Aniket Panchal

This article examines the recent decision of the matchbox manufacturers to collectively increase the matchbox prices vis-à-vis Competition Act, 2002. It inquires whether such an announcement requires the attention of the competition watchdog of India. While doing so, the author investigates the feasibility of ‘crisis cartels’ in general and evaluates whether the current arrangement between the matchbox manufacturers comes within the scope of a crisis cartel.

Background

From 1st December 2021, the MRP of matchbox was increased from Re. 1 to Rs. 2. In the meeting of All India Chamber of Matches at Sivakasi, the representatives of five major matchbox industry bodies unanimously resolved to double matchbox prices on 21st October 2021.  However, in a competitive landscape, prices are determined on the basis of supply and demand and thus should not be influenced by an agreement between competitors. Therefore, such an announcement by the apex body of all associations, deciding price rise in a concerted manner, indicates either some justification for this act or blatant disregard of competition law. 

With that backdrop, the author analyses the collective decision of raising matchbox prices vis-à-vis Competition Act, 2002 (“Act”) and whether it requires attention of the fair market regulator of India.  In doing so, justifications advanced by the matchbox manufacturers have also been dissected. Further, the author looks into the feasibility of ‘crisis cartels’ in general and considers whether this present arrangement between matchbox manufacturers falls under the ambit of crisis cartel.

Reportedly, the cost of matchboxes has been increased in the past twice. Firstly, in 1995, when it was increased from 25p to 50p. Secondly, in 2007, when it was increased from 50p to Re 1. With these two instances, one might argue that if a behaviour was not previously declared anticompetitive, why should it be examined now? However, it has to be borne in mind that during previous decades, a robust competition law enforcement was not in place.  While India enacted the Competition Act in 2002, the Act took 5 years to pass due to two writ petitions filed in the High Court and Supreme Court. Therefore, the Competition Commission of India (“CCI”) has been fully functioning only since  2009.

Competition law in India

Anti-competitive agreements are usually classified into two categories by competition laws around the world: horizontal agreements and vertical agreements. Horizontal agreements are ones made between the competitors, whereas vertical agreements are ones that are made between parties on different levels of the distribution chain. The cartel is a particularly pernicious type of horizontal agreement. For the same reason, horizontal agreements are taken more seriously than vertical agreements.   

A price-fixing agreement is a common type of anti-competitive agreement which directly or indirectly determines sale or purchase price.  The same is also known as “price cartel”.  By the virtue of Section 3(3)(a) read with Section 3(1) of the Competition Act, 2002, price fixing is per se illegal in India since it is presumed to produce an appreciable adverse effect on competition.  

Antitrust laws generally demand that each entity set its own prices and terms, rather than negotiating with a competitor. This is primarily for the reason that when competitors agree to restrict competition, the result is often higher prices. Further, one must not lose sight of a cardinal principle that the prices in a competitive market should be determined freely on the basis of demand and supply and not as a result of an agreement between the competitors. 

In a highly competitive market, matching competitors’ prices can be beneficial. It is also true that each entity is allowed to determine its own product rates. By an extension of this right, it may even charge the same price as its competitors. However, any sort of arrangement or coordination cannot be in place for effectuating such a change in price. There is a fine but discernible line between adhering to prices at one’s own accord and having an explicit agreement towards the same. 

Borrowing words from Adam Smith “people of the same trade seldom meet together, even for merriment and diversion, but the conversion ends in a conspiracy against the public or some contrivance to raise prices.”

Thus, price fixing only occurs if there’s an agreement (implied or express) between competitors to fix prices.  To contextualise the same, let’s take an example of gasoline prices.  If the price of crude oil rises due to market conditions on the world stage, the wholesale price of gasoline may rise as well. Higher wholesale gasoline prices may prompt local gas stations to raise their pricing to offset the increased costs. Strictly speaking, this would not be deemed anticompetitive. However, if evidence exists that gas station owners discussed raising rates and agreed on a similar pricing scheme, this may be considered an antitrust violation. 

Similarly, in the current case, matchbox manufacturers would have easily escaped the regulator’s attention if they had just increased product’s prices in response to prevailing market conditions, as we saw in the gasoline example above. However, in reality, matchbox manufacturers’ conduct involves a conscious agreement towards increasing the price since they have collectively agreed to increase the matchbox price to Rs. 2. In Rajasthan Cylinders and Containers Limited vs. Union of India and Anr., it was held by the Supreme Court that if the agreement is proven under Section 3, there is a presumption of an appreciable adverse effect on competition based on the mere proof of the agreement. Resultantly, the burden of proof transfers to the other side to prove otherwise. Therefore, such an arrangement between matchbox manufacturers, at least on a prima facie level, seems to squarely fall within the bounds of price fixing which is an offence under Section 3(3)(a) of the Act. Drawing parallel with the example above, the five matchbox industry bodies could not possibly reach an agreement to fix the matchbox prices at Rs 2 which does not go against the spirit of the competition law.

Justifications for the doubled price?

To justify this, manufacturers have cited an increase in the price of 14 essential raw ingredients that go into the creation of a matchbox. For instance, the price of one kilogram of red phosphorous increased from Rs 410 to Rs 850, the price of wax increased from Rs 72 to Rs 85, the outer box board increased from Rs 42 to Rs 55, and the inner box board increased from Rs 38 to Rs 48. In addition, the increase in price, according to the matchbox manufacturers, is also attributable to the rising cost of splints, paper, sulphur, and potassium chlorate. Initially, the producers considered charging 1.50 for a single item, but opted against it since merchants would find it difficult to return 50p change to customers.

While the industry body has tried to justify this rising of production costs with an increase in price of raw materials, it raises valid competition related concerns in the free market. In fact, such an agreement will eliminate the incentive of competing on lower prices between the manufacturers since they have collectively agreed on a price of Rs 2 for a unit.

Crisis Cartels

When the economy is in a slump, forming a ‘crisis cartel’ could be a good way to start co-operating with other operators to address common issues and stay afloat in the market. Usually, crisis cartels are seen in the form of agreements or contracts between two or more enterprises with the goal of lowering overcapacity induced by exogenous factors. The aforementioned objective can be realised when industry players agree on production quantities and/or agree on fair prices to keep some industry participants from incurring bankruptcy. In regard to crisis cartels, economic literature makes mention of two different phenomena. The first is when a government enables or encourages firm cooperation or agreement during a slump. The second scenario is when a cartel forms amid a slump in the economy without the authorization of the government or on legal grounds.

However, beyond the obvious anticompetitive nature of the cartels, the crisis cartels can accrue significant benefits if effectuated with caution in the times of a catastrophe. In fact, such agreements can make the best of disrupted demand and supply levels. As is obvious, it can also enable firms to survive longer in the market by avoiding losses which is in the interest of the overall consumer welfare. This is also in consonance with Section 18 of the Act which requires the Competition Commission of India to act in the overall interests of the consumers. 

While the Indian Competition Act still treats cartels as presumptively harmful to the competition landscape in India, the European Court of Justice (“ECJ”) has pinned down the benefits of entering into such types of cartels. The ECJ, factoring in these benefits, held that such agreements are legal in Dutch Bricks and Synthetic Fibres cases.

Can the matchbox manufacturers avail the exemption of crisis cartel?

Consequently, the ensuing question is whether this aforementioned arrangement between matchbox manufacturers can be categorized as a crisis cartel.  As mentioned in the preceding section, the extant antitrust law framework in India does not contemplate for any exemption to crisis cartels and treats cartels as per se anticompetitive. Considering this, it can be said that any sort of cartel will witness zero tolerance from Indian competition watchdog, which is always on the lookout for price hikers taking advantage of the such crisis.  

At this juncture, reference could be made to a recent order of the CCI passed in November 2021 viz. In Re: Anti-competitive conduct in the paper manufacturing industry. In this case, it was ruled that 10 paper manufacturers, as well as an association which served as a common platform were guilty of engaging in cartelization through price fixing of writing and printing paper and accordingly CCI imposed a penalty of Rs. 5 lakhs on each of 10 paper manufacturers. The CCI noted that the paper manufacturers indulged in the act of cartelization by participating in meetings convened under common platform provided by their trade association and discussing prices and roadmap for coordinated increase. 

Hypothetically, even if we were to accord this arrangement between matchbox manufacturers a tag of crisis cartel as recognised by mature jurisdictions like European Union, it would be a meek argument. It is for the reason that crisis cartels are permitted when an industry is facing the problem of “overcapacity”. The problem of overcapacity happens when existing market players refuse to calibrate their production capacity in line with extant demand with the objective of driving out other players from the market. 

While the COVID-19 pandemic, as a crisis of unprecedented sorts, has brought many industries on the brink of hardship including civil aviation industry. However, matchbox industry does not face any stumbling-block such as “overcapacity” so as to enable these matchbox manufacturers to avail the exemption of a crisis cartel. Therefore, this arrangement between matchbox manufacturers, by any stretch, cannot be construed as a crisis cartel since doing so would amount to going beyond the intended purpose of capacity reduction.

Concluding remarks

Price fixing agreements are at the heart of antitrust infractions since they violate the widely recognised norm of market forces determining the price. With these revisions coming in force from December 1, 2021, the matchbox prices stand increased to Rs 2. While it hasn’t been long since these revised prices were enforced by these five manufacturers, it will be interesting to note how the Indian fair market watchdog responds to this arrangement. 

Aniket Panchal is a third year student at Gujarat National Law University.