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The author is Chaitanya Vohra, a third-year student at Rajiv Gandhi National University of Law, Punjab.
Introduction
In order to effectively prove the charge of cartelization, one needs to satisfy the requirements provided in Section 3(3) of the Competition Act, 2002 (“Act”), which in turn vests the statutory presumption to have an appreciable adverse effect on competition and the power of Competition Commission of India (“CCI”) to inquire into such agreements under Section 19(3) of the Act. Another paramount factor in these matters can be the wide scope and application of Section 2(b) of the Act which defines “agreement” into an understanding, arrangement or a concerted action. Additionally, cartels are defined under Section 2(c) of the Act and the legal ramifications of such formation includes a hefty penalty, as illustrated in Section 27 of the Act. Therefore, CCI ensures that cartels are not formed in the market, with a view to promote healthy competition and avoid elements which are anti-competitive in nature. It is pertinent to note that such anti-competitive agreements such as cartels can only function if majority of the players in a certain market are a part of it, as highlighted in Anti-competitive Conduct in the Paper Manufacturing Industry v. Banwari Paper Mills Ltd. This article effectively studies the conduct of the firms in cases of pricing strategies, which has the capability to serve as a circumstantial evidence for formation of cartels, as relied in Rajasthan Cylinders & Containers Ltd. v. Union of India. Thus, the conduct of the firm in pricing its goods or services can be indicative of a cartel if it is found to be absurd in nature, and far from the normal competitive behaviour.
However, when oligopoly exists in a certain sector, it is strenuous to decipher whether the pricing strategies of the firms are absurd since the prices are interdependent in nature, thereby creating a thin line of difference between proving price fixation and mere existence of price parallelism, due to the price rigid nature of such markets. In order to simplify the concept of pricing strategy, an effective analogy may be drawn with the concept of Nash Equilibrium. Hence, this article provides a juridico-economic analysis of price collusion as an indicator of cartelization.
Nash Equilibrium in Oligopolistic Pricing: A Game-Theoretic Lens on Cartel Behaviour
Nash equilibrium is an economic theory set up in the non-cooperative environment, akin to the independent conduct of firms in the market. In this concept, an example is drawn whereby two prisoners are inculpated for a crime and asked to confess. The consequences vary depending upon their action to confess or not confess coupled with other prisoner’s action to confess or not confess. If one of them confesses and the other is mute, the one with his testimony will be freed and the other will receive a severe sentence. If they both confess, they give them both a less severe sentence. If neither of them admits the crime, then they will both end up doing minimal sentences. Both the prisoners choose confessing as they think about their best interests, therefore giving up the possibility of having minimal sentence. An analogical analysis is done in an article which states that the concept of Nash Equilibrium applies to firms in an oligopoly as well, whereby they price their products in their own best interests. Having an absurd and non-competitive behaviour amounts to choosing to not confess in case of prisoners, with the mutual knowledge that other players would not confess as well. Thus, this is highly indicative of a formation of cartel, as it amounts to having higher order knowledge amongst the parties to collusion.
Price Rigidity as a Circumstantial Evidence for Collusion
It is pertinent to note that evidence for cartelization can be direct or circumstantial in nature. However, it is very rare to find direct evidence indicative of a cartel due to the obvious maintenance of secrecy between the culprits. In such cases, circumstantial evidence comes in handy to support the allegations of cartelization, as held in Shri Surinder Bhakoo v. The HDFC Bank Ltd.
Price rigidity is an economic concept, which highlights towards the rigid or sticky nature of price, such that they do not conform to the normal reciprocation to the market conditions and it is said to be an inherent nature of oligopoly with the view to ensure stability. In All India Tyre Dealers Federation v. Tyre Manufacturers, a standard was relied upon whereby price parallelism must be accompanied with the presence of plus factors in order to establish cartelization. These plus factors included price cost trend analysis, capacity utilization, cost of sales, sales realization and margin, analysis of net dealer price and margin, higher operating profits and return on capital employed, market share and the conduct of the firm. While such an analysis brings clarity to the thin line between price parallelism and collusion, it may not be effective at all times, hence the case inviting preliminary suspicion and not conclusive enough to prove collusion. There are various nuances in these factors, which prima facie may invite suspicion of cartelization, but upon deeper dive, may be totally reliant on underlying complex economic concepts. For example, large accumulation of profits on account of efficiency of the firm and low costs does not amount to price fixation. Another example can be the usage of software programs to predict demands amongst airline companies to mark their prices, resulting in similar pricing but independent behaviour, thereby not being liable for formation of cartels.
Conclusion
Hence, the whole mystery boils down to the clash of concepts of independent action and concerted action. The problem with oligopoly is that rarely any action of the market player amounts to being an independent one, but rather interdependent, making the task of deciphering upon the matter altogether more challenging. While a simple approach to identify an absurd behaviour on part of alleged parties may help, it is pertinent to note that the concept of absurdism is itself subjective in nature, and essentially in this case, surrounded with plethora of economic factors. Therefore, a meticulous analysis into the cause-effect relationship of each factor is needed to be carried out by economists, with the view to clear the sky of justice.
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