Types of Anti – competitive Agreements: Horizontal, Vertical and AAEC

Horizontal Agreements

Horizontal agreements are done between businesses that are on the same level of the production chain. These agreements are usually done among the large scale businesses in the market that would, under normal circumstances, compete with each other. However, they come to an agreement as to fixing a minimum price for the products, or to limit production to artificially drive up prices, or share the relevant market among themselves, etc. In this way, they can ensure that the customers are effectively deprived from the options that they would usually have, and the companies can continue to benefit from their lack of options. Horizontal agreements are provided for under Section 3(3) of the Competition Act, 2002, and the description specifically includes cartels

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The horizontal agreements between enterprises can be described as cartels. As per the definition of cartel, as provided under Section 2(c) of the Act, cartel includes “an association of producers, sellers, distributors, traders or service providers who, by agreement amongst themselves, limit, control or attempt to control the production, distribution, sale or price of, or, trade in goods or provision of services”. Even though the word cartel may instantly remind us of the infamous drug cartels of Spain and Mexico, any kind of horizontal agreement can be described as a cartel as long as they take part in certain anti – competitive practices, by deciding not to compete on price, product, or customers. Government departments may also be a part of such cartels.

The various types of horizontal agreements are:

  • Price Fixing: The horizontal agreements that are formulated to directly or indirectly determine the purchase or sale prices, would be this type of agreements. As the intention of competition is to provide the customers with the lowest possible price, this is a harmful anti – competitive practice.
  • Controlling: Another type of horizontal agreement may seek to control the business in various ways, by controlling production, supply, markets, technology, investment, or provisions.
  • Sharing: Some horizontal agreements that are formed to share the market, or source of production, or provision of services by sharing amongst themselves the  geographical area of market, or by the type of goods and services that each would sell, or by fixing a maximum number of customers that each would have, it would come under this category.
  • Bid Rigging: This kind of agreement only comes into play for cases where the process of business involves bidding. By forming anti – competitive agreements, the bidders may reduce competition in the process, or manipulate the bidding process.

Vertical Agreements

Vertical agreements, as the name suggests, are done among the players that are at different levels of the production chain. However, you might be thinking that there are certain kinds of agreements that the different level players in the production chain might need – for example, there could be an agreement between a seller and a distributor that the distributor would supply the necessary goods in a timely manner, as per the seller’s requirements. This is why vertical agreements are not considered to be prima facie illegal, and whether they are distorting competition, is decided via the rule of reason

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The Competition Act, 2002, provides for vertical agreements and its different types under Section 3(4). It provides a comprehensive definition of the same, and “Any agreement amongst enterprises or persons at different stages or levels of the production chain in different markets, in respect of production, supply, distribution, storage, sale or price of, or trade in goods or provision of services” falls under its purview. As per the Act, the different types of vertical agreements are:

  • Tie in arrangement: Under this agreement, as we saw in the Adidas example in the previous module, the seller forces the customers to compulsorily buy another product, while buying a different product.
  • Exclusive supply agreement: This kind of agreement happens when the purchaser is restricted from acquiring goods that are not of the seller – as in, the seller becomes the sole supplier of the product for the concerned customer.
  • Exclusive distribution agreement: This is slightly different from the previous scenario, as under this, an agreement is made to sell or not to sell a product in a specific pre-determined area.
  • Refusal to deal: This kind of agreement includes those which restrict certain people or classes of people, from selling or buying the concerned products.
  • Resale price maintenance: This agreement mandates the purchaser that if, he or she wishes to resale the product in a future time, a minimum price must be maintained as a resale value.

Appreciable Adverse Effect on Competition (AAEC)

The effect of anti – competitive agreements is measured by their appreciable adverse effect on competition or AAEC. For horizontal agreements, it is presumed that AAEC would be there, because there can be no logical reason for two competitors in the market to enter into an agreement. For that reason, in cases of horizontal agreements, it is enough to prove that the agreement was there – the existence of AAEC is presumed. However, the situation becomes tougher for vertical agreements, because as we discussed before, there can be certain agreements within the chain of supply which are not anti- competitive in nature. Thus, such agreements are not considered to be primarily illegal or causing AAEC, rather, the existence of AAEC needs to be proved separately. Now, we will discuss what are the important factors, based on which AAEC is assessed.

The Competition Act, 2002, provides under Section 19(3), as to which factors should be considered when deciding whether there is an appreciable adverse effect on competition or not. It provides that the CCI should take into account “any or all of these factors, namely:

  • Creation of barriers to new entrants in the market;
  • Driving existing competitors out of the market;
  • Foreclosure of competition by hindering entry into the market;
  • Accrual of benefits to consumers;
  • Improvements in production or distribution of goods or provision of services;
  • Promotion of technical, scientific and economic development by means of
  • production or distribution of goods or provision of services.”

If you notice, you will see that the first three points talk about the negative effects that might befall on competition in the market, while the next three talk about the positive effects. Thus, to analyse whether there is AAEC in the market due to the concerned agreement, both the harmful and beneficial effects of the same would need to be considered.

Case Law

In discussing the jurisprudential development on anti – competitive agreements, we can again turn to a case we have discussed in the previous modules, the case of Shri Shamsher Kataria v. Honda Siel Cars India Ltd. & Ors. As we have already discussed the facts of the case extensively before, I will only delve into the facts that are important  for this particular analysis. In this case, the various car companies including Honda, did not make their cars’ spare parts available in the open market. In fact, the companies had clauses in their agreements with the authorized dealers, that they must source these spare parts only from the companies directly, or from their authorized vendors.

The CCI firstly found that there were a number of vertical agreements between the car companies and the authorized dealers of the spare parts, for example, exclusive supply, exclusive distribution, and refusal to deal. However, as you already know, vertical agreements are not considered prima facie illegal and causing AAEC. Thus, an analysis was now required as to whether there was an AAEC in the concerned market.

You would remember that the CCI had found that there were virtually two relevant markets in this case – one market for the cars themselves, or primary products, and one aftermarket for the spare parts and other relevant materials and documents. The Commission found that due to such kind of agreements, once a customer bought a car from a company, it allowed the car companies to be monopolistic players in the aftermarket for their space products. This created entry barriers for new companies in the market for spare parts, and prevented independent service providers from entering the market. Thus, the car companies could now charge even the most exorbitant amount of prices for their spare parts, and due to the lack of competition and the lack of option for the customers, they would have to comply with the same.In this way, the CCI found that such vertical agreements had major distorting effects on competition in India, and they were found to be illegal.

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