VanDuzer Report - Part 4

Elements of a Competition Regime - Summary and Conclusions

Introduction

Dealing effectively with anticompetitive pricing is fraught with challenges. Both identifying pricing behaviour that is anticompetitive and designing legal rules which permit effective and timely enforcement actions are difficult. In this part, we summarize the results of our review and draw some conclusions regarding the Canadian rules on anticompetitive pricing and their enforcement.

Conclusions Regarding Specific Types of Anticompetitive Pricing Practices

Price Discrimination

Adequacy of Existing Provisions - There is no question that the current criminal price discrimination provision is not adequate to address anticompetitive price discrimination. The economic analysis in Part I concludes that price discrimination is not anticompetitive in many circumstances. 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 the discriminating supplier to have market power, a prerequisite to true discrimination, nor does it require any assessment of the effect of discrimination on competition. 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.

This conclusion may be supported by reference to a specific problem with the current criminal provision which was disclosed in the study. Section 50(1)(a) 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.

Certain elements of the existing provision do require consideration of factors that the economic analysis in Part I suggests are relevant. The requirement for a policy of price discrimination screens out price discrimination that is transitory, perhaps as a consequence of changes in supply or demand or to meet price changes by competitors. The requirement that non-discriminatory pricing be “available” to competitors is also consistent with economic theory. So long as either is present, there is no true discrimination.

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. Treating price discrimination as a matter subject to civil review would be consistent with the manner in which other vertical behaviour is dealt with in the Act. 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.

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. A test which specifically takes into account the availability of alternative sources of supply, as in the refusal to deal provision,²⁷⁸ may need to be developed for assessing competitive effect. 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. It is not clear whether even substantial effects on a single or small number of firms would justify a finding of substantially lessening competition under the abuse provision.

Dealing with price discrimination under section 79 would be much less certain and predictable than the criminal price discrimination in practice. There are two answers to this legitimate concern. First, compliance costs will increase only for market participants who have sufficient market power to meet the threshold for the application of the provision. Even these firms need to worry about their behaviour only if it meets the substantial lessening of competition test. While such a test is admittedly less certain and predictable than the requirements of the current provision, it is a higher threshold and similar to standards in the Act’s other civil provisions. For the vast majority of firms without market power, section 79 will have no application, so their compliance costs will be much less than under the current regime. Second, the approach taken under section 79 would be at least as predictable as the current standard in the U.S. and Europe and could be fleshed out by Tribunal decisions.

Dealing with price discrimination under the abuse of dominance provision 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 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. The Tribunal would have to discern the appropriate solution based on a weighing of the various elements of the purpose clause. The Interac case, in which there were numerous interventions before the Tribunal, is a good example of the use of the Tribunal to resolve complex issues where there are competing interests at stake.²⁷⁹ Tribunal decisions would provide guidance for similar cases. Compared to the existing per se rules for price discrimination, it is more likely to provide better results in more cases and will minimize the competition and efficiency chilling effects associated with the current over inclusive per se rule.

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 referred to above to create a provision consistent with the economic analysis in Part I. Some improvements may be made, however.

Work needs to be done to revise the Guidelines to render them more consistent with the Competition Act. The current approach to “availability” of price concessions requires that an offer of a price concession be made by a supplier in some circumstances. It is difficult to square such an interpretation with the statute. Also, the approach taken to the interpretation of sales needs to be reconsidered. The Guidelines create exemptions for enforcement purposes for transactions involving affiliates, franchise systems and international volume discounts which require an interpretation of sale that the is inconsistent with established jurisprudence. At least with respect to affiliates, this is not simply a technical issue. There may be good reasons for exempting sales between affiliated businesses; the terms of such sales may not mirror arm’s length commercial relationships. In some such situations, however, discrimination in favour of affiliates may have anticompetitive effects.²⁸⁰ A blanket exemption for enforcement purposes is hard to justify.

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 and to ensure a break with any tendency to deal with price discrimination primarily through the criminal provision which we concluded may exist on the basis of the statistical profile in Part III.

Adequacy of Enforcement Activity - The statistical profile of enforcement activity shows that no formal enforcement actions were taken during the Review Period and few have ever been taken. Recent initiatives to deal with complaints through alternative case resolutions had only limited success in relation to price discrimination. Few price discrimination complaints were dealt with under the abuse of dominance provision.

Without assessing the relative value of the Bureau’s many other activities, it is impossible to draw any definitive conclusion regarding this enforcement record. Nevertheless, 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. A more cost effective strategy would be to make better use of ACR’s. Given the clear terms of the criminal provision, it is not clear why such a strategy could not be more successful.

Predatory Pricing

Adequacy of Provisions - Designing rules to deal effectively with predation is the thorniest problem related to anticompetitive pricing practices. The effects can be devastating but are extremely difficult to distinguish from the effects of aggressive competition, even with the expenditure of substantial resources. One thing seems clear, the existing criminal provision, suffers from some serious defects as an instrument to provide relief in circumstances where predation exists.²⁸¹

The requirement for the alleged predator to be selling at prices which are unreasonably low in section 50(1)(c)²⁸² is very vague. The limited case law does not provide a complete methodology for determining when prices are unreasonably low. As discussed below, the Predatory Pricing Enforcement Guidelines respond to this concern, though there are various ways in which they may be improved as discussed below.

In the absence of such a framework, the section itself is 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 based on efficiency.

Dealing with predation under section 79 is one solution to 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, it 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.

The abuse provision would also permit account to be taken of the particular conditions in the marketplace, including the factors discussed in relation to the new economy in Part I. Where a market was characterized by high levels of innovation, declining costs and network effects, low pricing which eliminated a competitor might nevertheless be found to be pro-competitive, where the pricing was part of a strategy to introduce a new and better technology and any dominance which resulted was unlikely to be sustained in the face of future innovation.

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, the nature of market power may well be different in predation situations as compared to other cases of abuse of dominance. Strategic behaviour on the part of the dominant firm would play a larger role.

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 as by 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, they may set a standard which is tougher than is appropriate in practice.

There are several reasons for this concern. 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 provide guidance on the possible application of the newer theories regarding 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, the Guidelines do not address the challenges of the new economy specifically.²⁸³

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 could be usefully addressed in the Guidelines. The Guidelines do not, however, address how predation may be dealt with under section 79.

A final difficulty with the Guidelines is that the approach taken by the Bureau in the Guidelines has not been forthrightly adopted and applied by the courts. The Guidelines indicate that predatory intent, without the structural and dynamic market characteristics which would make recoupment likely and predation rational, is unlikely to be sufficient to found a case. Such an approach does not fully reflect the words of section 50(1)(c) which refer to eliminating a competitor and a design to substantially lessen competition or eliminate a competitor. The Bureau’s approach recognizes the practical reality that direct evidence of intent is scarce and unreliable and that efficiency may not require the protection of particular competitors. Prosecuting cases based on intent alone also runs the risk of punishing unsuccessful predation which benefits the consumer, at least temporarily, in the form of lower prices. Nevertheless, possible inconsistencies between the Guidelines and the Act render the Guidelines less effective. This point is discussed in more detail below.

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, though predation was one of the allegations in NutraSweet. Again, without assessing the relative value of the Bureau’s many other activities, it is impossible to draw any definitive conclusion regarding this enforcement record. Because the tests set out by the Bureau, in general, are consistent with economic analysis, some would argue that nothing needs to be done claiming that the absence of formal enforcement proceedings simply reflects the reality that predation is rare and recognizes that the risk of being wrong is that the Bureau’s intervention will succeed only in forcing consumers to pay more. Given the number of complaints regarding predatory behaviour and the strong concerns raised by some independent business organizations interviewed for this study, this does not seem a complete response, particularly since as argued above, 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, one may be concerned about the relatively low priority likely to be accorded to predation cases under the Bureau’s case selection criteria which 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.

There are several factors arguing in favour of the Bureau seeking to initiate predation cases more aggressively. The lack of certainty regarding the law on predation is a significant concern. Formal enforcement proceedings would force the courts and the Tribunal to progressively refine the law, making clear its appropriate application, signal the seriousness of the Bureau’s intent to enforce it and expose the weaknesses in the law which would, in turn, facilitate law reform. Increasing certainty brought about by greater formal enforcement activity by the Bureau would encourage greater interest in private actions under section 36. These issues are discussed in more detail below.

Price Maintenance

Adequacy of Existing Provisions - The present provisions dealing with price maintenance suffer from some of the same defects as those identified above in relation to price discrimination. The current provision 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.

With respect to all forms of vertical price maintenance, the economic analysis in Part I indicates that suppliers should be able to take advantage of efficiency based defenses, such as encouraging customers to devote more resources to the provision of customer service. Under section 61, where a supplier refuses to supply or otherwise discriminates against a customer because of the customer’s low pricing policy, there are various defences which go some way to providing efficiency based defences. There is no obvious reason that these defences should be restricted to refusal to supply as opposed to all resale price maintenance activities. It may, nevertheless, be preferable to have more open ended categories given the impossibility of exhaustively listing all possible efficiency defenses.

The current provision treats as a criminal offence efforts by anyone to induce a supplier to refuse to supply a customer because of the customer’s low pricing policy. Where the person making such efforts is a competitor of the customer, the motivation may often be anticompetitive. Nevertheless, the effect on competition will depend on the effort being successful, circumstances in the downstream market and the presence of an efficiency based justification for the supplier’s action. So even here, an assessment of the effect on competition would appear to be warranted and the per se treatment of all attempts by competitors to induce refusal to supply is over- inclusive based on economic efficiency considerations.

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. Dealing with price maintenance under the abuse provision would be consistent also with the manner in which other vertical restraints are dealt with under the Competition Act. 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 for dealing with price maintenance cases, 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. As a consequence, in the interest of certainty, guidelines addressing these issues should be considered before section 79 is chosen as the preferred enforcement approach. A final disadvantage associated with dealing with price maintenance under section 79 is that it is substantially less certain than the current criminal provision. The impact that this may have on enforcement is discussed in the next section.

Horizontal price maintenance is unambiguously anticompetitive and it is appropriate to prohibit it on a per se basis as in the present provision, though consideration should be given to developing an enforcement policy and possibly guidelines to address the relationship between horizontal price maintenance and the conspiracy provision.

Adequacy of Enforcement - Formal enforcement actions used to be very common with respect to price maintenance; it represented one of the success stories for the Bureau. 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 is no compelling need to engage in formal enforcement proceedings 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 defenses, 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 of 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. The reduction in predictability will be somewhat offset for market participants who are not dominant, since the section has no application in such circumstances.

It may be as well that dealing with price maintenance under section 79 would reduce the ability of the Bureau to negotiate ACR’s, because it will remove the stigma of a possible criminal conviction reducing the Bureau’s negotiating leverage. This may be offset somewhat, because it will be easier to approach an alleged perpetrator where only civil sanctions may be threatened.

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 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

Responding to the Challenge 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.

One way of doing so would be to work toward developing greater industry specific expertise as discussed below. Another would be to ensure that emphasis is placed on taking into account the dynamic operation of markets over time rather than short term effects. Such an approach will affect conclusions regarding the changes to the nature and durability of dominance in some sectors.

One characteristic of innovation driven markets is that the innovator will be dominant, at least for a time, where, for example, the innovator succeeds in establishing its product as a standard. The establishment of a standard may be beneficial to consumers. A second characteristic of such markets, however, is that the market power needed to successfully engage in many types of anticompetitive pricing practices will be elusive because such markets are characterized by declining barriers to entry and persistent threats to dominance from new products and technology. Any standard will not be sustainable in the long term since standards themselves are a significant site of competition. This has direct implications for the manner in which market power assessments are conducted under the abuse of dominance provision and under the Predatory Pricing Enforcement Guidelines.

The competition policy analysis currently conducted by the Bureau recognizes dynamic efficiency considerations in many situations. 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, is based on 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.

Marshalling Industry Specific Expertise

Through experience particular Bureau officers have gained an in depth understanding of particular industries but greater efforts need to be made to capitalize on this accumulated wisdom and to develop it. Recently, the Civil Branch arranged to obtain information on a regular basis from the Mergers Branch related to the waste industry. This sort of information exchange as well as applying expertise held by particular individuals in different branches should be encouraged and supported.

The importance of improving industry specific expertise stems from a range of factors disclosed in this study. The Bureau's basic role as an investigative agency is to respond to complaints. This encourages an intensive examination of the current situation subject of the complaint but may discourage consideration of longer term trends.²⁸⁴ Yet it is precisely such trends that may be most relevant to assessing the likely competitive impact of a particular behaviour. Sensitivity to dynamic changes in industries is both more difficult and more important given the current radical transformation taking place in some industries as the Canadian marketplace responds to the challenges of the new economy. Pricing strategies are becoming more sophisticated and the environment for many businesses is evolving quickly in response to accelerated technological change and network effects.

More effective marshalling of industry specific expertise at the Competition Bureau is critical to ensuring that Bureau officers are equipped to make accurate judgements on the high volume of complaints they deal with. As the statistical profile in Part III shows, most pricing cases are resolved, in one way or another, before complaints become projects based on an officer's preliminary assessment. As a consequence, it is at this stage that the impact of competition law will be experienced by many market place participants and so priority must be attached to maximizing the likelihood of an accurate assessment at this stage. Enhanced industry specific expertise may also permit complaints to be processed in a more timely and cost effective manner.

The need for industry specific expertise is most pressing in relation to predation cases where the assessment of market dynamics is most complex, in part, because of the need to take into account strategic behaviour by the alleged predator, such as behaviour related to its reputation. As well, not only must the Bureau take into account the dynamics of the market in which the predation is alleged, but also other markets in which the alleged predator is active. An appreciation for what has happened and what is likely to happen in an industry makes assessments about the credibility of predation simpler and more likely to be accurate. In some cases in which it was determined not to proceed, for example, it may be useful to monitor the market in which the predation was alleged to have been occurring. Gathering this type of information would permit better understanding of the competitive process in a particular industry and the possible application of some of the newer theoretical rationales for predatory strategies.

Enhancing industry specific expertise does not mean that a case should be considered on anything other than its own merits. Rather, it would allow more accurate assessments of what is going on in a particular situation based on past experience and a sophisticated appreciation of current and likely future developments. The challenge is to create effective strategies to better develop and lever such expertise.²⁸⁵

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 relating to the provisions of the Competition Act. As well, 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 who make 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 the 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. In the case of Predatory Pricing Enforcement Guidelines, the elaborate two step test for predation has not been fully endorsed in the limited case law. As well, the Guidelines downplay of the role of intent and the significance of eliminating competitors both of which are referred to in the criminal predatory pricing provision. The Price Discrimination Enforcement Guidelines adopt interpretations regarding when terms are available to competitors and when a sale occurs which have been criticized as inconsistent with the statute. 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. Such activity is needed both to show that formal enforcement is a credible threat and to clarify the law, whether by confirming the Bureau’s interpretation or by discrediting it. 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,²⁸⁶ exposing problems with the law or clarifying its operation. It is essential to acknowledge that increased litigation would impose enormous resource demands on the Bureau. The resource implications of increased formal enforcement activity would have to be addressed. One possible solution may be to permit private access to the Tribunal as recommended recently by Roach and Trebilcock.²⁸⁷

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.²⁸⁸ In particular, the independent business community seems to feel that the Bureau is not enforcing the Act in a manner which lives up to the promise of the purpose clause and the language of the pricing provisions. 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 are adequate.

Recommendations

Price Discrimination

1. In order to target anticompetitive conduct accurately, competition rules dealing with price discrimination

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(a) should apply to

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(i) all products, including articles and services,
(ii) all forms of transactions, not just sales,

(b) should not apply to

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(i) differential pricing by a supplier justified by differences in the cost to the supplier of serving different customers,
(ii) price differences which are a temporary expedient or a defensive competitive response,

(c) should take into account

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(i) the market power of the supplier, including the availability of alternative sources of supply, and
(ii) the competitive effects of the price discrimination.

2. Price discrimination should not be a criminal offence but should be subject to civil review.

3. Civil review could be accomplished under the abuse of dominance provision, section 79, in a manner consistent with recommendation 1, but revision of the criminal price discrimination provision, section 50(1)(a), should be considered in the next round of amendments to the Competition Act.

4. The Price Discrimination Enforcement Guidelines should be revised to

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(a) provide guidance regarding the application of the abuse of dominance provision, section 79, to price discrimination, including an analytical framework for the assessment of market power and competitive effect under section 79,

(b) modify the analysis of the circumstances in which price concessions are considered to be available to competing customers in a manner more consistent with the Act by revising the requirement that any concession unilaterally offered to one customer be offered to all others and

(c) modify the analysis of transactions between affiliates, sales to franchise systems and international volume discounts to more accurately reflect the commercial law definition of sales.

Predatory Pricing

5. In order to target anticompetitive conduct accurately, competition rules dealing with predatory pricing should take into account

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(a) the market power of the alleged predator including the prospect for the predator to recoup the costs of its low pricing policy,

(b) the degree to which the predator is selling below its costs and

(c) evidence of predatory intent.

6. Predatory pricing should not be a criminal offence but should be subject to civil review.

7. Civil review could be accomplished under the abuse of dominance provision, section 79, in a manner consistent with recommendation 5, but revision of the criminal predatory pricing provision, section 50(1)(c), should be considered in the next round of amendments to the Competition Act.

8. The Predatory Pricing Enforcement Guidelines should be revised to

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(a) provide guidance regarding the application of the abuse of dominance provision, section 79, to predatory pricing, including an analytical framework for the assessment of market power and competitive effect under section 79,

(b) expand the discussion of how firms may create strategic barriers to entry by their behaviour, such as by creating a reputation for predation, to reflect current economic thinking regarding the broader range of circumstances in which predation may occur and

(c) provide guidance on the application of the Guidelines to industries most affected by the accelerating pace of innovation and the other characteristics of the new economy.

9. The Bureau should consider adopting a more aggressive approach to initiating formal enforcement actions in predation cases, taking due account of budgetary implications and competing priorities.

Price Maintenance

10. In order to target anticompetitive conduct accurately, competition rules dealing with vertical price maintenance should take into account

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(a) the market power of the supplier, including the availability of alternative sources of supply, and

(b) the competitive effects of the price maintenance, including any efficiency based explanations.

11. Vertical price maintenance should not be a criminal offence but should be subject to civil review.

12. Civil review could be accomplished under the abuse of dominance provision, section 79, in a manner consistent with recommendation 10, but revision of the criminal price maintenance provision, section 61, should be considered in the next round of amendments to the Competition Act.

13. Consideration should be given to the development of guidelines regarding the application of section 79 to price maintenance cases, including an analytical framework for the assessment of market power and competitive effect under section 79.

14. Consideration should be given to developing guidelines to address the relationship between the current criminal provision, section 61, as it applies to horizontal price maintenance, and section 45, dealing with conspiracies and agreements to lessen competition.

General Recommendations

15. The apparent conflicts between the promotion of efficiency and the protection of competitors which exist in some circumstances under the existing criminal provisions dealing with price discrimination, predatory pricing and price maintenance should be resolved by the courts, the Competition Tribunal or through legislative reform.

16. The Bureau should ensure that its guidelines, policies and practices regarding enforcement give appropriate emphasis to dynamic efficiency considerations and the characteristics of the new economy including (i) high rates of innovation, (ii) marginal costs declining or zero for additional units of output, (iii) the possible desirability of market dominance by a firm where it sets a new industry standard and (iv) the increasingly fragility of dominance.

17. The Bureau should increase its efforts to develop industry specific expertise in order to ensure that officers are equipped to make accurate assessments in a timely manner.

18. The Bureau should develop a more effective communications strategy to promote better understanding of the Competition Act provisions and the activities of the Bureau regarding anticompetitive pricing, with a view to encouraging compliance, enhancing the legitimacy of the Bureau's activities and providing an informed basis for public discussion.

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Part III | Table of Contents | Appendices