CIRC-NLUD CPL COURSES ASSIGNMENT ON MODULE 1 MARKETS AND BUSINESS LAWS

Name of the Participant Roll No. Course

TEJASWITA

Certificate

yes

Diploma

Note:
This assignment is mandatory for internal evaluation Both the questions are compulsory. Each question carries 10 marks [Overall assignment carries 20 Marks] Answers to be provided in maximum 1500 words per question. Original and first-hand analysis of the issue is expected. Latest developments in the area through newspaper reports, latest articles, committee reports to be incorporated. A suitable conclusion and recommendations to be provided. No plagiarism please (assignment will not be evaluated if plagiarism is found). Participants are requested to complete the assignment and send the same by 31 st December, 2012 either printed on A4 size sheets or email the same at cpl@circ.in.

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1.

The first point which must be made about the theory of perfect competition is that it is only a theory; the conditions necessary for perfect competition are extremely unlikely to be observed in practice Richard Whish Discuss this comment elaborating the concept of competition and the different forms of market and its associated competition. [10 Marks]

Ans: Competition is the rivalry among sellers trying to achieve such goals as increasing profits, market share, and sales volume by varying the elements of the marketing mix: price, product, distribution, and promotion. Merriam-Webster defines competition in business as "the effort of two or more parties acting independently to secure the business of a third party by offering the most favourable terms.1 This means that we have competition in the market, which allows price to change in response to changes in supply and demand. Furthermore, for almost every product there are substitutes, so if one product becomes too expensive, a buyer can choose a cheaper substitute instead. In a market with many buyers and sellers, both the consumer and the supplier have equal ability to influence price. In some industries, there are no substitutes and there is no competition. In a market that has only one or few suppliers of a good or service, the producer(s) can control price, meaning that a consumer does not have choice, cannot maximize his or her total utility and has have very little influence over the price of goods. A monopoly is a market structure in which there is only one producer/seller for a product. In other words, the single business is the industry. Entry into such a market is restricted due to high costs or other impediments, which may be economic, social or political. For instance, a government can create a monopoly over an industry that it wants to control, such as electricity. Another reason for the barriers against entry into a monopolistic industry is that oftentimes, one entity has the exclusive rights to a natural resource. For example, in Saudi Arabia the government has sole control over the oil industry. A monopoly may also form when a company has a copyright or patent that prevents others from entering the market. Pfizer, for instance, had a patent on Viagra.2 In an oligopoly, there are only a few firms that make up an industry. This select group of firms has control over the price and, like a monopoly, an oligopoly has high barriers to entry. The products that the oligopolistic firms produce are often nearly identical and, therefore, the companies, which are competing for market share, are interdependent as a result of market forces. Assume, for example, that an economy needs only 100 widgets. Company A produces 50 widgets and its competitor, Company B, produces the other
1

https://en.wikipedia.org/wiki/Competition_(economics) last accessed on 30 June 2013

2

http://www.investopedia.com/university/economics/economics6.asp last accessed on 30 June 2013

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50. The prices of the two brands will be interdependent and, therefore, similar. So, if Company A starts selling the widgets at a lower price, it will get a greater market share, thereby forcing Company B to lower its prices as well. There are two extreme forms of market structure: monopoly and, its opposite, perfect competition. Perfect competition is characterized by many buyers and sellers, many products that are similar in nature and, as a result, many substitutes. Perfect competition means there are few, if any, barriers to entry for new companies, and prices are determined by supply and demand. Thus, producers in a perfectly competitive market are subject to the prices determined by the market and do not have any leverage. For example, in a perfectly competitive market, should a single firm decide to increase its selling price of a good, the consumers can just turn to the nearest competitor for a better price, causing any firm that increases its prices to lose market share and profits. 3

Perfect competition, a theoretical market structure that features no barriers to entry, an unlimited number of producers and consumers, and a perfectly elastic demand curve.

The imperfectly competitive structure is quite identical to the realistic market conditions where some monopolistic competitors, monopolists , oligopolists, and duopolists exist and dominate the market conditions. The elements of Market Structure include the number and size distribution of firms, entry conditions, and the extent of differentiation. In the absence of perfect competition, three basic approaches can be adopted to deal with problems related to the control of market power and an asymmetry between the government and the operator with respect to objectives and information: (a) subjecting the operator to competitive pressures, (b) gathering information on the operator and the market, and (c) applying incentive regulation. Perfect competition means that there are many buyers and many sellers and that they make homogenous or same products; there are no barriers to entry or conditions governing these buyers and sellers. This is not possible in real life. Monopoly and perfect competition are two extreme sides and it is highly unlikely that they be found in there purest form. There are many markets structures which lie in between these. There are brands that enjoy a high level of consumer loyalty and therefore a change in price wont affect them much. Hence the need for homogeneity does not come into picture as their products are highly differentiated from those of a similar brand. It is also a case that the consumer is ill aware about pricing of different brands. This makes it necessary to pass laws and spread consumer awareness. Competition is not perfect but rather the law deals with dominance in the market and its abuse.
3

http://en.wikipedia.org/wiki/Perfect_competition last accessed on 30 Jun. 13

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The theory of perfect competition keeps the cost at minimum which is impractical. In other words, the private cost of producer may be kept minimum which external costs like pollution caused to the atmosphere by factory may not. The theory is based on static economic behavior. Even firms like Xerox and IBM have found competition; the same may happen to Microsoft. The theory is therefore too extreme to be applicable in real life scenario.

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2.

Planning Commission of India states that promotion of consumer welfare is the common goal of consumer protection and competition policy. At the root of both consumer protection and competition policy is the recognition of an unequal relationship between consumers and producers. It is stated that there is strong commonality between competition policy and law on the one hand and consumer protection policy and law on the other hand. In light of the aforesaid statement discuss the aspect of consumer welfare in Competition Law in India and how it is different is that Consumer Protection Act, 1986. [10 Marks]

In Ashoka Smokeless Coal Ind. P. Ltd. v. Union of India ((2007) 2 SCC 640) the Honble Supreme Court reflecting on consumers interest observed: In a market governed by free economy where competition is the buzzword, producers may fix their own price. It is, however, difficult to give effect to the constitutional obligations of a State and the principles leading to a free economy at the same time. A level playing field is the key factor for invoking the new economy. Such a level playing field can be achieved when there are a number of suppliers and when there are competitors in the market enabling the consumer to exercise choices for the purpose of procurement of goods. If the policy of the open market has to be achieved the benefit of the consumer must be kept uppermost in mind by the State. Competition law concentrates on maintaining the process of competition between enterprises and tries to remedy behavioral or structural problems in order to re-establish effective competition in the market. Thus it results into higher economic efficiency, greater innovation and enhancement of consumer welfare. Thereby the consumer experiences wider choice and greater availability of goods at affordable prices. On the other side, the consumer protection policy and law are mainly concerned with consumer dealings, making efforts to progress market conditions for effective exercise of consumer choice. Thus, these two streams focus on different objectives and offer different remedies, but both aim at maintaining good performance, competitive markets that encourage consumer welfare. INTERPLAY BETWEEN CONSUMER PROTECTION AND COMPETITION LAW There exists some difference among the Consumer Protection Act and the Competition Act with reference to their respective provisions for consumers. Firstly the definition of consumer varies a little under the two acts.

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The definition of consumer under the Consumer Protection Act, 1986, includes any buyer or user of goods or services but does not include a person who obtains such goods for resale or for any commercial purpose. However, the definition under the Competition Act, 2002, recognizes a person who buys or uses goods or services for commercial purpose or for resale, as a consumer. In this way, the Competition Act aims to protect the larger public interest from anticompetitive practices. Thus the summary of differences is given below: CONSUMER PROTECTION ACT Definition Person dealt with does not include a person who obtains such goods for resale or for any commercial purpose end user ; must use the goods for his personal purpose COMPETITION LAW includes a person who obtains such goods for resale or for any commercial purpose might be a commercial entity reusing the goods for commercial purposes. public interest based i.e. it is the duty of the commission to protect fair competition in the entire market CCI- Regulator Competition Law deals with market as a whole.

Relief & Rights

Individuals Not a regulator deals with consumption and the consumers interest and not with markets as a whole,

CONSUMER WELFARE AS A GOAL OF COMPETITION LAW Competition law has multiple goals, which includes consumer welfare and aims to protect competition in the market as a means of enhancing consumer welfare and ensuring the efficient allocation of resources. Consumer welfare also known as consumer surplus refers to the difference between what consumers are willing to pay and what they actually pay. Competition is now universally acknowledged as the best means of ensuring that common man, have access to the range of services at competitive prices. The Report of the Raghavan Committee, explains that often consumer interest and public interest are considered synonymous, but they are not and need to be distinguished. In the name of public interest, many Governmental policies are formulated which are either anticompetitive in nature or which manifest themselves in anti-competitive behaviour. If the consumer is at the fulcrum, consumer interest and consumer welfare should have primacy in all Governmental policy formulations.

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Consumers are affected by pricing policies, financing practices, quality of goods and services and various trade practices. They are distinguishable from manufacturers, who produce goods and wholesalers or retailers, who sell goods. Public interest, on the other hand, is something in which society as a whole has some interest, not fully captured, by a competitive market. Competition and consumer policies aim at increasing consumer welfare in the total welfare equation, by protecting consumers economic interests. When the two policies are applied properly they have a complementary effect because they reinforce one another despite the fact that, they deploy different approaches in regulating conducts of markets. Thus, the end objectives of both the policies are essentially the same. However, competition policy is more of a proactive policy that inter alia attempts to promote consumer interest in the marketplace, whereas consumer protection policy puts forward mainly a reactive agenda to protect the interests of the consumers, and provide access to redressal against abuses. Of course, consumer protection policy also has some proactive elements. In this regard there is a strong complementary relationship between the two policies in that consumer welfare is a common goal. There are two approaches to development. The first one is concerned with fulfilling the basic needs of the people, removing the sources of poverty and marginalization, focusing on problems like unemployment, basic health services and so on. The second approach to development is concerned with latest technologies, exports, industrialization, more competition to provide better choice and so on. At the core of this lies enhancement and maintenance of competitiveness. Consumer protection policy is part of the strategy that emanates from the first approach, while competition policy is an integral part of the second approach though there are significant overlaps. However, it may be noted here that the two approaches do not mean two alternatives, but rather two instruments that must be used simultaneously. The relationship between competition policy and consumer welfare is governed by three fundamental principles: Principle 1. Competition policy exists within the realms of consumer welfare and not the other way around. Principle 2. Competition policy should encourage only conduct which promotes consumer welfare. Principle 3. Competition policy imposes an obligation on consumers, not only on merchants. Competition law protects consumers directly and indirectly. The substantive provisions of competition legislation are grouped under two broad headings: consumer protection and competition protection. The groupings are misleading; however, in the sense that it suggests that consumer protection and competition protection are distinct objectives. In practice, however, both sets of provisions are alternative means of achieving the common goal of promoting consumer welfare. The competition process provides the greatest incentives for merchants to offer consumers the best quality goods and services at the lowest possible prices. The competitive process generates the

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greatest possible level of public surplus. By protecting the competitive process, therefore, competition protection provisions indirectly promote consumer welfare.4 While it is apparent that the awareness of consumer interests in the enforcement of competition law is increasing, it is obviously not capable of protecting certain final consumers needs. Competition law has inherent limits in that respect. First, the notion of consumer under competition law is broader than under consumer law. This means that competition law might acknowledge certain situations as favourable for consumers while such situations do not benefit the final consumers; only the direct customers of the undertakings. Second, competition law is mostly concerned with the economic interests of consumers and while in a few cases it might take account of wider consumer interests it is definitely not concerned with other significant consumer interests like health and safety issues or information disclosure. Competition policy also has other goals than improving final consumers welfare and therefore final consumers cannot and should not become the sole focus of competition laws. Competition Policy deals with the relations of economic operators with each other (eg: cartels, mergers etc), while Consumer Policy deals with the behaviour of economic operators in their direct contact with consumers. Despite the differences in their field of operation and types of remedies, it is essential for competition and consumer policy to operate in a complementary and mutually enhancing way, in the interest of the consumers and competitiveness. Competition law, therefore, prevents anti-competitive practices like abuse of dominant position, anticompetitive agreements, combinations etc. These practices will harm the consumers. Thus it can be inferred that consumer welfare is not the ultimate goal of competition law, but the implementation of Competition policies leads to consumer welfare. In this way, Competition law promotes consumer welfare indirectly. Conclusion Competition law and consumer protection are interdependent concepts, but both operate in their own spheres. Competition law, while regulating the competition in the market, results in the protection of consumer interests, but consumer welfare cannot be considered as the sole or ultimate goal of competition law. It is one of the aspects of competition law, and should not be given undue importance in its enforcement.

Kevin Harriott, Paper presented at the Competition and Consumer Welfare Sensitisation Workshop, March 16,2010 in Antigua & Barbuda, available athttp://www.jftc.com/Libraries/Speeches_and_Presentations/Competition_Welfare_Within_Competition _Policy_-_Dr_Kevin_Harriott.sflb.ashx, accessed on 21/10/12
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Works Cited
Cseres, K J. "the Controvesrsies of the consumer welfare standard." competition law review 3, no. 2 (march 2007): 121-173. GOEL, SHUBHANGI. Protecting Consumer Interests under Competition Law. internship report, ils law college pune, delhi: competition commission of india, 2012.

(Wilsh and Bailey 2012)

Bibliography
http://www.investopedia.com/university/economics/economics6.asp (accessed june 29, 2013). http://www.investopedia.com/university/economics/economics6.asp (accessed june 30, 2013). Cseres, K J. "the Controvesrsies of the consumer welfare standard." competition law review 3, no. 2 (march 2007): 121-173. GOEL, SHUBHANGI. Protecting Consumer Interests under Competition Law. internship report, ils law college pune, delhi: competition commission of india, 2012. Wilsh, Richard, and David Bailey. Competition Law. 7, illustrated. Oxford University Press, 2012.

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