Abuse of market power—What is an SME to do?
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Refusal to supply
I recently opened a small retail outlet selling men's clothing. I noticed that many of my customers were asking for a particular brand of dress shirt, but when I contacted the manufacturer he refused to sell to me. I know that one of my competitors on the other side of town carries this brand and I am losing a lot of customers to him because of this. Isn't it a violation of the Competition Act for someone to refuse to supply me?
As a general rule, a manufacturer has the right to organize his distribution system in the manner which he thinks best suits his business plans. A manufacturer may, for example, establish a rule of thumb whereby he will try to maintain a given ratio of population to retail outlets in any particular market so that each retailer has a minimum share of anticipated sales in the area.
How does your answer to Question 1 jibe with section 75 of the Act? It says that if a person is substantially affected in his business due to his inability to obtain adequate supplies of a product, then the Competition Tribunal may order the supplier to accept him as a customer.
Section 75 sets out a number of specific requirements in order for the refusal to raise issues under the Act. First, the word "product" as used in the section refers to a product class, in this example men's dress shirts, not to a particular brand. Second, according to the section, the refusal must be attributable upon analysis to "insufficient competition among suppliers of the product in the market". As noted in Answer 1, manufacturers often have legitimate business reasons for refusing to supply a particular retailer.
I operate a retail outlet selling home furnishings. I am also an authorized dealer for the Red brand of major home appliances. While the Red brand is a recognized industry leader in fridges and stoves, its dishwashers and certain of its other product lines do not share this good reputation. I would prefer not to carry Red dishwashers, but the Red company has told me that it is a condition of my dealership that I carry its full line. Furthermore, the Blue brand also makes quality products and they have offered to open me as a retailer, but my dealership agreement with Red prohibits me from carrying any lines that directly compete with Red's flagship products. Are these limitations on the way that I do business allowed under the Competition Act?
Your question describes two forms of what are called "vertical restraints". These are covered in section 77 of the Competition Act. Red's actions in compelling you, as a condition of your dealership, to carry more of its line of products than you would prefer is sometimes referred to as "full line forcing". This activity falls within the definition of "tied selling" as it appears in section 77 (1). Similarly, the requirement in your dealership agreement with Red that you not carry competing product lines, such as those of Blue, is called "exclusive dealing" and it is defined in the same section. Policies involving tied selling, exclusive dealing, and the related "market restriction" (also, section 77) are not prohibited per se under the Act. Such policies, however, can be subject to remedial Orders by the Competition Tribunal prohibiting their continuation or altering their terms if it is found that their effect has been, or is likely to be, a substantial lessening of competition in a market. Absent this "substantial lessening", these practices are legitimate.
I own a small store selling consumer electronics products. Recently, a nationwide chain opened an outlet nearby, and it is selling many of my more desirable products at prices that seem to me to be predatory, insofar as they are near or below my wholesale costs. There is no way that I can compete. The chain's acquisition costs must be well below mine. I thought that price discrimination and predatory pricing were against the law.
Price discrimination and predatory pricing are criminal offences in Canada. However, the law speaks of discrimination in the prices for products "of like quality and quantity", meaning that a seller may offer quantity discounts. The logic behind this is that, for a manufacturer, the more a particular retailer buys, the less it costs the manufacturer to supply him on a per unit basis. This cost reduction is passed on to the retailer in the form of a quantity discount, and this is allowed under the law. Likewise, because the chain's acquisition costs are below yours, it can offer prices which may be below your costs, but which in fact cover the chain's costs and thus cannot be characterized as predatory.
Abuse of dominant position
I own a company called Ad-Fly Inc. in a community that serves an area population of about 10,000 families. I publish a bi-weekly advertising flyer which is delivered freely to virtually all households. My expenses are covered by the advertising which I sell into the flyers. The area newspaper, The Daily, a local monopoly, has recently started publishing an advertising flyer of its own which is delivered with the weekend edition of its newspaper at no extra charge. Since most area households subscribe to the paper, this pretty much covers my territory. Its prices are similar to mine, but because it publishes twice as many editions as I do, its effective prices are much lower. Furthermore, it is offering substantial discounts for those who opt to advertise in both the newspaper and the flyer, with the effect that the flyer space is close to being given away. I believe that the newspaper publisher is abusing its monopoly in the newspaper industry by trying to take over the area flyer business as well.
There is nothing in the abuse of dominance sections, which prohibits a dominant firm from expanding its horizons. In this instance, the newspaper publisher is actually already in the business of selling print advertising into The Daily. It would in all likelihood possess scale and scope economies in sales, printing, and distribution facilities, meaning that its costs to publish the flyer would be lower than yours, enabling it to charge lower prices. Its advantages derive from its greater efficiency. Since much of the purpose of antitrust laws like the Competition Act is to encourage efficiency in the distribution of goods and services, this complaint would not support further action under the abuse of dominance provisions. Your recourse here is to ensure that your product has sufficient advertiser and consumer appeal to enable you to remain an effective competitor in the market.
Given the scenario just discussed, what additional actions on the part of the newspaper publisher would it take to provoke further action under the abuse of dominance provisions?
Let's assume that Ad-Fly acts on the suggestion in the final line that it respond to the new entrant by upgrading its own product, adding features, improving service, and the like, such that, after a year or so, it is not only holding its own against The Daily's product, but outperforming it to the point where the newspaper's investment in its own version of an advertising flyer is beginning to look like a bad idea. The Daily, it turns out, is owned by a large chain of newspapers and it contracts out its printing requirements to a sister publisher in an adjacent community. This printer happens to be the only one of its kind within a reasonable distance from the subject market, so Ad-Fly, too, contracts its printing requirements to it and has never had any difficulties in the relationship. Then, Ad-Fly begins to encounter problems with printing and with the relationship with the printer. Suddenly, everything is a problem: delays, paper supply, credit disputes, and so on to the point where service to the customer and the quality of the product are being compromised. An employee at the printer tells the publisher of Ad-Fly on a confidential basis that there is no real reason for this change, aside from directives from management that he is having trouble understanding. Later, The Daily, out of nowhere, contacts three of the Ad-Fly's best and most experienced sales representatives and offers them jobs at a salary that none could refuse and that Ad-Fly could not match. Ad-Fly then learns through the grapevine that The Daily has been quietly approaching his five or six most critical clients and offering them a substantial discount if they agree to advertise in its flyer on an exclusive basis. Finally, after a bit of research, Ad-Fly's publisher finds that the chain which controls The Daily has had, over the past few years, other confrontations with independent advertising flyer publishers in other markets which seemed always to result in the competitor exiting the market.
Note the character of these additional activities of The Daily. None are directed towards improving its own product or service, but instead have been designed to impede Ad-Fly and to degrade its product in the eyes of both advertisers and consumers. Presented with these additional facts, the Commissioner would likely have sufficient reason to open an investigation pursuant to the abuse of dominance sections.
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