VanDuzer Report - Summary (2)

Part III
Enforcement of Competition Act Provisions by the Bureau

Introduction

This part of the report provides (i) a brief overview of the process by which the Bureau deals with complaints, followed by (ii) a statistical profile of the Bureau’s enforcement experience for all complaints dealt with by the Bureau over the five (5) year period beginning April 1, 1994 and ending March 31, 1999 (the “Review Period”) which concerned price discrimination, predatory pricing or price maintenance and (iii) a discussion of the criteria used by the Bureau to select cases for enforcement action.

Complaints Process

Bureau commerce officers are responsible for making a preliminary assessment of each complaint received. In cases where the responsible commerce officer determines that the complaint does not disclose any basis for proceeding under the Act, the officer may terminate the investigation. If, after a preliminary assessment, it appears to the officer and his or her supervisor that there is a basis for a more thorough review, a complaint is designated as a “project” and further work is done, including applying the case selection criteria developed by the Bureau, gathering more complete information and identifying and assessing the strength of evidence.

In light of the results of the application of the case selection criteria and this more comprehensive analysis, a decision is made as to whether the case has sufficient merit to justify going forward to the next stage, the commencement of an inquiry by the Commissioner. Once an inquiry has been commenced the Commissioner can use his formal investigative powers, including seeking an order directing a person to be examined under oath or a warrant authorizing the searching of premises and the seizing of documents.

Alternatively, at any stage, the investigation of a complaint may be terminated or some kind of alternative case resolution (“ACR”) reached. An ACR may take various forms from a simple information visit by Bureau staff to explain the Act to formal undertakings monitored by the Bureau and consent prohibition orders.

Summary of Statistical Record of Enforcement Experience

During the Review Period, 931 complaints were received but very few rose to the level of the more intensive review characterizing the project stage. The overwhelming majority of complaints (88%) were terminated by commerce officers and their supervisors. Of the complaints which did become projects, in fewer than 1/3 was an inquiry initiated and formal enforcement proceedings were extremely rare. By contrast, ACR’s were successfully used in about 10% of complaints.

Price maintenance was the most frequently complained about anticompetitive pricing practice (461 complaints), though it was fairly closely followed by predatory pricing (382 complaints). Notwithstanding the pervasiveness of price discrimination, the number of price discrimination complaints was a relatively small proportion of the total (88 complaints).

Price maintenance was the only anticompetitive pricing practice in relation to which the Bureau took formal enforcement proceedings, though the number of occasions was very small (3). This rare resort to formal enforcement in price maintenance cases during the Review Period represented a significant change in enforcement policy from years before the Review Period. Formal enforcement activity was largely replaced by ACR’s.

In contrast to price maintenance, the number of formal enforcement actions with respect to price discrimination and predatory pricing has never been substantial. That there were none during the Review Period is consistent with earlier enforcement activity. The proportion of price discrimination and predatory pricing complaints resolved through alternative case resolutions during the Review Period was also very small.

Complaints are received from a wide variety of industries. With the notable exception of gasoline (16.7% of complaints), no single industry appeared to be the source of a disproportionate number of complaints. There were certain industries in which there were serious enough concerns that projects were commenced in a significant number of cases: gas, groceries, telecommunications and waste, together accounting for almost 50% of total Bureau projects relating to pricing. It is also notable that the overwhelming significance of gasoline in complaints did not follow through into projects, where groceries, telecommunications and waste were all more frequently the subject of the more thorough investigations to which projects are subject.

Case Selection Criteria

Introduction

In an era of continually shrinking resources, it is essential for any government organization to put in place systems which will assist it to marshal its resources most effectively to accomplish its mandate. In response to its expanded responsibilities and constrained resources, the Bureau has adopted case selection criteria to ensure that competing priorities are evaluated in a systematic way and that resources within each branch are efficiently allocated.

The core of the case selection criteria consists of four (4) categories of factors:

1. Economic Impact
2. Enforcement Policy
3. Strength of the Case
4. Management Considerations

From the interviews conducted for this study, it is clear that the case selection criteria are used as a guide to management decision making not a substitute. Often, it was suggested that if a case was considered to have sufficient merit, it could be proceeded with notwithstanding a low score. Consequently, while there are several aspects of the case selection criteria which may tend to produce low scores when applied to pricing cases, it seems that this would not necessarily prevent a meritorious case from proceeding.

The enforcement policy expressed in the case selection criteria attach no priority to price discrimination or vertical price maintenance cases. Indeed price discrimination is not even referred to. As well, the significance given to the economic impact of the anticompetitive conduct under the criteria may tend to lead to lower scores in such cases, since often the activity complained about may be restricted to local markets. In the case of price maintenance, this negative effect may be significantly offset because the likelihood and availability of ACR's provides a meaningful alternative to prosecution making enforcement action much more cost effective and leading to higher scores under management considerations. Also, meritorious price maintenance cases are likely to receive high scores on the strength of case criterion because the requirements for the offence are relatively straightforward.

With respect to predation cases, several features of the criteria seem likely to reduce scores in most cases. Like price maintenance and price discrimination, predation cases are not a priority and tend to be in local markets in which the economic impact may be low. As poor candidates for ACR's, the only option for resolving a predation case is likely to be a drawn out prosecution which will score poorly on the management considerations criteria. With respect to strength of case, the criteria do not give points if pricing is above average variable cost or for evidence of intent. Given the analytical and evidentiary challenges associated with meeting the two part test, this restriction on the cost/price comparison and the lack of recognition of intent evidence, means that predation cases are unlikely to score well under this criteria.

Part IV
Elements of a Competition Regime - Summary and Conclusions

Conclusions Regarding Specific Types of Anticompetitive Pricing Practices

Price Discrimination

Adequacy of Existing Provisions - The current criminal price discrimination provision, section 50(1)(a), is not adequate to address anticompetitive price discrimination. The economic analysis in Part I concludes that whether there is any possibility that price discrimination will have an anticompetitive effect will depend on the facts of each case. The current provision does not require a discriminating supplier to have market power, a prerequisite to true discrimination, nor does it require any assessment of the effect of discrimination on competition. More specifically, it does not accurately reflect the legitimate bases upon which customers may be treated differently. The economic analysis in Part I suggests that only differences in the costs of serving different customers rather than simply differences in quantity and quality, should be adopted as the standard. The requirement that discrimination relate to articles of like quality and quantity are partial and imperfect proxies for the different costs of serving customers. To this extent the provision is over-inclusive.

At the same time, by failing to include discrimination in services and discrimination in forms of transactions other than sales, the provision excludes important areas of economic activity in the contemporary marketplace. In its present form, the criminal price discrimination provision is not an accurate tool for addressing anticompetitive behaviour and imposes excessive compliance and monitoring costs on business. Because price discrimination is a criminal offence, this chilling effect is exacerbated.

Dealing with price discrimination as a species of abuse of dominance under section 79 has the potential to address some of the defects in the criminal price discrimination provision. The abuse provision incorporates the market power test which economic theory identifies as a prerequisite to discrimination and requires there to be an assessment of the effect of the discrimination on competition.

The abuse of dominance provision also provides a process which would permit the Competition Tribunal to achieve an accommodation of the prescriptions of economic theory and the interests of individual businesses in being protected against being discriminated against by their suppliers. The weight of economic theory suggests that the purpose of the Act should be the protection of competition in the interests of efficiency and not individual competitors and the purpose clause of the Act as well as many provisions in the Act reflect this emphasis. Nevertheless, the legislative history of section 50(1)(a), as well as the purpose clause of the Act, speak to the need to ensure, in the words of section 1.1, that competition be maintained in order to ensure “that small and medium-sized enterprises have an equitable opportunity to participate in the Canadian economy.” Under section 79, it would be up to the Tribunal to decide whether relief was appropriate given the effects on competition in general including any prejudice experienced by individual competitors in the context of particular cases.

Nevertheless, applying section 79 to price discrimination complaints faces several challenges. The approach to market power in the abuse provision may have to be adapted for price discrimination cases. Consideration will have to be given to the appropriate market share threshold. As well, thought will have to be given to how to assess competitive effects when the dominant firm operates in a different market from that in which the person who is affected carries on business. In practice, dealing with price discrimination under section 79 would be much less certain and predictable than the criminal price discrimination, though this problem is somewhat mitigated by the requirement for market power.

Adequacy of Price Discrimination Enforcement Guidelines - In their current form, the Price Discrimination Enforcement Guidelines are useful, though the Guidelines cannot fully correct for the defects in the criminal price discrimination provision to create a provision consistent with the economic analysis in Part I.

Some improvements are needed, however. Work needs to be done to revise the analysis of the circumstances in which price concessions are available and when a sale will be considered to have taken place. As well, although there is no technical impediment to applying section 79 to price discrimination, in order to ensure that price discrimination is routinely analyzed under the abuse provision, the Guidelines would have to be revamped to describe how this would be done in light of the issues raised in the preceding section.

Adequacy of Enforcement Activity - Without assessing the relative value of the Bureau’s many other activities, it is impossible to draw any definitive conclusion regarding the Bureau’s enforcement record with respect to price discrimination. One can say that the present criminal provision is sufficiently defective that, in pursuing its general mandate to protect competition, it is appropriate for the Bureau to adopt a very conservative enforcement approach in dealing with the relatively few complaints made regarding discriminatory pricing. With respect to taking cases under the abuse provision, there are a variety of questions which would arise with respect to how the Competition Tribunal would deal with a price discrimination case. It is not obvious that pursuing cases to resolve these questions would be a responsible use of the Bureau’s constrained resources, except perhaps where price discrimination is one of a number of alleged anticompetitive acts or the anticompetitive effect is substantial.

Predatory Pricing

Adequacy of Provisions - Because the case law does not provide a complete methodology for determining when the prices an alleged predator are unreasonably low under section 50(1)(c), the section is, potentially, very broad. Any intention to eliminate a competitor or the elimination of a competitor in fact, combined with low prices, may be sufficient for liability. While efficiency concerns might argue in favour of a regime which prevented below cost pricing which had the effect of eliminating more efficient, vigorous or innovative competitors, the existing provision protects all competitors, regardless of the overall effect on competition or efficiency. To this extent, the provision is in conflict with the economic analysis of predation.

Dealing with predation under section 79 avoids these problems. As prescribed by economic analysis in Part I, section 79 imposes market power as a threshold for obtaining relief. The abuse provision offers the lower civil burden of proof which may be important given the inherently contestable nature of claims regarding predation.

As well, section 79 requires an assessment of the effect on competition. The Tribunal would be able to consider not only whether there was a prospect of recoupment through supra-competitive pricing, but also the effects of predatory behaviour on the dynamic of competition in the market in which the predation took place. Such effects would include effect of the loss of particular competitors and their prospects for re-entry. The Tribunal could sort out the extent to which it was appropriate to take into account non-efficiency based considerations, such as the fairness of intentionally eliminating a competitor through low prices.

Nevertheless, section 79 does not provide a specific methodology for dealing with predation and the existing approach of the Tribunal to the critical concept of market power would have to be developed and adapted for use in predation cases. In particular, as suggested in the Predatory Pricing Enforcement Guidelines, there may be cases of predation where the predator has a market share below the rough 50 percent guide referred to by the Tribunal in its cases to date. As well, strategic behaviour on the part of the dominant firm plays a larger role in predation cases.

One possible hurdle to obtaining relief from the Tribunal is its expressed unwillingness to directly interfere with pricing decisions by firms. It may be reluctant to order a firm to cease specific pricing behaviour such by as setting a minimum price. Ordering a firm to simply stop predating would be virtually unenforceable. Some appropriate remedial approach would have to be developed before section 79 could be relied on as an effective way to deal with predation.

Adequacy of Predatory Pricing Enforcement Guidelines - The approach to enforcement taken in the Bureau’s Predatory Pricing Enforcement Guidelines is generally consistent with the factors indicating predation identified in Part I. Nevertheless, the Bureau may be setting a standard which is tougher than is appropriate in practice.

The two part test established in the Guidelines is a very high standard. The need to prove market power sufficient to permit recoupment to the criminal standard of proof, beyond a reasonable doubt, is very onerous, given the ultimately contestable nature of claims about market power. Obtaining good evidence of the alleged predator's costs will be extremely difficult in many circumstances, such as where the predator is extensively vertically integrated. In other circumstances, it will be impossible to obtain cost evidence without the exercise of formal search powers and the inability to demonstrate a credible prospect of recoupment may well make it impossible to take this step.

While reliance on intent evidence may relieve some of these problems, such evidence will not be available in some cases and in many others will be unreliable. In any case, the Guidelines suggest that intent will play a small role in the Bureau’s assessment.

The Predatory Pricing Enforcement Guidelines do not emphasize or provide guidance on the possible application of the newer theories suggesting a wider array of situations in which predation may be present. They do not fully reflect this new learning regarding how strategic barriers to entry may be identified and measured and how non-price benefits associated with a predatory strategy should be taken into account. Also, as discussed more fully below, the Guidelines do not address the challenges of the new economy specifically.

While section 79 could be used to deal with predation cases, as indicated above, there are a range of questions which would need to be resolved with respect to its application and these are not currently addressed in the Guidelines.

Adequacy of Enforcement - Prosecutions under the criminal predatory pricing provision have been rare and there has never been a successful application to the Tribunal in relation to predation. While it is impossible to draw firm conclusions regarding this enforcement record without considering the merits of competing priorities, there are some reasons to be concerned about it.

The Bureau’s approach in the Guidelines is in need of improvement if it is to be an accurate tool for assessing allegations of predation. As well, the Bureau’s case selection criteria appear to disfavour predation cases in two main ways. First, the case selection criteria give weight to a narrower range of predatory behaviour than the Guidelines and the economic analysis in Part I would suggest may exist. Second, because ACR's seem to be rarely successful in predation cases and, consequently, there is no alternative to a contested case with the attendant commitments of time and expense, predation cases will rank poorly under the management considerations factor. Finally, the lack of certainty regarding the law on predation argues in favour of the Bureau seeking to initiate predation cases more aggressively.

Price Maintenance

Adequacy of Existing Provisions - The present provision dealing with price maintenance is not designed to address only anticompetitive price maintenance based on the criteria suggested by economic analysis. Consequently, in its present form, it is not an accurate tool for taking enforcement action and likely imposes excessive compliance and monitoring costs on business. This chilling effect is exacerbated by the criminal nature of the offence of price maintenance.

The application of the existing abuse of dominance provision to price maintenance cases would require consideration of the market power of the person seeking to maintain prices and the effect on competition as suggested by the economic analysis in Part I. As noted in relation to price discrimination, it would require the Tribunal to consider the need to balance the interests of economic efficiency against the interest of businesses in being free from coercion by their suppliers on the facts of individual cases.

Relying on section 79 is not without challenges, however. Since section 79 is not specifically adapted to dealing with price maintenance cases, the development of some analytical framework taking into account the efficiency based explanations discussed in Part I would be necessary. It is not obvious that the market power requirement should be the same in price maintenance cases as in the cases dealt with by the Tribunal so far. The issue of question of how to deal with the anticompetitive effects in downstream markets would also need to be addressed.

Adequacy of Enforcement - Formal enforcement actions used to be very common with respect to price maintenance. The enforcement profile in Part III shows that this has changed dramatically. Formal enforcement actions during the Review Period were rare. During the same time period, the use of ACR’s as a substitute was remarkably successful.

Given the restricted focus of this study, an overall assessment of the Bureau’s enforcement record cannot be made. There would appear to be no compelling need to engage in more formal enforcement actions under the existing criminal provision as an alternative to ACR’s since the criminal provision is very clear and the subject of substantial case law. Consequently, the Bureau’s emphasis on ACR’s would seem to be appropriate.

Inevitably, dealing with price maintenance under section 79, imposing a market power requirement and permitting efficiency defences, would make it much more difficult to deal with price maintenance using the ACR approach. The requirement to gather sufficient information to make an accurate assessment, alone will greatly extend the period of time before ACR discussions can begin in many cases. Also, again in many cases, the existence of market power and efficiencies will be contestable conclusions in contrast to the relative certainty associated with proving that the very specific requirements in the current section 61 are met. From the perspective of compliance, resort to section 79 would be far less predictable.

In any case, the economic analysis in Part I suggests that addressing price maintenance under section 79 should yield more accurate enforcement activity than the per se approach in section 61. Consequently a cautious approach to the enforcement of section 61 is appropriate, focusing on price maintenance where there is a clear anticompetitive effect. The Bureau’s case selection criteria reflect this focus.

General Comments

Challenges of the New Economy

In the new economy, competition will continue to increase in intensity and the pace of technological change will continue to accelerate. In industries most affected by these trends, the challenge of accurately identifying and taking enforcement action against anticompetitive pricing behaviour will be daunting. The Bureau needs to ensure that its enforcement of the Competition Act reflects an appreciation of how these industries operate.

The competition policy analysis currently conducted by the Bureau recognizes dynamic efficiency considerations which will become increasingly important in assessing competitive effects in the context of the new economy. The structure of section 79 permits dynamic efficiency considerations to be taken into account. As well, the framework developed for interpreting the predatory pricing provision in the Predatory Pricing Enforcement Guidelines, takes into account dynamic efficiency. With respect to neither provision, however, has the Bureau spelled out how it will address dynamic efficiency in the specific context of the industries of the new economy. More importantly, the current per se criminal provisions dealing with price discrimination and price maintenance, on their face, provide little scope for a dynamic efficiency analysis. Accordingly, one may be concerned that these provisions are not well adapted to be responsive to the changes currently transforming the Canadian economy.

Marshaling Industry Specific Expertise

Through experience particular Bureau officers have gained an in depth understanding of particular industries but more effective marshalling of industry specific expertise at the Competition Bureau is critical to ensuring that officers are equipped to make accurate judgements on the high volume of complaints which were disposed of based on their analysis alone. The need for industry specific expertise is most pressing in relation to predation cases where the assessment of market dynamics is most complex. Enhanced industry specific expertise may also permit complaints to be processed in a more timely and cost effective manner.

The Limitations of Guidelines

Through its Price Discrimination Enforcement Guidelines and Predatory Pricing Enforcement Guidelines the Bureau has attempted to provide, for enforcement purposes, a coherent rationale for enforcing the criminal provisions dealing with price discrimination and predatory pricing. Despite some of the criticisms made above, for the most part, this has been a very effective approach to enforcement. Guidelines are significantly more cost effective than litigation for the purposes of clarifying interpretive uncertainty. They can deal with issues comprehensively and within an analytical framework, while decisions in individual cases contribute only incrementally to the understanding of the law and the analysis may be tied to the facts of each case. Guidelines increase the likelihood of consistent and accurate decision making by commerce officers making the difficult assessments of cases at the critical preliminary assessment stage. By disclosing a clear approach to enforcement, guidelines may facilitate ACR’s and, more generally, will ease the compliance burden for business.

Nevertheless guidelines have limits. Guidelines have no binding effect on the Bureau and provide no defence to private enforcement. They are not capable of correcting basic defects in the law. To the extent that the enforcement policy disclosed in guidelines is at variance with the provisions themselves, the guidelines are less reliable. As well, there is a risk that a gap will be created between the expectations about enforcement based on the provisions of the Act and enforcement activity based on the guidelines. We have found that there are several ways in which the Price Discrimination Enforcement Guidelines and Predatory Pricing Enforcement Guidelines adopt interpretations which stretch the provisions of the Act. When one examines the case selection criteria, one finds additional criteria not specified in the Act.

In order for guidelines and other voluntary compliance strategies to be successful, they must be accompanied by formal enforcement activity to show that enforcement is a credible threat and to clarify the law. By showing the defects in the law, formal enforcement encourages law reform.

Formal enforcement may be useful in relation to pricing practices. There are significant differences between what economic theory would prescribe and the criminal provisions dealing with anticompetitive pricing. In part, this is because the pricing provisions were designed to protect certain categories of competitors from activities of other competitors perceived to be unfair, rather than the promotion of overall economic efficiency. These conflicts between the protection of competitors and the promotion of efficiency should be resolved in the courts, before the Tribunal or though legislative reform.

Admittedly, the litigation alternative is not a very efficient way of protecting competition, exposing problems with the law or clarifying its operation and would impose enormous resource demands on the Bureau. One possible solution may be to permit private access to the Tribunal.

Improved Communications Strategy

The Bureau needs to find a more effective communications strategy to make the Act and the role and practice of the Bureau better understood by the business community and the public. While the work of the Bureau has become significantly more transparent in the past few years, interviews conducted for this study revealed that substantial work remains to be done. Promoting better understanding of its interpretation and analysis would encourage compliance, enhance the legitimacy of the Bureau’s activities and provide a basis for informed public discussion of the extent to which Canada’s competition law dealing with anticompetitive pricing is adequate.

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