COMPETITION LAW

INTRODUCTION TO THE
CONCEPT OF
COMPETITION
• Economics – branch of social science focusing on the production, distribution and consumption of goods and
services
• Studies the behaviour and changes in a market to predict trends
• Market – system in which interaction between persons and businesses guides the economic decisions and pricing
• Allows the laws of supply and demand to govern the production and distribution of goods and services
• 4 kinds of market structures – monopoly, oligopoly, perfect, monopolistic – each market structure refers to the
degree of competition in the economy
• Other determinants are - the nature of the goods and products, the number of sellers, number of consumers, the
nature of the product or service, economies of scale etc.
• Perfect market : large number of buyers and sellers – no seller has any parlicular influence in the market – all
sellers are in competition with each other – all are price takers – based on certain assumptions such as presence of
homogenous products, goal of profit maximization, free from barriers (free entry and exit), no concept of
consumer preference – eg. Vegetable vendors – largely theoretical concept
• Monopoly market : presence of a single seller – exercise absolute control over the entire market – can sell at any
price they wish – consumers have no alternative – eg. Carnegie Steel Company now US steel, American Tobacco
Company, Google
• Oligopoly market : only few firms in the market – though there are no fixed number of firms only about 3 – 5
will hold power – buyers greater than sellers – either compete or collaborate with each other – use market
ifluennce to affect price changes to maximise profits – consumers are price takers – barriers to entry present – eg.
Cellular phone service, Airlines, Mass media, Pharmaceuticals
• Monopolistic market : large number of buyers and sellers – no homogenous products – products are similar but
differentiated – consumers have preference or alternatives – sellers having higher market power can charge
marginally higher price – eg. Cereals, cosmetics
• In economics, competition is a condition where different economic firms seek to obtain a share of a limited good
by varying the elements of the marketing mix: price, product, promotion and place. In classical economic thought,
competition causes commercial firms to develop new products, services and technologies, which would give
consumers greater selection and better products. The greater selection typically causes lower prices for the
products, compared to what the price would be if there was no competition (monopoly) or little competition
(oligopoly).
• Essentially in marketing – competition – rivalry between firms selling similar products or services with the
goals of achieving market share growth, profits and revenue.
• Eg : Horlicks and bournvita, the hindu and times of india
• Benefits of competition – increased consumer preference, price stability, fosters healthy rivalry, promotes
innovation, economic development, foreign investment, creation of goodwill etc.
• Globalisation – international competition
• Theories of competition
• Invisible hand theory : When consumers enjoy many choices, businesses must remain on their toes and continue
to offer the best prices. In this way, competition self-regulates the supply and demand of markets, keeping
goods affordable for consumers.
• Types of Competition
• Perfect competition : Perfect competition happens when there are many sellers of nearly identical products.
Because of so many companies selling similar products, there are many substitutes available for consumers.
Prices are controlled by supply and demand, and are generally low for consumers.
• Monopolistic competition : Monopolistic competition is a market where there are many competitors, but each
company sells a slightly different product. Businesses are not perfect substitutes of each other. There is a
relatively low barrier of entry for businesses. This means there will be many companies entering the competition.
They must each use marketing to differentiate their products and convince consumers of why their company’s
product should be chosen over all the others.
• Monopoly competition : A monopoly exists when there is only one company covering an entire market. This
company is the sole market for the product and can set prices without any competition. This lack of consumer
choice usually results in high prices. Sometimes a business is a monopoly because the barrier to entry is too great
for other companies to enter the market and compete. Other times, a monopoly is artificially created, such as
when a government is the sole controller of a product, like electricity, mail delivery or gas. Another reason
monopolies exist is that one company has a patent on a product, and that patent protects the company from others
entering the market and creating price competition.
• Oligopoly competition : An oligopoly is a market where there are more than two competitors, but no more than a
handful. Usually, oligopoly markets have a high barrier to entry. In oligopolies, all companies are at risk of
entering a price war, which can ultimately be harmful to a business’ bottom line. Profit margins tend to be higher
in oligopolies because there is little competition.
• Types of Anti – competitive practices
• Dumping, where a company sells a product in a competitive market at a loss. Though the company loses money
for each sale, the company hopes to force other competitors out of the market, after which the company would be
free to raise prices for a greater profit. For example, many developing countries have accused China of dumping.
In 2006, the country was accused of dumping silk and satin in the Indian markets at a cheaper rate which affected
the local manufacturers adversely.
• Exclusive dealing, where a retailer or wholesaler is obliged by contract to only purchase from the contracted
supplier.
• Price fixing, where companies collude to set prices, effectively dismantling the free market.
• Refusal to deal, e.g., two companies agree not to use a certain vendor
• Dividing territories, an agreement by two companies to stay out of each other's way and reduce competition in
the agreed-upon territories.
• Limit pricing, where the price is set by a monopolist at a level intended to discourage entry into a market.
• Tying, where products that are not naturally related must be purchased together. – Product bundling – bowl
designed by Versace if you buy icecream – a pack of banjaras facewash with AVT tea
• Resale price maintenance, where resellers are not allowed to set prices independently.
• Religious/minority group doctrine, where businesses must apply tribute to a significant (normally religious) part
of the community in order to engage in trade with that community. (E.g., a business that does not comply will be
50% worse off than the competitor if they do not comply with the tribute demanded by just 20% of the
community.)
• Formation of cartels
• Bid rigging
• Group boycott
• Essential facilities, is a legal doctrine which describes a particular type of claim of monopolization made
under competition laws. In general, it refers to a type of anti-competitive behavior in which a firm with market
power uses a "bottleneck" (impose restrictions to entry) in a market to deny competitors entry into the market. It is
closely related to a claim for refusal to deal.
• Under the essential facilities doctrine, a monopolist found to own "a facility essential to other competitors" is
required to provide reasonable use of that facility, unless some aspect of it precludes shared access. The basic
elements of a legal claim under this doctrine under United States antitrust law, which a plaintiff is required to
show to establish liability, are: control of the essential facility by a monopolist, a competitor’s inability to
practically or reasonably duplicate the essential facility, the denial of the use of the facility to a competitor; and the
feasibility of providing the facility to competitors and finally absence of regulatory oversight from an agency
(Verizon v. Trinko).
• Conscious parallelism is a term used in competition law to describe pricing strategies among competitors in
an oligopoly that occurs without an actual agreement between the players. Instead, one competitor will take the
lead in raising or lowering prices. The others will then follow suit, raising or lowering their prices by the same
amount, with the understanding that greater profits result.
• Patent misuse that restricts economic competition
• Predatory pricing, also known as undercutting, is a pricing strategy where a dominant firm deliberately reduces
prices of a product or service to loss-making levels in the short-term.
• Competition law aims at regulating the market economy by regulating anti competitive practices and agreements
• Anti – competitive practices and agreements – business, government or religious practices that aims to reduce
competition in a market
• Market competition - condition where different economic firms seek to obtain a share of a limited good by
varying the elements of the marketing mix: price, product, promotion and place. In classical economic thought,
competition causes commercial firms to develop new products, services and technologies, which would give
consumers greater selection and better products.
• Known as Antitrust law in US – Antimonopoly law in China
• Competition regulated by private and public involvement
• Principles of competition law
Competition law, or antitrust law, has three main elements:
1. prohibiting agreements or practices that restrict free trading and competition between business. This includes in
particular the repression of free trade caused by cartels.
2. banning abusive behavior by a firm dominating a market, or anti-competitive practices that tend to lead to such
a dominant position. Practices controlled in this way may include predatory pricing, tying, price
gouging, refusal to deal, and many others.
3. supervising the mergers and acquisitions of large corporations, including some joint ventures. Transactions that
are considered to threaten the competitive process can be prohibited altogether, or approved subject to
"remedies" such as an obligation to divest part of the merged business or to offer licenses or access to facilities
to enable other businesses to continue competing.