Dr. Ajit Ranade, Chief Economist, Aditya Birla Group, began the lab by asking the students what competition meant to them. He asked them to think about the last time they were in a competitive environment. Then using the example of IIT JEE exams he extracted concepts like Fair/Unfair competition and Healthy/Unhealthy competition from the students themselves.
Through discussion of cases like how FMCG companies like Hindustan lever and P&G influence distributors and shelf strategies, Dr. Ranade was able to give some clarity to students on what is fair competition and what is unfair competition. Is it okay if Coke pays the distributer to not stock Pepsi? Why/Why not? He then explained why it’s illegal and the nuances of the law.
Competition can be fair or unfair, depending on whether the strategies used by firms are legal or not. Competition can also be healthy or unhealthy – the main differentiating factor here being one’s judgement of ethics and morality. But is competition good? It is, as long as it’s fair, healthy and rule-based.
Using the example of AT&T and Pfizer, he explained why Monopoly is good in certain cases and bad in certain cases. If Pfizer produces a drug by investing money in its R&D, it needs the market to allow some monopoly while selling the good. This monopoly is good monopoly. But, AT&T reserved rights to sell telecommunication services in USA till the 80s and the moment their patents expired, Sprint and Verizon took over. This is example of a bad monopoly.
Presently, competition law, or a variant of it, is present in more than 150 countries in the world which provides a legislative framework for firms to function in a market. In India, it is a fairly recent development. In 2002, the Competition Act replaced the Monopoly and Restrictive Trade Practices Act but was only implemented in 2009. Under this Act, Dr. Ranade covered 2 areas – anti-competitive agreements and abuse of dominant position.
- Anti-competitive agreements: The act prohibits explicit agreements between two or more firms to form a cartel in an industry. A cartel refers to an implicit or explicit agreement to restrict price or quantity or both to maximise their profits and/or market share. In economic theory, this situation can be analysed in two ways.
- First, cartel formation leads to an increase in price with a decrease in quantity supplied. This results in a transfer of profits from consumers to producers, causing a loss in consumer surplus.
- Second, a cartel is inherently unstable because a firm can earn higher profits by deviating from the agreement. OPEC is the only cartel to have sustained itself and proved beyond the logic of prisoner’s dilemma’s Nash Equilibrium.
To give students more clarity on cartels, Dr. Ranade discussed the case that the Builder’s Association of India bought against the cement industry claiming that they had secretly formed an illegal cartel. The defence provided by the cement industry consisted of various arguments from an economic point of view.
- First, the cement industry had 40 producers, which means that sustaining a cartel with would have been extremely difficult.
- Second, the output levels of these producers were at their highest levels, showing no signs of output restriction.
- Third, the fact that all the producers charged the same price was a sign of price-parallelism and not cartel formation.
Despite these and many other arguments, the CCI’s judgement was against the Cement Industry and it charged them a fine of ₹ 6000 crores. The cement industry in turn filed a case in the Supreme Court challenging this decision, and this case is still pending
2. Abuse of dominant position: The act forbids any abuse of power by a large firm to maximise its own welfare at the expense of the consumers’. An example of this would be Microsoft’s strategy to promote the usage of Internet Explorer by tampering with the functioning of other browsing soft wares on Windows devices. A complaint was made to the competition authority, and Microsoft ended up losing the case.
Although competition law seeks to list out clear norms for companies to ensure fair competition in the market, it does not account for some ambiguous practices that may lead to unfair competition. Thus, the essential takeaway from this discussion is this – It is unanimously agreed that fair competition is good for the market, and this “fairness” should be judged on the basis of a set of regulations prescribed by a competition law.
To conclude not every competitive strategy is black or white and the line between fair and unfair is very arbitrary and permeable.
Date(s) - 23/09/2015
3:00 pm - 5:00 pm