COMPETITION LAW & COVID: HOW TO MAKE THE MOST OUT OF IT
Updated: Nov 13, 2020
[Navedya Bhateja is a 2nd Year BA.LLB. student at National Law Institute University, Bhopal]
At times when economic activities have been disrupted due to the COVID outbreak, CII issued a notice stating that companies have to be cautioned not to breach the competition norms while collaborating with each other.
A compliance with the black letter of competition laws might seem to be both a hassle and hurdle for traders in these trying times unfair to the traders and as every economic crisis from the great depression to the great recession has raised the question for competition law, i.e. should there be a temporary relief on application of the law to the public and private restraints of competition? Such as fixing the prices of essential commodities or formation of cartles, and COVID is no alien to it. The current situation poses some major concerns in relation to the welfare of the economy as well as the companies.
Apart from discussing the relief to be sought for competition under the market, the author will also discuss the cleansing effect of the recession that will help the country to get rid of the zombie companies which are generally negatively affecting the economy during the normal times.
Competition in the Time of Crisis
Many studies have been conducted suggesting the marketing strategies in the time of crisis, for example, dealing with the shortage of goods and services, strategies for managing the businesses at the time of crisis, resolving the financial problems of the businesses, and many more. Below provided are some examples of how can we make the best use of competition during the time of emergency.
(1) COMPETITION DURING THE LARGE-SCALE EMERGENCIES
There has been very limited research as to how competition could help in overcoming the emergency, out of which in one of the researches[i]it was found that coming up in a coalition helps a company to ameliorate their survival prospects in the time of crisis, for instance, many financial institutions came together during the time of great recession to save themselves from bankruptcy, something of similar sort can also be adopted in the present situation. Moreover, it has also been found that these engagements have also helped the companies to lessen their operating costs, and boosting productivity[ii].
(2) EUROPEAN COMMISSION AND THE COMPETITION LAW DURING THE CRISIS
Even though it is generally suggested that giving temporary relief to the competition in the market is a bad idea and different laws such as prohibition of anti competitive agreements and abuse of dominant position under section 3(1) and 4(2) respectively have also been made for the same, but most economic recessions in the last 50 years have led to some or the other sort of relief in competition law. COVID, again, is no exception to it[iii]. The European Commission has even green flagged the member states to infuse the state aid enormously in the market to solace the economic effects of COVID and have also set up lenient measures for the market to bolster an already crushed economy. Not only this, but retailers have also been allowed to share stock level data, coordinate closure time and etc, thereby helping them to operate more efficiently. The European model of competition during the recession helps to get the insights into the competitive business environment that can affect the competition paradox in the time of crisis.
(3) USING SECTION 54 OF THE COMPETITION ACT 2002
Apart from using the above-stated examples for lessening the effect of COVID on businesses. Section 54 of the competition act 2002 can also be used; it states that any class of enterprises can be exempted from the applicability of the competition act if the center may consider it necessary for the public interest. And during this time of economic crisis, section 54 should come into the assistance of every business with a few restrictions taking into account the AAEC.
There is a scarcity of research regarding how competition should work in the time of crisis but the above-stated examples are the tried and tested methods of how the businesses would be least affected during the time of crisis and these should be taken into consideration.
Cleansing Effect of Recessions
It can be said that the cleansing effect is a good effect of the recession on the competition. Recession often comes with a cleansing effect, which means the exit of Zombie firms that dismiss the growth prospects of a more efficient company and delay the insertion of the latest technological trends. It can therefore be said that the ongoing recession is an opportunity for the Indian economy to get rid of a weak cycle of production, old technologies, and low economic dynamism.
It has been asserted by Schumpeter in his work on monopoly and recession that recession helps in the cleansing effect by replacing the inefficient firms with the more efficient ones[iv]. His work was assented by the economists for the mainstream economic theory. One famous theory regarding this is a theory of natural recession which suggests that inefficient firms are the one which turns unprofitable earlier than the firms with efficient productivity[v]. Not only this, but it can also be noted that the fall in demand will raise the returns of efficient firms and the lackluster firms will slowly start diminishing. In all, it can be said that the firms which do not build the right skills under the organization during normal times have a high chance will perish when the recession arrives.
The cleansing effect is nothing, but another form of Darwinian dynamics, which says that efficient firms survive while the inefficient go underway. For an economy to flourish, it is not crucial how many firms are present in the market, but how many are competing efficiently to meet the demand. The economy can regenerate very swiftly if the uncompetitive companies have perished, and only the competitive ones are present in the market.
The swift exit of inefficient firms should be on top priority under the competition law, especially when the recession is underway. Inefficient firms are obscure during the normal times, so the best use of the recession could be to perish these companies as fast as possible so that the economy can revive more swiftly and with a strong competition in the market.
President Obama’s chief of staff Rahm Emanuel once said, “You never let a serious crisis go to waste. And what I mean by that it’s an opportunity to do things you think you could not do before”. With every crisis, there is an opportunity, and COVID is no exception to it. During the ongoing recession, the Indian economy has a golden chance of getting rid of the zombie firms and also makes certain changes in the competition law so that the companies don’t face issues again during the time of economic recession.
But companies need to be very cautious while collaborating with each other, it will not be advisable for the competitors to exchange any sensitive information with each other or coordinate on commercial strategy since an imprudent action during the time of crisis may harm the company, and a negative outcome would not only be financially draining but also impact the company’s reputation more severely than usual.
[i] British Journal of Management, 18 (3) (2007), pp. 209-223 [ii] Journal of Marketing Research, 40 (4) (2003), pp. 421-436 [iii] H. L. Cole & L. E. Ohanian (2004), New Deal Policies and the Persistence of the Great Depression: A General Equilibrium Analysis, Journal of Political Economy 112(4), 779–816. [iv] J. E. Stiglitz (1993), Endogenous growth and cycles, NBER Working PapersNo. 4286. [v] R. J. Caballero & M. L. Hammour (1991), The cleansing effect of recessions, NBER Working Papers No. 3922.
The views and opinions expressed in this article are those of the authors alone and do not
necessarily reflect the views of RICLP.