DETERMINING DOMINANCE IN COMPETITION LAW

The general definition of a dominant position takes into account the ability of a firm to behave independently of its competitors; and the absence of competitors or constraints from the conduct of competitors. Market Power in competition policy is defined by economists as the ability of firms to increase prices profitably above the competitive price for a sustained period.

DOMINANT POSITION

Section 4 of the Competition Act, 2002 determines the dominant position by whether the enterprise is in such a position of economic strength that it can operate independently of competitive forces; or can affect the relevant market in its favor. It is imperative to note here that independence under section 4 of the act does not mean the absence of any other player in the relevant market but that the enterprise whose dominance is being ascertained has market power & is in the position to influence competitive forces to its own advantages and to the detriment of others.

Conclusively as the Act doesn't prescribe any structural definition of dominance in terms of the defined threshold of market share alone, it is required instead to give due regards to the other factors in addition to the market share as mentioned in Section 19(4) of the Act to determine if an enterprise is in a position to operate independently of competition or can affect competitors or consumers in its favor in the relevant market.

FACTORS FOR DETERMINING DOMINANT POSITION

The Act expressly lays down factors that are to be taken into account to determine dominant positions in section 19(4) of the Act. The rationale behind this is that while assessing the dominant position of the undertaking it is important to consider all the constraints present in the market which hinders the enterprise's ability to act independently and affect the relevant market in its favor.

These factors help CCI to precisely & accurately assess the dominance of the alleged undertaking under the relevant market by providing an objective POV. You can read the section here.

DETERMINATION OF DOMINANT POSITION

It is pertinent to note that the dominance of an entity in a relevant market is a question of fact. The selection of factors for assessing dominance will depend solely upon the facts & circumstances of each case. These factors are not in the nature of a due diligence checklist which has to be mechanically applied in every investigation but they must be analyzed in light of the factual matrix of each case.

To evaluate the relative position of strength in terms of parameters like size & resources of the enterprise or size or importance of competitors as mentioned in clause(b) & clause(c), it is not necessary to confine evaluation only to the relevant market. Indeed, to do that would defeat the very purpose of the parameters. It is the overall size & resources of an enterprise or overall importance of a competitor that has to be compared to see the comparative position of strength and not the limited manifestation of that strength in a particular product/geographic market.

MARKET SHARE

Determination of dominance in an enterprise or group in the relevant market is a pre-requisite to enquire into abuse thereof. India, in line with international trend bid farewell to the arithmetical criteria of 25% to label an undertaking as dominant and has now opted for a combined structural cum behavioral approach.

Despite this, the market share that a particular entity has in the relevant market is one of the most important factors to be taken into account to determine whether it is in a dominant position. Under the laws of some jurisdiction, the existence of market share over and above a specified level gives rise to the presumption of the existence of a dominant position even though such presumption is rebuttable by submitting evidence to the contrary.

In practice, different parameters are employed to measure the market share depending upon the nature of the case, sector, and issue under investigation. In case the products are heterogeneous, it is advisable to calculate market share in terms of value expressed in turnover. In case products are homogenous, production capability and reserves are predicted to be a better indication of market share.

Primarily, CCI is required to look at the current market share only as provisions are applicable to pre-existing dominance. However, historic data may be relevant to a market which are characterized by relatively infrequent large bulk orders. In-house production is normally not included in the calculation of market share.

The competition literature also suggests that if the market share has fluctuated significantly, it indicates effective competition in the relevant market. Furthermore, if the market leader has been able to keep constant or consistently increase his market share, it demonstrates a dominant position.

CALCULATION OF MARKET SHARE

The definition of the relevant market in both product & geographic market helps in identifying the suppliers & consumers who are active in that market. On that basis, the total size & market share of each supplier can be calculated on the basis of their sales of the relevant product under the relevant area.

In practice, the total market size and market shares are obtained by available sources like the company's estimates, studies commissioned to industry consultants and trade associations. When the above data is either unavailable or unreliable, the CCI may ask the relevant market players to provide their own sales in order to calculate the market share of each supplier. Other measures for calculating market share can be resources or production capability. In cases of infrequent products(large and bulk orders by a small number of customers), it is helpful to analyze market shares of the past several years.

The interpretation of the market shares should reflect expected or reasonably likely future changes in the market conditions. If eligible firms are poised to enter or exit the market, the alleged dominant firm's market share may understate/overstate the firm's market power. This is also true when existing firms other than the alleged dominant firm are in the process of adding or retiring capacity. In sum, the appropriate method for assessing market share depends upon the case entirely.

Usually, the sales data by value & volume are both informative, still, preference is given to value. In addition to this, there are many other issues that may arise when measuring market share like choosing between product sales and capacity, sales value, choice of exchange rates, imports, adjusting internal production sales and capacity, sales value, choice of exchange rates, imports and adjusting internal production.

• Choosing between Production, Sales & Capacity: Market share is usually determined by undertaking sales to direct customers in the relevant market rather than an undertaking's total production which can vary when stocks increase or decrease. Sometimes market share will be measured by undertaking's capacity to supply the relevant market.
• Sales Value: When considering market shares on a value basis, market share is valued at a price charged to an undertaking's direct customers.
• Choice of Exchange Rates: If the relevant geographic market is international, this may complicate the calculation of market shares by value as exchange rates vary over time. It may then be appropriate to consider a range of exchange rates over-time including an assessment of the sensitivity of the analysis to the use of different exchange rates.
• Imports: If the relevant geographic market is international, market share would be calculated with respect to the whole geographic market. On the other hand, if the RGM is not international, sales of each importer should be separately considered rather than aggregating shares as if they were of the same single competitor. If RGM is domestic, both domestic sales and imports are factored in the market share.
• Adjusting Internal Production: In some of the cases, a supplier may be using some of its capacity or production to meet its own internal production. In the event of the rise of price in the open market, a supplier may decide to divert some or all of its capital capacity & production to catering the open market if it is profitable to do so taking into effects on its own business that is not deprived of the necessary supply. Since the external and internal production capacity is likely to be released onto the open market will be taken into account while accessing competitive actions.

OTHER FACTORS UNDER SECTION 19(4)

The other factors are discussed in brief here:

• Size & Resources of the Enterprise: Large size and superior financial position/resources are a contributing factor to a dominant market position.
• Size & Importance of Competitors: When looking at market share it is also relevant to look at the largest firm's market share relative to its competitors. If all the competitors hold small shares in the relevant market it is advisable to hold that the largest firm is dominant. The market share of one of the competitors in the market also determines the competition constraints on other players.
• Economic Power of the Enterprise including Commercial Advantage over Competitors: Superior market position or resources may be a contributing factor to a dominant market position. Economies of Scale and scope was considered as a significant power leading to dominance. Furthermore, access to capital especially international capital which the incumbent has to the exclusion of others is a significant factor in determining dominance.
• Vertical Integration of the Enterprises or Sales or Services Network: The vertical integration & well-established distribution system may act as a barrier to entry as it can discourage or impede new entrants in a market. Sales Network is also a relevant factor while determining dominance as it confers the enterprise sustainable advantage over its rivals in terms of supply chain and dealership networks amongst others.
• Dependence of Consumers on an enterprise: In public utility, the dependence on the enterprise of consumers is invariably high giving it a monopolistic nature. In the after-sale market or support service market where the demand is inelastic, it is quite convenient for the provider of goods or services to exercise market power. An example is the non-standardization of spare parts that facilitate the enterprise to dominate as after-sales support and service are contingent on this and replacement cost is high.
• Monopoly due to Government Intervention: Monopoly due to the government or a dominant position whether acquired as a result of any statute or by virtue of being a government entity or a public sector undertaking would come under this. A former monopoly now facing competition from new entrants may have inherent advantages of strong financial position, control of certain networks, established relations with suppliers, and customers which may make the entry for new entrants difficult.

The imbalance between a former state monopoly & the new entrants has been noticed globally. The public sector companies do have an edge over new private sector entrants. Knowing this reality the lawmakers have placed an obligation on CCI to appreciate the monopoly or dominance acquired by enterprises through state intervention in determining dominance.

• Entry barriers including barriers such as regulatory barriers, financial risk, the high capital cost of entry, marketing entry barriers, technical entry barriers, economies of scale, high cost of substitutable goods or service for consumers: An important factor in the assessment of dominance are barriers to entry, exit, and durability in the relevant market. If entry barriers faced by the rivals are low, the undertaking which has a high market share may not be able to continue its significant market power for long.

Substantial entry barriers shield existing competitors from external competition and foster market power. The barriers to entry could be structural, regulatory, or strategic. Structural barriers could be on the peculiar nature of the industry- cost advantages for existing firms, supplier-customer relationship, switching costs, economies of scale & scope, and technological know-how. Regulatory Barriers are those created by the state in the form of laws, regulation & administrative practice- tariff and non-tariff barriers. Strategic Barriers are those created by existing firms in the market which has the effect of deterring entry- long-term supply contracts, exclusivity contract, over-investment in capacity building or advertising, exclusive dealing, or tying agreements, etc.

If barriers substantially delay entry, the existing firms would not be constrained by entry of new firms. Frequent & successful examples of entry reflect the lack of barriers to entry. The likelihood of entry & profitability is also an important component for entry analysis.

• Countervailing Buying Power: An enterprise may be constrained not only by actual & potential competitors but the buyer's tendency to shift from their product/service especially in a monopsony market. If there are competitors with adequate capacity to meet the demand a buyer's threat to switch to another supplier may have a considerable effect on a supplier that sells a major part of its production to a single buyer. A strong buyer may pave the way for new entrants so as to defeat the dominant enterprise not only to its own benefit but also to the benefit of other buyers and consumers.
• Market Structure & Size of Market: Market structure which is characterized by a sole supplier of goods and services either on a standalone basis or by virtue of common ownership makes conditions conducive to exercise of market power affecting competition, consumers & market itself. Further, the smaller the size of the market, the greater the likelihood of dominance. It would also be wrong to suppose that only the large-sized firm is likely to be dominant, given that the relevant market is narrow a small firm may also be found to be dominant.
• Social Obligation & Social Costs: This factor of consideration gives CCI the flexibility to consider social obligations performed by an entity like employment capacity and consumer welfare.
• Relative Advantage by way of Contribution on to Economic Development: Positive conducts on part of an enterprise can weigh the scales in favor of it while determining dominance- pro-development approach or rural reach.
• Any other factors which the Commission may consider relevant for the inquiry: This provision gives CCI the power to include any other factor it deems fit for the purpose of the inquiry. Access to essential inputs on a long-term basis may be used in assessing dominance. In the DLF Case, the CCI took into consideration the various factors other than market share like statements issued by DLF in the public domain, DLF's vast amount of fixed assets & capital turnover, brand value, strategic relationships, sales network, etc.

INDIAN SCENARIO: VULNERABILITIES IN COMPETITION LAW

The application of competition law in India has been erratic if observed from the perspective of a competition law enthusiast. The wide spectrum of factors provided in Section 19(4) indicates that the CCI is required to take a very holistic & pragmatic approach while inquiring about the dominance of an enterprise before arriving at a conclusion based on such inquiry.

Furthermore, it is quite possible that the dominant position may be acquired due to several factors outside the relevant market but for the purpose of Section 4, this position of strength must get the enterprise ability to operate outside the purview/independently of competitive forces in the relevant market or ability to affect its competitor or consumers or the relevant market in its favor.

It is imperative to ponder upon that CCI has shown vulnerability in the determination of the dominant position by grounding its judgment on different factors in different disputes. While CCI allows market share to act as a sole determinant of dominant position in one case, it prohibits the same in the other. The dual faced judging criteria of CCI have raised several quandaries ultimately leading to challenging the just authority of CCI.[1]

However, in the context of the Indian market, market share remains a strong indicator of dominance; even though the CCI has also considered other factors listed in section 19(4) of the Act to determine the dominance of an impugned enterprise.