VOLUME DISCOUNTS AND MARGIN SQUEEZE: ANALYZING COMPETITIVE IMPACT AFTER CCI V. SCHOTT GLASS

[Vishesh Khanna is a third-year law student at National Law University, Odisha]

INTRODUCTION

In a landmark verdict, the Supreme Court (SC) upheld the Competition Appellate Tribunal’s (COMPAT) 2014 ruling in CCI v. Schott Glass India Pvt. Ltd., dismissing appeals filed by the Competition Commission of India (CCI) and Kapoor Glass India Private Limited (Kapoor Glass). The SC reasoned that a uniform, volume-based discount, if applied uniformly even by a firm dominating the market, does not amount to abuse of dominance under Section 4 of the Competition Act 2002 (the Act).

The judgment raises important questions: Can dominant firms like Schott Glass Private Limited (Schott Glass) use joint ventures (JV) and discounting techniques to suppress fair competition in the market? This piece will explore two focal points emerging from the case: firstly, when volume-based discounts are legitimate business measures and when they get converted into a form of covert foreclosure; and secondly, the implication of vertically integrated JVs, focusing on margin squeezing and exclusionary risks in a competitive market.

CHAIN OF EVENTS

Alleging abuse of dominance, Kapoor Glass filed a case under Section 9 of the Act, claiming anti-competitive conduct by Schott Glass in the market for neutral USP-I borosilicate glass tubing, a component used in the production of pharmaceutical ampoules and vials. The central allegation was the preferential treatment that Schott Glass extended to its downstream JV entity, Schott Kaisha.

Schott Glass entered into a JV with Kaisha Manufacturers Pvt. Ltd., which enabled it to get vertically integrated in both upstream and downstream markets of the packaging sector of the pharmaceutical industry. Kapoor Glass alleged that Schott Glass was indulging in anti-competitive practices by offering significantly lower prices to ouster its competitors. Later, when the competition diminished, Schott Glass raised the prices. The main allegation was a volume-based rebate scheme, offering quarterly rebates on total annual purchases. Kapoor Glass argued that although the scheme appeared neutral on its face, but it discouraged buyers from sourcing their supplies from other players in the market, effectively establishing dominance of Schott Glass in the market.

Moreover, Schott Glass also offered a functional rebate of 8% to those converters who met annual purchase targets, refrained from using Chinese imports, and adhered to pricing conditions. Apart from these rebates, a Long-Term Tubing Supply Agreement (LTTSA) with Schott Kaisha, under which Kaisha agreed to source 80 % of its tubing needs exclusively from Schott Glass. In return for this exclusivity, Kaisha received other benefits like a three-year price freeze, dispatch priority, etc., which were not extended to other market participants. Together, these practices formed the basis of Kapoor Glass’s allegation that Schott Glass abused its dominant position.

The CCI initially found Schott Glass guilty of abusing its dominant position under Section 4(2) of the Act. It imposed a fine and issued a cease-and-desist notice against exclusionary practices. However, the COMPAT later overturned CCI’s findings. It was held by the COMPAT that volume-based discounts are not inherently discriminatory unless they are applied unequally to similarly placed buyers in a comparable transaction. This shift in reasoning makes it essential to closely examine the structure and impact of rebate schemes.

REBATE STRUCTURES: LEGITIMATE INCENTIVES OR HIDDEN FORECLOSURE

Rebates, mainly functional and target (volume) based discounts, are widely used commercial incentives. While they may look benign at first instance, their design and context in the market determine their impact on competition. Functional discounts, also known as loyalty discounts, essentially reward customers who remain committed to a particular supplier for their purchases. Similarly, volume-based rebates offer discounts on units purchased when they meet a particular level of threshold. These schemes can be beneficial for both supplier and consumer, especially in a high fixed cost market, enabling the supplier to lower the production cost per unit and share such savings with the consumer.

However, such schemes may lead to market foreclosure. For example, imagine a buyer who purchased 250 units of a commodity and is eligible for a 20% rebate if they purchase 300 units. Switching from 50 units to a rival supplier would make them ineligible for a rebate, making this decision financially impractical even in a situation where a rival competitor offers a better price. In such cases, the dominant firms lock in customers and prevent fair competition in the market. Thus, the rebate structure may look neutral, but if applied inequitably, it may lead to abuse of dominance in the market.

In the Schott Glass case, the SC examined whether the volume-based rebates offered crossed the line of discriminatory pricing. The SC found that Schott Glass applied uniform rebate slabs to all converters. The rebate was applied to the annual purchase of Neutral Glass Clear and Neutral Glass Amber without considering the identity of the buyer. Moreover, these rebates were disclosed to all market participants.

Schott Kaisha received the highest 12% rebate due to the scale of the order they placed, and the differential treatment was the result of volume disparity, not discriminatory treatment. Additionally, no converter purchasing an equivalent quantity was denied the same rebate. Thus, the SC held that rebate schemes that are based on objective commercial justification are not in violation of Section 4 (a) or 4 (b) of the Act.

Similarly, in Intel Corporation Inc. v. European Commission, the European Court of Justice evaluated these target-based schemes and concluded that these schemes do not foreclose competitors from the market. Rebates were not aimed at creating dominance rather, they were introduced to increase the sale of low-demand products. It was lastly held that these rebates are reasonable commercial practices to boost competition. However, the concern for margin squeeze reveals a complex challenge, particularly in cases involving JVs.

MARGIN SQUEEZE: WHEN INTEGRATION BECOMES A THREAT

In any industry where raw materials are used to create finished goods, two linked markets are often involved. The upstream market, where the basic inputs are produced, such as in our case, glass tubes. The downstream market, where inputs are sold to final good producers, such as in our case, ampoule or syringe manufacturers. Sometimes a single entity gets involved in both markets, which is when a margin squeeze may happen. It is like a price trap where the same company sets raw material prices high and sells its finished goods at such low prices that other players cannot earn adequate profits. Over time, rival players are pushed out of the market, leaving the vertically integrated company in complete control.

In TeliaSonera Sverige AB v. Konkurrensverket, the European Court of Justice laid down a three-limb test to prove margin squeeze. Firstly, the upstream undertaking must also be involved in the downstream market. Secondly, the price gap between the upstream input and the downstream finished product must be so narrow that rivals can’t operate profitably. Thirdly, the conduct must have the potential to hamper competition in the market.

In the Schott Glass case, none of these conditions were fulfilled. Firstly, Schott Glass was only involved in the upstream market. The downstream conversion was carried out by Schott Kaisha, a separate legal entity and JV partner, but not under the control of Schott Glass. The absence of unified control meant that Schott Glass could not manipulate prices to favour its JV partner. Secondly, although Schott Kaisha received preferential treatment under the LTTSA, the price difference was not substantial enough to render the rivals unprofitable. Thirdly, there was no evidence of actual foreclosure since the market remained competitive as imports increased, new players entered the market, and overall downstream production increased. These indicators show that Schott Glass’s conduct did not distort competition, thereby failing to satisfy the third limb of the test.

CONCLUSION AND THE WAY FORWARD

The Schott Glass verdict is an important step in shaping how Indian competition law treats volume-based discounts. The SC acknowledged the fact that incentives applied with commercial logic do not automatically result in exclusionary practices. This view aligns with international standards, including the European Union’s treatment of rebate structure in Intel Corporation Inc. v. European Commission.

The SC emphasized that the margin squeeze must be established by proving the actual foreclosure effect. JVs between entities in different markets are not inherently anti-competitive; evaluation must be based on the exclusionary effect rather than just on form. Although JVs and the parent companies are not presumed to operate as a single entity, they may still attract liability if their conduct leads to exclusionary outcomes.

CCI needs to establish a framework to monitor potential competitive harm arising from JVs or other collaborations, particularly in vertically integrated markets. In this regard, the European Commission’s Guidelines on Vertical Restraints offer a valuable reference, a framework for assessing the legality of various agreements between entities at different levels of the supply chain. This framework would not only help in consistent enforcement but also in promoting healthy competition in the market.