Relevant Market: It was stated in GT-Link [1997] case "The definition of the market is of fundamental significance." Therefore, it is essential that we define a "relevant market" carefully for the purposes of Competition Laws.
While defining a relevant market, careful study of demand substitution should be made as it constitutes the most immediate and effective disciplinary force on the suppliers of a given product especially in relation to their pricing decisions.
Under section 2(k) of the Competition Ordinance, "relevant market" has been defined by stating that it shall be determined by the Commission with reference to a product market or geographic market and lays down several other considerations before it is established as a "relevant market."
Therefore, the Commission has wide jurisdiction in this respect to determine whether a "relevant market" does or does not exist. As this area of law is fairly complicated and lot of case law been developed in this field, reference would have to be made towards this case law of the UK and EU regimes.
In the case of United Brands v Commission [1978], United Brands was the world's largest producer on the world banana market. Its European subsidiary was responsible for coordinating banana sales across EC, except in the UK and Italy.
In this case, it was important to decide if the banana market was a market in its own right, or merely a part of the fresh fruit market. The key deciding factor in this case was its interchangeability, or substitutability with other fruits.
Therefore, the court examined the cross elasticity of demand between fruits, and other factors such as the particular characteristics of the banana to distinguish it from the rest of the market.
Similarly, in the case of Hilti AG v Commission [1992] EC, In this case, Hilti was the largest European producer of PAF nail guns, nails and cartridge strips (PAF stands for powder actuated fastening) the court had to decide on two questions.
First whether nail guns were interchangeable with other fastening systems, such as drilling and screwing. Secondly, whether there were separate markets for nail guns in existence or they were to be considered as a single product market for the whole PAF system.
These two important cases also demonstrate the importance attached to correct determination of a relevant market. With the implementation of the new Ordinance in Pakistan, the Commission's notifications, guidelines and future decisions in this important area would become guiding principles for our industrial, commercial and economic communities to understand the meanings of a "relevant market" for products and services within Pakistan.
ANTI COMPETITIVE MEASURES The Ordinance is intended to ensure that undertakings do not enter into any such agreements, decisions, or understanding in respect of production, supply, distribution, acquisition or control of goods or the provision of services which have the object or effect of preventing, restricting or reducing competition within the "relevant market" unless exempted under section 5 of the said Ordinance.
Section 5 gives powers to the Commission to grant exemptions from the requirement of section 4 of the Ordinance that lists the circumstances and situations where such agreements may create dominant positions as mentioned above.
MERGERS, CONCENTRATION AND ACQUISITIONS: The company's mergers, concentrations or acquisitions can create or strengthen a dominant position which may give rise to abuse of dominant power. Merger situation applies to companies and undertakings in all economic sectors.
A merger comes into existence when two separate independent companies or parts of the undertakings become one entity. A concentration of resources comes into existence when integration takes place between the two previously existing operations of separate companies.
An acquisition takes place if one or more persons take direct or indirect control of the whole or parts of one or more other undertakings through purchase of securities or assets, or by contract or by any other means. The increase in mergers as a result of rapid economic growth due to economies of scale is witnessed everyday.
The recent mergers in the banking sectors in Pakistan are good examples, where two foreign banks acquired two local banks to increase their market share through a developed network.
Had these acquisitions taken place before the enforcement of Competition Ordinance, these acquisitions would have been probed by the Competition Commission to determine if these acquisitions placed the entities into a dominant role and if their post acquisition power is capable to be abused or not by these entities.
Under EU anti competitive laws, two very important cases lay down the guiding rules in this field. In the case of Continental Can (1973), the Court ruled that there is abuse of a dominant position when a company already holding such a position strengthens it by acquiring a competitor.
Similarly, in the case of BAT-Philip Morris (1987) case, the court acknowledged that in the absence of a dominant position, an acquisition of this kind could be penalised as forming an anti-competitive agreement under Article 81 (EU Law).
The Competition Commission of Pakistan would have to judge the criteria of dominance taking into account our own local conditions and these may vary if compared with the UK and EU conditions.
The risks resulting from mergers, concentrations and acquisitions justify the Competition Commission under Ordinance 2007 to exercise prior control on these acts. Therefore, no undertaking shall enter into a merger, concentration or acquisition agreements that substantially lessens competition by creating or strengthening a dominant position in the relevant market.
The Ordinance 2007 does not provide guidance as to how and which measure would be used to establish that a merger between the two entities would be regarded lessening the competition or strengthening a dominant position.
However, it is felt that the Commission would frame rules and regulation in this respect soon. In the absence of specific local case law, the Commission would have to depend upon the case law of the UK Competition Act 1998 and EU competition laws in this respect.
The Competition Commission would have to draft very clear rules and regulations to ensure that applications for mergers and acquisitions of undertakings pay due regard to these rules before mergers, concentrations and acquisitions take place in Pakistan.
The Commission may investigate the status of these proposed actions to ensure that the new undertakings after the mergers or acquisition do not abuse their economic wealth by becoming dominant. As already explained, assuming a role of dominance through mergers, concentrations or acquisitions is not forbidden under the competition laws, however, it's the dominant power, if it is abused through anti competitive practices, is caught under the competition laws.
If a concentration takes place that significantly impedes effective competition in a relevant market in particular by the creation or strengthening of a dominant position, it may be declared incompatible with the Competition Law. Companies proposing mergers must notify the Commission, which will consider whether the proposal creates or strengthens a dominant position on the relevant market. If it does so, the operation is prohibited. If not, the operation is allowed.
THE EXEMPTION SYSTEM: Many common commercial agreements contain restrictions as discussed above which may breach the Competition laws. The Commission is empowered by virtue of section 9 of the Ordinance to grant individual or block exemptions in respect of an agreement that contributes towards improving production or distribution or promotes technical; and economic progress and the benefits of these agreements outweighs the adverse impacts of these agreements.
Therefore the Commission is expected to develop series of individual and block exemption regulations. These regulations will provide exemption from Competition Ordinance 2007 under section 7 of the Ordinance.
Section 8 of the Ordinance lays down a procedure for obtaining individual and block exemptions. However, no such block exemptions have been finalised and approved as of todate under this section.
This is upto the individual undertaking desirous of obtaining exemptions to convince the Commission or to establish that due to its benefits, the agreements should be exempted individually or through block exemptions from the perview of the Competition Ordinance 2007.
The concept of block exemptions comes from EU law. The exemption regulations of EU are set out over several pages lists of restrictions which breach Article 81 (EU Law) Some of the breaches are completely exempted, some are permitted due to their economic benefits and others are prohibited.
The block exemptions are in the areas of exclusive purchasing and distributive arrangements, franchising, patent and know-how and research and development. The block exemption lists are reviewed periodically to determine the justification for extending the exemptions or eliminating thses from block exemptions lists.
CONSEQUENCES OF INFRINGEMENT: As the Commission has just started functioning in Pakistan, it would be interesting to observe, what would be the consequences if the provisions of the Ordinance are infringed. If we review the consequences of infringement in other similar competition law regimes of the UK and EU, there seems to be little doubt that agreements between undertakings containing restrictions beyond those which are permitted under individual or block exemptions are void.
In addition, the block exemptions cannot be applied to the agreement and cannot be challenged in any court of law. The Commission may impose fines for the breaches. There is every likelihood that the consequences of infringements of the provisions of the Ordinance would result into the same consequences as listed above.
POWERS OF THE COMMISSION: The Competition Commission enjoys vide powers in the areas of proceedings or enquiry into the breaches of the Ordinance, entering and searching the premises and calling for any necessary information that may assist the Commission in the implementation of the Ordinance.
These powers are alike to the powers given to other Commissions that are entrusted to implement the provisions of anti competitive laws in the United Kingdom or European Union. Case law studies in those regimes would be useful to understand how these powers would be used by the Commission to implement the Ordinance 2007.
(The writer has done research work on Competition Law of the UK and EU with Law School of Northumbria University in the UK).
(Concluded)
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