Statement by Konrad von Finckenstein, Q.C., Commissioner of Competition

To the Standing Committee on Industry

April 15, 1999

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Madam Chairperson, I am pleased to appear before the Committee to offer my closing remarks with respect to Bill C-235. You will recall that the last time I was here it was to testify on Bill C- 20, a Bill that substantially amended the Competition Act. Let me take this opportunity to thank the committee for the support it gave to the Bureau in approving Bill C-20.

The Competition Bureau has been watching these hearings with interest and has heard your witnesses who clearly are troubled by this Bill - just as we at the Bureau are.

The ultimate purpose of Bill C-235 is very simple. It provides that integrated manufacturers:

(a) cannot sell to independent retailers at higher prices than to their own affiliates; and,

(b) cannot sell at the wholesale level to independent retailers at higher prices than their own retail price.

Clearly, this is intended to protect independent retailers who are perceived to be threatened by the integrated manufacturer who supplies them.

The unstated assumption underlying the Bill is that by protecting independent retailers one enhances competition and thus protects consumers. The Bureau fundamentally disagrees with this approach and the underlying assumption for the reasons which follow.

1. The purpose of the Competition Act is to protect competition and not competitors. The proposed amendments in Bill C-235 depart from these principles by creating special protections for one class of competitors.
   
   
2. Contrary to the intention underlying these amendments, protecting specific classes of competitors can lead, not to lower prices for consumers, but in fact to higher prices.
   
   
3. Another fundamental point of difference with respect to Bill C-235 is that it assumes that selling at wholesale prices which are lower than retail prices is automatically predatory. However, as you have heard from other witnesses, there are often valid reasons for selling at such prices. For example:

A. Where a new entrant is competing to gain market share

In some mature markets cutting prices may be the only way to enter or to induce consumers to try a new competing brand.

B. Where there is over supply in a market

Excess supply in a market may drive wholesalers to get rid of stock at exceptionally low prices. There is, after all, a cost of holding stock (especially if items are out of season or become obsolete due to innovation).

C. Marketing or promotional reasons

A new product is being introduced and the retailers offer a “special” low price or lower their price to react to a competitor’s promotion.

4. Cases of true or successful predation - the kind that harms the health of competition in market- are rare and difficult because evidence is hard to get and because of the unlikelihood of recoupment. In other words, what the Bureau is looking for is evidence that pricing below cost is worthwhile for alleged predators. That they will be able to make back the money lost through low pricing. This is the case if the alleged predators can drive a competitor out of the market (and be sure they won’t be replaced by another) or can soften up a competitor’s will to compete enough to be sure that prices can be raised later in the certainty that the competitor will follow.

5. As you know, the Competition Act applies to all industries. While we appreciate that gasoline and groceries are the focus of your concerns, Bill C-235 will affect all industries.

This means that the Bill is likely to have any number of unintended consequences –it is too soon to predict what all of those may be.

My point is that it is very important to be sure that, by enacting an overly broad solution we do not want to inadvertently:

(a.) scare off investment;

(b.) give the message that big is bad;

(c.) stop or slow down new developments or innovations.

6. The Bureau is especially concerned about the effect of the Bill on sales over the Internet. The Internet is in its infancy, and I am certain that it is a phenomenon that will challenge and change current distribution channels. Growing numbers of manufacturers are already selling directly to consumers over the Internet (example: Levis). While it is too soon to say to what extent this form of direct selling may overtake traditional distribution methods, everyone agrees that this will bring new efficiencies and drive down prices for consumers.

7. An additional concern I would like to raise today is the fact that Bill C-235 is very intrusive and uses criminal sanctions to effectively regulate wholesale prices. Regulating prices always hurts the consumer in the end.

8. Finally, section 2 of the Bill adds a civil version of the criminal offence of price maintenance to the Competition Act. Why this provision is needed is not clear. The existing criminal price maintenance provisions found in s. 61 of the Act concern conduct which is almost always anticompetitive and which are well understood by the legal profession and industry. They have been effectively applied in the past. Creating a civil alternative will diminish the seriousness of criminal price maintenance and make this behaviour more likely to occur.

Conclusion

In my view the case has not been made out that the existing civil and criminal provisions of the Act dealing with predatory pricing are insufficient to address the problem when it does occur.

However, we have heard your concerns. The Bureau is certainly willing to look at our Guidelines to see if we need to revise our approaches, to determine for example whether they need to be updated.

And as I have said in the past, the Competition Act is not perfect. Periodic reviews and revisions are necessary and welcome. However, we are not willing, as Bill C-235 does, to change underlying concepts or make drastic alteration which could lead to unforeseeable and potentially huge consequences.