Enforcement Guidelines: The Abuse of Dominance Provisions (Sections 78 and 79 of the Competition Act) as Applied to the Retail Grocery Industry

Draft

(PDF: 80KB)

December 17, 2001

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Table of Contents

1. Purpose and Scope of the Guidelines

2. The Canadian Grocery Industry

3. The Abuse of Dominance Provisions

4. Institutional Framework for Enforcement

5. The Elements of an Abuse of Dominance

5.1 Market Dominance

5.1.1 Defining the Relevant Markets 
5.1.2 The Retail and Wholesale Grocery Markets
5.1.3 Geographic Market
5.1.4 Assessing Market Power
5.1.5 Market Share 
5.1.6 Barriers to Entry

5.2 Anti-Competitive Acts: Section 78

5.2.1 Raising Rivals' Costs

5.2.1(a) Exclusive Rights 
5.2.1(b) Slotting Allowances and Other Listing Fees 
5.2.1(c) An Illustrative Example: The Heinz Canada Undertaking 

5.2.2 Predatory Conduct

5.2.3 Interdependence or Tacit Collusion Among Firms: Facilitating Practices 

5.3 Substantial Prevention or Lessening of Competition

6. Remedies

6.1 Alternative Case Resolutions

6.2 Limitations and Exceptions

Appendix I: 

The Abuse of Dominance Provisions of the Competition Act (Sections 78 and 79) 

Appendix II: 

List of Economic Papers Commissioned by the Competition Bureau

Appendix III: 

Definitions

Appendix IV: 

References

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1.    Purpose and Scope of the Guidelines

As part of its continuing effort to maintain a transparent and predictable enforcement policy, the Competition Bureau periodically releases various guidelines and bulletins about its approach to anti-competitive practices. While it has been suggested that the Bureau amend the Abuse of Dominance provisions of the Competition Act to include provisions specific to the Canadian grocery sector, the Bureau believes that the current provisions can adequately address abuse of dominance issues in this sector. These guidelines are being issued in order to provide a better understanding of the Bureau's approach to enforcing the provisions as they relate to the Canadian Grocery Industry.

In addition to producing these guidelines, the Bureau has also commissioned three background economic papers to address similar issues. Their titles are listed in Appendix 2 of the guidelines, and copies can be obtained from the Bureau Web site at http://www.cb-bc.gc.ca.

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2.    The Canadian Grocery Industry

The retail food sector in Canada comprises a key component of the Canadian economy, accounting for more than a quarter of total retail trade in Canada or almost $60 billion per year¹. Mergers in this sector have increased over the past decade, to the extent, the Bureau estimates, that the four largest supermarket chains now account for approximately 75% of total Canadian food store sales.

The retail grocery sector consists of three main segments: manufacturers, wholesalers, and retailers. Manufacturers - the producers - require wholesalers to distribute their goods to retailers, who market the product directly to consumers.

While this chain of manufacturing, distribution and retailing may appear straightforward, the structure of the sector is actually much more complex. Within each segment of the market competitors operate at various levels, locally, regionally or nationally. Some firms specialize in one segment of the grocery industry while others, such as large retailers, own chains of stores and have their own distribution and wholesale operations.

Some of the larger retail chains supplement their recognized brands with a range of exclusive products that are packaged and marketed under their own brand name. Alongside these large chains are smaller independent grocers who do not have the resources to develop their own private labels. Sometimes these retailers join larger buying groups that allow members to obtain volume discounts from manufacturers.

Consequently, the grocery sector includes a broad spectrum of competitors ranging from independent firms with standard business relationships with their suppliers, to fully integrated firms with significant market presence in all areas of the industry. In some cases, integrated firms supply their independent competitors: for example, wholesalers owned by the retail chains may also be supplying independent retailers. As a result, the application of competition policy to the grocery sector must take into account the above-noted horizontal and vertical relationships amongst firms.

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3.    The Abuse of Dominance Provisions

These guidelines focus on how, from an enforcement policy perspective, the Competition Bureau addresses allegations that a dominant firm or group of firms in the grocery sector is harming competition through abuse of market power. The Bureau takes an evolving, rather than static, approach to enforcement policy that is based on the provisions set out in the Competition Act, supplemented by jurisprudence, academic literature and practical enforcement experience. Nothing in these guidelines for the retail gorcery sector deviates from the enforcement approach outlined in the Enforcement Guidelines on the Abuse of Dominance Provisions, which were released in July, 2001.

The provisions of the Competition Act dealing with abuse of a dominant market position clearly set the boundaries for legitimate competitive business behaviour, and provide the means for legal action against companies who choose to abuse their dominant market position. In July 2001, the Competition Bureau released the Enforcement Guidelines on the Abuse of Dominance Provisions, which outline, in considerably more detail than these guidelines, the Bureau's approach in investigating cases involving abuse of dominance.

Briefly, abuse of dominance occurs when a dominant firm in a market, or a dominant group of firms, engages in conduct intended to eliminate or to discipline a competitor and to deter future entry by new competitors. This conduct either prevents or substantially reduces competition.

It is recognized at all levels of the grocery sector that firms require an equitable opportunity to compete in the market. In cases of market dominance, one firm, or group of firms, has sufficient market power to exercise significant control over the market. In these instances, careful scrutiny needs to be given to the impact of the activities of the dominant firm on smaller and medium sized companies, since in dominance situations the latter usually constitutes the remaining effective competition in the market.

Dominant firms at the manufacturing level may be able to abuse their positions vis-à-vis distributors or retailers to the extent that smaller manufacturers become severely limited in their attempts to enter or expand in the market. Dominant firms in similar circumstances at the retail level may prevent smaller retailers from obtaining the products they require to compete. Potential problems also arise when the actions of a dominant firm at one level of the grocery sector have a direct impact on competition at other levels of the sector.

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4. Institutional Framework for Enforcement

The Competition Act and the Competition Tribunal Act were created to provide a clear separation between the functions of investigation and adjudication. The Commissioner of Competition is responsible for inquiries under the Act, with significant powers to carry out this responsibility. The Competition Tribunal is responsible for adjudication of the civil provisions of the Act, including the abuse of dominance provisions.

 Only the Commissioner can make an application to the Tribunal for a remedial order. Similarly, the Tribunal can consider an issue under the Act only when it has received an application from the Commissioner. When an application has been filed with the Tribunal, the burden of proof is on the Commissioner to satisfy the Tribunal that all of the elements of section 79 have been met and that an order of the Tribunal should be granted. In other words, the Commissioner cannot directly compel changes in business behaviour, but rather must take on the role of litigant before the Tribunal and produce evidence to support the grounds for making the order.

Since market participants vary in terms of size and resources, it is important to note that the abuse of dominance provisions are not intended to provide protection from legitimate market competition, nor are they designed to ensure that all firms continue to prosper in the market. Rather, they are meant to make it possible for businesses of all sizes to have an equitable opportunity to participate in the market. In this way, the market can provide consumers with competitive prices and product choices.

The Bureau, acting as the investigative arm of the Commissioner, conducts its role on an impartial basis, pursuing those complaints that meet the elements of section 79 and that raise a substantive issue of prevention or lessening of competition.

An application may be filed on a consent basis when the Commissioner concludes that grounds exist for an application to the Tribunal for a remedial order, and when the respondent and the Commissioner agree to provide the Tribunal with their suggested remedy for the competition problem. When an agreement on a consent order has not been reached with the respondent, the Commissioner will file an application with the Tribunal seeking adjudicative relief. Whether cases come before the Tribunal on a consent or contested basis, the rules of the Tribunal provide for an open public hearing process in which affected third parties can apply for intervener status. Proceedings are governed by the Competition Tribunal Rules, which include procedures for the appearance of witnesses as well as the production of documentary evidence.

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5. The Elements of an Abuse of Dominance

Subsection 79(1) sets out three essential elements for abuse of dominance that the Competition Tribunal (the Tribunal) must identify before it grants an order². The Tribunal must find that:

(a) one or more persons substantially or completely control, throughout Canada or any area thereof, a class or species of business;

(b) that person or those persons have engaged or are engaging in a practice of anti-competitive acts; and

(c) the practice has had, is having, or is likely to have the effect of substantially preventing or lessening competition in a market.

5.1 Market Dominance

Paragraph 79(1)(a) concerns whether market dominance exists. In keeping with the jurisprudence established by the Competition Tribunal, the Bureau considers market dominance to be synonymous with market power - that is, the ability to profitably maintain prices above competitive levels for a significant period of time, normally one year. The law does not imply that the mere existence of market power provides grounds for a Tribunal remedial order, since charging prices above the competitive level is in itself insufficient for an application under section 79. The abuse of dominance provisions are not intended to regulate prices, but rather to ensure the proper handling of anti-competitive conduct that, in this context, means efforts to maintain or enhance market power through activities directed towards competitors in an exclusionary, disciplinary or predatory manner.

Assessing whether market power exists requires first of all the proper identification of the relevant markets, including the existing competitors that are likely to constrain the ability of the firm, or firms, to profitably raise prices and/or to restrict competition.

5.1.1 Defining the Relevant Markets

The Competition Act adopts the term "class or species of business" rather than the term "market" in terms of the control aspect. The Bureau defines a "class or species of business" as one that is synonymous with a relevant product.³ It begins by examining the product market(s) within which the alleged abuse of dominance has occurred or is occurring. As in other areas of competition law, the Bureau then looks at whether competition from other product sources limits the ability of the firm(s) in question to exercise market power. It focuses on whether close substitutes exist for the product(s) in question, such that buyers would choose them if the product price were raised above competitive levels by a significant amount for a non-transitory period of time. In general, a five percent real price increase above competitive levels lasting one year is considered a significant and non-transitory amount.

An analysis of existing competitors and product substitutes also has a geographic dimension. The Bureau considers the specification "throughout Canada or any area thereof" to describe the relevant geographic market.

5.1.2 The Retail and Wholesale Grocery Markets

No clear-cut standard exists to assess products or geographic parameters for relevant markets at the wholesale or manufacturing level. Instead, products vary considerably, as do their manufacture, distribution and marketing.

At the retail level, the product market has traditionally been viewed as a basket of grocery and food products sold in full-line supermarkets.⁴ From a demand perspective, the Bureau estimates shopping patterns in terms of the purchase of a basket of individual products that normally constitute the core bundle of weekly household food requirements. The size and number of items in the basket vary according to the size and income of the household.

From the supply perspective, two factors are of particular importance: the size of the stores and the number of stock keeping units (SKUs) provided in each store. Each SKU represents a particular product in a specific size or packaging format⁵. Normally, a store must have a minimum retail area of about 20,000 sq. feet to be considered a full-line supermarket used for weekly shopping. The Bureau generally excludes stores that are less than 7000 sq. feet of retail area⁶. The number of SKUs in supermarkets starts at around 10,000. The Bureau generally excludes stores that handle about 5000 SKUs.

This approach to market definition serves simply as a starting point for analytical purposes. Many households do not keep to a specific shopping pattern: people often grocery- shop more than once a week, and also supplement those traditional trips with other shopping that may include the purchase of food items. As well, with the advent of new format retailers such as the big box discount stores containing large grocery items, the competitive impact that non-traditional grocery stores have on the market also needs to be considered.

5.1.3 Geographic Market

The Bureau assesses the relevant geographic retail market for groceries by determining the location and size of supermarkets and the existing grocery shopping patterns in each area. As well, it calculates how far consumers will travel to shop for the core bundle of household food requirements. The Bureau also considers the market targeted by individual stores by looking at advertising efforts, home deliveries, shopper surveys and other available data indicating where local supermarkets attract business. The Bureau tries to estimate a reasonable average travel time when it establishes a local geographic market definition for a one-stop weekly grocery shopping market for an area.

Generally, the Bureau has found that in most urban markets a travel time of 5-10 minutes by car (an outer bound of about 5-7 km.) serves as a reasonable proxy for determining the parameters of a geographic market. In rural markets it is harder to be specific, since travel times and catchment areas for supermarkets are typically larger. Consequently, the Bureau approach is to define the geographic parameters of the market on a case by case basis.

5.1.4 Assessing Market Power

Once the Bureau has ascertained the existing competitors, it must assess the extent to which they constrain any market power that the dominant firm(s) might otherwise possess. The Bureau considers control to be synonymous with market power where the latter is seen as the ability to profitably set prices above competitive levels for a considerable period of time. Market power may also be defined in terms of a material, specific reduction in other factors of competition, such as service, quality, variety, advertising and innovation. For ease of reference, market power is referred to here with respect to price increases, but should be understood to also include non-price factors of competition.

As it is difficult to measure market power directly, the Bureau normally relies on a number of indicators, both qualitative and quantitative. These include, but are not necessarily limited to, the following:

• market share, including share stability and distribution;

• barriers to entry, including the conduct allegedly engaged in by the dominant firms(s); and

• other market characteristics, including extent of technological change, extent of excess capacity, and customer or supplier countervailing power.

5.1.5 Market Share

The Bureau prefers to use sales revenues to assess market shares in the retail grocery industry. However, when revenue data are not available, it will use market shares based on capacity, using both the size of a store's selling area, and/or the entire store, as proxies. The Bureau accepts that capacity shares based on physical size have limitations in measuring market power, since stores can have different formats with differing marketing capacities. Since there is no definitive numeric market share to imply that a firm has market power, it has taken the view that a high market share is usually a necessary, but not sufficient, condition to establish market power.

With the focus on control by a single firm or group of firms, market power analysis measures the extent to which existing competitors (identified in the market definition exercise described above) and/or potential competitors (discussed in the following section on entry barriers) or any other relevant factors (such as countervailing customer power) are likely to constrain exercise of market power.

In the contested abuse of dominance cases heard to date by the Competition Tribunal, the market shares of the dominant firms were high. In these instances, high market shares suggest that consumers have few alternatives when the dominant firm increases prices above competitive levels.

In summary, the Bureau's general approach with regard to market share is as follows:

• A market share of less than 35 percent will generally not give rise to concerns of market power or dominance;
• A market share of 35 percent or more will generally prompt further examination; and
• In the case of a group of firms alleged to be jointly dominant, a combined market share of 60 percent or more will generally prompt further examination.

5.1.6 Barriers to Entry

As noted above, a high market share is not in itself sufficient to prove market power. Without barriers to entry, any attempt by a firm with a high market share to exercise market power is likely to be met with the entry or expansion of existing firms. In this process, the firm with the high market share loses customers to its rivals to the extent that it does not find it profitable to attempt to raise prices above competitive levels. In general, entry is likely to be prevented by the presence of absolute cost differences between the incumbent and the entrant, or by the entrant's need to make investments that are not likely to be recovered if entry is unsuccessful. These investments are referred to as "sunk costs." An entrant must not only be able to enter the market, but also to become a viable competitor. Many of the anti-competitive activities that concern the Bureau involve the creation or enhancement of barriers to entry.

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5.2 Anti-Competitive Acts: Section 78

Paragraph 79(1(b) adds the further qualification that the provisions refer to behaviour that is anti-competitive, since it is the abuse of a dominant position that gives rise to scrutiny under the Act. Examples of business practices constituting anti-competitive acts are listed in section 78. The list, although broad, is not exhaustive. Accordingly, the Tribunal has latitude to addresss anti-competitive acts not defined in section 78 and has done so in a number of cases. In order to help differentiate between legitimate competitive activity and that constituting abuse within the meaning of section 79, the practices listed in section 78 all involve an element of purpose, object or design to undermine competition.

The Bureau's approach to assessing potentially anti-competitive acts in the grocery sector is to determine whether they are exclusionary, predatory or disciplinary with respect to other competitors in the relevant market.

The Bureau focuses on determining whether the activities in question:

1. facilitate raising rivals' costs or reducing rivals' revenues
2. involve predatory conduct aimed at eliminating or disciplining competitors; and/or
3. encourage interdependence or tacit collusion among firms.

The retail grocery industry contains a variety of allowances, fees and promotional arrangements between manufacturers, wholesalers, and retailers that are the chief method whereby business relationships are established and maintained. In this regard, mention is often made of "slotting fees", "pay-to-stay fees" and various product promotion schemes.

In responding to concerns about these types of arrangements, the Bureau assesses each situation by looking at the particular facts of the case to determine whether or not there have been anti-competitive effects. If the anti-competitive effects lead to substantial lessening or prevention of competition in the market, the Bureau will take the action necessary to remedy the situation.

Without knowing the particulars of a specific business arrangement, it is difficult to generalize about the competitive effects of any class or type of business arrangement. The Bureau examines business arrangements from the perspective of understanding the competitive impact they have on the market(s) affected. In a generic sense, the types of arrangements which raise particular concerns to the Bureau include raising rivals' costs; exclusive rights; slotting allowances and other listing fees; predatory conduct; and interdependence or tacit collusion among firms.

5.2.1 Raising Rivals' Costs

The most straightforward strategy for raising rivals' costs in the grocery sector is for a dominant firm or group of firms to enter into agreements with manufacturers, distributors or retailers in the market that preclude competitors' access to facilities. This could involve pre-empting access to the distribution system or shelf space in retail stores. Another approach is to pre-empt access to important brands or suppliers through the use of exclusive agreements.

Where dominance in a market has been established and anti-competitive activities have been alleged, the Bureau will examine whether this market power is being maintained or enhanced through anti-competitive activities that raise rivals' costs include the following:

 5.2.1(a) Exclusive Rights

Retailers may ask to have the exclusive rights for selling a manufacturer's goods within their trading area. In these instances, other competitors may complain to the Bureau that this exclusive right puts them at a significant disadvantage. Initially, the Bureau would examine the nature of the exclusive agreement to determine whether it would confer market power on the retailer, or enhance it, at the expense of competition among the other retailers.

Consider a hypothetical situation where a core product or group of products in the household bundle of groceries is supplied by only one manufacturer or distributor in a given market. If that manufacturer or distributor gives an exclusive right to retailing that good to one retailer or group of competitors in the market, it could have a significant anti-competitive impact on the ability of other retailers in that area to compete. In these situations, the Bureau would assess the availability of substitute products, the scope of the territory involved, the duration of the arrangement and any other relevant factors regarding the nature of the exclusive arrangement.

Manufacturers or distributors possessing market power through the control of significant brands may abuse this power by requiring retailers wishing to carry their brand (or bundles of branded products) to refuse to carry, or to restrict the number of, competitors' products listed in their stores. These sorts of exclusive arrangements raise rivals' costs and can result in a substantial lessening or prevention of competition.

5.2.1(b) Slotting Allowances and Other Listing Fees

Retailers in the grocery sector are perpetually challenged by the competitive pressure of maximizing revenues generated in stores with finite space. To meet this challenge, they continually assess the profitability of the products on their shelves by determining which categories and brands of products are generating the most revenue. The decision to change products or to introduce new products brings with it inherent risks and opportunities. One of the common ways in which retailers seek to minimize risks in promoting products is to pass some of the costs back to the manufacturers or distributors in the form of listing fees, slotting fees and pay-to-stay fees. In all these instances the retailer is extracting some form of rent from the supplier in exchange for shelf space.

Retailers with market power may not be contravening the abuse provisions of the Competition Act by soliciting rents in the form of fees or allowances. However, it is clear that, given the imposition of fees in exchange for shelf space and the fact that shelf space is not unlimited, such schemes could have an exclusionary effect on some competitors or classes of competitors. Where a firm, or a group of firms, dominate a market for a product, the Bureau would be concerned if the payment of a slotting fee is being used by the dominant firms(s) to acquire exclusivity or to tie up enough of the available shelf space to preclude other competitors from entering or expanding into the market.

The Bureau has investigated several exclusive dealing contracts between manufacturers and grocery retailers. In so doing, it determines whether the exclusionary effect of these contracts has the effect of increasing competitors' costs. If these effects also result in higher prices to consumers, the Bureau concludes that there is a substantial lessening of competition in the product market.

Equally problematic in the Bureau's view are full exclusivity contracts, along with contracts between manufacturers and retailers that condition the amount of shelf space and the placement of the manufacturer's products in relation to its competitors. The Bureau is particularly concerned about contracts including clauses that:

• tie up a specific percentage share of shelf space devoted to a specific product category;
• limit competitors to a specific number of SKUs;
• exclude specific competitor SKUs;
• require some form of price parity with competitors;
• specify when and how competitors can advertise;
• obtain information on the terms of competitors' contract offers.

5.2.1(c) An Illustrative Example: The Heinz Canada Undertaking

In 2000, the Competition Bureau had concerns that certain exclusive practices carried on Heinz Canada with respect to the supply of baby food to retailers in Canada contravened the abuse of dominance provisions of the Competition Act. The matter was raised with the company and following settlement negotiations with the Bureau, Heinz Canada voluntarily entered into a binding undertaking designed to enhance the competitive climate for jarred baby food and infant cereal in Canada.

The principal anti-competitive practices uncovered by the Bureau's investigation included:

1. large, lump sum, up front payments made to retailers not to stock non-Heinz Canada jarred baby food and infant cereal;
2. multi-year contracts for exclusive supply; and
3. discounts conditional upon exclusive supply.

Based on these factors, the Bureau concluded that a major and dominant supplier had engaged in activities which created a significant additional barrier to entry for competitors, substantially preventing or lessening competition in the marketplace.

In the undertaking, Heinz Canada agreed not to:

• enforce the exclusivity provisions of any existing supply agreements with retail and wholesale customers of jarred baby food and infant cereal;
• enter into agreements requiring or providing more favourable treatment (including lump sum payments) in exchange for such exclusivity;
• engage in tied selling of its jarred baby food and infant cereal products;
• provide volume discounts inducing exclusivity.

Heinz Canada also agreed to:

• limit the terms of its supply arrangements for jarred baby food and infant cereal to one year except when meeting competitive offers of a longer duration; and
• advise all users of gravity feed racks that they might be used to display any brand of jarred baby food.

5.2.2 Predatory Conduct

It is difficult to distinguish predatory pricing from competitive pricing since both, at least initially, involve lower prices. As clarification, predatory pricing by a dominant firm normally involves a firm's ability to raise prices once rivals have been disciplined or have exited the market.

Predatory pricing is often described as selling at a price below some measure of cost in order to harm a competitor. It can be profitable to the dominant firm, and hence harmful to competition, if that firm, through maintaining or enhancing market power, is potentially able to recoup the losses from its predatory strategy. It can do this by eliminating a rival in cases where entry barriers prohibit or discourage potential entrants from preventing 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. This reputation for predation may also deter entry into other markets in which the dominant firm operates, thus increasing that firm's incentive to engage in predation.

Dominant firms can also engage in predation in order to discipline competitors that have undertaken to challenge the market power of the dominant firm. The intent of disciplinary actions is to convince the target of the actions to cease a particular practice, rather than to eliminate or exclude it from the market. However, the effect on competition can be the same as elimination of a rival if the disciplining eliminates the competitive threat. Consider the example of a competitor seeking to obtain market share by lowering its prices. The dominant firm reacts by engaging in a predatory pricing strategy, aimed not at eliminating the competitor, but rather at compelling it to resume pricing at previous levels.

The Bureau has received a number of complaints regarding the pricing practices of some grocery retailers. In general, these complaints allege that a retailer is engaged in predatory conduct aimed at eliminating or disciplining competitors. This predatory conduct usually involves either low prices on frequently purchased items or low prices offered by a new retail grocery entrant (geographic price discrimination) on a broad selection of SKUs.

The Bureau has on several occasions established that a dominant retailer sold a number of SKUs at below cost. However, it concluded that the competitive impact in a retail grocery market of a loss leader selling under 50 SKUs, in a store stocking 17-23,000 SKUs, was too limited to meet the substantial lessening requirement of section 79 of the Act.

Situations arise where there is intense competitive rivalry in a market between large retailers who can exploit lower cost structures associated with their size and buying power. Often such rivalry imposes significant pressure on smaller retailers who must also compete in the market. Often this pressure can result in a loss of market share or even the exiting of higher cost competitors from the market. This consequence, however, is not the basis for concluding that there has been an abuse of dominance as it has come about as a result of competition rather than as a result of a strategy by the larger competitors to discipline or eliminate smaller competitors.

The Bureau has also received complaints related to predatory pricing following a large scale entry by a supermarket in a geographic market. As well, suppliers complained that the entrant was permitted a "new store discount" for a period of up to a year.

In cases of low prices offered by a new retail grocery entrant on a larger selection of SKUs, the Bureau focuses on prices in relation to costs, as well as on typical mark-ups for that particular retail format in other geographic markets in order to judge whether prices are predatory. The Bureau has done extensive price comparisons between areas to establish that the lower post-entry prices do not cross the predatory threshold.

While the Bureau generally accepts that most large scale retail grocery entrants incur losses in the first six months, it is also of the view that subsequent significant deviations from normal mark-ups and pricing strategy to cover costs are direct evidence of predatory pricing.

In these cases, the Bureau requires the entrant to show that the lower prices and other pro-competitive benefits of entry to consumers will be offset by higher prices in the future. This is difficult to establish because many of the new retail formats are on a larger scale and have lower costs and mark-ups than incumbent retail grocery stores.

5.2.3 Interdependence or Tacit Collusion Among Firms: Facilitating Practises

The abuse of dominance provisions recognize that firms who have legitimately obtained a dominant position in a market through superior competitive performance are free to exercise their market power, provided that they do not engage in abusive activities designed to eliminate or restrict competition. However, in markets where a small number of competitors account for a significant proportion of the market and barriers to entry make it difficult for other competitors to enter or expand in the market, there is increased concern that incumbent firms could create market dominance through co-ordinated activities. This would constitute an anti-competitive act through the creation of market power and would substantially lessening competition in the relevant markets.

There has been no evidence to date to suggest that this sort of co-ordinated behaviour is ongoing within the grocery sector. However, given the dynamic nature of this sector, the Bureau gives priority to staying on top of changes in the structure of the industry, and of any emerging trends in the market that might facilitate greater co-ordination between competitors.

Facilitating practices enhance the ability of firms to coordinate their behaviour in order to increase or maintain prices. Thus, a group of firms would employ facilitating practices to ensure cooperation of members in order to sustain the group's joint dominance in the relevant market(s). Typically, such practices assist firms in monitoring each other to ensure that no one "cheats" on an arrangement, or allow firms to more effectively punish such deviations.

Examples of this behaviour include pre-announcing price increases, publicizing price lists, and engaging in delivered pricing. The latter can involve uniform delivered prices, whereby firms charge the same delivered price to all customers regardless of location. Alternatively, firms can adopt the same base points from which transportation costs are added. Both forms of delivered pricing simplify price lists and result in customers facing the same price from each firm, thus making pricing more transparent to other firms and facilitating coordinated behaviour.

Contractual arrangements can also be used to enhance transparency and to allow for more effective punishments. "Meet-or-release" clauses can alert a firm to price cutting by other firms, thereby facilitating detection of deviations. These clauses also provide for punishment by allowing the firm to match the offer, thus preventing the price cutter from making the sale.

Similar practices incorporate stronger punishments, such as a firm promising to beat any rival's price by 10 percent. Most favoured customer clauses effectively commit a firm to punishing itself for offering a selective price cut to a particular customer, since that price cut would have to be offered to all customers with similar clauses. Thus, these clauses can deter selective price cuts and stabilize interdependence among oligopolists.

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5.3 Substantial Prevention or Lessening of Competition

Paragraph 79(1)(c) imposes a requirement of proof that the business conduct has had, is having, or is likely to have, an effect of "preventing or lessening competition substantially." The focus is placed squarely on competition rather than on individual competitors. In any given case, the final determination of whether competition has been substantially lessened or prevented will depend on the degree of dominance, the nature and severity of the anti-competitive acts, and the degree of competition remaining in the market. In general, the Bureau will focus on a variety of indicators to determine the impact of anti-competitive activities on competition. These include level of choice or product variety, quality and innovation and the impact on consumer price levels.

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6 Remedies

6.1 Alternative Case Resolutions

If the Commissioner is satisfied that the evidence supports an application to the Competition Tribunal, a number of options to remedy the situation are available. The parties are afforded the opportunity to respond to the Commissioner's concerns and can propose an alternative means of dealing with them. In most circumstances the Commissioner's preference would be to have any proposed remedy agreed upon by the parties reviewed by the Competition Tribunal pursuant to a consent order application. However, resolution of these matters are dealt with on a case-by-case basis.

In instances where an alternative ( to litigation ) course of action has been adopted to resolve the competition issues, the Commissioner will make the resolution public to ensure that the process remains transparent and that all interested parties have been informed of the fact that the matter has been resolved.

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6.2 Limitations and Exceptions

Subsection 79(3) places a limitation on the scope of an order under subsection 79(2), in order to provide an additional safeguard protecting the rights of persons against whom an order is directed. The intent here is that an order should restore competition, but not exceed that objective.

Subsection 79(4) is intended to compel the Tribunal to consider whether the lessening of competition is attributable to the superior competitive performance of the dominant firm or firms. It does not call upon the Tribunal to balance superior competitive performance against the effects of anti-competitive acts. Superior competitive performance is only a factor to be considered in determining the cause of the lessening of competition rather than a justifiable reason for engaging in an anti-competitive act.

Exclusive rights provided by intellectual property law do not of themselves constitute abusive conduct by a dominant firm. Subsection 79(5) is intended to ensure that the legitimate use of intellectual property rights does not constitute an anti-competitive act. However, abuse of those rights could result in a violation of section 79.

Subsection 79(6) clarifies the point that no action can be taken against an anti-competitive act by a dominant firm or group of firms three years after the practice has ceased.

Subsection 79(7) requires the Commissioner to choose between the conspiracy, the merger or the abuse of dominance provisions when electing to proceed with either a recommendation to the Attorney General (alleging criminal conspiracy) or an application to the Tribunal (under the civil provisions). The choice of which provision to pursue will depend on the facts of each case and the nature of the remedy sought to alleviate the competition issue.

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Footnotes

1. Jean Francois Wen, Market Power in Canadian Grocery Retailing: Assessing the Evidence for Canada, p 1.   back 

2. See Appendix 1     back 

3. In the NutraSweet case the Competition Tribunal concluded that delineating a class or species of business is equivalent to defining a relevant product market.     back 

4. This is the product market definition the Bureau used in Great Atlantic & Pacific Company of Canada / Steinberg Inc. s. 92 (1990), File M533 and Safeway / Woodward 1987.     back 

5. A product is frequently supplied in a variety of different sized formats. Each format of the same product represents a different SKU.     back 

6. In smaller rural towns the grocery establishments may fall below this threshold.     back