INDU Committee Report
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COMPETITION
AND COMPETITION
POLICY IN CONTEXT
The purpose of competition policy and competition law … is to protect competition and economic efficiency, not to protect competitors. It’s to protect the efficiency of the process, not the existence or the viability of individual companies. [Roger Ware, 52:9:45]
Competition law is essentially a back-up. If the market runs beautifully, the Commissioner should be asleep. … The reality is the market does not work on a perfectly good self-sustaining basis and there are competitors who will seek to fix prices. There are competitors who will exercise their market power in ways that are unacceptable to society and we simply have to hit them … and say "no." [William Stanbury, 47:16:05]
As a general law of general application … one of the implications … is that it is a very blunt instrument. [Lawson Hunter, 46:9:25]
Two major economic forces are shaping the world economy as we move into the third millennium: globalization and innovation. "Globalization" is the growing economic and political integration and interdependence of countries as a result of trade, investment, movement of persons and the dissemination of knowledge. Multinational enterprises have been at the centre of this globalization process. These seemingly denationalized and borderless corporations, encouraged by recent advances in transportation and communications technologies, have begun to outsource the manufacture and assembly of selective non-core components of their complex products to affiliates and strategic allies across national borders, thereby taking advantage of the new trade environment sweeping the globe. The business sectors of most industrialized countries have thus internationalized their activities, resulting in an intricate web of linked activities around the world.
Today’s knowledge-based economy, although still in its infancy, is proving to be fast-paced and spurred by product, technology and organizational innovation. Anecdotal evidence is all around us: product lifecycles are becoming shorter and shorter all the time; new, largely computer-assisted technologies resulting from the digital microprocessing revolution are proliferating in all aspects of business from the factory giants to the local corner store; and lean production techniques, which promote specialization in core competency activities while outsourcing from strategic allies, are reorganizing the marketplace.
The government policy responses to these developments, in the form of trade liberalization efforts and the deregulation and privatization of utilities, have made the Canadian economy more competitive. For example, the Canada-United States Free Trade Agreement (FTA) has played a significant role in raising the productivity and competitiveness of the Canadian manufacturing sector over the past decade by forcing industry to rationalize plants and operations and to exploit economies of scale further. Innovations in telecommunications and energy technologies and systems have eliminated any general notion of "natural monopoly," and resulted in deregulation and open competition where once only government or regulated private monopolies dominated the commercial landscape.
These new business models exert new pressures on the business sector and are beginning to reveal new stresses and fracture points in the competition policy framework. For instance, greater cross-border trade may also mean more international anticompetitive conduct. As a result, competition authorities must respond by further cooperating with one another:
International cooperation is my number one priority. We clearly live in an integrated North American market, and probably an increasingly global market. We cannot administer the Competition Act appropriately without international cooperation, first of all with the Americans, but with other nations too. We have very good cooperation with them in criminal matters. We have the Mutual Legal Assistance in Criminal Matters Act and we regularly do joint investigations. We exchange data and have been quite successful in dealing with international cartels. The same kind of exchange on the civil side is lacking because the American law does not allow them to exchange unless the Canadian law has reciprocal dispositions. [Konrad von Finckenstein, Commissioner of Competition, Competition Bureau, 43:10:25]
This, however, will be no easy task. In civil matters, far greater confidentiality issues are at stake:
There are different considerations at stake in criminal matters, as opposed to civil, or administrative, or competition law matters. The criminal matters tend to be looking at what you did last year, or in a lot of the cartel cases it could be 10 or 15 years ago. Information of that sort often is not particularly competitively sensitive. Sometimes it is, but not always. It’s historical ¾ whereas, in the civil matters, abuse of dominance, mergers especially, you’re looking forward and the information the Bureau needs to investigate and assess these cases properly is current, up-to-date information of the companies: their current business plans, their current capacities, their current R&D programs, their current product development. That stuff is far more sensitive than your market shares and production figures from 1983… [Milos Barutciski, Davies, Ward & Beck, 50:9:45]
Most disputes in civil matters, at least in Canada, are resolved expeditiously and efficiently through "informed negotiation," the vital ingredient for the process to be fruitful and productive. The companies need to have the confidence that they can tell the Competition Bureau all the pertinent facts on the understanding that this information is not going to slip out to their detriment in a perfectly legitimate context. This becomes tricky when cooperating with foreign competition authorities:
So you may want to reflect on having some language in here to make sure that if we’re cooperating with somebody, it’s with a country that has a competition law that approximates, or at least reflects, what we call competition law, not something that’s completely different ¾ national champion industrial policy in the guise of competition law. Out of the 80-plus competition Acts in the world, and I can point to you several, that are really more industrial policy and picking national champions and giving them a break, at the expense of foreign competitors, as opposed to real competition acts that protect the competitive process. [Milos Barutciski, 50:9:45]
A knowledge-based, innovation-driven economy is a dynamic economy, one that is characterized by numerous new products, technologies and production processes, and even new industries. Barriers to entry into the more mature industries can be knocked down and competition can sometimes flourish where it has never been seen before. Market dominance also appears to be more short-lived than in any previous time. However, across all industries technological change is apparently driving down the costs of production with the result that the typical firm’s cost structure more frequently exhibits substantial increasing returns to scale (a cost structure in which declining unit or zero marginal costs are achieved with increased output). Allegations of predatory behaviour are likely to mount in this new economic environment and the related provisions of the Competition Act will come under increased pressure and scrutiny. The Committee was reminded of the benefits derived from organizational innovation and the appropriate competition test:
Organizational innovation is a very important source of innovation. I mean sometimes we miss it, we think about innovation as new products or processes but sometimes it’s just a new organizational form. The ultimate test should be whether consumers benefit by it. And if they’re disadvantaged because the dominant grocery chain has squeezed suppliers and told them not to supply, we should go after that, because that’s taking away a level playing field and not giving the independent grocery a chance to compete. But given that level playing field, if one organizational form starts to lose to another ... We don’t have many blacksmiths any more either, and I don’t think it’s in our interest to protect them. [Lawson Hunter, Blake, Cassels & Graydon, 46:10:15]
Innovative products will often be accompanied by an intellectual property right and there is an interface there that must be looked at more closely:
The other thing is that the intellectual property rights are becoming increasingly important. By definition, they restrict the use of certain property. We have, for instance, issued in the guidelines how we see those two can interact in an intellectual property regime and a competition regime, because it seems … to be one of the key questions we’re going to … increasingly face. [Konrad von Finckenstein, 43:10:25]
The policy and enforcement interfaces between intellectual property and competition policies are complex; however, clear borderlines must be drawn between competitive and anticompetitive conduct.
The intellectual property laws by and large have two purposes. They give you a right of property in your ideas so that you can market them and you can get the financing. Since you did the intellectual work, you should reap the benefits. That’s essentially it. That’s for a limited period; after that, they become public goods. The period varies with the intellectual property you’re talking about. However, having been given essentially this time-limited monopoly to reward you for your rights, you should not be able to abuse it. What we look at first of all is how you market it, how you license, what you can do. We make sure your licensing is not done in a way that you’re using it to lever yourself into other markets and you use unfair advantage that has nothing to do with your invention. Since you have that invention and people want to get at it, they’re willing to pay that price. So that’s the unfair leverage aspect. The other one is that there are some rare instances where we say that because it’s a key to a larger market and you’re refusing to share it with anybody, you’re holding up overall development. You’ve really wreaked havoc in the Canadian economy. In those cases, there is essentially an abuse of your power. You should be fairly rewarded for it, etc., but you should share it on fair terms. [Konrad von Finckenstein, 43:10:55]
These economic developments also pose new challenges to the competition authority. For one, we must revisit the Competition Bureau’s two-year forecast horizon when reviewing mergers and other matters:
I am concerned that the current law does not give sufficient weight to innovation. We, and the Bureau, need to give, either legislatively or in its guidelines, more importance to innovation in markets, and that is often a factor in the question of how much time they’re willing to look at that changes may take in the marketplace. They tend to take a two-year view, and in some industries I think that may be too long a period. In others, it may be plenty of time. But I’m not sure innovation is properly factored into the law at the moment. [Lawson Hunter, 46:9:30]
Though such a proposition is not clear cut:
That’s one of the difficulties with merger analysis, unlike some of these abusive practices in which you have an ongoing history or something that’s tangible and that you can relate to. In a merger, you’re trying to predict what will happen as a consequence of the change in the structure of the market. That can be very difficult. I can understand the Bureau not wanting to go too far out into the future, but in some cases that might shift the balance of concern from one side to the other. You may have all kinds of competitive developments that may occur two and a half or three or four years down the road; you’re ignoring that and that’s probably not very good. [Donald McFetridge, Carleton University, 44:10:10]
Moreover, with the microprocessing and information technologies revolution in today’s economy, many user networks demand standard setting agreements; however, a network economy poses its own set of problems for competition and the competition authority:
The new economy has several features that are very worrisome. It is, in effect, a network economy. And whoever controls the network can use his dominant position. Or you have several networks, etc. So there’s a huge degree of interconnectivity and interdependence that’s being created in the new economy, and how can you assure competition with it? [Konrad von Finckenstein, 43:10:25]
The task is daunting.
Competition and Competition Policy Interplay
The interplay between competition, on the one hand, and competition policy and law, on the other hand, is interesting. Witnesses made it clear from the outset that: "Competition is a means to an end. The reason we have competition is to deliver the best products at the best prices for the people who buy them" [Donald McFetridge, 44:10:25]. As a result, "the best protection for consumers is a free and open market, with as few barriers to new competitors coming in as possible, whether they’re regulatory, ownership, trade, whatever types of barriers" [Donald McFetridge, 44:10:25]. However, unfettered competition alone is not enough. A complementary competition policy is required in circumstances where, owing to technological or regulatory barriers, competition will not automatically and immediately flourish.
While competition and competition policy are complementary, they are not perfect substitutes when regulatory barriers intervene:
I think they are complements to each other, and that’s how we need to think about them. The two go hand in hand. You’re absolutely right that if Canada had a different policy about cabotage or if we didn’t have the same interprovincial restrictions on industrial milk quotas or whatever it may be, then it would be easier to deal with a dairy merger, it would be easier to deal with an airline merger. It’s not always the case that those policies will completely substitute for competition law. [Margaret Sanderson, Charles River Associates Canada Limited, 48:11:05]
Indeed, certain government policies, deliberately or inadvertently, restrict competition and in such situations:
There are many ways to foster additional competition. … Often the government enacts a number of regulatory restrictions for different purposes. One of the outcomes, whether explicitly intended for that or not, is to restrict competition. That being said, this does not deny the fact that we do need to have a strong Competition Act in this country because it provides a framework law for basic businesses to operate under. [Margaret Sanderson, 48:11:05]
However, competition policy can be at best partially corrective, for example:
If you limit interprovincial trade, you’re going to cause problems downstream for processors, in that you can create a potential monopoly, not because there aren’t potential competitors out there … but because you have precluded them by regulation from competing. … Regulations which keep competitors out of markets, whether it’s provincial markets or the national market, are the enemy of competition, competition law and policy sometimes can’t do very much about fixing that. … Competition policy may be just the window dressing there and it really can’t do anything about the lessening of competition that has been put in place for other reasons. [Donald McFetridge, 44:10:15]
In this case, "competition law alone is not sufficient to ensure the vitality of the competitive process. … Occasionally competition law can offset some of the negative effects of these types of restrictions. More frequently, however, it cannot. Indeed, trying to twist competition law so as to accommodate an anticompetitive regulatory environment is likely to compromise and even corrupt competition law. Bad regulation begets bad competition law" [Donald McFetridge, 44:9:05].
This interdependency also runs in the opposite direction when governments adopt policies that, deliberately or inadvertently, foster competition. For example, trade liberalization accomplished through the FTA, followed by the North American Free Trade Agreement (NAFTA) was not only good trade policy, but also good competition policy.
Competing and Complementary Provisions of the Competition Act
The overriding objective of Canada’s Competition Act is to preserve and promote the competitive process and, as witnesses mentioned time and time again, not to preserve and protect individual or classes of competitors:
Protecting competition is not the same as protecting individual competitors. … Competition law should not be used to protect or give advantage to individual competitors or classes of competitors, nor should competition law be used to pursue other political or social objectives. Nevertheless, if competition is allowed to flourish many of the good things commonly sought by governments are likely to follow and these include economic efficiency growth and economic opportunity. The historical record on this is hard to dispute. [Donald McFetridge, 44:9:05]
Given this one constraint, any competition framework, if it is to work for consumers’ welfare and economic efficiency, must incorporate the most up-to-date economic analysis. There is, nevertheless, considerable room to manoeuvre in the choice of framework, with no one framework being the "correct" framework. The mix of competition provisions in any governing Act will usually reflect the culture, business customs, legal history, political philosophies, and the geographic and demographic size and makeup of a country.
For example, the United States antitrust agency, the Federal Trade Commission, begins to get tough on mergers at much lower levels of industrial concentration than does Canada’s Competition Bureau. This is because the much larger United States economy means there is much less risk that firms will not achieve economies of scale and other savings related to size and scope. Furthermore, Canada’s competition legislation sets us apart from other countries in that it probably better takes into account the efficiency considerations of a proposed merger. Canada’s competition legislation explicitly requires that the review of a merger balance the anticompetitive effects related to the "prevention or lessening of competition" against the likely "gains in efficiency," with whichever of the two impacts is greater determining acceptability or unacceptability. This provision is far more generous than it is in the United States, where the efficiency gains must be so great that prices will not rise as a result of the merger.
While the much smaller Canadian economy dictates a less vigilant merger enforcement framework than exists in the United States, this does not mean that Canada has a less vigilant competition policy than the United States. Weaknesses found in the merger review process can be made up elsewhere, for example, by having more stringent anticompetitive pricing, market restriction and abuse of dominant position prohibitions. Obviously, a careful balancing of factors is required.
Indeed, the needed balance can be a subtle one. One contemporary example of this subtlety at the enforcement stage has proven to be an unresolved public concern for the better part of a decade.
Not enough attention was paid to the significance of that back when there was some consolidation going on in the refining sector in the oil industry. … The Bureau allowed the consolidation to take place, and that’s why in my view you’re seeing some of the problems today in that sector, because there just wasn’t enough supply available. The notion was that, oh well that’ll come across the border, but the reality was that wasn’t really going to happen. So you do need to look down the road and I think that maybe some past decisions have exacerbated that problem. [Lawson Hunter, 46:10:00]
If this view is correct, then the organizational structure of the downstream petroleum products industry presents an almost unresolvable competition problem for Canada’s anticompetitive pricing provisions:
It happens to be a very homogeneous product. There’s no difference at all whether you buy the gas from Esso or Shell. It’s purely driven by price. There’s no differentiation whatsoever between the various products. So it’s only the price, and it’s rising higher. The fact is, it’s also an industry that posts its prices. So the price information that is going on in the industry is about as readily available as it can be. Therefore, for companies to move in unison is no problem, and that’s what they’re doing. It’s conscious parallelism. The margins for the retailers are relatively very small. If there’s an opportunity to raise the price and increase your margin and one person does it, everybody follows the leader. This is the behaviour that consumers see, and they say there has to be a conspiracy. So far, we haven’t found one … notwithstanding extensive investigation, millions of dollars spent going through thousands of documents, putting people under oath, searching and seizing documents, and doing everything. [Konrad von Finckenstein, 43:10:00]
The Committee is in no position to ascertain the validity of this hypothesis, but its mere possibility only confirms the importance of getting the competition framework right; one that fits Canada’s unique economic circumstances.
Legislation, Guidelines and Enforcement
The Committee feels that, apart from the specific provisions contained in the Competition Act, its overriding objective is to assess whether Canadian competition policy represents modern economic analysis, is clear and transparent to the business community, and is appropriately enforced. Most witnesses gave the Competition Act a positive evaluation. A typical response was "I think that in general we have a solid, modern Act that we can be quite proud of. It reflects modern economic thinking. It is a piece of economic regulation ... And it’s pretty up to date" [Tom Ross, University of British Columbia, 46:9:15]. Yet everyone who extolled Canada’s Competition Act as a modern piece of economic regulation was also able to find room for improvements. Consider, for example, the following comments made on the economic analysis of merger review, a section of the Act where most stakeholders believe the least amount of change is needed, and in their interpretations by the Bureau and the Tribunal:
I think considerable thought went into the framework for merger analysis as it’s embodied in the Competition Act. I think that in general it’s still applicable and I don’t see any serious need to tinker with it. For the section 93 factors, which would require the Bureau — and then ultimately the Tribunal if a merger goes to the Tribunal — to assess the broad state of competition in the market, including foreign competition, potential entry, technological change, and these types of things, the law is well written here ...
You might want to quarrel a bit with the time horizon that the Bureau has imposed on itself, this sort of two-year horizon — "well, we won’t look beyond two years" — other than the fact that it’s very hard when you’re doing merger analysis to look ahead at all, to make very good predictions about what will happen in the future. …
With respect to efficiencies in section 96 of the Act, that, even after all this time, have not been resolved. I think there’s some expectation that the Competition Tribunal will pronounce upon the appropriate interpretation of section 96 in its Superior Propane decision. We will see, I guess, when they hand down their decision — it’s supposed to be sometime this summer — exactly how they propose to interpret section 96. Then we’ll see if it’s consistent with what Parliament might have intended. [Donald McFetridge, 44:10:10]
In terms of predatory pricing, something that the Committee expects will be of more importance in the upcoming years, Professor VanDuzer was critical of the Bureau’s enforcement guidelines:
A … concern about the guidelines is that they were published in 1992 and they don’t fully reflect the current learning on the situations in which predatory pricing might occur. There’s been a lot of economic evidence and a lot of economic analysis to suggest that there is a wide range of circumstances in which a predatory strategy is rational. One of them has to do with the success that a firm might have in establishing a reputation for toughness by predatory activity. [Anthony VanDuzer, University of Ottawa, 14:15:40]
Lack of clarity in the enforcement guidelines is a problem, but criticisms went beyond this feature.
The other concern we have is that if we look at enforcement we see that over the five-year period we looked at there were 382 complaints about predatory pricing and there were no formal enforcement actions taken, and a relatively small number of negotiated settlements in predation cases. I think one has to be very clear that you cannot draw, and we did not draw, any specific conclusion about that enforcement record, because whether that’s a good record or a bad record depends, in significant part, on the relative priorities the Bureau attaches to other activities given the budgetary constraints to which it’s subject. We all have to acknowledge, I think, that litigation is a very expensive proposition. Notwithstanding that, we did have some concerns about enforcement. [Anthony VanDuzer, 14:15:40]
This appearance of inadequate enforcement leaves open to question the Bureau’s selection criteria for case management, which appear biased against the pursuit of egregious predatory behaviour:
The other aspect of these case selection criteria that causes some difficulty or that can cause some difficulty in predation cases is that they consider — I think appropriately — management considerations. And what that means is they look at the likely cost associated with getting to a resolution in a particular case. If you are contemplating a full-blown contested procedure that’s going to take a long time and going to require all kinds of complicated economic evidence, then obviously it’s going to be a much more expensive proposition. Unfortunately for predation cases, almost all predation cases fit that profile. [Anthony VanDuzer, 14:15:40]
To some witnesses all these problems are not the result of inadequate legislation, but stem from a lack of sufficient enforcement resources allocated to the Bureau:
The Competition Act … continues to reflect the balanced and modern approach to competition law ... Over the last few years, we recognize there may have been some cases where bona fide anticompetitive conduct was not appropriately addressed. In our respectful view, the problems in question had more to do with insufficient enforcement resources than with any fundamental inadequacy of the Competition Act. … If the Commissioner of Competition were given more resources to enforce the Competition Act, instances of unaddressed anticompetitive conduct would be rare. [Paul Crampton, Davies, Ward & Beck, 53:15:35]
Part of the enforcement problem was identified as resulting from uncontrollable factors such as the deregulation and liberalization of the transportation, telecommunications, and energy sectors. Increased funding did not match the increased responsibility that these developments imposed on the Bureau. A second uncontrollable factor was the unforeseeable merger wave:
On the question of workload, I think we’re going through an unprecedented merger wave around the world, and of course in Canada also. The number of mergers has increased dramatically. That adds enormously to our workload. We have also seen the emergence of international conspiracies on a scale we haven’t seen before. For instance, there was the vitamin conspiracy, where all the major producers of vitamin A around the world kept together and systematically conspired to share markets and to fix prices. That increases our workload. [Konrad von Finckenstein, 43:9:15]
One witness suggested this problem can be easily corrected and at no expense to the federal treasury:
The present standard has the two thresholds. One which involves the acquired business having gross assets or gross annual revenues in excess of $35 million, Canadian dollar terms, and the parties and their affiliates having Canadian assets or annual revenues in aggregate over $400 million. Those are the same levels that they were in 1988 so whether that was the appropriate standard at that time as it was thought to be to capture the ones that are more likely to create an issue, there has been erosion in the value of those thresholds by a third. [Tim Kennish, Osler, Hoskin & Harcourt, 44:9:40]
So I think at a minimum, the threshold ought to be elevated to restore those original dollar levels, real dollar levels, and I think this would eliminate a lot of smaller cases that are now clogging the system and arguably impairing the Bureau’s ability to handle its other responsibilities. [Tim Kennish, 44:9:25]
The Committee agrees that the minimum thresholds for reviewing a merger may need to be adjusted to account for inflation over the 1986-2000 period. However, the Committee is equally uncertain about the thresholds being an impediment to the optimal enforcement of the Act ¾ other factors may be more to blame. The Committee, therefore, finds that:
1. The Government of Canada should re-evaluate the minimum thresholds for reviewing a merger, and, if found unsatisfactory for the optimal enforcement of the Competition Act, might give further consideration to resetting them accordingly.
Apart from the positive economic benefits generated through increased competition, the Committee was also made aware of the positive impact of antitrust enforcement on the federal treasury:
The fines obtained under the Competition Act last year exceeded $100 million. By contrast, the Bureau’s budget for fiscal 1998-1999 was reported to have been $25.3 million. So clearly there’s room for some of the money that’s being generated under the Competition Act to be allocated to the improvement of the enforcement of that legislation. [Paul Crampton, 53:15:35]
While the Committee does not advocate that antitrust enforcement be a profit-maximizing exercise, clearly more consideration should be given to allocating additional resources to the Competition Bureau. The Committee, therefore, finds that:
2. The Government of Canada provide the Competition Bureau with the resources, including financial, necessary to ensure the effective enforcement of the Competition Act.
Finally, there are two other variables that can have an impact on enforcement and are worthy of further study: private enforcement (addressed in greater detail in Chapter 6) and fines. No witness suggested that industry treated fines similarly to a licence fee and regarded them as just another cost of doing business. As the Commissioner of Competition put it: "The fines are very substantial. They’re the largest ever in Canadian criminal history. Nobody has ever collected fines like we have collected in the last two years. Also, they’re not deductible from tax, so they’re a direct hit on your bottom line" [Konrad von Finckenstein, 43:11:25]. As a supplementary note on the determination of a fine:
In the final analysis, of course, it’s the courts that do the determination of fines. But when the Department of Justice is involved in assessing cases, you’re indeed looking at deterrence. You’re looking at the value of commerce and the impact on those particular companies concerned. You also go into their past behaviour. Is this something that’s relatively new in their behaviour, or is this something that has some long history? The courts do take that into account, and we take that into account when we’re looking at sentencing. Certainly those fines that were assessed in those particular cases have a greater deterrence than we would have achieved a few years ago, when we were getting fines of a maximum of $1 million on the same volume of commerce. We’ve come a long way through this process. In fact you’ll note that this has been a trend both in the United States and Canada, and in the last three or four years there has been a dramatic escalation in fines as the courts say that price-fixing is indeed a criminal offence that should be taken seriously … [Don Mercer, Competition Bureau, 43:11:25]
The Committee therefore sees no reason to alter the maximum fines imposable on violations of the Act.