Anti-Competitive
Agreements: Concept, Forms, and Treatment
Introduction
Competition is the lifeblood of a healthy economy, as it ensures fair prices, better quality, innovation, and wider consumer choice. When enterprises collude instead of competing, the very foundation of the market is disturbed. Such arrangements, known as anti-competitive agreements, restrict fair trade and distort the natural forces of demand and supply.
Recognizing the dangers posed by these practices, the Competition Act, 2002 was enacted in India to prevent agreements that cause or are likely to cause an Appreciable Adverse Effect on Competition (AAEC). The Act prohibits both horizontal agreements (between competitors at the same level of trade) and certain vertical agreements (between entities at different stages of the supply chain) if they harm competition. At the same time, the law acknowledges that not all agreements are harmful; some may enhance efficiency, foster innovation, and benefit consumers.
Thus, the regulation of anti-competitive agreements seeks to strike a
balance between curbing harmful collusion and encouraging cooperation that
promotes economic growth and consumer welfare.
F Concept
of Anti-Competitive Agreements
The
concept of anti-competitive agreements
revolves around the idea that while competition in the market encourages
efficiency, innovation, and consumer welfare, certain agreements between
enterprises can distort this competitive process and harm the larger economic
interest. In simple terms, an anti-competitive agreement is any understanding,
arrangement, or contract between two or more enterprises or associations that
has the object or effect of restricting competition.
Under
Section 3 of the Competition Act, 2002,
such agreements are considered void if they cause, or are likely to cause, an Appreciable Adverse Effect on Competition (AAEC)
in India. These agreements may be formal or informal, written or oral, and even
tacit collusion can qualify as anti-competitive. For instance, competitors at
the same level of trade (horizontal agreements) may collude to fix prices,
limit supply, or divide markets, thereby reducing consumer choice and
artificially inflating prices.
Similarly,
agreements between enterprises at different stages of production or
distribution (vertical agreements) may also restrict fair competition, such as
when manufacturers impose resale price restrictions or engage in exclusive
distribution arrangements. The underlying principle is that market outcomes
should be determined by the independent actions of enterprises and the forces
of demand and supply, not by collusion or restrictive arrangements that hinder
competition.
Thus,
anti-competitive agreements are viewed as a serious violation of competition
law because they directly undermine the objectives of maintaining free and fair
competition, protecting consumer interests, and ensuring the healthy growth of
markets.
F Forms of Anti-Competitive Agreements
Anti-competitive
agreements are broadly categorized into Horizontal Agreements and Vertical
Agreements, but competition law also recognizes related forms and special
types of arrangements that restrict fair trade. Together, these help us understand the complete picture of how businesses may
collude or misuse agreements to limit competition.
Ø Horizontal Agreements
Horizontal
agreements are made between enterprises or persons operating at the same
level of the supply chain, such as two manufacturers, two distributors, or
two service providers. They are considered extremely harmful as they replace
natural competition with collusion. The Competition Act, 2002 treats
these agreements as per se anti-competitive, meaning they are
automatically presumed harmful without requiring detailed proof. Examples
include:
1) Price Fixing (fixing minimum prices instead
of competing).
2) Cartels (secret arrangements to control
production, supply, or pricing).
3) Market Allocation (dividing territories or
customers).
4) Bid Rigging/Collusive Bidding (manipulating tender processes
to benefit a pre-decided party).
These
practices artificially raise prices, restrict consumer choice, and lower
innovation.
Ø Vertical Agreements
Vertical
agreements are between enterprises at different stages of the supply chain,
such as between a manufacturer and a wholesaler, or a distributor and a
retailer. These agreements are not presumed anti-competitive but are tested for
their actual effect on competition. Examples include:
1) Resale Price Maintenance (RPM): Fixing the resale price for
retailers.
2) Exclusive Supply Agreement: Buyer restricted from sourcing
goods from other suppliers.
3) Exclusive Distribution Agreement: Distributor restricted from
selling competitors’ products.
4) Tying and Bundling Arrangements: Forcing customers to buy unwanted
goods along with the desired product.
5) Refusal to Deal: Restricting business with
certain competitors.
These
agreements can sometimes harm competition but may also increase efficiency,
improve distribution, and enhance consumer benefits.
Ø Hub-and-Spoke Agreements
A modern
form of anti-competitive conduct is the hub-and-spoke arrangement, where
a central player (hub), such as a supplier or online platform, coordinates
collusive practices between competitors (spokes) who may not directly
communicate with each other. For example, a large e-commerce platform may act
as the hub, helping different sellers (spokes) fix prices. This indirect
collusion is also prohibited as it restricts competition.
Ø Exclusive Dealing and Foreclosure
Practices
Some
agreements focus on foreclosing competition by denying rivals access to
markets or customers. For example:
1) Forcing retailers to stock only
one company’s products.
2) Long-term exclusive contracts that
lock out competitors.
3) Agreements that prevent entry of
new players into the market.
Such
practices create barriers to entry, reduce consumer options, and strengthen
monopolistic control.
Ø Technology and Data Sharing
Agreements
In the
digital economy, agreements on data sharing, algorithms, and technology
platforms can also become anti-competitive. For instance:
1) Competitors using the same
algorithm to fix dynamic pricing.
2) Online platforms favoring certain sellers through hidden agreements.
3) Technology collaborations that
result in market dominance instead of consumer benefit.
These
agreements are a growing concern in modern competition law.
Ø Exempted and Pro-Competitive
Agreements
It is
important to note that not all agreements that restrict trade are harmful.
Certain agreements may actually promote efficiency and consumer welfare. These
include:
1) Joint Ventures for research and development
(R&D).
2) Standardization Agreements that ensure product quality and
safety.
3) Specialization Agreements where companies share production
to improve efficiency.
If such
agreements lead to innovation, better quality, or lower costs for consumers,
they may be exempted under competition law.
F Treatment
of Anti-Competitive Agreements
The
treatment of anti-competitive agreements refers to the legal and regulatory
steps taken to identify, control, and penalize agreements that restrict
competition. In India, this is primarily governed by the Competition Act,
2002, and enforced by the Competition Commission of India (CCI). The
aim is not only to punish violators but also to restore fair competition in
the market and protect consumer interests.
The
treatment of anti-competitive agreements under the Competition Act, 2002, is
both punitive and preventive. By investigating agreements, imposing
penalties, encouraging leniency, and spreading awareness, the CCI seeks to
strike a balance between curbing harmful practices and promoting healthy
competition. This ensures that markets remain fair, consumers are protected,
and economic growth is sustained.
Ø Inquiry and Investigation
The
process usually begins when information is received by the CCI either through:
1) Complaints filed by individuals, companies,
or consumer associations,
2) References made by the Central/State Government,
or
3) Suo Motu Action taken by the CCI based on its
own knowledge or media reports.
If the
CCI finds a prima facie case, it directs the Director General (DG)
to conduct an investigation. The DG has wide powers to collect evidence,
examine parties, and submit a detailed report.
Ø Presumption of Illegality (Per Se
Rule)
For horizontal
agreements such as price fixing, bid rigging, and market allocation, the
law applies the per se rule, meaning these agreements are presumed to be
anti-competitive without needing detailed proof of their adverse effects. This
ensures quicker and stricter action against blatant forms of collusion.
Ø Rule of Reason (Case-by-Case
Assessment)
For vertical
agreements, such as exclusive distribution or resale price maintenance, the
CCI follows the rule of reason approach. Here, the actual impact of the
agreement on competition is studied in detail. If the agreement is found to
have Appreciable Adverse Effect on Competition (AAEC), it is declared
void; otherwise, it may be allowed if it promotes efficiency or consumer
welfare.
Ø Cease and Desist Orders
If an
anti-competitive agreement is proved, the CCI can direct the enterprises to “cease
and desist” from continuing such practices. This order aims to immediately
stop the harmful effect of the agreement on the market.
Ø Penalties and Fines
The CCI
has the power to impose heavy financial penalties on violators. The penalty can
be up to:
1) 10% of the average turnover of the enterprise for the last
three years, or
2) In the case of a cartel, up to three
times the profit of each year of violation.
These
penalties are meant to deter companies from entering into anti-competitive
agreements.
Ø Leniency Programme for Cartels
Recognizing
the difficulty in detecting secret cartels, the Act allows a leniency
programme, where a cartel member who voluntarily comes forward and provides
vital information can get a reduction in penalties. This encourages
whistleblowing and helps the CCI break cartels more effectively.
Ø Appeals Mechanism
If a
party is dissatisfied with the CCI’s order, they can appeal before the National
Company Law Appellate Tribunal (NCLAT), and further to the Supreme Court
of India. This ensures fairness and judicial oversight.
Ø Corrective Measures and Advocacy
Beyond
punishment, the CCI also engages in competition advocacy by spreading
awareness among businesses, government bodies, and consumers about the harmful
effects of anti-competitive agreements. In some cases, the CCI may recommend policy
changes to prevent restrictive practices in the future.
Ø International Cooperation
Since
many anti-competitive agreements, like global cartels, operate across borders,
the CCI also cooperates with international competition authorities. This is
crucial in sectors like aviation, shipping, and digital markets where global
coordination is common.
F Rules to
Determine Effects of Anti-Competitive Agreements
The rules to determine the effects of
anti-competitive agreements revolve around the concept of Appreciable Adverse Effect on Competition (AAEC),
which is the central test under Section 3 of the Competition Act, 2002. Since not every agreement that
restricts trade is harmful, the Competition Commission of India (CCI) evaluates
each case by balancing its negative and positive effects on the market.
To assess AAEC, the CCI looks at several
factors. First, it examines whether the agreement creates barriers to entry for new businesses,
since preventing fresh competition can strengthen monopolies. Second, it
studies whether the agreement has the effect of driving existing competitors out of the market, which
reduces consumer choice and gives undue advantage to a few firms.
Third, the Commission considers whether
the agreement leads to foreclosure of
competition, for example by denying rivals access to suppliers,
distributors, or customers. On the other hand, the CCI also evaluates the pro-competitive benefits of the
agreement.
Some agreements, although restrictive, may
improve production efficiency, promote technical progress, reduce costs, or
enhance the quality of goods and services, which ultimately benefits consumers.
The rules therefore require a balancing test if the harmful effects on
competition outweigh the benefits, the agreement is struck down as
anti-competitive; but if the efficiencies and consumer welfare gains are
greater, the agreement may be allowed. This flexible approach ensures that
while harmful collusion is punished, productive cooperation that contributes
positively to the economy is not discouraged.
1. Creation of Barriers to Entry: Whether new players are
prevented from entering the market.
F Agreements
Which Do Not Cause Adverse Effects on Competition
Not all agreements that restrict trade or cooperation between enterprises
are harmful to the market. Some agreements, despite imposing certain
restrictions, actually enhance efficiency,
promote innovation, and benefit consumers. The Competition Act, 2002 recognizes this by allowing
exceptions for agreements that do not cause an Appreciable Adverse Effect on Competition (AAEC). Such
agreements are considered pro-competitive
rather than anti-competitive.
Agreements where two or more companies
collaborate to carry out a project, share resources, or combine expertise are
often beneficial. For example, joint ventures in automobile manufacturing,
infrastructure, or pharmaceuticals may reduce costs, enhance technical
know-how, and lead to better products and services.
Collaborations in research, innovation, and
technological development are encouraged, as they promote advancement in
science and industry. Such agreements allow companies to pool resources, share
risks, and bring new products or improved processes to the market faster, which
ultimately benefits consumers.
Agreements among industry players to set
common standards for safety, quality, or compatibility (like USB charging
standards or telecom spectrum norms) are not harmful. Instead, they improve product
quality, ensure consumer safety, and reduce confusion in the marketplace.
In some cases, enterprises agree to specialize
in the production of certain goods or services to increase efficiency and
reduce duplication of resources. Such agreements lower production costs and may
lead to cheaper products for consumers without harming competition.
Certain exclusive supply or distribution
agreements may not harm competition if they improve the efficiency of
distribution, reduce logistics costs, or ensure consistent product availability
in remote areas. For example, an exclusive arrangement that brings essential
medicines quickly to rural markets may be justified.
If an agreement directly leads to improved
quality of goods and services, lower prices, or greater consumer choice, it is
not considered anti-competitive. The key factor is whether consumers are better
off despite the restrictive element in the agreement.
F Conclusion
Anti-competitive agreements strike at the heart of a healthy market system by replacing competition with collusion, reducing consumer choice, and distorting fair pricing. The Competition Act, 2002, through the powers of the Competition Commission of India (CCI), provides a robust mechanism to detect, regulate, and penalize such practices while also encouraging compliance through advocacy and leniency.
However, the law wisely recognizes that not all restrictive agreements are harmful some promote innovation, efficiency, and consumer welfare, and are therefore allowed.
The key lies in applying the Appreciable
Adverse Effect on Competition (AAEC) test, which balances the negative
and positive effects of an agreement. Thus, the treatment of anti-competitive
agreements reflects the larger goal of competition law: to preserve free and
fair markets, protect consumers, and ensure sustainable economic growth.