Horizontal agreements are pivotal in shaping the competitive landscape of markets and businesses, influencing how competitors interact. Under the Indian Competition Act, these agreements are subject to scrutiny to ensure fair competition and prevent anti-competitive practices that may harm consumers and hinder market efficiency.
This article delves into horizontal agreements under the Indian Competition Act, exploring their significance, types, enforcement, and exceptions. Understanding the implications of such agreements is crucial in fostering a level playing field and promoting a healthy and competitive business environment in India.
What Is a Horizontal Agreement?
A horizontal agreement is an agreement, arrangement, or understanding between two or more competing businesses operating at the same production or distribution chain level. These agreements are typically anti-competitive as they involve collusion among competitors, aiming to restrict competition and gain unfair advantages in the market.
Horizontal agreements are defined under section 3(3) of the Indian Competition Act, 2002. This section specifically deals with anti-competitive agreements among enterprises at the same production or distribution chain level.
For example, let’s consider a scenario where two leading mobile phone manufacturers, Company X and Company Y, decide to enter into a horizontal agreement to fix the prices of their smartphones in the market. They agree to set a minimum price at which they will sell their latest smartphone models. By doing so, they eliminate price competition, ensuring that consumers have limited options and no lower-priced alternatives. This horizontal agreement between Company X and Company Y is detrimental to consumers and other competitors in the market. It results in artificially inflated prices, preventing customers from enjoying the benefits of price competition and reduced choices.
Related Law Note: What Are Vertical Agreements?
Types of Horizontal Agreements
Here are four important kinds of horizontal agreements that you should know about:
1. Price Fixing
This type of horizontal agreement involves competitors agreeing to set prices at a certain level or to maintain price levels within a specific range. Price fixing eliminates competitive pricing and can lead to artificially inflated prices, ultimately harming consumers and reducing market competition.
2. Market Allocation
In a market allocation agreement, competitors divide the market among themselves, agreeing not to compete with each other in specific geographic areas or for particular customer segments. This division restricts consumer choice and hinders free and fair competition.
3. Bid Rigging
Bid rigging occurs when competitors conspire to manipulate the bidding process in public tenders or auctions. They may agree to submit non-competitive bids or designate a particular bidder to win the contract. Bid rigging distorts procurement, leading to unfair advantages for certain businesses.
4. Output Restrictions
In this type of horizontal agreement, competitors limit their production or output levels to artificially control supply and demand in the market. By restricting output, competitors can maintain higher prices, reducing competition and consumer welfare.
Prohibition and Enforcement of Horizontal Agreements
Under the Indian Competition Act of 2002, horizontal agreements that have an appreciable adverse effect on competition in India are considered anti-competitive and prohibited.
Section 3 of the Competition Act specifically deals with anti-competitive agreements, including horizontal agreements, and aims to maintain fair competition in the market.
CCI
The Competition Commission of India (CCI) is the regulatory authority responsible for enforcing the provisions of the Act and ensuring compliance with competition laws. The CCI actively monitors and investigates cases of potential anti-competitive behaviour, including horizontal agreements, to protect the interests of consumers and promote a competitive market environment.
Actions the CCI can take
If the Competition Commission of India finds that a horizontal agreement violates the Act, it can take several enforcement actions, including the following five actions:
- Imposing Fines: The CCI can impose substantial fines on the enterprises involved in the anti-competitive agreement. These fines are aimed at deterring anti-competitive practices and ensuring compliance with competition laws.
- Cease and Desist Orders: The CCI may issue cease and desist orders, directing the parties to stop their anti-competitive activities immediately. This ensures that the anti-competitive behaviour is halted promptly.
- Inquiry and Investigations: The CCI has the authority to conduct detailed inquiries and investigations to gather evidence and establish the extent of anti-competitive practices involved in the horizontal agreement.
- Penalties on Individuals: Besides fines on the enterprises, the Act empowers the CCI to impose penalties on individuals involved in orchestrating the anti-competitive agreement.
- Leniency Provisions: The Act includes leniency provisions that encourage businesses to self-report their involvement in anti-competitive practices. The first enterprise to disclose such activities may receive reduced penalties or immunity from fines.
Appreciable Adverse Effect on Competition
AAEC (Appreciable Adverse Effect on Competition) refers to the negative impact of such agreements on market competition. When competitors collude and enter into horizontal agreements, it can harm competition, adversely affecting consumers, other businesses, and the overall market.
For example, consider two rival pharmaceutical companies that manufacture a specific type of medication. If they enter into a horizontal agreement to fix the prices of their products or allocate specific market territories, it restricts competition between them. As a result, consumers may face higher prices for the medication, reduced choices, and limited access to alternative products.
Such horizontal agreements that have an AAEC are considered anti-competitive and are prohibited under competition laws. The Competition Commission of India (CCI) closely examines such agreements to determine whether they harm competition and consumer welfare significantly.
Exceptions and Exemptions of Horizontal Agreements
While horizontal agreements are generally considered anti-competitive and prohibited under the Indian Competition Act, 2002, there are certain exceptions and exemptions where such agreements may be permitted, some of them are:
- Agreements with Pro-Competitive Effects: Certain horizontal agreements that enhance economic efficiency, technological progress, or promote innovation may be exempted from the Act’s prohibition. These agreements are considered pro-competitive and are unlikely to harm competition.
- Joint Ventures and Collaborative Agreements: Horizontal agreements that are part of legitimate joint ventures or collaborative agreements may be exempted from the Act. These agreements are typically formed to achieve specific business objectives and may enhance competition and consumer welfare.
- Research and Development Agreements: Agreements between competitors aimed at research and development activities that lead to product innovation and technological advancement may be exempted from the Act. Such agreements are seen as fostering innovation and benefiting consumers.
Conclusion
Horizontal agreements are closely monitored and regulated under the Indian Competition Act of 2002 to ensure fair competition and protect consumer interests. While most such agreements are prohibited due to their potential adverse effects on the market, exemptions are provided for pro-competitive agreements that promote innovation and economic efficiency.
The effective enforcement of competition laws strikes a balance between fostering healthy competition and preventing anti-competitive practices, ultimately benefiting consumers and the overall economy.
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