Buyers’ Cartels in Indian Competition Law: Is it Time?

[Adyasha Samal is a student at the Hidayatullah National Law University]

On 20 February 2020, the Ministry of Corporate affairs sought public comments on the Competition (Amendment) Bill 2020, which proposes sweeping substantive and procedural changes to the Competition Act 2002 (the “Act”). Among these is the significant inclusion of buyers’ cartels within the definition of cartels in section 2(i), thus expanding the scope of the Act to anti-competitive agreements between buyers. This post attempts to conceptualise buyers’ cartels, assess their impact on competition, analyse the position of buyers’ cartels in India as well as other jurisdictions and argue in favour of their penalization.

Understanding Buyers’ Cartels

A buyers’ cartel refers to a group of buyers who agree to fix purchase prices or to eliminate competition with respect to such purchases or otherwise control supplier conduct. Such collusion may occur either at the end-consumer level or at other stages of production between commercial buyers. While cartelization among sellers has been termed a per se violation, i.e., where appreciable adverse effect on competition (“AAEC”) is presumed under section 3(3) of the Act without the requirement to prove any negative effects on competition, buyers’ cartels present a relatively complex situation before lawmakers. One reason is that they are difficult to identify, especially when sought to be distinguished from buyers’ groups.  

Buyers’ Cartels vs. Buyers’ Groups

Buyers’ groups are those that integrate their purchasing activity for market benefits. Like buyers’ cartels, these groups act in concert, but the objective of a buyers’ group is to avail the benefits of a joint enterprise such as reduced transaction costs, per unit costs, protection against defective products, and the like. On the other hand, buyers’ cartels only coordinate their purchases to overpower sellers, restricting competition. Demarcating the two often becomes an intractable task, thereby necessitating a case-by-case approach.

How Buyers’ Cartels Affect Competition

A greater conundrum faced by regulators is whether buyers’ cartels actually hinder competition at all. Some scholars argue that by passing forward the benefits of lowered prices to consumers, buyers’ cartels actually facilitate consumer welfare. However, this cannot be ascertained, and it is particularly unlikely, in cases where commodities are purchased in narrow buying markets and products are sold in wider, competitive markets. Further, when profits made on a commodity are reduced, there is low incentive for production, leading to decline in total output. Consequently, the final product available for consumers reduces while its price rises.

Buyers’ cartels deprive sellers of the rewards they could receive in a competitive market, thereby defeating the very purpose of competition law. At times when the buyers constitute a substantial part of the resale market as well, the buyers’ cartel may even morph into a sellers’ cartel on the selling side of the market.

Buyers Cartels in India

The Competition Act 2002 is based on the recommendations of the Raghavan Committee Report, which emphasized the prevention of concentration in market power as one of its end goals. While the Act does not explicitly use the term ‘buyer’, it can be argued that the legislative intent is to include buyers’ cartels, as the prohibitions against anticompetitive agreements are wide enough to accommodate them. Section 3(1) allows for ‘acquisition’ to be a possible subject matter of such an agreement. This inference is supported by section 3(3) which classifies fixing of ‘purchase’ prices and ‘collusive bidding’ as horizontal agreements that raise a presumption of AAEC.

The Competition Commission of India (“CCI”), however, has preferred a restrictive interpretation of the Act. In Pandrol Rahee Technologies v. DMRC Ltd, where it was argued that DMRC had colluded with other Metro Rail Corporations for purchase of rail fastening systems, the CCI observed that ‘acquisition’ means acquisition with respect to an enterprise, which excludes the purchasing activity of a consumer. In XYZ v. Indian Oil Corporation, the CCI held that buyers’ cartels cannot be treated at par with sellers’ cartels, denying the former a place in the law.

Position under EU and US Law

Since the US Supreme Court’s decision in Mandeville Island Farms v. American Crystal Sugar, the US courts have treated buyers’ cartels as per se illegal under the Sherman Act. Predatory bidding is also specifically outlawed. US law allows certain exemptions to buyer groups such as farm and fishing cooperatives, permitting them to engage in collective bargaining on an industry-wide basis.

Article 101(1)(a) of the Treaty on the Functioning of the European Union expressly prohibits agreements that directly or indirectly fix purchase prices, thereby preventing, restricting or distorting competition. In Raw Tobacco Italy, the European Commission condemned purchasing cartels as detrimental to consumer welfare. In BNIC v. Clair, the European Court of Justice held that it is unnecessary to take into account actual effects of an agreement fixing a minimum purchase price, as its natural object is to restrict, prevent or distort competition. EU Law also holds a buyer liable for abuse of dominant position.

Conclusion

While buyers’ cartels are more likely to be formed in oligopsonistic markets, where cooperation among the few buyers can achieve purchase price levels below competitive equilibrium, studies show that buyers’ cartels in fact are more common than sellers’ cartels. Faced with international consensus in favour of treating buyers’ cartels at par with sellers’ cartels, the CCI’s reluctance in expanding liability to buyers can be attributed to a general protectionist approach adopted by Indian courts towards consumers that holds consumer choice sacrosanct. Impleading buyers for attempting to consolidate market power seemingly penalizes consumer choices and risks liability upon legitimate buyers’ groups.

The Competition (Amendment) Bill 2020, drafted according to the recommendations of the Competition Law Review Committee Report 2019, proposes to make cartelization by buyers a per se offence. While, unlike the US and the EU, the recognition does not extend to abuse of dominance by buyers, the broad provisions of section 4 remain open for interpretation. By protecting the interests of sellers against monopsonistic forces, the recognition of buyers’ cartels attunes the law to the competitive realities of the market and aligns it with the legislative vision. It brings necessary balance to the law by protecting all stakeholders in the market, prevents distortion of incentives and misallocation of economic rewards, and preserves the free market structure.

Adyasha Samal

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