Price Parallelism in Bid Rigging Arrangements

[Gunjan Garg is a 3rd year B.A LLB (Hons.) student of National Law Institute University, Bhopal]

The Indian Competition Act in section 3 deals with ‘anti-competitive agreements’ which gives the Competition Commission of India (“CCI”) the power to prohibit any agreement between enterprises or persons engaged in identical or similar trade of goods and services, directly or indirectly resulting in bid rigging or collusive bidding. Since these agreements are said to be non-competitive and have appreciable adverse effect on competition, they are void. To determine whether any agreement has appreciable adverse effect on competition, factors like creation of barriers to new entrants in the market and foreclosure of competition by hindering entry into the market should be taken into account.[1]

One such anti-competitive agreement having appreciable adverse effect on competition and often found to exist within the realm of bid rigging is ‘price parallelism’. Price parallelism is defined as a practice where there are “changes in prices by rivals that are identical, or nearly so, and simultaneous, or nearly so. It includes other forms of parallel conduct, such as capacity reductions, adoption of standardized terms of sale, and suspicious bidding patterns, e.g., a predictable rotation of winning bidders”.[2]This is considered anti-competitive as it results in monopolistic pricing of goods and restricts new players from entering the market. Often referred to as concerted practice in European jurisprudence, it refers to a form of coordination between undertakings by which, without it having reached the stage where an agreement properly so-called has been concluded, practical cooperation between them is knowingly substituted for the risks of competition.[3]

In a recent Supreme Court judgment of Rajasthan Cylinders and Containers Ltd. v. Union of India (1 October 2018)as many as 45 appeals were filed against the orders of the Competition Appellate Tribunal (“COMPAT”) and the CCI’s concerning bid rigging violations by suppliers of liquefied petroleum gas (LPG) cylinders. The COMPAT, by the said judgment upholding the findings of the CCI, opined that the appellants/suppliers of LPG cylinders to the Indian Oil Corporation Ltd. (“IOCL”) by submitting identical bids had indulged in cartelization, thereby influencing and rigging the prices. This violated the provisions of section 3(3)(d) of the Competition Act, 2002 resulting in the imposition of severe penalties by CCI in the form of fines under section 27 of the Act.

Facts and Decision

It was alleged that the suppliers despite varying costs had submitted identical bids. Additionally, there existed an active trade association of the appellants which had met in Mumbai just before submission of the tenders.The products were identical with few or no substitutes and no significant technological changes. Further, there were a small number of suppliers with few new entrants.All these facts persuaded the CCI as to the existence of collusive bidding.

The Supreme Court looked at the flip side of the coin and noticed that there were only few suppliers of cylinders. The buyers were also limited to three, including IOCL, Bharat Petroleum Corporation Limited (“BPCL”) and Hindustan Petroleum Corporation Limited (“HPCL”). Due to lack of buyers, the appellants could not sell the goods to any other entity apart from the above three. This acted as a disincentive for other suppliers from entering into the market. Moreover, it was clear that the price of the bids was internally regulated by IOCL and the control remained with IOCL.

The Supreme Court in this regard analyzed the market conditions and noted that in an oligopsony there existed only a few buyers. The other condition for the existence of oligopsony is whether the buyers have some influence over the price of their inputs. It is also to be seen whether the seller has any ability to raise prices or it stood reduced/eliminated by the aforesaid buyers.

The Court stated that “in a situation of oligopsony, price parallelism would not lead to the conclusion that there was a concerted practice. There has to be other credible and corroborative evidence to show that in an oligopoly, a reduction in price would swiftly attract the customers of the other two or three rivals, the effect upon whom would be so devastating that they would have to react by matching the cut” (para 96). Similarly, the “theory of oligopolistic interdependence” states that an oligopoly cannot increase its price unilaterally because it would be deserted by its customers if it did so. Thus, the theory runs that in an oligopolistic market rivals are interdependent: they are acutely aware of each other’s presence and are bound to match one another’s marketing strategy. The result is that price competition between them will be minimal or non-existent; oligopoly produces non-competitive stability.[4]

InImperial Chemical Industries Ltd. v. Commission of the European Communities (1972), the European Court held that parallel behaviour does not, by itself, amount to a concerted practice, though it may provide a strong evidence of such a practice. However, before such an inference is drawn it has to be seen that this parallel behaviour has led to conditions of competition which do not correspond to the normal conditions of the market, having regard to the nature of the products, size and volume of the undertaking of the said market.

The practice of collusive tendering flowing from price parallelism was earlier discussed by the Supreme Court in Excel Crop Care Ltd. v. CCI, (2017) 8 SCC 47, where collusive tendering was defined as a practice whereby firms agree amongst themselves to collaborate over their response to invitations to tender. The main purpose for such collusive tendering is the need to concert their bargaining power, though such a collusive tendering has other benefits apart from the fact that it can lead to higher prices. The Court held that “in an oligopoly, parallel behaviour may not, by itself, amount to a concerted practice”.

Standard of Proof

In situations of price parallelism in bid rigging arrangements, there is often no direct evidence (such as proof of formal concluded agreement) available as these practices take place behind closed doors. Therefore, Indian courts often rely on circumstantial evidence to establish such anti-competitive practices.[5]In one such case, it was established that if indicators show practical cooperation between the parties which knowingly substituted the risk of competition, that would amount to anti-competitive practices.[6]The test formulated in the case of Excel Care Groupto determine the existence of such collusive concerted practice concerned with taking the contested evidence into account as a whole, not in isolation along with consideration being given to the specific features of the products in question.

Another test adopted by the Indian courts was from the US case of Monsanto Co v.Spray-Rite Service Corp., 465 U.S. 752 (1984), which established that there must be direct or circumstantial evidence that reasonably tends to prove that the manufacturer and others had a conscious commitment to a common scheme designed to achieve an unlawful objective. However, contradictorily, another classic case where price parallelism was identified and penalized by CCI was the cement cartel case.[7]The CCI relying on the report of Director General found price parallelism as the primary indicator of the existence of a cartel among the cement manufacturers without giving any detailed analysis to identify price parallelism.

Conclusion

The Supreme Court through the judgment under discussion established the need to determine the existence of anti-competitive practices not just objectively, but subjectively as well, cumulatively taking into account all relevant factors influencing price parallelism including prevailing market conditions. This judgement is significant as it settles the position of law regarding analysis of factors as circumstantial evidence of agreement under anti-trust law. This is in line with the Competition Act’s preamble to eliminate practices having adverse effect on the competition, as well as to promote and sustain competition in the market. Though this order establishes high standard of proof for showing anti-competitive behavior, it will act as a serious deterrent for bidders taking advantage of price parallelism to just land bids/orders in their favor. 

Gunjan Garg

[1] Section 19(3) of the Competition Act, 2002.  

[2] Para 2.1 of OECD Policy Roundtables on “Prosecuting Cartels Without Direct Evidence (2006)”.

[3] Para 60 of Guidelines on the Applicability of Article 101 of the Treaty on the Functioning of the E.U. to Horizontal Cooperation Agreements [Official Journal C 11 of 14.1.2011].

[4] Richard Whish & David Bailey, Competition Law177 (Oxford University Press 9thed. 2018)

[5] Western Coalfields Limited Coal Estatev. SSV Coal Carriers Private Limited and Ors.(Case No. 34 of 2015); India Glycols Ltd. v. Indian Sugar Mills Association and Ors.(Case No. 21 of 2013). 

[6] Paras 44, 45 of CCI v. Coordination Committee of Artistes and Technicians of West Bengal Film and Television & Ors. (Civil Appeal No. 6691 of 2014).

[7] In Re Builder’s Association of India v. Cement Manufacturers’ Association and Ors.(Case No. 29 of 2010).

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