INDU Committee Report
If you have any questions or comments regarding the accessibility of this publication, please contact us at accessible@parl.gc.ca.
Anticompetitive Pricing Practices and the Competition Act: Theory, Law and Practice, a report written by Professors J. Anthony VanDuzer and Gilles Paquet of the University of Ottawa, is a response to the Government of Canada’s request for a review of the selective pricing provisions of the Competition Act. These include price discrimination (section 50(1)(a)), predatory pricing (section 50(1)(c)), price maintenance (section 61), and, as it relates to pricing, abuse of dominant position (section 79). This report addresses the appropriateness of the Act in the context of the contemporary economy, the interpretations of the Act by both the Competition Bureau and the Competition Tribunal, and the Bureau’s enforcement, management and administration of the Act’s provisions.
The report assembles, explains, and addresses both conventional and contentious contemporary economic views on these pricing practices and how they are treated by the Act, the Bureau and the Tribunal. Perhaps the greatest and most novel contribution of the report is its analysis of the Bureau’s management of these pricing practices and legal provisions in light of present declining enforcement resources. The Bureau has apparently adapted its guidelines and enforcement policy to match contemporary economic theory where the law has failed to do so. The report is, however, somewhat critical of the lack of clarity and comprehensiveness of the Bureau’s guidelines on these pricing practices and the management of criteria chosen to respond to complaints.
In general, the report is critical of the use of criminal sanctions in dealing with these pricing practices, believing that such treatment is unwarranted in light of contemporary thinking and, in any case, is not effective in identifying anticompetitive cases. While the report does not mention or provide any examples of cases where anticompetitive behaviour have gone unpunished, it clearly indicates that the law could be applied to many cases that are in fact procompetitive. The excessive compliance and monitoring costs that are imposed on the business community by the present situation have a chilling effect on innovative pricing strategies.
The report recommends that: (1) the Act should be amended to comply with contemporary economic thinking; (2) the bulk of these pricing practices should be moved from the criminal to the civil reviewable section of the Act, specifically to the abuse of dominant position provision; (3) the abuse of dominant position provision should be modified in accordance with (2); (4) the Bureau’s guidelines should be updated and clarified; (5) the Bureau’s enforcement criteria should be reviewed for balance; and (6) the Bureau’s resources in the area of in-house industry specialists should be bolstered.
Price discrimination is practised by a supplier of goods or services when different prices are charged to different customers (whether other businesses or final consumers) for the same product and when these price differentials do not accurately reflect differences in costs of serving the different customers. Three conditions are necessary for a firm to be said to discriminate:
1. The firm must have market power to set prices (otherwise consumers can choose to purchase from a competing supplier).
2. The firm must be able to identify classes of consumers with different price sensitivities (i.e. price elasticities of demand).
3. There is limited opportunity for consumers to resell to each other (otherwise consumers would arbitrage these prices to the lower price offered).
Price discrimination is not inherently anticompetitive; much depends on the specific circumstances. It is often procompetitive to charge different prices to different consumers when there are different costs attached to serving them (in the same way as volume and quantity discounts imply different costs and are not anticompetitive in and of themselves). Price discrimination might also result in additional sales to consumers, for example, children and seniors who would not otherwise purchase the product.
The authors of the report are critical of the fact that though the civil provisions dealing with the ultimate discriminatory act, refusal to deal, and behaviour equivalent to price discrimination, such as tied selling, require a consideration of the impact of the behaviour on competition, section 50, price discrimination and predatory pricing, does not. Section 50 has been subject to very few criminal prosecutions, three since 1984. In each case the accused pleaded guilty. Many elements must meet the criminal standard of being beyond the reasonable doubt and, therefore, convictions would be hard to come by. The provision’s ineffectiveness has not led to any judicial decisions that would provide guidance on how to interpret it. As a result, there has been a "chilling effect" even on suppliers considering innovative pricing strategies that have no anticompetitive impact.
Dealing with price discrimination as a type of abuse of dominance under section 79 could overcome some of the defects in the present criminal provision. Treating price discrimination as a matter subject to civil review would be consistent with how the Act deals with other vertical behaviour. The abuse of dominance provision incorporates the market power test that economic theory requires as a prerequisite to discrimination, and further requires an assessment of how the discrimination affects competition. The application of section 79 to price discrimination complaints would face several difficulties, however. For example, the approach to market power in the abuse of dominance provision might have to be adapted for these cases. A test of alternative sources of supply, such as in the refusal to deal provision, might also be required in order to assess the impact of the alleged discrimination on competition.
Predatory pricing occurs when a firm temporarily lowers its prices in an attempt to deter market entry by new competitors or to drive out or discipline existing competitors. In all three cases, the predator incurs temporary losses in the expectation, at the very least, of recouping them by raising prices later. Prior to the 1980s, predation was regarded by most economists as extremely rare; the barriers to entry in most markets were seen to be low. Consequently, the high prices required in the post-predatory period to recoup the losses suffered in the predatory period would not be sustainable in the face of new entrants. Moreover, predation would be very expensive because the "prey" would be aware that it was costly for the predator to finance its losses. Indeed, the prospects of eventual profits would be enough to make the prey hold on (in the case of efficient capital markets), if only to see the predator attempt to buy him out. Only in the extremely rare event that the predator had greater and better access to external capital would a predatory campaign pay off; however, a takeover or merger would likely be a more successful way of monopolizing the market.
Several elements must be established before the offence of predation can be proven. The alleged predator must be engaged in a business and have adopted a policy of selling products at prices that are unreasonably low. The terms "policy" and "unreasonably low" have both raised difficult issues of interpretation. One of four requirements must be met with respect to a policy: (1) it must have the effect or tendency of substantially lessening competition; (2) it must have the effect or tendency of eliminating a competitor; (3) it must be designed to substantially lessen competition; or (4) it must be designed to eliminate a competitor.
Prosecutions under the criminal predatory provision have been rare and there has never been a successful application to the Tribunal with regards to predation. The high number of complaints regarding predatory behaviour and the strong concerns raised by some independent business organizations interviewed, suggest that a more complete response is required. Furthermore, one should be concerned with the relatively low priority likely to be accorded predation cases under the Bureau’s selection criteria, which appear to be biased against pursuing them.
Designing a test for predation is more difficult than doing so for other anticompetitive pricing practices. It is one thing to describe predatory behaviour, it is quite another to distinguish its devastating effects from the effects of aggressive competition, even where substantial resources are employed. One thing seems clear, the existing criminal provision is inadequate for providing relief. Dealing with predatory pricing under section 79 would be one solution to the problem. Section 79 establishes market power as a threshold for obtaining relief and it requires the lower civil burden of proof, which may be important given the inherently contestable nature of the claims surrounding predation.
Price maintenance is the practice whereby a firm tries to set a minimum price at which another firm down the manufacturer-wholesaler-retailer distribution chain can sell its product. Resale price maintenance is one of the most pervasive restraints in the marketplace. It may take place either vertically, for example between a wholesale supplier and a retailer that resells the supplier’s products, or horizontally, for example between competitors who agree to impose resale price maintenance on those who resell their products.
The economic rationale for prohibiting horizontal price maintenance is more obvious. Where suppliers agree among themselves to set the resale price of their products, price competition among downstream competitors is precluded. It may be that the resale price is more visible to the suppliers than their own prices, suggesting that resale price maintenance may facilitate collusion amongst suppliers. The prohibition of horizontal price maintenance agreements under section 61 is therefore appropriate.
The economic rationale for prohibiting vertical price maintenance under competition law is that it lessens competition by restricting the ability of the retailer to compete on price. It leads to higher prices for consumers and higher margins for retailers, while at the same time protecting inefficient retailers that might not succeed in a truly competitive environment. On the other hand, there are procompetitive motivations for vertical price maintenance. Resale price maintenance could enhance economic efficiency when supplemental pre-sales and post-sales services were required and there was a "free rider" problem with some retailers. In this context, the additional services are thought to be paid for by the additional sales they generate. The market for these efficiency enhancing sales services could, however, be destroyed by discount retailers who lured away customers who had been informed or had benefited from the pre-sales services provided by full-service retailers.
The present provisions dealing with price maintenance suffer from some of the same deficiencies as those identified in relation to price discrimination. The current provision is not designed to address only anticompetitive price maintenance according to criteria suggested by contemporary economic analysis. Consequently, it is not an accurate tool for enforcement and likely imposes excessive compliance and monitoring costs on the business community. The subsequent chilling effect is exacerbated when price maintenance is treated as a criminal offence. Analyzing vertical price maintenance under the abuse of dominance provision, section 79, would provide better prospects for incorporating legitimate defences for this practice since market power and the impact of the practice on competition would be taken into consideration.