI held that Maruti violated section 3(4) and 3(1) of the Act and imposed a penalty of INR 200 crores.

In Jasper Infotech Private Limited (Snapdeal) v KAFF Appliances (India) Private Limited, the CCI recently Snapdeal's allegations of Resale Price Maintenance (RPM) against Kaff Appliances (India) Pvt. Ltd. (KAFF). The case involved KAFF cautioning Snapdeal about counterfeit products and refusing warranties for items sold on the platform The DG's investigation found KAFF lacked enough market power to cause an appreciable adverse effect on competition. However, CCI rejecting DG's observation, stated that online platforms like Snapdeal add value to products and act as separate distribution channel. Hence, they are not immune to RPM despite being a non-purchaser. The CCI used rule of reason approach and found no evidence of RPM practice against the dealers. With intra-brand competition among dealers and no harm to online sales, KAFF's actions were deemed non-anti-competitive, and no violation of Section 3(4)(e) of the Act was found against Kaff/OP.

The above cases shows the CCIs actions against unfair pricing in the market causing AAEC.

This overview highlights how serious horizontal agreements are and how different types of agreements are treated differently. It's important to remember that legal treatment varies globally based on jurisdiction and competition laws.

Part B

Question 4.

I. Would you classify Zubis acquisition of Star as horizontal, vertical, conglomerate or a mix of any of these? Give reasons for your answer. [3 marks, 100 words]

Zubis acquisition of Star can be classified as a horizontal acquisition as both Zubi and Star are OTT streaming platforms being direct competitors in the market for online streaming services. Horizontal acquisitions occur when two firms operating at the same level of the production/supply chain in the same market merge with or acquire one another. It may come under the ambit of competition scrutiny if the transaction falls under the jurisdictional thresholds mentioned under Section 5 of the Competition Act (Act). Zubis acquisition of Star would result in the consolidation of market share of two OTT platforms with notable market positions leading to reduced competition in the OTT streaming services market to some extent. The acquisition could be of competition concern as it will eliminate competition between Zubi and Star when it comes to competing for quality content and subscribers leading to increased subscription fees and less choices for consumers.

II. Should the acquisition be notified to the CCI? If so, why? Explain by detailing why the transactions may or may not qualify for an exemption from notification requirements. Would the transaction qualify for a Green Channel notification? [7 marks, 600 words]

Yes, the acquisition should be notified to the CCI due to the following reasons:

1. Parties Test: We need to consider the assets and turnover of Zubi and Star together as the companies involved in the combination. Zubi is the second largest OTT streaming platform with 35% market share and more than INR 5000 crores assets, and Star having assets of around INR 1500 crores. Zubis assets alone surpass the threshold limit. Considering Star's assets in addition to Zubi's, they jointly have assets significantly exceeding the threshold limit of INR 1000 crore or more under the section 5 of the Act. Additionally, given Zubis significant market share, it is reasonable to believe that its turnover in India is also likely to be significant. This acquisition satisfies the parties test under the Act.

2. Group Test: We need to consider the combined assets and turnover of the parties after the acquisition is materialized. Zubi is already a big player in the OTT industry with significant market share. Considering the combined assets of Zubi and Star after the acquisition, the group will jointly have assets significantly exceeding the threshold limit of INR 4000 crore or more under the Act.

Zubis acquisition of Star satisfies the criteria of minimum threshold set out by the Act requiring notification to CCI for further detailed evaluation. This transaction is likely to have AAEC in the market with Zubi already being a significant player in the OTT market and Star expanding its market share after acquiring IPL streaming rights.

No Exemption: The transaction do not qualify for exemption from notification requirements for the following reasons:

1. Transaction Size: Given the assets and significant market shares of Zubi and Star as mentioned above, the acquisition exceed the threshold limit prescribed by the Act.

2. Target Exemption and other exemptions: The De Minimis or Target exemption would not be applicable here as it is only applicable when the acquired entity has assets less than INR 350 crore. However, Star has assets of around INR 1500 crores which significantly exceed the threshold provided under the Act. Other sector specific exemptions including government entities and exemptions under Schedule I of Combination Regulations (acquisition of shares due to bonus issues, stock splits, buybacks, or subscription to rights issues, transactions approved under Section 31, share subscriptions, financing facilities, or acquisitions by public financial institutions, foreign institutional investors, banks, or venture capital funds based on loan or investment agreements) are also not applicable here.

3. Significant Market Player: The transaction involves Zubi, a significant OTT market player, acquiring another competitor with expanding market share and exclusive streaming rights to IPL. This transaction may affect competition as it will take up a substantial combined market share leading to reduced competition and potential dominance.

4. Content: The acquisition will also reduce competition in acquiring streaming rights to OTT contents such as events, TV shows, movies, etc, leading to high subscription fees and less choices for consumers.

5. Less Options for Content Production Houses: The transaction will also affect the negotiating power of content production houses when it comes to selling their products on different OTT platforms.

6. Entry Barriers: Zubis argument of low entry barriers do not hold any value as high entry costs and need for exclusive content to attract subscribers could act as barriers to new entrants.

Green Channel Notification: The transaction also not do qualify for Green Channel notification. The Green Channel route is a quicker and simpler way for specific types of mergers and acquisitions that are less likely to raise competition concerns and where there is no horizontal or vertical overlapping. It allows parties to self-asses the transactions and inform the CCI without going into detailed analysis. However, the current horizontal acquisition is likely to have AAEC for the reasons mentioned above.

Therefore, there is no clear exemption applicable to this transaction as it involves two significant OTT market players which could lead to competition concerns requiring CCI scrutiny.

III. Are the remedies offered by Zubi behavioural or structural in nature? Explain what are behavioural remedies and structural remedies. [4 marks, 300 words]

The remedies offered by Zubi are a mix of behavioural and structural remedies. In a fair competition, there are two kinds of solutions offered to address the anti-competitive concerns arsing due to mergers or acquisitions:

1. Structural Remedies: These involve making changes to how market has been set up by requiring companies to sell or give away or transfer their assets or subsidiaries or parts of business. The goal is to make the market more competitive by removing all unfair effects.

Example: Imagine the merger of two firms leading to reduced market competition, the structural remedy would be merged firm selling a part of their business to a third party to prevent abuse of dominant position.

In the current case, Zubi proposal to sell its movie production facility to a third party to reduce its exclusive access to content is a structural remedy. It basically involves a change in the organizational and market structure of the merged entity by selling a part of its assets which will mitigate CCIs concerns about reduced competition for quality content.

2. Behavioral Remedies: These involve focusing on the actions of the firms involved in the transactions rather than the market structure. This could include imposing certain conditions or restrictions on how companies behave to stop unfair practices.

Example: In the merger of two firms, the behavioural remedy would be to restrict the merged entity to indulge in unfair practices, controlling prices and preventing market entry by other competitors.

In the current case, Zubis proposal to not increase its subscription fees for 3 years post acquisition is a behavioural remedy as it involves a commitment from Zubi to regulate its future conduct after the acquisition without any change in the market structure. This solution addresses the CCI concerns about reduced price competition in the market.

In conclusion, Zubi is taking a dual approach to address competition concerns by using both behavioral and structural remedies. While behavioral remedies rely on the assumption that the merged entity will act on its commitment, structural remedies are generally considered more effective in dealing with the root causes of unfair competition and promote healthy competition. Zubi's combination of these remedies reflects its commitment to ensuring fair conduct and a healthy market structure.

In Dish TV India Limited & Videocon D2h Limited amalgamation, the resultant entity, in a customer-friendly move, promised to cover the expenses of adjusting or changing antennas and set-top boxes for customers if needed.

IV. Are the CCI's concerns about harm from the acquisition classifiable under unilateral effects theory or coordinated effects theory? Do you agree with the CCIs concerns regarding the AAEC arising from the acquisition? Give reasons for your answer. [6 marks, 500 words]

Unilateral effects theory focuses on the potential anti-competitive actions of the entity post merger or acquisition such as price increase. It basically explains that the merged entity could impact the competition due to increased market power, raising prices, reducing innovation and quality. Imagine two direct competitors in the same market merging and the resultant entity raise prices without concerns about losing customers to other competitors.

Coordinated effects theory, on the other hand, focuses on the potential anti-competitive actions in the form of coordinated behaviour of the remaining competitors in the market i.e. resulting in potential collusion between the market players and reduced competition. Imagine if two major competitors merge and the few remaining players coordinate their actions in a way to disrupt the competition.

These two theories helps in understanding the potential results of the transactions on the market competition and consumers.

The CCI uses the substantive test laid down under section 20(4) of the Act to determine the AAEC by looking at the following factors:

• Market shares of merged entity and remaining competitors
• Market concentration post transaction
• Market growth and balancing buyer strength
• Remaining competitors left in the market
• Entry barriers
• delineation of the relevant market
• horizontal or vertical overlapping

In the current case, CCIs concerns on Zubis acquisition of Star could be majorly classified under unilateral effects theory for the following reasons:

Unilateral Effects:

1. Potential Abuse of Dominance: Zubi, being the second largest OTT platform with 35% market share, acquiring Star with significant assets and IPL streaming rights may result in increased market dominance by the resulting combined entity. It will increase Zubis market concentration by reducing competition.

2. Effect on Content: The acquisition will also reduce competition between Zubi and Star in acquiring streaming rights to OTT contents such as events, TV shows, movies, etc, leading to high subscription fees and less choices for consumers.

3. Less Options for Content Production Houses: The transaction will also affect the negotiating power of content production houses when it comes to selling their products on different OTT platforms.

4. High Subscription Fee: Though Zubi faces competition from Trim Video, Zubi's acquisition of Star could potentially reduce price competition for subscription fees among the different streaming platforms due to decrease in the number of significant competitors.

While CCI's major concerns indeed leans toward unilateral effects, the presence of some coordinated effects, such as the impact on overall market competition, cannot be entirely ignored.

Coordinated Effects:

1. Streaming Rights and Innovative Technology: Star has exclusive rights to stream IPL and other sports events because of its innovative technology which will increase its market share to 20%. This gives Star and Zubi a unique advantage over other competitors. The innovative technology introduced by Star enhances its competitive position, potentially leading to coordinated effects in the sports streaming market.

2. Subscription Fee: Star and WeTube having lower subscription fees than Zubi and TrimVideo. The fear that the acquisition will lead to a reduced price competition for charging subscription fees among streaming platforms can be indicative of coordinated effects in subscription pricing. It suggests that the combined entity may have increased market power to influence subscription fees collectively with reduced competitive pressure. Coordinated effects among other firms, especially in terms of pricing strategies for subscription fees, are possible after the acquisition.

3. Competition with Trim Video: Zubis individual competition with TrimVideo could be a unilateral effect, but the acquisition will affect the overall market competition for content and fees, involving multiple players in the market (coordinated effect).

In summary, the concerns involve a combination of unilateral effects and coordinated effects, reflecting the multifaceted nature of the potential anticompetitive impacts of the acquisition.

While Zubi argued about its competition with Trim Video regarding content acquisition and subscription fees, the primary focus is on the competition between Zubi and Star, the entities involved in the acquisition. Additionally, Zubis argument of low barriers to entry in the market does not negate the fact that the acquisition could impact existing competition, especially between Zubi and Star. To conclude, the CCI's concerns about the AAEC arising from the acquisition appear valid, especially considering the horizontal nature of the transaction and its potential impact on competition and price dynamics in the OTT streaming market.

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