CCI needs to pull up its socks

Financial Express, October 08, 2012

By Pradeep S Mehta

Recently, CUTS published a round-up on the performance of the Competition Commission of India called “CCI through the lens of media”. The media scan captures CCI’s reported activities from 2009 in an attempt to assess how it has performed since it became active in enforcement. We think that though still evolving, CCI has been very active in its role as the competition watchdog. Notwithstanding this, some deficiencies, such as a lack of sound economic reasoning in its case analyses and a desired level of consistency in its orders which is partly attributed to this, continue to mar its functioning. To do this better, CCI needs to pull up its socks.

There is an absence of a guideline or a methodology (present in several other jurisdictions) needed to calculate the appropriate amount of penalties/fines that is proportionate to the violation. In the cement cartel case, CCI’s efforts to serve as a powerful deterrent against allegedly defaulting companies through hefty penalties slapped on them is laudable. Nonetheless, the penalty imposed has met with wide criticism for being “too high”. Whether too high or not, the point is that it needs clear guidelines to arrive at determine the fines which is missing at the moment.

Secondly, there is a need for building adequate capacity such that the orders of CCI are premised in sound economics. As per the majority order in the National Stock Exchange case, the entire stock exchange market has been considered as the relevant market for the purpose of competition analysis. The delineation is rather superficial, without diving into an in-depth analysis. Moreover, it has foregone any analysis of the demand-side substitutability, which is the core determinant of market definition. The order did not consider the much endorsed globally employed tool of Small but Significant Non Transitory Increase in Price (SSNIP) or the popularly known hypothetical monopolist test in undertaking the exercise of market definition. Its rejection of SSNIP solely based on a cellophane fallacy is highly misplaced and not convincing enough. The minority order in the NSE case was based upon sound economic reasoning, but that did not prevail.

Market definition is the most crucial step in any competition analysis. If markets are defined incorrectly, it affects further analysis such as market share calculation, assessment of barriers to entry, etc. For example, if markets are defined too narrowly, a firm may appear to be dominant when it may not be so and if they are defined broadly, the opposite is true. Inconsistency has also been observed in the manner in which markets have been defined by the CCI in several other cases ranging from “residential accommodation” where flats were priced higher than those defined as “high end residential segment” to “units on sale”, “multi-storeyed apartments”, etc. In these cases, pertaining to apartments, CCI has failed to rely on any carefully formulated basic criteria evident from the completely divergent definitions in many cases.

Going back to the CCI order on NSE, CCI found NSE to be a dominant player based on a highly questionable market definition, which led to a share calculation of 92.53% in 2008-09. Besides, it failed to take note that a sole reliance on market shares is misguiding and they don’t help much in determining dominance if the entry barriers are low, which seems to be true in this case given the entry of the United Stock Exchange (USE) after which NSE’s market share came down substantially. However, this factor has not clearly been addressed before reaching such conclusions. Furthermore, on the issue of ascertaining dominance based on zero pricing, the alleged conduct may have been nothing more than a legitimate business purpose in order to attract a large consumer base (through penetration pricing) in a network industry. Therefore, reliance on zero pricing to ascertain dominance is flawed. And drawing such conclusions from the mere assumption that “had NSE not got the undeniable advantages arising out of its operations in other markets, it would not have been able to or wanted to charge nothing for providing stock exchange services for the cash derivative forwards market” seems like a disproportionately large leap to justify such a finding.

Finally, as clearly reasoned in the minority order, for any allegation of predatory pricing to succeed, certain criteria need to be met in addition to pricing below costs. And here as well, the mere elimination of competitors need not necessarily indicate predatory intent as long as they are not efficient for the objective of competition is to protection competition and not competitors. Predatory pricing, also known as profit sacrifice or investment in monopoly profits, needs to logically therefore be followed by a subsequent increase in prices once competitors are eliminated from the market through this strategy, known as recoupment. CCI has ignored all of this analysis in its majority order. Also, stock markets are network industries characterised by network effects or externalities where the value of the network to users increases with the number of users (think telephones). These network industries often face a two-sided demand, in so far as the transactions which they enable are demanded by two separate (and uncoordinated) types of consumers, whose participation is essential. Therefore, two-sided network industries are often faced with the celebrated “chicken-and-egg” problem, given the indispensable roles of both groups. Below cost pricing in such markets may well be legitimate business purpose in that it can be compared to the pro-competitive rationale of promotional pricing in order to build a larger customer base adding to operationalising the network effects.

While provisions pertaining to cartelisation and abuse of dominance became operational earlier on, regulation of combinations was notified only in 2010. Nonetheless, CCI has given out several orders in this regard and continues to do so. Some of these orders too point towards the lack of consistency in CCI’s reasoning and analysis. In the case of merger of IVRCL Ltd and IVRCL Assets & Holdings Ltd (Combination Registration No. C-2011/12/13 dated January 17, 2012), CCI acknowledged the filing as pertaining to the merger alone and approving the same while remaining silent on the demerger mentioned as one of the transactions under the Scheme executed by the parties spelt out in the joint notice filed. However, in the case of Varun Shipping Company Limited (C-2012/04/54 dated June 20, 2012), the CCI noted both demergers and amalgamations mentioned in the joint notice filed while deciding that both fall under Section 5 (c) of the Act. Also, in Reckitt Benckiser Investments Pvt Ltd (Combination Registration No. C-2012/02/39 dated May 08, 2012), the CCI acknowledged the merger as well as the demerger from the filing made but while approving, held them to fall under Section 5 (c).

Competition enforcement is a complex area, for it requires a good marriage of law with economics. CCI’s orders reveal a weakness in this respect. An effective tool that could be used to fill this gap is in job training and hand-holding for a sustained period of time (not just short-term training programmes) conducted by officials from competition agencies of other jurisdictions with a more mature competition regime such as the US, EU, Australia and the UK. Furthermore, tailored programmes could be designed for CCI’s consumption.

PS: Since there are so many CCIs in our country—Cotton Corporation of India, Cement Corporation of India, Cabinet Committee on Infrastructure, Constitution Club of India, etc—should we not use CompCom as the competition watchdog’s abbreviation? The Competition Appellate Tribunal in India has adopted the abbreviation: COMPAT because CAT is more popular as the Central Administration Tribunal. Even the South African Competition Commission is using CompCom as its popular name, and not SACC.

The author is secretary general, CUTS International. Natasha Nayak of CUTS contributed to this article..

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