Market Power under Competition Act

Market power is a pivotal concept under the Competition Act, 2002 (“the Act”) that helps regulate and maintain healthy competition in Indian markets. It plays a crucial role in analysing mergers, acquisitions, combinations, and anti-competitive practices. Market power essentially refers to the ability of an enterprise to influence prices or control the market in a way that restricts competition.

What is Market Power?

Market power can be broadly described as the ability of a firm to raise prices above the competitive level and maintain these prices without losing customers to competitors. It is also the power to act independently of other market players when making decisions related to pricing, output, or quality.

Market power is not inherently illegal. It often arises naturally through innovation, efficiency, or consumer preference for a firm’s product. However, when used to manipulate the market unfairly or exclude competitors, market power becomes a concern under the Competition Act.

Relevant Market: The Foundation for Market Power Analysis

Before assessing market power, it is essential to define the “relevant market”. This is crucial because market power is always assessed in relation to the market within which the enterprise operates.

Product Market

The product market consists of goods or services that consumers consider interchangeable based on characteristics, price, and intended use. For example, in the Indian telecom sector, mobile voice services might be considered a product market distinct from broadband internet services.

Geographic Market

The geographic market defines the area where the goods or services are traded and within which the conditions of competition are sufficiently homogeneous. For example, while the cement market may be national in scope, the market for fresh fruits may be local or regional due to perishability and transport costs.

Identifying the relevant product and geographic markets allows the CCI to determine which enterprises compete directly and the boundaries within which market power is to be measured.

Dominant Position: Legal Proxy for Market Power

Though the Competition Act does not explicitly define “market power”, it addresses the concept through the idea of “dominant position”. Under Section 4 of the Act, a dominant position means a firm enjoys such strength in the relevant market that it can influence competition and operate independently of competitors or customers.

In other words, dominant position legally reflects the presence of appreciable market power. This position, once established, subjects the enterprise to certain restrictions to prevent abuse.

How is Market Power Assessed?

The CCI adopts a holistic approach, considering multiple factors to assess market power or dominance. These factors include, but are not limited to:

• Market Share: A high market share (often over 50%) is a strong indication of market power, though context matters.
• Size and Resources: The financial strength, technological capability, and marketing reach of the enterprise can reinforce its power.
• Competitor Analysis: The number and strength of competitors in the market affect the degree of competitive constraint.
• Barriers to Entry: Regulatory hurdles, high capital requirements, technology patents, or brand loyalty that make it difficult for new firms to enter the market.
• Buyer Power: If buyers are large and capable of negotiating prices or switching suppliers easily, the firm’s market power is limited.
• Market Concentration: Measured by indices like CR4 (market share of top 4 firms) or HHI (Herfindahl-Hirschman Index), high concentration suggests potential market power.
• Vertical Integration: Control over supply chains or distribution networks strengthens the firm’s hold on the market.
• Switching Costs: High costs (financial, time, or effort) that consumers face when changing suppliers increase market power.
• Network Effects: In digital markets, the value of the product increases as more people use it, enhancing market power.

The CCI examines all these elements together to determine if the firm can act independently of market forces and competitors.

Market Power in Combination Control

One of the important roles of market power assessment is in the context of merger and acquisition (M&A) regulation. Under Sections 5 and 6 of the Act, certain mergers, acquisitions, and combinations must be notified to the CCI for approval.

The CCI evaluates whether the combination will result in a substantial increase in market power, potentially harming competition. The key considerations include:

• Post-merger Market Share: A significant increase in market share after the combination suggests enhanced market power.
• Change in Market Concentration: Using concentration ratios and HHI, the CCI analyses how the merger affects the competitive landscape.
• Effect on Barriers to Entry: The combination should not create or strengthen entry barriers for new competitors.
• Potential for Coordinated Effects: The merger should not facilitate collusion or reduce competitive pressure among remaining firms.

If the CCI finds that the combination would create or enhance market power that could lead to an appreciable adverse effect on competition (AAEC), it may impose conditions, require divestments, or block the combination altogether.

Market Power and Anti-Competitive Agreements

Market power also plays a significant role in investigating anti-competitive agreements under Section 3 of the Act. These agreements may be horizontal (between competitors) or vertical (between firms at different stages of production or distribution).

Firms with considerable market power may use agreements to:

• Fix prices collectively.
• Allocate markets or customers to reduce competition.
• Impose exclusive supply or distribution obligations that prevent rival entry.

Such agreements, when coupled with market power, may have an appreciable adverse effect on competition. Market power thus helps the CCI to identify the potential severity and impact of these agreements.

Abuse of Dominant Position: Market Power in Action

Once dominance is established, the Act prohibits abuse of that position. Abuse occurs when a dominant firm uses its market power to impose unfair conditions or restrict competition, harming consumers or other market players.

Common forms of abuse include:

• Predatory Pricing: Selling below cost to eliminate competitors.
• Excessive Pricing: Charging unfairly high prices not justified by costs.
• Tying and Bundling: Forcing consumers to buy an unwanted product as a condition to purchase another.
• Refusal to Deal: Denying essential inputs or access to market facilities to competitors.
• Limiting Production or Innovation: Restricting output or technological progress to suppress competition.

Market power is the enabling condition here. Without it, such conduct would not succeed or cause significant harm.

Market Power is Not Always Harmful

It is important to recognise that market power itself is not unlawful. It often results from legitimate business strategies such as innovation, superior quality, or efficiency.

Competition law is designed to ensure that such success does not cross the line into unfair practices. The mere possession of market power should not be punished; only its misuse to harm competition or consumers is prohibited.

Case Law and Regulatory Practice

Though Indian jurisprudence is still evolving, some key cases and CCI orders have helped clarify the approach towards market power:

• In the Reliance Jio 4G case, the CCI examined the telecom relevant market and network effects to assess dominance and market power.
• In cement cartel cases, the CCI analysed market concentration, entry barriers, and pricing patterns to find abuse of dominance.

These precedents underscore the need for careful market analysis and economic evidence in determining market power.

Conclusion

Market power is a foundational concept in the Competition Act, underpinning the regulation of mergers, anti-competitive agreements, and abuse of dominance. The CCI’s assessment involves defining the relevant market and weighing various economic and structural factors to ascertain whether a firm can act independently of competition.