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Competition commission of India on tyre cartelisation

Competition commission of India on tyre cartelisation

On 30 October 2012 the Competition Commission of India (CCI) decided that no case of cartelization had been made against 5 major tyre manufacturers in India. This decision provides insight on the evaluation of economic evidence by the CCI.

Background

The All India Tyre Dealer’s Foundation complained to the Government that tyre manufacturers in India were colluding in price and trading malpractices. This case was referred to CCI after promulgation of the Competition Act, 2002 (Act). CCI formed a prima facie opinion of cartelization and ordered an inquiry by the Director General (DG). The DG, in his report, concluded that there was a cartel among tyre manufacturers in India based on economic evidence including (i) price parallelism across the manufacturers related to the net weighted average dealer price of tyres and the percentage change in prices; (ii) positive correlation of data involving production, capacity utilization, cost analysis, cost of sales, margins, etc.

Decision and Reasoning

To arrive at its final decision, CCI first considered various structural factors conducive to cartelization. These included (i) the highly concentrated market for tyre manufacturers where 5 manufacturers control 95% of tyre production. This could give rise to collusion but may also indicate “rational” conscious parallelism where competing firms are conscious of each other’s activities; (ii) the cyclical and predictable nature of demand for tyres; (iii) homogenous products; (iv) competitive constraints of re-treaded tyres and imports; (v) entry barrier caused by the requirement of substantial capital investment; (v) existence of an active trade association. Some of these factors support cartelization while others militate against it. According to CCI, a conclusive determination was only possible based on circumstantial evidence. In this regard, CCI found that: (i) the DG had failed to study the price-cost trend; (ii) the price parallelism methodology was not sound since there was no parallelism in absolute prices and price movement but only in the directional change of prices; (iii) capacity utilization showed mixed trends and suppression of capacity made little sense in light of imports; (iv) there was no uniformity in margin trends; (v) excessive margins were absent and varied from 1% to 10%; (vi) rise in market share of one of the manufacturers was inconsistent with cartelization; and (vii) the activities of the trade association did not contravene the Act. Based on these findings, CCI held that the evidence was insufficient to substantiate the claim of cartelization among tyre manufacturers.

Brief Comment

While CCI’s decision seems to be well reasoned, its evaluation of economic evidence in this case may be at odds with its earlier decision in the cement cartel cases. In a deviation from its past orders, CCI’s decision in this case is under a provision of the Act, which makes appeal to the Competition Appellate Tribunal (COMPAT) possible.

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