Draft - Information Bulletin on the Abuse of Dominance Provisions as applied to the Telecommunications Industry: Part 4 - Anti-Competitive Acts

4.1 Anti-Competitive Acts in the Telecommunications Industry

Having defined the relevant product and geographic markets and determined that a firm or group of firms is dominant, the second element required under subsection 79(1) is to establish that the firm or group of firms in question has engaged in or is engaging in a "practice of anti-competitive acts." The jurisprudence has established that a "practice" under section 79 can encompass one occurrence that is sustained or systematic over a period of time, or a number of different acts taken together.^[45]

The Federal Court of Appeal has confirmed that “(a)n anti-competitive act is one whose purpose is an intended negative effect on a competitor that is predatory, exclusionary or disciplinary.”^[46] In keeping with this interpretation, the Bureau will generally find that acts that fall into one or more of the following general categories are potentially anti-competitive:

• acts to raise rivals' costs (or reduce rivals' revenues);
• predatory conduct; and
• acts to facilitate coordinated behaviour among firms (facilitating practices).^[47]

Certain types of anti-competitive acts may be more common in, or perhaps even unique to, the telecommunications industry. The following sections describe activities that may form the basis of complaints under section 79 in the telecommunications industry and outlines the approach that the Bureau will typically adopt when it is considering whether a dominant firm is engaging in a practice of anti-competitive acts.

4.2 Raising Rivals' Costs and Market Foreclosure

As noted in the Enforcement Guidelines on the Abuse of Dominance Provisions, a dominant firm may undertake a number of strategies that raise the costs of a rival, or reduce a rival's revenues, thereby making the rival a less effective competitor.  It may also engage in practices that have the effect of excluding competitors by hindering or denying current or potential rivals access to the inputs necessary to compete (market foreclosure).  For example, it could exercise its market power over an input that its rivals need to compete (e.g., by exclusive contracts that deny rivals access to efficient distribution or retailing).

Within the telecommunications sector, competitive entry can follow a number of models – facilities-based entry, entry via unbundled network elements, resale and sharing, or a combination of these methods.^[48] Facilities-based entry involves competition between at least two facilities-based service providers (e.g., local exchange services).  Entry via unbundled network elements involves entry by service providers that may own parts of their own network but also rely on regulated access to elements of the incumbent's network in order to offer their products to consumers (e.g., where local telecommunications access is provided using the unbundled loops of an incumbent).

Conduct by the dominant firm to disrupt compatibility, to reduce the quality of the service offered by its rivals or raise the costs of its rivals is potentially an anti-competitive act. Under the facilities-based entry model, many of the opportunities for a potentially dominant firm to raise the costs of its rival may be absent since the entrant's network operates, to a large part, independently from that of the incumbent firm. Many of the remaining opportunities for a dominant firm to disadvantage its rivals may involve conduct that remains subject to regulation (e.g., number portability, interconnection, and access to support structures).  

Other potentially anti-competitive acts of this type by a dominant firm in the telecommunications industry could include:

• creating artificial switching costs;
• acquiring control of suppliers of an input needed to compete; and
• requiring or inducing suppliers of an input needed to compete to not supply its rival.

The unbundled network elements model, whereby the entrant relies upon access to the incumbent's facilities to complete its network, raises a different set of concerns.  Under this model, the CRTC will have mandated access by competitors to facilities of the dominant firm under its statutory authority. Consistent with the Bureau's Technical Bulletin on “Regulated” Conduct (and past Bureau practice), the Bureau will not consider allegations of anti-competitive acts related to regulated facilities, only allegations that a dominant firm has refused access, or is providing discriminatory access, to an unregulated facility.

A different issue could arise in a market with competing facilities-based service providers when a third party is unsuccessful in its attempts to negotiate access to a facility that it requires in order to supply its services.  In those circumstances, the facility would not necessarily be considered “essential” for purposes of assessing alleged abuse of dominance because there are alternative suppliers of the service.  Having said that, if all (or a significant proportion) of the facilities-based competitors are engaged in a joint denial of access, the Bureau would examine the reasons underlying the decision by each facilities-based supplier to refuse access to the service.  If the denial of access is found to be a coordinated refusal to exclude or discipline the third party, it may constitute an anti-competitive act.  However, this behaviour might more properly be addressed under either the conspiracy or the refusal to deal provisions of the Act.

4.2.1 Margin Squeezing

A specific example of raising rivals' costs that is a source of frequent complaint in the telecommunications sector is margin squeezing.  Subsection 78 (1)(a) of the Act describes the anti-competitive act of “…squeezing, by a vertically integrated supplier, of the margin available to an unintegrated customer who competes with the supplier, for the purpose of impeding or preventing the customer's entry into, or expansion in, a market.” Margin squeezing can take different forms. Examples of squeezing include:

• the supplier raises the wholesale price relative to the retail price, thus squeezing the margin between the wholesale and retail prices;
• the wholesale price remains the same but the supplier lowers the retail price, compelling his or her customer/competitor to follow suit; and
• a new retail service is introduced at a low price relative to the existing wholesale service.

From a competition policy perspective, the mere observation of margin erosion is not sufficient to support a conclusion that a dominant firm has engaged in an anti-competitive act. The fact that margins are being squeezed may speak to the vigour of competition in the market concerned, and does not necessarily reflect a predatory, exclusionary or disciplinary purpose.^[49]

In considering the overall effect of any anti-competitive act, the Bureau will examine the underlying purpose of the act.  Specifically, the Bureau will consider whether the act is based on justifiable business practices that would be found in otherwise competitive markets.  For example, if a vertically integrated dominant firm sells a wholesale service to both competitors and large business end-users, an increase in the wholesale price may not constitute an anti-competitive act even if it impedes the ability of unintegrated competitors to compete with it in the downstream (retail) market. This would be the case if an examination of the evidence shows that the primary reason for the price increase related to increased costs associated with serving large business end-users, even though that sector does not compete in retail markets.

4.2.2 Denial of Access to a Facility

An example of market foreclosure is denying access to facilities^[50] that may be “essential” for competition but are not subject to regulation by the CRTC.  For the purposes of section 79 of the Act, an “essential” facility is an input that provides the firm controlling it with the power to lessen or prevent competition in a relevant downstream market.  Section 79 of the Act is concerned with abuse of this market power that has resulted, results or is likely to result in a substantial lessening or prevention of competition, not the exercise of any market power inherent in the facility.^[51]

In an allegation of abuse of dominance involving an essential facility, the conduct at issue would be an actual or constructive^[52] denial of access to the facility.  For such a denial to raise an issue under the Act, the following conditions must be present:

(i) A vertically integrated firm that is dominant in two markets.^[53] The first relevant market is the upstream market (or wholesale market) for the facility.  The second relevant market is the downstream market (or retail market) in which the facility is an input.  A necessary condition for concluding that there is dominance in the upstream market is that it is not practical or feasible for competitors to duplicate the facility in question.

(ii) A denial of access to the facility for the purpose of excluding competitors from entering or expanding in the downstream market or otherwise negatively affecting their ability to compete.

(iii) The denial has had, is having or is likely to have the effect of substantially lessening or preventing competition in the downstream market.^[54]

When considering an allegation of abuse of dominance involving an essential facility, market power must be present in both the upstream market for the facility and in the downstream market in which the facility is used as an input.  The Bureau takes a sequential approach by first assessing the market power of the allegedly dominant firm in the downstream market – this first requires that the downstream market be defined.  Market power is assessed in the time period in which the practice of anti-competitive act(s) is alleged to have occurred or is occurring.  The ability of the allegedly dominant firm to exercise market power in the downstream market will depend on the willingness and ability of consumers to switch to alternative providers who do not rely on access to that allegedly dominant firm's facility.  If that firm does not have market power downstream, the denial of access to the facility cannot amount to an abuse of dominance.

If the Bureau determines that the firm is dominant in the downstream market, it will then consider whether it is also dominant in the upstream market.  Market definition upstream is more complex because demand for the alleged essential facility is derived from the demand for the product in the downstream market.  The ability of the owner of an alleged essential facility to raise prices depends on the willingness and ability of the parties seeking access (downstream competitors) to turn to alternative inputs.  It will also depend on the willingness and ability of consumers to obtain the product or service from alternative providers or from the parties seeking access to the alleged essential facility using alternative facilities. For dominance to exist in the upstream and downstream markets, it must be difficult or impossible for downstream competitors to substitute toward other inputs or to practically or reasonably duplicate the facility, and the ability of consumers to switch to alternative providers must be limited.

With a finding of market power, a denial of access is an anti-competitive act when its purpose is to exclude or impede actual or potential competitors.  To infer such a purpose, it must be difficult or impossible for those competitors to substitute other inputs or to practically or reasonably duplicate the facility.  The requirement that it is not practical or feasible for a competitor to duplicate the facility means that such an entrant would not find it feasible to enter or compete effectively if it had to self-supply the facility.  At the same time, for the purpose to be anti-competitive, the supplier must have the necessary capacity, or have the willingness and ability to build the necessary capacity, to supply those competitors.  In its examinations of denial of access complaints, the Bureau will also take into account any vertical efficiency effects of the conduct.

Before the Tribunal is able to issue any remedial order under section 79, it must be shown that the practice of anti-competitive acts must actually, or be likely to, substantially lessen or prevent competition in the downstream market.  Accordingly, if control of the facility is a source of dominance in both an upstream and downstream market and the denial of access has been for an anti-competitive purpose, the Bureau's “but for” analysis would then focus on whether the denial of access leads to materially higher prices downstream than would occur if the dominant firm charged the profit-maximizing access price to downstream competitors.^[55] This concept is discussed in greater detail in Section 5.

4.3 Predatory Pricing

Predatory pricing involves a firm deliberately selling at below-cost prices for a sufficiently long period of time that a rival will be eliminated from the market or that competition will otherwise be diminished in the expectation that the firm will be subsequently able to recoup its losses by charging prices above competitive levels.

In considering a complaint of predation under section 79, the challenge is separating instances of true predatory conduct (i.e., conduct that results in the maintenance or enhancement of market power and a substantial lessening or prevention of competition) from competitive behaviour.  The risk is that by wrongly pursuing activity that is truly pro-competitive, beneficial pricing behaviour will be unnecessarily constrained, to the detriment of both the target of the complaint and, most importantly, consumers.  As a result, the Bureau will have a high evidentiary requirement to pursue a predation case.

A key determinant in assessing allegations of predatory pricing is the cost structure of the dominant firm.  At the theoretical level, establishing an appropriate test to determine below-cost pricing is difficult.  Competition authorities have adopted various measures to address this issue, including average variable cost and avoidable costs.^[56] When circumstances warrant, these cost measures allow authorities to address genuine instances of anti-competitive conduct while leaving sufficient room for the kind of price cutting that competition is intended to stimulate.

Below-cost pricing practices by a dominant firm can harm competition and be profitable only if they maintain or enhance its market power.  This may be possible through the elimination of a rival in cases where entry barriers are sufficiently high so as to prohibit or discourage potential entrants from entering the market in response to price increases by the dominant firm following its predatory action. In the absence of such barriers, predation may be profitable if it deters potential competitors from entering the market for fear of a repeated predatory episode. The success of such a strategy depends on the extent to which the costs of the entrant are sunk.  If the costs are sunk and hence it is difficult for the assets to be redeployed to other uses (other markets), then inducing the entrant's exit will reduce the profitability of predation and recoupment in the same market because the assets may be used subsequently by another party.  If the investment is abandoned by the entrant for a period of time, degradation of the facility and/or loss of required rights-of-way may occur.  This may delay the timing and increase the cost of redeploying of the facility in question, or even affect the decision to re-deploy the facility, and increase the profitability of the predation strategy.

In the telecommunications sector, the Bureau would take a sequential approach to examining predatory pricing complaints by evaluating various factors to determine the nature or purpose of the alleged anti-competitive acts. This approach is comprised of three steps.

First, the Bureau would consider whether the alleged predatory price is likely to drive the complainant, or other firms, out of the market.  In this context, the Bureau would assess whether the alleged predatory price is below the average avoidable costs of the firm that is alleged being driven from the market. The Bureau would also consider the likelihood of exit when costs are sunk, making redeployment of the assets to other uses difficult.

Second, if the first condition is satisfied, the Bureau would compare the alleged predatory price to the alleged predator's avoidable costs. The Bureau is not likely to pursue a complaint where the alleged predator earns profits in that market at the alleged predatory price. As a general principle, where a dominant telecommunications service provider's response to competition consists only of reducing prices to levels which match, but do not undercut those of a competitor (“meeting the competition”), the Bureau will not take enforcement action when considering allegations of predation.

Third, if the first and second conditions are satisfied (i.e., the alleged predatory price is likely to drive the complainant or other firms out of the market and the alleged predatory price is below avoidable cost), the Bureau would evaluate the likelihood that the alleged predator will be able to recoup the profit sacrifice that its predation strategy would entail.^[57] The profitability of the practice requires that predation maintain or enhance the market power necessary for recoupment.  This requires that there are barriers to entry.  As a result, the Bureau will examine the nature of the costs incurred by the entrant as well as any other barriers to entry.

In undertaking this three-step approach, the Bureau would consider the impact of continued regulation in other telecommunications markets.  For instance, the incentives to engage in predation in one geographic market to either create a reputation or signal that entry into other markets would not be profitable may not exist if recoupment in those markets is not possible because of continued and effective regulation.  On the other hand, if regulation allows costs of providing unregulated services to be passed on to customers of the regulated service, the regulated firm may have an unusually credible threat to predate in those unregulated markets by cross-subsidizing.

4.4 Targeted Pricing in the Telecommunications Industry

“Targeted pricing” refers to the practice of offering certain customers a significantly better price than charged previously, or that deviates from what it usually charges other customers in the market, in order to either win or retain the customer in the face of a more competitive offer.  Some telecommunications industry participants have argued that such pricing may have an effect similar to predatory pricing (i.e., preventing entry or inducing exit) even if it is not below cost.

In the context of telecommunications, to the extent that the dominant firm can identify customers who have switched to competitors, it may have an incentive to “win back” the customer by offering a better price.  If there are fixed and sunk costs associated with customer acquisition, then the effect of targeted pricing can result in exit from, or may deter entry into, the market as these costs are not recovered by the entrant.  In addition, if an entrant expects to face targeted pricing, it may not find it worthwhile to sink the costs necessary to enter the market as a whole.

However, as is the case with predation, the challenge in demonstrating that targeted pricing constitutes an anti-competitive act is being able to separate truly competitive conduct (which forms the basis for price competition and the competitive process) from actions that are designed to induce exit and/or hinder entry.^[58] Targeted pricing, and other tactics in which one firm commits to meet the prices of its competitors, are used in many different sectors (e.g., magazine sales promotions, coupon promotions, etc.) and are not inherently anti-competitive. In forborne markets, preventing targeting could chill price competition and frustrate the competitive process, to the detriment of consumers.

One example of the difficulty in addressing targeted pricing is that the theory of anti-competitive targeted pricing depends on the assumption that the dominant firm can target the customers lost to a competitor and not its remaining customers.  However, this may be difficult, depending upon the behaviour of the dominant firm's customers.  For instance, if the rollout of a telephony service on an existing network is not on the basis of a customer at a time but rather on a system-wide basis (i.e., relatively large geographic areas), then customers of the incumbent who are in the entrant's service area may recognize that they too can take advantage of the incumbent's targeted pricing by switching to the entrant, raising the cost to the incumbent of engaging in that tactic.

In its decision in Tele-Direct, the Tribunal discussed the inherent difficulty in establishing objective criteria that can distinguish between targeted pricing that is harmful and that which is beneficial competitive conduct.^[59]  The Tribunal noted that the closest analogy to the concept of targeting is predation and that the cost-revenue test used in predation cases provided an objective standard for distinguishing competitive pricing from predation. Should the targeted price exceed avoidable costs, the Bureau would require considerable ancillary evidence in support of the claim that the conduct of targeting constituted an anti-competitive act before it would consider pursuing the matter further.

4.5 Bundling

From a competition law perspective, bundling may raise enforcement issues under the Act in limited circumstances.  Consumers generally benefit from bundling because it typically offers them a package of products at better prices than are otherwise available. It may also prompt competitors to broaden their product offerings in order to maintain as complete a set of products as that of their competitors. 

Bundling could prompt concerns if it is viewed as a means to raise the costs for rivals or, in the alternative, as a means by which to engage in predation.  In terms of raising rivals costs, a practice of bundling may meet the competition law definition of tied selling.^[60] In this context, if it is shown that the practice is impeding entry or expansion of firms offering some or all of the bundled services, or is having some other form of exclusionary effect, it could constitute an anti-competitive act.  By way of example, a long-term contract that is required in conjunction with the sale of a bundle could constitute an anti-competitive act if it is designed to raise rivals costs.  With respect to predation, the practice of bundling could be viewed as an anti-competitive act when a firm offers below avoidable cost pricing for the bundle of products.  An assessment of such a situation will be complicated by the assignment of costs across multiple markets.

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[45] NutraSweet, supra, note 9.

[46] Canada Pipe, supra note 10.

[47] For a discussion on the Bureau's approach to acts that facilitate coordinated behaviour among firms (facilitating practices), see the Enforcement Guidelines on the Abuse of Dominance Provisions. Acts that raise rivals' costs and predatory conduct in the telecommunications industry are discussed further below.

[48] A “network element” is either software, hardware or a combination of both that primarily performs a telecommunications service function.  “Resale” is the subsequent sale or lease on a commercial basis, with or without adding value, of a distinct telecommunications service or distinct telecommunications facilities provided by a supplier on a wholesale basis.

[49] A full discussion of the theory and the Bureau's approach to margin squeezing is set out in Appendix III of the Enforcement Guidelines on the Abuse of Dominance Provisions, supra, note 3.

[50] Use of the term “facility” in this document may refer to a pertinent facility, function, or service that may be “essential” as defined in the text.

[51] Under the abuse provisions of the Act, what is of concern is not the existence of dominance (i.e., the exercise of market power) but conduct that maintains or enhances market power.  For instance, if there is evidence that the dominant firm can prevent entry of alternative providers of the essential facility by excluding or impeding unintegrated downstream competitors, then a denial of access may maintain the upstream firm's market power.  This could potentially result in a substantial lessening or prevention of competition in both the upstream and downstream markets.

[52] Constructive denial is a practice that has the equivalent effect of an actual denial, e.g., by charging a prohibitively high access price for the facility.

[53] The firm that controls the essential facility need not be explicitly vertically integrated; it can achieve the same result by contract, e.g., by designating one downstream firm as its exclusive retailer.  Similarly, a firm may operate indirectly in the wholesale market by selling access to a facility to another wholesaler that then supplies the retail market.

[54] This concept is discussed in greater detail below and in Section 5.

[55] The “profit-maximizing access price” would be that at the time of the denial (i.e., assuming the downstream market structure absent the denial).

[56] The variable costs of producing a given level of output of a good or service are those costs (such as the costs of labour and material inputs) that vary with changes in the amount of that output.  Average variable cost is a firm's total variable cost divided by the total output of the good or service produced by the firm.  The Competition Tribunal defined avoidable costs to be “all costs that can be avoided by not producing the good or service in question. In general, the avoidable cost of offering a service will consist of the variable costs and the product-specific fixed costs that are not sunk.” Canada (Director of Investigation and Research) v. Air Canada (2003), 26 C.P.R. (4^th) 476 (Comp. Trib.) at para. 76.

[57] In assessing the likelihood of recoupment, the Bureau will look to economic theories of predation, with confirming evidence, for reasons to expect that subsequent entry (or re-entry into the market) would not deter the alleged predator from charging post-predation prices significantly above competitive levels.

[58] As with predation, the Bureau will not take enforcement action with regards to targeted pricing where it is shown that a dominant telecommunications service provider's pricing is a response to competition at levels which match, but do not undercut those of a competitor (“meeting the competition”).

[59] Tele-Direct, supra note 38 at 289-290.

[60] See subsection 77(1) of the Act.