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Predatory Conduct (Inquiry #2 and #3)

Backgrounder

July 01, 1996

Complaint

While Inquiry #1 concerned high prices, the Director¹ received two additional six resident applications on July 8 and July 10, 1996, related to low gasoline pricing, in general, and Ultramar's Value Plus program in particular. Under this marketing program, Ultramar promised to meet or beat its competitors' prices: including those of "independent" brands which, depending on the local retail market, are often slightly lower than the prices of major oil companies.

The Value Plus program started a series of price wars in Quebec as well as in the Maritime provinces which produced, for a short period of time, some very low retail prices: including prices which were below the wholesale costs of some independents. In particular, these applications alleged:

a conspiracy among the major oil companies to force the independents out of business;
price discrimination;
predatory pricing; and
abuse of dominant position.

1. Conspiracy to Eliminate Independents

Competition Act

Section 45 of the Act makes it an offence for anyone to agree or arrange with another person to prevent, or lessen unduly, competition in the sale or supply of a product. This could include, for example, price fixing or market allocation schemes (dividing markets or customers among competitors). Direct or inferential proof of an agreement among competitors is needed. In addition, the Crown is required to prove beyond a reasonable doubt that the parties to an agreement have unduly lessened competition. Penalties for conspiracy include a fine of as much as $10 million, or up to five years imprisonment, or both.

Evidence

There was no evidence uncovered in the course of the inquiries to suggest that national and regional petroleum companies had entered into an agreement or arrangement, tacit or explicit, to eliminate independent gasoline marketers, or to enter into any other type of anti-competitive agreement, in violation of the conspiracy provision.

Evidence obtained indicated that price reductions which followed Ultramar's introduction of the Value Plus program were initiated by a variety of firms, including independents, and there was no evidence to suggest that there was an overall conspiracy to eliminate independents.

As discussed with respect to Inquiry #1, conscious parallelism can reflect normal competitive behaviour in a market such as retail gasoline. The observation that national and regional petroleum companies, and some independent marketers, matched each other's prices in the price wars during the summer and fall of 1996 is not an indication of an agreement.

Conclusion

Price reductions which followed Ultramar's introduction of the Value Plus program were initiated by a variety of firms, including independents, and there was no evidence to suggest that there was an overall conspiracy to eliminate independents.

2. Price Discrimination

Competition Act

Section 50(1)(a) applies to the practice of granting discounts or other price concessions to one purchaser which are not available to competing purchasers, in respect of a sale of articles of like quality and quantity. An important part of the price discrimination provision is that differing discounts or price concessions can be given to different customers as long as these customers do not compete with each other. Furthermore, some types of transactions between affiliated companies would not be subject to this provision. For example, affiliates may transfer articles at a price reflective of their interests as a single economic entity. Such discounts or price concessions are not subject to the competitive conditions of the marketplace and would not be concessions in respect of a sale as required by the price discrimination provision. (A detailed explanation of this section and related jurisprudence can be obtained from the Director's Price Discrimination Enforcement Guidelines, Minister of Supply and Services Canada, 1992.)

One of the six-resident applications alleged that Ultramar had violated the price discrimination provision of the Act by selling gasoline in different regions of Quebec at different prices. This would not be an offence unless these areas are in the same market, and competing purchasers in a market received different discounts for purchases of gasoline of like quantity and quality, at approximately the same time.

Evidence

Evidence obtained during these inquiries confirmed that retail gasoline markets are essentially local in nature and that retailers in different geographic areas do not compete with each other. There was no evidence found of price discrimination within local markets.

Complaints were also received that Ultramar was offering its affiliated gasoline stations price supports during the price wars that occurred this past summer. Most of Ultramar's gasoline sales are done on a consignment basis, whereby Ultramar retains title to the gasoline up to the point of sale to consumers. Since there is no separate purchase by a retailer under these circumstances, the price discrimination provisions of the Act do not apply to such situations.

Conclusion

There is no evidence of an offence under the price discrimination provisions of the Act.

3. Predatory Pricing

Competition Act

Section 50(1)(b) of the Competition Act, which concerns regional predatory pricing, prohibits businesses from engaging in the policy of selling products in any area of Canada at prices lower than those charged elsewhere in Canada, if the sale's effect, tendency or design is to substantially lessen competition or eliminate a competitor. This provision of the Act is similar to the more general predatory pricing provisions of the Act, described below, in which a key concern for the Director is whether the conduct resulted, or is likely to result, in a substantial lessening of competition.

Section 50(1)(c) of the Act prohibits businesses from engaging in a policy of selling products at prices unreasonably low, if the sale has the effect or tendency of substantially lessening competition or eliminating a competitor, or is designed to have that effect. (A detailed explanation of this section and related jurisprudence can be obtained from the Director's Predatory Pricing Enforcement Guidelines, Minister of Supply and Services Canada, 1992.)

The jurisprudence associated with the predatory pricing provision is clear that one must look at all the surrounding circumstances of low prices to distinguish between vigorous price competition and prices that may be predatory. (R. v. Consumer Glass Co. (1981), 330 R. (2d) 228 and R. v. Hoffman La Roche (1980), 28 O.R. (2d) 164; affirmed (1981), 33 O.R. (2d) 694 (C.A.).) For instance, the courts have considered whether low prices were defensive or offensive in nature, whether industry over-capacity encouraged low prices, whether low prices minimized losses, and the duration of the prices in question. An important point made by the court in the Consumer Glass case was that the law against predatory pricing should not interfere with legitimate competition. The Court observed, for example, that it is possible for a competitor to be eliminated from the market without offending the law:

"(...) The whole object of competition is to maximize profits by taking as much business as possible away from rivals, and so the mere fact one competitor lowers prices so as to take business away from a rival to the point that the rival might be forced from the marketplace cannot, by itself, determine whether predatory pricing was involved. (...)" - (Consumer Glass, decision, at 247)

In general terms, predatory pricing occurs when a dominant firm prices below its costs over a long enough period of time that it forces the exit of some or all of its competitors. The purpose of predatory pricing is to allow the predator to raise its prices to monopoly levels. This, in turn, requires that barriers to entry be sufficiently high so that charging monopoly prices does not attract competitive entry before the predator has recouped its previous losses.

Evidence

In response to the six-resident applications, the inquiries analyzed the evidence to determine if there was proof that any one company, or more than one company acting in concert, was responsible for initiating and maintaining the price wars in retail gasoline markets in Quebec and the Maritime provinces last summer.

The evidence indicated that Ultramar's Value Plus marketing program was an independent business initiative designed to increase Ultramar's market share and improve the efficiency of the company's refinery and retail outlets. Ultramar lowered its prices by 1 cent per litre on June 18, 1996 and decreased the price difference between regular and premium grades of gasoline on June 20, 1996. While these pricing decisions may have been the catalyst for the price wars that broke out in the summer and fall of 1996, the evidence does not establish that Ultramar, or any other company, was responsible for the chain of price reductions that occurred. Rather, the evidence suggests that the price reductions were initiated by a variety of firms, including independents, and that Ultramar initiated price decreases a relatively small percentage of the time.

Evidence of comparatively low barriers to entry into retail gasoline markets further suggests that a strategy of predatory pricing would not substantially lessen competition, and indeed would make little economic sense, because a firm would not be able to increase its prices in the long run without attracting new competition. (Some entry impediments are generally found to exist in most markets. Therefore, the analysis of entry conditions does not focus upon whether barriers to entry exist, but on whether entry conditions are sufficiently low that they constrain a dominant firm's (or firms') ability to significantly raise the market price.) Overall, the evidence indicated that the price wars that occurred in some markets were an indication of healthy competition for market share among gasoline companies in Quebec and the Maritime provinces. An increase in market share by one market participant necessarily entails a loss by another, unless the market is growing in size.

Conclusion

No evidence was found that any specific company was primarily responsible for the price wars. Nor was there evidence to support a conclusion that Ultramar initiated and conducted the Value Plus program with the intent to eliminate other gasoline marketers. Indeed, the Value Plus promotion had many pro-competitive features, such as its lower prices to consumers, and an increase in the number of products available at gasoline stations.

4. Abuse of Dominant Position

Complaint

One of the six-resident applications alleged that Ultramar, as well as other national and regional petroleum companies, had abused their dominant position in the market by engaging in the following anti-competitive acts:

squeezing the margins available to independent gasoline retailers,
selling gasoline at a price lower than the acquisition cost,
entering into a tacit agreement or arrangement, and
engaging in price wars,

all with the purpose of either disciplining or eliminating independent gasoline retailers.

Competition Act

The abuse provisions of the Competition Act are designed to remedy situations where one or more firms possess market power and engage in a practice of anti-competitive acts which have the effect of substantially lessening or preventing competition. To obtain a remedial order, the Director must establish before the Competition Tribunal that the following three elements in section 79(1) are met:

that one or more persons substantially or completely control, throughout Canada or any area thereof, a class or species of business (in other words, the possession of market power in a particular market).
that the dominant firm or firms engaged in a "practice of anti-competitive acts." An illustrative list of such acts is provided in section 78 of the legislation. The list is, however, not exhaustive.
that the practice of anti-competitive acts, has had, is having, or is likely to have the effect of preventing or lessening competition substantially in a market.

The Competition Tribunal in its decision in NutraSweet, its first abuse of dominant position case, held that purpose is a necessary component of an anti-competitive act. This makes intent the key factor in determining whether an act is designed to harm competition or it is simply part of a legitimate business initiative. In other decisions, the Competition Tribunal noted that one must also look at the circumstances surrounding the acts and determine whether the acts can be explained by other plausible reasons. ( Canada (Director of Investigation and Research) v. NutraSweet Co.(1990), 32 C.P.R. (3d) 1 (Comp. Trib.); Canada (Director of Investigation and Research) v. Laidlaw Waste Systems Ltd. (1992), 40 C.P.R. (3d) 289 (Comp. Trib.); Canada (Director of Investigation and Research) v. D & B Companies of Canada Ltd. (1996), 64 C.P.R. (3d) 216) (Comp. Trib.).)

Evidence

No evidence, however, was found during the inquiries to support the allegations that the national and regional petroleum companies were squeezing the margins available to independent petroleum marketers with the intent of forcing the independents out of business. In fact, the margin between crude and retail prices has been shrinking for all firms, including national and regional petroleum companies, over the past decade. The evidence indicated that declining margins being earned by Canadian petroleum companies, both large and small, are the result of competition and the restructuring in this industry rather than by a scheme to squeeze the margins available to independent gasoline retailers. In other words, there is no basis to show that the margins of the independent gasoline marketers were being purposely squeezed when the margins available to the national and regional petroleum companies were decreasing as well.

The allegation that the national and regional petroleum companies were selling gasoline at prices lower than acquisition costs is based on the fact that for some periods in the summer and fall of 1996 some petroleum companies were selling gasoline for a lower price at the retail level than at wholesale. Evidence obtained, however, indicates that the price inversion in the summer and fall of 1996 occurred because the price wars at the retail level in Quebec and the Maritimes did not spill over into wholesale markets. The prices at the wholesale level reflect the New York Harbour wholesale price, a common benchmark for wholesale pricing in the eastern provinces, plus the transportation cost to different points.

The fact that gasoline wholesalers did not subsidize the prices of retailers during the price wars is not an issue under the abuse of dominant position provision unless it can be shown that the price inversions were designed to eliminate or discipline gasoline retailers. No such evidence was uncovered by the inquiries.