Anti Competitive Agreement

Shardul Amarchand Mangaldas & Co
ANTI-COMPETITIVE
AGREEMENTS
10 December 2015
Faculty Development Programme on John Handoll
COMPETITION LAW Senior Adviser – European
and Competition Law
© Shardul Amarchand Mangaldas

ANTI-COMPETITIVE
AGREEMENTS:
INTRODUCTION
10 December 2015
and Competition Law

INTRODUCTION: WHAT ARE WE HERE FOR?
 Faculty Development Programme on Competition Law

 Capacity Building – “Training the Trainer”
 General Objective:
 To deepen and broaden knowledge of Competition Law as academic subject
 To assist academic development by enhancing teaching
 Specific Objective of these Sessions
 To assist participants in understanding Legal Analysis and Evidentiary Standards
 (1) Horizontal Agreement, Cartel – Price and Non-Price – and Joint Ventures
 (2) Vertical Agreements and their Various Forms
 Legal Analysis: John Handoll (Shardul Amarchand Mangaldas)
 Economic Analysis: John Ramirez (Econ One)
 Our job is NOT to give you a three hour lecture which you reproduce to your
students, but to provide a framework and ideas for you to develop an
structured, informed and effective course on competition law 3
INTRODUCTION: SCOPE OF LEGAL SESSIONS
 Outline discussion of legal framework and some issues

 Followed by economic comment /analysis
 Session 1: Horizontal Agreements
 Section 3 of Competition Act
 AAEC
 Cartels
 Trade Associations and Information Exchanges
 Joint Ventures
 Leniency
 Session 2: Vertical Agreements
 Section 3(4) of Competition Act
 Position in EU
 “Good” and “Bad” Agreements
 Different Types of Vertical Agreements
 Establishing an AAEC 4
INTRODUCTION: STRUCTURE OF SECTION 3
 Section 3(1) prohibits entry into anti-competitive agreements which cause

or are likely to cause an appreciable adverse effect on competition (AAEC)
within India.
 Such agreements are void (Section 3(2))
 Covers horizontal, vertical and (arguably) other agreements (Hiranandani
Hospital)
 CCI is “enforcer”. Makes determination on basis of evidence, applying
“negative” and “positive” factors for determining AAEC
- Creation of barriers to new entrants in the market
- Driving existing competitors out of the market
- Foreclosure of competition by hindering entry into the market
+ Accrual of benefits to consumers
+ Improvements in production/distribution of goods/provision of services
+ Promotion of technical, scientific and economic development
5
INTRODUCTION: STRUCTURE OF SECTION 3 (CONT.)
 Different approach to AAEC for horizontal agreements and vertical

agreements
 For horizontal agreements, there is a presumption of an AAEC
 This presumption does not apply to “any agreement entered into by way of joint
ventures if such agreement increases efficiency in production, supply,
distribution, storage, acquisition or control of goods or provision of services”
 The presumption is rebuttable, but it may be more difficult to show there is no
AAEC in the case of cartels
 For vertical agreements, the onus is on the CCI to show an AAEC
6
INTRODUCTION: FACILITATING ENFORCEMENT BY THE CCI
 As penalties are administrative not criminal, CCI can apply lower standard of proof
than criminal standard of “beyond reasonable doubt”
 Horizontal agreements:
 “Balance of probability”, “liaison of intention” – later, “preponderance of
probabilities” (CCI)
 “Strong probability”, but varying application with unlikely or particularly serious
events requiring more convincing proof (COMPAT in LPG Cylinders)
 Vertical agreements:
 CCI has used a fairly low standard of proof: “reasonable tendency to prove”
 Broad definition of “agreement” given in Section 2(b) of Competition Act
 Agreement includes any agreement or understanding or action in concert
 A “nod or a wink“ will do (Lord Denning)
 Especially in the case of cartels, the CCI can rely on circumstantial evidence
 “the existence of an anti-competitive practice or agreement must be inferred
from a number of coincidences and indicia which, taken together, may, in the
absence of another plausible explanation, constitute evidence of the existence of
an agreement” 7
INTRODUCTION: SANCTIONS
 Section 27 of the Competition Act sets out wide range of sanctions. CCI may:
 Issue a “cease and desist” order
 Impose financial penalties on the enterprises and individuals
 “Standard”: up to 10% of average of turnover for last three preceding financial
years
 “Cartel”: up to three times profit, or 10% of turnover, for each year of
continuance, whichever is higher
 Direct that agreements stand modified
 Direct enterprises to abide by orders/directions
 Pass “such other order or issue such directions as it may deem fit”
 Includes “non-association” orders
8
ANTI-COMPETITIVE
AGREEMENTS:
HORIZONTAL AGREEMENTS
10 December 2015
and Competition Law

HORIZONTAL AGREEMENTS: SECTION 3 COMPETITION ACT
 Section 3 of Competition Act

 Section 3(1) prohibits entry into agreements with an AAEC
 Applies to enterprises, associations of enterprises, persons or
associations of persons
 Agreement between competitors presumed to have an AAEC where it
 Directly/indirectly determines purchase or sale prices
 Limits or controls production, supply, markets, technical
development, investment or provision of services
 Shares the market or source of production or provision of services
by way of allocation of geographical area of market, or type of goods
or services, or numbers of customers in the market or any other
similar way
 Directly or indirectly results in bid rigging or collusive bidding
 Presumption may be rebutted
 “Exception” for efficiency-enhancing JVs 10
HORIZONTAL AGREEMENTS: TYPES
 Section 3 of Competition Act covers different types of horizontal

agreement
 Cartels
 Joint Ventures
 Information Exchanges
 Other Horizontal Agreements
 Focus on cartels
 Brief look at others
11
HORIZONTAL AGREEMENTS: CARTELS:

THE NATURE OF THE BEAST
 What is a “cartel”?
 In general terms, an association or combination of competitors who
agree to cease to compete while maintaining the illusion of
competition
 Legal definitions keep balance between legal certainty and suppleness
 Why is it so sinister?
 Clandestine
 Denies customer (and consumers) benefit of lower prices etc.
 Adversely affects levels of spending
 Puts off necessary industrial/commercial changes
 Can have other adverse economic and social effects
 Why is it so difficult to detect?
 Tends to be secretive and unadvertised
 Often no written agreement or arrangement 12

HOW TO FIGHT THE BEAST
 How can an investigation be initiated?

 Whistle blowing by disgruntled employee
 Leniency (lesser penalty) application
 Complaints/exposures of high/similar pricing
 How can breach be established?
 Wide definition of type of activity – broad definition of agreement (or
separate categories of “arrangement” or “concerted practice”)
 Evidential presumptions (including of an AAEC)
 Evidence from leniency applicant
 Standard of proof (depending on criminal or civil liability)
 Direct and indirect (circumstantial) evidence
 The “forensic” and “econometrics” approach
 Sanctions
 Especially severe sanctions for cartel behaviour 13

THE COMPETITION ACT, 2002
 “Cartel” includes an association of producers, sellers, distributors, traders

or service providers who, by agreement amongst themselves, limit, control
or attempt to control the production, distribution, sale or price of, or, trade
in goods or provision of services (Sect. 2(c))
 No enterprise or association of enterprises or person or association of
persons shall enter into any agreement … which causes or is likely to cause
an appreciable adverse effect on competition in India (Sect. 3(1))
 Any agreement entered into in contravention of the provisions contained in
subsection (1) shall be void (Section 3(2))
 “Agreement” includes any arrangement or understanding or action in
concert, whether or not such arrangement, understanding or action:
 is formal or in writing;
 is intended to be enforceable by legal proceedings (Section 2(b))
14

THE COMPETITION ACT, 2002 (CONT.)
 Any agreement entered into between enterprises or associations of

enterprise or persons or associations of person or between any person and
enterprise or practice carried on, or decision taken by, any association of
enterprises or association of persons, including cartels, engaged in similar
trade of goods or provision of services, which
 Directly/indirectly determines purchase or sale prices
 Limits or controls production, supply, markets, technical development,
investment or provision of services
 Shares the market or source of production or provision of services by way of
allocation of geographical area of market, or type of goods or services, or
numbers of customers in the market or any other similar way
 Directly or indirectly results in bid rigging or collusive bidding
 … shall be presumed to have an appreciable adverse effect on competition
(Section 3(3))
15
HORIZONTAL AGREEMENTS: CARTELS

LENIENCY
 In US and EU most cartel proceedings result from leniency application
 Idea is that confessing to participation in a cartel and helping the
competition authority to bring the (other) participants to justice will result
in total immunity from, or partial reduction in, penalty
 India: Section 46 of the Competition Act & 2009 Lesser Penalty Regulations.
 Applicants may get up to a 100%, 50% and 30% reduction in penalty
 Marker and prioritisation system (get place in line)
 Must satisfy conditions
 In principle cease participation in cartel
 Provide vital disclosure in respect of violation (first applicant), significant
added value (later applicants)
 Provide all required relevant information, documents and evidence
 Cooperate genuinely, fully, continuously and expeditiously throughout
 Not conceal, destroy, manipulate or remove relevant documents
 Can be applied for before prima facie opinion, or at investigation stage
16

BID-RIGGING CASES: WHAT IS BID RIGGING?
 Bid rigging (more or less the same as “collusive tendering”)

 “A particular form of collusive price-fixing behaviour by which firms
coordinate their bids or procurement or project contracts” (OECD)
 “any agreement … which has the effect of eliminating or reducing
competition for bids or adversely affecting or manipulating the process for
bidding” (Explanation to Section 3(3) of Competition Act)
 Can take many forms, including:
 Identical pricing
 Cover bidding (also “complementary”, “courtesy”, “token” or “symbolic”
bidding)
 Bid rotation
 Bid suppression
 Market allocation
 Collective boycotts
17

BID-RIGGING CASES: COMPETITION ACT 2002
 Section 3(1) No enterprise or association of enterprises or person or association
of persons shall enter any agreement … which causes or is likely to cause an
appreciable adverse effect on competition in India
 Section 3(2) Any agreement entered into in contravention of the provisions
contained in subsection (1) shall be void
 Section 3(3) Any agreement entered into between enterprises or associations of
enterprise or persons or associations of person or between any person and
enterprise or practice carried on, or decision taken by, any association of
enterprises or association of persons, including cartels, engaged in similar trade
of goods or provision of services, which - … (d) directly or indirectly results in bid-
rigging of collusive tendering, shall be presumed to have an appreciable adverse
effect on competition
 Explanation: … “bid rigging” means any agreement, between enterprises or
persons … engaged in identical or similar production or trading of goods or
provision of services, which has the effect of eliminating or reducing competition
for bids or adversely affecting or manipulating the process for bidding
18

BID-RIGGING CASES: EVIDENCE OF BREACH (I)
 Identical (near-identical) pricing
 In itself not conclusive evidence of collusion
 Collusion inferred where suppliers’ costs differ and no plausible reasons for
identical pricing
 Distinguish from conscious parallelism where “plus factors” needed
 Unless evidence of repeated identical pricing, need for supporting factors
 Supporting factors
 Contemporaneous meetings between bidders
 Trade association giving opportunity to interact and discuss
 Common agents to deposit bids, and keep eye on competition
 Sharing of confidential documents
 Same format, same handwriting, same errors
 Bidders visit agency together: same person makes bids
 Earning of huge margins: quotes far in excess of costs 19


BID-RIGGING CASES: EVIDENCE OF BREACH (II)
 Market allocation
 Total quantity offered by different bidders near quantity stated in tender
 Suppliers have capacity well in excess of quantity to be supplied
 Cover bidding
 Huge differences between bid rates
 Common typographical and other errors
 Bids contain identical technical deficiencies
 Failure to submit essential documents or to accept obligatory clauses
 Mismatching dates in bid and supporting documents
 COMPAT - not where other qualified bidders: or submitting bids at same time
 Bidders take similar approach to contracting body/auction
 Fact of non-participation in procurement procedure
 Consistent practice of making identical bids 20

BID-RIGGING CASES: EVIDENCE OF BREACH (III)
 General industry features tending to collusion (CCI in LPG Cylinder

Manufacturers, Vaccines, Bomb Containers)
 Market conditions (e.g., fixed/predictable flow of demand)
 Small number of suppliers (3, even as many as 37!)
 Geographical proximity of suppliers
 Few new entrants (barriers to entry)
 Active trade associations
 Repetitive bidding
 Identical or similar products, homogeneous nature of product, stringently
standardized product
 Few or no substitutes
 No significant technological changes
 Approach partially endorsed by COMPAT in LPG Cylinder Manufacturers
appeal 21
HORIZONTAL AGREEMENTS: JOINT VENTURES
 Presumption of AAEC in Section 3(3) of Competition Act does not apply

to any agreement entered into by way of joint ventures if such
agreement increases efficiency in production, supply, distribution,
storage, acquisition or control of goods or provision of services
 Reflects view that JVs may be “good” or “bad” and cannot be per se
illegal
 Not to date considered by CCI
 Unclear whether only formal JVs are covered
 Need to demonstrate efficiencies (no clarity what this means)
 In practice, JV partners will need to show that there are efficiencies,
and hence no AAEC, if arrangements are questioned by CCI
22
HORIZONTAL AGREEMENTS: INFORMATION EXCHANGES
 Exchanges of information between competitors can breach

competition rules even in the absence of a cartel
 General principles on the competitive assessment of information
exchange set out in European Commission’s 2011 Guidelines on
horizontal cooperation agreements
 Even once-off exchanges, even if made unilaterally, can amount to
breach (T-Mobile)
 In EU treated as “object breach”, with no need to show an effect on
competition
 In India, agreement between competitors, so may be presumption of
an AAEC
 Look critically at data collection by trade associations: risk reduced
where information exchanged on historic/aggregated basis
 Information exchanges may be in indirect, using “agents” to message
competitors. “Hub and Spoke” cartels recently seen in Indian practice 23
HORIZONTAL AGREEMENTS: INFORMATION EXCHANGES

A DIGRESSION: TRADE ASSOCIATIONS
 Widely recognised that trade associations have a legitimate

function, in areas such as standards, industry lobbying,
environmental protection, taxation (and even in promoting
competition compliance by members!)
 However, trade associations can also act as a forum, catalyst or
instigator of anti-competitive behaviour
 Vehicle for illegal prohibited information exchanges (see above)
 Platform for collusion, including price-fixing
 Facilitating bid-rigging
 Instigating anti-competitive behaviour
 Telling members to sell at particular price
 Prohibiting discounts
 Protecting industry structures
24
HORIZONTAL AGREEMENTS: OTHERS
 Other types of horizontal agreements include

 Research and development agreements
 Production agreements
 Purchasing agreements
 Agreements on commercialisation
 Standardisation agreements
 Rationalisation agreements
 Although there is may be presumption of an AAEC (but look at Section
3(3) carefully!), easier to rebut
 Little reported practice from CCI
 Look at practice from elsewhere:
 2000 US Antitrust Guidelines for Collaborations among Competitors
 Canadian Competition Bureau Competitor Collaboration Guidelines
 European Commission Guidelines on the Applicability of Article 101 TFEU to
Horizontal Cooperation Agreements 25
Faculty Development Programme on Competition Law
9-11 December 2015
HORIZONTAL AGREEMENTS
10 December 2015
John Ramirez
Managing Director, Econ One Research Inc.
Director, Econ One Research India Pvt. Ltd.
Overview
I. Basic Economics of Cartels
II. Cartel Detection ( Economics of Horizontal Agreements)
III. Optimal Cartel Penalties
IV. Leniency Programs
V. Joint Ventures
27
I. Basic Economics of Cartels
28
Prohibited Horizontal Behaviour under Sec. 3(3)
• Agreements that:
 Determine purchase or sale prices;

 Limit the production, supply, markets, technical development,
investment or provision of services;
 Share the market or source of production or provision of
services by way of allocation of geographical area of market, or
type of goods or services, or number of customers in the market
or any other similar way;
 Result in bid rigging or collusive bidding (Competition Act,
2002)
29
Why are Cartels Harmful?
 Cartels are agreements between firms aimed at reducing the level of
competition amongst suppliers to increase the profits of all cartelists
 Cartels can be viewed as an attempt to collectively act as a monopolist to

exert market power
30
Why are Cartels Harmful? (2)
 Efficacious cartelization allows firms to institute supra-competitive prices (i.e.,

above the level that would prevail in competitive market conditions), thereby
increasing profits
 There is a negative impact on consumer surplus (the difference between what
consumers are willing to pay and what they actually pay) due to increased prices
and restricted output
 In economic terms, there is deadweight loss as there is reduction in both
consumer and producer surplus
 Higher prices force some buyers to either lower purchase volume and/or exit the
market entirely (“lost volume effect”)
31
What Determines a Successful Cartel?*
 Cartels must solve three problems: coordination, cheating, and entry

 Successful cartels develop organizations that address these problems
 Market concentration (i.e., few market participants) benefits cartel stability both
directly (increasing individual profits and easing coordination) and indirectly
(concentration is a reflection of barriers to entry)
 Cartel organizational characteristics, e.g., industry associations, can allow for
cartel formation in less concentrated industries
 Demand instability (e.g., demand shocks and rapid growth) can adversely impact
cartel stability
 Cyclical demand fluctuations that are predicable are more manageable
 Successful cartels have mechanisms for sharing information, making decisions
and manipulating incentives (“carrots and sticks”)
* For further detail and a survey of empirical analyses of cartels, please see the
recommended reading: Levenstein & Suslow, “What Determines Cartel Success?”,
2006.
32
Characteristics of Cartels
Necessary Conditions Desired Effects

•Agreement on prices and/or price
increases
•Agreement to restrict supply or
Mechanism reduce capacity
•Allocate markets, customers, or
specific purchases
Monitoring • Detect any deviation from

There is an the agreement
Supra-
incentive for competitive
members to cheat prices & profits
on the cartel by
selectively
lowering prices to • Punishment of cheaters
increase profits Enforcement • Maintenance of market
shares to ensure harmony
33
Cartel Examples
Cartel Geography Duration Mechanism Description Enforcement / Reason for

Monitoring Dissolution
Marine Hose Global 12 years Allocation of The producers operated a worldwide Appointment of Leniency: Full
(1986-2007) customers / cartel whereby they regularly met to an external immunity to
contracts allocate tenders, fix prices, fix quotas, consultant to Yokohama
(bid rigging) fix sales conditions, share geographic allocate contracts
markets and exchange sensitive and maintain
information on prices, sales volumes market shares
and procurement tenders
Paraffin Europe 14 years Mainly price Nine companies fixed prices for the Regular meetings Leniency: Full
Wax (1992-2005) fixing wax products and allocated both immunity to
markets and customers for the Shell
paraffin waxes
Cathode Ray Global 6 years Price fixing & Cartel members organised meetings Regular meetings Gradual
Tubes (1999-2004) supply for price coordination activities with and audits of dissolution due
(CRTs) reduction the exchange of confidential and production to a declining
sensitive market information facilities to industry
ensure capacity
reductions were
implemented
34
II. Economic Analysis of Cartels
35
Economic Analysis of Cartels
36
Economic Assessment of Indirect Evidence
Analyze Why?
Some industry characteristics are

Structural Industry
Factors more conducive to cartel
Structure formation and cartel longevity
Price movements,
production/capacity changes, and
Conduct market share evolutions can yield
indicia of cartelization
Behavioral
Factors
The purpose of cartels is to fix
Performance prices and increase profits
37
1. Industry Structure: Some Characteristics
Conducive to Cartelization
•The more market participants there are the harder

Concentrated Industry it is to form a cartel and coordinate behaviour
•Cartels are easiest to form when price is the

Homogeneous Product determining factor and the number of product
variations is small
•It is more difficult to agree on price when
Symmetry in Costs underlying cost structures differ
•Super-competitive prices attract new suppliers, so

Barriers to Entry entry barriers must be substantial
•Inelastic demand (customers are less price
Demand Characteristics sensitive)
•No close substitutes
No Appreciable •Large customers constrain the ability of suppliers
Countervailing Power to increase price
Market Transparency & •Makes it easier to detect deviations from cartel

Cartelist Interactions agreements
38
1. Industry Structure: Which Industry is More
Conducive to Cartelization?
Float Glass Cosmetics
• Concentrated industry • Large number of suppliers

• Capital intensive (deters • Product diversity
entry) • Brand loyalty
• Commodity-like product – • Low entry barriers
competition occurs mainly
on the basis of price
• Inelastic demand
• Transport of glass over
long distances is
uneconomical
39
Some Select “Collusive Markers” Used to Assess
Behavioral Conduct Factors
Price
 A higher list (or regular) price and reduced variation in prices
across suppliers
 A series of steady price increases preceded by steep price
declines
 Prices across firms are strongly positively related
 A high degree of uniformity across firms in product prices
Quantity
 Market shares are highly stable over time
 For a subset of firms, each firm’s share of total supply in that
subset is highly stable over time
Source: Huschelrath (2010)/Harrington (2006)
40
2. Conduct: Some Cartel Behaviours Can be
Observed Provided Data are Available
Prices Supply Market Shares

• Co-movement • Capacity/production • Less volatile
across firms reductions not • Firms do not
• Reduced variation explained by market change positions in
• Muted response to conditions the market
changes in demand • Presence of excess
and costs capacity/ low capacity
utilisation
41
2. Conduct: Example 1 – Suggestive of Cartelization?
6.50
14%
6.00
12%
5.50
Price Variation
10%
5.00
Price
8%
4.50 6%
4.00 4%
3.50 2%
3.00 0%
Mo. 1 Mo. 2 Mo. 3 Mo. 4 Mo. 5 Mo. 6 Mo. 7 Mo. 8 Mo. 9 Mo. 10 Mo. 11 Mo. 12 Mo. 13 Mo. 14 Mo. 15
Month
Variation Relative to Mean Price of Firm A Price of Firm B Price of Firm C
100%
90%
80%
Capacity Utilisation
70%
60%
50%
Month
42
2. Conduct: Example 2 – More Suggestive of
Cartelization?
8.00 13%
Variation Relative to Mean (%)

7.00 11%
6.00 9%
5.00
7%
4.00
5%
3.00
Price
2.00 3%
1.00 1%
- -1%
Mo. 1 Mo. 2 Mo. 3 Mo. 4 Mo. 5 Mo. 6 Mo. 7 Mo. 8 Mo. 9 Mo. 10Mo. 11Mo. 12Mo. 13Mo. 14Mo. 15
Month
Variation Relative to Mean Price of Firm A
100%
90%
Capacity Utilisation Rate
80%
70%
60%
50%
40%
30%
20%
10%
0%
Month
43
3. Performance: Was the Cartel Successful?
 Is there evidence that the agreements were implemented?

 If there was a price fixing cartel, do actual prices correspond to
agreed upon prices (or if targets are unknown, list prices)?
 Is there evidence that the cartel successfully increased prices/profit
margins?
 Caution: not all cartels will result in prices and/or profits that are
higher than the non-cartel period
• Hence, more sophisticated economic analysis is advisable when
it comes to assessing the performance of a cartel (econometric
modelling)
 Does the behavior of suspected colluding firms differ from that of
competitive firms?
 Does a collusive model fit the observed behavior better than a
competitive model?
44
3. Performance: Actual Prices Deviate Substantially
from List Prices
55
50
45
40
Price
35
30
25
20
15
Mo.1 Mo.2 Mo.3 Mo.4 Mo.5 Mo.6
Month
List Price Transaction Price
45
3. Performance: Cartel Increases Prices & Profits
54 Cartel Period 30%
52
25%
50
20%
48
Profit %
Price
15%
46
10%
44
5%
42
40 0%
Mo.1 Mo.2 Mo.3 Mo.4 Mo.5 Mo.6 Mo.7 Mo.8 Mo.9 Mo.10 Mo.11 Mo.12 Mo.13 Mo.14 Mo.15
Month
Profit % Price
46
3. Performance: Cartel Stabilizes Prices & Profits
60 50%
Cartel Period 45%
50
40%
35%
40
30%
Profit %
Price
30 25%
20%
20
15%
10%
10
5%
0 0%
Mo.1 Mo.2 Mo.3 Mo.4 Mo.5 Mo.6 Mo.7 Mo.8 Mo.9 Mo.10 Mo.11 Mo.12 Mo.13 Mo.14 Mo.15
Month
Profit % Price
47
European Paraffin Wax Cartel: In Which Period
Were Prices Cartelized?
Period A Period B
Price
Sep-92 Sep-94 Sep-96 Sep-98 Sep-00 Sep-02 Sep-04 Sep-06 Sep-08
48
Paraffin Wax Price & Upstream Feedstock Price
Cartel Period
Price: Indexed to End of Cartel Period
Post Cartel Period
Date
Paraffin Wax Price Upstream Feedstock Price
49
German Cement Cartel: In Which Period Were
Prices Cartelized?
Period A Period B
Price
1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011
50
Cement Price & Percentage Change in Construction
GDP
80 Post-Cartel Period 23.0%
Cartel Period
70
18.0%
60
13.0%
Percentage Change
50
Cement Price
Price War
40 8.0%
30
3.0%
20
-2.0%
10
0 -7.0%
1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011
Percentage Change in Construction GDP Cement Price
51
Should Markets be Screened for Cartelization?
 Should competition authorities be proactive in screening cartels?
 Governments are proactive in detecting other white collar crimes (e.g., tax fraud and insider
trading), so why not cartels?
 Leniency programs have not stopped cartel formation, and applicants may come mainly from
cartels that have become unstable
 Profitable cartels are more likely to remain stable (Levenstein & Suslow, 2012); hence,
leniency may not catch the cartels that are most detrimental to consumers
 However, there are numerous challenges involved with implementing a cartel screening
program (for a discussion, see OECD, 2013):
 Does not provide sufficient proof of cartelization
 Can generate false positives and false negatives
 A false positive is incorrectly concluding that a cartel may have been operating; a false
negative is incorrectly concluding that the market shows no signs of cartelization
 Fails to distinguish explicit from tacit collusion. Many of the cartel markers can emerge in
non-cartelized markets
 Data and resource intensive activity
 Risk of firms evading screen detection
 Operating cartels may adjust their behavior so that they are not flagged by the
screening process
52
Information Sharing and Collusion
 Communication of information amongst competitors may constitute an agreement, a concerted
practice, or a decision of an association of undertakings with the object of fixing prices or sharing
markets or customers
 Sharing can take different forms:
 Direct exchange between competitors
 Indirect exchange through the platform of trading associations, publications, etc.
 Information sharing can be both pro-competitive (efficiencies/reduction in search cost/better
planning) and anti-competitive
 Key competition concerns with information sharing:
 Can lead to coordination of behaviour by increasing transparency in the market
 Can facilitate implementation of a cartel by enabling companies to monitor behaviour and
detect deviations
 Type of information sharing that can typically be considered problematic:
 Strategic information regarding future/current conduct (prices/quantity)
 Firm specific rather than industry aggregate information
 Shared at short intervals (frequency)
 Non-public exchange of information
 Whether or not an exchange of information will have restrictive effects depends on both the
economic conditions in the relevant markets and the characteristics of information exchanged
53
Investigation by the EC in the Container Freight
Industry for Price Signaling
 The EC initiated an antitrust investigation against several container shipping companies to
investigate whether they engaged in concerted practices (2013)
 Regular public announcements of price increase intentions conveyed to competitors
through press releases on websites were considered as potential evidence of collusion
 In most cases, the timing and quantum of the increase were largely similar for all the main
carriers, with announcements made by carriers within a few days of each other (Source:
Alphaliner)
 The EC’s investigation is still ongoing
1,000
($ per twenty foot equivalent)
800
Price Increase
600
400
200
0
Jan-09 Jan-10 Jan-11 Jan-12 Jan-13 Jan-14
Increase as announced by Hapag-Lloyd Increase as announced by MSC
54
III. Optimal Cartel Penalties
55
Cartel Penalties
 Cartel penalties play an important role in the prevention of competition law violations
 Penalties can be imposed as monetary sanctions (“fines”) and/or criminal sanctions against
individuals. Some jurisdictions allow for criminal sanctions; others do not
 Imposing fines on cartelists can aid in the prevention of competition law violations in three
ways (Wils, 2006):
 Deterrence effect
Creates a credible threat of being prosecuted and fined, which is factored into the
expected costs and benefits that firms consider while deciding to violate competition
law
 Moral effect
Sends a message to the law-abiding firms, reinforcing their moral commitment to
antitrust prohibitions
 Destabilizing effect
Penalties are an expected future loss for cartel members. In combination with leniency
programs and other policies, the prospect of penalties can destabilize cartels
 Proceeds from cartel fines are normally directed to the public coffers, and are not distributed
amongst those affected by the cartel. Victims of cartelization can and do pursue claims
against cartelists in civil courts, depending on the jurisdiction
56
Economic Theory of Fines
 Approaches to the determination of cartel fines (Allain et. al., 2013):
1. Compensation based approach
 Focuses on the reparation of the harm that the criminal activities had on society
 Under this approach, the optimal fine is set at a level that recoups the net harm
caused to individuals or entities
 However, the amount to be recouped can be difficult to estimate
2. Deterrence based approach
 Focuses on deterring the formation of cartels
 If the goal is to deter the formation of cartels then the penalty level should be set so that
the expected loss of participating in a cartel is greater than the expected gain
 An optimal deterrent fine is set at a level that per se makes cartel formation
unprofitable
 One complication with optimal deterrence based fines is that they may need to be set
very high to deter cartelization
 Generally, competition authorities set fines in order to deter the

formation of cartels
57
IV. Leniency Programs
58
Leniency Programs
 Leniency programs offer reduced penalties to cartel participants (firms

or individuals) in exchange for cooperating with the enforcement
authorities
 Depending on their structure, leniency programs can destabilize cartels
in two ways:
(1) Deterrence: leniency programs deter cartel formation either by making it
unprofitable (depending on the penalty structure), or making collusion unstable
(2) Desistance: leniency programs provide incentives for cartelists to break the cartel
agreement through confessions
 Most of the economic literature supports the general conclusion that
leniency programs can reduce cartel stability
 However, the empirical estimation of the impact of leniency programs
on cartel formation and longevity is difficult because it is not known
how many cartels were operating but not discovered
59
Impact on Competition Law Enforcement
 Leniency programs provide a substantial number of new investigative leads to

competition authorities, which have finite resources in terms of the number of
investigations that can be pursued
 As a result, the competition authority may focus on leniency cases at the expense
of investigating cases not generated through the leniency program (Chang &
Harrington, 2008)
 Therefore, there is an interactive effect between leniency programs and other

enforcement efforts that can be problematic:
 Leniency programs affect the probability that a cartel is discovered, but the probability
of discovering a cartel outside of leniency influences a firm’s decision on whether to
seek leniency
 If cartel members view it as less likely that the cartel will be discovered outside of
leniency then they will have a reduced incentive to apply for leniency (Ibid.)
60
Select Optimal Leniency Models
 An optimal leniency strategy will accomplish two goals (Chen & Rey, 2013):
 Destabilize usual collusion (i.e., collude and never report) by providing incentives to
firms to deviate from the cartel and denounce it
 Discourage firms from exploiting the leniency program (i.e., collude and report)
 Chen & Rey find that:

 It is always desirable to offer some leniency, at least in the absence of any ongoing
investigation
 Whether amnesty remains desirable once an investigation starts depends on the
frequency of the investigation and its likelihood of success
 It is optimal to offer less leniency once an investigation is already underway if the investigation
is likely to be successful
 It can be desirable to offer more amnesty if the investigation is less likely to be successful to make
the investigation more effective
 Harrington (2008) finds that offering leniency can trigger a “race to the courthouse” when
detection becomes likely and therefore:
 It is optimal to restrict eligibility to the first informant
 It is often optimal to grant full leniency to the first informant
61
V. Joint Ventures
62
Joint Ventures
 A Joint Venture (JV) may be defined as any arrangement whereby two or more parties co-
operate in order to run a business or to achieve a commercial objective
 JVs can be of two types:
 Equity/corporate in which the parent undertakings holds voting shares (in a newly
incorporated company or an already existing company)
 Contractual joint venture is a form of cooperation agreement that defines the activity of
the cooperation (but does not centre on a corporate vehicle)
 While significant pro-competitive benefits can be achieved through joint ventures, it is
nevertheless the case that when competitors collaborate, there is potential for harm
 Pro-competitive: Provides a method of organization which enables competitors to join to
produce beyond the productive capacity or inclination of its individual members
(efficiencies such as economies of scale/R&D/etc.)
 Anti-competitive: Threatens to reduce actual or potential competition between rivals by
providing a method of operation which engenders collusion (ability and incentive to
compete against one another may be compromised). Joint ventures also have the potential
to limit participants' independent decision making by combining control of or financial
interest in production, key assets, and other competitively sensitive variables.
 Given that JVs can have both pro and anti-competitive effects, they are not considered per
se illegal
63
References (Horizontal Agreements)
 Hüschelrath, “How Are Cartels Detected? The Increasing Use of Pro-active Methods to Establish Antitrust Infringements”,
Journal of European Competition Law & Practice, Vol. 1, No. 6. , 2010
 Joseph E. Harrington, Jr, “How Do Cartels Operate?”, Foundations and Trends in Microeconomics, 2006
 Joseph E. Harrington, Jr., “Behavioural Screens and the Detection of Cartels”, 2007
 Joseph E. Harrington, Jr., “Detecting Cartels”, Department of Economics, Johns Hopkins University, December 2004
 Margaret Levenstein and Valerie Suslow, “Cartels and Collusion – Empirical Evidence”, Ross School of Business, Working Paper
No. 1182, November 2012
 Organisation for Economic Co-operation and Development, “Roundtable on Ex Officio Cartel Investigations and the Use of Screens
to Detect Cartels”, November 2013
 Peter Davis and Eliana Garcés, “Quantitative Techniques for Competition and Antitrust Analysis”, Princeton University Press,
2010
 Cento Veljanovski , “The Economics of Cartels”, March 2007
 John M. Connor and Robert H. Lande, “Cartel Overcharges and Optimal Cartel Fines”, 3 Issues In Competition Law and Policy
2203 (ABA Section of Antitrust Law 2008), Chapter 88, 2007
 Marie-Laure Allain et. al., “Are Cartel Fines Optimal? Theory and Evidence from the European Union”, Center for Interuniversity
Research and Analysis of Organizations, 2013
 Wouter P.J. Wils, “Optimal Antitrust Fines: Theory and Practice”, World Competition, Vol. 29, No.2, June 2006
 Khaitan & Co., “Joint Ventures Under India’s Competition Act”

 Robins Kaplan LLP, “Antitrust Treatment of Joint Ventures: Analyzing Competitor Collaborations”
64
References (Horizontal Agreements)
 Georg Clemens and Holger A. Rau, “Do Leniency Policies Facilitate Collusion? Experimental Evidence”, Düsseldorf Institute for
Competition Economics”, 2014
 Jose Apesteguia et. al., “ Blowing the Whistle”, Economic Theory, 2007
 Joseph E. Harrington, Jr., “Optimal Corporate Leniency Programs”, Department of Economics, Johns Hopkins University,
October 2004 (revised July 2005)
 Joseph E. Harrington, Jr., “Optimal Corporate Leniency Programs”, Journal of Industrial Economics, December 2008
 Massimo Motta and Michele Polo, “Leniency Programs and Cartel Prosecution”, International Journal of Industrial Organization,
20
 Michael Reynolds et. al., “Antitrust Development : The EU Leniency Programme”, ABA Spring Meeting, March 2009
 Michele Polo and Massimo Motta, “Leniency Programs”, 2005
 United Nations Conference on Trade and Development, “The Use of Leniency Programmes as a Tool for the Enforcement of
Competition Law Against Hardcore Cartels in Developing Countries”, August 2010
 Zhijum Chen and Patrick Rey, “On the Design of Leniency Programs”, 2012
65
ANTI-COMPETITIVE
AGREEMENTS:
VERTICAL AGREEMENTS
9-11 December 2015

and Competition Law

VERTICAL AGREEMENTS: SECTION 3 COMPETITION ACT
 Section 3(1) No enterprise or association of enterprises or person or association of

persons shall enter any agreement … which causes or is likely to cause an
appreciable adverse effect on competition in India
 Section 3(2) Any agreement entered into in contravention of the provisions
contained in subsection (1) shall be void
 Section 3(4) Any agreement amongst enterprises or persons at different stages or
levels of the production chain in different markets, in respect of production, supply,
distribution, storage, sale or price of, or trade in goods or provision of services,
including -
 Tie-in arrangement
 Exclusive supply agreement
 Exclusive distribution agreement
 Refusal to deal
 Resale price maintenance
shall be an agreement in contravention of sub-section (1) if such agreement causes
or is likely to cause an AAEC in India 67
VERTICAL AGREEMENTS: AGREEMENTS COVERED
 Agreements “amongst” entities at different stages or levels of the

production chain in different markets
 In Motor Parts, CCI rejected arguments that “amongst” meant that
agreements had to be between more than two parties. Bilateral
agreements are covered!
 Single economic entity doctrine (Lamborghini and Motor Parts)
 Section 3 does not apply to agreements between group companies
 Inseparability of economic interest of parties: rebuttable – look at facts
and circumstances of each case
 “Existence of agreement may be inferred from coercive conduct when
level of coercion exerted to impose an apparent unilateral policy, in
combination with the number of distributors that are actually
implementing the unilateral policy of the supplier would, in practice,
point to tacit acquiescence by the other party or parties.” (Snapdeal
68
(prima facie order))
VERTICAL AGREEMENTS: BURDEN OF PROOF
 No presumption of an AAEC
 Vertical agreements have to be proved
 In Motor Parts, CCI relied on US Supreme Court in Monsanto case:
 “direct or circumstantial evidence that reasonably tends to prove that the
manufacturer and others had a conscious commitment to a common scheme
designed to achieve an unlawful objective”
 No direct or circumstantial evidence to prove that OEMs and (unrelated)
overseas suppliers had “understanding or conscious commitment” not to
supply to open market
 Fairly low standard of proof: “reasonable tendency to prove”
69
VERTICAL AGREEMENTS: COMPARE/CONTRAST EU REGIME (1)
 Article 101 TFEU

 Prohibits as incompatible with the internal market agreements between
undertakings, decisions by associations of undertakings and concerted practices
which may affect trade between Member States and which have as their object
or effect the prevention, restriction or distortion of competition within the
internal market, and in particular those which:
 directly or indirectly fix purchase or selling prices or any other trading
conditions;
 limit or control production, markets, technical development, or investment;
 share markets or sources of supply;
 apply dissimilar conditions to equivalent transactions with other trading
parties, thereby placing them at a competitive disadvantage;
 make the conclusion of contracts subject to acceptance by the other parties of
supplementary obligations having no connection with the subject of such
contracts.
 Agreements or decisions prohibited pursuant to this article automatically void. 70
 Art. 101(3): Prohibition may be declared inapplicable in the case of:

 any agreement or category of agreements between undertakings, any decision or
category of decisions by associations of undertakings, any concerted practice or
category of concerted practices, which contributes to improving the production or
distribution of goods or to promoting technical or economic progress, while
allowing consumers a fair share of the resulting benefit, and which does not:
 (a) impose on the undertakings concerned restrictions which are not
indispensable to the attainment of these objectives;
 (b) afford such undertakings the possibility of eliminating competition in
respect of a substantial part of the products in question
 EU regime characterised by exemption regime specifying agreements
exempted from prohibitions and conditions for such exemption
71

 For vertical agreements, European Commission provides some general

guidance on when prohibition will not apply at all
 De minimis
 Agents
 Sub-contracting
 2010 Block Exemption Regulation for Vertical Agreements
 Coverage and exclusions (e.g., agreements between competitors)
 Market share threshold of 30% for supplier and customer
 Hardcore restrictions (RPM, territorial/customer restrictions (with
exceptions))
 Excluded restrictions (e.g., long non-compete obligations)
 Network effects
 2010 Guidelines on Vertical Restraints
 Principles for self-assessment, in light of circumstances of each case
 Structure completely different from what exists in India
72
VERTICAL AGREEMENTS: SOME RELEVANT CCI CASES - OVERVIEW
 Global Automobiles (Case No. 33/2011, 3 July 2002)

 Exclusive dealership agreement: no AAEC given small size of players
 Apple (Case No. 24/2011, 19 March 2013)
 Mixed Section 3/Section 4 case
 Contractual tying agreement: no AAEC
 Intel (Case No. 48 of 2011, 16 January 2014)
 No AAEC for incentive scheme, reporting resale prices
 Car Parts (Case No. 3/2011, 25 August 2014)
 CCI found AAEC in relation to restrictions on supply to non-authorised players
 Opposite parties fined 2% of average of three years’ turnover
 “Cease and desist” and other specific compliance measures
 Hyundai (Case No. 36/2014, PF Order 12 September 2014)
 Snapdeal (Case No. 61/2014, PF Order 29 December 2014)
 Prima facie Orders, both dealing with resale price maintenance
73
VERTICAL AGREEMENTS: TYPES OF AGREEMENTS
 Section 3(4) gives non-exhaustive list of vertical agreements

 Other vertical agreements of the same “nature” are caught
 Specified types
 Tie-in arrangements
 Exclusive supply agreement
 Exclusive distribution agreement
 Refusal to deal
 Resale price maintenance
 “As defined”
 Only where agreement causes or is likely to cause an AAEC in India
74

VERTICAL AGREEMENTS: TIE-IN ARRANGEMENT
 Section 3(4), Explanation (a)

 “tie in arrrangement” includes any agreement requiring a purchaser of goods,
as a condition of such purchase, to purchase some other goods
 Apple: need to distinguish between “tying” and “bundling”
 Tying where, through a contractual or technological requirement, a seller
conditions the sale of lease of one product or service on the customer’s
agreement to take a second product or service
 Case involved a case of “contractual tying” where the handset manufacturer
(Apple) and service provider (Airtel and separately Vodafone) had joined hands
to offer a packaged product to a customer
 Apple: anti-competitive concerns where:
 Presence of two separate products or services capable of being tied
 Seller: sufficient economic power in tying good to restrain competition in tied
good
 Tying arrangement affects a “not insubstantial” amount of commerce
 Intel: no tie where distributors given incentives to sell more low demand
goods 75
VERTICAL AGREEMENTS: EXCLUSIVE SUPPLY AGREEMENT
 Section 3(4), Explanation (b):

 “exclusive supply agreement” includes any agreement restricting in any manner
the purchaser in the course of his trade from acquiring or otherwise dealing in any
goods other than those of the seller or any other person
 Motor Parts: dealers required to source spare parts only from OEM or
approved vendors
 Hyundai (PF case): agreements with dealers prohibiting them from sourcing
spare parts other than through approved vendors
76
VERTICAL AGREEMENTS: EXCLUSIVE DISTRIBUTION AGREEMENT
 Section 3(4), Explanation (c)

 “exclusive distribution agreement” includes any agreement to limit, restrict or
withhold the output or supply of any goods or allocate any area or market for the
disposal or sale of the goods
 Global Automobiles: dealer prevented from taking up other dealerships
 Motor Parts: arrangement/understanding between OEM and overseas parts
suppliers that latter would not supply parts directly to the Indian
aftermarket would, if proved, be an exclusive distribution agreement
 Motor Parts: agreement between OEM and local OESs preventing latter from
supplying to the aftermarket an exclusive distribution agreement
 Motor Parts: agreements between OEMs and authorised dealers restricting/
prohibiting OTC sale of spare parts
 Hyundai (PF case): dealers required to take prior approval of Hyundai before
dealing in competing brands of automobiles
77
VERTICAL AGREEMENTS: REFUSAL TO DEAL
 Section 3(4), Explanation (d):

 “refusal to deal” includes any agreement which restricts, or is likely to restrict, by
any method the persons or classes of persons to whom goods are sold or from
whom goods are bought
 Motor Parts: agreement between OEM and local OESs preventing latter from
supplying to the aftermarket a refusal to deal
 Motor Parts: agreements between OEMs and authorised dealers restricting/
prohibiting OTC sale of spare parts
78
VERTICAL AGREEMENTS: RESALE PRICE MAINTENANCE
 Section 3(4), Explanation (e)

 “resale price maintenance” includes any agreement to sell goods on condition that the
prices to be charged on the resale by the purchaser shall be the prices stipulated by the
seller unless it is clearly stated that prices lower than those prices may be charged
 In theory, CCI must prove AAEC, but likely to be low threshold
 In EU, any restriction of buyer’s ability to determine its sale price is seen as a
hardcore restriction (though efficiency defence may be argued). But supplier may
impose a maximum sale price or recommend prices provided this does not amount
to a fixed or minimum resale price
 In US, Supreme Court has seen this as an effects, not per se, breach (Leegin), but
some State courts have retained per se approach
 Intel: CCI found that Intel was not setting resale price for distributors. Monitoring
downstream prices of own products not anti-competitive
 Hyundai (PF case): restrictions imposed on maximum permissible discount given
by dealer to customer
 Snapdeal (PF case): appliance product supplier took exception to S displaying
products at prices below MOP (least price determined by manufacturer/seller at
which dealer retailer can sell product) 79
VERTICAL AGREEMENTS: AAEC (1)
 Unlike Section 3(3), there is no presumption of an AAEC

 CCI must establish AAEC applying Section 19(3) factors
 At both levels where parties operate (Global Automobiles)
 30% market share threshold (Global Automobiles, referring to EU)
 Snapdeal: PF case: RPM restrictions problem with 28% of market
 “Negative factors” (CCI – normally indicating AAEC)
 Creation of barriers to new entrants in the market
 Driving existing competitors out of market
 Foreclosure of competition by hindering entry into the market
 “Positive factors” (CCI – efficiency justifications, normally no AAEC)
 Accrual of benefits to consumers
 Improvements in production/distribution of goods / provision of
services
 Promotion of technical, scientific and economic development 80

VERTICAL AGREEMENTS: AAEC (2)
 Global Automobiles:
 “The absence of the last three factors alone can neither determine AAEC nor establish
efficiency justifications. In most cases, therefore, it is more prudent to examine all of the
above factors together to arrive at a net impact on competition.”
 Motor Parts:
 “An agreement which creates barriers to entry may also induce improvements in
promotion or distribution of goods or vice versa. Thus, whether an agreement restricts
the competitive process is always an analysis between the positive and the negative
factors listed under section 19(a)-(f).”
81

VERTICAL AGREEMENTS: AAEC: GLOBAL AUTOMOBILES
 Vehicle dealer prevented from dealing in other vehicles

 CCI stated that normally competition at different levels of production-
supply chain may possibly be affected where both entities possess
some market power in the respective spheres of market. Reference to
(supposed) EU rule that both must have at least 30% market share.
 Parties had insignificant presence in market and were fringe players.
Agreements incapable of causing any AAEC
 GA had barely 50 dealers and 1% market share – not in a position to
create entry barriers for potential manufacturers, foreclose
competition in market, or drive out existing competitors
 GA new and small player with teething troubles and unstable
operations
 Therefore no AAEC
82
VERTICAL AGREEMENTS: AAEC: APPLE
 “Contractual tying where handset manufacturer (Apple) and telecoms

service provider (Vodafone) joined hands to offer packaged product to
customer.
 CCI found
 Market shares of parties in respective markets made AAEC improbable
 No exclusivity: multiple choices for purchase of iPhone and service provider
 No consumer harm (e.g., customer has choices and can pay to unlock
phone)
 Parties did not have position of strength to affect market outcome in terms
of market foreclosure, deterring entry, creating entry barriers, driving out
competitors
 Arrangements helped create market for iPhones
 Developments elsewhere showed market-building, pro-competitive effects
83

VERTICAL AGREEMENTS: AAEC: INTEL
 Intel provided more incentives to distributors achieving targets for

Intel’s low demand products.
 Not a tie-in, as no condition of supplying high demand products only if low
demand products bought
 Targets and incentive structure seen by CCI as vertical agreement
 Plausible business justification/prudent business decision
 Anti-trust concern only if AAEC. CCI found no AAEC
 No foreclosure of Intel’s competitors
 No distortion of competition in downstream distribution business
(Informant – a distributor – not at any competitive disadvantage
 Intel also monitored resale prices of own products. No AAEC:
 No creation of barriers to new entrants in the market
 No driving out of existing competitors
 No foreclosure of competition into market 84

VERTICAL AGREEMENTS: AAEC: MOTOR PARTS (1)
 Agreement between OEM and OES preventing OES from selling spare parts
directly into aftermarket
 CCI rejected OEMs’ argument that, absent restriction, OEMs could not
ensure quality of spare parts – jeopardising safety and health, and goodwill
in cars. Restriction not necessary since:
 OESs could be contractually required to carry out safety checks, using OEM-
licensed safety check methodology
 OESs could be required to label products to limits OEM liability
 OEMs could limit warranty to exclude faulty/defective parts sold by OESs
 Selling finished products in open market does not compromise IPRs: can be
addressed by appropriate contractual commitments
 OESs can be required to following industry standards and consumer law
 OEMs can incentivise use of authorised network, but consumer should choose
 Collaboration between independents, multi-brand operators, OEMs and OESs to
curb use of spurious parts & give consumers competitive and efficient options
85
VERTICAL AGREEMENTS: AAEC – MOTOR PARTS (2)
 Agreements between OEMs and authorised dealers restricting/ prohibiting

OTC sale of spare parts, diagnostic tool and repair manuals
 CCI rejected arguments that restriction of sales to independent repairers
protected owners from buying spurious spare parts/ from botched repairs
 Cannot be used to deny consumer choice
 Affects multi-brand repairers, who are not unskilled
 Restricting access and OEM high pricing result in use of spurious parts!
 CCI sought to analyse (short term) efficiencies of selective distribution
system in the light of the (longer term) foreclosure effects and barriers to
entry resulting from the restrictive clauses
 AAEC looked at differently where supplier has monopoly/dominant position
 Hardcore restrictions (as set out in EU MV Block Exemption)
 Network effects
 Frowned upon by competition authorities in mature and developing regimes 86
VERTICAL AGREEMENTS: AAEC AND DOMINANCE
 Special application of AAEC test where dominant player

 Motor Parts
 Each OEMs sole supplier of its genuine spare parts and diagnostic tools in the
aftermarket. OEM therefore has a monopoly (and dominant position)
 Policy of cancelling warranties if customer goes to non-authorised repairer
 Agreements therefore result in total deprivation of consumer choice in
aftermarket and OEMs engage in high rent-seeking behaviour
 Where an agreement, irrespective of efficiencies, allows an enterprise to
completely eliminate competition in the market and thereby become a dominant
enterprise and indulge in abusive exclusionary behaviour, “negative” AAEC factors
should be prioritised over “positive” factors
 Referring to 1983 Michelin judgment of ECJ, dominant undertaking has “a special
responsibility not to allow its conduct to impair genuine undistorted competition”
 Such priority to be given where restrictive clauses used to create, maintain and
reinforce the exclusionary abusive behaviour on part of the dominant entity 87

Faculty Development Programme on Competition Law
9-11 December 2015
VERTICAL AGREEMENTS
10 December 2015
John Ramirez
Managing Director, Econ One Research Inc.
Director, Econ One Research India Pvt. Ltd.
Overview
 Concept of Vertical Agreements

• What are vertical agreements?
• Types of vertical agreements
• Positive effects
• Anti-competitive effects
 Implications for Competition Policy

• Treatment different from horizontal agreements
• Competition Act of India
• Balancing the positive and negative effects
• Case example
89
What are Vertical Agreements?
Vertical agreements are formed between firms operating at different levels in the
production/distribution chain such as between manufacturers and distributors,
manufacturers and retailers, distributors and retailers, etc.
• Relate to conditions on the purchase, selling, or reselling of certain goods or services
• Prevalent in industries including television (between channel broadcasters and distributors)

and e-commerce (between manufacturers and platform owners)
• Are also referred to as vertical restraints as they constrain parties under the agreement from
operating freely in the market
• Are generally employed to deal with problems arising in vertical relationships as

individual self-interests of the firms may sometimes conflict with their joint interests
• vertical agreements can therefore align incentives of the downstream firms with those
of the upstream firms
• However, they may also result in reduction in competition at either level of the supply chain
90
Types of Vertical Agreements
Manufacturer
Resale price maintenance
Two-part tariffs
Exclusive distribution –
customer or territorial
allocation
Selective distribution
Exclusive dealing
Quantity fixing
Distributors
91
Types of Vertical Agreements (2)
 Resale Price Maintenance: manufacturer restricts the final price that the
distributor can charge to end-consumers – could be in the form of a maximum
resale price or a minimum resale price, non-binding recommended retail price or
advertised price
 Exclusive distribution arrangement: manufacturer gives a distributor exclusive

rights to sell his products in a particular area (territorial restrictions) or to a
particular class of customers (customer allocation)
 Exclusive dealing arrangement: restrictions on distributors to engage in activities

that directly compete with the manufacturer’s businesses, for example, exclusive
purchasing arrangements
 Selective distribution: manufacturers lay out certain specifications for

distributors to become part of their distribution network
 Tying: supply of a product is made conditional on the purchase of another distinct

product(s). Tying would classify as a vertical restraint when the products involved
are vertically related
92
Types of Vertical Agreements (3)
 Two-part tariff: distributor has to pay a fixed amount to the manufacturer
irrespective of the quantity bought. In addition, there is a variable component in
the form of a per-unit fee
 Quantity discounts: distributors can obtain progressive rebates with the increase
in quantity they purchase from the manufacturer
 Royalty rebates: manufacturers might ask its distributor for payments (royalty)
proportional to the sales made by the distributor. But such schemes are effective
only when the manufacturer can easily observe and verify the distributor’s sales
 Quantity fixing: specification of the quantities to be bought and sold by the

distributor
93
Economic Rationale for Vertical Agreements/
Efficiency Justifications
Vertical agreements provide solutions to externalities arising out of producer-
distributor relationship, remove distortions in the distribution of products
 Free-riding by distributors: Some distributors take advantage of the pre-sales

services or advertising done by their rivals by offering a lower price to the
customers once they have seen the product. This reduces the incentive for
distributors to invest in these services underinvestment in these services
 Possible solution - Exclusive territorial allocation
 Double marginalisation: If both manufacturer and distributor have market power,

they can independently set their respective prices above their marginal costs
resulting in the final price being marked up over the marginal cost of production
twice higher price and lower quantity (reduced demand)
 Possible solution - Resale price maintenance, Quantity restriction
 Destructive competition between distributors: Distributors may charge less than

optimal prices as high prices could lead to an increase in demand for the products
offered by their rivals sub-optimal number of distributors
 Possible solution - Resale price maintenance, Exclusive territorial allocation
94
Economic Rationale for Vertical Agreements/
Efficiency Justifications (2)
 Free-riding by manufacturers: Manufacturers do not have incentive to invest in
services such as sales training, financing for distributors, etc. as these services also
benefit other brands carried by the distributors, specifically the brands of rival
manufacturers who do not invest in these services underinvestment in these
services
 Possible solution - Exclusive dealing
 Destructive competition between manufacturers: When a manufacturer increases

the price of his brand, distributors tend to divert sales to the less expensive brands.
To avoid this, manufacturers charge less than optimal prices decline in
manufacturer’s profits
 Possible solution - Exclusive dealing
 Capturing economies of scale: Manufacturers prefer to supply in bulk to a few

distributors over supplying small amounts to a large number of distributors. This
could be done by way of quantity restrictions
95
Anti-Competitive Effects
 Foreclosure of market
Manufacturers could use vertical restraints to foreclose the market to potential or
existing rivals by raising the costs of distribution, for example through exclusive
dealing arrangements
 Softening of competition at both levels

• Reduction in intra-brand competition: resale price maintenance removes price
competition between distributors;
• Reduction in inter-brand competition: use of selective distribution by a
manufacturer as a means to increase prices could encourage his rivals to follow
suit
 Facilitating collusion
When various manufacturers simultaneously employ restraints such as resale price
maintenance – it is similar to collusion. Resale price maintenance could also be
used as a monitoring device for detecting deviation from cartel
96
Implications for Competition Policy
 Vertical agreements are generally perceived to be less harmful than horizontal

agreements
• Parties in a horizontal agreement produce identical/substitutable goods,
therefore horizontal agreements generally reduce competition in that market
• Parties in a vertical agreement are involved in complementary activities
o Vertical relationships provides substantial scope for efficiencies
 But, one should not overestimate the positive effects

• A firm with market power can use the vertical restraint to increase its profits
at the expense of its direct competitors/distributors, and ultimately end
consumers
 In the European Union, there is a general exemption from antitrust scrutiny if

the contracting parties have market shares of less than 30 percent.
 One exception is resale price maintenance (RPM) which can be a per se violation
in some jurisdictions; however, there is a movement towards a rule of reason
assessment
97
Vertical Agreements under Sec. 3(4) of the
Competition Act, 2002
Section 3(4) of the Competition Act prohibits “an agreement between parties at
different levels of production chain including
• tie-ins
• exclusive supply or distribution
• refusal to deal
• resale price maintenance
if the agreement causes (or is likely to cause) an appreciable adverse effect on
competition (AAEC) in India”
 List of relevant factors for determining AAEC includes both positive and
negative effects of vertical agreements
• Entry barriers
• Market foreclosure
• Benefits to consumers
98
Assessment of Vertical Agreements
1. Market definition and market power: Define relevant markets

and assess if any of the firms under the agreement have market
power
2. Examination of anti-competitive effects vis-à-vis efficiency

benefits
• The two opposite effects are context specific
• A holistic analysis is required for evaluation
99
1. Relevant Market and Market Power
 Relevant markets are defined as follows under the Competition Act of 2002.
Relevant markets are assessed with respect to products and geography:
"relevant product market" means a market comprising all those products or

services which are regarded as interchangeable or substitutable by the consumer,
by reason of characteristics of the products or services, their prices and intended
use
"relevant geographic market" means a market comprising the area in which

the conditions of competition for supply of goods or provision of services or
demand of goods or services are distinctly homogenous and can be distinguished
from the conditions prevailing in the neighboring areas
 Assessment of market power with any of firms under the agreement

• Whether or not there is an adverse effect is strongly influenced by the
participants’ position in the market; in particular, whether they possess
market power (i.e., the ability to profitably increase price)
100
Impact of Behavior is Related to the Firm’s Position
in the Market
Impact if firm Impact if firm

Behaviour Example controls 10% of controls 70% of
the market the market
Consumers can Locks up most of

Restrictive switch to the market,
Loyalty
contractual competitors if making entry
discounts
terms discounts are difficult
unattractive
Dominant printer
Consumers can manufacturer may
Must buy ink purchase leverage dominance
Tying from printer printers from in printer market to
manufacturer manufacturers dominate ink
market
that don’t tie
101
Patents, Market Power, and Tying – Case Study
Illinois Tool Works v. Independent Ink (US, 2006)
Background
• Independent Ink asserted an antitrust claim against Illinois Tool Works (ITW) alleging that ITW engaged in unlawful
tying. ITW manufactures printing systems for barcodes, and requires its customers to purchase unpatented ITW ink to
be used with patented ITW printheads and ink containers
• Independent Ink developed ink that could be substituted for unpatented ITW ink. It claimed that ITW had effectively
excluded Independent Ink from the ink market by requiring customers of ITW patented products to also purchase
unpatented ITW ink (in violation of the Sherman Antitrust Act)
Basis
• Independent Ink relied on a long-standing (but increasingly criticized) holding that patents confer market power over
the patented product
• Independent Ink therefore did not present evidence to establish that ITW held market power
U.S. Supreme Court Holding
• Ruled that there is no such presumption of market power for patented products in a tying claim
• Courts can no longer presume that a patent confers market power over the patented tying product
• The Court concluded:
"Congress, the antitrust enforcement agencies, and most economists have all reached the conclusion that a patent does not
necessarily confer market power upon the patentee. Today, we reach the same conclusion, and therefore hold that, in all cases
involving a tying arrangement, the plaintiff must prove that the defendant had market power in the tying product."
102
2. Balancing Negative and Positive Effects
 Examination of anti-competitive effects
• Loss of product/service variety to the consumers
• Reduction in the intensity of competition in the market
• Comparison with the counterfactual scenario
 Indicators of efficiency benefits

• Cost reduction
• Gains to consumers
• Other benefits
 The net effect of the agreement will depend on which of the two effects is dominant
 For instance, tying of less popular channels with more popular channels by broadcasters
(e.g., Sony) when negotiating with distribution platforms (e.g., Tata Sky) may result in
economies of scope/scale contributing to better programming. It could also foreclose the
market for potential/existing broadcasters by denying them access to distribution
platforms (which are capacity constrained in terms of the number of channels they can
offer)
103
Example: Auto Parts Investigation
In August 2014, the CCI imposed a fine totaling INR 2,544 crore (USD 420
million) on 14 car manufacturers (OEMs) for restricting the sale and supply
of genuine spare parts in the open market thereby violating Section 3(4) &
Section 4 of the Competition Act, 2002.
The CCI concluded:
• Agreements between OEMs and authorized dealers requiring authorized

dealers to source spare parts only from OEMs or their approved vendors
are anti-competitive
• The OEMs’ restriction of independent repairers’ access to spare parts and
diagnostic tools, repair manuals violates Section 3(4) of the Act
• Consumers should be given the option to choose either an authorized
dealer of the OEM or an independent repairer to purchase spare parts of
repair services
104
References (Vertical Agreements)
 European Commission, “Guidelines on Vertical Restraints”, 2010
 Patrick Ray and Thibaud Verge, “The Economics of Vertical Restraints”, March 2005
 Paul W Dobson and Michael Waterson, “Vertical Restraints and Competition Policy”, UK Office of Fair Trading, December 1996
 Tilottama Raychaudhuri , “Vertical Restraints in Competition Law: The Need to Strike the Right Balance Between Regulation and
Competition”, December 2011
 Vincet Verouden,“Vertical Agreements: Motivation and Impact”, Chapter 72, Issues in Competition Law and Policy (ABA Section
of Antitrust Law 2008)
 UNCTAD, “Competition Policy and Vertical Restraints”, January 1999
105

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Shardul Amarchand Mangaldas & Co

© Shardul Amarchand Mangaldas

© Shardul Amarchand Mangaldas

INTRODUCTION: WHAT ARE WE HERE FOR?

 Faculty Development Programme on Competition Law

INTRODUCTION: SCOPE OF LEGAL SESSIONS

 Outline discussion of legal framework and some issues

INTRODUCTION: STRUCTURE OF SECTION 3

 Section 3(1) prohibits entry into anti-competitive agreements which cause

INTRODUCTION: STRUCTURE OF SECTION 3 (CONT.)

 Different approach to AAEC for horizontal agreements and vertical

INTRODUCTION: FACILITATING ENFORCEMENT BY THE CCI

© Shardul Amarchand Mangaldas

HORIZONTAL AGREEMENTS: SECTION 3 COMPETITION ACT

 Section 3 of Competition Act

HORIZONTAL AGREEMENTS: TYPES

 Section 3 of Competition Act covers different types of horizontal

HORIZONTAL AGREEMENTS: CARTELS:

HORIZONTAL AGREEMENTS: CARTELS:

 How can an investigation be initiated?

HORIZONTAL AGREEMENTS: CARTELS:

 “Cartel” includes an association of producers, sellers, distributors, traders

HORIZONTAL AGREEMENTS: CARTELS:

 Any agreement entered into between enterprises or associations of

HORIZONTAL AGREEMENTS: CARTELS

HORIZONTAL AGREEMENTS: CARTELS:

 Bid rigging (more or less the same as “collusive tendering”)

HORIZONTAL AGREEMENTS: CARTELS:

HORIZONTAL AGREEMENTS: CARTELS:

© Shardul Amarchand Mangaldas

HORIZONTAL AGREEMENTS: CARTELS:

HORIZONTAL AGREEMENTS: CARTELS:

 General industry features tending to collusion (CCI in LPG Cylinder

HORIZONTAL AGREEMENTS: JOINT VENTURES

 Presumption of AAEC in Section 3(3) of Competition Act does not apply

HORIZONTAL AGREEMENTS: INFORMATION EXCHANGES

 Exchanges of information between competitors can breach

HORIZONTAL AGREEMENTS: INFORMATION EXCHANGES

 Widely recognised that trade associations have a legitimate

HORIZONTAL AGREEMENTS: OTHERS

 Other types of horizontal agreements include

I. Basic Economics of Cartels

II. Cartel Detection ( Economics of Horizontal Agreements)

III. Optimal Cartel Penalties

IV. Leniency Programs

 Determine purchase or sale prices;

 Cartels can be viewed as an attempt to collectively act as a monopolist to

 Efficacious cartelization allows firms to institute supra-competitive prices (i.e.,

 Cartels must solve three problems: coordination, cheating, and entry

Necessary Conditions Desired Effects

Monitoring • Detect any deviation from

Cartel Geography Duration Mechanism Description Enforcement / Reason for

Some industry characteristics are

•The more market participants there are the harder

•Cartels are easiest to form when price is the

•Super-competitive prices attract new suppliers, so

Market Transparency & •Makes it easier to detect deviations from cartel

Float Glass Cosmetics

• Concentrated industry • Large number of suppliers

Source: Huschelrath (2010)/Harrington (2006)

Prices Supply Market Shares

Variation Relative to Mean (%)

 Is there evidence that the agreements were implemented?

54 Cartel Period 30%