Competition Law for dummies: The origins, basics of antitrust

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Traders in downtown Kampala. Ugandan businesses continue to struggle in a market that is highly saturated with cheap imports.  Photo | File

What you need to know:

  • Competition law is basically a policy designed to promote fair market competition by regulating anti-competitive conduct by companies, writes Simon M. Mutungi.

By Simon M. Mutungi

Competition law first emerged in 19th century North America where it was known as antitrust law. Back then, large companies entered legal arrangements where they formed a trust that would hold and consolidate their property. They would then cooperate as a single group in various ways to maximize their profits at the expense of customers. To better understand the impact of such an arrangement, imagine you are a kid again back in kindergarten, preparing for a tag-of-war match and you have chosen the biggest and strongest colleagues as your teammates to compete with other students. That team is going to win that competition before the whistle even blows.

Enter, John D. Rockefeller, one of modern history’s richest men, who formed a trust that consolidated a large number of petroleum companies under a single board of trustees. Through this trust called Standard Oil, he controlled about 90 percent of America’s oil refining capacity at its peak. Consequently, he could price the oil as he wished, and he did not need to produce quality petroleum products as there was no strong competition against his trust. Seeing the negative effect of such an arrangement on consumers and the economy at large, neighbouring Canada would pass the world’s first competition law in 1889 followed by the U.S in 1890 to break up such trusts hence the name ‘Antitrust’ law.

Now, 134 years later, Uganda has finally caught up following this month’s presidential assent of the Competition Act 2023, a very late yet equally very welcome endeavour. Till then we had mostly relied on sectoral laws such as Uganda Communications Act and regional laws like COMESA’s Competition Protocol. More recently, the Africa Continental Free Trade Area Competition Protocol was also promulgated. Competition law is basically a policy designed to promote fair market competition by regulating anti-competitive conduct by companies. Uganda’s introduction of a Competition Act marks a significant stride in its economic legislative framework, aiming to create a fair business environment and improve consumer welfare. This editorial highlights the ABCs of competition law tailored for businesses and individuals who might be unfamiliar with the concept, in the context of Uganda’s new law.

Levelling the playing field

Imagine a marketplace in Uganda where only one seller has maize to sell. Without competition, this seller can charge high prices, and buyers have no choice but to pay up if they need maize. That seller would also have no incentive to produce good quality maize products since there would be no other alternatives to his products. Competition law levels the playing field by preventing such monopolies and ensuring that no single company can dominate a market to the detriment of consumers and competitors. It encourages innovation, fair pricing, and quality through healthy competition. By regulating anti-competitive practices, such as price-fixing and market sharing, competition law keeps markets open and accessible, allowing new entrants and fostering an environment where businesses of all sizes can thrive. This ensures consumers benefit from a wider choice of products and services, improved quality, and better prices.

 The Competition Act 2023

President Museveni signed this law into effect on 2nd February 2024.and it addresses various practices as explained below:

 Prohibition of anti-competitive agreements.

The Act in effect, for instance prevents MTN and Airtel from agreeing on a deal to fix airtime or data prices at a certain level. It prevents Nile Breweries and Uganda Breweries from agreeing on a deal to limit the production of beers to cause a shortage and increase the price of Nile Special or Tusker Lite respectively. Under the Act, NTV cannot coordinate with NBS TV to divide the tele-broadcasting market by region, where one channel exclusively airs content in one area while the other operates in a different region, thereby avoiding direct competition. These are all examples of a horizontal agreement between competitors. The Act also prevents vertical arrangements such as tying arrangements where for example City Tyres would contract with Cafe Javas to only serve food to clients that used services of the former. Another example of vertical arrangements prohibited under the Act is resale price maintenance agreements where Unilever Uganda Limited for example would enter a contract with Akiki’s Retailer Shop to sell Geisha soap at a specific price, preventing her from offering discounts or altering the price. A deal forcing Akiki’s retail shop to only sell Unilever products under an exclusive supply/distribution agreement is also illegal under the new law. This position was earlier provided by the commercial court in Ezee Money V MTN Uganda where court found that MTN’s use of illegal exclusivity agreements on mobile money agents and intimidation tactics in the market; restricted competitors from rendering beneficial services to the public and thus constituted unfair competition in violation of the Communications (Fair Competition) Regulations, 2005..

However, the Act’s limitation lies in the genius nature of companies, which typically avoid explicit collusion agreements, opting instead for subtle coordination through mutual adjustments in their actions without documented interactions. For instance, Mogas and CityOil may observe each other’s pricing and adjust their own prices accordingly without any direct communication. If one station raises its prices and the others follow suit, maintaining higher prices collectively, they are indirectly coordinating to benefit from higher profits at the expense of consumers, despite not having an explicit agreement to do so. While the law addresses this issue in price fixing and tendering exercises, it leaves other media open and as such it ought to address not just overt but also covert forms of collusion, ensuring it encompasses both explicit and implicit conspiracies to ensure market fairness.

Abuse of dominant position

Dominant position is defined under the Act as a firm commanding 30 percent of the market or where a group of three or more has a 60 percent market share. Such a firm(s) are not allowed to use this position to the detriment of their competition or consumers for instance through predatory pricing. This is a concept where, hypothetically, Kinyara significantly lowers sugar prices below cost to outcompete and drive Kakira out of the sugar market and once the latter has left the market, the former raises prices again, taking advantage of its now dominant market position.

Another example of abuse of dominant position is the refusal of access to an essential facility.  The Act does not define what an essential facility is but it is basically a facility/asset/infrastructure that is owned and controlled by a dominant firm or monopolist which facility a third party needs access to, to offer its own product or service. This doctrine is applied when the facility in question is something competitors cannot feasibly replicate due to legal, economic, or technical barriers, and where denying access to this facility would hinder competition.

Essentially, it ensures that no company can use control over a crucial resource to lock out competition and maintain its dominance, thereby promoting a more competitive marketplace. This doctrine has proved controversial and Ugandan courts have dealt with this issue before and will likely deal with it again. For example, can MTN commanding a dominant position in the mobile money market deny any third-party fintech aggregators access to its mobile money platform? This issue was at play again in the 2013 Ezee Money v MTN matter where the court determined that MTN had unjustly prevented Ezee Money from connecting with the aggregator, Yo! Uganda Limited, to its network. As a result, Ezee argued that it incurred substantial financial losses.

The court rejected MTN’s flimsy response that the law only protected licensed persons and held that its activities unfairly prevented, restricted or distorted competition in the communications sector contrary to the Uganda Communications Act and the Communications (Fair Competition) Regulations, 2005. MTN was ordered to pay general damages of USD 235,000 as well as punitive damages to the tune of USD 441,000, though this was appealed. This verdict, in my opinion, was the catalyst for the emergence of the hundreds of Ugandan fintech start-ups that have leveraged the essential infrastructure provided by MTN and Airtel. This development has led to the creation of a robust national payment system, ultimately and significantly benefiting us, the consumers. This will also be critical as Uganda ventures into the open banking sphere.

Mergers, acquisitions and joint ventures

The Act requires that for all mergers, acquisitions and joint ventures to be consummated, there must be authorization from the Minister of Trade. Firstly, the Minister should immediately prescribe a threshold for the kind of mergers and acquisition that will require ministerial approval lest Frank’s Auto Shop acquisition of Amara’s Garage in downtown Kisenyi require clearance which can cause a mountain load of paperwork headache for both the minister and these SMEs. Only acquisitions that can alter competition on a large scale should require ministerial approval. For example, MTN can never be allowed to acquire Airtel in this current market under the new law.

Another type of arrangement the Act indirectly prohibits is “killer acquisitions” This refers to a strategy where a dominant firm acquires a potential competitor, not necessarily for the value of its existing operations, but to prevent future competition. Imagine a large pharmaceutical company, like Quality Chemicals Ltd that dominates the market for a specific class of HIV/AIDS medication “ARVx,”. Now imagine a small start-up, Ankole Pharma Ltd, develops a promising new HIV/AIDS drug “AnXX” that could potentially revolutionize treatment in this category, posing a competitive threat to Quality Chemical’s ARVx. Before Ankole Pharma can bring AnXX to the market, Quality Chemicals Ltd acquires Ankole Pharma.

However instead of further developing and marketing Ankole Pharma’s ground-breaking drug AnXX, Quality Chem shelves or kills the project altogether. This move effectively eliminates a potential competitor, ensuring Quality Chemical’s market dominance remains unchallenged, preventing the innovative drug from reaching patients who could benefit from it. This scenario exemplifies a “killer acquisition” in the pharmaceutical industry, where the primary motive is to stifle competition and innovation rather than enhance the acquirer’s product portfolio.

Such are the practices that competition law seeks to prevent. In a free capitalistic market, parties tend to place profits ahead of the consumer welfare and government intervention is welcome to this extent. This intervention is however a costly venture as the government would need to train/hire economists and lawyers to add some bite to its bark. Noting that there is also no competition authority despite the law being passed, the country still has challenges ahead in this regard.

The author is a legal consultant and an advocate of the Ugandan courts of judicature. He has pursued advanced graduate studies in competition law and economics at Yale and the University of Cape Town. 

[email protected] / @shakamara on Twitter/X