Archived — Information Bulletin on the Abuse of Dominance Provisions as Applied to the Telecommunications Industry
June 6, 2008
Table of contents
- Part 1 Introduction
- Part 2 Market definition
- 2.1 Role of market definition in abuse of dominance cases
- 2.2 Determining appropriate price levels – Avoiding the cellophane fallacy
- 2.3 Relevant product market definition
- 2.4 Relevant product market definition in the telecommunications industry
- 2.5 Relevant geographic market definition
- 2.6 Relevant geographic market definition in the telecommunications industry
- Part 3 Market power assessment
- Part 4 Anti-competitive acts
- Part 5 Substantial lessening or prevention of competition
- Part 6 Remedies
- Part 7 Conclusion
- Appendix A
Part 1 Introduction
1.1 Purpose and scope of this bulletin
The telecommunications industry is in transition from being governed by sector-specific regulation to laws of general application. This Bulletin (the "Bulletin") is part of the Competition Bureau's (the "Bureau") continuing effort to maintain a transparent and predictable enforcement policy. It describes the Bureau's approach under the abuse of dominance provisions (sections 78 and 79) of the Competition ActFootnote 1 (the "Act") with respect to conduct in the telecommunications industry to the extent that the Canadian Radio-television and Telecommunications Commission ("CRTC") has made a determination to refrain from regulating such conduct.Footnote 2
Nothing in this Bulletin deviates from the enforcement approach outlined in the Enforcement Guidelines on the Abuse of Dominance Provisions.Footnote 3 This telecommunications-specific Bulletin was developed by the Bureau, in consultation with staff members of the CRTC.Footnote 4
1.2 The Canadian telecommunications industry
The structure of the telecommunications industry is complex. Service providers often rely upon having access to important components of a competitor's network to provide an end-to-end service to their customers. The CRTC has a regulatory framework under which certain facilities, functions and services are made available by incumbent local exchange services to competitors at regulated rates. At the same time, suppliers are often fully-integrated service providers able to offer the same range of service and competing for the same customers. As technical innovations are introduced, firms are finding niches to provide select services, while others are integrating packages or bundles of services together to attract customers.
Over the past twenty years, the telecommunications industry has migrated from a monopoly service delivery model to a more competitive sector with multiple suppliers. Since the early 1980s, Industry Canada has licensed multiple suppliers of mobile and fixed wireless telecommunications services and the CRTC has opened almost all telecommunications markets to competition. In addition, the CRTC has forborne from economic regulation of most telecommunications services, including terminal equipment; toll; mobile wireless; interexchange private lines; retail Internet; international services; wide area networking; local exchange services in most urban areas; and certain other data services.
Moving further from a regulated to a competitive environment will have a significant impact for many in the industry, requiring all parties to adjust to the general competition framework of the Act. Given the complex relationships that exist within the industry and the history of competitive disputes that the CRTC has considered, the Bureau may receive a significant number of complaints within this sector. Where one firm, or group of firms, has market power, careful scrutiny needs to be given to the conduct of such firm or firms which may substantially lessen or prevent competition, e.g., impeding or preventing effective competition in a market by existing or potential competitors.
1.3 The abuse of dominance provisions
To the extent that the CRTC has forborne from regulating conduct related to a telecommunications service or class of services, complaintsFootnote 5 that a firm with market power has engaged or is engagingFootnote 6 in a practice of anti‑competitive acts can be dealt with under the abuse of dominance provisions contained in sections 78 and 79 of the Act.Footnote 7
Under the Act, where the Commissioner is satisfied, on the evidence obtained through an investigation, that the elements of the abuse of dominance provisions are met, the Commissioner may make an application to the Competition Tribunal (the "Tribunal")Footnote 8 for adjudication of the matter. Only the Tribunal can issue a remedial order(s) to address a Part VIII reviewable practice under the Act.
Subsection 79(1) of the Act sets out the three elements that must exist for the Tribunal to make a finding that a firm (or group of firms) has abused its dominant position and issue a remedial order(s):
- one or more persons substantially or completely control, throughout Canada or any area thereof, a class or species of business;
- that person or those persons have engaged, or are engaging, in a practice of anti‑competitive acts; and
- the practice has had, is having, or is likely to have the effect of preventing or lessening competition substantially in a market.
The first element requires the definition of a relevant product market(s) (i.e., a "class or species of business") and a relevant geographic market(s) (i.e., "throughout Canada or any area thereof"). It also requires a finding of market power or dominance (i.e., that "one or more persons substantially or completely control" the relevant market). The second element requires a practiceFootnote 9 of anti‑competitive acts (i.e., an act "…whose purpose is an intended negative effect on a competitor that is predatory, exclusionary or disciplinary"Footnote 10 ). The third element places the focus of the inquiry squarely on the effects, or likely effects, of the act(s) on competition, rather than on individual competitors. Appendix A contains the full text of sections 78 and 79 of the Act.
1.4 Abuse of dominance in the telecommunications industry
Certain characteristics of the telecommunications industry warrant particular consideration in determining whether abuse of dominance has occurred. Generally, the telecommunications industry is a network industry with large sunk costs and significant economies of scale, density, and scope, implying that some firms are likely to have larger market shares than might be typical in non-network industries.Footnote 11 Interconnection, both among competitors in the same market and across market boundaries (i.e., call termination), is widespread and in many respects necessary for firms to compete. Proper definition of the relevant market in the telecommunications industry poses particular challenges because the sector is dynamic, shaped by constant and rapid technological change. Finally, certain acts are more likely to be the subject of an abuse of dominance complaint in the telecommunications industry, given the nature of the sector.Footnote 12
1.5 Organization of this bulletin
This Bulletin, which applies to abuse of dominance complaints in the telecommunications industry, is organized into seven parts and one appendix as follows:
- Part 2 sets out the Bureau's approach to the definition of the relevant product and geographic markets.
- Part 3 sets out the Bureau's approach to assessing market power.
- Part 4 sets out the Bureau's approach to identifying an act as anti‑competitive.
- Part 5 sets out the Bureau's approach to determining whether a practice has had, is having, or is likely to have the effect of preventing or lessening competition substantially in a market.
- Part 6 describes the remedies that can be ordered to address an abuse of dominance.
- Part 7 provides concluding comments.
- Appendix A contains the text of sections 78 and 79 of the Act.
Part 2 Market definition
2.1 Role of market definition in abuse of dominance cases
As noted in section 1.3 above, market definition is necessary to establish the first element of subsection 79(1), namely, that one or more persons substantially or completely control, throughout Canada or any area thereof, a class or species of business. The overall objective of market definition is to identify a set of buyers that could potentially face increased market power as a result of the alleged anti‑competitive act(s). A precondition for assessing market power is identifying existing competitors that are likely to constrain the ability of the firm or group of firms to profitably raise priceFootnote 13 or otherwise restrict competition. Such competitors are identified by their provision of alternative products or geographic sources of supply to which buyers would be willing and able to substitute if the price for the product were to rise above competitive levels.
The boundaries of a market for competition analysis are delineated using the "hypothetical monopolist" framework to determine the smallest group of substitute products and the smallest geographic area that a firm must control such that a profit-maximizing firm (the hypothetical monopolist) would have an incentive to implement a small, but significant and non-transitory increase in price (referred to as a "SSNIP")Footnote 14 above the price level that would prevail absent the alleged anticompetitive act(s). The alleged anti‑competitive acts effectively provide the initial candidate product and geographic market in which the acts have the potential to maintain or enhance market power. These acts also identify the time period during which it is alleged that the firm exercised any such market power.
2.2 Determining appropriate price levels – Avoiding the cellophane fallacy
As a practical matter, the way market definition principles are applied in abuse of dominance cases can differ from merger cases and forbearance analyses in that abuse cases are typically retrospective in nature while merger and forbearance analyses are typically prospective. Where potentially anti‑competitive conduct may lead to a substantial prevention of competition, it may be that an abuse case will involve prospective analysis as well.
In allegations of abuse of dominance, a SSNIP refers to an increase in price above the level that would prevail absent the alleged anticompetitive act(s) rather than actual prevailing levels. Using the prevailing priceFootnote 15 could lead to overly broad definitions of product markets. This is because products that appear to be in the market based on the prevailing price may not be considered substitutes at levels that would occur absent the alleged anticompetitive act(s). The same is true for geographic market definition. This problem was first identified in a case in the United States involving the producers of cellophane and is therefore referred to as the "cellophane fallacy."Footnote 16
The potential for the cellophane fallacy necessitates an evaluation of whether, and if so the extent to which, the prevailing price differs from the price that would prevail absent the alleged anticompetitive act(s). Market definition in allegations of abuse of dominance is therefore considerably more complicated than, for example, most merger cases because it involves the often difficult task of identifying "but for" prices. The Bureau ideally would begin this assessment by estimating the approximate price level for the product in the absence of the alleged practice of anti‑competitive acts.
In recently deregulated telecommunications markets, there may be added difficulty in assessing evidence and data. For example, in an abuse of dominance analysis, the Bureau may consider evidence, such as business plans, strategic documents and data, during both the regulated and forborne time periods.
2.3 Relevant product market definition
As noted in section 2.1 above, product market definition involves identifying whether there are close substitutes for the product in question such that a sufficient number of buyers would switch to these substitutes in the event of a SSNIP. If there are, these substitute products will be included in the relevant product market.
In assessing whether products are close substitutes for one another, what matters are the characteristics of the product and consumers' ability and willingness to switch from one product to another.Footnote 17 Direct evidence of switching behaviour in response to a SSNIP (i.e., price changes and concomitant quantity changes) indicates substitutability.Footnote 18 In the absence of direct evidence, a number of factors may assist in determining product substitutability. These include the views, strategies, behaviour and identity of buyers and sellers or other market participants; end-use or functional interchangeability of the products; physical and technical characteristics of the products; switching costs; and other impediments to trade.Footnote 19
A relevant product market consists of the smallest group of products in regard to which a "hypothetical monopolist" of all sources of supply that are regarded as close substitutes by buyers, could impose a SSNIP. In some cases, buyers in separate such product markets may face the same competitive alternatives in two or more such groups of products.Footnote 20 The Bureau will "aggregate" product markets where such aggregation simplifies the analysis and likely leads to the same conclusion as treating them individually.Footnote 21
2.4 Relevant product market definition in the telecommunications industry
A number of issues related to product substitutability are particularly likely to arise, or to be relevant, in the telecommunications industry.
For example, in considering an allegation of abuse of dominance by a firm in its provision of local residential telephone service, the Bureau would first assess the willingness and ability of consumers to substitute to other local residential telephone services provided by different technologies (e.g., circuit switched, IP, and wireless technologies) to determine whether the services provided by these technologies are in the same product market. As part of this exercise, the Bureau would consider whether there are characteristics of a particular local residential telephone service (e.g., reliability and clarity) that sufficiently differentiate it from other local residential telephone services such that customers are unlikely to switch in response to a SSNIP. The Bureau would also consider whether there are costs involved in switching that would make switching a less likely response to a SSNIP. Examples of such switching costs include penalties associated with terminating an existing contract before it expires; service charges associated with migrating to another service provider; and new equipment that is required to use a similar service offered by a competitor (e.g., a wireless phone handset).
Bundling is a market definition issue that is often relevant in the telecommunications industry. Footnote 22 A bundle is an offering of a package of services at a price benefit compared to the price of the individual services in the package taken on a stand-alone basis. A bundle could include any number of communications services, such as video; high-speed Internet access; wireless, long distance and/or local telephony services; and optional local services. Generally, bundling of multiple communications services gives rise to the possibility that the relevant product market will be defined as the bundle. Whether the market is defined as the bundle depends on whether there is a significant enough difference in cost to consumers between buying a bundle and buying each service independently. A bundle is a separate product market if consumers would not turn to separate services if the bundled price increased by a SSNIP. If that is the case, relevant markets could be defined around bundles.
In practice, there are numerous different bundles of communications services, each appealing to various groups of consumers. If one service provider's bundle is differentiated from others on the basis of a key service that other providers cannot offer, reluctance on the part of consumers to forego this key service and substitute between bundles may create an incentive for a hypothetical monopolist to impose a SSNIP.
In many cases, however, the services offered in the bundle are simply a function of the intelligence of the network/technology, and other providers can access the appropriate software on similar terms to provide that service as part of their bundle. In such cases, it is unlikely that such services will be sufficient to differentiate one supplier's bundle from another. If this is the case, the Bureau will treat all similar, but slightly differentiated bundles as a single product market.Footnote 23
2.5 Relevant geographic market definition
For the purpose of geographic market definition, what matters is the ability and willingness of consumers to switch from suppliers at one location to suppliers in another location in response to a SSNIP. A relevant geographic market consists of the smallest region within which a "hypothetical monopolist" of all sources of supply that are regarded as close substitutes by buyers, could impose a SSNIP.Footnote 24
In the absence of direct evidence of switching behaviour in response to a SSNIP, a number of factors may assist in ascertaining consumers' willingness to switch between suppliers in different locations. These generally include the views, strategies, behaviour and identity of buyers; trade views, strategies and behaviour; switching costs; transportation costs; price relationships and relative price levels; shipment patterns; and foreign competition.Footnote 25
2.6 Relevant geographic market definition in the telecommunications industry
For many telecommunications services, the provision of the service is tied to a location such that the number of competitive alternatives that are available to consumers can differ depending on where they live or carry on business.Footnote 26 In such cases, consideration of demand-side substitution would likely result in relevant geographic markets based on specific locations if subscribers to services provided in one location were not willing to substitute to services supplied at a different location. Prima facie it may seem very unlikely that a subscriber at one location would cancel service there and substitute to access at another location in the face of a SSNIP. If this is true, then every location is a relevant geographic market and only suppliers that can provide access to that location are in the market.
The Bureau generally aggregates locations that have the same competitive alternatives (within the product market) for the relevant telecommunications services into a single geographic market.Footnote 27 The overlapping geographic coverage, or footprint, between the dominant firm and competing networks is a key fact to consider. Where there are differences in the geographic coverage of competing networks (i.e., "holes"), there may be consumers with differing competitive alternatives.Footnote 28 In such cases, it may be necessary to also look at the factors listed in section 2.5 in order to ascertain whether a hypothetical monopolist would impose a SSNIP with respect to such customers. If the imposition of a SSNIP is not likely and the geographic area corresponding to any hole is very small, the Bureau will aggregate the area of the hole and the area of the overlapping footprint into a single relevant geographic market. If the hole is not very small, it would likely comprise a separate geographic market.
For telecommunications services that are not tied to the location of a customer's residence or place of business (e.g., mobile telecommunications, terminal equipment), the analysis of geographic market would proceed immediately to the factors described in section 2.5.
Part 3 Market power assessment
3.1 Role of market power assessment in abuse of dominance cases
Having defined the relevant market, the next step is to assess whether a firm or group of firms possesses market power in that market (i.e., that one or more persons substantially or completely control the relevant market). Market power is defined with respect to the ability of a firmFootnote 29 to profitably cause one or more components of competition to significantly deviate from competitive levels for a sustainable period of time (i.e., impose a SSNIP). It is then necessary to identify all competitors and assess the extent to which they actually or potentially constrain any market power that the firm in question might otherwise possess.
Given the difficulty inherent in measuring market power directly, the Bureau also relies upon a number of indirect indicators – both qualitative and quantitative – of market power. These indicators include, but are not necessarily limited to, the following:
- market share;
- barriers to entryFootnote 30 ; and
- other market characteristics, such as the extent of technological change and countervailing power.
Each of these is discussed in more detail below.
3.2 Market share
An important factor in assessing market power, along with barriers to entry, is market share. The Bureau's view is that high market share is usually necessary, but not sufficient, to establish market power.Footnote 31 In the contested abuse of dominance cases heard to date, the market shares of the dominant firms were very high, suggesting that in these instances customers had few alternatives to choose from in the event that the dominant firm increased price above competitive levels.Footnote 32
Market share can be measured in terms of dollar sales; demand units such as minutes, lines or circuits; or capacity. If products in the relevant market are homogeneous and firms are all operating at capacity, market shares based on dollar sales, demand units or capacity should all yield similar results. As products are more differentiated, market shares based on dollar sales, demand units and/or capacity increasingly differ. The Bureau therefore collects information necessary to calculate market share on all of these bases. This is discussed in greater detail in section 3.5.
3.3 Barriers to entry
As noted above, high market share does not determine market power. Without barriers to entry, any attempt by a firm with high market share to exercise market power is likely to be met with entry or expansion such that the firm would lose enough customers to its rivals that it would not be profitable to attempt to raise prices above competitive levels. Barriers to entry can include significant economies of scale; sunk costs; regulatory barriers; long-term contracts; market maturity; and the reputation of incumbents.
Entry must be timely, likely and sufficient before it can constrain the exercise of market power. Timely means that entry will occur relatively quickly;Footnote 33 likely refers to the expectation that entry will be profitable; and sufficient means that entry would deter firms from raising prices by a significant amount. If entry is timely, likely and sufficient, then attempts to exercise market power by a firm will be unsuccessful as entry creates substitute products for consumers. In assessing barriers to entry, the Bureau will also consider the possibility of supply-side substitution. This includes potential service providers that would incur relatively substantial sunk costs to enter the market or expand their operations.
A thorough entry analysis will involve consideration of all possible barriers to entry. However, in telecommunications markets, certain barriers to entry are more common than others. These include sunk costs, regulatory barriers, IP rights,Footnote 34 economies of scale, network effects, long-term contracts and market maturity.
In telecommunications, sunk costs can be a large fraction of the costs to build or upgrade a network for the purpose of offering a particular service or services. Regulatory barriers can include any federal, provincial and municipal regulations that affect a firm's ability to enter a market or expand its operations. Foreign ownership restrictions, access to rights of way, allocation of spectrum, and other regulatory obligations imposed on providers of particular services may also constitute barriers to entry. Network effects occur in the telecommunications industry where the value of a product or service increases as more customers use that product or service.Footnote 35 Long-term contracts refer to commercial agreements binding a firm and its customers to the agreement for an extended period of time. The maturity of the market being assessed is relevant because in general, it will be more difficult to enter a mature market and compete with firmly entrenched players (i.e., incumbents may enjoy good reputations and close relationships with customers, which can be significant barriers to entry).
3.4 Other market characteristics
The Bureau will consider other factors in assessing market power. Factors other than market share and barriers to entry that are particularly important to the assessment of telecommunications markets are the extent of countervailing power, and technological change and innovation.
In determining whether a firm has the ability to exercise market power, the Bureau assesses whether one or more customers have a countervailing ability to constrain an exercise of market power. For example, large business customers may be able to constrain the ability of a firm to exercise market power if these customers can switch to other service providers in a reasonable timeframe, vertically integrate their operations, induce the expansion of existing service providers, or encourage the entry of potential service providers.Footnote 36
The Bureau also takes into account the nature and extent of change and innovation in a relevant market in assessing market power. A firm may not have market power, or its market power may be short-lived, if there is rapid change in the technologies used to produce the relevant products or services, or there is rapid change in the type of services offered.
In addition to technological change and innovation in products and processes, an assessment is made of the general impact on competition of the nature and extent of other forms of change and innovation. These include change and innovation in relation to distribution, service, sales, marketing, packaging, buyer tastes, purchase patterns, firm structure and the regulatory environment. The stage of market growth is also informative since entry into start-up and growing markets is less difficult and time-consuming and the dynamics of competition generally change more rapidly than in mature markets. Evidence of a rapid pace of technological change and the prospect of firms being able to "innovate around" or "leapfrog over" an apparently entrenched position by the incumbent firm is an important consideration.
3.5 Assessing market power in telecommunications markets
In many telecommunications markets, the provision of the service is tied to a location and the number of competitive alternatives that are available to consumers can differ depending on where they live or carry on business. In such cases, the Bureau believes that capacity within the relevant market, including network coverage, typically represents an important measure of market power, as the mere presence of a competing service provider with the ability to serve customers may have a larger impact on an incumbent service provider than revenues would suggest. Unused capacity enhances the incentive and ability of a service provider to compete for customers in response to a price increase by the allegedly dominant firm. Network coverage is an important component of capacity in that it represents the ability of a service provider, due to its physical presence, to offer service to customers of the allegedly dominant firm. When substantial excess capacity remains in a market that allows firms to easily increase supply in response to an increase in price, the ability to raise price above competitive levels may be considerably lower than what a simple concentration measure based on sales might suggest.Footnote 37
In addition, a firm that owns or controls a network and is not operating in the relevant market but can enter in a timely manner without incurring relatively substantial sunk costs will be considered in the market when assessing market power.Footnote 38 Such entrants could feasibly add capacity to the relevant market in response to a SSNIP in order to discipline an exercise of market power.Footnote 39 An example of this is a network requiring some technical upgrade to offer a competing service.
Part 4 Anti-competitive acts
Having defined the relevant product and geographic markets and determined that a firm or group of firms has market power, the second element required under subsection 79(1) is to establish that the firm or group of firms in question has engaged in or is engaging in a "practice of anti‑competitive acts." The jurisprudence has established that a "practice" under section 79 can encompass one occurrence that is sustained or systematic over a period of time, or a number of different acts taken together.Footnote 40
The Federal Court of Appeal has confirmed that "(a)n anti‑competitive act is one whose purpose is an intended negative effect on a competitor that is predatory, exclusionary or disciplinary."Footnote 41 In keeping with this interpretation, the Bureau will generally find that acts that fall into one or more of the following general categories are potentially anti‑competitive:
- acts to raise rivals' costs (or reduce rivals' revenues);Footnote 42
- predatory conduct; and
- acts to facilitate coordinated behaviour among firms (facilitating practices).Footnote 43
Certain types of anti‑competitive acts may be more common in, or perhaps even unique to, the telecommunications industry. The following sections describe activities that may form the basis of complaints under section 79 in the telecommunications industry and outlines the approach that the Bureau will typically adopt when it is considering whether a dominant firm is engaging in a practice of anti‑competitive acts. However, as with the general anti‑competitive acts described in section 78 of the Act, the activities listed here are non-exhaustive in terms of potentially anti‑competitive behaviour.
4.2 Raising rivals' costs and market foreclosure
As noted in the Enforcement Guidelines on the Abuse of Dominance Provisions, a dominant firm may undertake a number of strategies that raise the costs of a rival, or reduce a rival's revenues, thereby making the rival a less effective competitor. For example, it may raise rivals' costs by engaging in practices that hinder or deny current or potential rivals access to the inputs necessary to compete, and so have the effect of excluding competitors (market foreclosure). It could do so through, for example, e.g. exclusive contracts that deny rivals access to efficient distribution or retailing.
Within the telecommunications sector, competitive entry can follow a number of models – facilities-based entry, entry via unbundled network elements, resale and sharing, or a combination of these methods. Footnote 44 Facilities-based entry involves competition between at least two facilities-based service providers (e.g., local exchange services). Entry via unbundled network elements involves entry by service providers that may own parts of their own network but also rely on regulated access to elements of the incumbent's network in order to offer their products to consumers (e.g., where local telecommunications access is provided using the unbundled loops of an incumbent).
Conduct by the dominant firm to disrupt compatibility, to reduce the quality of the service offered by its rivals or raise the costs of its rivals is potentially an anti‑competitive act. Under the facilities-based entry model, many of the opportunities for a potentially dominant firm to raise the costs of its rival may be absent since the entrant's network operates, to a large part, independently from that of the incumbent firm. Many of the remaining opportunities for a dominant firm to disadvantage its rivals may involve conduct that remains subject to regulation (e.g., number portability, interconnection, and access to support structures).
There are, however, other potentially anti‑competitive acts available to a firm with market power facing facilities-based competition. They include, but are not limited to:
- creating artificial switching costs;
- acquiring control of suppliers of an input needed to compete; and
- requiring or inducing suppliers of an input needed to compete to not supply its rival.
The unbundled network elements model, whereby the entrant relies upon access to the incumbent's facilities to complete its network, raises a different set of concerns. Under this model, the CRTC will have mandated access by competitors to facilities of the dominant firm under its statutory authority. Consistent with the Bureau's Technical Bulletin on "Regulated" Conduct (and past Bureau practice), the Bureau may seek a remedy against a dominant firm that has refused access, or is providing discriminatory access, to an unregulated facility.
A different issue could arise in a market with competing facilities-based service providers when a third party is unsuccessful in its attempts to negotiate access to a facility that it requires in order to supply its services. In those circumstances, the denial of access to the facility would not necessarily raise concerns under the abuse of dominance provisions if there are alternative suppliers of the service, or where there are legitimate business justifications underlying the refusal. That said, if all (or a significant proportion) of the facilities-based competitors are engaged in a joint denial of access, the Bureau would examine the reasons underlying the decision by each facilities-based supplier to refuse access to the service to determine whether any or all of those refusals are for an anti‑competitive purpose. If the denial of access is found to be a coordinated refusal to exclude or discipline the third party, it may constitute an anti‑competitive act. However, this behaviour might more properly be addressed under either the conspiracy or the refusal to deal provisions of the Act.
4.2.1 Margin squeezing
A specific example of raising rivals' costs that is a source of frequent complaint in the telecommunications sector is margin squeezing. Paragraph 78(1)(a) of the Act describes the anti‑competitive act of "…squeezing, by a vertically integrated supplier, of the margin available to an unintegrated customer who competes with the supplier, for the purpose of impeding or preventing the customer's entry into, or expansion in, a market." Margin squeezing can take different forms. Examples of squeezing include:
- the supplier raises the wholesale price relative to the retail price, thus squeezing the margin between the wholesale and retail prices;
- the wholesale price remains the same but the supplier lowers the retail price, compelling his or her customer/competitor to follow suit; and
- a new retail service is introduced at a low price relative to the existing wholesale service.
From a competition policy perspective, the mere observation of margin erosion is not sufficient to support a conclusion that a dominant firm has engaged in an anti‑competitive act. The fact that margins are being squeezed may speak to the vigour of competition in the market concerned, and does not necessarily reflect a predatory, exclusionary or disciplinary purpose.Footnote 45
In considering the overall effect of any anti‑competitive act, the Bureau will examine the underlying purpose of the act. Specifically, the Bureau will consider whether the act is based on justifiable business practices that would be found in otherwise competitive markets.Footnote 46 For example, if a vertically integrated dominant firm sells a wholesale service to both competitors and large business end-users, an increase in the wholesale price may not constitute an anti‑competitive act even if it impedes the ability of unintegrated competitors to compete with it in the downstream (retail) market. This would be the case if an examination of the evidence showed that the primary reason for the price increase was increased costs as a result of serving large business end-users, even though that sector does not compete in retail markets.
4.2.2 Denial of access to a facility
An example of potential market foreclosure is denying access to facilitiesFootnote 47 that are not subject to regulation by the CRTC.Footnote 48 For the purposes of section 79 of the Act, such a denial must constitute an anticompetitive practice that has resulted, results or is likely to result in a substantial lessening or prevention of competition. It is not concerned with the exercise of any inherent market power, including that which may result from the ownership of the facility.Footnote 49
In an allegation of abuse of dominance involving denial of access to a facility, the conduct at issue would be an actual or constructiveFootnote 50 denial of access to the facility. In this context, the denial could refer to a facility that a firm had access to prior to the denial, or to a facility to which the firm has never had access. For such a denial to raise an issue under the Act, the following conditions must be present:
- A vertically integrated firm that has market power in the downstream (or retail) market for which the facility is an input in the time period following the denial.
- A denial of access to the facility has occurred for the purpose of excluding competitors from entering or expanding in the downstream market or otherwise negatively affecting their ability to compete.
- The denial has had, is having or is likely to have the effect of substantially lessening or preventing competition in the downstream market.Footnote 51
The Bureau's analysis begins with an assessment of downstream market power, once the denial has occurred. In cases where downstream firms do not currently have access, the ability and incentive of the allegedly dominant firm to impose a SSNIP in the downstream market will depend on the extent of barriers to entry, which in turn depends in part on the extent of upstream market power.Footnote 52 For example, if upstream market power exists and it is very difficult or impossible for downstream competitors to duplicate the facility or obtain it from other sources, a denial of access to that facility would create a very high barrier to entry at the downstream level, and hence result in downstream market power as a result of the denial. An assessment of downstream market power will also depend on the willingness and ability of consumers to obtain the product or service from alternative downstream providers that do not rely on the facility in question.
With a finding of market power, a denial of access is an anti‑competitive act when its purpose is to exclude or impede actual or potential competitors. If it is difficult or impossible for those competitors to substitute other inputs or to practically or reasonably duplicate the facility, such that it is reasonably foreseeable that a denial of access would result in their exclusion or impedance in the downstream market, this purpose can generally be inferred. The requirement that it is not practical or feasible for a competitor to duplicate the facility means that such an entrant would not find it feasible to enter, expand, or compete effectively if it had to self-supply the facility. At the same time, the purpose would not be anti‑competitive if there is a credible and valid business justification for the denial, such as if the reason access was denied was because it would be prohibitively expensive to build the necessary capacity to supply competitors. The creation or preservation of vertical efficiencies could also qualify as a valid business justification.
Before the Tribunal is able to issue any remedial order under section 79, it must be shown that the practice of anti‑competitive acts has had, is having, or is likely to have the effect of preventing or lessening competition substantially in the downstream market. Accordingly, if control of the facility is a source of market power in a downstream market and the denial of access has been for an anti‑competitive purpose, the Bureau's "but for" analysis would then focus on whether the denial of access likely leads to substantially less competition downstream than would occur absent the denial. If, absent the denial, the dominant firm would sell access to the facility, the "but for" analysis would entail assessing the competitive conditions that would prevail if the dominant firm were charging the profit-maximizing access price to downstream competitors.Footnote 53 This concept is discussed in greater detail in Section 5.
4.3 Predatory and targeted pricing
Predatory pricing involves a firm deliberately setting prices to incur losses for a sufficiently long period of time to eliminate, discipline, or deter entry by a competitor, in the expectation that the firm will be subsequently able to recoup its losses by charging prices above the level that would have prevailed in the absence of the impugned conduct, with the effect that competition would be substantially lessened or prevented.
In considering a complaint of predation under section 79, the challenge is separating instances of true predatory conduct (i.e., conduct that results in the maintenance or enhancement of market power and a substantial lessening or prevention of competition) from competitive behaviour. The risk is that by wrongly pursuing activity that is truly pro-competitive, beneficial pricing behaviour will be unnecessarily constrained, to the detriment of both the target of the complaint and, most importantly, consumers.
In matters involving alleged predatory conduct, the Bureau will examine the following questions:Footnote 54
- Is it likely that the alleged predator will be able to exercise market power after a period of predatory pricing?
- Is the complainant's business in the relevant market unprofitable, or is it likely to become unprofitable, and is this unprofitability attributable to the predatory conduct that is alleged?Footnote 55
- Is the allegedly predatory price below average avoidable cost?
- Are there business justifications for pricing below average avoidable cost?Footnote 56
In assessing a predation complaint, the Bureau will consider the impact of continued regulation in other telecommunications markets. For instance, the incentives to engage in predation in one geographic market to either create a reputation or signal that entry into other markets would not be profitable may not exist if recoupment in those markets is not possible because of continued and effective regulation. On the other hand, if regulation allows costs of providing unregulated services to be passed on to customers of the regulated service, the regulated firm may have an unusually credible threat to predate in those unregulated markets by cross-subsidizing.Footnote 57
The Bureau will also consider whether a practice of pricing is allegedly "targeted." "Targeted pricing" refers to the practice of offering certain customers a significantly better price than charged previously, or that deviates from what it usually charges other customers in the market, in order to either win or retain the customer in the face of a more competitive offer; i.e., where the price is allegedly targeted at customers of the alleged victim(s), the costs to the firm of lowering prices are smaller than under a uniform pricing policy.
In the context of telecommunications, to the extent that the dominant firm can identify customers who have switched to competitors, it may have an incentive to "win back" the customer by offering a better price. In these cases, it is necessary to determine whether the dominant firm has the information necessary to target customers, whether doing so would significantly deviate from its current pricing structure, and whether the practice increa ses barriers to entry. If there are fixed and sunk costs associated with customer acq uisition, then the effect of targeted pricing can result in exit from, o r may deter entry into, the market as these costs are not recovered by the entrant. In addition, if an entrant expects to face targeted pricing, it may not find it worthwhile to sink the costs necessary to enter the market as a whole.
In its decision in Tele-Direct, the Tribunal discussed the inherent difficulty in establishing objective criteria that can distinguish between targeted pricing that is harmful and that which is beneficial competitive conduct.Footnote 58 The Tribunal noted that the closest analogy to the concept of targeting is predation and that the cost-revenue test used in predation cases provided an objective standard for distinguishing competitive pricing from predation. Should the targeted price exceed average avoidable cost, the Bureau would require considerable ancillary evidence in support of the claim that the conduct of targeting constituted an anti‑competitive act before it would consider pursuing the matter further.
From a competition law perspective, bundling may raise enforcement issues under the Act in limited circumstances. Consumers generally benefit from bundling because it typically offers them a package of products at better prices than are otherwise available. It may also prompt competitors to broaden their product offerings in order to maintain as complete a set of products as that of their competitors.
Bundling could prompt concerns if it is used as a means to raise the costs for rivals or, in the alternative, as a means by which to engage in predation. In terms of raising rivals costs, a practice of bundling may meet the competition law definition of tied selling.Footnote 59 In this context, if it is shown that the practice is impeding entry or expansion of firms offering some or all of the bundled services, or is having some other form of exclusionary effect, it could constitute an anti‑competitive act.Footnote 60 By way of example, a long-term contract that is required in conjunction with the sale of a bundle could constitute an anti‑competitive act if it is designed to raise rivals' costs. With respect to predation, the practice of bundling could be viewed as an anti‑competitive act when a firm offers below avoidable cost pricing for the bundle of products. An assessment of such a situation is complicated by the assignment of costs across multiple markets.
Part 5 Substantial lessening or prevention of competition
Paragraph 79(1)(c) requires that "the practice [of anti‑competitive acts] has had, is having, or is likely to have the effect of preventing or lessening competition substantially in a market." The focus of the inquiry at this stage is on the impact of the practice in question on competition, not on competitors. The Bureau analyzes a potential substantial lessening or prevention of competition using a "but for" test: "but for" the practice in question, would there be substantially greater competition in the relevant market, in the past, present, or future?Footnote 61 The Tribunal has agreed that a relative assessment of whether the relevant markets would be substantially more competitive in the absence of the impugned practice, rather than an absolute assessment of whether the prevailing level of competition is sufficient, is required.Footnote 62
More specifically, a substantial lessening or prevention of competition is an effect that significantly preserves or enhances barriers to entry and/or expansion and, more generally, maintains or enhances market power. In examining whether barriers to entry are preserved or enhanced the Bureau will focus on whether the practice in question has materially altered the prospects or feasibility of entry, such as whether, "but for" the practice in question, an effective competitor or group of competitors could have emerged within a reasonable period of time to challenge the market power of the firm responsible for that practice.Footnote 63
There are a variety of other considerations in determining whether or not there has been a substantial lessening or prevention of competition, such as whether or not consumer prices might be significantly lower, or product quality, innovation, or choice significantly greater, in the absence of the practice.
Part 6 Remedies
6.1 Alternative case resolutions
If the Commissioner, having investigated a complaint of abuse of dominance, is satisfied that the evidence supports an application to the Tribunal for a remedy, the Commissioner will present to the parties any preliminary concerns regarding the alleged contravention of the Act. The parties are afforded the opportunity to respond to the Commissioner's concerns and can propose alternative means of addressing those concerns in order to avoid an application to the Tribunal.
Resolution of these matters is dealt with on a case-by-case basis. In most circumstances, the Commissioner's preference would be to have a remedy agreed upon by the parties affirmed in a consent agreement pursuant to sections 105 and 106 of the Act. In instances where an alternative (non-litigious) course of action has been adopted to resolve competition issues, the Commissioner will make the resolution public to ensure that all interested parties have been informed of the fact that the matter has been resolved.
6.2 Orders of the Competition Tribunal
Where, on application by the Commissioner, the Tribunal finds that the elements of subsection 79(1) are met, it may make an order prohibiting a respondent firm or firms from engaging in the practice of anti‑competitive acts. In addition, or alternatively, if the Tribunal finds that an order prohibiting the continuance of the practice is not likely to restore competition in the affected market, the Tribunal may, pursuant to subsection 79(2), make an order directing any such actions, including the divestiture of assets or shares, as are reasonable and necessary to overcome the effects of the practice of anti‑competitive acts.
In some cases, the Tribunal has explicitly ordered access to certain facilities or services.Footnote 64 However, access will not improve competitive performance in a market if it is provided at a prohibitive price.Footnote 65 The Tribunal has stated that it does not function as a price regulator, such as through ongoing oversight of rates or access price setting. The Bureau also does not have the legislative mandate to act as a binding price regulator in access disputes. Having said that, the level of the access price would usually be an important consideration in assessing whether a firm is in compliance with the order to provide access.Footnote 66
Subsection 79(2) gives the Tribunal broad discretion in making orders, and in limited circumstances this has included orders specifying formulas for setting prices.Footnote 67 However, such orders do not involve ongoing oversight and instead specify what would constitute compliance with the order. Specific disputes over what would constitute "reasonable" access prices could be resolved through third-party mediation or arbitration.
Part 7 Conclusion
This document outlines the Competition Bureau's approach to enforcing the abuse of dominance provisions contained in sections 78 and 79 of the Act.
The Bureau cannot, however, provide guidance for every situation and the circumstances of each case will ultimately determine how the Bureau will exercise its enforcement discretion. Under its Program of Written Opinions, the Bureau has historically provided its views on proposed actions by businesses. Consequently, telecommunications companies can seek advice on whether or not a proposed course of action would raise an issue under the Act.
For further information, contact the Competition Bureau:Information Centre
50 Victoria Street
Gatineau, QC K1A 0C9
Toll free: 1-800-348-5358
TDD (for hearing impaired): 1‑866‑694‑8389
Fax on demand: 819-997-2869
Web site: www.competitionbureau.gc.ca
The Abuse of Dominance Provisions of the Competition Act (Sections 78 and 79)
78. (1) For the purposes of section 79, "anti‑competitive act", without restricting the generality of the term, includes any of the following acts:
- squeezing, by a vertically integrated supplier, of the margin available to an unintegrated customer who competes with the supplier, for the purpose of impeding or preventing the customer's entry into, or expansion in, a market;
- acquisition by a supplier of a customer who would otherwise be available to a competitor of the supplier, or acquisition by a customer of a supplier who would otherwise be available to a competitor of the customer, for the purpose of impeding or preventing the competitor's entry into, or eliminating the competitor from, a market;
- freight equalization on the plant of a competitor for the purpose of impeding or preventing the competitor's entry into, or eliminating the competitor from, a market;
- use of fighting brands introduced selectively on a temporary basis to discipline or eliminate a competitor;
- pre-emption of scarce facilities or resources required by a competitor for the operation of a business, with the object of withholding the facilities or resources from a market;
- buying up of products to prevent the erosion of existing price levels;
- adoption of product specifications that are incompatible with products produced by any other person and are designed to prevent his entry into, or to eliminate him from, a market;
- requiring or inducing a supplier to sell only or primarily to certain customers, or to refrain from selling to a competitor, with the object of preventing a competitor's entry into, or expansion in, a market;
- selling articles at a price lower than the acquisition cost for the purpose of disciplining or eliminating a competitor;
- acts or conduct of a person operating a domestic service, as defined in subsection 55(1) of the Canada Transportation Act, that are specified under paragraph (2)(a); and
- the denial by a person operating a domestic service, as defined in subsection 55(1) of the Canada Transportation Act, of access on reasonable commercial terms to facilities or services that are essential to the operation in a market of an air service, as defined in that subsection, or refusal by such a person to supply such facilities or services on such terms.
The Governor in Council may, on the recommendation of the Minister and the Minister of Transport, make regulations
- specifying acts or conduct for the purpose of paragraph (1)(j); and
- specifying facilities or services that are essential to the operation of an air service for the purpose of paragraph (1)(k).
R.S., 1985, c. 19 (2nd Supp.), s. 45; 2000, c. 15, s. 13.
79. (1) Where, on application by the Commissioner, the Tribunal finds that
- one or more persons substantially or completely control, throughout Canada or any area thereof, a class or species of business,
- that person or those persons have engaged in or are engaging in a practice of anti‑competitive acts, and
- the practice has had, is having or is likely to have the effect of preventing or lessening competition substantially in a market,
the Tribunal may make an order prohibiting all or any of those persons from engaging in that practice.
(2) Where, on an application under subsection (1), the Tribunal finds that a practice of anti‑competitive acts has had or is having the effect of preventing or lessening competition substantially in a market and that an order under subsection (1) is not likely to restore competition in that market, the Tribunal may, in addition to or in lieu of making an order under subsection (1), make an order directing any or all the persons against whom an order is sought to take such actions, including the divestiture of assets or shares, as are reasonable and as are necessary to overcome the effects of the practice in that market.
(3) In making an order under subsection (2), the Tribunal shall make the order in such terms as will in its opinion interfere with the rights of any person to whom the order is directed or any other person affected by it only to the extent necessary to achieve the purpose of the order.
(3.1) Where the Tribunal makes an order under subsection (1) or (2) against an entity who operates a domestic service, as defined in subsection 55(1) of the Canada Transportation Act, it may also order the entity to pay, in such manner as the Tribunal may specify, an administrative monetary penalty in an amount not greater than $15 million.
(3.2) In determining the amount of an administrative monetary penalty, the Tribunal shall take into account the following:
- the frequency and duration of the practice;
- the vulnerability of the class of persons adversely affected by the practice;
- injury to competition in the relevant market;
- the history of compliance with this Act by the entity; and
- any other relevant factor.
(3.3) The purpose of an order under subsection (3.1) is to promote practices that are in conformity with this section, not to punish.
(4) In determining, for the purposes of subsection (1), whether a practice has had, is having or is likely to have the effect of preventing or lessening competition substantially in a market, the Tribunal shall consider whether the practice is a result of superior competitive performance.
(5) For the purpose of this section, an act engaged in pursuant only to the exercise of any right or enjoyment of any interest derived under the Copyright Act, Industrial Design Act, Integrated Circuit Topography Act, Patent Act, Trade-marks Act or any other Act of Parliament pertaining to intellectual or industrial property is not an anti‑competitive act.
(6) No application may be made under this section in respect of a practice of anti‑competitive acts more than three years after the practice has ceased.
(7) No application may be made under this section against a person
- against whom proceedings have been commenced under section 45, or
- against whom an order is sought under section 92
on the basis of the same or substantially the same facts as would be alleged in the proceedings under section 45 or 92, as the case may be.
R.S., 1985, c. 19 (2nd Supp.), s. 45; 1990, c. 37, s. 31; 1999, c. 2, s. 37; 2002, c. 16, s. 11.4.
79.1 The amount of an administrative monetary penalty imposed on an entity under subsection 79(3.1) is a debt due to Her Majesty in right of Canada and may be recovered as such from that entity in a court of competent jurisdiction.
2002, c. 16, s. 11.5.
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