EVOLUTION FROM CONSCIOUS PARALLELISM TO CONSCIOUS PARALLELISM PLUS: US PERSPECTIVE
Conscious parallelism is behaviour commonly observed in an oligopolistic market. This can be attributed to the competitive nature of the market and the homogenous nature of products. Considering conscious parallelism finds economic justification, competition law requires factors other than identical price movement to establish anti-competitive practice. These are known as ‘plus factors’.
Competition law regimes, around the world (including developed ones like US and UK, and developing ones like India) treat agreement among rival firms as a serious offence. Such agreements violate the principles of a free market. Central to punishing collusion is the definition and proof of concerted action. Investigative agencies undertake comprehensive market analysis to establish the same. Thought the general rule allows a firm to set its prices as high as it likes,[1]but if it colludes with its competitors to hike the price, it would be liable for engaging in anti-competitive behaviour and will be penalized accordingly.
However in the case of an oligopoly, firms are mutually interdependent.[2] Firms understand that they are players in a repeated game and hence act accordingly. In other words it is absolutely normal for one firm in an oligopoly to change its prices while following a price increase undertaken by another firm.[3] This had been termed “conscious parallelism”. Since price of a substitute product is likely to have repercussion on one’s own product, it is only commercial wise for firms to be conscious of competitors’ market behaviour, hence a pattern of parallel pricing. Thus, it is now understood that parallel movement cannot be the sole determining factor of anti-competitive behaviour. Thus the price competition between them will be minimal and the result would be non-competitive stability.[4]
In the US, the Supreme Court has stated that though facts of an agreement can be established by circumstantial evidence, this standard for evidence has to be “conscious parallelism plus”.[5] This means that a plaintiff alleging anti-competitive behaviour must establish some plus factor other than mere conscious parallelism. Plus factors are economic actions and outcomes, above and beyond parallel conduct by oligopolistic firms that are largely inconsistent with unilateral conduct but largely consistent with explicitly coordinated action.[6]Broadly, the major plus factors that are looked into are:
Actions contrary to each defendant’s self-interest unless pursued as part of a collective plan.
Phenomena that can be explained rationally only as the result of concerted action.
Evidence that the defendants created the opportunity for regular communication.
Industry performance data, such as extraordinary profits, that suggest successful coordination.
The absence of a plausible, legitimate business rationale for suspicious conductor the presentation of contrived rationales for certain conduct (such as certain communications with rivals).[7]
ANALYSIS - BUILDERS' ASSOCIATION V CMA & ATHRS[8]
General Overview:
In this case, CCI was looking at cartelisation in the cement industry. Cartelisation of the cement industry was alleged for three major reasons. Firstly, there was under capacity utilisation of the manufacturing plants of the producers despite sufficient demand. Secondly, there was an increase in the prices in all the five zones that the market was divided into. There was correlation in the increase in price in all the zones despite there being a difference in the costs involved in each. Despite under capacity utilisation, firms were experiencing super normal profits. Thirdly, even under the Monopolies and Restrictive Trade Practices Act (MRTP Act), 1969 cement manufacturers had been guilty of engaging in cartel-like behaviour. Hence, there were historical underpinnings to the current allegations.
This case relied on circumstantial evidence to prove the existence of a cartel. The Director General of Investigation (DGI) in his report (DG report) established that price parallelism existed not only because of the oligopolistic market and the homogenous product but due to the concerted action undertaken by all the players in the market. Additionally, the Commission explicitly held that the underutilisation of capacity was a plus factor. In this part, I also look at the other factors that the DGI considered and the CCI addressed and in order to determine whether or not they would constitute as plus factors.
Understanding Agreement:
It was argued by the Cement Manufacturers’ Association and the other manufacturers that the DGI’s Report had not been able to establish the existence of an agreement which was a pre-requisite to establish the contravention of Section 3 of the Competition Act, 2002 (the Act). Analysing the definition of agreement in section 2(b)[9], the Commission observed that the Act did not require an explicit, formal or legally enforceable agreement. In the cases of conspiracy or existence of any anticompetitive agreement, proof of formal agreement is usually not available as no formal contractual arrangement is entered into and certainly not public knowledge. Thus, the concerted action may be established by circumstantial evidence alone.
Even academically, it has been argued that it is not the formal nature of the agreement that is of the relevance. The following characteristics establish the existence of an agreement:
A sense of commitment in the minds of the agreeing parties. Such commitment is evident in those cases were the parties have made efforts to suppress competition.
An assurance as to what the other agreeing parties are going to be doing in the future. An agreement imports some plan of action.[10]
Establishing Price Collusion amongst the members of CMA:
This part looks into the relevant findings of the DG report with regard to price collusion. It should be noted that though price parallelism finds economic justification, price collusion would suggest the formation of a cartel.
The report observed that cement was not priced competitively and that manufacturers were operating at unreasonably high profit margins. Prices had been increasing continuously for five to six years, even when the construction industry was facing a slump. The price increase was not in proportion with the increase in the price of the input costs. Additionally, it was observed that the cost of production did not have a significant role to play in the price increase and infact price change was primarily due to external factors and was evidently independent of competitive forces in the market. After monitoring the prices of competitors it was said that the nature of price change was indicative of a centralised decision making system. This was further established by looking into the functioning of the CMA and referring to the minutes of the meetings held.
The Commission stated that though price information was collected by CMA at the behest of the Department of Industrial Policy and Promotion, it did not absolve the manufacturers and the association of their liability. There were publications which published price information and this allowed competitors to exchange price information. The minutes of the meeting also showed that prices were being discussed. Members who were not a part of the association continued to attend the meetings. This was all indicative of the fact that CMA was being used as a platform to collude. Additionally, ‘price leaders’ would make announcements of future increase in price and this would allow other manufacturers to coordinate strategies. It was also unusual behaviour for competitors not to cut down prices, considering the fact that demand for cement was inelastic.
Other Plus factors considered
Stating that existence of Agreement was not required to be proved, the Commission used the common design by observing behaviour of the market and the market participants to establish the objective. The Commission stated the reduced capacity utilisation would be considered as a plus factor as there was no apparent constraint in demand which could justify the lower capacity utilisation. Production parallelism was argued because though the capacity of the manufacturing plants had been increased in the last four years, the production had not commensurately increased. The manufacturers, on the other hand argued, that there was a difference between ‘name plate’ capacity and actual capacity and that actual capacity was dependent on factors like raw materials, plant stabilisation and power supply etc. However, these arguments were not accepted by the Commission. There was positive correlation in the figures of the cement companies which was indicative of coordinated behaviour.
The Commission also agreed with the DG report where it said that there was a trend of dispatch parallelism in the industry. There was a drop in both production and dispatch in 2010. It observed that the forces of demand and supply dictated that the dispatch figures should have been more than or equal to consumption of cement in the corresponding period of the previous year. However, in two months of November and December 2010, the dispatch was lower than the actual consumption for the corresponding months of 2009. It was not the case that the market could not absorb the supplies, but, instead, the lower dispatches coupled with the lower utilisation establishes that the cement companies indulged in controlling and limiting the supply of cement in the market.
In the Cement Cartelisation case, we see that the Commission has relied primarily on establishing concerted action by showing the existence of price collusion. One can argue that plus factors such as under capacity utilisation, dispatch parallelism, production parallelism and circumstantial evidence were established to show that CMA was used as a platform for collusion. However, on the other hand, one can also argue that these have not been established beyond doubt. The Commission failed to accept or investigate the veracity of the economic justifications that the producers had to offer. Though the role of Commission was recently raised in the Competition Appellate Tribunal order in this case as being judicial or not, the answer to same in either case does not undermine the fact that the Commission’s decision on the matter was not based on plus factors only, as it ought to be. A prima facie reading of this case would show that we have accepted and adopted the concept of ‘conscious parallelism plus’. But it should also be noted that such plus factors have not been given due importance in the in the Indian competition law regime. Such factors have not been put to use comprehensively as they have not been the sole determining criteria of any decision of the Commission to this date.
[1] William E. Kovacic, Robert C. Marshall, Leslie M. Marx, Halbert L. White, Plus Factors and Agreement in Antitrust Law, 110 Michigan L. Rev 394 (2011) [2] Jonathan B. Baker, Two Sherman Act Section 1 Dilemmas: Parallel Pricing, the Oligopoly Problem, and Contemporary Economic Theory, 38 Antitrust Bull 143 (1993) [3]Richard Whish, Competition Law 547 (2009) [4]Id., 547 [5]Theatre Enterprise, Inc. v. Paramount Film Distribution. Corporation., 346 U.S. 537, 541 (1954) (“Circumstantial evidence of consciously parallel behaviour may have made heavy inroads into the traditional judicial attitude toward conspiracy; but ‘conscious parallelism’ has not read conspiracy out of the Sherman Act entirely.”) See also, American Tobacco Co. v. United States 328 U.S. 781 (1946); United States v. Paramount Pictures Inc. 334 U.S. 131 (1948) [6]Supra 1, 393 [7] See, Andrew I. Gavil et al., Antitrust Law in Perspective: Cases, Concepts and Problems in Competition Policy 310-311 (2d ed. 2008) [8]Case No 29/2010 (Date of Order: 26.06.2012) [9] The relevant provisions as mentioned in section 2(b) are as under; (b) "agreement" includes any arrangement dr understanding or action in concert,— (i) whether or not, such arrangement, understanding or action is formal or in writing; or (ii) whether or not such arrangement, understanding or action is intended to be enforceable by legal proceedings;" [10] Michael D. Blechman, Conscious Parallelism, Signalling And Facilitating Devices: The Problem Of Tacit Collusion Under The Antitrust Laws, 24 N. Y. L. Sch. L. Rev. 881 1978-1979 (895-896) This post has been written by Srishti Goyal, Student Director of SITC and a 5th year student of West Bengal National University of Juridical Sciences, Kolkata.
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