This article is written by Ronika Tater, a student of University of Petroleum and Energy Studies, School of Law. In this article, she discusses the importance of economics by interpreting the competition law and the role of competition for the growth and development of the economy in society.
Competition law is the branch of economics, as this is predicted by the frequent references to economic concepts and the method of competition and regulatory authorities, the judicial precedents and the expanding of soft law relating to interpreting the competition law and regulatory statutes. As economics forms the basis of competition law, it is essential in determining and predicting market behaviour and a pre-understanding of the concepts of economics helps economists or a lawyer to adopt a methodical approach especially dealing with matters of competition law.
Considering the economic growth and development of the country, the Government constituted the Competition Act, 2002, with the objective to constitute a commission to preclude practice having an adverse effect in the market, to facilitate and sustain competition in markets, to ensure the interest of consumers and to preserve the freedom of trade which is also a fundamental right provided under Article 19(1)(g) in the Constitution of India, 1949, to every participant in the market in India.
Evolution of competition law in India
India is one of the first developing countries to have a competition law of its own, known as Monopolies and Restrictive Trade Practices (MRTP) Act, 1969. It was constituted on the recommendations of the Monopolies Inquiry Committee (MIC) which stated in the report that there is a high concentration of economic power of Industries in India during the period. In 1999, the high-level Raghavan Committee was constituted which recommended replacing the MRTP Act with the present competition law for facilitating competition in the market and reducing anti-competition practices in the economy. Later, a committee on National Competition Policy was constituted by the Ministry of Corporate Affairs (MCA) in June 2011, which stated that the competition policy should aim at facilitating competitive market structure in the economy to raise the rate of productivity and support inclusive growth in the economy.
The Competition Law Review Committee (CLRC) was constituted in October 2018 to review the Competition Act, 2002, the committee recommended certain reform. The draft Competition (Amendment) Bill, 2020 which states certain extraordinary amendments which would boost the competition regime in India. One of the major amendments brought forward by this bill, owning to the digital sector which leads to an increase in compliance costs for businesses impacting the ease of doing business. It is important to note that the new bill mandates the limit only after providing economic and legal assessment.
Indian competition law framework
Article 38 and 39 of the Constitution of India states that the State promotes the welfare of the people by securing and protecting the citizen to maintain social order in which justice, social, economic, and political is involved. Considering this, the parliament first enacted the MRTP Act in 1969 and thereafter, the Competition Act to promote equitable distribution of wealth and economic power. The object of the establishment of the act was to open the country for globalization by opening the economy, removing control, and restoring liberalization.
The following are the important elements from the competition act and also highlights the importance of economic:
- Section 3 of the Competition Act states that any agreement which causes or is likely to cause an Appreciable Adverse Effect (AAE) on competition in India is anti-competitive. However, AAE is not defined anywhere in the act but Section 19(3) of the Competition Act states the following factors that the Competition Commission of India (CCI) determines as to an agreement has an AAE competition under Section 3:
- Creation of barriers to new entrants in the market.
- Driving existing competitors out of the market.
- Foreclosure of competition by providing obstacles into the market entry.
- Accrual of benefits to consumers.
- Promotion of technical, scientific and economic development through the means of production or distribution of goods or services.
- Promotion of technical, scientific and economic development by means of production or distribution of goods and services.
- Section 4 of the Competition Act deals with the abuse of dominant position and it is important to note that the competition Act does not prohibit the mere possession of dominance that could be achieved through superior economic performance, the economic power of the enterprise consisting of commercial advantages over competitors, or by innovations. Further to analyze abuse of dominance the CCI should apply economic principles. The three-step test to determine abuse of dominant position is below-mentioned:
- Determine the relevant market.
- Find out the dominant position in the relevant market.
- To establish the abuse of a dominant position.
- The two-sided market is one of the niche areas in economics and competition policy. The businesses operate platforms in such a case are connected to both the two groups of customers, help the consumers to interact and then create value out of this. This type of market and platform has become increasingly relevant in the competition law because of the internet domain and its uses for good. The number of activities through technology has increased and as more and more economic activities increase the internet platform will become the main source of value in commerce. Hence, most of the internet platforms will be two-sided markets consisting of both merchants on one side and the end-consumers on the other.
The basic concept of economics
Adam Smith defines economics as “an inquiry into the nature and causes of the wealth of nations.”
To succeed in competition law, the basic concept of economic should be well-versed as below-mentioned:
- Fundamentals of demand, supply and market equilibrium.
- Consumer and market behaviour.
- Types of markets.
- Basic concepts in game theory.
- Factors and quantitative test for assessing market power.
- Cartelization strategies.
- Approaches to cartel detection.
- Economics of abuse of dominance.
- Tests for merger analysis.
- Anticompetitive effects and efficiency defence in mergers.
- Merger remedies.
Role of economics in competition law
Competition law is a branch of economics and it is essentially concerned with the study of the market with the objective to ensure that there is the competition between the suppliers in any market and that the competition benefits the consumer thereby, increasing growth and development in the economy. On the daily basis, the role of competition law is to identify the markets and assess whether the competition is fair and just in those markets. It also involves assessing how the actions of the company would affect competitors and consumers. These are the major economic issues.
Economists study the role of markets and how goods and services are allocated to the consumers and it also keeps a check on the demand and supply in the market to provide equilibrium. They are also interested in how the consumer reacts in various cases such as when there are more or few competitors in the market when companies merge or when companies change or are taken away from the market. Thereby, keeping a check on the firm’s reaction and behaviour also. Economists provide an answer to such issues, hence, understanding economics would provide clarity and transparency on how the market operates and what action should be taken to prevent regulation in the markets through just and fair legislation.
Economics is an essential tool to assess the market power and to determine the relevant boundaries of the market in which the competitors play an important role, and the competition authorities should analyze it. It is quintessential for the legal practitioners to be well-versed and have a clear understanding of the economic issues, market structure, and behaviours of different firms.
The following are the role of economics:
- It provides important insights into market structures, business practices, market structures, and incentives, and the adverse effects of those business practices on the economy.
- However, economists do not always agree about whether a business practice would affect competition in the market.
- Hence, an application of economics to competition law analysis can result in transparency, precision and predictability in the law enforcement.
Applications of Economics
The following can be applied to determine the competition in the market:
- Defining and identifying the relevant market.
- Identifying and measuring market power.
- Identifying and assessing barriers to entry.
- Analysing pricing patterns.
- Analyzing competition effects.
- Quantifying economic effect or damages in the market.
- Assessing efficiencies.
The following are some takeaways from economics:
- There are certain products in the market for which the minimum efficient scale or scope of production does not take away from several competitors to promote efficiency in the market.
- Whenever competitors compete they take business away from each other.
- It has been noticed that certain business practices are always anticompetition such as in the case of vertical and horizontal mergers. Though, in certain circumstances, it may be enhancing.
Competition law has conjoined with economy theory since its inspection. understanding the economic market behaviour, perfect and imperfect competition, producers and consumer rights, the rise and fall of consumer demand, the adverse effect of various factors on the price of a product, consumer behaviour, etc. plays an important instrumental to competition law. Thus, understanding the basic concepts of the economy to regulate competition law is quintessential.