Role of Economic Evidences in Prosecution of Cartels

ROLE OF ECONOMIC EVIDENCES IN PROSECUTION OF CARTELS

Dissertation submitted in part fulfilment for the requirement of the

Degree of

LL.M.

Submitted by Supervised by RINKI SINGH DR. GARIMA DADHICH

NATIONAL LAW UNIVERSITY DELHI (INDIA) 2017 DECLARATION BY THE CANDIDATE

I hereby declare that the dissertation entitled “Role of Economic Evidences in Prosecution of Cartels” is the outcome of my own work carried out under the supervision of Dr. Garima Dadhich, Assistant Professor, Corporate Governance and Public Policy, Indian Institute of Corporate Affairs, Ministry of Corporate Affairs, Govt. of India.

I further declare that to the best of my knowledge the dissertation does not contain any part of work, which has not been submitted for the award of any degree either in this University or any other institutions without proper citation.

I further declare that I followed the Research guidelines of the University.

Place: New Delhi Rinki Singh Date: 35LLM, 2016 National Law University Delhi

CERTIFICATE OF SUPERVISOR

This is to certify that the work reported in the LL.M dissertation entitled “ROLE OF

ECONOMIC EVIDENCES IN PROSECUTION OF CARTELS,” submitted by

Rinki Singh at National Law University, Delhi is a bona fide record of his/her original work carried out under my supervision. To the best of my knowledge and belief, the dissertation: (i) embodies the work of the candidate herself; (ii) has duly been completed; and (iii) is up to the standard for being referred to the Examiner.

Place: New Delhi Dr. Garima Dadhich

Date: Assistant Professor,

Corporate Governance and Public Policy,

Indian Institute of Corporate Affairs,

Ministry of Corporate Affairs,

Govt. of India

ACKNOWLEDGEMENT

I express my deepest sincere regards and gratitude to my respected supervisor, Dr. Graima Dadhich, for her steady help, direction on the subject and consolation for undertaking this exploration work on the topic “Role of economic evidences in Prosecution of Cartels”. She has dependably been a wellspring of inspiration for this attempt and have motivated me to undertake further research in this work. Her important proposals and exchanges have been exceptionally useful in the finishing this research work. This work would not have been attainable without her thorough directions.

I, further, wish to offer my thanks to the whole NLU-D family particularly Prof. (Dr.) Ranbir Singh (Vice-Chancellor, National Law University, Delhi) and Prof. G.S. Bajpai (Registrar, National Law University, Delhi) for giving all the framework and infrastructure required for undertaking this research work. I would also like to show my gratitude to the Library staff of the National Law University, Delhi for their steady support.

I extent special thanks to my parents, family and friends for their steady support and guidance in this attempt. Last, but not the least, I recognize and thank the researchers whose work is utilized for this work.

Rinki Singh 35LL.M.2016

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LIST OF ACRONYMS & ABBREVIATIONS

AAEC Appreciable Adverse Effect on the Competition AITDF All India Tyre’s Dealers Federation ATMA All India Tyre Manufacturer Association BCDA Bengal Chemist and Druggist Association CCI Competition Commission of India CMA Cement Manufacturer’s Association CMA Cement Manufacturing Association DG Director General EU European Union MRTPC Monopolies and Restrictive Trade Practices Commission OECD Organization for Economic Co-operation & Development PAN Presence Across the Nation R&D Research and Development SCP Structure - Conduct - Performance TFEU Treaty on Functioning of European Union US United States WTO World Trade Organisation

LIST OF CASES

1. Alkali Chemical Corporation Ltd 2002, CTJ 459 (MRTP) 2. All India Tyre’s Dealers Federation v. Tyre Manufacturer MRTP Case: RTPE No. 20 of 2008. 3. Aluminium Phosphate Manufacturers, Case no. 2 of 2011 4. American Tobacco Co. v. United States 328 U.S. 781 (1946). 5. Bell Atlantic Corp. v. Twombly 550 U.S. 544 (2007). 6. Builders Association of India v. Cement Manufacturers, Case No. 29 of 2010. 7. Exclusive Motors Private Limited v. Automobili Lamborghini , case 52 of 2012 8. Express Industry Council of India Ltd. V. Jet Airways and others, Case No. 30 of 2013 9. Hindustan lever Ltd. & Tata Oils mills co. Ltd, 994 CTJ 270 (SC) (MRTP) 10. ICI v. Commission, Case 48/69 ECJ, [1972] ECR 619 11. In re alleged cartelisation by steel producers, Case No.: RTPE No. 09 of 2008 (MRTP) 12. In Re Bengal Chemist and Druggist Association, Case No. 02 of 2012 and Ref. Case No. 01 of 2013. 13. Monsanto Co. v. Spray-Rite Service Corp 465 U.S. 752 (1984). 14. Neeraj Malhotra and Deutsche Bank and Ors. Case No. 5 of 2009. 15. RPTA v. Crompton India Ltd. and Rallis (India) Case vol III. 16. RRTA Vs W. H. Smith & Sons Ltd. [1969] 3 All ER 1065. 17. Sarabhai Chemicals case, (1979) 49 Comp Cases 145 (MRTP commission). , 18. Theatre Enterprises 346 U.S. at 541. 19. Wood Pulp Case OJ [1985] L 85/1, [1985] 3 CMLR 474 20. Zinc Producer Groups OJ [1984] L 220/27, [1985] 2 CMLR 108

LIST OF TABLES

TABLE NUMBER CAPTION PAGE NUMBER 2.1 Prisoner’s Dilemma. 45

TABLE OF CONTENTS

S.No. TITLE PAGE NO.

DECLARATION BY THE CANDIDATE I CERTIFICATE OF SUPERVISOR ii ACKNOWLEDGEMENT iii LIST OF ABBREVIATIONS iv LIST OF CASES V LIST OF TABLES V

CHAPTER 1 INTRODUCTION 1 1.2 LITERATURE REVIEW 2

1.3 STATEMENT OF PROBLEM 3

1.4 HYPOTHESIS 3

1.5 RESEARCH QUESTIONS 4

1.6 RESEARCH OBJECTIVE 4

1.7 RESEARCH METHODOLOGY 4

CHAPTER 2 DEFINING CARTELS 5 2.1 FORMATION OF A CARTEL 7

2.2 LAWS PROHIBITING CARTELS 13

2.3 ESSENTIALS OF A CARTEL 14

2.3.1 ESSENTIALS OF AN AGREEMENT 14

2.3.1.1 AGREEMENT BETWEEN WHOM. 16 2.3.1.2 AGREEMENT NEEDS TO BE A 18 HORIZONTAL ONE. 2.3.1.3 EXCEPTIONS TO THE RULE OF 20 AGREEMENTS 2.3.1.4 RAGHAVAN COMMITTEE’S VIEWS 21

2.3.2 PURPOSE AND CONDUCT OF A 22 CARETL. 2.3.2.1 PRICE FIXING 22 2.3.2.2 MARKET SHARING 23 2.3.2.3 OUTPUT RESTRICTING 24 2.3.2.4 BID RIGGING 25

CHAPTER 3 ROLE OF ECONOMIC EVIDENCES IN 27 DETECTION OF CARTELS 3.1 DETECTION OF CARTELS 30

3.1.1 PROBLEMS OF AN OLIGOPOLISTIC 31 MARKET 3.2 METHODS OF DETECTION 34

3.2.1 KINDS OF EVIDENCES 34 3.2.1.1 DIRECT EVIDENCES 35

3.2.1.2 INDIRECT EVIDENCES 35

3.3 APPROACHES FOR DETECTION OF 38 CARTELS 3.3.1 LENIENCY APPROACH OF DETECTION 43 OF CARTELS 3.3.2 DAWN RAIDS 46 EVIDENTIARY VALUE OF CHAPTER 4 ECONOMIC EVIDENCES 47

4.1 PRICE PARALLELISM AND 48

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EVIDENTIARY VALUE OF ECONOMIC EVIDENCES. 4.1.1 CONCERTED PRACTICES IN EU 49

4.1.2 CONSPIRACY IN US 51

4.1.3 ACTION IN CONCERT IN INDIA. 52

CHAPTER 5 CCI’s APPROACH IN 54 APPLICATION OF ECONOMIC EVIDENCES. 5.1.1 ALL INDIA TYRE’S DEALERS 54 FEDERATION V. TYRE MANUFACTURER 5.1.2 BUILDERS ASSOCIATION OF INDIA V. 57 CEMENT MANUFACTURERS 5.1.3 IN RE ALLEGED CARTELISATION BY 58 STEEL PRODUCERS 5.2 CRITICAL ANALYSIS OF THE CASE 60 STUDIES 5.1 SUGGESTIONS 62 BIBLIOGRAPHY 63 BOOKS 63 STATUTES 64 REPORTS 64 ARTICLES 64 WEBSITES 65

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CHAPTER 1

INTRODUCTION

“Competition law is all about economics and economic behaviour.1”

-Fali S. Nariman.

As the statement suggests, it is quite evident that economic plays an important in the regime of Competition Law. The roots of the Competition Law are found in the theories and concepts of the Economics. The Anti-Trust legislations all over the world are drafted based on economic theories and concepts. The main aim of the Anti-Trust Law in a country is to promote its economic development. This explains well the importance of economics with respect to the Competition Law. Economics and Competition law walks hand in hand. The litigators, judges and competition authorities all over the world to interpret the competition law, to apply it and to enforce the law, use it. Various economic concepts, theories and evidences are used by the competition authorities to identify and understand the market structure and behaviour of the firms in the market, which helps the authorities and the lawyers to support their arguments and to proceed in the further investigation if needed.

In the cases related to Anit-Competitive Agreements, or Abuse of dominance, or in the case of Mergers, the competition authorities used the economic analysis, economic theories and concepts to figure out the economic data of supply and demand, demand elasticity, market power, market concentration etc.

With respect to prosecution of cartels, economic analysis and theories of economics and data collected as economic evidences holds a very important role, as it is very difficult to detect a cartel. Other direct and circumstantial evidences also plays an important role in prosecution of cartels. The economic analysis helps the investigating authorities to establish a prima face case to the existence of a cartel and cause further investigation. Therefore, economic evidences do hold an imperative role in prosecution of cartels.

1 Fali S. Nariman, ‘Law and Economics’, in vinod dhall (ed), Competition Law Today: Concepts, Issues and Law in Practice xv (New Delhi: Oxford Press, 2007)

1.1 LITERATURE REVIEW

There have been many research works done by various scholars on approaches of economic analysis and gathering of economic evidences in the cases involving the prosecution of cartels. A few of the works are reviewed as below:

 Patrick Rey, “On the Use of Economic Analysis in Cartel Detection”, (2006): The author in his paper have discussed various economic approaches for detecting a cartel. He talks about structural approach, conduct approach and performance approach. Puts an emphasis that these approaches are very beneficial in the cases related to merger. He says that with respect to cases concerning the cartels, these approaches are not effective enough and generally fails to provide a clear-cut answer in the cases of cartels. He in his wok put an emphasis on understating the formation of cartels and the factors facilitating the formation of cartels. He says that economic analysis can be used in various effective ways to detect a cartel. While, he suggests that there is a need for further theoretical andempirical based approach research in detection of cartels.

 Paul A. Grout and Silvia Sonderegger, “Structural Approaches to Cartel Detection”, (2006): The authors in this paper are also of the same view as that of Patrick Rey that the traditional structural and behavioural approaches are not that effective in detecting a cartel, it generally leave the competition authorities with ambiguity. They have discussed the detailed theories used in detection of cartels relating to how and when cartels are formed and the factors that facilitate the collusion in an industry and in the later part of the paper the authors have discussed and analyseda few case studies and statistical approaches. The authors suggests that the study of industry characteristicsis a factor that empowers the cartelization and that, by recognizing those elements, theantitrust authorities might be helped in cartel identification.

 Harrington J., Detecting Cartels, December (2004): the author in his work revolves around the role of economic analysis in detection of cartels. He suggests that the study of the impact of the collusion on the market and on the consumers can be very helpful in detecting a cartel. The effects of the cartel is to be determined. He suggests that there are two stages of cartel detection one

the screening process and the second one is the verification. The author have discussed four empirical approaches of economic analysis of the data that can be helpful and can guide the competition authorities in dealing with the detection of cartels better.  Richard Whish, “Oligopoly Theory and Economic Evidence”, (2006): The author in his book in the chapter relating to the Collusion in Oligopolistic markets, have discussed the problems of detection of a collusive practice an oligopolistic market. He has identified the factors that facilitate collusion in an oligopolistic market and how without proper evidence the cartels in such a market gets undetected. The author in his work has undertaken an economic approach to explain the nature of an oligopolistic market and how this market is prone to price parallelism and that mere price parallelism cannot be an outcome of cartelization.

1.2. STATEMENT OF PROBLEM

The problem that is faced in the prosecution of cartels is that since, it is illegal, the parties forming a part of a cartel, tend to keep it highly secretive and avoid any kind of documentation evidencing the same. The competition authorities conducts an investigation into detection of cartels using various economic theories, concepts and analysis. Still they fail to gather enough evidence to prove a cartel.

1.3. HYPOTHESIS

Detection of cartels in a developing country like Indian is difficult. There are different measures that are taken up the authorities to prohibit cartelization in a country. In the process of detection and prosecution of cartels various economic theories and concepts are applied by the authorities to understand the nature of the market and detect a cartel. The competition authorities undertake various economic analysis and gather economic evidences to establish their claim. Economic Evidences plays a very important role in the prosecution of cartels. However, alone presentation of claim of cartelization solely on the basis of economic evidences is not enough and economic evidences alone cannot really establish the existence of a Cartel.

1.4. RESEARCH QUESTIONS

The researcher would like to investigate the following research questions:  What are cartels and what factors facilitate the cartelization in a market?  What are the tools that are used by the competition authorities in detecting and prosecuting the cartels?  What economic analysis and economic evidences are used in prosecution of cartels?  Can existence of a cartel be proved solely on the basis of economic evidences?  What approach undertaken by the Indian Competition Authority in detecting and prosecuting cartels?

1.5 . OBJECTIVES The objectives of this research are:  To study and understand the behaviour of the cartels.  To the conditions, that favours the cartelization.  To study the kinds of approaches and economic analysis undertaken by the competition authorities in prosecution of cartels.

 To study the approach of Competition Commission of India in application of economic evidences in the prosecution of cartels . 1.6. RESEARCH METHODOLOGY The research methodology the author have relied on is Doctrinal. The sources of data are secondary and electronic. Various legislations, books, articles, reports and online websites have been referred to conduct this research.

CHAPTER 2

DEFINING CARTELS

Any competitor in the market works with one main aim i.e. to earn maximum profit, while a competitor in a market competes there runs a risk of incurring losses or not earning much profit because of the competition prevailing the market due to the presence of other competitors. In such a situation the players/the competitors prefer to collude and coordinate their prices and output so as to reduce the risk of losses and earn maximum profit without facing any competition from each other, thereby acting as a “Collective Monopoly” in the market. This is when a cartel is formed where firms operating in the same industry collude to coordinate and decide on pricing, production or marketing practices, with an intention to limit competition among themselves and to maximise their market power resulting in affecting the market prices.1

Indian Competition Act, 2002 defines the term “Cartel” under section 2 sub-section (c) as:

“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.”

Whereby, section 2, sub-section (b) defines the term “Agreement” to include any arrangement, understanding or action in concert, whether or not such arrangement, understanding or action is formal or in written form2 or is intended to be enforceable by legal proceedings.3

Whereas, In 1998, the Organization for Economic Co-operation and Development (herein after as “OECD”) defined “HARDCORE CARTEL” as anti-competitive agreement, anti-competitive concerted practice or anti-competitive arrangement by competitors to fix prices, make rigged bids (Collusive tenders), establish output restrictions or quotas, or share or divide markets by allocating customers, suppliers, territories or lines of commerce.

1Canadian Economy online, available at http://www.canadianeconomy.gc.ca/english/economy/cartel.html; http://www.cci.gov.in/sites/default/files/cartel_report1_20080812115152.pdf, page no. 1. 2 Section 2 (b) (i) of Indian Competition Act, 2002, No. 12, Acts of Parliament, 2002. 3Id. at Section 2 (b) (ii).

In European Union (herein after as “EU”), the term cartel is defined by the European Commission as

“agreements and/or concerted practices between two or more competitors aimed at coordinating their competitive behaviour on the market and/or influencing the relevant parameters of competition through practices such as the fixing of purchase or selling prices or other trading conditions, the allocation of production or sales quotas, the sharing of markets including bid-rigging, restrictions of imports or exports and/or anti-competitive actions against other competitors.”4

The OECD website5 mentions “Hard Core Cartels” whereas in our legislations we use the term “Cartels”.

A Cartels is nothing but a collusion between firms/individuals engaged in the same level of production or distribution to decide on their business strategies with an aim to earn maximum profit by adopting anti-competitive practices with an intention to not to compete with each other and to restrict competition. It is a term used to describe an arrangement or other form of cooperation or interaction between two or more actual or potential competitors with the object or effect of reducing competition between the competitors with regard to prices, markets, customers and/or products.6

A cartel is said to exist when two or more enterprises enter into an explicit or implicit agreement to fix prices, to limit production and supply, to allocate market share or sales quotas, or to engage in collusive bidding or bid-rigging in one or more markets. The aim of the agreements establishing cartels is not to compete on prices, products or customers.7

2.1 FORMATION OF A CARTEL

4European Commission Notice on Immunity from fines and reduction of fines in cartel cases. 5 http://www.oecd.org/competition/cartels/ 6 Competition Law of the European Community (Fifth Edition) (Van Bael & Bellis (ed.); Jan 2010) at para 341. 7Competition commission of India, Advocacy Booklet on Cartels, at page 1.

As already discussed that a cartel is an agreement between the firms operating in the same industry. Therefore, a cartel can be formed through agreements and these agreements can be classified into two kinds8:

1. Agreements that are explicit i.e. Explicit Agreements.

2. Agreements that are impliciti.e. Implicit Agreements, also known as Tacit Collusion.

An agreement is said to be Explicit, when the players/competitors in the marketto form and maintain a cartel actually meet to decide on their terms as to how to control prices, production etc. in the market. The meetings are done under the cover or veil of the causal dinner/lunch or at a casual social gathering maybe some party or marriage, or at some business conference or annual meets. It is known that such kind of activity of colluding is unlawful and the members taking part in such activities tend to hide and keep everything highly secretive.

Whereas, in the case of implicit agreements/Tacit collusion,takes place when the players/competitors in the concerned market cooperate with each other and coordinate their actions without the presence of any explicit agreement. An example of tacit collusion can be when a one firm undertakes the lead in the market to decide prices in coordination with other firms and all the firms decides to follow the same pricing policy as decided because of collusion, knowing that they stand to benefit by doing so.9 Without the presence of any formal agreement between the parties, the prosecution of the firms taking part in an implicit collusion is very difficult. The gathering of evidence against such collusion is difficult, further, the arguments of behaviour being the outcome of the structure or nature of the industry has been raised up a defence by the firms under the scanner.10 In tacit collusion, firms/competitorscoordinate and act in concert to carry out anti-competitive practice of cartelization. However, presence of mere parallel behaviour is enough to call it as tacit collusion or anti-competitive.

There are factors, which facilitate and contribute to the formation of cartels, which are discussed below.

8 Study of Cartel Case Laws in Select Jurisdictions – Learnings for the CompetitionCommission of India, CUTS, at page 1. 9Ibid. 10 http://www.cci.gov.in/sites/default/files/cartel_report1_20080812115152.pdf

1. Nature of the Market: The foremost is the nature of the market,11it depends on the number of players/firms in the market. If there are less players in the market, it’s easy for players to collude and coordinate and maintain the established cartel. If there are more number of players/members involved in a cartel, it’s difficult to maintain the cartel, to coordinate and to collude in the first place.12 And where are more number of players, then the benefits will be shared by many players which makes players to think of short run benefits and deviate from the long run benefits and to maintain the cartel.13

2. Homogeneity of the Product: The second factor is the nature of product, if the product is homogeneous, it’s easy to decide on prices and output and divide territories etc., therefore making it easy to take decisions on the product quality, quantity, price etc. as the homogeneous products areeasily and perfectly substitutable and interchangeable, it’s better to collude rather than competing. Plus, consumer preferences are same and homogeneous products are easily substitutable and competitors can easily divide the markets and consumers easily.14 If the products are homogeneous then calculation of cost of production and calculation of output capacity is easy to compare and it is easy to settle on a selling price. Therefore, a market of a homogenous provides favourable conditions to collude and coordinate.

3. Inelasticity of the Demand and Fluctuations in the Demand: The third factor is the elasticity of demand, if the demand is inelastic, it’s easy for firms to collude, where there is no shift in the demand of the product or service when the prices are increased or decreased, the demand is said to be inelastic. Collusion is less sustainable and difficult to maintain in a market

11 An oligopolistic Market is more likely to facilitate cartelization as the market is concentrated. 12Patrick Rey: On the Use of Economic Analysis in Cartel Detection, Behavioural Screening and the Detection of Cartels, European Competition Law Annual 2006: enforcement of prohibition of cartels, 51-69, (2006).; Compte O. and Jehiel P. (2002): “Multi-Party Negotiations,” mimeo, CERAS. 13Patrick Rey: On the Use of Economic Analysis in Cartel Detection, Behavioural Screening and the Detection of Cartels, European Competition Law Annual 2006: enforcement of prohibition of cartels, 51-69, (2006). 14Cement cartel case, Case No. 29 of 2010.

where demand fluctuates.15 Also, if the demand is inelastic and stable it’s easy to collude and earn great profits through collusion. The demand remains the same and the consumers are with no bargaining power, therefore, the suppliers/competitors takes the advantage of this situation and tend to harm and exploit the consumers. Talking about fluctuations in demand in the market, when there’s high demand in the market, it’s very likely that the competitors in order to respond to that high demand, may deviate from the collusion and start producing more for a short period to gain more, whereas the potential cost of punishment is at a minimum. 16Further where there exists a predictable pattern of fluctuations in the demand in the market, the players in the market may accordingly coordinate and continue to collude.

4. Governmental Control: The fourth factor is control of the government on the market, if the governmental control is less, cartelization is easy as where there’s less governmental control, the firms who are members of the cartel do not expect to get caught by the authorities easily, therefore it’s more likely for firms to cartelize where there is less governmental control. Whereas when there is high governmental control, the members are always cautious not to get caught and play their game safe and tend to collude less. Also, there’s always a fear of getting caught by the Competition authorities but firms may collude by weighing and balancing their profits/ benefits earned by colluding and losses/punishment incurred as a result of being caught by the authorities. Therefore, the extent of governmental control also plays an important role in formation of cartels in an industry.

5. Benefits derived from the Cartelization:

15Supra note. 14. 16Paul A. Grout and Silvia Sonderegger: Structural Approaches to Cartel Detection, Behavioural Screening and the Detection of Cartels, European Competition Law Annual 2006: enforcement of prohibition of cartels, 69-83, (2006).

The fifth factor is the benefits that are derived out of the cartels, if the benefits are high as compare to the cost of forming and maintaining the cartel, then it’s worth cartelizing. The benefits are also to be weighed and balanced with the penalty and losses incurred in case the competition authorities catch them. Also, benefits are to be calculated in case a member deviates from the collusion and the punishment to be given to the member who deviates. If the benefits derived from the cartelization is more as compared to the prospective expected losses, it is more likely that players in the market/industry will collude.

6. Geographical Concentration: If the industry is concentrated geographically, it helps in cartelization. If in a specific geographical area there are less number of players, it gives them incentive to gain collective market power over the geographical area and act as a monopoly collectively. Also, it is easy for members to coordinate and maintain the cartel in a geographical concentrated area. Firms can easily monitor the actions of each other in a geographical concentrated area, and it is easy to divide the share and consumers in a geographical concentrated area.

7. Entry Barriers: If there are no entry barriers and cost of entry and exit is relatively low, firms can easily enter and exit making the collusion short run as competitors will focus only on short run benefits and it’s unlikely that collusion will prevail for a long term, which will erode the profitability of the collusion as if the entry will be free and easy and if the market seems to be profitable, new competitors will enter the market and more the number of competitors/members market share of each player will decrease making it less profitable and difficult to coordinate the collusion. 17

17Ibid.

8. Frequent Interaction between the Firms/ Existence of Trade Associations etc.: where there is more and frequent interaction between the players in the market, it’s more likely for firms to collude, interact and coordinate. Generally, where there exists a trade association it becomes easy for firms to meet and have frequent interactions between them and they can react better to the deviations.

9. Industries with stabilized technologies: Where there is a mature, well established industry in the market holding various intellectual property rights and technologies acts as a rival for its competitors in the market. In such a market where there’s a firm which strong in terms of innovation and technology, it’s difficult for all other competitors to collude, as the future prospects of innovation is reduces the chances of collusion and the cost of retaliation increases, because if this mature industry/ competitor innovates further it will be difficult to maintain the cartel and if it will be difficult to punish such an industry for future deviation from the cartel.18

10. Symmetric Costs: If the cost of production of the product is same for all the firms, they are on the same footing and it is easier to collude with equals. If there is a firm whose marginal cost id very low as compared to others, it will result in difficulties in agreement of a common price policy.19 Also, low cost firms are more likely expected to deviate from the cartel as they will be benefited more from under cutting their rivals and there’s less fear of retaliation.20

11. Cooperative and other Contacts and Structural links:

18Supra note. 14. 19 Bain J., Output Quotas in Imperfect Cartels, 62 Quarterly Journal of Economics 617 for an early discussion. (1948): 20 Harrington J. Collusion Among Asymmetric Firms: The Case of Different Discount Factors, 7 International Journal of Industrial Organization 289(1989); Thalm J “Optimal Collusion under Cost Asymmetry,” mimeo, University of Toulouse (2005). See also Mason C., Phillips O. and Nowell C “Duopoly Behavior in Asymmetric Markets: An Experimental Evaluation”, 74 Review of Economics and Statistics 662, (1992).

Where there are cooperative agreements or structural links between the competitors in the firm, the chances of retaliation are high. They enlarge the scope of relation. For example, in the case of structural links, firms may have some shareholding in another firm or if there’s a joint venture, when the firms collude and if they deviate, the firms having shareholding in the other frim may punish that firm better by not investing further in the defaulting firm. Therefore, the scope of retaliation is high.21 In such a case there’s a link between the members, and these agreements can foster the chances of further collusion because it makes it easy for firms to trust each other and to punish them in case of deviation. When we talk about cooperative agreements like research and development agreements, standardization agreements, or joint commercial agreements, again the firms are mutually dependent for their business and in case of deviation may face harsh retaliation, also these agreements provide a veil for the firms where they can easily collude. One example could be of the media communications industry, where contenders need to reach interconnection understandings with a specific end goal to offer board network connectivity. These understandings not just grow the extension for countering, they additionally have an immediate effect on the administrator’s valuing procedures.All the more for the most part, these firms may change their terms of agreements and understandings, either between themselves or with outsiders, to facilitate collusion.

12. Buying Power: When the buyers in the market have high power to switch to other products or stop using that product because of the increase in prices, even an immaculate cartel may think that it’s hard to force high costs on intense purchasers, which makes cartel action less gainful and, by a similar token, more delicate. Thereby, making it difficult for the cartel to survive.22

21Supra note. 14.. 22Tirole J., The Theory of Industrial Organization, MIT Press, Cambridge Massachusets.(1988)

2.2 LAWS PROHIBITING CARTELS

In India Section 3 of the Indian Competition Act, 2002 prohibits the Cartelization, whereas in EU Article 101 of Treaty on Functioning of European Union (herein after as “TFEU”) is the provision prohibiting the same and in United States it is section 2 of the Sherman Act, 1890.

Section 3 of the Indian Competition Act, 2002 prohibits anti-competitive agreements between the enterprises, association of enterprises, persons or association of enterprises, having appreciable adverse effect on the competition within India (herein after as “AAEC”).23In addition, sub-section 2 of section 3 declares such anti- competitive agreements as void.

Sub-section 3 of section 3 of Indian Competition Act, 2002, deals with the horizontal agreements including cartels which are presumed to have appreciable adverse effect on competition and are thus anti-competitive. However, it excludes agreements entered into by way of Joint Ventures, if such agreement increases the efficiency in production, distribution, supply, storage, acquisition or control of goods or provisions of services.24

Sub-section 3 of Section 3 prohibits:

1. any agreement25 entered into between enterprises26 or associations of enterprises, persons27 or associations of persons or between any person and enterprise; 2. Practice carried on by any associations of enterprises or persons; 3. Decision taken by any associations of enterprises or persons;

Including Cartels, engaged in identical or similar trade of goods or provisions of services. And in particular identifies the following types of horizontal agreements as presumed anti-competitive:

1. Agreements, practices or decisions taken to fix prices which directly or indirectly determines purchase or sale prices of the products or services.28

23 Section 3, sub-section (1) of the Indian Competition Act, 2002, No. 12, Acts of Parliament, 2002. 24Id. at Proviso of sub-section 3 of section 3. 25Id. Defined under section 2 (b). 26Id. Defined under section 2 (h). 27Id. Defined under section 2 (l).

2. Agreements, practices or decisions taken that limits or controls production, supply, markets, technical development, investment or provision ofservices.29 3. Agreements, practices or decisions taken that divides the markets which results in sharing of the market or source of production or provision of services by way of allocation ofgeographical area of market, or type of goods or services, or number of customers in the marketor any other similar way.30 4. Agreements, practices or decisions taken which directly or indirectly results in bid rigging or collusive bidding.31

2.3 ESSENTIALS OF A CARTEL

After analysing the definition of a “Cartel” and provision regulating “Cartels” under the competition law, essentials of a cartel can be deduced as follows:

1. An agreement between the enterprises or persons or associations of enterprises or personsengaged in identical or similar trade of goods and services. 2. Aimed at limiting, controlling or attempt to control the production, distribution, sale or price of, or, trade of goods or provisions services.

Focusing on the main requirements for a Cartel to be established we need to analyse the points establishing the above two mentioned conditions.

2.3.1 ESSENTIALS OF AN AGREEMENT

Firstly, there has to be an agreement. The first requirement is the existence of an agreement. An agreement is defined under the act under section 2 (b) of the act, it can be in written form or either in oral irrespective of the fact if it’s legally enforceable or not. An agreement under the act can be in the form of:

 an arrangement,  understanding,  Action in concert.

The foremost requirement of existence of a cartel is an agreement establishing it. The existence of an agreement is sine qua non.32 The definition of an “Agreement” under

28Id. at Section 3(3)(a). 29Id. at Section 3 (3) (b). 30Id. at Section 3(3)(c). 31Id. at Section 3 (3) (d). 32Steel Cartel Case,Case No.: RTPE No. 09 of 2008 (MRTP) at para 111.

14 the act is exhaustive and wider in sense, to include any agreement oral or written, legally enforceable or not. It not only includes the formal agreements that can be found to establish a cartel but it also includes any arrangement between the parties, or any kind of understanding between the parties, or any concerted action. The reason for providing such a broad scope to the definition of an agreement in the competition act is that in every jurisdiction cartel are considered harmful for the economic growth of the country; they considered beingper se illegal. CCI in the Cement Cartel case33noted that, “Parties to an anticompetitive agreement will not come out in open and reveal their identity to be punished by the competition agencies. This is also the reason that the legislature in its wisdom has made the definition of ‘agreement’ inclusive and wide enough and not restricted it only to documented and written agreement among the parties.34

Therefore, the scope of definition of an agreement in the competition law is, kept quite broad.

Further, members forming a cartel are aware that it is illegal to cartelize and they make sure not to get caught by the competition law authorities. They tend to destroy every evidence that can get them into trouble, they preferto have secret meetings,discuss their dealings at social gatherings, even a wink or a nod works acts a signal to take the next move.

Therefore, it is very difficult to gather direct evidence of an agreement establishing a cartel. Hence, the scope of meaning of an agreement under competition law is, kept broad to make it easy for the Competition Commission to gather indirect/circumstantial evidences to prove the existence of an agreement establishing a cartel.

As already stated an agreement establishing a cartel can be IMPLICIT or EXPLICIT. Where there is a formal document evidencing the formation/existence of cartel or where the parties actually meet up and decide the terms and actions of a cartel so formed, it is an explicit one. If there is a trade association facilitating the meetings and exchange of information between the cartels, the evidence establishing the cartel is easy to be found. But in the case where the members of the cartel tend to destroy

33 Case No. 29 of 2010. 34Tyre cartel case. MRTP Case: RTPE No. 20 of 2008

15 every documentary evidence and prefer in having less documentation and where, it’s very difficult to identify if in any market there exit a cartelwhere, it’s difficult to determine by direct, circumstantial or economic evidences that the members are in coordination and not independently. It is difficult prove the existence of an agreement in the case of Tacit collusion.

The competition Commission of India (herein after as “CCI”), MRTP commission and Supreme Court of India have attempted to define the meaning of an “Agreement” and the terms “Arrangement”, “Understanding” and “Action in Concert”. As the definition of an agreement under The Monopolies and Restrictive Trade Practices Act, 1969 (MRTP), included the expressions – “Arrangement or Understanding.35” therefore, there is ample jurisdiction on defining what amounts to an agreement for the purpose of anti-trust laws.

2.3.1.1 AGREEMENT BETWEEN WHOM.

Secondly, according to the definition of cartel under section 2 (c) and section 3 (1) of the Indian Competition Act, 2002, the agreement needs to be between two parties, these parties can be an enterprise, or an association of enterprises, persons or association of persons.36The competition Act, have defined the terms “enterprise” and “Person”, therefore, it’s important to analyse these definitions so as to find out as to which transaction/contacts/ agreements are eligible to be qualified as an agreement for the purpose of section 3 of the Indian Competition Act, 2002.

Section 2 (h) defines the term “Enterprise”, whereas section 2 (l)defines the term “Person” for the purpose of this Act. Section 2 (h) defines enterprise to include a person or any department of the government, which/ who, has been or is already engaged in any activity relating to the following:

 production, storage, supply, distribution, acquisition, control of articles or goods,  the provision of services of any kind,  the investment,

35 Section 2 (a) of Monopolistic Restrictive Trade Practices Act , 1969. 36 Section 3(1) of the Indian Competition Act, 2002, No. 12, Acts of Parliament, 2002.

 or business of acquiring, holding, underwriting or dealing with shares, debentures or other securities of any other body corporate, either directly or indirectly.

However, section 2(h) excludes any activity of the government including all activities carried on by the department of the central government dealing with atomic energy, currency, defence and space.

In addition, it is to be noted here that, enterprises include only those persons or a department of the government that is and has been engaged in the activities mentioned in the definition; it does not include any persons or department of government that is not yet in existences or is capable of being in existence in future.

Whereas,section 2 (l) defines the term “Person” to include an individual37, a Hindu undivided family38, a company39, a firm40, an association of persons or a body of individuals, whether or not incorporated or not, in India or outside India41, any corporation established by or under any Central, State or Provincial Act or a Government company as defined in section 617 of the Companies Act, 195642, any body corporate incorporated by or under the laws of a country outside India43, a registered co-operative society44, a local authority45, any other artificial juridical person.46

Next question to be assessed is that, for an agreement establishing a cartel is it necessary for the parties to the agreement to be engaged in the same level of production chain and in the same markets?Can a cartel be formed only via horizontal agreement? Is cartel always a sub-set of a horizontal agreement? Alternatively, can there be a vertical agreement establishing a cartel? To answer this question, the definition of a cartel as provided under the act and provision dealing with cartels is to be analysed.

37Id. at section (2) (l) (i). 38Id.at section (2) (l) (ii). 39Id. at section (2) (l) (iii). 40Id.at section (2) (l) (iv). 41Id.at section (2) (l) (v). 42Id.at section (2) (l) (vi). 43Id.at section (2) (l) (vii). 44Id.at section (2) (l) (viii). 45Id.at section (2) (l) (ix). 46Id.at section (2) (l) (x).

And according to the definition of cartel as provided under the act a cartel is an association of producers, sellers, distributors, traders or services providers and section 3 (3) uses the terms “including cartels, engaged in identical or similar trade of goods or provision of services.” Further, sub-section (4) of section 3 of the Act, doesn’t talk about cartels, it talks about agreements amongst enterprises o persons at different stages or levels of the production chain in different markets.

2.3.1.2. AGREEMENT NEEDS TO BE A HORIZONTAL ONE.

Generally, Cartels are formed to control similar product markets in horizontal fashion, to limit the competition from the competitors present in the same market. However, contracts in downstream markets with suppliers, subcontractors, wholesalers, or retailers or enterprise groups might be anticompetitive, but they are not cartels. One may imagine such courses of action as “vertical cartels,” yet they are better portrayed as systems of firms, key unions, undertaking gatherings, or joint endeavours.47

Therefore, cartels are formed by an agreement between the competitors operating in the same level of production chain and in the same markets. Hence, every agreement establishing a cartel is a horizontal agreement. A cartel is a sub-set of horizontal agreements. It is to be noted that not every horizontal agreement is a cartel. On this point, a comparison is to be made between two cases dealt by CCI.

In Re Bengal Chemist and Druggist Association48, CCI held the Bengal Chemist and Druggist Association (BCDA), an association of wholesalers and retail sellers of drugs in West Bengal, to be engaged in anti-competitive practices violating section 3(1), 3(3)(a) and (b). The BCDA had approximately 34000 members who were engaged in wholesale and retail sale of drugs in the state of West Bengal.In this case, the association’s executive committee directed the retailer member not to give discount on the MRP in the sale of medicines to consumers and ensured strict compliance of these directives. Here, CCI did not held that the association and its members were cartelizing, but instead noted that BCDA has indulged in the concerted practice to ensure sale of drugs MRP only. BCDA took collusive action to ensure that the trade margins do not get determined on a competitive basis and that the members do not decide the prices themselves, but based on whatever the association decides.

47http://www.hbs.edu/faculty/Publication%20Files/07-011.pdf, page 13 48 Case No. 02 of 2012 and Ref. Case No. 01 of 2013.

The conduct of BCDA in this case curtailed the freedom of trade for the retailers and the directions to the wholesalers and retailers not to give any discount restricted the competitors to pass any benefits on to the end consumers.

The practices carried on by BCDA and its compliance by the members qualified to be a concerted practice under section 3 of the Act, being a Horizontal agreement but it was not a cartel.

Whereas in, Cement Cartel Case49,CCI fined11 cement companies and Cement Manufacturer’s Association(CMA) for cartelization.In this case, CCI noted that the opposite party cement companies were operating in the same level of chain of production i.e. manufacturing of cement and, therefore examined the allegations under Section 3(1) read with Section 3(3) of the Act. Here, all the 11 cement- manufacturing companies cartelized to limit the supply of the cement in India and to determine prices, they intended to work as a “Collective Monopoly” to limit the supply and create an artificial scarcity of cement in India, with an aim to decrease the supply and increase the prices. In addition, these cement-manufacturing companies divided their zones to sell cements in different parts of the country. With respect to CMA, it provided a platform for the members to interact and take decisions. The commission held that the cement companies were engaged in cartelization, wherebyCMA provided a platform for the members to interact with each other, share information about cost, prices, production and capacities.

In this case, it was held to be a cartel because the members had an agreement between themselves to not to compete with each other and to limit / control the supply of the cement and to limit/control the prices of the cement to earn maximum profits. Therefore, it was a Cartel. Whereas, in the Bengal Chemist and Druggist case, the parties and members of the BCDA were not indulged in a concerted practice to limit competition among themselves or the control/limit the supply, prices or divide territories, neither do they have an aim to earn maximum profit. The members here complied with the directions of the BCDA because of the directions of the concerned authority. Therefore, it was not a Cartel but a Horizontal agreement.

Hence, every Cartel is a Horizontal agreement but not every Horizontal Agreement is a Cartel.

49 Case No. 29 of 2010.

2.3.1.3 EXCEPTIONS TO THE RULE OF AGREEMENTS

Further, Competition Commission of India (CCI), have ruled and have laid a few decisions and clarified what kind of agreements are to be considered as agreements for the purpose of section 3 of the Act. In the case of Neeraj Malhotra and Deutsche Bank and Ors.,50 the commission clarified that for the purpose section 3 of the competition act, 2002, an agreement with an end consumer is not included.

In addition, any decision by two departments of an enterprise will not comprise as an agreement for the purpose of section 3 of the act. Therefore, the parties for the purpose of an agreement under section 3, should be independent and operating autonomously. The Competition Commission of India have accepted the worldwide doctrine of Single Economic Entity in Indian competition law jurisprudence. The doctrine says that an agreement between the entities forming the part of the same group, where one company is exercising the sole control, such an agreement is not considered to be an agreement for the purpose of section 3 of the Act.51

In the Exclusive Motors Private Limited v. Automobili Lamborghini,52 CCI noted that “Volkswagen India” and “Automobili Lamborghini” both are a part of the same group and with respect to it, stated that:

“To establish a contravention under Section 3, an agreement is required to be proven between two or more enterprises. Agreement between opposite party and its group company ‘Volkswagen India’ cannot be considered to be an agreement between two enterprises as envisaged under section 2(h) of the Act. Agreements between entities constituting one enterprise cannot be assessed under the Act.”53

Lastly, Section 3, talks about certain kind of agreements which do not fall under the ambit of section 3 (3). The proviso of section 3(3), clearly states that 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, do not fall under the category of agreements for the purpose of sub- section (3) of section 3.

50 Case No. 5 of 2009. 51Exclsuive motors pvt. Ltd. v. Automobili Lamborghini S.P.A, CCI order, case 52 of 2012 dated, 6 Nov. 2012 52Ibid. 53Ibid.

Further talking about essentials of a Cartel, as defined under section 2 (c), a cartel should be aimed at limiting, controlling or attempt to control the production, distribution, sale or price of, or, trade of goods or provisions services. Section 3 (3) in particular recognises four kinds of cartel conducts.

2.3.1.4 RAGHAVAN COMMITTEE’S VIEWS

The Raghavan Committee mentions that since, it is not possible to provide an exhaustive list the all the agreements that can be declared anti-competitive under section 3 (3) under the category of horizontal agreements and that for individual cases “rule of reason” is to be applied. Hence, an illustrative list would include the following types of agreements:54

 Agreements concerning the fixing purchase or selling prices.  Agreements that limits the quantities, markets, technical development or investment.  Agreements with respect to dividing territories to be served by the parties and dividing the sources of supply.  Agreements regarding dissimilar and differential treatment to equivalent transactions with other tradinhg parties that place them at a disadvantagie.

Although, In general “rule of reason” is to applied for establishing an agreement to be anti-competitive. Nevertheless, the Committee Report identified certain kinds of agreements for which the presumption is often that they cannot to be pro- competitive and therefore, for such kind of agreements there no need for analysis under the rule of reason test and such agreements are often presumed to be anti-competitive. These agreements have been adopted in section 3(3) from sub-sections (a) to (d), which are as follows:

 Agreements regarding prices, that includes all agreements which directly or indirectly fix prices.55  Agreements regarding quantities, that includes agreements aimed to limit or control the production and investment.56

54 Ragahavan Committee Report, at Para 4.3.6. 55 Section 3 (3) (a) of the Indian Competition Act, 2002, No. 12, Acts of Parliament, 2002. 56Id. at Section3(3) (b).

 Agreements related to Bids (collusive tendering), which includes tendersa submitted as a resultq of any joint activity or agreement.57  Agreements regarding market sharing, that includes agreements for sharing of markets by territory, type or size of customer or in any other way.58

2.3.2. PURPOSE AND CONDUCT OF A CARETL.

Based on the above, there are Four Types of Cartel Conduct, which are summarized as follows:

 Price Fixing.  Market sharing.  Output Restricting.  Bid-rigging.

In the first three types of conducts usuallythe all firms in a market, or a majority of them, are included in coordinating their business, whether its related toprice, geographic market, oroutput, they collide so as to effectively act like a monopoly and share the monopoly profits accrued from their collusion. The fourth and last type of cartelised conduct usually involves competitors colluding to restrict the competition amongst themselves in response to a tender invitation and it can be a combination of all the other practices.59

2.3.2.1. PRICE FIXING:

The most well-known practice undertaken by cartels is price fixing. It is an agreement between the members to sell the same product or service at fixed price. It can also include agreements to fix, determine discounts or stabilise prices. The aim of the members here is to sell their product at the highest price possible to earn maximum profit for all involved. This cartel conduct affects the consumers at the core and is considered most harmful as consumers are forced to pay high prices. Further,

57Id. at section 3(3)(d). 58Id. at section 3(3)(c). 59Study of Cartel Case Laws in Select Jurisdictions – Learnings for the Competition Commission of India, CUTS.

22 according the study by CUTS, there can be following types of agreements, which fall under this category of price fixing:60

 Agreement related to increase in price.  Agreement based on a some kind of standard formula, on which the pricing scheme is to based and prices will be calculated.  Agreements that maintain a balance and fixed ratio between the prices of products which in competition but are non-identical.  Agreements entered with the aim of eliminating any discounts or rebates or to settle any uniform discounts;  Agreement on credit conditions and terms that will be applied to the customers.  Agreements that removes any products, which are offered at low prices withj an aim to limit supply and keep prices high.  Agreement among the players to not to reduce or increase process without informing the other members of the cartel.  Agreement between the parties to published prices;  Agreement between the parties to not to sell the products unless prices are agreed.

2.3.2.2 MARKET SHARING

In this type of cartel conduct, the members of a cartel divides among themselves to share the market. The sharing is done by dividing or allocating the territories to themselves or by dividing the customers or by dividing any type of goods or services or in any other way. The members then work or operates only in their areas or regions and agree not to encroach on other’s territories.

In the case of RPTA v. Crompton India Ltd. and Rallis (India),61 in this case the members shared the market on the basis of division of products. Rallis and Crompton Greaves divided the market by sharing the manufacturing of products. Rallis agreed on manufacturing pedestal and table fans, while Crompton Greaves agreed to manufacture only ceiling fans and to produce each other’s products.

60 Rai, Q & Saroliya,Restrictive and Unfair Trade Practices – Where Stands the Consumer?,CUTS,(2003), India, p. 16 61Case vol III.

Where it is difficult for firms to fix prices and maintain the common prices, firms generally agrees to divide or share the market and not to go for price fixing as it gets difficult to decide on prices if there are products for which price can’t be settled upon. In such a situation, it becomes easy for them to share the market and to effectively eliminate the competition among themselves.

Such type of cartel conduct is considered harmful and is presumed to have an appreciable adverse effect on competition as it reduces the choice available to customers in a competitive market.

2.3.2.3 OUTPUT RESTRICTING

The next category of cartel conduct, which is presumed to have appreciable adverse effect on competition, is Output restricting. Any agreement, which limits or controls production, supply, markets, technical development, investment or provisions or services, comes under this category.62

To understand and find out if there’s any pattern or trend evidencing the limit or control of production, analysis of product, product capacity and capacity utilization of the market participants is to be done.The same is reflected in the decisional analysis of CCI in a few decisions. In the Cement Cartel Case63, CCI went to look into economic analysis of capacity utilization for past 6 years and noticed a low level capacity Utilization.64 CCI in this case also analysed the production parallelism to detect the collusive practice carried by the alleged parties. Generally, the period for which this analysis is done is for 3 years or above.65

It’s not only the agreements which restrict the production that are treated to be illegal but other agreements that limit of control but any agreement that controls or limits the technical development like innovation and research and development etc. are also treated to be illegal.

In the case of Sarabhai Chemicals case66, the parties entered into a technical know- how agreement initially for 20 years and terminated it after 10 years. Parties then

62 Section 3 (3)(b) of the Indian Competition Act, 2002, No. 12, Acts of Parliament, 2002 63 Case No. 29 of 2010. 64Id. at Para 253. 65Roy Abir, “Competition Law in India: A Practical Guide”,( Kluwer Law International 2016) at Page 51 66Sarabhai Chemicals, (1979) 49 Comp Cases 145 (MRTP commission).

24 entered into another the agreement whereby one of the parties i.e. E. Merck A.G., was restricted not to manufacture, pack, sell, distribute its products in India and was permitted to import it’s products and to package to sell and to distribute in India either by itself or by a licensee or an agent. However, this was not a case of cartel but a horizontal agreement.

2.3.2.4 BID RIGGING

Explanation to section 3 (3) of the Act, defines the term “Bid-Rigging” as any agreement horizontal agreement which has effect of eliminating or reducing competition for bids or adversely affecting or manipulating the process for bidding. The competition Act declares such agreements as illegal and presume them to have an appreciable adverse effect on competition.67 CCI in the case of Aluminium Phosphate Manufacturers68, defined collusive tendering or bid rigging is the practice whereby firms agree amongst themselves to collaborate the response of a tender. Bid rigging or collusive tendering occurs when two or more competing enterprises including potential bidders, agree not to compete genuinely with each other forparticular tenders. This kind of collusive behaviour affects the prices of the bid. The bidders secretly influence theoutcome of a contract or series of contracts, whereby they allow one of the participants in the agreement to win the tender and later they take turns to win the bid on different occasions, thereby sharing the benefits of their collusion.69

According to CUTS, there can be following kinds of agreements that amounts to bid- rigging/ collusive tendering:

 Sub-Contracting agreements whereby some bidders agrees not to compete for the bid, as some parts of the bid will be sub-contracted to them.  Bid rotation agreements whereby all the bidders agrees to take turns to win the bids.  Bid- suppression whereby bidders agrees not to compete and decides not to take part in the bidding process so that the other bidder wins the bid.

67 Section 3 (3) (d)of the Indian Competition Act, 2002, No. 12, Acts of Parliament, 2002. 68Case no. 2 of 2011. 69Abir Roy, “Competition Law in India: A Practical Guide”,( Kluwer Law International 2016). At Page 53,

 Market division for bidding whereby the competitors allocate specific customers or types of customers, products, or territories among themselves and bids are rigged inaccordance with such allocation.  Common Bidding whereby firms submits a common price in the bidding process so that price competition is eliminated.  Complementary Bidding, whereby the bidders submit very high prices or with unacceptable conditions in the bidding process, so that the pre agreed bidder wins the bid.

CHAPTER 3

ROLE OF ECONOMIC EVIDENCES IN DETECTION OF CARTELS

Competition law is growing at a faster pace in the recent years. It is because of the change in the economic behaviour all over the world.1 With the increase in globalisation and establishment of World Trade Organisation (WTO), the world economy has internationally integrated. The focus has shifted on improving and protecting the economy of a state, which is why countries need free trade and regulations to monitor the market. For economic development and economic efficiency, countries have adopted competition law policies to promote competition and to protect their domestic markets by preventing anti-competitive activities for overall economic development of the nation. Economics have played an important role in making of the competition law. The anti-trust laws are nothing but an interdisciplinary between economics and law. Not just that economics have played an indispensable role in making of Anti-Trust Laws all over the world, but economics and competition law goes hand in hand. Economics with respect to competition law is all about studying and understanding the markets. The competition law authorities use economics at various stages. The economic analysis of markets is done to know how markets work to understand the market structure and to arrive at a conclusion with better analysis and understanding the behaviour of the firms in the market. The economic analysis is also very important to measure the market power a firm is holding in the concerned market. Economic analysis is very important in identifying the problems of a market and to understand the conduct of firms in that market. The models of completion law all over the world are based on economic considerations and concepts.In addition, the competition policies all over the world have economic goals based on which the Anti-Trust Laws have been drafted. It focuses on healthy competition between the competitors so that the benefits arising out of the competition is transferred to the customers. Talking in economic terms,competition maximizes consumer welfare by increasing both allocative efficiency and productive efficiency, which are the centre of competition policy. The Indian Competition Act in its preamble clearly states that one of its objectives is to protect the interests of the

1Whish Richard, Competiton Law, (Oxford Press, 7th edition, 2011).

27 consumers.2 The goals of competition policy are based on two approaches. One is the Harvard Approach and the second one is Chicago Approach. Both these approaches are result of economic studies. In Harvard approach, the Harvard school researchers in 1930s conducted analysis of certain specific industries. This approach is based on the structure - conduct - performance (SCP)models according to which performance is determined by a firm’s conduct of business, which in turn is determined by firm and market structure. This model focused on the market structures and it advocate state intervention and argue that the limitation of market power should be the central focus of competition policy and that market power should be reduced. This approach includes study of economics to understand market and to determine market power. The second approach the Chicago Approach is more inclined on economic analysis of the conduct of the firms in the market. The Chicago School gave “reverse causation” of the SCP argument. According to this approach, the reverse causation, performance of a firm reflects the conduct of a firm and conduct reflects the structure. The monopolistic industries according to this approach are the result of efficient and superior performance of the firm. This school advocated for proper economic and conduct analysis of a firm. Like there should be proper analysis of the structure of the industry, entry barriers etc. with respect to the performance of the firms by applying the model of perfect competition, which explains most business behaviour. The centre of Chicago School lies in consumer welfare in the most efficient allocation of resources, which should be the only in objective of the anti-trust laws and the state should intervene when only if not doing so would result in an efficient allocation of resources. Therefore, it is very clear from the two approaches that Anti-Trust Laws are stemmed from economics.

It is not just that competition law finds its roots in Economics, but it is an indispensable part when it comes to enforcement of these Anti-Trust laws. Economics influences Competition Law not just at the level of designing and drafting of Competition policy but, also at the level of formulating guidelines and application of law. The competition law authorities while dealing with Anti-Competitive Agreements or Abuse of Dominance or Mergers uses economic analysis, economic evidences, economic reasoning and various economic concepts. A few questions can only be dealt with the help of economic analysis. Economists advises lawyers, judges

2 Preamble, of the Indian Competition Act, 2002, No. 12, Acts of Parliament, 2002.

28 and competition authorities on competition law litigation and cases. The terms like elastic of demand, nature of oligopoly, marginal costs, market power, predatory pricing etc. have become indispensable part of Competition law litigation.3

In application and enforcement of law the lawyers, Courts and competition authorities are referring various economic concepts, economic theories, various empirical economic analysis and economic evidences. The role of economics is evident at the stages of application of the law. In the case of Abuse of Dominance, the courts and competition authorities use economics in analysing determining the market power of the firm and other economic analysis in case of predatory pricing, firm’s concerned behaviour amounting to abusive behaviour. In addition, in the cases related to mergers, the use of economics is quite evident as the determination of combined market power that firms will acquire after combination, in understanding the market structure and industry to which the margining entities belongs to, in determining the elasticity of demands etc. However, economic plays an indispensable role in cases related to Anti-competitive Agreements. With respect to Cartels, economics plays an important role in understanding the market structure, especially in the case of oligopoly, various economic analysis and economic evidences are used to detect and investigate cartels. The economics is applied in the development and interpretation of evidences about industry market power, conditions of barrier, effects of merger or collusion, etc.4

The competition authorities all over the world to detect, investigate and prosecute cartels use various economic evidences and economic empirical tools. With the increase in advancements in technologies and computerized age, it has become easy to collect appropriate data with respect to sale and demand of the products; it becomes easy to determine the elasticity of demand, to determine the relevant market etc. The competition authorities have started gathering various economic data, economic evidences, and have started conducting various empirical economic researches while investigating the competition law cases.

3 Baker B. Jonathan & Bresnahan F. Timothy, Economic Evidence in Antitrust: Defining Markets and Measuring Market. 4Ibid.

From the above discussion, it is clear that economics plays an important role in competition law litigation. However, with respect to cartel cases, what economic evidences and economic analysis is used are discussed in detail in upcoming chapters.

3.1DETECTION OF CARTELS

“People who combine together to keep up prices do not shout it from the house tops. They keep it quite. They make their own arrangements in the cellar where no one can see. They will not put anything into writing nor even into words. A nod or wink will do.”5

Form the above statement; it is clear that members forming a cartel tend to avoid every documentation evidencing the Cartelization. Therefore, the detection of cartels is generally difficult and a challenging job. It is difficult to collected evidence establishing an agreement evident to cartelization. In certain cases, cartels are detected easily where any document establishing a Cartel is easily found, but in case where there is no such documents are available, it becomes difficult for the Competition Authorities to detect and prosecute a Cartel because of lack of evidence.

The first step involved in detection of a cartel is the first information received by the competition authorities or any kind of parallel or collusive behaviour creating suspicion as to existence of a cartel, whereby the competition authorities takes suo moto investigation against such behaviour. The next steps involves the investigation of a cartel, finding and searching for the evidences to establish the existence of a cartel. As, already stated that cartels are formed either by implicit agreements or by explicit agreements. In certain circumstances, the competition authorities are successful in finding evidences relating to cartelization like emails, or any documents maintained by the members or in case of any trade associations, there can be evidences found as to maintenance of meetings by the members etc. However, the problems lies in the case of tacit collusion, whereby it is difficult to find any evidence to establish the cartelization. It is generally a trend in a market that large firms decides their prices independently and leads the market as other small players in the market follow them, but it is difficult to establish that they cartelized. In an oligopolistic market where there a few number of firms, the firms takes an account of the actions of their rival firms to compete with them, it may take the form of

5 Lord Denning in RRTA Vs W. H. Smith & Sons Ltd. [1969] 3 All ER 1065.

coordination and conscious parallelism, without any existence of an explicit agreement, resulting in tacit collusion.

The problem of detection of cartels arises where there exits an implicit agreement between the members of a cartel and gathering of evidences becomes difficult. In an oligopolistic market, it is difficult to detect and prosecute a cartel because of the structural behaviour of an oligopolistic market. Further, in certain industries cartels operate for a long duration and can take a form of a complex cartel, where over a period some firms/membersmay drop out and re-enter again, some firms may be less active for some period, or they may be highly active at some period. Some may attend all the meeting or may avoid a few meetings and communicate in other ways etc. but somehow coordinate in maintenance of a cartel. Such a situation creates a problem for the competition authorities to detect a cartel, and prosecute its members and identify all the firms that are parties to such agreement and collusive practices.6

Therefore, it becomes difficult for competition authorities to detect and prosecute such hard-core cartels.

3.1.1 PROBLEMS OF AN OLIGOPOLISTIC MARKET

Before the problems of detecting and investigation a cartel in an oligopolistic market, it is imperative to understand the structure of an oligopolistic market.

We need to understand what an oligopoly is. An oligopoly is a market, where the structure is such that there aremore than one player/ competitor competing in that market. In an oligopoly, only a few players operate and compete in the market.Each player in the oligopolistic market wants to earn maximum profit and instead of competing with each other, they prefer colluding and working as a “collective monopoly” resulting in exploitation of consumers and affecting the economy of the nation. This is another problem that is faced by the makers of the competition policy that arises in such markets structures, whereby only a few operators or players dominate the market and by virtue of the characteristics of the market tend to behave in a parallel manner. By acting in concert,the firms in an oligopolistic market

6 Whish Richard, Competition Law, (Oxford Press, 7th edition, 2011) , page 101.

31 gaincollective market power so that they work in coordination and maintain an equilibrium where they all earn maximum profit.7

The economics of an oligopolistic market tells us very clearly that an a market which is oligopolistic in natureis highly prone and vulnerable to tacit collusion. The firms in an oligopolistic market carry on concerted practices, and decides to coordinate and cooperate among themselves to limit the competition between themselves, thereby causing harm to the competition in the market. Detection of such concerted/coordinated behaviour of firms is difficult because the players tend to be highly secretive of their actions and collusionso that they not to get caught by the competition authorities in future. Hence, the gathering and production of evidences that can establish such anti-competitive behaviour of the players/firms in a market, which is oligopolistic in nature, is difficult. The structure of an market which is oligopolistic in nature is such that, there could be a one large firm in the market that can emerge as a market leader and other small firms may just opt to follow its footprints to determine their prices. Simply following the footprints of a market leader and deciding prices independently by other firms may give rise to price parallelism. However, the problem lies in deciding and determining if such kind of behaviour amounts to the concerted practice or it is because of the nature of an oligopolistic market that such structure exists. Another question is, is mere existence of parallel behaviour isstrong enough to prove and establish that there exists a coordination between the firms and can be concluded that they are cartelizing? It also to be noted in an oligopolistic market, that each player in an oligopoly keeps an account of the actions of other players in the market. The nature of oligopolistic market is such that the firmsin order to survive the competition from the other rivalry, prefer to keep an eye on activities of the other players. If a player in an oligopolistic market decides to reduce the prices of its products, it would swiftly attract the consumers of the other rivals which are its competitor in the market, therefore in order to keep their customersstick other players in an oligopolistic market would respond to it and may reduce their prices as well. Moreover, a player may increases or decide its price unilaterally without giving regards to what other players are pricing and this might result in desertion by its customers perhaps because other players are offering the product at lesser price. Therefore, it can be said that the players are interdependent in

7Id. at page 559.

32 an oligopolistic market. They keep an account of each other’s actions in the market and are acutely aware of each other’s presence in the market and thereby in order to survive in the market they are bound to match with each-others marketing strategy.8

Another fact, which is to be considered here, is that an oligopolistic market is extremely prone to cartelization. There are less number of players; it is easy for them to maintain the cartel, to check if other members are loyal to their commitment of the cartelization and if the product is homogenous, it is easy to for them to decide on prices, quality and amount of production and supply.

Further, every player in the market wants to earn maximum profit and play safe. A very less number of sellers or producers shares an oligopolistic marketand there exists a competition between the players. For them it is easy to cartelize and divide the profits among themselves so that each of them earns maximum profit and face less competition from each other. In such a market situation, it is highly predictable that instead of facing competition from rivals, the competitors prefer to coordinate and collude, by agreeing on sharing the profit earned by fixing price, manipulating the amount of production and choose not to compete at all with each other but do business in unity so that everyone gets the profit out of the coordination. They work in coordination to act as a collective monopoly. In a monopolistic market, a single player is the only player in the market and possess the absolute market power. A monopoly in order to earn maximum profit can abuse its market power and can decide to produce that amount of its product and sell it at such a price at which it will earn maximum profit. Similarly, in an oligopolistic market, since it is easy to collude and coordinate they prefer working as a collective monopoly, manipulate the prices, and supply in the market to sell at the maximum price. However, the firms/players in an oligopolistic market should compete with each other, produce at an optimum level and sell their products at a competitive price, resulting out of the healthy competition among themselves. Nevertheless, like a monopolist firm, these firmscolluding in an oligopolistic market prefer to collude and to limit the production and supply of the product, sellingit at an exorbitant high price, toreach to an equilibrium, where all of them earn the maximum profit. This kind of agreement between the players for production and fixing price isknown as “COLLUSION” and the group acting in

8Id. at page 561.

33 concert is called a “CARTEL”.9 This act of collusion in an oligopolistic market is however considered to be an unlawful and anti-competitive under various Anti- Trust Laws as they exploit the consumers in the market, distorts the competition, exploitation of valuable resources, thereby damaging the economy of the country.

Even where, parties are colluding in an oligopolistic market and the competition authorities catch them, the prosecution becomes difficult because the firms takes various defences including the market structure that demands them to work in coordination.10

The investigation of cartels in the case of an oligopolistic market is discussed later in coming chapters.

3.2. METHODS OF DETECTION

Generally there are two ways in which cartels are detected: one by observing the means by whichfirms coordinate and second by observing the end result of the coordination. The former uses the term means of coordination, which includes some form of direct communication, and the competition authorities have detected many cartels by observing that communication.11 While the later includes observing the result caused because of coordination, which includes any increase in price, reduction in supply, or any suspicious pattern resulting from that coordination.

3.2.1. KINDS OF EVIDENCES

Before the methods and approaches can be discussed in details, it is important to discuss the kinds of evidences that are used in detection and investigation of cartels. Evidences play an important role in detection and investigation of cartels. Evidences can be classified into following kinds as identified as OECD12:

1. Direct Evidences 2. Circumstantial/ Indirect Evidences. (Communication and economic evidences).

9 Mankiw Gregory, “Principles of Economics” (South-Western, Cengage Learning, 6th edition, 2012),Page 351, 10Supra note. 9.. 11Harrington J., Detecting Cartels, December (2004). 12 Organization for Economic Cooperation and Development (OECD), Prosecuting Cartel without Direct Evidences of an Agreement, Policy Brief, June 2007.

3.2.1.1 DIRECT EVIDENCES:

Direct evidences are those evidences, which are concrete proof of existence of an agreement establishing a cartel. According to the OECD report direct evidences includes any documents that essentially embodies the agreement establishing the cartel. It also includes those documents, which are not complete agreement but parts of it, and it includes those documents, which identify the parties to the cartel. It is not necessary that direct evidences should be in paper form, even any information in electronic media like e-mails etc. are considered to be direct evidences. In addition to it, any oral or written statements of the participants of the cartel evidencing their cooperation or operation of the cartel or their participation in it are included in the category of direct evidences.13

3.2.1.2 INDIRECT EVIDENCES:

Indirect or circumstantial evidences have further classified into two: Communication Evidences and Economic Evidences.

Communication Evidences:

With respect to communication evidences, the records of telephone conversations between competitors which may or may not include their substance, or any evidence of travel to a common destination whereby there is a possibility of meeting or any evidences of participation in a meeting in a trade conference or association meeting or business festivals etc. It also any other evidences that give a proof of any communication between the parties about the subject, which includes any kind of minutes or notes evidencing the meeting concerning prices, demand or capacity utilization or whereby such concerns are discussed by the parties. Any other internal documents or evidences evidencing any kind of knowledge or understanding of other competitors pricing or business strategy or any awareness of future price increase by a rival firm.14

13Ibid. 14Ibid.

Economic Evidences:

OECD identifies “Economic Evidences” as a broader category of circumstantial evidence. Economic evidences concerns with the conduct of the firm that suggests that an agreement establishing a cartel is reached. Economic Evidences also concerns with the conduct and structure of the industry as a whole, other elements of market structure, which suggest that it was easy to fix prices or that the market is prone to cartelization or any other practices that can be used to sustain a cartel agreement.15

The only economic evidence, which is most important, is the “Conduct evidence”. Certain observations of conduct of firms in a market can create a suspicion, can draw competition authority’s attention, and can trigger an investigation of a cartel. An analysis of normal market conduction and normal conduct of the firms in that market and an analysis of any suspicious conduct or behaviour of firms in a market can be very useful in detection of cartels.

According to OECD report, Conduct evidence can be following types:

1. Parallel Behaviour: Any parallelism in pricing andany change in prices by competitors in that marketthat are identical or are nearly identical can be helpful in observing the behaviour and conduct of the firms and to further investigate as to why such parallelism exists. It is not just parallel behaviour in pricing that can be used as a conduct evidence but other forms of parallel behaviour like capacity utility reductions, adoption of any standardised terms and conditions of sale. It also includes any suspicious bidding behaviour which is resulting in some kind of patterns etc. 2. Industry performance:Industry performance is also a kind of conduct evidence, which can trigger the competition authorities to start an investigation in a probable cartel. The conducts that amounts to Industry performance giving rise to suspicion includes, any abnormally high profits earned by the firms, any stable market shares between the firms for a longer period of time, if the industry is prone to cartelization i.e.the industry has history of competition law violations. 3. Market Structure: Evidences related to analysis of market structure, are generally helpful in detecting a cartel agreement.Although evidences related to

15Ibid.

and an analysis of market structure cannot really prove that the existence of a Cartel agreement but can be very helpful in detecting a cartel agreement. Such evidence is required to be corroborated with any direct evidence or by any other circumstantial evidences to prove that there exists a Cartel agreement. OECD report identifies following relevant economic evidences relating to market structure, which are all those factors that facilitates formation of cartel as discussed in the first chapter, which are:16

 High concentration, if the market is highly concentrated and there are less players, the market is prone to cartelization.  Low concentration on the other side of the market is another market structure evidence, whereby if there are more number of wholesalers and retailers, it becomes highly probable that collusion in on level of the chain of production will facilitate the collusion in the other level of the chain of production.  High entry barriers to the market.  High degree of vertical integration;  Standardised or homogeneous product.

The report further says that evidentiary value of structural evidence is limited as it is possible that in case of a highly concentrated market,whereby parties are selling homogeneous products, compete with each other and maintain a healthy competition. Structural Evidences are therefore not conclusive unless corroborated by any other direct or circumstantial agreements.In addition, it would be wrong to say that, in the absence of such evidence a cartel did not exist. Even in case of markets where there are many competitors, it is highly probable that they will collude.

4. Facilitating Practices: The OECD report identifies a specific kind of economic conduct evidence known as “Facilitating Practices”. These practices are those, which, makes it convenient for the competitors to reach or sustain an agreement. However, it is not necessary that a conduct described as facilitating practices is always unlawful. Nevertheless, in a case where a competition authority has found other circumstantial evidence evidencing the

16Ibid.

existence of an agreement establishing a cartel, then the existence of facilitating practices can be of an important complement. Facilitating Practices helpsin describing what kind of arrangements the parties can opt for to facilitate the formation of a cartel agreement, to monitor it, detection etc.the report identifies following to be included in Facilitating practices:17

 Information exchanges, a few information exchange through commercialisation agreements or R&D agreements etc, can provide parties a platform to exchange information on cost, supply, production etc.  Price signalling, whereby parties through any, medium publishes their future pricing scheme signalling it to the other members.  Freight equalisation, whereby the sellers charge freight, which facilitates members of the cartel to coordinate prices and monitor cartel.  Price protection and most favoured nation policies, these helps the member of the cartel as enforcement or punishment mechanism in a cartel agreement.  Unnecessarilyrestrictive product standards, such agreements operates to exclude new entry resulting in destabilising a cartel.

The above-mentioned evidences are very useful at different stages of detection and investigation of cartels.

3.3. APPROACHES FOR DETECTION OF CARTELS

Joseph E. Harrington identifies fourempiricalapproaches/methods for detecting cartels that includes economic analysis and economic methods. He says that any kind of collusion be it explicit or implicit have varying degrees of impact on the prices and the economic welfare of the country. The methods that are proposed are, based on data analysis,identification of phases of collusion and a comparison of market conditions working under healthy competition and collusive market. After receiving the first information or any suspicion created or any information received through leniency, the competition authorities then starts with detection of the cartels and after

17Ibid.

38 detection directs the director general to cause an investigation. The process of screening involves the economic analysis. However, these economic analyses does not provide any conclusive proof of existence of a cartel, but creates a suspicion for further investigation and gathering of evidences. These economic analyses might show that there has been some structural shift from the normal behaviour in that particularindustry or that there have been some activities and behaviour, which is consistent with the collusive behaviour. However, such findings and conclusions are never conclusive prove of cartelization.18The four approaches mentioned are:

1. Analysing if the behaviour is inconsistent with the competition. 2. Analysing if there is any structural break in behaviour. 3. Analysing if the behaviour of the suspected colluding firms differ from that of competitive firms. 4. Analysing if any collusive model fit the data better than a competitivemodel.

1. Analysing if the behaviour is inconsistent with the competition:19 In this approach, the normal behaviour of the firms under the conditions of the healthy competition that would prevail are analysed and are compared to the present prevailing behaviour of the firms. Also, already established competition models are tested if they fit in the scenario of the concerned industry under the screening. In this approach the behaviour of those firms is analyse which may be members of a cartel. It is to be seen if the behaviour of the concerned firms is inconsistent with competition.The behaviours or properties of the firms that is to be analysed could be how firms prices are related to each other. Like should the prices be correlated when they areoperating independently, or how a firm’s prices are respondingto the cost and demand shocks , like is the increase in prices respond appropriately to cost, is the increase in price is attributable to the cost of production or if the pricing scheme is reasonable or not.This approach is implemented to estimate the pricing equation for each firm and then to test whether there is any connection or nexus between the independence and exchangeability of thefirms. When a test for independence is done, it determines whether the unexplained part of each

18Supra note. 81.. 19Ibid.

firm’spricing scheme are independent or not. Whereas when a test for exchangeability is done, it determines whether firm’s estimatedcoefficients for calculating the pricing scheme is same or not. The next thing to compare is the already existing models of competition to the departure of the firms from the heathy competition. Therefore, it is to be checked and analysed whether the observed behaviour of the firms amounts to the departures from competition and whether the observed behaviour is consistent with the concerned model of the collusion. For example, there is a collusive model in which the bidding firms are familiar with the identitiesof the other bidding firms, which are members of a cartel, and the expected bidder to win the bid would optimally use the lowest cost among the cartel members. Whereas, if the firms submits complementary bids that exceed the bid of the designated bidder firm who is supposed to win the bid, it would obviously result in depicting a picture where the cartel firms have lack of independence if. Further, ifsuppose the two cartel members decides not to compete with each other, then this would imply that the factorsaffecting the cost mentioned in the bids of one firm does not affect the bid of the other.As already stated that these economic analysis based on economic concepts are not conclusive of cartelization therefore, even if the firms if they are colluding they can still satisfy this test of independence and exchangeability because all they have to do is just simply proportionately scale their “competitive” bids or pricing whatever the behaviour relates to.

2. Analysing if there is any structural break in the behaviour.20 The second general approach used to identify the collusion is to look for a structural break in firmbehaviour of the firms and the market. The study of the change in the behaviour of the firms could be related to the behaviour shown by the firms when engaged in the healthy competition or the time when the cartel is formed or the time the cartel has destabilized or at the time when the cartel has actually ended. As already discussed in the previous sections of this chapter, the a cartel can operate for a long time and during this period a few members of a cartel may drop out of it, or at some time a few members will be very active or may not be very active , or a few of them may attend a few meeting or a few may join the

20Ibid.

40 cartel again or the cartel itself can break and can reform etc. The study of the behaviour of the suspected firms and the history of the industry they operate can provide with a study of the structural break in the behaviour of the suspected firms, which can be a very useful evidence to detect and investigate a cartel. The study can be done by an empirical research on the pricing scheme of the firms, change in demand and supply in the market, production and supply by the firms and the profit earned by the firms. This approach the analysis is done not only for the period until when the cartel is operating; it requires analysis of the data outside of the time of suspected collusion. The study done on structural behaviour of the firms and the market can be compared with those models of the collusion, such comparison and theories of collusion and past evidences collected can suggest the authorities what properties to focus upon and to observe if indeed the cartel is formed. The analysis of the average price of the firms can be done to see if the average pricing of the firm has changed. The analysis of the relationship between firm’s price and cost is also helpful to scan the change in the relationship. Further, the relationship between the prices of the firms, the change in thevariance of price and market share are also to be analysed. This method or approach is not conclusive and hence it is nothing more than a screening device, whereby if the authorities finds any structural break in the behaviour of the firms, then the authorities should take up further investigation for verification purposes.The Appropriate breakpoints for identifying if a firm who is a member of a cartel includes those which makes the collusion easier or more profitable and those that allows the cartel to operate efficiently and effectively. Further, any breakpoint events like formation of a trade association etc are also considered effective indicators of collusion as in many cases these trade associations are formed for the purpose of facilitating the maintenance and operation of the cartel. In addition, a further analysis of the bids submitted by the firms or change in the price or supply after the formation of such trade association can be helpful in detecting the break in the structural behaviour. Moreover, one can argue that even if firms are not colluding there can still be structural changes in the behaviour of the firms and the industry, which again demands the verification of the same by gathering of further evidences. However, a trade association may help deciding a reasonable pricing policy because of the homogeneity of the products, which can be for the welfare of the consumers. It is

a not always that such trade associations are formed to be used a veil or a platform to maintain and monitor the cartelization. Therefore, it imperativeto note the various significances of a trade association and to clearlyidentify those behaviours that clearly relatable to collusion. Further, any exist or any major merger taking place can provide with another breakpoints in the structural behaviour of the industry.Other events that can provide better information on breakpoints can be any kind of entry barrier imposed or removed, it can mark a breakpoint in the structural behaviour. It is quite probable that even when the firms are not colluding, there can still be a shift in the in the prices of the products. However, one can see the discrete shift in the relationship between the colluding firms, in case a cartel dismantle because of the new entrants in the market. Also, a shift the relationship between the prices of the colluding firms can be seen when they become aware of any new governmental price-fixing investigations as there are chances that the cartel may be caught and thus as a result the cartel demise. Another method is to see and do a deep study of correlative pricing system of the firms. This approach can be very helpful in identifying the change in the structural behaviour of a tacit collusion as well, for example, one can notice a structural change if there is an abrupt demand of the products that destabilises the equilibrium of the cartel. And when the members of the cartel would strive for a new equilibrium, which can provide a great change in the structural behaviour of the firms. Therefore, this method based on economic analysis of the structural change could prove to be helpful in detection of cartels.

3. Analysing if the behaviour of the suspected colluding firms differ from that of competitive firms.21 This approach simply involves a method whereby the behaviour of the suspecting colluding firms is compared with some competitive benchmark. Where the competition authorities have prior information about the members of the cartel and the cartel is not inclusive then the behaviour of the non-colluding firms can be used as a benchmark. Another benchmark that can be used to compare is when there is information that contains times of when the cartel was suspected and also

21Ibid.

the information about the times when the cartel was not in the existence.It is considered that the information form the period when the cartel was in existence and when the cartel have broken down temporarily can be used as a perfect benchmark because during the temporary breakdown, the firms will actually compete with each other at that time so as to survive and earn maximum profit. This data available can be used as a perfect benchmark for the comparison with the data of the times when the firms were colluding. A common approach to this method is that the price equations are to be taken into consideration when the firms were competing with each other om cost and shift in demand and at the same time to consider the price equation of the suspected members of the cartels who are colluding. Then, both the data collected should be compared. This method would result in a test to determine if the price equations of both the conditions are statistically different.If this comparison results statistically differentthen the next step should be to check and compare this with the behaviour of firms who are non-colluding to see if it is consistent with a competition model or not and whether the colluding firms are acting in a manner, whichis consistent with some model of collusion.

4. Analysing if any collusive model fit the data better than a competitive model.22

After the three approaches and the above mentioned , the fourth is an approach where the collusive and competitive models put for considerations and it is seen which models fits better to the present data and information collected. If the collected data or information fits better into the collusive behaviour then there is an evidence of collusion and further investigation is to be done find more supportive evidences to establish that the firms are colluding.

3.3.1. LENIENCY APPROACH OF DETECTION OF CARTELS

The competition law enforcement agencies cannot really rely on one tool or one method of detecting cartels. Apart from the economic analysis and gathering of economic evidences to detect a cartel, there exists another concept of leniency approach. Under thus programme any member of a cartel can act as a whistle-blower

22Ibid.

43 and can inform the competition authorities about the existing cartel in operation and can seek leniency in the punishment or penalty for infringing the competition law and taking parting part in the process of cartelization. However, the concept of leniency also finds its roots in the economics. The leniency programme is based on the “Game theory” known as “Prisoner’s Dilemma”.

The concept of prisoner’s dilemma is an analysis of strategic behaviour of the two criminals caught by the authorities. If they were coordinating in some way, then how would they behave and after being caught, will they confess or stick to their agreement of coordination. The theory can be explained with an example of two criminals say “X” and “Y”. The police on the bases if enough evidence being gathered against them to convict them for a crime say stealing belongings of a shop, for which both of them would spend two years in a jail. The police suspects that they have been involved in another crime of robbery as well, but they lack conclusive evidence for the same. In order to find if they have been coordinating together to commit these multiple robberies, the police interrogates both the criminals in separate rooms. They offers them with a situation where they are put in dilemma that if in the present situation they are being jailed for two years, but if anyone confess about being involved in the other robbery as well, then the person confessing will be left free without any imprisonment and the other partner will be jailed for 10 years. However, if both does not confess they will imprisoned for 2years and if both of them confess then both will be served imprisonment for 6 years. Since, both the criminals are in separate rooms they cannot communicate with each other and are under dilemma if to confess or to stick to the agreement they hold. Both the criminals “X” and “Y” are under dilemma what if the other one confess first and gets zero imprisonment and the one who remains silent gets imprisoned for 10 years. Also, there is a dilemma for both of them whether the other partner would stick to the agreement and would not confess at all and would prefer getting imprisoned for 2 years only. However, the concept is that both “X” and “Y”, will think about its own benefit and profits and instead of being imprisoned for 10 years or 2 years, both of them would prefer to be left free and would prefer to confess and would prefer to get imprisoned for 6 years if case both of them confess.23

23 Mankiw Gregory, “Principles of Economics” (South-Western, Cengage Learning, 6th edition, 2012) 355-356.

The situation can be better explained in the following table:

Table 2.1: Prisoner’s Dilemma.

“X” remains Silent “X” confess

Each serves imprisonment “X” goes free “Y” remains silent for 2 years. “Y” serves imprisonment for 10 years.

“Y” goes free Each serves imprisonment “Y” confess “X” serves imprisonment for 6 years. for 10 years.

It is to be noted that a player in a cartelization would only go for that strategy which is best for it. Therefore, under the leniency programme if the member of a cartel thinks that that’s the best strategy for it to inform the competition authorities it will do that. As if it is quite evident for it to see that the competition authorities might detected the cartel soon and the members will be punished soon, in such a case, it is the best strategy for a member to inform the competition authorities first of the existing cartel and plead for reduction on the heavy penalty so imposed.

The leniency programme is very effective if it is implemented effectively, it not only helps in detecting a cartel, but it makes the investigation also easy. In addition, when a member of a cartel informs the authorities, it destabilises the cartel as well.

Game theory and Oligopoly

It is not just that the game theory holds an importance in the case of leniency programmes only. This theory can also be used to study the behaviour and strategy of the firms colluding in an oligopolistic market. As there are less number of players in the market, it becomes easy for them to coordinate and divide the production and supply among themselves and to work as a monopoly together so that they can reach

45 that equilibrium where they sell at the maximum selling price, thereby earning the maximum profit.

3.3.2. DAWN RAIDS

Dawn raids are the uninformed, unannounced and surprise visit by the authorities to the offices of the firms suspected of being a member cartel. The aim of such surprise and uninformed visits is to search and seize the documents or electronic evidences that can be used as evidence of a cartel agreement. Dawn raids are generally used as a tool for investigation in various countries and many a times, the dawn raids are successful especially in the case where the firms refuse to cooperate with eth competition authorities. Dawn raids are basically used as method of evidence collecting tool in case of cartel prosecution. Section 41 of the Indian Competition Act, 2002, empowers Director General (DG) to cause any search and seizure as applied to the inspector in terms of section 240 and 240A of the Companies Act, 1956. In September2014, the Competition Commission of India undertook it first dawn raid at the premises of JCB but it was in the case of abuse of dominant position.

CHAPTER 4

EVIDENTIARY VALUE OF ECONOMIC EVIDENCES

It is a very well established that the role of evidences in law is to prove the argument. Any claim made by the parties or by any infringement of law by the parties is claimed by the competition authorities should be backed and supported by strong evidences.

As already stated that the competition authorities with adequate amount of evidences should prove the existence of an agreement establishing a cartel. If the competition authorities are have found direct evidences to prove the agreement establishing the agreement, then the proof is conclusive of cartelization. However, the competition authorities have found circumstantial evidences in support of the existence of the cartelization, then it is to be seen that whether the cumulative effect of the multiple circumstantial evidences are strong enough to prove the cartelization. It is the duty of the competition authorities to put forward sufficient amount of evidence to support their claim that the alleged firms have infringed the law prohibiting the cartelization. 1 The evidence should be precise and coherent. Any decision of the competition authorities should be based on evidences gathered by them and for each claim they must specify the evidence relied on. Any evidence which creates a doubt should be corroborated, any evidence which is not conclusive or doubtful does not hold a strong evidentiary value. Direct evidences, which includes proper documents, any electronic e-mails, register maintained, letters etc. are considered to hold a strong evidentiary value. Whereas, circumstantial evidences when given cumulative effect can hold a strong evidentiary value as well. However, economic evidences alone do not hold a strong evidentiary value, although they act as a strong indicators that the parties in a specific industry may collude. The economic evidences and economic analyses of the behaviour of the firms and the market structure and condition can support the claim of the competition authorities. In addition, there economic analyses, economic concepts etc. can be used as a defence by the parties alleged of the infringement of the law prohibiting the cartelization. As it seems, economic evidences are not conclusive but they hold very important value in supporting the claims and understanding the market structure and behaviour of the firms in a particular market condition. Economic

1 René Barents, “Directory of EC Case Law on Competition”, (International Competition Law Series, Volume 28) at para 1.2.

47 analysis and economic evidences are generally considered ambiguous. Theses evidences can either support the cartelization or can support the independent actions of the firms. However, economic evidences play a very imperative role in the initial stages of detection a cartel. they forms the basis for establishing the Prima facie case and helps deciding the competition authorities if to pursue further investigation or not. Economic evidences causes the competition authorities to further indulge into investigation to gather any direct or circumstantial evidence in support of the claim formed because of the found economic evidences. 2

The OECD report on Prosecution of Cartels without Direct Evidence, states that:

“Circumstantial evidence is of no less value than direct evidence for it is the general rule that the law makes no distinction between direct and circumstantial evidence but simply requires that before convicting a defendant the jury must be satisfied of the defendant's guilt beyond a reasonable doubt from all of the evidence in the case.”3

It is clear from the above statement that the circumstantial evidences,which includes both communication and economic evidences, have no less value than the direct evidence, but the evidences should not be ambiguous. The evidences should be strong enough to remove all the reasonable doubts. Therefore, it can be concluded that economic evidence can hold high evidentiary value if they are strong enough to prove the claim and convince the court that the evidence is so strong that it leaves no room for any reasonable doubts.

In addition, the report says that the quality of the evidence matters, if there is any direct evidence,which in the form of testimony from any weak, single, unconvincing witness then it is considered to be less credible as compared to anyconvincing, strong and cumulative circumstantial evidence gathered by the Competition authorities.4

4.1. PRICE PARALLELISM AND EVIDENTIARY VALUE OF ECONOMIC EVIDENCES.

As already discussed in the previous chapters, an oligopoly is prone to cartelization, the issues of conscious price parallelism arises in such market setup. The structure of

2 Organization for Economic Cooperation and Development (OECD), Prosecuting Cartel without Direct Evidences of an Agreement, Policy Brief, June 2007. 3Id. at page 17. 4Id. at page 18.

48 market is such that, the firms in an oligopoly tends to collude so as to work a collective monopoly and reach an equilibrium where they earn the maximum profit. However, in such a market condition where there are only a few market players, one of them can emerge as a market leader and the other firms in the market may just follow the market leader. In such a case all the players in the market have decided their prices on the foot prints of the market leader and their own market strategy to be able to sustain and compete with the other players in the market and not to lose its consumers in the market. The firms have taken the decisions independently and not in collusion and coordination with each other. Such conduct in an oligopoly is simply an outcome of the market structure. Firms may increase and decrease their prices in independently, but on an economic analysis by the competition authorities, it may look like as if the parties are colluding, because of the parallel behaviour. However, in fact it is the result of the structure of the market or the functioning of the market, which is making it look as if firms are colluding.

To find a solution to this problem the US and EU courts have adopted the concept of “Plus Factor”. Which says that in addition to the economic evidences of price parallelism, a plus factor should be provided so as to prove the cartelization or collusive behaviour/conduct. India have also adopted the same approach of “Plus Factor”. However, in all the three jurisdiction, presence of parallel behaviour is considered to be an evidence establishing a prima facie view that the concerned firms are colluding and are engaged in cartelization.

4.1.1 CONCERTED PRACTICES IN EU

In EU, in the case of Dyestuffs5, with respect to the price parallelism, the court of justice said that:

“the concerted practice does not have all the elements of a contract but may inter alia arise out of coordination which becomes apparent from the behaviour of the participants. Although parallel behaviour may not itself be identified with a concerted practice, it may however amount to strong evidence of such a practice if it leads to conditions of competition which do not respond to the normal conditions of the market.”

5ICI v. Commission, Case 48/69 ECJ, [1972] ECR 619

Further, In the case of Zinc Producer Groups6 , it was held by the court that parallel pricing patterns and behaviour of the producers in an oligopoly which, produces homogeneous products and goods is a nature of an oligopoly market, which is nota sufficient evidence of a concerted practice. It should be proved by the element of “Plus Factor”.

EU recognises that the presence of the element ofconscious parallelism is not enough to prove that there exits concerted practice. As already stated there is need for a “Plus Factor”. However, the EU courts recognises that the plus factor is not necessarily required to be a direct evidence; it can be a serious of “Circumstantial evidences” as well.

The European Competition commission in the case of, Wood Pulp Case7 the European Commission prosecuted the manufacturers of wood pulp for carrying out a concerted practice by indulging into price fixing in the European Union and found them guilty. The evidences those gathered against the producers were related to the parallel conduct for 6 years in the market, from 1975 to 1981 and there was no evidence gathered to prove the existence of an explicit agreements to fix prices. In this case, the commission based its decision on various other factors and evidences, first the economic evidence related to the parallel conduct, second, proof of direct and indirect exchanges of information related to price among the producers and third, an economic analysis of the study of the market that clearly showed that the market whereby the producers were operating was not a narrow oligopolistic market and in such a market system price parallelism is not really expected

Therefore, what matters is the standard of proof the concerned evidence is providing and not what kind of evidence is used to establish the case. The evidences can be direct or circumstantial and plus factor can be proved by any kind of evidence.

However, if the parties can prove that there exists a reasonable explanation and there isa rationale for the concerned parallel behaviour then, the it cannot assumed by the commission that there exists concerted practice, the same needs to weigh in the light of the standard of proofs being presented.8

6 OJ [1984] L 220/27, [1985] 2 CMLR 108. 7 OJ [1985] L 85/1, [1985] 3 CMLR 474. 8 Whish Richard, Competiton Law, (Oxford Press, 7th edition, 2011), page 569.

4.1.2 CONSPIRACY IN US

It is well established that US courts introduced the concept of the “Plus Factor” to the anti-trust regime. The US Sherman Act, talks about conspiracy.9The US court in the case of American Tobacco Co. v. United States10, stated that there is no need for a formal agreement to prove that the parties were indulged in the unlawful conspiracy. It can be justified by the circumstances,which clearly shows that the parties were conspiring for a common purpose and that there existed an understanding between the conspirators and that there was a meeting of minds of them to such kind of unlawful arrangement amounting to the conspiracy prohibited under Sherman Act.11

Later in the case of Theatre Enterprises12, the US courts clarified that the circumstantial evidences of the conscious parallelism / parallel behaviour are enough to create a suspicion that there exists an element of conspiracy as mentioned under the US Anti- Trust laws. However, mere presence of a parallel behaviour is not enough to prove that it amounts to unlawful conspiracy under the Sherman Act.

In Monsanto Co. v. Spray-Rite Service Corp,13, the Us court ruled on the standard of proof required to establish that the parties have taken part into unlawful conspiracy as mentioned under the Sherman Act. The court said that the proof of standard produced should be such that it makes it clear and leaves no reasonable doubt or any possibility that the parties to the conspiracy have acted independently. The evidence must exclude all the possibilities that parties have acted independent of each other. The same is to proved by a standard of evidences that can be direct or circumstantial which proves that the partied has a conscious commitment to the conspiracy to achieve some unlawful goals by the means of such unlawful conspiracy.

The US Courts clearly established the principle that any proof or evidences of conscious parallelism alone are not enough to establish conspiracy. An allegation of parallel conduct between the parties is just not enough to prove that the parties conspired.The same must be proved with proper proof and standard of evidences to

9 Section 2 of Sherman Act, 1980. 10 328 U.S. 781 (1946). 11Id. at 810. 12 346 U.S. at 541. 13 465 U.S. 752 (1984).

51 establish the claim. In addition the parallel conduct, it is necessary to prove the elements of the “Plus Factor”.14

4.1.3 ACTION IN CONCERT IN INDIA.

As the rule established in US and EU, Indian also follows the same rule. In order to prove that the parties are cartelizing and are indulged in the collusion and concerted practices. Mere presence of price parallelism or parallel conduct is not enough to be considered as a concerted practice for the purpose of section 3 of the Indian Competition Act, 2002. It is required to establish that there was meeting of minds between the parties and that there was an unlawful purpose for their collusive behaviour. The economic evidences and economic analysis of the market structure and the market behaviour proving the parallel conduct is not enough; “Plus Factor” is to be produced to corroborate the evidences of the parallel behaviour. The evidences encompassing the plus factor can be direct as well as circumstantial but strong enough to prove the collusive behaviour of the parties.

In the case of Alkali Chemical Corporation Ltd.,15it was held the mere presence of price parallelism is not itself anti-competitive and is a restrictive trade practice. It is to be proved that kit amounts to a concerted practice. The presence of an agreement is to be proved with the adequate standard of poofs.

In steel Cartel case,16 the CCI held that pro proving that a parallel behaviour amounts to a concerted practice, in addition to the evidence of price parallelism, the “Plus Factor” is necessary to prove the anti- competitive conscious parallel behaviour with the help of proper standard of proof. Further, CCI stated that the evidence for the purpose of establishing “Plus Factor” can be in the form of direct evidence or a wide range of circumstantial evidences. In this case, DG in its investigation found the elements of price parallelism existing amongst the manufacturers of steel. However, no additional evidence was found that can be used as ‘plus factors’ and to conclusively prove that there was a conscious parallel understanding among the players.

14Bell Atlantic Corp. v. Twombly550 U.S. 544 (2007). 15 2002, CTJ 459 (MRTP) 16 Case No.: RTPE No. 09 of 2008 (MRTP)

In the case of Hindustan lever Ltd. & Tata Oils mills co. Ltd.,17a two tier test was laid down to find if a practice amounts to be a concerted one. The two considerations are as follows:

 That the practice undertaken by the firm must have an impact on the market behaviour of the concerned undertaking.  That there should exist anunderstanding between the coordinating parties and that there should be aclear communication or contact between the coordinating parties,which can be either by meeting or decision or in any manner.

In the Tyre Cartel case,18 it was CCI observed that a parallel behaviour can be achieved as a result various factors affecting the cost of the production of the goods, which will obviously result in the parallelism in the price. Such price parallelism can be because of various factors, like increase in the cost of production of the goods, or increase in levied taxes or duties by the authorities, or any shift in demand etc.Therefore, there can be a situation, where, conscious parallelism can be a result of interdependence of market player’s strategic choices, which is reasonable and is a result of independent decisions of the firms.

Further, CCI in the case of Express Industry Council of India Ltd. V. Jet Airways and others,19 noted that firms in an oligopolistic market are free to revise their prices and pricing policy after taking into consideration of the other rival firm’s business strategy so as to survive the competition in the market, which is not necessarily to be a indicative of collusive behaviour among them.

Therefore, in the entire three jurisdiction the law is well established that mere parallel behaviour cannot be considered unlawful but it is required for the authorities to substantiate their claim with proper standard of the evidences, which leaves no reasonable doubt.

17 994 CTJ 270 (SC) (MRTP) 18 MRTP Case: RTPE No. 20 of 2008 19 Case No. 30 of 2013

CHAPTER 5

CCI’s APPROACH IN APPLICATION OF ECONOMIC EVIDENCES.

As already discussed, the competition commission of India’s approach towards application of economic evidences in the prosecution of cartels is that of “Plus Factor”. The established rule is that in case of “Price Parallelism” the claim of cartelization is to be proved by production of any direct evidences or conclusive circumstantial evidences. it is not necessary that the additional evidence should be a direct evidence only. To understand the approach of Competition Commission of India in the application and use of economic concepts, theories and economic evidences, it will be helpful to analyse the CCI’s approach in a few cases concerning cartelization.

5.1 CASE STUDIES

5.1.1 ALL INDIA TYRE’S DEALERS FEDERATION V. TYRE MANUFACTURER.1

In this case the All India Tyre’s Dealers Federation (AITDF) against the tyre manufacturers in India filed the information with the CCI, and five major tyre manufacturing companies were investigated in this case. It was alleged that the domestic tyre industry have indulged into collusive practices.

The CCI formed a prima facie case on the basis that tyre industry is prone to cartelization and in history, the tyre manufacturers have found to be indulged in cartelization even 35 years back and the MRTP commission in October 1974 passed its first “cease and desist” order against the tyre industry for indulging in cartelization. On the basis of the information received by AITDF and an analysis of history, created a suspect of collusion in the industry and hence, CCI directed the DG to cause an investigation against the five major domestic tyre

1Supra note 113..

manufacturing companies: Apollo Tyres Limited, MRF Ltd., Ceat Tyre Ltd., Birla Tyre Ltd. and JK Tyre Ltd. 2 Investigation and Findings of DG Report

The DG in its investigation conducted empirical economic analysis of various factors and analysed any shift in the structural behaviour of the firms. In his analysis, the DG referred the following data of the alleged tyre manufacturers:

1. The data related to the actual and installed capacity of the manufacturers for past 6-8 years. 2. The Production and export details of the alleged companies for past 5 years. 3. The data of the Cost of production per unit for the past 5 years. 4. The data of the Cost of raw material for past 6 years

In addition to above, the DG also analysed the role of a trade association for tyre manufacturers: All India Tyre Manufacturer Association (ATMA).DG after collection of the data of the major tyre manufacturing companies analysed it. And also made a detailed analyses of evidences to be used as secondary documents to corroborate his findings.

After analysing the findings of the above analysis, DG formed an opinion that these companies were not utilising their capacity at its optimum level and thereby limiting the supply of the products, based on this the DG further directed its investigation started to analyse the “Plus Factor”. 3

To find the evidence of “Plus Factor”, conducted an analysis of the Cost of Sales, Sales Realization and Margin, Production and Net Dealer Price, cost of production and natural rubber price movement, Net Dealer Price and Margin and Market Share.

The DG undertook a comparative study of the market share for the alleged five tyre manufacturing companies and found that they collectively hold 95% of the market share which indicates that the industry was highly concentrated.

2Id. at Para 7. 3Id. at Para 53.

Based on the empirical economic analysis conducted by the DG, he found that the tyre companies failed to pass the benefit of reduction in excise duty to the consumers, that Price parallelism existed in the industry, the companies did not reduce the Net Dealer Price (weighted price) in proportion to the actual production, the companies failed to utilize their full capacity resulting in limitation in the supply, the companies have been able to earn positive margins in most of the period under investigation, change in the price of rubber did not affected the cost of the production, that the companies earning high margins did not pass the benefits to the consumers and that the industry is highly concentrated as the five companies holds 95% of the market share.

Conclusion by the DG

On the basis of the above findings the DG concluded that the 5 major tyre manufacturing companies have acted in concert and that ATMA have provided a platform to interact and operate the cartel. Therefore, ATMA and the 5 tyre manufacturers have infringed the provisions of section 3(3)(a) and 3(3)(b) of the Act.

Decision of the CCI

However, CCI in its analysis, analysed the structure of the tyre industry, demand and supply conditions in the market, homogeneity of the product, dependence of customers, role of the active trade associations, entry barriers, and other factors that facilitate the cartelization.

CCI in this case concluded that,in the present case there are certain factors and economic analysis that may be conducive to cartelization.The factors being that market is highly concentrated with entry barriers, the product is homogenous, the industry have history of collusion, that the capacity utilization was not to the optimum level, the benefits were not passed on the consumers etc.CCI, in addition to these factors also considered the other factors like the high bargaining powers of OEMs due to the volumes, options to replacement consumer to retread, increasing radialization, and cheap imports in the brief period of anti-dumping duty etc. which goes against sustaining a cartel structure. CCI, further examined other circumstantial evidences to prove the existence of a concerted action, but failed to find sufficient evidence. With respect to ATMA, CCI after considering

the functions of the association and examining the meetings held by ATMA concluded that it was a platform to protect the members’ interest and while taking decisions did not take any action that is in contravention to the provisions of the act. However, in this case the available evidences were not sufficient, enough to prove that ATMA was used as a platform by the parties to decide prices or production etc. of tyres or that the opposite parties have carried any anti- competitive practices.

5.1.2 BUILDERS ASSOCIATION OF INDIA V. CEMENT MANUFACTURERS4

In this case, 11cement manufacturing companies and Cement Manufacturing Association (CMA) were levied penalty of cartelization, indulging in anti- competitive practices amounting to the collusive price fixing and, limiting and controlling the supply and production of cement in the country. The alleged cement manufacturing companies having presence across the nation (PAN), acted in concert, collectively holding more than 57.23% of the market share in India. These companies divided the territory of India into five (5) zones among themselves, to enable themselves to control and limit the production and supply by reaching an equilibrium, whereby these companies fixed high prices of cement all over the country, there infringing the provisions of Section 3(3) of the Indian Competition Act, 2002. They deliberately reduced the production and produced much less than their installed capacity to create an artificial scarcity in the market and to raise the prices to earn abnormal profits.

Investigation and Findings of the DG.

In this case the DG analysed the data of the installed capacity and utilised capacity of the plants in past 6 year of the alleged companies and amount of cement the companies supplied in the regions which were divided among themselves, further DG also analysed the shift in prices of raw materials used and inputs like lime stone, coal, electricity and crude petroleum etc,and the shift in the increase in the price of cements, demand and supply etc.The process of determination of prices i.e the pricing policy of each company was also taken into account and a detailed comparison was made by the DG to find the pattern in the pricing schemes of the

4 Case No. 29 of 2010.

companies, other factors affecting the pricing of the product like incentives provided the government, relaxation in the taxes and profit margins of each company were also analysed by the DG.

Conclusion by the DG

The DG on the basis of economic analysis done, found that there exists a parallel behaviour between the alleged firm with respect to pricing, production and dispatch of the production. DG concluded that the increase in price of the cement was not a result of anyreasonable shift in the cost of the raw materials or any other factor but it is merely as a result of concerted action and collusion undertaken by the alleged companies. The analysis done with respect to the role of the Trade association i.e Cement Manufacturers Association (CMA) found that it was a platform for the companies to meet and interact and share their pricing schemes and strategy. CMA was a platform where the companies took prior decisions.DG concluded that CMA was a platform for the members to disclose their prices to the other members of the cartel that were circulated all over India so that the parties can accordingly limited their production and supply to create a false scarcity to increase the prices and to earn high profit margins.

Decision of the CCI

CCI on the basis of findings of the investigation conducted by the DG and evidences gathered by the DG held that, there existed the element of price parallelism among the alleged companies and that these cement manufacturing companies were interacting and sharing information about their prices, production etc. with each other at the meetings conducted by the CMA. Such evidence amount to the communication evidence, which is strong enough to be qualified as “Plus Factor” here, and which is a clear indicative of existence of an agreement between the alleged cement manufacturers. The commission in this case found sufficient evidence to prove the existence of a cartel having adverse effect on the competition in India. Therefore, these 11 cement manufacturing companies and CMA were held guilty of acting in concert and infringing section 3(3) of the act.

5.1.3 IN RE ALLEGED CARTELISATION BY STEEL PRODUCERS.5

5 Case No.: RTPE No. 09 of 2008 (MRTP)

The present case was transferred form the MRTP commission to the CCI. In this case three steel producers SAIL, RINL and Tata Steel were under the scanner for the alleged collusive behaviour and cartelization.

It was reported that the prices of the steel were increased by more than 3 times in the period of April 2007- January 2008 the parties affecting the construction and automobile sector in the country.

Investigation and findings by the DG.

The DG on the directions of the CCI, caused an investigation in the alleged case and on the basis of his findings found that:

 There existed a pattern in pricing of the four main steel products i.e. HR coils, HR Plates, Wire Rods and TM. The analysis of the data on demand and supply by the DG indicated that there was a periodic suppression of supply to increase the demand of the production and thereby increase the prices to earn profits.  DG found 4 major steel producers in the steel industry and out of which the three alleged steel producers were found to have 40% of the market share. The market was found to be highly concentrated.  DG found the Steel production market as an oligopolistic one which is highy prone to cartelization.  The DG also found that there waslack of transparency in determining the prices. Any evidence did not support the rationale provided by the alleged steel producers for their pricing scheme.  DG found that in the industry there exists an element of collusive price leadership and concluded that there is high possibility of formation of informal cartel amongst the alleged steel producers.  That the circumstantial evidence and economic analysis undertaken by the DG also indicated that the players in the steel producing industry have coordinated in determining the prices.

Conclusion by the DG

On the basis of the analysis conducted by the DG , the DG concluded that the allegd steel producers in the concerned industry have acted in coordination and have

59 contravened the provisions of section 3(3)(a) & (b) of the Act, by entering into informal agreement for determining the pricing, limiting and controlling production of steel products.6

Decision of the CCI

CCI on the basis of the first report submitted by the DG concluded that the investigation carried by the DG is flawed and was not carried out properly. DG’s report lacked the required evidences. The evidence so provided by the failed to show that there was meeting of minds between the parties. Also, the DG’s investigation failed to find any plus factor or additional evidences to support the claim.And that DG’s finding that steel production market is an oligopoly and is susceptible to cartelization is not enough to prove the contravention of the law.

CCI directed the DG to cause a supplementary investigation. And in the supplementary investigation DG failed to find any direct evidence or any additional evidences to prove the meeting of minds of the parties and it was concluded that there was no contravention of section 3 (3) by the alleged parties. Therefore due the lack of sufficient evidences CCI found that there was not contravention of section 3 (3) of the Act.

5.2 CRITICAL ANALYSIS OF THE CASE STUDIES

After conducting the case study of the above mentioned cases and the approach of CCI and DG in the investigation and prosecution of the cartel and after having done a thorough study of the kind of economic evidences, economic analysis and the different methods and approaches for detecting a cartel, it can be said that CCI and DG during their investigation and analysis of the economic evidences, so gathered puts emphasis on the direct or other circumstantial evidence that can further make their claim strong. However, in the case of tyre cartel the analysis made by the CCI was based on competitive approach of the evidences, which are in favour of the cartelization and other factors that are not in favour of the cartelization. As the evidence gathered created a reasonable doubt and were not conclusive and further in the absence any direct or circumstantial evidence, it was held that there was no cartelization in the industry. However, CCI in this case should have adopted an

6Id. at Para 12.

60 approach whereby the present structure of the market should be compared with some competitive model so as to have a better understanding of the behavioural shift in the industry and to have a better approach to further investigate in the alleged cartelization. Also, in the case of steel cartel, it clearly shows the incapability on the part of the investigating authorities to conduct a better and in depth economic analysis to have better understating of the market structure and the coordination carried out by the steel producers. The DG could have adopted an approach where, the historic conditions of the industry should be analysed and the shift in the behaviour of the market to should be better studied so as to advance the investigation in the right direction and gather more relevant evidences to prove the claim. And, in the case of Cement Cartel, CCI based its decision on the production of the evidence of the communication which acted as a “Plus Factor” in addition to the economic evidences so gathered by the DG.

CHAPTER 6

CONCLUSION

Economic evidences plays an important role in prosecution of cartels. The competition authorities undertakes a detailed economic analysis of the economic data based on various economic theories and concepts. The formation and facilitation of a cartel is dependent on a lot of factors which can easily be analysed on the basis of economic concepts which can be used as economic evidences to support the claim of the competition authorities of cartelization against the alleged parties. Although the competition authorities of various jurisdictions and Indian Competition Commission have established it well, that the economic evidences in the case of prosecution of cartels is required to be supported by any other circumstantial or direct evidence. However, if the economic evidences produced are such that they remove all the reasonable doubts that the parties are not cartelizing then, economic evidences alone can be used to prosecute a cartel. Therefore,economic evidences can hold high evidentiary value if they are strong enough to prove the claim and convince the court that the evidence is so strong that it leaves no room for any reasonable doubts.

6.1 SUGGESTIONS

It is suggested that the DG and the CCI should undertake better approach towards implying economic analysis in the cases related to prosecution of cartels. The DG should undertake a thorough and detailed economic analysis of the data so collected and should conduct more comparative study between the models of competition with that of the prevailing structure of the market under scan. In cases concerning the collusive practice in an oligopolistic market, a detailed study and analysis of the concerned market should be done with the application of various theories of the oligopolistic markets.

BIBLIOGRAPHY

BOOKS:

 Jenny Frederic & Katsoulacos Yannis, “Competition Law Enforcement in the BRICS and in Developing Countries Legal and Economic Aspects”, (Springer International Publishing Switzerland 2016).  Stroux Sigrid, “US and EC Oligopoly Control”, (Vol. 14,Kluwer LawInternational 2004 )  Facey A. Brian &Finkelstein Jonathan & ors., “World Competition Law and Economics Review”, (Vol 32,Kluwer Law International 2009.)  Richard Whish, “Oligopoly Theory and Economic Evidence”, Behavioural Screening and the Detection of Cartels, European Competition Law Annual 2006: enforcement of prohibition of cartels, (2006).  Decker Christopher, “Economics and the Enforcement of European Competition Law” (Edward Elgar Publishing Limited, 2009)  Bellis & Bael Van , “Competition Law of the European Community” (5th edition, Kluwer Law International 2010)  Whish Richard, Competiton Law, (Oxford Press, 7th edition, 2011).  Mankiw Gregory, “Principles of Economics” (South-Western, Cengage Learning, 6th edition, 2012).  René Barents, “Directory of EC Case Law on Competition”, (International Competition Law Series, Volume 28).  Roy Abir, “Competition Law in India: A Practical Guide”,( Kluwer Law International 2016).  Vahini Varsha, Indian Competition Law, (Lexis Nexis, 1st edition, 2016).  Fali S. Nariman, ‘Law and Economics’, in vinod dhall (ed), Competition Law Today: Concepts, Issues and Law in Practice xv (New Delhi: Oxford Press, 2007)

STATUTES:

 The Indian Competition Act, 2002, No. 12, Acts of Parliament, 2002.  Treaty on Functioning of European Union.  The Sherman Act, 1980.

REPORTS:

 Raghavan Committee Report.  OECD’s Report on Prosecution of Cartels without Direct Evidences, 2006.

ARTICLES:

 Joseph E. Harrington, Jr: Behavioural Screening and the Detection of Cartels, European Competition Law Annual 2006: enforcement of prohibition of cartels, 49-51, (2006).  ReyPatrick,“On the Use of Economic Analysis in Cartel Detection”, Behavioural Screening and the Detection of Cartels, European Competition Law Annual 2006: enforcement of prohibition of cartels, 51-69, (2006).  Paul A. Grout and Silvia Sonderegger: Structural Approaches to Cartel Detection, Behavioural Screening and the Detection of Cartels, European Competition Law Annual 2006: enforcement of prohibition of cartels, 69-83, (2006).  Harrington J., Collusion Among Asymmetric Firms: The Case of Different Discount Factors, 7 International Journal of Industrial Organization 289(1989)  Thalm J , Optimal Collusion under Cost Asymmetry, mimeo, University of Toulouse (2005).  Mason C., Phillips O. and Nowell C, Duopoly Behavior in Asymmetric Markets: An Experimental Evaluation, 74 Review of Economics and Statistics 662, (1992).  Tirole J., The Theory of Industrial Organization, MIT Press, Cambridge Massachusets. (1988).  Rai, Q & Saroliya, Restrictive and Unfair Trade Practices – Where Stands the Consumer?,CUTS, (2003), India.

 Baker B. Jonathan & Bresnahan F. Timothy, Economic Evidence in Antitrust: Defining Markets and Measuring Market.  Study of Cartel Case Laws in Select Jurisdictions – Learnings for the Competition Commission of India, CUTS.  Harrington J., Detecting Cartels, December (2004).  Maher M. Dabbah, EC and UK Competition Law: Commetary, Cases and Materials, (Cambridge, UK: Cambridge University Press, 2004).  Cucu Cristina, “Agreements”, “Decisions” and “Concerted Practices”: key concepts in the analysis of anticompetitive agreements.”

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 http://citeseerx.ist.psu.edu/viewdoc/download?doi=10.1.1.470.2022&rep=rep1 &type=pdf

 http://www.nishithdesai.com/information/research-and-articles/nda- hotline/nda-hotline-single-view/article/airlines-penalized-for-imposing-fuel- surcharge-through-concerted- action.html?no_cache=1&cHash=5d415e6fd95a588205dcceddefe35e79

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 http://scholarlycommons.law.northwestern.edu/cgi/viewcontent.cgi?article=15 85&context=njilb  file:///D:/Libraries/Downloads/cks_2013_law_art_025.pdf  http://www.concurrences.com/en/droit-de-la-concurrence/glossary-of- competition-terms/Concerted-Practice

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