The Values behind Competition Law: Consumer Welfare, Efficiency, Freedom of Trade and Globalisation

Competition law is unusual among legal subjects in that its standards come from outside the law. Whether a practice is lawful depends on its effect on a market, and what counts as a bad effect depends on what the law is for. Four answers are given, and the Indian preamble adopts three of them at once: the welfare of consumers, the efficiency of the economy, and the freedom of trade of other participants. The fourth consideration, the effect of an open economy on all three, runs through the modern practice of the subject.

1. Consumer Welfare

Consumer welfare is the object that most competition systems treat as decisive, and the preamble lists the protection of the interests of consumers among the purposes of the Act. It means something particular in this subject, and confusing it with the consumer protection sense is the commonest error in writing on the topic. Here it is aggregate and structural. The question is not whether a particular buyer was treated unfairly by a particular seller, but whether buyers as a class are better or worse off because of what has happened to the market: lower or higher prices, more or less output, better or worse quality, wider or narrower choice.

The standard appears in the statute in three places. Section 18 states the duty of the Commission to protect the interests of consumers. Section 19(3), in listing the factors relevant to an appreciable adverse effect, includes the accrual of benefits to consumers, improvements in production or distribution of goods or provision of services, and the promotion of technical, scientific and economic development, which are the beneficial factors weighed against the harmful ones. And Section 4 describes several abuses by reference to prejudice to consumers, such as limiting production or technical development to the prejudice of consumers.

2. Economic Efficiency

Efficiency is the economic value that competition is said to produce, and it comes in three forms, each of which appears in competition arguments in a different way.

1. Allocative efficiency. Resources go to the uses that buyers value most, which happens when price approaches marginal cost. A cartel or a dominant firm that raises price above that level causes output to fall below what buyers would have taken, and the loss to society from the transactions that never happen is the classic harm of monopoly. It is the loss no one captures, which is why it is harm rather than mere transfer.
2. Productive efficiency. Goods and services are produced at the lowest attainable cost. Competition pushes firms towards it, since a firm with higher costs than its rivals loses business; protection from competition allows costs to drift upward, which is the phenomenon sometimes described as the quiet life of the monopolist.
3. Dynamic efficiency. Innovation and improvement over time. This is the efficiency most often relied on to defend conduct, because investment in innovation requires an expectation of reward, and an exclusive arrangement may be the means by which that reward is secured. It is also the efficiency about which economists are least certain, since the relationship between market structure and the rate of innovation is contested.

Indian law has no separate efficiency defence of the kind found in Article 101(3) of the European treaty, under which an agreement may be exempted if it contributes to improving production or distribution or to promoting technical or economic progress while allowing consumers a fair share of the benefit and imposing no indispensable restriction. The Indian statute instead folds the same considerations into the balancing exercise. Section 19(3) requires the Commission to have due regard to all or any of the listed factors, of which the first three are harmful, being the creation of barriers to new entrants, the driving of existing competitors out of the market, and foreclosure of competition by hindering entry, and the last three are beneficial, being accrual of benefits to consumers, improvements in production or distribution, and the promotion of technical, scientific and economic development. Efficiency therefore enters as a factor to be weighed rather than as a defence to be established.

3. Freedom of Trade

The fourth object in the preamble is to ensure freedom of trade carried on by other participants in markets in India. It is the object with the longest Indian pedigree, since it descends from the concern with the concentration of economic power that produced the MRTP Act, and it is the one that most clearly distinguishes the Indian statute from a purely welfare-based system.

Its practical significance is that the Act protects the ability of other firms to participate in the market, which is not the same as protecting those firms. A refusal by a dominant firm to supply an essential input, or a denial of market access under Section 4(2)(c), harms competition precisely because it removes the freedom of others to trade, and it is actionable on that basis even where the immediate effect on price is not demonstrated. The caution to keep alongside it is the one stated at the outset of this subject: the object is the freedom to participate, not a guarantee of survival, and a firm that fails because it is outperformed has lost nothing the Act protects.

4. Article 19(1)(g)

Article 19(1)(g) guarantees to all citizens the right to practise any profession or to carry on any occupation, trade or business, and Article 19(6) permits the State to impose reasonable restrictions on that right in the interests of the general public. Competition law engages both limbs, and the relationship runs in two directions.

• As a restriction. The Act restricts what an enterprise may agree to, what a dominant firm may do and what transactions may be completed. Those restrictions are defended under Article 19(6) as reasonable and in the interests of the general public, the general public interest being the maintenance of competitive markets. The Act's procedural safeguards, the requirement of a hearing before an adverse order, the reasoned order, the appeal to a judicial tribunal and the further appeal to the Supreme Court, are what make the restriction reasonable in the constitutional sense.
• As a protection. The freedom of trade of other participants, which the preamble states as an object, is the Article 19(1)(g) freedom of those participants. A cartel that excludes a new entrant, or a dominant firm that denies access to a distribution network, restricts that freedom as effectively as a statute would, and the Act is the mechanism by which such private restrictions are removed.

Two further constitutional points arise. The first is the separation of powers, which was the issue in Brahm Dutt v. Union of India, (2005) 2 SCC 431 and which the amendment of 2007 resolved by separating the expert regulator from the judicial appellate tribunal. The second is the relationship with Section 27 of the Indian Contract Act, 1872, under which an agreement in restraint of trade is void. The two provisions overlap but are not the same: Section 27 protects the party restrained and makes the agreement unenforceable between the parties, whereas Section 3 protects the market and makes the agreement void and the parties liable to penalty. An agreement may be valid between the parties under the general law of contract and still be a contravention of the Competition Act, and the reverse is also possible.

5. Globalisation

An open economy changes competition law in three ways, and all three are visible in the Indian statute.

1. Conduct abroad affects Indian markets. Section 32 permits the Commission to inquire into an agreement made outside India, a party outside India, an enterprise abroad or a combination abroad, where the conduct has or is likely to have an appreciable adverse effect on competition in a relevant market in India, and to pass such orders as it may deem fit. This is the effects doctrine in statutory form, and it is the provision under which an international cartel in a raw material or a component supplied to Indian industry is reached.
2. Transactions abroad change Indian market structure. A merger between two foreign firms may reduce the number of suppliers to an Indian market from three to two. The combination provisions therefore extend to transactions taking place outside India, subject to the thresholds and, since 2023, to the requirement of substantial business operations in India.
3. Enforcement has become plural. The same merger may be reviewed by several authorities and the same cartel investigated by several regulators, which produces coordination on timing, waivers of confidentiality by the parties so that agencies can discuss a case, and cooperation arrangements between authorities. It also produces the practical problem of inconsistent remedies, where one authority permits a transaction on conditions another does not accept.

Against those effects must be set the discipline that openness itself provides. Imports constrain domestic market power more effectively than any enforcement action, which is why Section 19(3) requires the Commission to consider barriers to entry and why the assessment of dominance under Section 19(4) includes the countervailing buying power and the market structure and size of the market. A protective tariff can create the very market position that an abuse of dominance case is later brought to correct, which returns the argument to the distinction between competition policy and competition law.

6. How the Values Are Used in Practice

A well-constructed argument in a competition case names the value it relies on and connects it to a statutory factor. A complaint about a cartel is a consumer welfare and allocative efficiency argument, and it is made through the presumption in Section 3(3). A defence of an exclusive distribution arrangement is a dynamic efficiency argument, and it is made through the beneficial factors in Section 19(3). A complaint about denial of access to a network is a freedom of trade argument, and it is made through Section 4(2)(c). A defence of a merger on the ground of cost savings is a productive efficiency argument and is made through Section 20(4). The values are not decoration; they tell you which factor in the statute to argue.

7. Related Topics and Provisions