A growing number of firms have turned to strategic alliances as a means of improving their competitiveness in an age of increasing international competitive pressures, the globalization of markets, and generally decreasing trade barriers. Indeed, several have taken advantage of our compliance program to obtain advisory opinions from my office on proposed alliances. Nonetheless, uncertainty on the part of some business people regarding the legality of strategic alliances may increase the risk that opportunities to create alliances which are beneficial for the economy may not be pursued. To reduce this risk, I am issuing this policy statement which provides general guidance and clarifies my enforcement approach to strategic alliances under the Competition Act (the Act).

There are no specific provisions within the Act dealing exclusively with strategic alliances, which is not surprising when one considers the myriad of corporate forms which these arrangements have taken in the past and may take in the future. At their broadest, strategic alliances may encompass any form of inter-firm cooperative arrangement beyond contracts completed in the ordinary course of business. A far narrower interpretation might include only those alliances which are joint ventures or entail an equity investment and endorsement of a longer-term strategic plan. Various definitions have been used by others in an attempt to distinguish strategic alliances from alternative forms of inter-firm cooperation. While these definitions may be helpful for particular studies, they do little to assist in determining how the Act will apply to strategic alliances. Therefore, I have not adopted a set definition of a strategic alliance. My ultimate responsibility is the enforcement and administration of the Act, which is why this Bulletin is focused on the competitive effects of strategic alliances and not the form they may take.

The use by Canadian firms of strategic alliances to improve their competitiveness should generally lead to positive in novation and efficiency gains without accompanying negative effects on competition. As a result, these alliances are unlikely to raise competition issues. Indeed, it is the Bureau of Competition Policy's experience that most strategic alliances do not raise issues under the Act. However, alliances can take a variety of forms with varying impact in the marketplace and where they are likely to lead to anticompetitive effects, intended or otherwise, parties must be able to determine whether the Act is contravened. This Bulletin provides guidance on how the Director will review, and if necessary, seek to apply the Act to the few alliances which potentially lead to anticompetitive effects.

The Bulletin begins by briefly describing some of the types of inter-firm cooperative arrangements which have been characterized as strategic alliances. The remaining sections focus on the application of the Act and key elements of our compliance program. The Act contains certain provisions which do not involve any test of market power, and it is the Bureau's experience that most strategic alliances are less likely to raise any issues under these sections. As a result, the bulletin focuses o n those provisions of the Act which involve a test of market power.

In conducting our analysis of a strategic alliance under the Act, we will examine whether an alliance is likely to maintain, create or enhance market power. Market power has been legally interpreted to be the ability of the parties to behave relatively independently of the market. Consistent with this legal interpretation, economists refer to market power of a seller as the ability to increase price above competitive levels (or reduce output, quality, choice, service, promotional activity, innovati on or other significant dimensions of rivalry, below competitive levels) for a sustained period of time. Thus, the reason that few strategic alliances raise issues under the Act is because the majority of them do not result in market power.

In the few situations where market power is maintained, created or enhanced by a strategic alliance, the examination involves an in-depth analysis of the nature of the alliance. An alliance may be reviewable under a number of the provisions of the Act, given the wide range of corporate activity which alliances may encompass. It has been our general experience that horizontal alliances involving competitors more often raise issues of market power than either vertical or conglomerate alliances, and consequently the focus of this Bulletin is on the provisions of the Act most applicable to horizontal alliances. Therefore, details on the legal tests which must be met under the provisions of the Act related to conspiracy, export consortia, specialization agreements, mergers, joint ventures and abuse of dominant position are given. Nine illustrative examples are also provided in Appendix 1.

While this information should assist business people in determining the application of the Act to a particular alliance, it is not possible for this document to answer all possible questions which might arise in an individual case. As a result, parties contemplating entering into a strategic alliance, particularly one which is likely to maintain, create or enhance market power, may wish to seek the Bureau of Competition Policy's advice through the Program of Advisory Opinions.

George N. Addy
Director of Investigation and Research
Competition Act

The Competition Act is available in major public libraries or bookstores that carry government publications.

To obtain copies of this document or additional information on the subjects discussed in it, readers may contact:

Telephone: 819-997-4282
1-800-348-5358
Fax: 819-997-0324

Strategic Alliances under the Competition Act
Director of Investigation and Research

Competition Act

Information Bulletin

Copyright (©) Minister of Supply and Services Canada 1995

ISBN 0-662-61944-7
Catalogue No. RG 52-27/1995
Industry Canada IC 50290 B95-10