Sep 30, 2018

Supreme Court Recognizes Principles of ‘Oligopsony’ under Competition Law and Exonerates 44 Liquefied Petroleum Gas Cylinder Manufacturers

CCI and the Competition Appellate Tribunal (‘COMPAT’) found collusive behavior among the 45 LPG Cylinder manufacturers (‘LPG manufacturers’) holding them in violation of Section 3(1) read with Section 3(3)(a) and Section 3(3)(d) of the Act. CCI imposed a penalty of Rs 165.58 crores on the LPG manufacturers. However, in appeal, the COMPAT directed reduction of penalty.

In appeal, the Supreme Court rejected the two arguments raised by the LPG manufacturers i.e., (i) there is no possibility of competition in this market, therefore the CCI has no jurisdiction to deal with the case; and (ii) the LPG manufacturers have not engaged in ‘collusive bidding’. While rejecting the above two arguments, the Supreme Court observed that the real question in the present case is whether there was a possibility of a collusive agreement having regard to market conditions in the industry, even assuming that the meeting between competitors did take place.

In sum, the Supreme Court agreed that the presence of an active trade association, a meeting of the bidders held in Mumbai just before the submission of the tenders, submission of identical bids despite varying cost, products being identical and the presence of a small number of suppliers with few new entrants are supporting factors which may be suggestive of collusive bidding. However, these factors are to be analyzed keeping in mind the ground realities, namely:

i.       There were only three buyers in the market for cylinders, namely Indian Oil Corporation Limited (‘IOCL’), Bharat Petroleum Corporation Limited (‘BPCL’) and Hindustan Petroleum Corporation Limited (‘HPCL’);

ii.      All the LPG manufacturers manufacture 14.2 kg gas cylinders to the three buyers. If a LPG manufacturer fails to sell its product to any of the three buyers, it won’t able to survive in the market;

iii.     The market is not attractive for new entrants to manufacture the cylinders in the market on account of presence of a very limited number of buyers;

iv.      The manner in which the tenders are floated by IOCL and the rates at which these are awarded, are an indicator that it is IOCL which calls the shots insofar as price control is concerned. Negotiations are held with a L-1 bidder generally leads to further reduction of price than the one quoted by L-1. Thereafter, the other bidders who may be L-2 or L-3 etc. are awarded the contract at the rate at which it is awarded to L-1;

v.       Entry of 12 new entrants in the relevant market shows low entry barriers in the market;

vi.      Since there are few manufacturers and supplies are needed by the three buyers on regular basis, IOCL ensures that all the LPG manufacturers whose bids are technically viable, are given some order for the supply of specific cylinders;

vii.     The price at which the LPG cylinder is to be supplied to the consumer is controlled by the Government vide LPG (Regulation and Distribution) Order, 2000;

viii.    Just a few days before the tender in question, another tender was floated by BPCL and on opening of the said tender the rates of L-1, L-2 etc. came to be known. This obviously becomes a guiding factor for the other bidders to submit their bids;

ix.      The meetings prior to submission of the bids were attended by only 19 LPG manufacturers. The LPG manufacturers who were not a member of the association or who did not attend the meetings also submitted identical bid quotes.

Therefore, the Supreme Court held that the reason for identical bids is the prevalent market conditions and not the meetings of the association. Market conditions led to the situation of an oligopsony because of limited buyers and the influence of these buyers in fixing prices. In an oligopsony, a manufacturer with no buyers will have to exit from the trade. Therefore, the first condition of oligopsony stands fulfilled in this case.

The other condition for the existence of oligopsony is also fulfilled in this case, i.e., whether the buyers have some influence over the price of their inputs. It is also to be seen as to whether the seller has any ability to raise prices or it stood reduced/eliminated by the aforesaid buyers. Since both the conditions were fulfilled, the Supreme Court concluded that the LPG manufacturers were able to demonstrate that the parallel behaviour was not the result of any concerted practice.

For the abovementioned reasons, the Supreme Court concluded that there is no sufficient evidence to hold that there was any agreement between the LPG manufacturers for bid rigging.




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