Case Studies on Competition

A Presentation by Manoj Pandey Director Competition Commission of India New Delhi , 7th September 2011

Agenda
1. A Brief Background of Anti-Trust or Competition 2. Legal Framework in India 3. Discourse on Competition 4. Case Studies and Legal Principles
5. Q&A

Law Enforcers/Firms Dilemma !

Higher prices than anyone else - profiteering!

Lower prices than anyone else- predatory pricing!

Same prices as everyone else - collusion and price fixing!

Equilibrium Point = P=MR=MC, MC is cutting MR and MR is rising

Anti-Trust in early days

An early example of competition law is the Lex Julia de Annona, enacted during the Roman Republic around 50 BC. (Price of Corn was an issue).
Kautilya, Prime Minister of Mauryan King, Chandra Gupta in 3rd Century BC, in Arthashastra has written about traders propensity to form cartels in order to fix prices and make excessive profits, prescribing heavy fines with a view to protect consumers.

1. Trust and Anti-Trust -Evolution

1.1 Chronological Events in USA
Trusts Combination of Firms after rapid industrialization - Post Civil War in US. Farmers blamed high railroad charges which were making farming unprofitable. Consumers and labour unions joined hands. In 1888, Republicans and Democrats both made it an issue. Benjamin Harrison from Ohio A Republican President; when Sherman Act was enacted in 1890. (Canada had already enacted anti-trust law in 1889). John Sherman, an Ohio Republican, the chairman of the Senate Finance Committee who introduced the bill , was also Rockefeller's colleague (Case of Standard Oil- First Major Case)

Laws Over the Years

1.2 Various Acts Over the Years in USA
Sherman Act, 1890 - Price fixing and Monopolization Clayton Act, 1914 - Price Discrimination, Exclusive Dealing , tying contracts, stock acquisition of competitors, interlocking Directors FTC Act, 1914 Established FTC. Robinson Pattman Act, 1936 - Amended Clayton Act, to include quantity discounts, free advertising , promotional allowances offered to large buyers and not small buyers.

HSR Act, 1976 Pre-Merger Filings

Laws Over the Years

Celler Kefauver Act, 1950- Also called Anti-Merger Act. While the Clayton Act prohibited stock purchase mergers that resulted in reduced competition, firms were able to find ways around the Clayton Act by simply buying up a competitor's assets. The Celler-Kefauver Act prohibited this practice if found that competition would be reduced because of assets acquisition. The Act gave the government the ability to prevent vertical mergers and conglomerate mergers which could limit competition.

Laws over the Years

1.3 Treaty of Rome in 1957 Foundation of Competition Laws in European Union

1.4

Post 1991 More than 110 countries have competition laws

2. Legal Framework-Contd.
2.1 MRTPAct -1969 2.2. Competition Act initially notified in January, 2003, enforcement delayed due to certain legal issues raised in courts. 2.2 Act amended in the year 2007. Competition Act, 2002; Prohibits Anti-Competitive Agreements (Sec 3) Prohibits Abuse of Dominant Position (Sec 4) Regulates Combinations (Sec 5&6 )

Mandates Competition Advocacy (Sec 49)

2.3 MRTP Act repealed in 2009.

3. Discourse on Competition Over the years

3.1 Evolutionary and Intentional School of Thought 3.2 Chicago and Post Chicago 3.3 Market Failure- Traditional Point of View ; Market Power Externalities Asymmetry of Information Why not behavioral biases be taken as Market Failure? If yes, role of agencies?

Discourse on Competition Over the years

3.4. Role of Agencies Regulation of Price vs. Market. Regulation of conduct vs. business models. Consumer Protection vs. Promotion of free and fair Competition. Consumer Protection vs. Consumer Welfare.

4. Case Studies
4.1 Agreements and Cartels

4.2 Abuse of dominance

4.1 Cartels
4.1.1 Fines on Cartels in EU - Amount in
Years 2007 2008*** Amount in Euro 3.313.427.700 2.270.012.900

2009*****++ 2010**** 2011

1.540.651.400 2.868.676.432 315.200.000

Total

10.307.968.432

4.1.2 Some cases of Fines in EU

Year 2008 Undertaking Saint Gobain Car (glass) Amount in Euro 896.000.000

2009

E.ON (Gas)

553.000.000

2009

GDF Suez (Gas)

553.000.000

2001

F. Hoffmann-La Roche AG (Vitamins) Siemens AG (Gas insulated switchgear)

462.000.000

2007

396.562.500

Fines Imposed-EU
Fines imposed

14.000 11.968 12.000

amount in millions

10.000 8.000 6.000 4.000 2.000 1 0 1960 - 1969 1970 - 1979 1980 - 1989 period 1990 - 1999 2000 - 2009 9 174

864

4.1.3 UK Construction Companies

Case against 103 construction Companies The OFT was contacted by an Internal Audit Manager acting for the Queens Medical Centre Nottingham University Hospital NHS Trust in Nottingham on 1 April 2004. The Internal Audit Manager alleged that, amongst other things, there had been collusion in the bidding process for tenders for works at the Queens Medical Centre. Inspections carried out at the premises of 8 companies in 2005. Leniency applications by 3 companies. Followed by Searches at the premises of 22 companies. Leniency by 22 companies in 2005.

UK Contd.
Inspections of 14 more companies in 2006.

Followed by leniency applications by 6 companies. Searches at 9 additional companies. Followed by leniency from 8 companies. Searches again on 8 companies. Followed by leniency by 7 companies. The OFT imposed fines totalling 129.2 million on 103 construction firms in England which it has found had colluded with competitors on building contracts.

Conclusions OFT
The OFT concluded that the firms had engaged in illegal anticompetitive bid-rigging activities on 199 tenders from 2000 to 2006, mostly in the form of 'cover pricing. Cover bids are submitted so as not to win the contract but give a misleading impression to clients as to the real extent of competition. The OFT also found six instances where successful bidders had paid an agreed sum of money to the unsuccessful bidder (known as a 'compensation payment'). These payments of between 2,500 and 60,000 were facilitated by the raising of false invoices.

Conclusions OFT
The infringements affected building projects across England worth in excess of 200 million including schools, universities hospitals, and numerous private projects from the construction of apartment blocks to housing refurbishments. Eighty-six out of the 103 firms received reductions in their penalties because they admitted their involvement in cover pricing . Investigation uncovered significant infringements competition law on nearly 200 projects across England. of

4.1.4 Case Studies on Cartels and Agreements- Harm to Public Procurement

The Competition Council of the Hungarian competition authority (GVH) imposed a fine of HUF 593,9 million ( EUR 2,4 million) on 8 construction companies for the rigging of their bids in respect of a road construction work put out to tender. The bids in the public procurement deal were invited by the Municipality of Budapest. The members of the cartel agreed which one of them was to win the public procurement contract and to employ then the others as subcontractors to the project. On 16 September 2005, the Competition Council found that the practice of the undertakings had the potential to restrict competition and, therefore, imposed fines on them.

Bid-Rigging
Bid-Rigging under explanation to Section 3(3)Bid rigging means any agreement, between enterprises or persons referred to in sub-section (3) of Section 3, 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.

Forms of Bid-Rigging
Bid rigging may take many forms, but most bid rigging conspiracies usually fall into one or more of the following categories:
Bid Suppression
In bid suppression schemes, one or more competitors who otherwise would be expected to bid, or who have previously bid, agree to refrain from bidding or withdraw a previously submitted bid so that the designated winning competitors bid will be accepted.

Forms of Bid-Rigging
Complementary Bidding
Complementary bidding ( cover or courtesy bidding) occurs when some competitors agree to submit bids that are either too high to be accepted or contain special terms that will not be acceptable to the buyer. Such bids are not intended to secure the buyers acceptance, but are merely designed to give the appearance of genuine competitive bidding. Complementary biddings are the most frequently occurring forms of bid rigging, and the bidders defraud purchasers by creating the appearance of competition to conceal secretly inflated prices.

Forms of Bidding
Complementary Bids
ITEM X
Year 1 A B Rs. 100 Rs. 130 B A

ITEM-Y
Rs. 110 Rs. 140

Year 2

A B
A B

Rs. 120 Rs. 150

Rs. 140 Rs. 170

B A
B A

Rs. 130 Rs.160

Rs.150 Rs.180

Year 3

Bid-Rotation
All conspirators submit bids, but take turns being the lowest bidder The terms of the rotation may vary - Company X submits the low bid first time Company Y submits the low bid next time Company Z submits the low bid third time

Rotation of Bids
ITEM - A
Year 1 Firm A Year 2

ITEM-B
Year 1 Year 2

Firm B Firm C Firm D ITEM-C Firm D Firm A Firm B Firm C

Rs.100 Rs.120 Rs.130 Rs.140

Rs.140 Rs.120 Rs.130 Rs.100

Firm B Firm C Firm D Firm A

Rs.100 Rs.120 Rs.130 Rs.140

Rs.140 Rs.130 Rs.120 Rs. 100

Year 1 Rs. 100 Rs. 120 Rs. 130 Rs. 140

Year 2 Rs. 140 Rs. 130 Rs. 120 Rs. 100

Firm C Firm D Firm A Firm B

ITEM-D Year 1 Year 2 Rs. 100 Rs. 140 Rs. 120 Rs. 120 Rs. 130 Rs. 130 Rs. 140 Rs. 100

Forms of Bid-Rigging
Subcontracting
Subcontracting arrangements are often part of a bid rigging scheme. Competitors, who agree not to bid or to submit a losing bid, frequently receive subcontracts or supply contracts in exchange from the successful bidder. In some schemes, a low bidder will agree to withdraw its bid in favour of the next low bidder in exchange for a lucrative subcontract that divides the illegally obtained higher price between them.

Forms of Bidding
Market Allocation
Agreements by which competitors divide markets among themselves. Division could be by territory, by customer type or by Product. Company A only submits bids for jobs north of the city; Company B only submits bids for jobs south of the city

Detection of Bid-Rigging- Red Flags

Suspicions may be aroused by unusual bidding or something a bidder says or does. Situations of suspicious behaviour include the following (only illustrative and not exhaustive): The bid offers by different bidders contain same or similar errors and irregularities (spelling, grammatical and calculation). This may indicate that the designated bid winner has prepared all other bids (of the losers). Bid documents contain the same corrections and alterations indicating last minute changes. A bidder seeks a bid package for himself/herself and also for the competitor.

Red Flags
A bidder submits his/her bid and also the competitors. A party brings multiple bids to a bid opening and submits its bid after coming to know who else is bidding. A bidder makes a statement indicating advance knowledge of the offers of the competitors. A bidder makes a statement that a bid is a complementary, token or cover bid. Same e-mail , same telephone, same address, same letter head

Problem Identification
Officers must get training in procurement procedures It is not that as long as L1 is selected , everything is fine. Old archaic Manual systems are in place. Importance of institutional mechanism in place. Many countries use electronic system of surveillance and detection like BAMS in USA.

4.2 Abuse of Dominance

Case of United Brands v Commission of the European Communities United Brands is a frequently cited precedent in EC competition law. Judgment of the Court of 14 February 1978. - United Brands Company and United Brands Continentaal BV v Commission of the European Communities - Chiquita Bananas. - Case 27/76. The case relates to alleged abuse of a dominant position by United Brands Company, the importer of the Chiquita brand of Latin American bananas. United Brands supplied these bananas unripe and in bulk to distributors/ripeners operating in various EC countries. The distributors would buy them while still green, ripen them using their own facilities and distribute them to retailers across their national markets.

Charges- United Brandes Case

i) By requiring its distributor/ripeners in the Belgo-luxembourg economic union , Denmark , Germany , Ireland and the Netherlands to refrain from reselling its bananas while still green ; ( Since ripe bananas have short shelf lives, the effect of this restriction was to prevent distributors from selling in other countries.)

The Court confirmed that the imposition of a restriction on competition which affects cross-border trade within the Community is an abuse under Article 82, unless the restriction is justified and proportionate to its objectives.

United Brandes Case

ii) The second abuse identified by the Commission was the refusal of United Brands to supply bananas to Olesen, a longstanding distributor in Denmark. -United Brands argued that this refusal was justified by Olesen's decision to promote a rival brand (Dole) to the detriment of sales of Chiquita bananas, and also alleged quality shortcomings on Olesen's part. The Court found that refusal to supply in these circumstances was an abuse.

United Brandes Case

iii) The third abuse identified by the Commission was the differential pricing charged by United Brands to distributors in different member states. United Brands argued that the differences were justified because the prices applied to distributors were directly linked to the final market price for bananas in each country. The Court found that this argument provided no justification for discriminatory prices, which were imposed by United Brands, and affected cross-border trade, thus amounting to abuse irrespective of any commercial logic underpinning them.

Legal Foundation-United Brandes Case

A market share of 40-45 per cent "does not permit the conclusion that UBC automatically controls the market. It must be determined having regard to the strength and number of the competitors." An undertaking does not have to have eliminated all opportunity for competition in order to be in a dominant position. An undertaking's economic strength is not measured by its profitability; a reduced profit margin or even losses for a time are not incompatible with a dominant position, just as large profits may be compatible with a situation where there is effective competition.

United Brandes
Why United Brands was considered dominant in addition to market shares; had control of (or easy access to) all its inputs. It is "vertically integrated to a high degree with effective control over all stages of transport and ripening. "owns large plantations. "can obtain supplies without any difficulties from independent planters. has significant influence over independent planters. is sufficiently diversified to withstand natural disasters.

United Brandes Case

The capabilities have enabled it to develop Chiquita as a trusted must-have brand, thereby placing distributors and ripeners in a degree of dependency. United Brands had "attained a privileged position by making Chiquita the premier banana brand name on the relevant market with the result that the distributor cannot afford not to offer it to the consumer The robustness of United Brands' business has enabled it to withstand competitive attacks by rivals. Given the inherent challenges of entry into the market, this means that new entrants "come up against almost insuperable practical and financial obstacles.

United Brandes
Paragraph 65 of the judgment is often quoted as a characterisation of a dominant position: The dominant position referred to in Article 82 relates to a position of economic strength enjoyed by an undertaking which enables it to prevent effective competition in being maintained on the relevant market by giving it the power to behave to an appreciable extent independently of its competitors, customers and ultimately of its consumers. (Section 4 of Indian Competition Act has almost similar definition)

 Q&A Session- Questions are invited, if Any. Contact

Website - www.cci.gov.in