Description
An important feature of several developing countries’ policies in the last decade has been the
enactment of Competition Acts as part of a pro-competitive policy. Even the deliberation at
various rounds of WTO also relate to the promotion of competitive environment in International
Trade.
India too has substantially improved the competition climate in its manufacturing sector since
1991 via a series of changes in both domestic and international trade policies. The effect of these
policies has been mixed. In some sectors, due to easy of entry of firms in the market, competition
has increased, while in others, due to the survival of fittest strategies, competition has reduced.
Competition Commission Of India
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Competition Issues in Electronic Goods Sector: Television
Industry
A Research Paper submitted in partial fulfillment for the
requirement of the Internship, May, 2010
Submitted to:
Mr. Pravin Purwar
Advisor
Competition Commission Of India
Submitted By:
Apoorva Gupta
M.A. Economics (P)
Delhi School Of Economics
Competition Commission Of India
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DISCLAIMER
This project report has been prepared by the author as an intern under the Internship Programme
of the Competition Commission of India for the period of one month from May 10, 2010 to June
10, 2010, for academic purposes only.
The views expressed in the report are personal to the intern and do not reflect the views of the
Commission or any of its staff or personnel and do not bind the Commission in any manner. This
report is the intellectual property of the Competition Commission of India and the same or any
part thereof may not be used in any manner whatsoever, without express permission of the
Competition Commission of India in writing.
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ACKNOWLEDGEMENT
At the outset, I would like to thank my supervisor Mr. P.K. Purwar, Competition Commission
of India, for being a guiding force throughout the course of this submission and being
instrumental in the successful completion of this project report without which my efforts would
have been in vain. He has been kind enough to give me his precious time and all the help which I
needed. Also, I am immensely thankful to Dr. Geeta Gouri who gave her valuable time for
discussing the issues of the paper. I would also like to express my heartfelt gratitude to Mr.
Bhupender Singh, Mr. Sudershan, Mr. Hari and Mr. Rajinder Kumar, who directed me towards
the accomplishment of the report. I would also like to appreciate the cooperation we got from Dr.
Anil Kumar (Assistant Director) and Mr.Srinivasan, the librarian of CCI. I am also very grateful
to the other staff of Competition Commission of India, for being immeasurably accommodating
to the requirements of this humble endeavor. To all the above individuals and to several
colleagues whose names I cannot continue listing and who have assisted me one way or another,
I feel very much indebted.
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TABLE of CONTENTS
TOPIC Page No.
1. Abstract………………………………………………………………...…………..……..5
2. Chapter 1 – Introduction………………………………………………..……………..…6
3. Chapter 2 – Consumer Electronic goods sector in India
Introduction………………………………………………………………………..8
Competition in Electronic Goods Sector……………………………….................8
IPR and Electronic Goods Sector………………………………………………..10
Television in India…………………………………………………….................11
4. Chapter 3 — Television Industry
Introduction………………………………………………………………………13
Globalization and Television………………………………………….................14
Challenges and Opportunities…………………………………………................17
5. Chapter 4 — Review of Literature…………………………………………..................20
6. Chapter 5 — Area of Research and Model Making
Introducing the Model…………………………………………………................24
Why are we considering a merger?........................................................................28
Why LG and Samsung only?.................................................................................30
Emerging Competition Issues……………………………………………………35
Effects on Market Variables……………………………………………………..41
Economic Effects………………………………………………………………...51
Effects on Concentration Measures……………………………………………...54
Efficiency as a Defense Tool…………………………………………….............55
Should this Merger be Allowed?...........................................................................58
7. Chapter 6 – Conclusion…...……………………………………………………..............59
8. Bibliography……….. …………………………………………………………………..61
9. Websites Used…………………………………………………………………………...64
10. Appendices………………………………………………………………………………66
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ABSTRACT
The Indian Television industry is going through turbulent transformation. Companies are
relooking at their strategies and are desperate for growth. The entrenched position of the Indian
market leaders in TVs’ like Videocon, BPL and Onida has been challenged by the MNCs such as
LG, Panasonic, Samsung, Sony, Philips and Sharp; some in a perceptible way and others
threatening to do so. The changing environment demands fresh thinking to gain the cutting edge
advantage. Exchange schemes, free gifts, price offs, prizes, deferred payment schemes and other
incentives as promotional tools have been deployed by the players, which certainly have made
the market, vibrant and pulsating. A major factor contributing to the growth has been availability
of consumer financing schemes. Concomitantly, the industry has been witnessing a new scenario
with a new market profile. The entry cost into this industry is substantially low. Thus, there is
already a lot of competition in this sector and due to this, consumer is benefitting by not only
getting the above benefits, but also world class products of high quality at reasonable prices. Due
to this, TV is now a necessity of every house, whether in rural India or Urban India.
This paper talks about the Television Industry in India, its market structure and challenges and
opportunities it faces. The paper uses econometric techniques to deal with the issue of market
concentration. Towards the end, a hypothetical situation is created where the major Korean
MNCs, LG and Samsung get together and play in the market as a single entity. The paper
analyses the reasons and results for this merger, and the economic theory and the competition
issues emerging with this collaboration. The paper talks of entire TV industry and not of CTV or
flat TV or LCD TV market separately.
Keywords: Television, Merger, Efficiency, Competition.
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CHAPTER ONE
INTRODUCTION
An important feature of several developing countries’ policies in the last decade has been the
enactment of Competition Acts as part of a pro-competitive policy. Even the deliberation at
various rounds of WTO also relate to the promotion of competitive environment in International
Trade.
India too has substantially improved the competition climate in its manufacturing sector since
1991 via a series of changes in both domestic and international trade policies. The effect of these
policies has been mixed. In some sectors, due to easy of entry of firms in the market, competition
has increased, while in others, due to the survival of fittest strategies, competition has reduced.
Indian Electronic and IT sector is one major segment where the effect of the liberalization and in
turn the effect of competition issues have been seen in its totality. This sector in itself is so vast
that covering each and every issue will be cumbersome. Thus, we focus on Television industry
among the immense pool of gadgets.
Television is now almost a necessity of every house. For education, for daily soap serials, for
news, for sports, and for every now and then, people switch to television. Furthermore, 100%
foreign equity participation is permitted in manufacturing in India. Thus, the production of
consumer durables and other consumer products allows for direct sales in India. One successful
example is LG Electronics of Korea, which entered India in 1997 and within a period of five
months, it has launched the nation’s ever largest plant in Noida. It is now one of the most
preferred brands of this segment.
In addition, India is a diverse country both ethnically and culturally, giving a boost to TV in
India. Consequently, Companies get a chance to spread out their distribution networks. The
Indian TV market is basically is in its infancy. Hence, it has a huge potential to grow. It seems
that India’s growing consumer market might be taking on a life of its own, over a due course of
time.
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In this paper, we have focused on three major players of the market, Videocon, LG and
Samsung. We have also focused on the issues why we have focused on these three companies
only. We have highlighted the market structure, the type of competition in the market and other
important market variables. As a case study, we have created a hypothetical situation, where LG
and Samsung get merged and have become the market leaders. The analysis is done from three
sides, one is the effects on the market, second is the economics applied, and third is the
competition issues which will emerge. Towards the end, we have reasoned out efficiency as a
defense tool for this merger.
The paper is arranged in the following manner: In chapter two, we deal with the introduction of
consumer electronics in India, the issue of IPRs and the competition in this sector. We also
highlight the detailed reasoning on why we choose Television industry as the industry for our
research. Chapter three introduces the scenario of television industry in India and the effects of
globalization policies ushered in from 1991. The chapter also focuses on the challenges and
opportunities faced by this industry. Chapter four provides literary review. Chapter five sets out
the model explained above and it presents the results, while chapter six concludes the research.
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CHAPTER TWO
ELECTRONIC GOODS SECTOR IN INDIA
INTRODUCTION
Electronic goods sector is a major booming sector in our country. Not only as an intermediate
commodity, but more as a consumer product, this sector has undergone a rapid growth and
development since ushering in of liberalization in India, from cassette to DVDs, from black and
white TVs to LCDs, from analogue terrestrial cables to DTH services and from landline phone to
mobile internet. These developments did not take place in one day, but the pace of this
innovation was impetus.
Indian Consumer Electronic Goods Sector is facing a lot of competition from abroad, especially
from South Korea and Japan, whose success story is based on the export promotion techniques in
this sector. From a small capital based firm, the companies like LG and Samsung have become
popular MNCs. The biggest attraction for MNCs is the growing Indian middle class. This market
is characterized with low penetration levels. MNCs hold an edge over their Indian counterparts
in terms of superior technology combined with a steady flow of capital, while domestic
companies compete on the basis of their well-acknowledged brands, an extensive distribution
network and an insight in local market conditions. Thus, it’s now a trend that while rural
population has greater access to goods from Indian manufactures, urban population is showing
preference to the MNCs brands. However, Consumerization of technology could be a major
phenomenon over the next 5 to 10 years. This could hasten the industrial consolidation, as
healthy companies gain market share by buying out weaker ones at attractive prices.
Competition in Electronic Goods Sector in India
Prior to the economic reforms, electronic goods sector was not much developed in India. MRTP
Act was also not active enough to promote full grown competition in this sector. The New Trade
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Policy Regime of 1991 promoted trade liberalization which allowed foreign companies to settle
in India and have their manufacturing plants. Various laws and acts have been passed since then
to enhance competition in electronic goods sector. A snapshot of some is as follows.
1
1. Free Trade Agreement
WTO regime which came in force in 2005, results in zero customs duty on imports of all
telecom equipments. 217 IT/electronic items were covered under the Information
Technology Agreement (ITA) of the WTO for complete customs tariff elimination by 2005.
Out of these 217 items, several items were already at NIL customs duty. In fact,
IT/electronics was the first sector in India to face complete customs tariff elimination. The
ITA-1 would result in intensifying competition as more imported products will be easily
available at lower prices.
2. Foreign Investment Policy: FDI
Foreign investment up to 100 per cent is allowed in Indian electronics industry set up
exclusively for exports. The units set up under these programmes are bonded factories
eligible to import, free of duty, their entire requirements of capital goods, raw materials and
components, spares and consumables, office equipment etc. Deemed export benefits are
available to suppliers of these goods from the Domestic Tariff Area (DTA). A part of the
production from such units is permitted to be sold in the DTA depending upon the level of
the value addition achieved. The FDI approval for electrical equipment (including computer
software and electronics) from January 1991 to March 2004 was US$ 7.29 billion, which was
9.94 per cent of the total foreign direct investment (FDI) approved. During the same period
the FDI inflow for electrical equipment (including computer software and electronics) was
US$ 3.32 billion.
3. Procedure for approval
Once the investment in equity has been approved, the import of capital goods, components
and raw materials or the engagement of foreign technicians for short duration does not
1
Corporate Catalyst India
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require any additional approvals. Corporate Catalyst India A report on Indian Consumer
Durables Industry Approval of Ministry of Home Affairs says, “Now, there is no need for
hiring foreign nationals holding valid employment visa. Approval for setting up units in
Export Processing Zones (EPZs) is given by the Board of Approvals in the Ministry of
Commerce. Approval for setting up export-oriented units (EOUs) outside the zones is given
by the Ministry of Industry. Approvals for setting up Electronic Hardware Technology Park
(EHTP) and Software Technology Park (STP) units are cleared by the Inter Ministerial
standing Committee (IMSC) set-up under the Chairmanship of the Secretary, Department of
Information Technology. Proposals involving foreign direct investment not covered under
the automatic route are considered by the Foreign Investment Promotion Board (FIPB).
4. FDI/ Foreign Technology Collaboration Agreement
The government facilitates FDI and investment from Non- Resident Indians (NRIs) including
Overseas Corporate Bodies (OCBs), predominantly owned by them, to complement and
supplement domestic investment. Foreign technology induction is encouraged through FDI
and foreign technology collaboration agreements. FDI and foreign technology collaborations
are approved through automatic route by the Reserve Bank of India.
IPR and Electronic Goods Sector
Protection of Intellectual property rights (IPR) is a prime requisite for development of R&D and
innovation in the consumer electronics sector. The Government of India has developed a robust
IP act to facilitate innovation, growth and development. Several amendments to the Copyright
Act, creation of a new Trademark Act, a new Designs Act and amendments to the Patents Act
show India’s continued effort to protect IPR. The country has already made several changes in its
IP acts over the years. Several amendments to the Copyright Act, creation of a new Trademark
Act, a new Designs Act and amendments to the Patents Act show India’s desire to change and
adapt. New acts have also been enacted to cover semiconductors and layout designs which will
be of considerable importance to the electronic industry.
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In the current WTO regime, India is a party to the “Trade Related Aspects of the Intellectual
Properties (TRIPs) Agreement” and has accordingly, amended most of its IPR Acts and Rules to
conform to the said Agreement. The Indian Copyright Act 1957 was amended in 1999; the patent
Act 1970 was amended in 1999 & 2003 and Trademarks and Merchandise Marks Act 1959 was
overtaken by a new Trademark Act 1999. The Industrial Design Act 1911 was effectively
replaced by The Design Act 2000, and the Layout Design of Semiconductor integrated Circuit
Act 2000 was enacted.
Corporate Catalyst India A report on Indian Consumer Durables Industry reports that the
agreement on TRIPs takes care of the intellectual property rights by enforcing the patent rights,
Copyrights and related rights, and the protection of industrial designs, trademarks, geographical
indications, layout designs of integrated circuits and undisclosed information. Accordingly, the
member nations are asked to modify their existing laws. Once these laws come into force,
unauthorized use of the patented innovations, trademarks, etc. becomes difficult. Enforcement of
the TRIPs agreement makes the production of any product possible either through internal
innovation or through formal transfer of technologies.
Thus, legally also, the consumer electronics and durables sector is expected to continue to benefit
from supportive policies and become globally competitive.
Television Industry in India
Consumer electronics are the products that are used every day by the households. These include
the products that come under the category of office products, communications, and
entertainment. These can be classified into personal computers, telephones, calculators,
playback, digital video disk (DVD), video compact disc (VCD), video home systems (VHS),
home theatre, music players, color televisions (CTVs), cameras, camcorders, portable audio, Hi-
Fi, etc.
Owing to this vast pool of gadgets, our research will focus on Television Industry. Television in
India has been in existence for four decades. For the first 17 years, it spread haltingly and
transmission was mainly in black & white. The thinkers and policy makers of the country, which
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had just been liberated from centuries of colonial rule, frowned upon television, looking on at it
as a luxury, which Indians could do without.
Television has come to the forefront only in the past 21 years and more so in the past 13 years.
Year 1982 was a significant year in the history of Indian Television. The government allowed
thousands of color TV sets to be imported into the country to coincide with the broadcast of
Asian Games hosted in New Delhi. Over the years, this industry experienced a great boom and
today, India is one of the largest television markets in terms of viewership. Not only this, but
overall TV industry is the most booming sector among consumer electronics in India. The
diagram below depicts the same.
The above diagram clearly shows that Television sales are the maximum among the consumer
electronics and are increasing over the years. Thus, the choice of Television Industry, from
among the basket of electronic goods, seems to be appropriate and well-founded.
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CHAPTER THREE
TELEVISION INDUSTRY in INDIA
Television continues to be the mainstay of the consumer electronics industry in India, with the
transition slowly occurring to newer technologies such as LCD and PDP. There was a huge
demand for color televisions all through the 80s. During the last two years 11.5% of Indian
homes bought a TV set. This figure is even higher among the top eight metros at 21.3% about
one in every five home in these cities acquired a TV set in the last two years.
2
Indian TV industry is technology driven, so companies need to constantly improvise, innovate
and customize their products. Colored cabinets, headphones, 3-D 360 degree sound technology
and e-mail in TV, plasma TV and golden eye technology are just a few examples. The last few
years have seen a quantitative and qualitative change in TV technology and software. With the
advent of several local and foreign satellite channels, demand for CTVs has seen a rise. In fact,
the television manufacturing industry has come a long way from the big black and white TV sets
to the modern day ultra-thin Plasma and LCD TV sets. With the ever changing technology the
Television industry has adapted itself suitably to cater to the changing tastes of the consumer.
Although the top players viz. LG, Sony, Videocon, Phillips, Samsung and Onida have drastically
reduced prices, they have gained more volume due to increasing market size and higher
penetration levels, coupled with conscious shift towards flat color televisions. Aggressive and
innovative marketing strategies and technological advances have led to strong brand
differentiation and prices. In the process the industry has evolved with products available at
different price points at all levels. This process was also facilitated by growth in production in
the organized segment and domestic availability of multinational brands due to lowering of
import duties and other liberal measures. The television industry, thus, appears to have two
clearly differentiated segments. The MNCs also have an edge over their Indian counterparts in
2
http://www.cci.in/pdf/surveys_reports/indias_telecom_sector.pdf
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terms of technology, aggressive marketing strategy, economies of scale in branding through
international events (like sports events or International Summits) and associations combined with
a steady flow of capital. Thus, the sale of TVs also tends to be event driven. For instance, during
the Cricket World Cup in 1999, CTV sales recorded a phenomenal rise of 40-50%.
Many MNCs and domestic companies are now making India as a manufacturing centre because:
• Low cost skilled labor
• Tax free zones i.e. SEZs
• Qualified workforce
• Untapped domestic market
• Excellent supply base for glass and colour picture tubes
Some economic measures that have also played a role in this phenomenal growth are:
• Custom duty on colour picture tubes (CPT’s) lowered to 20% from 25%
• Abatement rates on TV sets have changed from 35% to 40%
• Special additional duty on customs of 4% was done away with
• Single rate of excise duty at 16%
Globalization and its impact on Television Industry in India
In countries like India, the economic liberalization has influenced the consumer durable industry
especially the television industry. This industry has seen a gamut of changes in the past one
decade making its market highly competitive and consumer driven. Changing and growing
demands of the consumers made the industry competitive. This globalization is important for
various reasons as discussed below:
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New areas for growth. Globalization provides the Indian television industry an access to new
markets beyond its typical Southeast Asian demographic constituents. Serving new markets can
not only provide new revenue sources but also lead to product innovations in the industry.
Minimal marginal cost. Globalization requires significant initial investment and learning. But
once global, the firm can easily release the programs produced for one market in other markets.
The success rate of a program across various markets may differ; nonetheless the marginal cost
is extremely low post-penetration thereby providing much higher overall returns.
Diversify and stabilize. Political, economic, or viewer preference upheavals in a market can be
disastrous to a firm, if the firm is completely dependent on that market. Globalization can
provide the much-needed diversification, stability, and insurance against unexpected, drastic
changes. A global firm can easily survive and organically adapt to the changes in market
conditions.
Better utilization of assets. Over the years, the Indian television industry has developed both
tangible and intangible assets in terms of production facilities, program libraries, and
experienced talent. Recycling and reusing these assets in global markets can increase the return
on these assets and make a better economic sense. It also provides global exposure to the Indian
talent leading to the development of professional approach to the activities of the industry.
Analyzing these benefits, after globalization and liberalization, many foreign players have
entered the Indian market. Together with this, consumers in India with open markets on an
average are enjoying lower prices, improved consumption, and improved savings and rising
standards of living. Before liberalization in India, the consumer was at the mercy of the producer
and savings management was prevailing in the sense that individuals saved and then consumed.
This might be because of no financing facilities, no credit card facilities and moreover demand
side economic were prevailing. After liberalization the total scenario has changed- consumers in
India moved from savings management to expenditure management. This is because of the
availability of goods and services at lower price, availability of credit cards, availability of
finance at low interest and in some cases zero interest and moreover the death of power of
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monopoly in many sectors because of the entry of the foreign players. Producers have become
price takers rather than price setters. The tastes and preferences, life style and consumption
patterns of the consumers have also changed. Like other third world countries, people in India
have started spending much more money and there has been a distinct shift from joint family
system to that of nuclear families.
Because of the entry of the foreign players we felt that in the Indian T.V. Industry, the following
changes have taken place
3
:
a- Economic substitutability and technical substitutability: The T.V industry is facing
intense competition and in the process new innovations in the form of giving additional
features are taking place;
b- Indifference in brand preference: The consumers are indifferent in choosing the brand
because whatever the brand that the consumer is going to purchase gives the same
satisfaction. This because the features of T.V in almost all the brands are same and there
is a negligible difference in the prices. However, local made company products are
cheaper. Hence we can define the indifference in brand preference as the locus of all
brands in which the consumer gets the same level of satisfaction;
c- Excludability: The producers are not excluding the customer before going to produce the
product like how they ventilate them before liberalization. Without due care and
attention, the relationship between producer and consumer becomes much more akin to a
gibberish than a purchase and sale one;
d- Rivalry: In the information era economy the use or enjoyment will no longer necessarily
involve rivalry. Especially with most tangible goods like TV, if X uses one brand of TV
there is no guarantee that Y also uses the same brand. Free market price provides the
3
These changes are mentioned by Father of Economics, Adam smith, in his book wealth of Nations (1776), mainly
for color TV sets; however, we feel that these changes apply to the entire TV industry.
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producer with an ample award for its effort. It also leads to the appropriate level of
production.
e- Transparency: The consumers know what they want and what they are buying so that
they can effectively take the advantage of competition and comparison. They can now
shop around and collect the required information whose marginal cost is zero. Hence the
producers should be transparent.
Challenges and Opportunities Ahead
The Challenges
Heavy taxation in the country is one of the challenges for the players. At its present structure, the
total tax incidence in India, even now, stands at around 25-30 per cent, whereas the
corresponding tariffs in other Asian countries are between 7 and 17 per cent.
About 65 per cent of Indian population that lives in its villages still remains away from some
consumer durables companies. A large proportion of its constituents still buys black and white
TVs and doesn't know what flat screens are. Also, foraying into these rural markets has a
considerable cost component attached to it. Companies not only have to set up the basic
infrastructure in terms of office space, manpower, but also spend on transportation for moving
inventory. Even LG and Samsung; and Videocon among Indian MNC, which are touted as
having the largest distribution network in the country, have a direct presence only in 15,000 to
18,000 of the around 40,000 retail outlets (for consumer durables) in the country.
Poor infrastructure is another reason that seems to have held back the industry. Regular power
supply is imperative for any consumer electronics product.
And the opportunities…
The rising rate of growth of GDP, rising purchasing power of people, higher propensity to
consume, more preference for sophisticated brands, all would provide constant impetus to
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growth of Television Industry segment in India. Opportunities for the penetration of consumer
durables would be deeper in rural India, especially when banks and financial institutions come
out with liberal incentive schemes for this industry. While the CTV market is facing a slowdown
due to saturation in the urban market, rural consumers should be provided with easily payable
consumer finance schemes and basic services, after sales services to suit the infrastructure and
the existing amenities like electricity, voltage etc.
Currently, rural consumers purchase their durables from the nearest towns, leading to increased
expenses due to transportation. Purchase necessarily done only during the harvest, festive and
wedding seasons — April to June and October to November in North India and October to
February in the South, believed to be months `good for buying’, should be converted to routine
regular feature from the seasonal character. The urban consumer durable market for products
including TV is growing annually by 7 to 10 % whereas the rural market is zooming ahead at
around 25 % annually. According to a survey conducted by Corporate Catalyst India, the rural
market is growing faster than the urban India now. The urban market is a replacement and up
gradation market now. The increasing popularity of easily available consumer loans and the
expansion of hire purchase schemes will give a moral boost to the price-sensitive consumers.
Consumer goods companies are themselves coming out with attractive financing schemes to
consumers through their extensive dealer network. This has a direct bearing on future demand.
The other factor for surging demand for consumer goods is the phenomenal growth of media in
India. The flurry of television channels and the rising penetration of cinemas will continue to
spread awareness of products in the remotest of markets.
“Adequate investment in Research and Development, attractive packages from government and
introduction of Goods and Services Tax (GST), will boost the growth and attract international
companies. The electronics and appliances industry size is estimated to reach US$40 billion by
the year 2012. Government initiatives towards supporting rural income levels will provide
stimulus to the rural market for electronic and durable products as well.” – Pinakiranjan Mishra,
Partner and Industry Leadfer, Retail and Consumer Product Practice, Ernst and Young.
The following diagram depicts the opportunities for this sector in domestic as well as in the
export market. However, in this paper, we will consider only the domestic market.
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Competition Commission Of India
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CHAPTER FOUR
REVIEW OF LITERATURE
The vast literature available on television industry provides a mixed picture of competition in
this sector. Some authors say that this industry is still in its infancy, while others say that this
industry is among one of the mature group of companies in India. A brief note on some of the
findings by celebrated personal is presented below.
Seshaiah and Krishna (2003) say that branding of TV is an important factor in determining the
choice of TV by buyers, which depends not only on age, education and income, but also on
personality and psychological dimensions. Consumers buy not the products but bundle of
emotions. A “Usage Factor” runs through the data. Many more people tend to associate a
positive attribute with longer brands than associate it with smaller brands. The explanation is that
a larger brand has more claimed user than a smaller brand and the users of brand are more likely
than non-users to give a positive attribute response. This effect is known more generally as
“Double Jeopardy” or DJ Effect.
4
Talking of TV industry per se, on one hand, the production of black- and-white (B&W) TV sets
has stagnated around six million sets a year since 1995 and is not likely to improve its
performance in the near future, while on the other hand, competition in other TV sets like CTV,
LCDs, etc. is so fierce that some of the companies have completed exited the market.
The literature also says that the industrial circles are of the view that the competition offered by
the foreign brands in CTVs has almost killed 60-odd indigenous manufacturers but has
strengthened the position of the three Indian leaders. Over the years, these Indian brands have set
up their distribution networks in urban areas besides the four metros, namely, Mumbai, Calcutta,
Chennai and Delhi. The multinationals therefore will face severe competition in the vastly
spread-out, semi-urban areas.
4
Barwise and Ehrenberg (1985).
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The competition in this sector is of a different character, in the sense that the market leaders—
both Indian and foreign—have been trying to lure consumers through aggressive sales promotion
programmes and after sales services, rather than the type of competition which is seen in other
sectors. Amazingly, the literature also says that, the B&W TV is more popular compared to the
CTV because its sets are cheaper and are able to attract families in the lower income brackets.
Annual sales of B&W TV sets are 50% more than those of CTVs. Also, it is no secret that the
year 1998 was a lean one for the Indian industrial sector as a whole. However, the CTV industry
(including both domestic and foreign brands) was not much affected, thanks to increased
publicity, easy schemes of finance, buy-back schemes etc.
The new dawn came for television industry in the new century when the Department Of
Electronics fully changed the climate and raised funds for R&D activities. The delicensing of
most of the equipments needed by the industry has been a positive factor in its expansion. What
is more, both excise and customs duties have been reduced by the government. The country also
benefitted by the collaboration on getting technical know-how from Korean companies.
However, the International scene is dynamic and not static. Kumar Chopra, managing director of
Thomson CE India Pvt Ltd, stated recently that, “The Indian TV industry has an ocean of
opportunities staring it in the face. The question is: Will it muster up enough courage to grab it?”
Looking into a completely different perspective, Mihir Parikh says, “To promote Indian
Companies worldwide, we have to first make the presence in the US market and fight the
competition there.”
5
He further added that the lack of finance for innovation makes Indian firms
loose the competition in the world. Continuing his discussion, he pointed out that acts like
Copyrights Act, MRTP Act, IPR, etc., have, comparatively, not been of much help to Indian
industries.
The literature also reveals that while the entry costs to this industry are quite substantial, the exit
costs from the TV industry are very high. Closing down of a company is an elongated and time
consuming process and is a costly affair. Thus, it’s better to sell the firm or to get merge with
some other company, instead of completely going out of the market. Acquiring some weak
enterprises or merging with some other firm is comparatively easier.
5
In saying this, he was referring to both the content and physical markets.
Competition Commission Of India
22
However, in this case, efficiency issue comes up. When it comes to efficiency defense in merger
analyses, various economists and lawyers have several issues and they often contradict among
themselves. While a merger allows the combined firm to exploit the potentialities, which a single
firm can’t, it may also lead to anti-competitive practices.
Anne Perrot presents the conflict between competition theory and economic theory in terms of
information, environment, and employment and in terms of a complete general equilibrium
scenario. He gives three reasons for not looking at consumer surplus in short run, but overall
economic growth in the long run. These are:-
1. Competition authorities have the relevant tools to measure the consequences of a practice
or of a merger on the market equilibrium, but suffer from the lack of information on
other aspects of a practice, like its effects on the environment or on employment. This
lack of data makes it difficult to take into account these far-removed objectives.
2. A general and well-known economic policy principle consists in using the tool that is the
most appropriate to achieve a given objective. For instance, environmental policy should
intervene at the relevant step of micro-decisions, i.e., where these decisions involve
environmental consequences. In the same spirit, employment policies are more relevant
to the employment level and employment conditions than is competition policy, even if
the latter has an impact on the job market.
3. The most pertinent approach to dealing with the functioning of an economy as a whole
would be, theoretically, a general equilibrium one.
On the other hand, Wolfgang Kerber, a renowned economist, while focusing on normative
concept of Competition Law, says that the competition theory has not been developed much and
neither “welfare” nor “efficiency” is a sufficiently clear and satisfactory answer to the question
of promoting competition.
Michal S Gal focuses on a completely different approach and Law says that Competition Law
should distinguish efficiency from equity and fairness, and should focus more on fairness than
efficiency.
6
6
His point adds to the view of Kerber, mentioned above.
Competition Commission Of India
23
Thus, the literature is diverse and the debate is still unresolved. This paper also presents a similar
debate, but from a completely different setup. The paper does not consider the viewership or the
branding of the company, but presents the similar debate by presenting a simple model, starting
from the next chapter.
Competition Commission Of India
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CHAPTER FIVE
AREA of RESEARCH and MODEL-MAKING
Introducing the Model
An important feature of developing country policies in the last decade has been the enactment of
Competition Acts as part of a pro-competitive policy. Even various rounds of WTO vigorously
advocate the promotion of competitive environment in International Trade.
India too has substantially improved the competition climate in its manufacturing sector since
1991 via a series of changes in both domestic and international trade policies. The effect of these
policies has been mixed. In some sectors, due to easy of entry of firms, competition has
increased, while in others, due to the survival of fittest strategies, competition has reduced.
However, various studies show that the market by itself does not bring about competitive
outcomes, probably because of unequal strengths of the market players. This indicates that the
role of some regulatory agency is must in promoting either competition or concentration. In this
backdrop, Competition Act of 2002 was passed.
“The Competition Act was enacted in 2002 keeping in view the economic development that
resulted in opening up of the Indian economy, removal of controls and consequent economic
liberalization which required the Indian economy be enabled to allow competition in the market
from within the country and outside. The Competition Act, 2002 provided for the establishment
of a Competition Commission, to prevent practices having adverse effect on competition, to
promote and sustain competition in markets, to protect the interests of consumers and to ensure
freedom of trade carried on by other participants in markets in India, and for matters connected
therewith or incidental thereto.”
7
7
The Competition Act 2002 amended in 2007.
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The literature shows that openness to foreign competition, leads to pro-competitive set up and it
reduces profitability of the firm, but the Price Cost Margin of the firms does not reduce much as
the wage share of the labour has decreased over the years. There is a trend of weakening of the
labour unions, which have lead firms, especially more efficient firms, to maintain their monopoly
power. Thus, there is a need for stimulating the competition for not only restricting the monopoly
practices but also for safeguarding the interest of the employees.
Coming to TV industry, it is true that Indian Television Industry is highly competitive in nature.
Various brands are coming up and various brands are closing down. Entry leads to more
competition, while this competition leads to survival of fittest strategies among the companies.
The graph below depicts the stated claim.
Herfindahl- Hirschman Index (HHI) is calculated by summing the squares of the market shares
of all the firms active in the market. The HHI potentially reflects both the number of firms in the
market and their relative size. It’s a much better indicator of concentration in the market. HHI
lies between 0 and 1. Perfect competition has the value zero, while monopoly has the value one.
The value of HHI in Television industry is less than 0.25 for all the years. In earlier decades,
competition was fierce, while now, market structure is more of competitive in nature. However,
Hirschman-Herfindahl Index
0
0.05
0.1
0.15
0.2
0.25
1
9
9
2
1
9
9
4
1
9
9
6
1
9
9
8
2
0
0
0
2
0
0
2
2
0
0
4
2
0
0
6
2
0
0
8
Years
H
H
I
Hirschman-Herfindahl
Index
Competition Commission Of India
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competitive market structure is hard to find in its true sense. Thus, we consider Television
market to be monopolistically competitive market structure.
Television industry is monopolistic competitive in nature is clear from various directions. The
features of this type of market structure, clearly applies to the television industry. There are large
number of buyers and sellers; product differentiations; and imperfect product knowledge, are the
keys to this industry.
8
The advertisement planning and timing, the type of offers made and their
timing, etc, all reveal that this market is monopolistically competitive in nature.
CMIE data shows that there are around 24 different brands (companies), big and small, operating
in Television Industry. Competition is wild and both the strategies, competitive as well as
surviving, are prevalent in the market. Both Cooperating and Non-cooperating strategies are
customary to this market. These cooperating and non-cooperating strategies are leading to what
Schumpeter had called “Creative Destruction”.
9
On the other hand, in this cooperating and non-cooperating scenario, there is one more
conflicting issue being considered, which is on efficiency grounds. Economists say that
competition promotes efficiency by having efficient allocation of resources; while on the other
hand, they also say that merger leads to more efficient production as economically less
productive firms get out of the market. Usually, the issues narrow down to the question of total
welfare standards v/s consumer welfare standards. However, it is also true in welfare economics
that there are an infinite number of “efficient allocations” in a society, but the theory of efficient
allocations cannot determine the optimal efficient allocation.
10
8
A brief note on monopolistically competitive market structure is given in the appendix.
9 Creative destruction is an economic theory of innovation and progress which was introduced by Joseph
Schumpeter. It can cause temporary economic distress. Layoffs of workers with obsolete working skills can be one
price of new innovations valued by consumers. Though a continually innovating economy generates new
opportunities for workers to participate in more creative and productive enterprises (provided they can acquire the
necessary skills), creative destruction can cause severe hardship in the short term, and in the long term for those who
cannot acquire the skills and work experience
.
10
There is no so called Optimum Optimorum.
Competition Commission Of India
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This paper focuses on a completely different aspect. It moves away from the conventional
pattern and presents a different scenario. It focuses on a prospective merger analysis, which
might be possible in the future.
11
It analyzes three major companies, one Indian company:
Videocon, and two Korean companies: LG and Samsung.
A hypothetical situation is created where the two Korean companies, LG and Samsung, get
together and try to affect the market variables like sales figure, market share, advertising and
marketing expenses, etc. We are going to analyze the formation of this new company called
SamLG from economic as well as from competition perspective.
12
The economic analysis is
more of an econometric analysis, the data for which is taken from CMIE Prowess and EIS.
13
The
time period is from 1992 to 2009. However, forecasting is done for the year 2012, because any
change happening today, will have an effect not before 2012.
By creating this type of situation, we will try to find out the answers of the questions like: Why
we choose a merger? Why we choose LG and Samsung only? What will be the effect on the
market and the competition? Who will be the new market leader? What is the economics behind
11
…in this industry or in any other sector.
12
The two companies are getting together. They may form a cartel, or they get merged or get into a joint venture or
a combination.
13
We are not looking at CTV, Plasma or LCD TV markets separately, but the complete TV market. This is so
because of the data availability issues.
Competition Commission Of India
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this merger? And what will be the roll of the concerned authorities? Let’s look at these issues
one by one.
Why are we considering a merger or a joint venture?
Formation of a merger or a cartel or a joint venture is considered to be economically efficient for
the society. There are various reasons for choosing this type of analysis.
First, the entry barriers to this industry are low but the exit barriers are quite high. If things do
not go right, the company has to think twice before getting out of the market. Thus, they think
that instead of facing exit barriers, it’s better to get collaborated with some other enterprise and
remain in the market.
Second, the benefits of forming a cartel are higher to the firm then what the different firms can
earn individually. This can be easily explained by the Game-Theoretic Approach.
14
The
incentive for firms to collude, and the difficulties of sustaining collusion, can be illustrated by
the “Prisoners’ Dilemma.” In the following game, there are two firms, Firm A and Firm B, who
can each either have competitive or cooperating strategies.
Firm A/ Firm B Competitive Cooperating
Competitive 10,10 30,0
Cooperating 0,30 20,20
The first number in each quadrant in the above Figure shows the profits earned by Firm A and
the second number shows the profits earned by Firm B. For example, if Firm A tries to play in a
competitive setup while firm B wants to cooperate, then firm A will get a payoff of 30, while
firm B will end up getting Zero payoff (top right quadrant). Thus, looking at the diagram, it is
clear that if both the firms cooperate, they can together earn higher profits, and may pass on the
benefits to the consumers, thus, increasing the overall welfare of the society.
15
14
Note that this type of collaboration can be an explicit or a tacit collusion.
15
Notice that the payoffs are such that there is no incentive for the firms to deviate from the set equilibrium.
Competition Commission Of India
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Another reason for us to consider this merger is that it leads to positive synergies to the society.
16
Synergy, also known as synergism, refers to the combined effects produced by two or more
parts, elements, or individuals. Simply stated, synergy results when the whole is greater than the
sum of the parts. For example, two people can move a heavy load more easily than the two
working individually can each move their half of the load.
There are positive synergies in an organization which can be seen in the combined efforts of
individuals working together. Synergy can result from the efforts of people serving on
committees or teams. By combining their knowledge, insights, and ideas, groups often make
better decisions than would have been made by the group members acting independently.
Positive synergy resulting from group decisions may well include the generation of more ideas,
more creative solutions, increased acceptance of the decision by group members, and increased
opportunity for the expression of diverse opinions. Much of the current interest in teams and
team building is an effort to achieve positive synergy through the combined efforts of team
members. Organizations strive to achieve positive synergy or strategic fit by combining multiple
products, business lines, or markets. One way to achieve positive synergy is by acquiring related
products, so that sales representatives can sell numerous products during one sales call. Rather
than having two representatives make two sales calls to a potential customer, one sales
representative can offer the broader mix of products.
Mergers and acquisitions are corporate-level strategies designed to achieve positive synergy.
17
The intended result of many business decisions is positive synergy. Managers expect that
16 According to the American Heritage Dictionary, the term "synergy" is derived from the Greek word sunergos,
meaning "working together." Positive synergy is sometimes called the 2 + 2 = 5 effect. Operating independently,
each subsystem can produce two units of output. However, by combining their efforts and working together
effectively, the two subsystems can produce five units of output.
17 For instance, The 2004 acquisition of AT&T Wireless by Singular was an effort to create customer benefits and
growth prospects that neither company could have achieved on its own—offering better coverage, improved quality
and reliability, and a wide array of innovative services for consumers.
Competition Commission Of India
30
combining employees into teams or broadening the firm's product or market mix will result in a
higher level of performance.
Thus, the choice of analysing a merger through the hypothetical situation is valid from various
grounds. Now, we are going to answer another question, why we have chosen only LG and
Samsung for this analyses.
Why LG and Samsung only?
Among the number of foreign players operating in India, in Television Industry, the two Korean
players, LG and Samsung, are the most vibrant. On the surface, they are aggressive, while
beneath the ocean, they may be operating on some kind of cooperating strategies. If one focuses
on the pricing strategies, marketing strategies, product choice, advertisements publicized, offers
made and their timings, in India, it is clear that there is something which is going on wrong.
Thus, we are going to study the collaborated firm SamLG and the Indian MNC Videocon.
18
Samsung is the world's largest conglomerate by revenue with annual revenue of US $173.4
billion in 2008 and is South Korea's largest chaebol. A large number of South Korean firms,
particularly those in the electronics industry, are dependent on Samsung for the supply of vital
components or raw materials such as semiconductor chips or LCD panels. This has led to
continued allegations of price fixing and monopolistic practices. Samsung Group accounts for
more than 20% of South Korea's total exports. In many domestic industries, Samsung Group is
the sole monopoly dominating a single market, its revenue being as large as some countries' total
GDP
19
. The company has a powerful influence on the country's economic development, politics,
media and culture, being a major driving force behind the Miracle on the Han River; many
businesses today use its international success as a role model.
18
The following details are taken from various reports of Corporate Catalyst India.
19
In 2006, Samsung Group would have been the 34th largest economy in the world if ranked, larger than that of
Argentina.
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31
Compared to other major Korean companies, Samsung survived the Asian financial crisis of
1997–98 relatively unharmed. Samsung Electronics, which saw record profits and revenue in
2004 and 2005, overtook Sony as one of the world's most popular consumer electronics brands,
and is now ranked #19 in the world overall.
On the other hand, LG is the second largest maker of TV sets in the world. With every design of
its television sets, LG has won multiple awards that recognize not only in design but also in its
high-performance multimedia and entertainment in addition to its high quality and durability.
The company has announced that it is likely to become the first producer of TVs for 2012
because it will sell a substantial amount of equipments to try to overtake arch-rival Samsung.
Videocon, an Indian multinational, is the market leader in television industry and is consistently
maintaining its position at the first place for over more than a decade. The Videocon group has
an annual turnover of US$ 4.1 billion, making it one of the largest consumer electronic and home
appliance companies in India. Since 1998, it has expanded its operations globally, especially in
the Middle East. Videocon has many products (within the television segment itself) and is selling
them through a Multi-Brand strategy. With the largest sales and service network in India,
Videocon Group brands include Akai, Electrolux, Hyundai, Kelvinator, Kenstar, Kenwood,
Next, PlanetM, Sansui, Toshibha, Philips (TV Products) etc.
Videocon is one of the largest CPT Glass manufacturers in the world, operating in Mexico, Italy,
Poland and China. The major advantages that Videocon has in India are as follows:
Cost cutting – Videocon is better positioned to shift the activities to low-cost locations and also
it can integrate the operations with the glass panel facility in India. With the CPT manufacturing
facilities acquired from Thomson S.A., Videocon wants to leverage its position in the existing
parts of the business and this acquisition has given it a strong negotiation position and can reduce
impact of glass pricing volatility. Videocon has the capacity to reduce the costs by upgrading and
improving the existing production lines.
Vertical Integration – The acquisition, mentioned above, has helped Videocon in vertically
integrating its existing glass-shell business where it has been enjoying substantially high
margins. Videocon’s glass division has the largest glass shell plant in a single location. This
Competition Commission Of India
32
gives the company an unrivalled advantage in terms of economies of scale and a leadership
position in the glass shell industry.
Rationalization of Product Profile – Videocon has modified its product profile to cater to the
changing market needs like moving away from very large size picture tubes to smaller ones.
“Apart from the overall strategy, Videocon also has a plan on the technological front. It wanted
to improve the setup for the production line and line speed post-merger. Its focus was to increase
sales while reducing the costs and thereby improving the productivity of the existing line. The
company also wanted to foray in a big way into LCD panels’ back-end assembly. On the sales
front the company wanted to leverage on the existing clients of Thomson and build relation as a
preferred supplier to maximize sales. Also, Videocon could benefit from OEM CTV business
with the help of Videocon’s CTV division, invest for new models and introduction of new
technologies.”
An official of Videocon said on the deal “The word is out in the world that India and Indian
companies are not just a good bet by themselves, but also a hedge against China.”
20
Despite
facing a highly competitive market Videocon has managed to turn a plant around while the other
is on its way.
The vigorous marketing efforts being made by the domestic majors will help the industry. The
Internet is now being used by the market functionaries will lead to intelligence sales of the
products in the future. It will help to sustain the demand boom witnessed recently in this sector.
The ability of imports to compete is set to rise. However, the effective duty protection is still quite
high at about 35-40 per cent. So, a flood of imports is unlikely and would be rather need based.
Reduction in import duties may significantly lower prices of products. Otherwise, local
manufacturing will continue to stay competitive. At the same time, there will be some positive
benefits in the form of reduction in input costs.
20
Ibid 7
Competition Commission Of India
33
Given this huge success of Videocon, it emerges to be the market leader. It has the maximum
share in the market for the entire television industry and has the maximum sales in India. The
graphs below illustrate the same.
Market Share
0
10
20
30
40
50
2
0
0
0
2
0
0
2
2
0
0
4
2
0
0
6
2
0
0
8
2
0
1
0
2
0
1
2
Year
P
e
r
c
e
n
t
(
%
)
Videocon
LG
Samsung
SamLG
Sales
0
2000
4000
6000
8000
2
0
0
0
2
0
0
2
2
0
0
4
2
0
0
6
2
0
0
8
2
0
1
0
2
0
1
2
Year
R
s
c
r
o
r
e
Videocon
LG
Samsung
SamLG
Both the graphs show that after a small decrease in the year 2007, Videocon has gained a lot
within two years and if the same trend continues, it will have nearly 40% of the market share by
2011.
Competition Commission Of India
34
When LG and Samsung are merged together, called SamLG, the market share of this new
corporation is somewhere above Videocon
21
. This means that together, the two companies can
beat Videocon, and challenge the monopoly of Videocon in rural areas, where individually they
were not able to do so.
22
Thus, it is quite useful to study this situation in a greater detail.
Another reason for choosing LG and Samsung is that separately, these two companies fight with
one another in becoming the first company of Korea. If they join hands, not only they will
become the first company, but also will get a chance to spread their operations in different parts
of the world, which are still untouched by them. Thus, the choice of merging these two
companies seems to be apposite.
Moreover, we are talking of two companies getting merged. There could be a possibility that
Samsung and LG form a cartel. Cartel has been defined in section 2c of the Competition Act
2002 as:
“Cartel” includes an association of producers, sellers, distributors, traders or service providers
who, by agreement amongst themselves, limit, control or attempt to control the production,
distribution, sale or price of, or, trade in goods or provision of services.
While the formation of a cartel amounts to an anti-competitive trade practice, which is
indisputably against the public interest, the existence of a cartel is seldom proved by direct
evidence. Generally no express agreement showing its existence is ever found. It has to be
proved by circumstantial evidence by setting up a chain events leading to a common
understanding or plan. The underlying issue is what, at the minimum, constitutes the ‘meeting of
the minds’ which must be directly or circumstantially established to prove that there is a
restrictive on competition.
21
Notice that in getting into the figures of the combined company SamLG, we assume that the figures will get added
up in an additive form with equal weights. In projecting the values for the future years, we assume that the trend
which was prevailing in the previous years will continue to remain the same. The figures are founded out by doing
the trend analyses using the statistical package Stata. For all the graphs we are showing in this paper are developed
by this technique only. The tables for the variables included in the paper are given in the Appendix.
22
That’s the greatest disadvantage of the law in India that it considers market share to be the only indicator of
dominance. The two Korean companies, not being the leader in numbers, are the leaders in other variables, which
actually harm the competition climate in the market.
Competition Commission Of India
35
Lord Denning in RRTA v W.H.Smith and Sons Ltd. observed that: “People who combine together
to keep up prices, do not shout it from their housetops. They keep it quiet. They make their own
arrangements in the cellar where no one can see. They will not put anything into writings nor
into words. A nod or wink will do.”
23
Another case could be that the two companies form an export cartel. An export cartel is an
agreement or arrangement between firms to charge a specified export price and/ or to divide
export markets. Most countries exempt export cartels from their anti-trust laws, as long as they
do not have any anti-competitive effect on domestic market. In India, similar exemption exists in
both the outgoing MRTP Act and the new Competition Act. The rationale for permitting export
cartels is that it may facilitate cooperative penetration of foreign markets, transfer income from
foreign consumers to domestic producers and results in a favorable balance of trade.
Thus, the two companies may form a cartel or get merged or form an export cartel, or any kind
of combination. The focal point is to study this kind of set-up through the eyes of Competition
Authorities.
Emerging Competition Issues
Competition Law 2002 was introduced to serve two fold purposes. At the first instance,
competition law ensures competition in the market. Secondly, wherever there is competition,
there is a likelihood of unfair competition. Violation of the “rules of game” is the essence of
unfair competition, and it is the nature of the competition that determines those rules. Thus,
competition law also restricts unfair competition in the market.
On the other hand, Karl Marx stated that “Competition contains the seed of future
centralization”, or rather, competition contains the seed of future capital accumulation and
concentration that is achieved through “mergers and acquisitions”.
24
23
Roy and Kumar. This type of cartel is called a tacit collusion (mentioned earlier).
24
Das Kapital, Karl Marx, only the words in quotes.
Competition Commission Of India
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One thing worth noting here is that competition law says to promote competition, but
surprisingly, the term “Competition” has not been defined under the competition act of 2002.
Competition Commission, UK defines competition as “a process of rivalry between firms or
other suppliers seeking to win customers”. This definition does not define the degree of rivalry
needed as it focuses on the process of competition rather than the outcome.
However, Competition Law 2002 forces the market players to search for better permutation and
combinations for providing greater profits through greater efficiency.
25
Thus, there could be a
reshuffling where the gigantic MNCs LG and Samsung get together.
The competition laws of various countries imbibe the idea that no enterprise or association of
enterprises or person or association of persons shall enter into any agreement which relates to
production, supply or distribution of goods or provision of services which causes or is likely to
cause an appreciable adverse effect on competition in their country and that such an agreement
would be declared void. The same rests on the premise that competition law is designed to be a
comprehensive character of economic liberty aimed at preserving free and unfettered
competition as the rule of trade, and that unrestrained interaction of competitive forces will yield
the best allocation of economic resources of the country, the lowest prices, the highest quality
and greatest material progress.
But the entire concept of appreciable adverse effect on competition is made subjective that may
vary from case to case. And, therefore, under section 19(3) of the Competition Act 2002 it is
provided that while determining whether an agreement has an appreciable adverse effect on
competition or not, the Competition Commission of India (CCI), the nodal agency, incorporated
under the administrative set up of the Act, and has to look at the following factors:
a) Creation of barriers to new entrants in the market;
b) Driving existing competitors out of the market;
c) Foreclosure of competition by hindering entry into the market;
d) Accrual of benefits to consumers;
25
Roy and Kumar, Competition Law in India.
Competition Commission Of India
37
e) Improvements in production or distribution of goods or provision of services;
f) Promotion of technical, scientific and economic development by means of production or
distribution of goods.
Promotion of economic growth is the ultimate object of the Act, intended to achieve. The
operation of the economic system should not result in the contraction of wealth and means of
production to the common detriment. The broad premises on which the Competition Act rests are
unrestrained interaction of competitive forces, maximum material progress through rational
allocation of economic resources, availability of goods and services of quality at reasonable
prices and finally a just and fair deal to the consumers. An interesting feature of the statute is that
it envelops within its ambit, fields of production and distribution of both goods and services. In
this respect, the pre-entry restriction on investment decision of the corporate sector has outlived
its utility and has become a hindrance to the speedy implementation of industrial projects. By
eliminating the requirement of time-consuming procedures and prior approval of the
government, it would be possible for all productive sections of the society to participate in efforts
for maximization of production.
In this promotion of economic growth and maximization of production capabilities, if the merged
firm SamLG gets into anti-competitive practices, then there could be problems regarding this
merger/ collaboration. There are various anti-competitive practices mentioned in the Act
26
and
there are also various practices which a dominant player may engage in, and abuse its position as
a market leader.
27
A brief description of these practices and how the combined firm SamLG can
get into it is explained below.
Abuse of Dominant Position
Section 4 of Competition Act 2002 defines the dominant position as a position of strength,
enjoyed by an enterprise, in the relevant market, in India, which enables it to—
26
Chapter II, Section 3.
27
Chapter II, Section 4.
Competition Commission Of India
38
a). Operate independently of competitive forces prevailing in the relevant market; or
b). Affect its competitors or consumers or the relevant market in its favour.
Since SamLG may become the market leader in our analysis, so it might be the case that it enters
in unfair competitive practices. Section 4(2) of Competition Law 2002 enumerates the activities
which can be considered as abuse, if practiced by the enterprise holding dominant position in the
market, namely: unfair or discriminator condition or price including predatory pricing, limiting
or restricting production or technical or scientific development, denying market access, imposing
supplementary obligations having no connection with the subject of the contract, or using
dominance in one market to enter into or protect another relevant market. Let us look at these
one by one.
Predatory Pricing
Predatory pricing is defined as the situation wherein the firm with the market power prices below
cost so as to drive the competitors out of the market and acquire or maintain a position of
dominance. Basically, price below average variable cost is regarded as abusive. It’s a kind of
price discrimination strategy. The predatory merchant then has fewer competitors or is even a de
facto monopoly. In essence, the predator undergoes short-term pain for long-term gain.
Therefore, for the predator to succeed, it must have sufficient strength (financial reserves,
guaranteed backing or other sources of offsetting revenue) to endure the initial lean period.
In our hypothetical situation, it is difficult to estimate both the prices and the average variable
cost, and it is also difficult to find out the prices and costs in actual situation. Thus, we can only
Competition Commission Of India
39
say that if the price charged by the new company SamLG is less than the competitive price, then
it is abusive, even though the price is above the cost.
Price Discrimination
Price discrimination means charging different prices to different customers, for the same
commodity. Any firm or a company engages in price discrimination to capture the consumer
surplus and increase its profits. The following diagram explains it clearly.
Figure1 Figure2
In the above diagram (fig1), a single price (P) is available to all customers. The amount of
revenue is represented by area P, A,Q, O. The consumer surplus is the area above line segment P,
A but below the demand curve (D).
With price discrimination, (the bottom diagram), the demand curve is divided into two segments
(D1 and D2). A higher price (P1) is charged to the low elasticity segment, and a lower price (P2)
is charged to the high elasticity segment. The total revenue from the first segment is equal to the
area P1,B, Q1,O. The total revenue from the second segment is equal to the area E, C,Q2,Q1.
The sum of these areas will always be greater than the area without discrimination assuming the
demand curve resembles a rectangular hyperbola with unitary elasticity. The more prices that are
introduced, the greater the sum of the revenue areas, and the more of the consumer surplus is
captured by the producer.
The new company SamLG can do this very competitively. After merger, they can develop a new
Television, having the best features of both LG and Samsung television sets and then price it
Competition Commission Of India
40
accordingly. They can have Exchange Offers like: Customers having LG or a Samsung TV
already, will get this brand new TV which is of better quality absolutely free of cost, in exchange
of their old LG or Samsung TV. Customers of other brands can have this TV at 50% off on
exchange of their old TV. In addition to this, SamLG can provide an essential facility like
insurance of television for one year (apart from guarantee period) to the (already) users of LG
and Samsung. Price discrimination can also take the form of Corporate Discounts, whereby the
new company SamLG gets in contact with some other company (not in the same business); to
sell its TV sets to the employees of that company. This kind of offer is anti-competitive and
competition authorities have to keep an eye on them.
Tying and Bundling
A “tying arrangement” is an agreement by the party to sell one product but only on the condition
that buyer also purchases a different product, or at least agrees that he will not purchase the
product from any other supplier. Bundling refers to the situation where a package of two or more
products is offered. If only the bundle is offered and not its individual components then bundling
is called ‘pure’, otherwise it is ‘mixed’. This kind of situation can arise in consumer market,
where SamLG says to buy a mobile phone/ or a television trolley/ or a Dish antina with the
television at a lower cost. Tying and bundling can also come in the intermediate market, where
SamLG is giving (better and more) incentives to retailers to sell its product to the consumers.
Limiting or Restricting Production
The new company SamLG can limit the production of their old television sets with the view that
they are coming up with the new television sets, having the features of both the televisions, and
this may lead to increase in the price of television sets already in stocks.
Creating Entry Barriers
Competition Commission Of India
41
It is very likely that the new company SamLG may create the entry barriers in the industry
through huge Research and Development Expenditures
28
, Advertising and Marketing Strategies,
building up a massive infrastructure, having economies of scale, getting IPR on new product, etc.
The firm may incur endogenous sunk costs which, in economics, are considered to be one of the
potential entry barriers.
Exclusive Distribution Arrangements
Explanation to Section 3(4) (c) of the Competition Act 2002 explains “exclusive distribution
arrangements” as those which ‘includes any agreement to limit, restrict or withhold the output or
supply of any goods or allocate any area or market for the disposal or sale of the goods.’
Accordingly, the new company SamLG can engage in this type of practice by giving incentives
(either monetary or of any other kind) to the dealers that they have to promote the products of
new company, among the consumers, and try to discourage the sales of the competitors. They
can do this in any relevant product or geographical markets. They can also engage in “refusal to
deal” strategies by not to deal with the agent who do not follow their terms and conditions for the
distribution.
Effects on Market Variables
According to the Competition Law, in India, whenever the Competition Commission has to look
at the viability of the any merger or want to verify that any dominant position exist in the market
or not, certain variables are analyzed again and again. Finding out the dominant position in the
relevant market is the first step to our analysis.
The current market share cannot be the sole indicator of the dominance as it may be constrained
by the threat of competition from potential entrants and by the purchasing power of its
customers. Thus, we have to look at other variables also mentioned under section 4 of the
Competition Act 2002. Though some of them are quite difficult to measure, but we try our best
28
The new company SamLG can also reduce the R&D expenditures saying that the merger has lead to a buoyant
increase in technology and the company can do a lot without incurring such huge expenses.
Competition Commission Of India
42
to give the maximum. The list of these variables is as follows and this section will check out
these variables and their interpretation for competition in the market.
29
(a) Market share of the enterprise;
(b) Size and resources of the enterprise;
(c) Size and importance of the competitors;
(d) Economic power of the enterprise including commercial advantages over competitors;
(e) Vertical integration of the enterprises or sale or service network of such enterprises;
(f) Dependence of consumers on the enterprise;
(g) Monopoly or dominant position whether acquired as a result of any statute or by virtue of
being a Government company or a public sector undertaking or otherwise;
(h) Entry barriers including barriers such as regulatory barriers, financial risk, high capital cost of
entry, marketing entry barriers, technical entry barriers, economies of scale, high cost of
substitutable goods or service for consumers;
(i) Countervailing buying power;
(j) Market structure and size of market;
(k) Social obligations and social costs;
(/) Relative advantage, by way of the contribution to the economic development, by the
enterprise enjoying a dominant position having or likely to have an appreciable adverse effect on
competition;
(m) Any other factor which the Commission may consider relevant for the inquiry.
A brief detail about these variables in the Television industry is given as follows:
a). Market share of the enterprise.
Market share, in strategic management and marketing is, according to Carlton O'Neal, the
percentage or proportion of the total available market or market segment that is being serviced
by a company. It can be expressed as a company's sales revenue (from that market) divided by
the total sales revenue available in that market.
29
List is taken from Competition Act 2002.
Competition Commission Of India
43
Videocon is the market leader having the market share of nearly 36% in 2009, while LG is
having around 18% and Samsung is having about 16%. If the Korean firms are taken together,
then the market share of new firm SamLG would be around 34% in 2009. It is less than
Videocon, but forecasting reveals that over the years, market share of SamLG would be
approximately 50% and Videocon would be left behind with the share of only 34%.
30
Having control over nearly half of the market, SamLG will become the leader in the market.
Though the market will not be called as a monopoly, but surely, there would be an adverse effect
on the competition in the market. According to the established judicial pronouncements, very
large market shares, 50% or more, may in themselves be evidence of existence of dominance
position.
31
b). Size and resources of the enterprise
The Competition Act 2002 does not specify what is the size of the enterprise and what all will be
included in the resources of the enterprises. The act (also) does not specify how to measure these
variables. So, we are assuming net investment (physical), measured by net fixed assets
32
, of the
company as an indicator of the size of the company. As far as the resources are concerned, we
are taking capital employed as the indicative variable.
33
The graph below shows that Videocon is still ranking first if you consider size and the resources
of an enterprise in India. Market dominance is not only shown by the market size or share, but
these variables are also important to have a look at. Having the largest size and resources,
30
The graph of this has already been shown above.
31
Roy and Kumar
32
Net Fixed Assets is a term used in accounting for assets and property which cannot easily be converted into cash.
Fixed assets normally include items such as land and buildings, motor vehicles, furniture, office equipment,
computers, fixtures and fittings, and plant and machinery.
33 Capital employed is the value of the assets that contribute to a company's ability to generate revenues, i.e. their
liquidity.
Competition Commission Of India
44
Videocon is helping the competition authorities in maintaining the competition in the market,
even after the merger of LG and Samsung.
Net Fixed assets
0
2000
4000
6000
8000
2
0
0
0
2
0
0
3
2
0
0
6
2
0
0
9
2
0
1
2
Year
R
s
C
r
o
r
e
Videocon
LG
Samsung
samLG
Capital Employed
0
5000
10000
15000
2
0
0
0
2
0
0
3
2
0
0
6
2
0
0
9
2
0
1
2
Year
R
s
c
r
o
r
e
Videocon
LG
Samsung
SamLG
c). Size and importance of the competitors
Since we are investigating the merger of LG and Samsung and are considering Videocon to be
the major competitor, we have, thus, covered this part above. One thing to notice is that the new
firm has the potential to derive smaller brands like Goa electronics, Hendez electronics, Trends
Electronics, etc. out of the market, which have very less market share of nearly 1-2%. These
companies will not be able to face the stiff competition so created and so will be driven out of
the market.
d). Economic power of the enterprise
Economic power of an enterprise can be measured by the income it earns, its profits, its paid up
capital, its net worth, share capital, etc. We are not going to look at so many variables, but just a
few. The graphs of these variables are as follows
34
:
34
The accounting meaning of these variables and their formulae are mentioned in the Appendix. We are not
considering the economics of these variables.
Competition Commission Of India
45
PBT/Total Income
-10
-5
0
5
10
15
2
0
0
0
2
0
0
3
2
0
0
6
2
0
0
9
2
0
1
2
Year
Percent %
Videocon
LG
Samsung
SamLG
PAT/Total Income
-5
0
5
10
15
2
0
0
0
2
0
0
2
2
0
0
4
2
0
0
6
2
0
0
8
2
0
1
0
2
0
1
2
Year
P
e
r
c
e
n
t
%
Videocon
LG
Samsung
SamLG
Net Income
0
5000
10000
15000
20000
25000
2
0
0
0
2
0
0
3
2
0
0
6
2
0
0
9
2
0
1
2
Year
R
s
c
r
o
r
e
Videocon
LG
Samsung
SamLG
Tax/ Total income
-4
-2
0
2
4
2
0
0
0
2
0
0
2
2
0
0
4
2
0
0
6
2
0
0
8
2
0
1
0
2
0
1
2
Year
P
e
r
c
e
n
t
%
Videocon
LG
Samsung
SamLG
Net Worth
0
2000
4000
6000
8000
10000
2
0
0
0
2
0
0
3
2
0
0
6
2
0
0
9
2
0
1
2
Year
Rs Crore
Videocon
LG
Samsung
SamLG
Debt-Equity Ratio
0
1
2
3
2
0
0
0
2
0
0
2
2
0
0
4
2
0
0
6
2
0
0
8
2
0
1
0
2
0
1
2
Year
N
u
m
b
e
r
o
f
T
i
m
e
s
Videocon
LG
Samsung
SamLG
Above, we have presented a plethora of graphs to estimate the economic power of the enterprise.
Both the ratios, profit before tax and after tax to total income, are rising for Videocon, but not for
the combined firm SamLG. However, the net income of SamLG is increasing at an increasing
rate. The net worth of the company, which is the difference between the total assets of the
company and its outside liabilities, are increasing for Videocon at a higher level, while for the
new firm SamLG it is increasing but the level is quite low. To substantiate this point, we have
Competition Commission Of India
46
presented the graph for Debt-Equity Ratio. The debt-to-equity ratio (D/E) is a financial ratio
indicating the relative proportion of shareholders' equity and debt used to finance a company's
assets. Closely related to leveraging, the ratio is also known as Risk, Gearing or Leverage. This
ratio for the three companies under analyses ranges from 0 to 1.8. However, the upper limit of
the combined firm is around 2.5. Since, the Debt-Equity Ratio of SamLG is high; along with low
and negative profit after tax, it is clear that SamLG is trading on equity.
Thus, different economic variables give dissimilar picture of the how the market is behaving. If
one looks at the graph of Net Worth, Videocon is on the top, while LG and Samsung, together
are not able to beat it. If the focus is shifted towards the ratio of PBT/ total income, we find that
this ratio is increasing only for Videocon and decreasing for other two. Thus, if the competition
authorities are looking the dominant position only on the basis of market share, they are going to
get a biased picture of market power in their analysis.
e). Vertical Integration of Enterprises
Not much is known and not much is available on this issue in India, except something about the
inputs used in television. It is known that Philips has been in India for a long time but has not
been able to face up to the competition. It therefore sells its CTV unit in Calcutta to Videocon,
which produces not only CTV but also CPT. However, vertical integration can occur in a
completely different way, where the new company SamLG, again get in some kind of agreement
with the local manufactures, who assembles the parts and sell the TV with their own brands in
rural areas, so that it can get the benefits of market reach of these small manufactures.
Nevertheless, still more is to be explored.
f). Entry Barriers
Since, the entry barriers are not mentioned explicitly in the act, we consider various economic
factors as entry barriers. One is the size of enterprise, as mentioned above. Other is the
advertising and marketing expenses.
Competition Commission Of India
47
In the diagrams shown below, we find that in advertising and marketing expenses, LG ranks first
and Samsung second. Thus, the merged company has the better position than Videocon. Thus,
any other brand which is planning to enter in television market will think twice.
Advertising Expenses
0
200
400
600
800
2
0
0
0
2
0
0
3
2
0
0
6
2
0
0
9
2
0
1
2
Year
R
s
C
r
o
r
e
Videocon
LG
Samsung
SamLG
Marketing Expenses
0
500
1000
1500
2000
2500
3000
2
0
0
0
2
0
0
5
2
0
1
0
Year
Rs
Crore
Videocon
LG
Samsung
SamLG
Other barrier could be R&D expenditure.
35
Research and development expenditure is incurred by
each and every firm, not only to develop new improved products, but also to widen the horizon
of technology and to spread out their corners. This is the foremost source by which companies
restrict the entry of incumbents. Along with it, acts like IPR, Copyright, etc. add to the chain.
The following diagram portrays the size of this expenditure by our survey corporations.
36
R&D and Royalty Expenses
0
100
200
300
400
500
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012
Year
R
s
c
r
o
r
e
Videocon
LG
Samsung
SamLG
35
Basically, we are focusing on the variables which are mentioned by Sutton as Endogenous Sunk Cost. These cost
act as the entry barriers in the industry.
36
The graph considers both R&D and royalty expenditures together. This is so because, in television industry, some
companies uses the technology of others and pay royalty to them, and this is considered as their expenses on
research.
Competition Commission Of India
48
The above graph clearly shows that LG is the leader in innovation and technology. When it is
merged with Samsung, this trend would take a kink and would rise at a greater speed and at a
different angle then the original LG curve. This is so because of the reason for the merger of the
two companies, i.e., efficiency (explained later)
37
Surely the new company SamLG will create the entry barriers for the entry of any new firm by
having huge expenditure on R&D, salaries to employees, advertising and marketing expenses,
etc., but on the same side, there will be improvements in the production and/ or distribution of
quality TV sets and the provision of better quality of services to the customers. (Not only after-
sales services, but other accruing benefits also like insurance schemes.)
g). Position of Employees
Whenever the question on employees is raised, economists always have a point, which is proved
empirically.
Whether there is a firm, industry, factory, or a corporation, after globalization in 1991, the
competition has increased and to avoid getting the profits down, employers are paying less
37
There are other variables mentioned in the economics as the indicators of entry barriers, but due to data
availability issues, we are ignoring them.
Depreciation
0
200
400
600
800
2
0
0
0
2
0
0
1
2
0
0
2
2
0
0
3
2
0
0
4
2
0
0
5
2
0
0
6
2
0
0
7
2
0
0
8
2
0
0
9
2
0
1
0
2
0
1
1
2
0
1
2
Year
R
s
c
r
o
r
e
Videocon
LG
Samsung
SamLG
Competition Commission Of India
49
salaries (or wages) to the employees. Trade unions are weakening and the working conditions
are getting worse.
If we look at the television industry, except Videocon, no other brand gives bonus to the
employees. However, we cannot test the above hypothesis for the television industry, again
because of data problems. But the following graph actually disproves the claim and displays the
continuous rise in the compensation to employees.
38
Wages and Salaries
0
100
200
300
400
500
2
0
0
0
2
0
0
1
2
0
0
2
2
0
0
3
2
0
0
4
2
0
0
5
2
0
0
6
2
0
0
7
2
0
0
8
2
0
0
9
2
0
1
0
2
0
1
1
2
0
1
2
Year
R
s
C
r
o
r
e
Videocon
LG
Samsung
SamLG
This rise would even get steeper after the merger of the two corporations as they will try to lure
the efficient and technical personal to join their organization. Also, India’s cost of skilled labour
is among the lowest in the world. For example, average labour rate per employee in the
electronics sector is about $3,000 per year. Labour cost, as a percentage of value added is only
21 per cent in India as compared to 23 per cent in China and 30 per cent in Taiwan. Thus, the
new company will try to set up its manufacturing plant in India.
Even, SamLG will try to expand its operations and try to go down to the remote areas where till
date, only Videocon has the access and for that, SamLG would be needing manpower. This
quality of the individuals will also vary from region to region and thus, people from diverse
backgrounds will get a chance to work. The working conditions will also get improved. Overall,
38
We have to say this with a pinch of salt, as we don’t know the number of employees employed in different
companies.
Competition Commission Of India
50
there would be a change in the demand and supply of labour and the entire equilibrium of the
labour market will change. Not only this, there will be promotion of technical, scientific and
wholesome economic development by the means of production and/ or distribution of quality TV
sets. This is being one of the arguments given for the validity of the hypothetical situation so
created.
h). Consumer Preferences
Though it is hard to find what consumers want without doing a systematic survey, planned
beforehand, yet we have tried to find out something from the people at CCI. Through this, we
will get a balance sample as the employees are coming from different backgrounds. Officers,
Interns and other employees can give us a good sample. From this kind of informal survey, it is
revealed that in consumer preferences, Samsung ranks first, Sony second and LG ranks third.
Metro stations have LG TV. The canteen of CCI has Samsung television.
As far as the benefits to consumers are concerned, consumers will be benefitted a lot by getting
the good features of the two popular brands in one TV set at almost the same price. Along with
it, after the spread of SamLG in rural areas, rural people will have a wider choice bracket. Thus,
consumer welfare will increase. Moreover, we have to take into account, as mentioned earlier,
total welfare standards and not only the consumer welfare standards; and this merger will
improve overall welfare of the society.
Thus, looking at above variables, it is clear that Videocon has the dominant position in the
market and Samsung and LG are following it. SamLG, the new company, will become the
market leader in the near future. Thus, the result of the forecasting for the year 2012 says that
SamLG has the dominant position.
Economic Effects
The main idea behind competition law is economic theory. Thus, dealing with economic effects
separately will not be correct. Nevertheless, we will see what the microeconomic foundations
have to say about this merger.
Competition Commission Of India
51
Television market is monopolistically competitive. Economic theory gives the following analysis
for it. Let us look at a single firm analysis.
In the diagrams shown, x-axis shows the quantity of television while y-axis shows the price and
cost. AR curve is the average revenue curve, which we call the demand curve
39
. MR is the
marginal revenue curve
40
. MC is the marginal cost curve, which resembles the supply curve.
41
AC is the average cost curve.
42
Figure1 Figure2
In the above diagram, we have shown two different figures for the two companies. Figure one is
for Samsung, while figure two is for LG. These are free hand curves, drawn without any data.
The average cost and the average revenue curves of the two companies are drawn differently, to
show that the cost structure and the consumer preference for the two companies are different.
43
39
Average Revenue is the total revenue per unit of output.
40
Marginal Revenue is the rate at which total revenue changes with respect to output.
41
Rising portion of MC curve is the supply curve. Marginal Cost is the rate at which total cost changes with respect
to output.
42
Average Cost is the total cost per unit of output.
43
It is beyond the scope of this paper to measure the exact demand and cost structures of the firm.
Competition Commission Of India
52
Equilibrium is attained at a point where MR=MC. Thus, the shaded region is the profit for the
two firms. Depending upon the cost structure, the prices are determined at Pl and Psam for LG
and Samsung, respectively.
Figure 3
The above diagram is drawn when the two firms get together and a new firm is formed called
SamLG. The cost structure and the demand facing the new firm will change. The price and
quantity produced and sold, will both be changed. The new profit if the shaded region. We
cannot estimate the exact price, quantity and profits of the firm, lest we can only make a guess
work. For instance, refer the following table, which shows the price of some famous brands of
LCD TV of 26” and its features.
Competition Commission Of India
53
Brands 26 Inches (Rs) Features
Videocon 20,000 16.9 aspect ratio, 16.7 mn
display color
LG 30,000 Dynamic contrast ratio, 5ms response time, PC connectivity
Samsung 28,000 Wide color enhancer, multimedia player for JPEG, in built
FM radio, digital natural image
Panasonic 25,990 Backlight control, alpha panel, 2xHDMI inputs
Sony 26,900 Intelligent picture plus, MPEG noise reduction, USB
playback
The above table shows the price of some famous brands of LCD TVs and its features. When the
two companies get together to form SamLG, they may have economies of scale and efficiency
and may pass on the benefits to the consumers, and hence, charge a minimal price of Rs 25,000
or less. It might be the case of predatory pricing for an outsider, but the company may be
charging the price accordingly. On the other hand, the company could also the charge the price
of Rs 35,000, which is above the prices mentioned in the list, because they are providing double
offers in a single TV set.
Effects on Concentration Measures
There are various possible concentration measures used in the literature. The most commonly
used measure is the coefficient Cm, which is the sum of the market shares of the largest m firms
in the industry. It is called the Concentration Ratio. The Concentration Ratio (herein after
referred to as CR) is a simple summary statistic of level of concentration. It is calculated at
different levels: CR2, CR3, CR4, etc. (E.g., CR4 is the concentration among the largest four
firms in the industry). Its index is as follows:
Competition Commission Of India
54
CR3>75% High Concentration
75%
An important feature of several developing countries’ policies in the last decade has been the
enactment of Competition Acts as part of a pro-competitive policy. Even the deliberation at
various rounds of WTO also relate to the promotion of competitive environment in International
Trade.
India too has substantially improved the competition climate in its manufacturing sector since
1991 via a series of changes in both domestic and international trade policies. The effect of these
policies has been mixed. In some sectors, due to easy of entry of firms in the market, competition
has increased, while in others, due to the survival of fittest strategies, competition has reduced.
Competition Commission Of India
1
Competition Issues in Electronic Goods Sector: Television
Industry
A Research Paper submitted in partial fulfillment for the
requirement of the Internship, May, 2010
Submitted to:
Mr. Pravin Purwar
Advisor
Competition Commission Of India
Submitted By:
Apoorva Gupta
M.A. Economics (P)
Delhi School Of Economics
Competition Commission Of India
2
DISCLAIMER
This project report has been prepared by the author as an intern under the Internship Programme
of the Competition Commission of India for the period of one month from May 10, 2010 to June
10, 2010, for academic purposes only.
The views expressed in the report are personal to the intern and do not reflect the views of the
Commission or any of its staff or personnel and do not bind the Commission in any manner. This
report is the intellectual property of the Competition Commission of India and the same or any
part thereof may not be used in any manner whatsoever, without express permission of the
Competition Commission of India in writing.
Competition Commission Of India
3
ACKNOWLEDGEMENT
At the outset, I would like to thank my supervisor Mr. P.K. Purwar, Competition Commission
of India, for being a guiding force throughout the course of this submission and being
instrumental in the successful completion of this project report without which my efforts would
have been in vain. He has been kind enough to give me his precious time and all the help which I
needed. Also, I am immensely thankful to Dr. Geeta Gouri who gave her valuable time for
discussing the issues of the paper. I would also like to express my heartfelt gratitude to Mr.
Bhupender Singh, Mr. Sudershan, Mr. Hari and Mr. Rajinder Kumar, who directed me towards
the accomplishment of the report. I would also like to appreciate the cooperation we got from Dr.
Anil Kumar (Assistant Director) and Mr.Srinivasan, the librarian of CCI. I am also very grateful
to the other staff of Competition Commission of India, for being immeasurably accommodating
to the requirements of this humble endeavor. To all the above individuals and to several
colleagues whose names I cannot continue listing and who have assisted me one way or another,
I feel very much indebted.
Competition Commission Of India
4
TABLE of CONTENTS
TOPIC Page No.
1. Abstract………………………………………………………………...…………..……..5
2. Chapter 1 – Introduction………………………………………………..……………..…6
3. Chapter 2 – Consumer Electronic goods sector in India
Introduction………………………………………………………………………..8
Competition in Electronic Goods Sector……………………………….................8
IPR and Electronic Goods Sector………………………………………………..10
Television in India…………………………………………………….................11
4. Chapter 3 — Television Industry
Introduction………………………………………………………………………13
Globalization and Television………………………………………….................14
Challenges and Opportunities…………………………………………................17
5. Chapter 4 — Review of Literature…………………………………………..................20
6. Chapter 5 — Area of Research and Model Making
Introducing the Model…………………………………………………................24
Why are we considering a merger?........................................................................28
Why LG and Samsung only?.................................................................................30
Emerging Competition Issues……………………………………………………35
Effects on Market Variables……………………………………………………..41
Economic Effects………………………………………………………………...51
Effects on Concentration Measures……………………………………………...54
Efficiency as a Defense Tool…………………………………………….............55
Should this Merger be Allowed?...........................................................................58
7. Chapter 6 – Conclusion…...……………………………………………………..............59
8. Bibliography……….. …………………………………………………………………..61
9. Websites Used…………………………………………………………………………...64
10. Appendices………………………………………………………………………………66
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ABSTRACT
The Indian Television industry is going through turbulent transformation. Companies are
relooking at their strategies and are desperate for growth. The entrenched position of the Indian
market leaders in TVs’ like Videocon, BPL and Onida has been challenged by the MNCs such as
LG, Panasonic, Samsung, Sony, Philips and Sharp; some in a perceptible way and others
threatening to do so. The changing environment demands fresh thinking to gain the cutting edge
advantage. Exchange schemes, free gifts, price offs, prizes, deferred payment schemes and other
incentives as promotional tools have been deployed by the players, which certainly have made
the market, vibrant and pulsating. A major factor contributing to the growth has been availability
of consumer financing schemes. Concomitantly, the industry has been witnessing a new scenario
with a new market profile. The entry cost into this industry is substantially low. Thus, there is
already a lot of competition in this sector and due to this, consumer is benefitting by not only
getting the above benefits, but also world class products of high quality at reasonable prices. Due
to this, TV is now a necessity of every house, whether in rural India or Urban India.
This paper talks about the Television Industry in India, its market structure and challenges and
opportunities it faces. The paper uses econometric techniques to deal with the issue of market
concentration. Towards the end, a hypothetical situation is created where the major Korean
MNCs, LG and Samsung get together and play in the market as a single entity. The paper
analyses the reasons and results for this merger, and the economic theory and the competition
issues emerging with this collaboration. The paper talks of entire TV industry and not of CTV or
flat TV or LCD TV market separately.
Keywords: Television, Merger, Efficiency, Competition.
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CHAPTER ONE
INTRODUCTION
An important feature of several developing countries’ policies in the last decade has been the
enactment of Competition Acts as part of a pro-competitive policy. Even the deliberation at
various rounds of WTO also relate to the promotion of competitive environment in International
Trade.
India too has substantially improved the competition climate in its manufacturing sector since
1991 via a series of changes in both domestic and international trade policies. The effect of these
policies has been mixed. In some sectors, due to easy of entry of firms in the market, competition
has increased, while in others, due to the survival of fittest strategies, competition has reduced.
Indian Electronic and IT sector is one major segment where the effect of the liberalization and in
turn the effect of competition issues have been seen in its totality. This sector in itself is so vast
that covering each and every issue will be cumbersome. Thus, we focus on Television industry
among the immense pool of gadgets.
Television is now almost a necessity of every house. For education, for daily soap serials, for
news, for sports, and for every now and then, people switch to television. Furthermore, 100%
foreign equity participation is permitted in manufacturing in India. Thus, the production of
consumer durables and other consumer products allows for direct sales in India. One successful
example is LG Electronics of Korea, which entered India in 1997 and within a period of five
months, it has launched the nation’s ever largest plant in Noida. It is now one of the most
preferred brands of this segment.
In addition, India is a diverse country both ethnically and culturally, giving a boost to TV in
India. Consequently, Companies get a chance to spread out their distribution networks. The
Indian TV market is basically is in its infancy. Hence, it has a huge potential to grow. It seems
that India’s growing consumer market might be taking on a life of its own, over a due course of
time.
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In this paper, we have focused on three major players of the market, Videocon, LG and
Samsung. We have also focused on the issues why we have focused on these three companies
only. We have highlighted the market structure, the type of competition in the market and other
important market variables. As a case study, we have created a hypothetical situation, where LG
and Samsung get merged and have become the market leaders. The analysis is done from three
sides, one is the effects on the market, second is the economics applied, and third is the
competition issues which will emerge. Towards the end, we have reasoned out efficiency as a
defense tool for this merger.
The paper is arranged in the following manner: In chapter two, we deal with the introduction of
consumer electronics in India, the issue of IPRs and the competition in this sector. We also
highlight the detailed reasoning on why we choose Television industry as the industry for our
research. Chapter three introduces the scenario of television industry in India and the effects of
globalization policies ushered in from 1991. The chapter also focuses on the challenges and
opportunities faced by this industry. Chapter four provides literary review. Chapter five sets out
the model explained above and it presents the results, while chapter six concludes the research.
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CHAPTER TWO
ELECTRONIC GOODS SECTOR IN INDIA
INTRODUCTION
Electronic goods sector is a major booming sector in our country. Not only as an intermediate
commodity, but more as a consumer product, this sector has undergone a rapid growth and
development since ushering in of liberalization in India, from cassette to DVDs, from black and
white TVs to LCDs, from analogue terrestrial cables to DTH services and from landline phone to
mobile internet. These developments did not take place in one day, but the pace of this
innovation was impetus.
Indian Consumer Electronic Goods Sector is facing a lot of competition from abroad, especially
from South Korea and Japan, whose success story is based on the export promotion techniques in
this sector. From a small capital based firm, the companies like LG and Samsung have become
popular MNCs. The biggest attraction for MNCs is the growing Indian middle class. This market
is characterized with low penetration levels. MNCs hold an edge over their Indian counterparts
in terms of superior technology combined with a steady flow of capital, while domestic
companies compete on the basis of their well-acknowledged brands, an extensive distribution
network and an insight in local market conditions. Thus, it’s now a trend that while rural
population has greater access to goods from Indian manufactures, urban population is showing
preference to the MNCs brands. However, Consumerization of technology could be a major
phenomenon over the next 5 to 10 years. This could hasten the industrial consolidation, as
healthy companies gain market share by buying out weaker ones at attractive prices.
Competition in Electronic Goods Sector in India
Prior to the economic reforms, electronic goods sector was not much developed in India. MRTP
Act was also not active enough to promote full grown competition in this sector. The New Trade
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Policy Regime of 1991 promoted trade liberalization which allowed foreign companies to settle
in India and have their manufacturing plants. Various laws and acts have been passed since then
to enhance competition in electronic goods sector. A snapshot of some is as follows.
1
1. Free Trade Agreement
WTO regime which came in force in 2005, results in zero customs duty on imports of all
telecom equipments. 217 IT/electronic items were covered under the Information
Technology Agreement (ITA) of the WTO for complete customs tariff elimination by 2005.
Out of these 217 items, several items were already at NIL customs duty. In fact,
IT/electronics was the first sector in India to face complete customs tariff elimination. The
ITA-1 would result in intensifying competition as more imported products will be easily
available at lower prices.
2. Foreign Investment Policy: FDI
Foreign investment up to 100 per cent is allowed in Indian electronics industry set up
exclusively for exports. The units set up under these programmes are bonded factories
eligible to import, free of duty, their entire requirements of capital goods, raw materials and
components, spares and consumables, office equipment etc. Deemed export benefits are
available to suppliers of these goods from the Domestic Tariff Area (DTA). A part of the
production from such units is permitted to be sold in the DTA depending upon the level of
the value addition achieved. The FDI approval for electrical equipment (including computer
software and electronics) from January 1991 to March 2004 was US$ 7.29 billion, which was
9.94 per cent of the total foreign direct investment (FDI) approved. During the same period
the FDI inflow for electrical equipment (including computer software and electronics) was
US$ 3.32 billion.
3. Procedure for approval
Once the investment in equity has been approved, the import of capital goods, components
and raw materials or the engagement of foreign technicians for short duration does not
1
Corporate Catalyst India
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require any additional approvals. Corporate Catalyst India A report on Indian Consumer
Durables Industry Approval of Ministry of Home Affairs says, “Now, there is no need for
hiring foreign nationals holding valid employment visa. Approval for setting up units in
Export Processing Zones (EPZs) is given by the Board of Approvals in the Ministry of
Commerce. Approval for setting up export-oriented units (EOUs) outside the zones is given
by the Ministry of Industry. Approvals for setting up Electronic Hardware Technology Park
(EHTP) and Software Technology Park (STP) units are cleared by the Inter Ministerial
standing Committee (IMSC) set-up under the Chairmanship of the Secretary, Department of
Information Technology. Proposals involving foreign direct investment not covered under
the automatic route are considered by the Foreign Investment Promotion Board (FIPB).
4. FDI/ Foreign Technology Collaboration Agreement
The government facilitates FDI and investment from Non- Resident Indians (NRIs) including
Overseas Corporate Bodies (OCBs), predominantly owned by them, to complement and
supplement domestic investment. Foreign technology induction is encouraged through FDI
and foreign technology collaboration agreements. FDI and foreign technology collaborations
are approved through automatic route by the Reserve Bank of India.
IPR and Electronic Goods Sector
Protection of Intellectual property rights (IPR) is a prime requisite for development of R&D and
innovation in the consumer electronics sector. The Government of India has developed a robust
IP act to facilitate innovation, growth and development. Several amendments to the Copyright
Act, creation of a new Trademark Act, a new Designs Act and amendments to the Patents Act
show India’s continued effort to protect IPR. The country has already made several changes in its
IP acts over the years. Several amendments to the Copyright Act, creation of a new Trademark
Act, a new Designs Act and amendments to the Patents Act show India’s desire to change and
adapt. New acts have also been enacted to cover semiconductors and layout designs which will
be of considerable importance to the electronic industry.
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In the current WTO regime, India is a party to the “Trade Related Aspects of the Intellectual
Properties (TRIPs) Agreement” and has accordingly, amended most of its IPR Acts and Rules to
conform to the said Agreement. The Indian Copyright Act 1957 was amended in 1999; the patent
Act 1970 was amended in 1999 & 2003 and Trademarks and Merchandise Marks Act 1959 was
overtaken by a new Trademark Act 1999. The Industrial Design Act 1911 was effectively
replaced by The Design Act 2000, and the Layout Design of Semiconductor integrated Circuit
Act 2000 was enacted.
Corporate Catalyst India A report on Indian Consumer Durables Industry reports that the
agreement on TRIPs takes care of the intellectual property rights by enforcing the patent rights,
Copyrights and related rights, and the protection of industrial designs, trademarks, geographical
indications, layout designs of integrated circuits and undisclosed information. Accordingly, the
member nations are asked to modify their existing laws. Once these laws come into force,
unauthorized use of the patented innovations, trademarks, etc. becomes difficult. Enforcement of
the TRIPs agreement makes the production of any product possible either through internal
innovation or through formal transfer of technologies.
Thus, legally also, the consumer electronics and durables sector is expected to continue to benefit
from supportive policies and become globally competitive.
Television Industry in India
Consumer electronics are the products that are used every day by the households. These include
the products that come under the category of office products, communications, and
entertainment. These can be classified into personal computers, telephones, calculators,
playback, digital video disk (DVD), video compact disc (VCD), video home systems (VHS),
home theatre, music players, color televisions (CTVs), cameras, camcorders, portable audio, Hi-
Fi, etc.
Owing to this vast pool of gadgets, our research will focus on Television Industry. Television in
India has been in existence for four decades. For the first 17 years, it spread haltingly and
transmission was mainly in black & white. The thinkers and policy makers of the country, which
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had just been liberated from centuries of colonial rule, frowned upon television, looking on at it
as a luxury, which Indians could do without.
Television has come to the forefront only in the past 21 years and more so in the past 13 years.
Year 1982 was a significant year in the history of Indian Television. The government allowed
thousands of color TV sets to be imported into the country to coincide with the broadcast of
Asian Games hosted in New Delhi. Over the years, this industry experienced a great boom and
today, India is one of the largest television markets in terms of viewership. Not only this, but
overall TV industry is the most booming sector among consumer electronics in India. The
diagram below depicts the same.
The above diagram clearly shows that Television sales are the maximum among the consumer
electronics and are increasing over the years. Thus, the choice of Television Industry, from
among the basket of electronic goods, seems to be appropriate and well-founded.
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CHAPTER THREE
TELEVISION INDUSTRY in INDIA
Television continues to be the mainstay of the consumer electronics industry in India, with the
transition slowly occurring to newer technologies such as LCD and PDP. There was a huge
demand for color televisions all through the 80s. During the last two years 11.5% of Indian
homes bought a TV set. This figure is even higher among the top eight metros at 21.3% about
one in every five home in these cities acquired a TV set in the last two years.
2
Indian TV industry is technology driven, so companies need to constantly improvise, innovate
and customize their products. Colored cabinets, headphones, 3-D 360 degree sound technology
and e-mail in TV, plasma TV and golden eye technology are just a few examples. The last few
years have seen a quantitative and qualitative change in TV technology and software. With the
advent of several local and foreign satellite channels, demand for CTVs has seen a rise. In fact,
the television manufacturing industry has come a long way from the big black and white TV sets
to the modern day ultra-thin Plasma and LCD TV sets. With the ever changing technology the
Television industry has adapted itself suitably to cater to the changing tastes of the consumer.
Although the top players viz. LG, Sony, Videocon, Phillips, Samsung and Onida have drastically
reduced prices, they have gained more volume due to increasing market size and higher
penetration levels, coupled with conscious shift towards flat color televisions. Aggressive and
innovative marketing strategies and technological advances have led to strong brand
differentiation and prices. In the process the industry has evolved with products available at
different price points at all levels. This process was also facilitated by growth in production in
the organized segment and domestic availability of multinational brands due to lowering of
import duties and other liberal measures. The television industry, thus, appears to have two
clearly differentiated segments. The MNCs also have an edge over their Indian counterparts in
2
http://www.cci.in/pdf/surveys_reports/indias_telecom_sector.pdf
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terms of technology, aggressive marketing strategy, economies of scale in branding through
international events (like sports events or International Summits) and associations combined with
a steady flow of capital. Thus, the sale of TVs also tends to be event driven. For instance, during
the Cricket World Cup in 1999, CTV sales recorded a phenomenal rise of 40-50%.
Many MNCs and domestic companies are now making India as a manufacturing centre because:
• Low cost skilled labor
• Tax free zones i.e. SEZs
• Qualified workforce
• Untapped domestic market
• Excellent supply base for glass and colour picture tubes
Some economic measures that have also played a role in this phenomenal growth are:
• Custom duty on colour picture tubes (CPT’s) lowered to 20% from 25%
• Abatement rates on TV sets have changed from 35% to 40%
• Special additional duty on customs of 4% was done away with
• Single rate of excise duty at 16%
Globalization and its impact on Television Industry in India
In countries like India, the economic liberalization has influenced the consumer durable industry
especially the television industry. This industry has seen a gamut of changes in the past one
decade making its market highly competitive and consumer driven. Changing and growing
demands of the consumers made the industry competitive. This globalization is important for
various reasons as discussed below:
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New areas for growth. Globalization provides the Indian television industry an access to new
markets beyond its typical Southeast Asian demographic constituents. Serving new markets can
not only provide new revenue sources but also lead to product innovations in the industry.
Minimal marginal cost. Globalization requires significant initial investment and learning. But
once global, the firm can easily release the programs produced for one market in other markets.
The success rate of a program across various markets may differ; nonetheless the marginal cost
is extremely low post-penetration thereby providing much higher overall returns.
Diversify and stabilize. Political, economic, or viewer preference upheavals in a market can be
disastrous to a firm, if the firm is completely dependent on that market. Globalization can
provide the much-needed diversification, stability, and insurance against unexpected, drastic
changes. A global firm can easily survive and organically adapt to the changes in market
conditions.
Better utilization of assets. Over the years, the Indian television industry has developed both
tangible and intangible assets in terms of production facilities, program libraries, and
experienced talent. Recycling and reusing these assets in global markets can increase the return
on these assets and make a better economic sense. It also provides global exposure to the Indian
talent leading to the development of professional approach to the activities of the industry.
Analyzing these benefits, after globalization and liberalization, many foreign players have
entered the Indian market. Together with this, consumers in India with open markets on an
average are enjoying lower prices, improved consumption, and improved savings and rising
standards of living. Before liberalization in India, the consumer was at the mercy of the producer
and savings management was prevailing in the sense that individuals saved and then consumed.
This might be because of no financing facilities, no credit card facilities and moreover demand
side economic were prevailing. After liberalization the total scenario has changed- consumers in
India moved from savings management to expenditure management. This is because of the
availability of goods and services at lower price, availability of credit cards, availability of
finance at low interest and in some cases zero interest and moreover the death of power of
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monopoly in many sectors because of the entry of the foreign players. Producers have become
price takers rather than price setters. The tastes and preferences, life style and consumption
patterns of the consumers have also changed. Like other third world countries, people in India
have started spending much more money and there has been a distinct shift from joint family
system to that of nuclear families.
Because of the entry of the foreign players we felt that in the Indian T.V. Industry, the following
changes have taken place
3
:
a- Economic substitutability and technical substitutability: The T.V industry is facing
intense competition and in the process new innovations in the form of giving additional
features are taking place;
b- Indifference in brand preference: The consumers are indifferent in choosing the brand
because whatever the brand that the consumer is going to purchase gives the same
satisfaction. This because the features of T.V in almost all the brands are same and there
is a negligible difference in the prices. However, local made company products are
cheaper. Hence we can define the indifference in brand preference as the locus of all
brands in which the consumer gets the same level of satisfaction;
c- Excludability: The producers are not excluding the customer before going to produce the
product like how they ventilate them before liberalization. Without due care and
attention, the relationship between producer and consumer becomes much more akin to a
gibberish than a purchase and sale one;
d- Rivalry: In the information era economy the use or enjoyment will no longer necessarily
involve rivalry. Especially with most tangible goods like TV, if X uses one brand of TV
there is no guarantee that Y also uses the same brand. Free market price provides the
3
These changes are mentioned by Father of Economics, Adam smith, in his book wealth of Nations (1776), mainly
for color TV sets; however, we feel that these changes apply to the entire TV industry.
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producer with an ample award for its effort. It also leads to the appropriate level of
production.
e- Transparency: The consumers know what they want and what they are buying so that
they can effectively take the advantage of competition and comparison. They can now
shop around and collect the required information whose marginal cost is zero. Hence the
producers should be transparent.
Challenges and Opportunities Ahead
The Challenges
Heavy taxation in the country is one of the challenges for the players. At its present structure, the
total tax incidence in India, even now, stands at around 25-30 per cent, whereas the
corresponding tariffs in other Asian countries are between 7 and 17 per cent.
About 65 per cent of Indian population that lives in its villages still remains away from some
consumer durables companies. A large proportion of its constituents still buys black and white
TVs and doesn't know what flat screens are. Also, foraying into these rural markets has a
considerable cost component attached to it. Companies not only have to set up the basic
infrastructure in terms of office space, manpower, but also spend on transportation for moving
inventory. Even LG and Samsung; and Videocon among Indian MNC, which are touted as
having the largest distribution network in the country, have a direct presence only in 15,000 to
18,000 of the around 40,000 retail outlets (for consumer durables) in the country.
Poor infrastructure is another reason that seems to have held back the industry. Regular power
supply is imperative for any consumer electronics product.
And the opportunities…
The rising rate of growth of GDP, rising purchasing power of people, higher propensity to
consume, more preference for sophisticated brands, all would provide constant impetus to
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growth of Television Industry segment in India. Opportunities for the penetration of consumer
durables would be deeper in rural India, especially when banks and financial institutions come
out with liberal incentive schemes for this industry. While the CTV market is facing a slowdown
due to saturation in the urban market, rural consumers should be provided with easily payable
consumer finance schemes and basic services, after sales services to suit the infrastructure and
the existing amenities like electricity, voltage etc.
Currently, rural consumers purchase their durables from the nearest towns, leading to increased
expenses due to transportation. Purchase necessarily done only during the harvest, festive and
wedding seasons — April to June and October to November in North India and October to
February in the South, believed to be months `good for buying’, should be converted to routine
regular feature from the seasonal character. The urban consumer durable market for products
including TV is growing annually by 7 to 10 % whereas the rural market is zooming ahead at
around 25 % annually. According to a survey conducted by Corporate Catalyst India, the rural
market is growing faster than the urban India now. The urban market is a replacement and up
gradation market now. The increasing popularity of easily available consumer loans and the
expansion of hire purchase schemes will give a moral boost to the price-sensitive consumers.
Consumer goods companies are themselves coming out with attractive financing schemes to
consumers through their extensive dealer network. This has a direct bearing on future demand.
The other factor for surging demand for consumer goods is the phenomenal growth of media in
India. The flurry of television channels and the rising penetration of cinemas will continue to
spread awareness of products in the remotest of markets.
“Adequate investment in Research and Development, attractive packages from government and
introduction of Goods and Services Tax (GST), will boost the growth and attract international
companies. The electronics and appliances industry size is estimated to reach US$40 billion by
the year 2012. Government initiatives towards supporting rural income levels will provide
stimulus to the rural market for electronic and durable products as well.” – Pinakiranjan Mishra,
Partner and Industry Leadfer, Retail and Consumer Product Practice, Ernst and Young.
The following diagram depicts the opportunities for this sector in domestic as well as in the
export market. However, in this paper, we will consider only the domestic market.
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Competition Commission Of India
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CHAPTER FOUR
REVIEW OF LITERATURE
The vast literature available on television industry provides a mixed picture of competition in
this sector. Some authors say that this industry is still in its infancy, while others say that this
industry is among one of the mature group of companies in India. A brief note on some of the
findings by celebrated personal is presented below.
Seshaiah and Krishna (2003) say that branding of TV is an important factor in determining the
choice of TV by buyers, which depends not only on age, education and income, but also on
personality and psychological dimensions. Consumers buy not the products but bundle of
emotions. A “Usage Factor” runs through the data. Many more people tend to associate a
positive attribute with longer brands than associate it with smaller brands. The explanation is that
a larger brand has more claimed user than a smaller brand and the users of brand are more likely
than non-users to give a positive attribute response. This effect is known more generally as
“Double Jeopardy” or DJ Effect.
4
Talking of TV industry per se, on one hand, the production of black- and-white (B&W) TV sets
has stagnated around six million sets a year since 1995 and is not likely to improve its
performance in the near future, while on the other hand, competition in other TV sets like CTV,
LCDs, etc. is so fierce that some of the companies have completed exited the market.
The literature also says that the industrial circles are of the view that the competition offered by
the foreign brands in CTVs has almost killed 60-odd indigenous manufacturers but has
strengthened the position of the three Indian leaders. Over the years, these Indian brands have set
up their distribution networks in urban areas besides the four metros, namely, Mumbai, Calcutta,
Chennai and Delhi. The multinationals therefore will face severe competition in the vastly
spread-out, semi-urban areas.
4
Barwise and Ehrenberg (1985).
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The competition in this sector is of a different character, in the sense that the market leaders—
both Indian and foreign—have been trying to lure consumers through aggressive sales promotion
programmes and after sales services, rather than the type of competition which is seen in other
sectors. Amazingly, the literature also says that, the B&W TV is more popular compared to the
CTV because its sets are cheaper and are able to attract families in the lower income brackets.
Annual sales of B&W TV sets are 50% more than those of CTVs. Also, it is no secret that the
year 1998 was a lean one for the Indian industrial sector as a whole. However, the CTV industry
(including both domestic and foreign brands) was not much affected, thanks to increased
publicity, easy schemes of finance, buy-back schemes etc.
The new dawn came for television industry in the new century when the Department Of
Electronics fully changed the climate and raised funds for R&D activities. The delicensing of
most of the equipments needed by the industry has been a positive factor in its expansion. What
is more, both excise and customs duties have been reduced by the government. The country also
benefitted by the collaboration on getting technical know-how from Korean companies.
However, the International scene is dynamic and not static. Kumar Chopra, managing director of
Thomson CE India Pvt Ltd, stated recently that, “The Indian TV industry has an ocean of
opportunities staring it in the face. The question is: Will it muster up enough courage to grab it?”
Looking into a completely different perspective, Mihir Parikh says, “To promote Indian
Companies worldwide, we have to first make the presence in the US market and fight the
competition there.”
5
He further added that the lack of finance for innovation makes Indian firms
loose the competition in the world. Continuing his discussion, he pointed out that acts like
Copyrights Act, MRTP Act, IPR, etc., have, comparatively, not been of much help to Indian
industries.
The literature also reveals that while the entry costs to this industry are quite substantial, the exit
costs from the TV industry are very high. Closing down of a company is an elongated and time
consuming process and is a costly affair. Thus, it’s better to sell the firm or to get merge with
some other company, instead of completely going out of the market. Acquiring some weak
enterprises or merging with some other firm is comparatively easier.
5
In saying this, he was referring to both the content and physical markets.
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However, in this case, efficiency issue comes up. When it comes to efficiency defense in merger
analyses, various economists and lawyers have several issues and they often contradict among
themselves. While a merger allows the combined firm to exploit the potentialities, which a single
firm can’t, it may also lead to anti-competitive practices.
Anne Perrot presents the conflict between competition theory and economic theory in terms of
information, environment, and employment and in terms of a complete general equilibrium
scenario. He gives three reasons for not looking at consumer surplus in short run, but overall
economic growth in the long run. These are:-
1. Competition authorities have the relevant tools to measure the consequences of a practice
or of a merger on the market equilibrium, but suffer from the lack of information on
other aspects of a practice, like its effects on the environment or on employment. This
lack of data makes it difficult to take into account these far-removed objectives.
2. A general and well-known economic policy principle consists in using the tool that is the
most appropriate to achieve a given objective. For instance, environmental policy should
intervene at the relevant step of micro-decisions, i.e., where these decisions involve
environmental consequences. In the same spirit, employment policies are more relevant
to the employment level and employment conditions than is competition policy, even if
the latter has an impact on the job market.
3. The most pertinent approach to dealing with the functioning of an economy as a whole
would be, theoretically, a general equilibrium one.
On the other hand, Wolfgang Kerber, a renowned economist, while focusing on normative
concept of Competition Law, says that the competition theory has not been developed much and
neither “welfare” nor “efficiency” is a sufficiently clear and satisfactory answer to the question
of promoting competition.
Michal S Gal focuses on a completely different approach and Law says that Competition Law
should distinguish efficiency from equity and fairness, and should focus more on fairness than
efficiency.
6
6
His point adds to the view of Kerber, mentioned above.
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Thus, the literature is diverse and the debate is still unresolved. This paper also presents a similar
debate, but from a completely different setup. The paper does not consider the viewership or the
branding of the company, but presents the similar debate by presenting a simple model, starting
from the next chapter.
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CHAPTER FIVE
AREA of RESEARCH and MODEL-MAKING
Introducing the Model
An important feature of developing country policies in the last decade has been the enactment of
Competition Acts as part of a pro-competitive policy. Even various rounds of WTO vigorously
advocate the promotion of competitive environment in International Trade.
India too has substantially improved the competition climate in its manufacturing sector since
1991 via a series of changes in both domestic and international trade policies. The effect of these
policies has been mixed. In some sectors, due to easy of entry of firms, competition has
increased, while in others, due to the survival of fittest strategies, competition has reduced.
However, various studies show that the market by itself does not bring about competitive
outcomes, probably because of unequal strengths of the market players. This indicates that the
role of some regulatory agency is must in promoting either competition or concentration. In this
backdrop, Competition Act of 2002 was passed.
“The Competition Act was enacted in 2002 keeping in view the economic development that
resulted in opening up of the Indian economy, removal of controls and consequent economic
liberalization which required the Indian economy be enabled to allow competition in the market
from within the country and outside. The Competition Act, 2002 provided for the establishment
of a Competition Commission, to prevent practices having adverse effect on competition, to
promote and sustain competition in markets, to protect the interests of consumers and to ensure
freedom of trade carried on by other participants in markets in India, and for matters connected
therewith or incidental thereto.”
7
7
The Competition Act 2002 amended in 2007.
Competition Commission Of India
25
The literature shows that openness to foreign competition, leads to pro-competitive set up and it
reduces profitability of the firm, but the Price Cost Margin of the firms does not reduce much as
the wage share of the labour has decreased over the years. There is a trend of weakening of the
labour unions, which have lead firms, especially more efficient firms, to maintain their monopoly
power. Thus, there is a need for stimulating the competition for not only restricting the monopoly
practices but also for safeguarding the interest of the employees.
Coming to TV industry, it is true that Indian Television Industry is highly competitive in nature.
Various brands are coming up and various brands are closing down. Entry leads to more
competition, while this competition leads to survival of fittest strategies among the companies.
The graph below depicts the stated claim.
Herfindahl- Hirschman Index (HHI) is calculated by summing the squares of the market shares
of all the firms active in the market. The HHI potentially reflects both the number of firms in the
market and their relative size. It’s a much better indicator of concentration in the market. HHI
lies between 0 and 1. Perfect competition has the value zero, while monopoly has the value one.
The value of HHI in Television industry is less than 0.25 for all the years. In earlier decades,
competition was fierce, while now, market structure is more of competitive in nature. However,
Hirschman-Herfindahl Index
0
0.05
0.1
0.15
0.2
0.25
1
9
9
2
1
9
9
4
1
9
9
6
1
9
9
8
2
0
0
0
2
0
0
2
2
0
0
4
2
0
0
6
2
0
0
8
Years
H
H
I
Hirschman-Herfindahl
Index
Competition Commission Of India
26
competitive market structure is hard to find in its true sense. Thus, we consider Television
market to be monopolistically competitive market structure.
Television industry is monopolistic competitive in nature is clear from various directions. The
features of this type of market structure, clearly applies to the television industry. There are large
number of buyers and sellers; product differentiations; and imperfect product knowledge, are the
keys to this industry.
8
The advertisement planning and timing, the type of offers made and their
timing, etc, all reveal that this market is monopolistically competitive in nature.
CMIE data shows that there are around 24 different brands (companies), big and small, operating
in Television Industry. Competition is wild and both the strategies, competitive as well as
surviving, are prevalent in the market. Both Cooperating and Non-cooperating strategies are
customary to this market. These cooperating and non-cooperating strategies are leading to what
Schumpeter had called “Creative Destruction”.
9
On the other hand, in this cooperating and non-cooperating scenario, there is one more
conflicting issue being considered, which is on efficiency grounds. Economists say that
competition promotes efficiency by having efficient allocation of resources; while on the other
hand, they also say that merger leads to more efficient production as economically less
productive firms get out of the market. Usually, the issues narrow down to the question of total
welfare standards v/s consumer welfare standards. However, it is also true in welfare economics
that there are an infinite number of “efficient allocations” in a society, but the theory of efficient
allocations cannot determine the optimal efficient allocation.
10
8
A brief note on monopolistically competitive market structure is given in the appendix.
9 Creative destruction is an economic theory of innovation and progress which was introduced by Joseph
Schumpeter. It can cause temporary economic distress. Layoffs of workers with obsolete working skills can be one
price of new innovations valued by consumers. Though a continually innovating economy generates new
opportunities for workers to participate in more creative and productive enterprises (provided they can acquire the
necessary skills), creative destruction can cause severe hardship in the short term, and in the long term for those who
cannot acquire the skills and work experience
.
10
There is no so called Optimum Optimorum.
Competition Commission Of India
27
This paper focuses on a completely different aspect. It moves away from the conventional
pattern and presents a different scenario. It focuses on a prospective merger analysis, which
might be possible in the future.
11
It analyzes three major companies, one Indian company:
Videocon, and two Korean companies: LG and Samsung.
A hypothetical situation is created where the two Korean companies, LG and Samsung, get
together and try to affect the market variables like sales figure, market share, advertising and
marketing expenses, etc. We are going to analyze the formation of this new company called
SamLG from economic as well as from competition perspective.
12
The economic analysis is
more of an econometric analysis, the data for which is taken from CMIE Prowess and EIS.
13
The
time period is from 1992 to 2009. However, forecasting is done for the year 2012, because any
change happening today, will have an effect not before 2012.
By creating this type of situation, we will try to find out the answers of the questions like: Why
we choose a merger? Why we choose LG and Samsung only? What will be the effect on the
market and the competition? Who will be the new market leader? What is the economics behind
11
…in this industry or in any other sector.
12
The two companies are getting together. They may form a cartel, or they get merged or get into a joint venture or
a combination.
13
We are not looking at CTV, Plasma or LCD TV markets separately, but the complete TV market. This is so
because of the data availability issues.
Competition Commission Of India
28
this merger? And what will be the roll of the concerned authorities? Let’s look at these issues
one by one.
Why are we considering a merger or a joint venture?
Formation of a merger or a cartel or a joint venture is considered to be economically efficient for
the society. There are various reasons for choosing this type of analysis.
First, the entry barriers to this industry are low but the exit barriers are quite high. If things do
not go right, the company has to think twice before getting out of the market. Thus, they think
that instead of facing exit barriers, it’s better to get collaborated with some other enterprise and
remain in the market.
Second, the benefits of forming a cartel are higher to the firm then what the different firms can
earn individually. This can be easily explained by the Game-Theoretic Approach.
14
The
incentive for firms to collude, and the difficulties of sustaining collusion, can be illustrated by
the “Prisoners’ Dilemma.” In the following game, there are two firms, Firm A and Firm B, who
can each either have competitive or cooperating strategies.
Firm A/ Firm B Competitive Cooperating
Competitive 10,10 30,0
Cooperating 0,30 20,20
The first number in each quadrant in the above Figure shows the profits earned by Firm A and
the second number shows the profits earned by Firm B. For example, if Firm A tries to play in a
competitive setup while firm B wants to cooperate, then firm A will get a payoff of 30, while
firm B will end up getting Zero payoff (top right quadrant). Thus, looking at the diagram, it is
clear that if both the firms cooperate, they can together earn higher profits, and may pass on the
benefits to the consumers, thus, increasing the overall welfare of the society.
15
14
Note that this type of collaboration can be an explicit or a tacit collusion.
15
Notice that the payoffs are such that there is no incentive for the firms to deviate from the set equilibrium.
Competition Commission Of India
29
Another reason for us to consider this merger is that it leads to positive synergies to the society.
16
Synergy, also known as synergism, refers to the combined effects produced by two or more
parts, elements, or individuals. Simply stated, synergy results when the whole is greater than the
sum of the parts. For example, two people can move a heavy load more easily than the two
working individually can each move their half of the load.
There are positive synergies in an organization which can be seen in the combined efforts of
individuals working together. Synergy can result from the efforts of people serving on
committees or teams. By combining their knowledge, insights, and ideas, groups often make
better decisions than would have been made by the group members acting independently.
Positive synergy resulting from group decisions may well include the generation of more ideas,
more creative solutions, increased acceptance of the decision by group members, and increased
opportunity for the expression of diverse opinions. Much of the current interest in teams and
team building is an effort to achieve positive synergy through the combined efforts of team
members. Organizations strive to achieve positive synergy or strategic fit by combining multiple
products, business lines, or markets. One way to achieve positive synergy is by acquiring related
products, so that sales representatives can sell numerous products during one sales call. Rather
than having two representatives make two sales calls to a potential customer, one sales
representative can offer the broader mix of products.
Mergers and acquisitions are corporate-level strategies designed to achieve positive synergy.
17
The intended result of many business decisions is positive synergy. Managers expect that
16 According to the American Heritage Dictionary, the term "synergy" is derived from the Greek word sunergos,
meaning "working together." Positive synergy is sometimes called the 2 + 2 = 5 effect. Operating independently,
each subsystem can produce two units of output. However, by combining their efforts and working together
effectively, the two subsystems can produce five units of output.
17 For instance, The 2004 acquisition of AT&T Wireless by Singular was an effort to create customer benefits and
growth prospects that neither company could have achieved on its own—offering better coverage, improved quality
and reliability, and a wide array of innovative services for consumers.
Competition Commission Of India
30
combining employees into teams or broadening the firm's product or market mix will result in a
higher level of performance.
Thus, the choice of analysing a merger through the hypothetical situation is valid from various
grounds. Now, we are going to answer another question, why we have chosen only LG and
Samsung for this analyses.
Why LG and Samsung only?
Among the number of foreign players operating in India, in Television Industry, the two Korean
players, LG and Samsung, are the most vibrant. On the surface, they are aggressive, while
beneath the ocean, they may be operating on some kind of cooperating strategies. If one focuses
on the pricing strategies, marketing strategies, product choice, advertisements publicized, offers
made and their timings, in India, it is clear that there is something which is going on wrong.
Thus, we are going to study the collaborated firm SamLG and the Indian MNC Videocon.
18
Samsung is the world's largest conglomerate by revenue with annual revenue of US $173.4
billion in 2008 and is South Korea's largest chaebol. A large number of South Korean firms,
particularly those in the electronics industry, are dependent on Samsung for the supply of vital
components or raw materials such as semiconductor chips or LCD panels. This has led to
continued allegations of price fixing and monopolistic practices. Samsung Group accounts for
more than 20% of South Korea's total exports. In many domestic industries, Samsung Group is
the sole monopoly dominating a single market, its revenue being as large as some countries' total
GDP
19
. The company has a powerful influence on the country's economic development, politics,
media and culture, being a major driving force behind the Miracle on the Han River; many
businesses today use its international success as a role model.
18
The following details are taken from various reports of Corporate Catalyst India.
19
In 2006, Samsung Group would have been the 34th largest economy in the world if ranked, larger than that of
Argentina.
Competition Commission Of India
31
Compared to other major Korean companies, Samsung survived the Asian financial crisis of
1997–98 relatively unharmed. Samsung Electronics, which saw record profits and revenue in
2004 and 2005, overtook Sony as one of the world's most popular consumer electronics brands,
and is now ranked #19 in the world overall.
On the other hand, LG is the second largest maker of TV sets in the world. With every design of
its television sets, LG has won multiple awards that recognize not only in design but also in its
high-performance multimedia and entertainment in addition to its high quality and durability.
The company has announced that it is likely to become the first producer of TVs for 2012
because it will sell a substantial amount of equipments to try to overtake arch-rival Samsung.
Videocon, an Indian multinational, is the market leader in television industry and is consistently
maintaining its position at the first place for over more than a decade. The Videocon group has
an annual turnover of US$ 4.1 billion, making it one of the largest consumer electronic and home
appliance companies in India. Since 1998, it has expanded its operations globally, especially in
the Middle East. Videocon has many products (within the television segment itself) and is selling
them through a Multi-Brand strategy. With the largest sales and service network in India,
Videocon Group brands include Akai, Electrolux, Hyundai, Kelvinator, Kenstar, Kenwood,
Next, PlanetM, Sansui, Toshibha, Philips (TV Products) etc.
Videocon is one of the largest CPT Glass manufacturers in the world, operating in Mexico, Italy,
Poland and China. The major advantages that Videocon has in India are as follows:
Cost cutting – Videocon is better positioned to shift the activities to low-cost locations and also
it can integrate the operations with the glass panel facility in India. With the CPT manufacturing
facilities acquired from Thomson S.A., Videocon wants to leverage its position in the existing
parts of the business and this acquisition has given it a strong negotiation position and can reduce
impact of glass pricing volatility. Videocon has the capacity to reduce the costs by upgrading and
improving the existing production lines.
Vertical Integration – The acquisition, mentioned above, has helped Videocon in vertically
integrating its existing glass-shell business where it has been enjoying substantially high
margins. Videocon’s glass division has the largest glass shell plant in a single location. This
Competition Commission Of India
32
gives the company an unrivalled advantage in terms of economies of scale and a leadership
position in the glass shell industry.
Rationalization of Product Profile – Videocon has modified its product profile to cater to the
changing market needs like moving away from very large size picture tubes to smaller ones.
“Apart from the overall strategy, Videocon also has a plan on the technological front. It wanted
to improve the setup for the production line and line speed post-merger. Its focus was to increase
sales while reducing the costs and thereby improving the productivity of the existing line. The
company also wanted to foray in a big way into LCD panels’ back-end assembly. On the sales
front the company wanted to leverage on the existing clients of Thomson and build relation as a
preferred supplier to maximize sales. Also, Videocon could benefit from OEM CTV business
with the help of Videocon’s CTV division, invest for new models and introduction of new
technologies.”
An official of Videocon said on the deal “The word is out in the world that India and Indian
companies are not just a good bet by themselves, but also a hedge against China.”
20
Despite
facing a highly competitive market Videocon has managed to turn a plant around while the other
is on its way.
The vigorous marketing efforts being made by the domestic majors will help the industry. The
Internet is now being used by the market functionaries will lead to intelligence sales of the
products in the future. It will help to sustain the demand boom witnessed recently in this sector.
The ability of imports to compete is set to rise. However, the effective duty protection is still quite
high at about 35-40 per cent. So, a flood of imports is unlikely and would be rather need based.
Reduction in import duties may significantly lower prices of products. Otherwise, local
manufacturing will continue to stay competitive. At the same time, there will be some positive
benefits in the form of reduction in input costs.
20
Ibid 7
Competition Commission Of India
33
Given this huge success of Videocon, it emerges to be the market leader. It has the maximum
share in the market for the entire television industry and has the maximum sales in India. The
graphs below illustrate the same.
Market Share
0
10
20
30
40
50
2
0
0
0
2
0
0
2
2
0
0
4
2
0
0
6
2
0
0
8
2
0
1
0
2
0
1
2
Year
P
e
r
c
e
n
t
(
%
)
Videocon
LG
Samsung
SamLG
Sales
0
2000
4000
6000
8000
2
0
0
0
2
0
0
2
2
0
0
4
2
0
0
6
2
0
0
8
2
0
1
0
2
0
1
2
Year
R
s
c
r
o
r
e
Videocon
LG
Samsung
SamLG
Both the graphs show that after a small decrease in the year 2007, Videocon has gained a lot
within two years and if the same trend continues, it will have nearly 40% of the market share by
2011.
Competition Commission Of India
34
When LG and Samsung are merged together, called SamLG, the market share of this new
corporation is somewhere above Videocon
21
. This means that together, the two companies can
beat Videocon, and challenge the monopoly of Videocon in rural areas, where individually they
were not able to do so.
22
Thus, it is quite useful to study this situation in a greater detail.
Another reason for choosing LG and Samsung is that separately, these two companies fight with
one another in becoming the first company of Korea. If they join hands, not only they will
become the first company, but also will get a chance to spread their operations in different parts
of the world, which are still untouched by them. Thus, the choice of merging these two
companies seems to be apposite.
Moreover, we are talking of two companies getting merged. There could be a possibility that
Samsung and LG form a cartel. Cartel has been defined in section 2c of the Competition Act
2002 as:
“Cartel” includes an association of producers, sellers, distributors, traders or service providers
who, by agreement amongst themselves, limit, control or attempt to control the production,
distribution, sale or price of, or, trade in goods or provision of services.
While the formation of a cartel amounts to an anti-competitive trade practice, which is
indisputably against the public interest, the existence of a cartel is seldom proved by direct
evidence. Generally no express agreement showing its existence is ever found. It has to be
proved by circumstantial evidence by setting up a chain events leading to a common
understanding or plan. The underlying issue is what, at the minimum, constitutes the ‘meeting of
the minds’ which must be directly or circumstantially established to prove that there is a
restrictive on competition.
21
Notice that in getting into the figures of the combined company SamLG, we assume that the figures will get added
up in an additive form with equal weights. In projecting the values for the future years, we assume that the trend
which was prevailing in the previous years will continue to remain the same. The figures are founded out by doing
the trend analyses using the statistical package Stata. For all the graphs we are showing in this paper are developed
by this technique only. The tables for the variables included in the paper are given in the Appendix.
22
That’s the greatest disadvantage of the law in India that it considers market share to be the only indicator of
dominance. The two Korean companies, not being the leader in numbers, are the leaders in other variables, which
actually harm the competition climate in the market.
Competition Commission Of India
35
Lord Denning in RRTA v W.H.Smith and Sons Ltd. observed that: “People who combine together
to keep up prices, do not shout it from their housetops. They keep it quiet. They make their own
arrangements in the cellar where no one can see. They will not put anything into writings nor
into words. A nod or wink will do.”
23
Another case could be that the two companies form an export cartel. An export cartel is an
agreement or arrangement between firms to charge a specified export price and/ or to divide
export markets. Most countries exempt export cartels from their anti-trust laws, as long as they
do not have any anti-competitive effect on domestic market. In India, similar exemption exists in
both the outgoing MRTP Act and the new Competition Act. The rationale for permitting export
cartels is that it may facilitate cooperative penetration of foreign markets, transfer income from
foreign consumers to domestic producers and results in a favorable balance of trade.
Thus, the two companies may form a cartel or get merged or form an export cartel, or any kind
of combination. The focal point is to study this kind of set-up through the eyes of Competition
Authorities.
Emerging Competition Issues
Competition Law 2002 was introduced to serve two fold purposes. At the first instance,
competition law ensures competition in the market. Secondly, wherever there is competition,
there is a likelihood of unfair competition. Violation of the “rules of game” is the essence of
unfair competition, and it is the nature of the competition that determines those rules. Thus,
competition law also restricts unfair competition in the market.
On the other hand, Karl Marx stated that “Competition contains the seed of future
centralization”, or rather, competition contains the seed of future capital accumulation and
concentration that is achieved through “mergers and acquisitions”.
24
23
Roy and Kumar. This type of cartel is called a tacit collusion (mentioned earlier).
24
Das Kapital, Karl Marx, only the words in quotes.
Competition Commission Of India
36
One thing worth noting here is that competition law says to promote competition, but
surprisingly, the term “Competition” has not been defined under the competition act of 2002.
Competition Commission, UK defines competition as “a process of rivalry between firms or
other suppliers seeking to win customers”. This definition does not define the degree of rivalry
needed as it focuses on the process of competition rather than the outcome.
However, Competition Law 2002 forces the market players to search for better permutation and
combinations for providing greater profits through greater efficiency.
25
Thus, there could be a
reshuffling where the gigantic MNCs LG and Samsung get together.
The competition laws of various countries imbibe the idea that no enterprise or association of
enterprises or person or association of persons shall enter into any agreement which relates to
production, supply or distribution of goods or provision of services which causes or is likely to
cause an appreciable adverse effect on competition in their country and that such an agreement
would be declared void. The same rests on the premise that competition law is designed to be a
comprehensive character of economic liberty aimed at preserving free and unfettered
competition as the rule of trade, and that unrestrained interaction of competitive forces will yield
the best allocation of economic resources of the country, the lowest prices, the highest quality
and greatest material progress.
But the entire concept of appreciable adverse effect on competition is made subjective that may
vary from case to case. And, therefore, under section 19(3) of the Competition Act 2002 it is
provided that while determining whether an agreement has an appreciable adverse effect on
competition or not, the Competition Commission of India (CCI), the nodal agency, incorporated
under the administrative set up of the Act, and has to look at the following factors:
a) Creation of barriers to new entrants in the market;
b) Driving existing competitors out of the market;
c) Foreclosure of competition by hindering entry into the market;
d) Accrual of benefits to consumers;
25
Roy and Kumar, Competition Law in India.
Competition Commission Of India
37
e) Improvements in production or distribution of goods or provision of services;
f) Promotion of technical, scientific and economic development by means of production or
distribution of goods.
Promotion of economic growth is the ultimate object of the Act, intended to achieve. The
operation of the economic system should not result in the contraction of wealth and means of
production to the common detriment. The broad premises on which the Competition Act rests are
unrestrained interaction of competitive forces, maximum material progress through rational
allocation of economic resources, availability of goods and services of quality at reasonable
prices and finally a just and fair deal to the consumers. An interesting feature of the statute is that
it envelops within its ambit, fields of production and distribution of both goods and services. In
this respect, the pre-entry restriction on investment decision of the corporate sector has outlived
its utility and has become a hindrance to the speedy implementation of industrial projects. By
eliminating the requirement of time-consuming procedures and prior approval of the
government, it would be possible for all productive sections of the society to participate in efforts
for maximization of production.
In this promotion of economic growth and maximization of production capabilities, if the merged
firm SamLG gets into anti-competitive practices, then there could be problems regarding this
merger/ collaboration. There are various anti-competitive practices mentioned in the Act
26
and
there are also various practices which a dominant player may engage in, and abuse its position as
a market leader.
27
A brief description of these practices and how the combined firm SamLG can
get into it is explained below.
Abuse of Dominant Position
Section 4 of Competition Act 2002 defines the dominant position as a position of strength,
enjoyed by an enterprise, in the relevant market, in India, which enables it to—
26
Chapter II, Section 3.
27
Chapter II, Section 4.
Competition Commission Of India
38
a). Operate independently of competitive forces prevailing in the relevant market; or
b). Affect its competitors or consumers or the relevant market in its favour.
Since SamLG may become the market leader in our analysis, so it might be the case that it enters
in unfair competitive practices. Section 4(2) of Competition Law 2002 enumerates the activities
which can be considered as abuse, if practiced by the enterprise holding dominant position in the
market, namely: unfair or discriminator condition or price including predatory pricing, limiting
or restricting production or technical or scientific development, denying market access, imposing
supplementary obligations having no connection with the subject of the contract, or using
dominance in one market to enter into or protect another relevant market. Let us look at these
one by one.
Predatory Pricing
Predatory pricing is defined as the situation wherein the firm with the market power prices below
cost so as to drive the competitors out of the market and acquire or maintain a position of
dominance. Basically, price below average variable cost is regarded as abusive. It’s a kind of
price discrimination strategy. The predatory merchant then has fewer competitors or is even a de
facto monopoly. In essence, the predator undergoes short-term pain for long-term gain.
Therefore, for the predator to succeed, it must have sufficient strength (financial reserves,
guaranteed backing or other sources of offsetting revenue) to endure the initial lean period.
In our hypothetical situation, it is difficult to estimate both the prices and the average variable
cost, and it is also difficult to find out the prices and costs in actual situation. Thus, we can only
Competition Commission Of India
39
say that if the price charged by the new company SamLG is less than the competitive price, then
it is abusive, even though the price is above the cost.
Price Discrimination
Price discrimination means charging different prices to different customers, for the same
commodity. Any firm or a company engages in price discrimination to capture the consumer
surplus and increase its profits. The following diagram explains it clearly.
Figure1 Figure2
In the above diagram (fig1), a single price (P) is available to all customers. The amount of
revenue is represented by area P, A,Q, O. The consumer surplus is the area above line segment P,
A but below the demand curve (D).
With price discrimination, (the bottom diagram), the demand curve is divided into two segments
(D1 and D2). A higher price (P1) is charged to the low elasticity segment, and a lower price (P2)
is charged to the high elasticity segment. The total revenue from the first segment is equal to the
area P1,B, Q1,O. The total revenue from the second segment is equal to the area E, C,Q2,Q1.
The sum of these areas will always be greater than the area without discrimination assuming the
demand curve resembles a rectangular hyperbola with unitary elasticity. The more prices that are
introduced, the greater the sum of the revenue areas, and the more of the consumer surplus is
captured by the producer.
The new company SamLG can do this very competitively. After merger, they can develop a new
Television, having the best features of both LG and Samsung television sets and then price it
Competition Commission Of India
40
accordingly. They can have Exchange Offers like: Customers having LG or a Samsung TV
already, will get this brand new TV which is of better quality absolutely free of cost, in exchange
of their old LG or Samsung TV. Customers of other brands can have this TV at 50% off on
exchange of their old TV. In addition to this, SamLG can provide an essential facility like
insurance of television for one year (apart from guarantee period) to the (already) users of LG
and Samsung. Price discrimination can also take the form of Corporate Discounts, whereby the
new company SamLG gets in contact with some other company (not in the same business); to
sell its TV sets to the employees of that company. This kind of offer is anti-competitive and
competition authorities have to keep an eye on them.
Tying and Bundling
A “tying arrangement” is an agreement by the party to sell one product but only on the condition
that buyer also purchases a different product, or at least agrees that he will not purchase the
product from any other supplier. Bundling refers to the situation where a package of two or more
products is offered. If only the bundle is offered and not its individual components then bundling
is called ‘pure’, otherwise it is ‘mixed’. This kind of situation can arise in consumer market,
where SamLG says to buy a mobile phone/ or a television trolley/ or a Dish antina with the
television at a lower cost. Tying and bundling can also come in the intermediate market, where
SamLG is giving (better and more) incentives to retailers to sell its product to the consumers.
Limiting or Restricting Production
The new company SamLG can limit the production of their old television sets with the view that
they are coming up with the new television sets, having the features of both the televisions, and
this may lead to increase in the price of television sets already in stocks.
Creating Entry Barriers
Competition Commission Of India
41
It is very likely that the new company SamLG may create the entry barriers in the industry
through huge Research and Development Expenditures
28
, Advertising and Marketing Strategies,
building up a massive infrastructure, having economies of scale, getting IPR on new product, etc.
The firm may incur endogenous sunk costs which, in economics, are considered to be one of the
potential entry barriers.
Exclusive Distribution Arrangements
Explanation to Section 3(4) (c) of the Competition Act 2002 explains “exclusive distribution
arrangements” as those which ‘includes any agreement to limit, restrict or withhold the output or
supply of any goods or allocate any area or market for the disposal or sale of the goods.’
Accordingly, the new company SamLG can engage in this type of practice by giving incentives
(either monetary or of any other kind) to the dealers that they have to promote the products of
new company, among the consumers, and try to discourage the sales of the competitors. They
can do this in any relevant product or geographical markets. They can also engage in “refusal to
deal” strategies by not to deal with the agent who do not follow their terms and conditions for the
distribution.
Effects on Market Variables
According to the Competition Law, in India, whenever the Competition Commission has to look
at the viability of the any merger or want to verify that any dominant position exist in the market
or not, certain variables are analyzed again and again. Finding out the dominant position in the
relevant market is the first step to our analysis.
The current market share cannot be the sole indicator of the dominance as it may be constrained
by the threat of competition from potential entrants and by the purchasing power of its
customers. Thus, we have to look at other variables also mentioned under section 4 of the
Competition Act 2002. Though some of them are quite difficult to measure, but we try our best
28
The new company SamLG can also reduce the R&D expenditures saying that the merger has lead to a buoyant
increase in technology and the company can do a lot without incurring such huge expenses.
Competition Commission Of India
42
to give the maximum. The list of these variables is as follows and this section will check out
these variables and their interpretation for competition in the market.
29
(a) Market share of the enterprise;
(b) Size and resources of the enterprise;
(c) Size and importance of the competitors;
(d) Economic power of the enterprise including commercial advantages over competitors;
(e) Vertical integration of the enterprises or sale or service network of such enterprises;
(f) Dependence of consumers on the enterprise;
(g) Monopoly or dominant position whether acquired as a result of any statute or by virtue of
being a Government company or a public sector undertaking or otherwise;
(h) Entry barriers including barriers such as regulatory barriers, financial risk, high capital cost of
entry, marketing entry barriers, technical entry barriers, economies of scale, high cost of
substitutable goods or service for consumers;
(i) Countervailing buying power;
(j) Market structure and size of market;
(k) Social obligations and social costs;
(/) Relative advantage, by way of the contribution to the economic development, by the
enterprise enjoying a dominant position having or likely to have an appreciable adverse effect on
competition;
(m) Any other factor which the Commission may consider relevant for the inquiry.
A brief detail about these variables in the Television industry is given as follows:
a). Market share of the enterprise.
Market share, in strategic management and marketing is, according to Carlton O'Neal, the
percentage or proportion of the total available market or market segment that is being serviced
by a company. It can be expressed as a company's sales revenue (from that market) divided by
the total sales revenue available in that market.
29
List is taken from Competition Act 2002.
Competition Commission Of India
43
Videocon is the market leader having the market share of nearly 36% in 2009, while LG is
having around 18% and Samsung is having about 16%. If the Korean firms are taken together,
then the market share of new firm SamLG would be around 34% in 2009. It is less than
Videocon, but forecasting reveals that over the years, market share of SamLG would be
approximately 50% and Videocon would be left behind with the share of only 34%.
30
Having control over nearly half of the market, SamLG will become the leader in the market.
Though the market will not be called as a monopoly, but surely, there would be an adverse effect
on the competition in the market. According to the established judicial pronouncements, very
large market shares, 50% or more, may in themselves be evidence of existence of dominance
position.
31
b). Size and resources of the enterprise
The Competition Act 2002 does not specify what is the size of the enterprise and what all will be
included in the resources of the enterprises. The act (also) does not specify how to measure these
variables. So, we are assuming net investment (physical), measured by net fixed assets
32
, of the
company as an indicator of the size of the company. As far as the resources are concerned, we
are taking capital employed as the indicative variable.
33
The graph below shows that Videocon is still ranking first if you consider size and the resources
of an enterprise in India. Market dominance is not only shown by the market size or share, but
these variables are also important to have a look at. Having the largest size and resources,
30
The graph of this has already been shown above.
31
Roy and Kumar
32
Net Fixed Assets is a term used in accounting for assets and property which cannot easily be converted into cash.
Fixed assets normally include items such as land and buildings, motor vehicles, furniture, office equipment,
computers, fixtures and fittings, and plant and machinery.
33 Capital employed is the value of the assets that contribute to a company's ability to generate revenues, i.e. their
liquidity.
Competition Commission Of India
44
Videocon is helping the competition authorities in maintaining the competition in the market,
even after the merger of LG and Samsung.
Net Fixed assets
0
2000
4000
6000
8000
2
0
0
0
2
0
0
3
2
0
0
6
2
0
0
9
2
0
1
2
Year
R
s
C
r
o
r
e
Videocon
LG
Samsung
samLG
Capital Employed
0
5000
10000
15000
2
0
0
0
2
0
0
3
2
0
0
6
2
0
0
9
2
0
1
2
Year
R
s
c
r
o
r
e
Videocon
LG
Samsung
SamLG
c). Size and importance of the competitors
Since we are investigating the merger of LG and Samsung and are considering Videocon to be
the major competitor, we have, thus, covered this part above. One thing to notice is that the new
firm has the potential to derive smaller brands like Goa electronics, Hendez electronics, Trends
Electronics, etc. out of the market, which have very less market share of nearly 1-2%. These
companies will not be able to face the stiff competition so created and so will be driven out of
the market.
d). Economic power of the enterprise
Economic power of an enterprise can be measured by the income it earns, its profits, its paid up
capital, its net worth, share capital, etc. We are not going to look at so many variables, but just a
few. The graphs of these variables are as follows
34
:
34
The accounting meaning of these variables and their formulae are mentioned in the Appendix. We are not
considering the economics of these variables.
Competition Commission Of India
45
PBT/Total Income
-10
-5
0
5
10
15
2
0
0
0
2
0
0
3
2
0
0
6
2
0
0
9
2
0
1
2
Year
Percent %
Videocon
LG
Samsung
SamLG
PAT/Total Income
-5
0
5
10
15
2
0
0
0
2
0
0
2
2
0
0
4
2
0
0
6
2
0
0
8
2
0
1
0
2
0
1
2
Year
P
e
r
c
e
n
t
%
Videocon
LG
Samsung
SamLG
Net Income
0
5000
10000
15000
20000
25000
2
0
0
0
2
0
0
3
2
0
0
6
2
0
0
9
2
0
1
2
Year
R
s
c
r
o
r
e
Videocon
LG
Samsung
SamLG
Tax/ Total income
-4
-2
0
2
4
2
0
0
0
2
0
0
2
2
0
0
4
2
0
0
6
2
0
0
8
2
0
1
0
2
0
1
2
Year
P
e
r
c
e
n
t
%
Videocon
LG
Samsung
SamLG
Net Worth
0
2000
4000
6000
8000
10000
2
0
0
0
2
0
0
3
2
0
0
6
2
0
0
9
2
0
1
2
Year
Rs Crore
Videocon
LG
Samsung
SamLG
Debt-Equity Ratio
0
1
2
3
2
0
0
0
2
0
0
2
2
0
0
4
2
0
0
6
2
0
0
8
2
0
1
0
2
0
1
2
Year
N
u
m
b
e
r
o
f
T
i
m
e
s
Videocon
LG
Samsung
SamLG
Above, we have presented a plethora of graphs to estimate the economic power of the enterprise.
Both the ratios, profit before tax and after tax to total income, are rising for Videocon, but not for
the combined firm SamLG. However, the net income of SamLG is increasing at an increasing
rate. The net worth of the company, which is the difference between the total assets of the
company and its outside liabilities, are increasing for Videocon at a higher level, while for the
new firm SamLG it is increasing but the level is quite low. To substantiate this point, we have
Competition Commission Of India
46
presented the graph for Debt-Equity Ratio. The debt-to-equity ratio (D/E) is a financial ratio
indicating the relative proportion of shareholders' equity and debt used to finance a company's
assets. Closely related to leveraging, the ratio is also known as Risk, Gearing or Leverage. This
ratio for the three companies under analyses ranges from 0 to 1.8. However, the upper limit of
the combined firm is around 2.5. Since, the Debt-Equity Ratio of SamLG is high; along with low
and negative profit after tax, it is clear that SamLG is trading on equity.
Thus, different economic variables give dissimilar picture of the how the market is behaving. If
one looks at the graph of Net Worth, Videocon is on the top, while LG and Samsung, together
are not able to beat it. If the focus is shifted towards the ratio of PBT/ total income, we find that
this ratio is increasing only for Videocon and decreasing for other two. Thus, if the competition
authorities are looking the dominant position only on the basis of market share, they are going to
get a biased picture of market power in their analysis.
e). Vertical Integration of Enterprises
Not much is known and not much is available on this issue in India, except something about the
inputs used in television. It is known that Philips has been in India for a long time but has not
been able to face up to the competition. It therefore sells its CTV unit in Calcutta to Videocon,
which produces not only CTV but also CPT. However, vertical integration can occur in a
completely different way, where the new company SamLG, again get in some kind of agreement
with the local manufactures, who assembles the parts and sell the TV with their own brands in
rural areas, so that it can get the benefits of market reach of these small manufactures.
Nevertheless, still more is to be explored.
f). Entry Barriers
Since, the entry barriers are not mentioned explicitly in the act, we consider various economic
factors as entry barriers. One is the size of enterprise, as mentioned above. Other is the
advertising and marketing expenses.
Competition Commission Of India
47
In the diagrams shown below, we find that in advertising and marketing expenses, LG ranks first
and Samsung second. Thus, the merged company has the better position than Videocon. Thus,
any other brand which is planning to enter in television market will think twice.
Advertising Expenses
0
200
400
600
800
2
0
0
0
2
0
0
3
2
0
0
6
2
0
0
9
2
0
1
2
Year
R
s
C
r
o
r
e
Videocon
LG
Samsung
SamLG
Marketing Expenses
0
500
1000
1500
2000
2500
3000
2
0
0
0
2
0
0
5
2
0
1
0
Year
Rs
Crore
Videocon
LG
Samsung
SamLG
Other barrier could be R&D expenditure.
35
Research and development expenditure is incurred by
each and every firm, not only to develop new improved products, but also to widen the horizon
of technology and to spread out their corners. This is the foremost source by which companies
restrict the entry of incumbents. Along with it, acts like IPR, Copyright, etc. add to the chain.
The following diagram portrays the size of this expenditure by our survey corporations.
36
R&D and Royalty Expenses
0
100
200
300
400
500
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012
Year
R
s
c
r
o
r
e
Videocon
LG
Samsung
SamLG
35
Basically, we are focusing on the variables which are mentioned by Sutton as Endogenous Sunk Cost. These cost
act as the entry barriers in the industry.
36
The graph considers both R&D and royalty expenditures together. This is so because, in television industry, some
companies uses the technology of others and pay royalty to them, and this is considered as their expenses on
research.
Competition Commission Of India
48
The above graph clearly shows that LG is the leader in innovation and technology. When it is
merged with Samsung, this trend would take a kink and would rise at a greater speed and at a
different angle then the original LG curve. This is so because of the reason for the merger of the
two companies, i.e., efficiency (explained later)
37
Surely the new company SamLG will create the entry barriers for the entry of any new firm by
having huge expenditure on R&D, salaries to employees, advertising and marketing expenses,
etc., but on the same side, there will be improvements in the production and/ or distribution of
quality TV sets and the provision of better quality of services to the customers. (Not only after-
sales services, but other accruing benefits also like insurance schemes.)
g). Position of Employees
Whenever the question on employees is raised, economists always have a point, which is proved
empirically.
Whether there is a firm, industry, factory, or a corporation, after globalization in 1991, the
competition has increased and to avoid getting the profits down, employers are paying less
37
There are other variables mentioned in the economics as the indicators of entry barriers, but due to data
availability issues, we are ignoring them.
Depreciation
0
200
400
600
800
2
0
0
0
2
0
0
1
2
0
0
2
2
0
0
3
2
0
0
4
2
0
0
5
2
0
0
6
2
0
0
7
2
0
0
8
2
0
0
9
2
0
1
0
2
0
1
1
2
0
1
2
Year
R
s
c
r
o
r
e
Videocon
LG
Samsung
SamLG
Competition Commission Of India
49
salaries (or wages) to the employees. Trade unions are weakening and the working conditions
are getting worse.
If we look at the television industry, except Videocon, no other brand gives bonus to the
employees. However, we cannot test the above hypothesis for the television industry, again
because of data problems. But the following graph actually disproves the claim and displays the
continuous rise in the compensation to employees.
38
Wages and Salaries
0
100
200
300
400
500
2
0
0
0
2
0
0
1
2
0
0
2
2
0
0
3
2
0
0
4
2
0
0
5
2
0
0
6
2
0
0
7
2
0
0
8
2
0
0
9
2
0
1
0
2
0
1
1
2
0
1
2
Year
R
s
C
r
o
r
e
Videocon
LG
Samsung
SamLG
This rise would even get steeper after the merger of the two corporations as they will try to lure
the efficient and technical personal to join their organization. Also, India’s cost of skilled labour
is among the lowest in the world. For example, average labour rate per employee in the
electronics sector is about $3,000 per year. Labour cost, as a percentage of value added is only
21 per cent in India as compared to 23 per cent in China and 30 per cent in Taiwan. Thus, the
new company will try to set up its manufacturing plant in India.
Even, SamLG will try to expand its operations and try to go down to the remote areas where till
date, only Videocon has the access and for that, SamLG would be needing manpower. This
quality of the individuals will also vary from region to region and thus, people from diverse
backgrounds will get a chance to work. The working conditions will also get improved. Overall,
38
We have to say this with a pinch of salt, as we don’t know the number of employees employed in different
companies.
Competition Commission Of India
50
there would be a change in the demand and supply of labour and the entire equilibrium of the
labour market will change. Not only this, there will be promotion of technical, scientific and
wholesome economic development by the means of production and/ or distribution of quality TV
sets. This is being one of the arguments given for the validity of the hypothetical situation so
created.
h). Consumer Preferences
Though it is hard to find what consumers want without doing a systematic survey, planned
beforehand, yet we have tried to find out something from the people at CCI. Through this, we
will get a balance sample as the employees are coming from different backgrounds. Officers,
Interns and other employees can give us a good sample. From this kind of informal survey, it is
revealed that in consumer preferences, Samsung ranks first, Sony second and LG ranks third.
Metro stations have LG TV. The canteen of CCI has Samsung television.
As far as the benefits to consumers are concerned, consumers will be benefitted a lot by getting
the good features of the two popular brands in one TV set at almost the same price. Along with
it, after the spread of SamLG in rural areas, rural people will have a wider choice bracket. Thus,
consumer welfare will increase. Moreover, we have to take into account, as mentioned earlier,
total welfare standards and not only the consumer welfare standards; and this merger will
improve overall welfare of the society.
Thus, looking at above variables, it is clear that Videocon has the dominant position in the
market and Samsung and LG are following it. SamLG, the new company, will become the
market leader in the near future. Thus, the result of the forecasting for the year 2012 says that
SamLG has the dominant position.
Economic Effects
The main idea behind competition law is economic theory. Thus, dealing with economic effects
separately will not be correct. Nevertheless, we will see what the microeconomic foundations
have to say about this merger.
Competition Commission Of India
51
Television market is monopolistically competitive. Economic theory gives the following analysis
for it. Let us look at a single firm analysis.
In the diagrams shown, x-axis shows the quantity of television while y-axis shows the price and
cost. AR curve is the average revenue curve, which we call the demand curve
39
. MR is the
marginal revenue curve
40
. MC is the marginal cost curve, which resembles the supply curve.
41
AC is the average cost curve.
42
Figure1 Figure2
In the above diagram, we have shown two different figures for the two companies. Figure one is
for Samsung, while figure two is for LG. These are free hand curves, drawn without any data.
The average cost and the average revenue curves of the two companies are drawn differently, to
show that the cost structure and the consumer preference for the two companies are different.
43
39
Average Revenue is the total revenue per unit of output.
40
Marginal Revenue is the rate at which total revenue changes with respect to output.
41
Rising portion of MC curve is the supply curve. Marginal Cost is the rate at which total cost changes with respect
to output.
42
Average Cost is the total cost per unit of output.
43
It is beyond the scope of this paper to measure the exact demand and cost structures of the firm.
Competition Commission Of India
52
Equilibrium is attained at a point where MR=MC. Thus, the shaded region is the profit for the
two firms. Depending upon the cost structure, the prices are determined at Pl and Psam for LG
and Samsung, respectively.
Figure 3
The above diagram is drawn when the two firms get together and a new firm is formed called
SamLG. The cost structure and the demand facing the new firm will change. The price and
quantity produced and sold, will both be changed. The new profit if the shaded region. We
cannot estimate the exact price, quantity and profits of the firm, lest we can only make a guess
work. For instance, refer the following table, which shows the price of some famous brands of
LCD TV of 26” and its features.
Competition Commission Of India
53
Brands 26 Inches (Rs) Features
Videocon 20,000 16.9 aspect ratio, 16.7 mn
display color
LG 30,000 Dynamic contrast ratio, 5ms response time, PC connectivity
Samsung 28,000 Wide color enhancer, multimedia player for JPEG, in built
FM radio, digital natural image
Panasonic 25,990 Backlight control, alpha panel, 2xHDMI inputs
Sony 26,900 Intelligent picture plus, MPEG noise reduction, USB
playback
The above table shows the price of some famous brands of LCD TVs and its features. When the
two companies get together to form SamLG, they may have economies of scale and efficiency
and may pass on the benefits to the consumers, and hence, charge a minimal price of Rs 25,000
or less. It might be the case of predatory pricing for an outsider, but the company may be
charging the price accordingly. On the other hand, the company could also the charge the price
of Rs 35,000, which is above the prices mentioned in the list, because they are providing double
offers in a single TV set.
Effects on Concentration Measures
There are various possible concentration measures used in the literature. The most commonly
used measure is the coefficient Cm, which is the sum of the market shares of the largest m firms
in the industry. It is called the Concentration Ratio. The Concentration Ratio (herein after
referred to as CR) is a simple summary statistic of level of concentration. It is calculated at
different levels: CR2, CR3, CR4, etc. (E.g., CR4 is the concentration among the largest four
firms in the industry). Its index is as follows:
Competition Commission Of India
54
CR3>75% High Concentration
75%