In a decisive stride for Indian competition law jurisprudence, the Supreme Court’s ruling in Competition Commission of India (CCI) v. Schott Glass India Pvt Ltd has shone the spotlight on the “As Efficient Competitor” (AEC) test as a pivotal tool in determining abuse of dominance.
At the heart of competition law lies a delicate balance between preserving market rivalry and penalising efficiency. While dominance per se is not unlawful, its misuse to exclude capable competitors through pricing tactics like loyalty rebates or predatory undercutting invites regulatory scrutiny.
The AEC test, by asking whether an equally efficient rival would survive such conduct, filters anti-competitive strategy from robust market play. In the Schott Case, the Supreme Court not only validated the AEC test but also set a judicial benchmark, insisting on rigorous, evidence-driven effects analysis. With this judgment, the Court has steered enforcement away from form and toward economic substance, reaffirming that competition law must guard against foreclosure while not protecting inefficiency. The implications are clear: enforcement must evolve, guided by principles that reward merit, not market muscle.
The AEC test is a foundational analytical tool in modern competition law, designed to assess whether the pricing practices of a dominant firm are capable of excluding rivals that are as efficient as the dominant firm itself. The core question posed by the AEC test is whether a hypothetical competitor - operating with the same cost structure, efficiencies and scale as the dominant firm - could viably compete under the challenged pricing conditions. If such a competitor would be foreclosed from the market or forced to operate at a loss, the conduct in question may be deemed exclusionary and abusive under competition law.
The intellectual roots of the AEC test lie in US antitrust economics, particularly in the seminal work of Richard Posner and of Areeda & Turner in the 1970s. These scholars argued that the purpose of competition law should be to protect the competitive process, not individual competitors. They cautioned against legal standards that would shield inefficient firms from market forces. Their reasoning was that only conduct which would exclude an equally efficient rival should be considered anti-competitive, as protecting less efficient firms would ultimately harm consumer welfare by reducing incentives for innovation and efficiency.
This economic logic influenced the evolution of European competition law, where the AEC test gained formal recognition in the European Commission’s 2008 Guidance on enforcement priorities in applying Article 82 of the EC Treaty [now Article 102 TFEU] to abusive exclusionary conduct by dominant undertakings. The adoption of the AEC test marked a significant shift toward effects-based enforcement, emphasising rigorous economic analysis over formalistic or per se legal rules.
Judicial endorsement of the AEC framework has come through a series of landmark cases. In Post Danmark I, the European Court of Justice (ECJ) clarified that competition law is not intended to protect less efficient competitors, and that the assessment of exclusionary conduct must focus on the ability of as-efficient rivals to compete. In the Intel case, the ECJ held that when a dominant firm submits credible economic evidence - including the results of an AEC analysis - competition authorities are required to engage with and assess that evidence. The ECJ further reiterated in Unilever that while the AEC test is not mandatory in every case, it remains highly relevant, especially where robust economic data is available and the conduct in question is price-based.
By focusing on the fate of as-efficient competitors, the test ensures that legal intervention does not inadvertently protect inefficiency or stifle innovation. This approach advances consumer welfare by promoting competitive pricing, product quality and innovation, while also providing businesses with clearer guidance on the boundaries of lawful competitive conduct.
In practical terms, the AEC test is most relevant in cases involving price-based exclusion, such as predatory pricing (where a dominant firm prices below cost to drive out rivals), margin squeeze (where the margin between upstream and downstream prices is insufficient for rivals to compete profitably) and loyalty rebates (where discounts are conditioned on exclusivity or high purchase volumes). In each of these scenarios, the test involves comparing the effective price - after accounting for discounts, rebates, or input prices - to relevant cost benchmarks. These benchmarks typically include average avoidable cost (AAC), which reflects the costs that could have been avoided if the output had not been produced, and long-run average incremental cost (LRAIC), which captures both fixed and variable costs over a longer period.
In the Schott case, the Court underscored the importance of effects-based analysis in Indian competition law, referencing international best practices. The Court discussed the AEC test in the context of margin squeeze allegations against Schott India, a dominant supplier of neutral borosilicate glass tubing. It was alleged that the company had engaged in a margin squeeze by offering preferential pricing to Schott Kaisha (a joint venture between SCHOTT Pharma AG and the Serum Institute of India), a major downstream converter. The Competition Commission of India (CCI) contended that this arrangement distorted competition by potentially foreclosing rivals from the market. Schott India, in response, argued that the pricing structure was commercially justified, particularly in light of operational efficiencies.
Before reaching the Court, neither the CCI nor the Competition Appellate Tribunal (COMPAT, now NCLAT) explicitly applied the AEC test in their analysis While COMPAT examined whether independent converters were harmed, its analysis was primarily factual, focusing on market outcomes such as profitability, output and market entry, rather than structuring the inquiry around the sustainability of equally efficient competitors under the alleged pricing arrangement.
The Supreme Court elevated the discussion by referencing international jurisprudence, particularly the TeliaSonera case from the European Union, and outlined that in margin squeeze cases, three cumulative conditions must be satisfied:
(a) the dominant firm must operate in both the upstream and downstream markets;
(b) the margin between the input and output prices must be insufficient to allow an equally efficient competitor to compete; and
(c) the pricing structure must result in, or threaten, competitive harm.
The Court emphasised that these conditions are necessary for establishing a margin squeeze, but did not state that the AEC test is mandatory in all cases under Indian law - rather, it is a necessary component in margin squeeze analysis.
Applying these to the case, the Court found that Schott India did not operate in the downstream market; Schott Kaisha was a distinct legal entity with no overlapping management. Further, financial records of rival converters showed they remained profitable, with no evidence of market foreclosure or reduced output. Imports increased, competition remained robust and no competitor exited the market.
The judgment in Schott Glass India marks a significant development in Indian competition law by affirming the AEC test as essential in margin squeeze cases under Section 4, though not mandatory in all abuse of dominance inquiries. The Court emphasised that enforcement must be effects-based, requiring concrete economic evidence - such as proof of actual or likely foreclosure of equally efficient rivals, objective justification and market impact - before finding abuse. For digital markets, where deep discounting and aggressive pricing are common, the ruling means that the CCI must show that such conduct truly excludes equally efficient competitors, rather than relying on formalistic or presumption-based reasoning.
This approach protects pro-competitive conduct and innovation, ensuring that only genuinely exclusionary practices are penalised. By insisting on robust, data-driven analysis and rejecting presumption-led enforcement, the Court has brought Indian competition law in line with global standards, enhancing legal certainty and promoting a more rigorous, economically sound regulatory regime.
Despite its analytical appeal, the AEC test faces notable criticisms. Its application is resource-intensive, demanding granular cost and pricing data often unavailable in India’s less transparent markets. Rigid adherence risks under-enforcement by ignoring harm to less efficient but potentially viable entrants, especially in digital sectors where scale, not efficiency, drives competitiveness. Critics argue that the AEC test fails to protect smaller or nascent players who may be inefficient initially due to innovation, lack of scale, or sustainable practices. This is particularly concerning in developing economies like India, where competition often comes from firms still scaling up.
In such contexts, a strict AEC test may inadvertently shield dominant incumbents and stifle dynamic competition. Thus, while the test ensures legal rigour, its suitability in developing and fast-evolving markets is debated, with growing consensus that its application must be tempered by market realities and broader policy considerations.
The judgment affirms that the test is not only a tool for assessing exclusionary conduct, but also a valid defence for dominant firms in abuse of dominance cases, where objective justifications are present. While it promotes legal certainty, its rigid application may risk under-enforcement, especially in dynamic or less mature markets. A flexible, context-sensitive application will be essential to ensure effective and balanced competition enforcement in India.
Ojaswi Bhagat is as an Associate in the Competition Law practice at AZB & Partners.