Tackling abuse of dominance by checking monopolies

Business Standard, June 21, 2008

A new competition law passed in 2002, further amended in 2007, will be operational soon. One of its active agenda will be to curb abusive monopolistic practices by businesses, says Pradeep S Mehta

Contestability of markets is the adrenaline of all economies. While countries liberalise their economies, an extremely vital concomitant reform is the enactment and implementation of appropriate competition laws so that consumers and businesses get the benefits of liberalisation. In India, a new competition law was passed in 2002 to replace the archaic Monopolies and Restrictive Trade Practices Act of 1969. The new law has been further amended in 2007 and will be in operation soon. One of its active agenda will be to curb abusive monopolistic practices by businesses.

Businesses either collude through cartels or abuse their dominance through exploitative and/or exclusionary behaviour. Every other day, cartels are being hauled up by competition agencies around the world. But a more difficult area for competition authorities is taking action against dominant players abusing their dominance through monopolistic practices. The complex analysis can take time and care has to be taken to see whether the dominance has actually harmed competition. The use of ‘rule of reason’ rather than the ‘rule of law’ will need to be applied to ensure that actions do not end in stifling competition and growth.

Abuse of dominance (AOD) is broadly of two types: Exclusionary and exploitative.

Exclusionary abuse involves driving out competitors from the market. For example, in some states in India, truck operators are not allowed to load and unload goods on a particular spot unless they join the truck union. The truck union charges tariffs almost 35-40 per cent higher than prevailing market rates. The Monopolies and Restrictive Trade Practices Commission (MRTPC) has taken action against over two dozen such cases in its history, but only with an order to cease and desist. The MRTP Act has no bite, hence these cases of ‘collective abuse of dominance’ continue to function. Hopefully, the new Competition Act, 2002 will be able to deal with them in an effective manner.

Exploitative abuse is when a firm is exploiting customers by ignoring their needs as well as those of its competitors. For example, a contemporary case in India relates to Monsanto’s high pricing of Bt cotton seeds: A farmer-consumer has little choice because Monsanto has a global patent on such seeds. This matter had come up before the MRTPC, which ruled that Monsanto’s charging of a high royalty is unconscionable. The matter is now pending in an appeal to the Supreme Court.

Exploitative monopolies are also common place across natural monopolies like energy and utility companies, airports and toll roads. For instance, bills generated by a utility can impose onerous terms on the consumer, who has no choice but to pay up or face no supply. Where intellectual property rights are involved, as in the Monsanto case, both types of abuses can take place.

For example, in its first ever and biggest fine on a single company the European Commission recently levied a fine of $1.4 billion on Microsoft for non-compliance of its order.

The fine stemmed from a 2004 decision by the Commission in which Microsoft was required to disclose “complete and accurate” technical information on reasonable terms that would allow competitors to develop products compatible with its patented Windows system. In complying with the order, the royalties that Microsoft demanded from its competitors were pretty unreasonable, thus negating the spirit of the order.

This is a typical case of an IPR holder which misuses its position by ensuring that consumers have little choice and are pushed into buying their products. Microsoft also has allegedly stacked national standards sub-committees of the International Organisation of Standards (ISO) with its nominees to finalise international standards that are loaded in favour of Microsoft’s own products. For example, the ISO accepted Microsoft’s Office Open XML in April 2008 as the format for an international standard, in spite of serious objections by India and South Africa.

A similar type of abusive behaviour and unfair practice has been observed in segments like microchips. Intel dominates the world market for microchips with an 80 per cent share, while the other US-based firm, AMD, has a 20 per cent market share. In a recent case filed in the US District Court of Delaware, AMD claims that Intel paid off Acer, Dell, major Japanese manufacturers, system builders and distributors ‘to close their doors to AMD’. Where it could not buy exclusivity from PC makers, AMD alleged that Intel focused its payments on keeping away computers based on AMD microchips from large business customers.

Recently, while the cases in the US and Europe are still being adjudicated, Korea has been the first country to charge Intel with a ¤16.5 million fine for rebates offered to Samsung and Trigem to buy only its chips and not from AMD.

In India, AMD is fighting the same battle with Intel. In February 2008, its India chief alleged that most procurement tenders from both central and state government units ask bidders for PCs only with Intel chips. For example, the Lok Sabha tenders for 105 laptops and 80 palmtops last year required a bid from OEMs on only Intel-based products.

These two monopoly power cases in the technology sector strike at the heart of a modern economy. With the presence of both Microsoft and Intel, competition regulators need to ensure that innovation for the benefit of consumers, and indeed the entire economy, is protected. No two firms should be able to retard the ability of rivals and customers to innovate. Without a wide supplier base, the future trajectory of computing is left in the hands of a Wintel monopoly.

An AMD spokesman in a conversation told me their assessment is that the consumer-cost burden of Intel’s dominance is around $30 per PC, whereas the consumer-cost impact of Microsoft’s dominance is about $8 per PC. If the Wintel monopoly can be broken, then it would increase gains not only for consumers but also competing businesses and our growing IT industry. Imagine their impact in India today, and tomorrow, when we may become world leaders as the largest consumers of PCs, software, and exporters of IT services.

This article can also be viewed at: