Draft Enforcement Guidelines on Illegal Trade Practices: Unreasonably Low Pricing Policies: The Way Ahead

Michael Sullivan
Acting Assistant Deputy Commissioner of Competition
Criminal Matters Branch

Competition in Difficult Times Conference
Toronto, Ontario

November 12, 2002

(PDF: 49KB)

---

The author would like to thank Messrs. Marcel Morin, Legislative Development Unit, David McAllister, Civil Matter Branch and Gwillym Allen, Competition Policy Branch, Competition Bureau for their helpful comments during the preparation of this paper.

 

Table of Contents

1. Introduction



2. Economics of Predation



3. Canadian Law and Jurisprudence



4. 1992 Predatory Pricing Enforcement Guidelines



5. VanDuzer Report and the Standing Committee on Industry Report



6. Draft Enforcement Guidelines for Illegal Trade Practices:
   Unreasonably Low Pricing Policies



7. Consultation Results



8. Proposals for Further Consultation



9. Conclusion

---

1. Introduction

On March 8, 2002 the Competition Bureau ("Bureau") released a draft document Enforcement Guidelines on Illegal Trade Practices: Unreasonably Low Pricing Policies (hereinafter referred "Draft Guidelines") for public comment which signaled a renewed approach to predatory pricing. The Draft Guidelines have received a mixed response from the public. Several commentators support the new proposals whereas others have noted concerns, particularly with respect to the treatment of recoupment. This paper describes the development of the economics, law and enforcement policy on predation in Canada. It concludes with a brief overview of options that are being considered for revised Draft Guidelines that will be issued by the Bureau in the coming months.

 

2. Economics of Predation

Robert Bork stated that predatory pricing occurs where a firm deliberately pursues business practices that would not be profit-maximizing except for the expectation that (1) rivals will be driven from the market, leaving the predator with sufficient market share to command monopoly profits, or (2) rivals will be chastened sufficiently to abandon competitive behaviour the predator finds threatening or inconvenient¹. The classic form of predation involves an actual or near monopolist selling at below cost prices, and thus incurring losses, in the short run to eliminate competitors, typically a new entrant, and subsequently recouping losses by charging higher, non-competitive prices in the market. Short run profits are sacrificed but the economy is harmed in the long run as the resulting high prices decrease output and exclude some consumers from the market. Predation is also usually associated with having "deep pockets" or "the long purse," that is greater financial wherewithal to withstand losses than rivals.

A great deal has been written on whether predation is plausible, notably by Easterbrook and McGee². Theories of predation contain assumptions that have been challenged by the "Chicago School" of economic analysis. Predation is implausible it is posited because the monopolist or near monopolist will incur comparatively greater losses than its intended victim, and therefore, the more logical course would be to enter into a merger to avoid losses. Imperfect access to capital and financing by targets of predation is the second assumption that has been attacked by the "Chicago School". Again, because losses will be more onerous for the predator, all the target has to do is stop operations and finance fixed costs for the period of predation, then resume operations when prices recover. Another problem with firms pursing a predator strategy is that consumers must be complicit with the strategy. Critics of predation argue that consumers usually understand that it is against their long term interest to permit the market to be monopolized in the future, and counterstrategies, such as long term contracts between consumers and targets, can defeat the goal of monopolization. Finally, the predator's goal of recoupment will only be successful if there are high barriers to entry or expansion. In addition to the inherent uncertainty of recouping losses, the "Chicago School" generally only sees barriers created by government to be of sufficient effect to limit entry into profitable markets.

Not surprisingly there are competing schools of thought. The "New Learning" does not concede that capital markets are always perfect or that barriers to entry are low in every market. There are antitrust laws governing mergers. Asymmetry of information, multi-product or multi-market firms and game theory based on leveraging reputation can also explain why predation is plausible in certain circumstances. Firms in a competitive game do not know the costs of their rivals with certainty. However, firms may take prices as signals of their competitor's costs. Predation can be less costly than a merger and, thus, be a rational response if it creates a reputation of having lower costs or a reputation of "toughness' to discipline actual or potential rivals³. Obviously, the viability of this strategy is directly related to the firm's size and market share as well as the number of product and geographic markets in which the firm participates. In these circumstances, it may be viable for a firm with "deep pockets" to finance predation internally. In contrast, the target of the predation may not have the "commercial muscle" to convince its bankers or shareholders to finance losses. As well, on-going financing of new entrants is usually contingent on meeting certain financial objectives ultimately related to profitability. The result is that the target either exits or raises prices.

Academics have also written extensively about rules to distinguish predation from beneficial competition. Easterbrook recommended that only consumers should be able to bring complaints of predation⁴. However, the latter would result in under enforcement because the Competition Bureau relies almost exclusively on information provided by alleged targets to detect predatory behaviour. Other suggestions such as requiring a firm to go out of business before taking action would be tantamount to a rule that only deadmen can object to murder.

Much of the literature on predation focuses on how to distinguish predatory pricing from aggressive competition. The well-known Areeda-Turner test focuses on price-cost relationships to detect predatory pricing⁵. In theory, only prices below marginal cost should be condemned as predatory since the sale of each additional unit only adds to losses and makes no contribution to fixed costs. In practice, the accounting concept of average variable costs, that is costs that vary directly with production, are used as a proxy for marginal costs.

Where prices are above average variable costs but less than average total costs, determining predation becomes more complex. More factors need to be taken into account because over a longer time period more costs are variable. We also know that firms experience distress, sell perishable products, enter new markets or develop new products, face new competitors, or participate in network industries. All of the above can be business justifications for below-cost pricing.

The debate on whether predation exists and whether such behaviour should be addressed by competition law has largely been resolved in the affirmative⁶. Nonetheless most economists concede that predation is rare, and enforcement policies should protect competitive markets rather than protect competitors from competition itself.

 

3. Canadian Law and Jurisprudence

Section 50 of the Competition Act was introduced into Canada's competition law in 1935 following the Report of the Royal Commission on Price Spreads and Mass Buying. At the time, Parliament was concerned about the survival of small and medium sized businesses⁷. The provisions have been untouched by amendments despite several recommendations and one recent attempt to decriminalize the price discrimination and discriminatory promotional allowances provisions in paragraph 50(1)(a) and section 51, respectively⁸.

The provisions addressing predation provide:

s. 50(1)	Everyone engaged in a business who
s. 50(1)(b)	engages in a policy of selling products in any area of Canada at prices lower than those exacted by him elsewhere in Canada, having the effect or tendency of substantially lessening competition or eliminating a competitor in that part of Canada, or designed to have that effect, or
s. 50(1)(c)	engages in a policy of selling products at prices unreasonably low, having the effect or tendency of substantially lessening competition or eliminating a competitor, or designed to have that effect,
is guilty of an indictable offence and liable to imprisonment for a term not exceeding two years.

Paragraph 50(1)(b) (geographic price discrimination) and paragraph 50(1)(c) (predatory pricing) address two types of harm to competition:

 

The competitive effects test of "substantially lessening competition" is sufficiently close to the test of prevent or lessen competition substantially found in the merger and abuse of dominance provisions of the Competition Act that it falls within the mainstream concerns about market power. However, the same cannot always be said of the eliminating a competitor element of the offence. This presents a longstanding conundrum for antitrust enforcers. The Competition Act seeks to protect competition and not individual competitors, yet in certain markets the presence of individual competitors can be vitally important to maintaining and encouraging a competitive market.

Carnation is the only significant case under paragraph 50(1)(b)⁹. The company was charged with geographic price discrimination as it charged lower prices for condensed milk in British Columbia than it did in Alberta to counter a new competitor in the British Columbia market. The Court ruled that the pricing conduct was not illegal, it is permissible to react to new competition by cutting prices. There have been few cases under that provision since the Carnation decision¹⁰.

There have been four significant cases under section 50.1(c) Producers Dairy,¹¹ Hoffman LaRoche,¹² Consumers Glass¹³ and Boehringer v. Bristol Myers Squibb¹⁴.

In Producers Dairy the court found that two days of low pricing activity was not of a sufficient duration to constitute a policy. Similar complaints would not likely merit more than a few minutes consideration at the Bureau today.

In Hoffman LaRoche, the accused was convicted for selling valium at a zero price to hospitals in response to the entry of a new competitor. The court found that the give-away program had no adverse impact on competition and that the target firm was not seriously impeded in its ability to compete, but convicted on the basis that the policy was designed to substantially lessen competition. The trial decision provides considerable insight to meaning of "unreasonable". The court ruled that above cost prices can never be unreasonable, but rejected a purely price cost approach for determining whether prices are unreasonable. Rather all relevant factors need to be considered by courts such as the duration of the below cost prices and the business objectives underlying the policy.

The company was fined $50,000, far less than the Crown's recommendation of $1 million. The court noted that Hoffman LaRoche's policy did not ultimately succeed in excluding competitors and cost the company more than $1 million. The court also commented on the rarity of predatory pricing in the economy compared to conspiracy and price fixing, the defensive nature of Hoffman LaRoche's policy, that a penalty for intention to harm should be less severe than actual harm as well as other well established factors in delivering its sentence¹⁵.

In Consumers Glass, Portion, a wholly owned subsidiary of Consumers Glass that manufactured disposable cup lids, cut prices below average total costs in response to the entry of a new competitor formed by former employees. The company was acquitted on the basis that, at a time of industry over capacity, the company was minimizing losses by selling at above average variable cost. The court essentially endorsed the Areeda-Turner test although it did consider the underlying intent of Portion's business objectives in determining that Portion's prices were not unreasonable¹⁶.

Boehringer v. Bristol Myers Squibb was a private prosecution under section 36 of the Competition Act. The case is notable for affirming that price matching, even if it is below cost, is not unreasonable.

Predatory pricing can also be the subject of an application to the Competition Tribunal under the civil abuse of dominance provisions. The recent Enforcement Guidelines on these provisions contain a section on predation¹⁷. The Bureau has incorporated, and the Competition Tribunal has considered, allegations of predatory conduct in two abuse cases: Nutrasweet and Teledirect.

In NutraSweet, the Competition Tribunal dismissed the Commissioner's allegation that the NutraSweet Company was selling at prices below "acquisition cost" which is identified as an anti-competitive act in paragraph 78(i). The Tribunal held that the Commissioner did not present a consistent or coherent case as to the proper measurement of cost, and then went on to endorse the Areeda-Turner rule, pricing below average variable cost, as the appropriate standard for determining predation.

The other case where the Competition Tribunal addressed predatory conduct was Teledirect where the Tribunal rejected the argument that Teledirect's responses to entry initiatives were predatory. In the judgement, the Tribunal expressed concerns about drawing proper distinctions between pro and anti-competitive pricing behaviour and expressed concerns about the law being used to discourage aggressive competition. In both cases, the Tribunal concluded that evidence of probable recoupment is an essential element to support an allegation of predation¹⁸.

While there have been a very limited number of cases, an over-arching set of principles to establish predation have developed, including below cost pricing without business justification and post-predation recoupment through the exercise of market power.

 

4. 1992 Predatory Pricing Enforcement Guidelines

In the early 1990s, the Bureau issued two enforcement guidelines on criminal provisions addressing pricing which continue in effect today¹⁹. Prior to the publication of the 1992 Predatory Pricing Guidelines (the "1992 Guidelines") the Bureau's examination of predatory pricing complaints focused on the complicated and time-consuming analysis of price-cost relationships as opposed to the likely competitive effects of the low pricing behaviour. The result was a significant number of inquiries but few referrals to the Attorney General or prosecutions before the courts.

The 1992 Guidelines follow the classic model of predation. They were heavily influenced by the jurisprudence arising out of the U.S. courts in Matsuhita Electric Industrial Co. v. Zenith Radio Corp.²⁰ and the paper by Paul L. Joskow and Alvin K. Klevorick, A Framework for Analyzing Predatory Pricing Policy which proposed a two stage process for analyzing predation²¹.

In Matsuhita, the U.S. Supreme Court commented on the rarity and general implausability of predation²². The costs tests in the 1992 Guidelines are taken from Consumers Glass which in turn are based on Areeda-Turner.

The two stage analysis introduced in the 1992 Guidelines radically changed the Bureau's approach to predation. In stage one, market power on the part of the predator must be established using high market share and barriers to entry as well as the ability to recoup losses as indicators. Only if the market power requirement is satisfied would the Bureau move to the second stage and examine the relationship between price and costs.

Prices below average variable costs were deemed to be unreasonable while prices between average variable and average total costs would fall into the "grey range". In the "grey range," the Bureau would delve into the surrounding circumstances such as industry conditions, business objectives underlying the below cost prices and whether the firm passed over opportunities to increase prices. In both situations, there would have to be a "policy" of selling at below cost prices and an absence of a legitimate business justification for the activity as required by the jurisprudence.

Equally important as the analytical approach contained therein, the Preface to the 1992 Guidelines states that predation is rare and the Bureau's enforcement policy should not chill price competition.

The 1992 Guidelines provide minimal commentary on how complaints about the elimination of a competitor would be addressed other than to suggest that market power must be evident before the Bureau would act²³. The 1992 Guidelines are arguably stricter than the actual statute. Pricing policies designed to substantially lessen competition or eliminate a competitor are barely discussed. Nonetheless, the 1992 Guidelines have been criticized for continuing to include pricing policies with a predatory intent as a basis for a predation case²⁴.

 

5. VanDuzer Report and the Standing Committee on Industry Report

In 1997, MP Dan McTeague introduced a private member's Bill, Bill C-235, designed to combat the anti-competitive effects of predatory pricing²⁵. The Bill was considered by the Standing Committee on Industry, but it was not passed. Rather the Committee embarked on a study of the pricing provisions of the Competition Act. In response, the Bureau retained Anthony VanDuzer and Gilles Paquet of the University of Ottawa to undertake an independent study of the pricing provisions of the Act and related enforcement practices of the Bureau. The Report, commonly referred to as the VanDuzer Report, was issued in October 1999²⁶.

The VanDuzer Report covers section 50, (price discrimination, geographic price discrimination and predatory pricing), section 51, (discriminatory promotional allowances) and section 61, (price maintenance). As well, the VanDuzer Report addresses the potential application of the abuse of dominant position provisions to pricing practices largely as a prescriptive measure. The adequacy of the law, the Bureau's interpretation of the sections and its enforcement guidelines as well as the Bureau's enforcement track record and practices are described and analyzed in detail.

The VanDuzer Report provides a statistical breakdown of the Bureau's enforcement effort. Since the publication of the 1992 Guidelines, the only formal action taken by the Bureau or the Attorney General consists of nine complaints which were resolved by way of Alternative Case Resolutions. The absence of prosecutions or formal inquiries was not condemned. In fact, the VanDuzer Report noted that the Bureau's focus on cartel enforcement was reasonable in an era of resource pressures. The situation has not changed since the publication of the VanDuzer Report²⁷.

The Report's recommendations regarding predatory pricing are noted below.

• The current criminal provision is vague, potentially overbroad and limited in remedial options. The case law does not provide a complete methodology for accessing illegality. Consequently, the provision should be repealed and treated as an anti-competitive act under civil abuse of dominant position before the Competition Tribunal, an adjudicative body expert in competition law and economics.



• Revised notions of market power using strategic behaviour and a different approach to remedial orders would have to be developed under the abuse of dominance provisions given the Competition Tribunal's reluctance both to accept dominance where market shares are less than 50% and to directly intervene in pricing decisions of firms.



• The authors advocate revisions to the 1992 Guidelines. The requirement to establish sufficient market power held by the predator to recoup losses under a criminal law burden of proof is too onerous. The Guidelines effectively remove intent based predation claims from consideration. Consequently, they adopt an interpretation that is narrower than the statute or case law. Finally, the 1992 Guidelines do not address newer theories of predation, issues arising out of the new information based economy or how predation could be addressed under the abuse of dominance provisions.



• The Bureau should contest more predation cases. The 1992 Guidelines and the Bureau's case selection criteria mitigate against initiating predation cases.

In April 2002, the Standing Committee on Industry issued a report entitled A Plan to Modernize Canada's Competition Regime²⁸. The report is the outcome of a complex series of events involving both private member's bills and government initiated proposals to amend the Competition Act²⁹. The Report is comprehensive with a list of 29 recommendations.

On the subject of predation, the Standing Committee on Industry endorses the VanDuzer Report recommendation to repeal paragraphs 50(1)(b) and 50(1)(c) and include predatory pricing as an anti-competitive act within the abuse of dominance provisions. Identical recommendations are made for the price discrimination and discriminatory promotional allowances provisions of the Act. The Bureau's argument that a criminal sanction deters the most egregious form of predation was not accepted.

The Report also recommends that the government repeal the ‘dominance test' in section 79(1)(a) of the abuse of dominance provisions and grant the Competition Tribunal the power to impose administrative penalties and damages as well as permit private access under section 79.

In its response to the Committee report tabled in the House of Commons on October 1, 2002, the government undertakes to consult on decriminalizing sections 50 and 51 in the next initiative to amend the Competition Act.

 

6. Draft Enforcement Guidelines for Illegal Trade Practices: Unreasonably Low Pricing Policies

The Draft Guidelines attempt to respond to the recommendations in the VanDuzer Report albeit largely within the continued context of criminal law. They follow the release of the Draft Enforcement Guidelines on The Abuse of Dominance in the Airline Industry in February 2001. The document is more comprehensive than the 1992 Guidelines as it addresses geographic price discrimination set out in paragraph 50(1)(b), and provides more guidance on enforcement process and potential inquiry outcomes. The Draft Guidelines contain three fundamental proposed changes:

1. recoupment would not be used as the primary case screening factor at the initial complaint evaluation stage;



2. the concept of avoidable cost, as opposed to average variable and average total cost, is used as the cost standard to determine ‘unreasonableness'; and



3. a new concept, predation resulting from market expansion, is incorporated.

The 1992 Guidelines set a high enforcement threshold for the Bureau. By establishing recoupment as the primary screening criterion, potentially valid predatory pricing complaints may not have been addressed. As noted in the VanDuzer Report, the burden of establishing that the alleged predator has market power sufficient to recoup losses is too onerous for both Bureau enforcement officers and economists as well as the complainants at the early stage of an investigation. The likelihood of recoupment requires a sophisticated analysis of the potential reactions of competitors, potential entrants as well as consumers. Without recourse to formal investigatory powers it may be almost impossible to establish a likelihood of recoupment which relies on a sophisticated theory of competitive harm, such as establishing an industry standard or increased interdependent market power³⁰. Where the alleged predator has a market share of at least 35% in a market characterized by high barriers to entry, it is perverse that the Bureau would not continue an investigation. Recoupment should be viewed as a rebuttable presumption under such market conditions³¹.

The change to using avoidable cost stems from dissatisfaction with the Areeda-Turner test among economists³². Classifying variable and fixed costs items and the relevant time period for the analysis can be difficult³³. In the long run, all costs are variable, and fixed cost investment decisions are variable costs before they are actually committed. Boulton et.al. describe avoidable cost as "average per unit cost that the predator would have avoided during the period of below-cost pricing had it not produced the predatory increment of sales". In practice, average variable costs will likely account for the greatest proportion of cost items under the avoidable cost test with only incremental fixed costs being added to the equation³⁴.

In any event, below cost pricing is not per se illegal in Canada. Only a policy of selling at unreasonably low prices will attract liability, and unreasonably low prices can only be established after examining all of the surrounding circumstances to determine whether there is a business justification for the behaviour.

The section on predation resulting from market expansion responds to a common source of complaints from small and medium size businesses: the extension of dominance into new markets through the use of predation.

 

7. Consultation Results

The Bureau undertook public consultations for three months and received nine submissions which can be viewed on the Bureau's website. A critical analysis was also published in the Canadian Competition Policy Record³⁵. Compared to previous draft guidelines issued by the Bureau, the document did not attract a great deal of public interest³⁶.

The proposed change addressing recoupment generated the most comments. The Canadian Bar Association, among others, argued that removing recoupment as the primary screening factor could have a chilling effect on legitimate price competition. The Draft Guidelines clearly did not succeed in communicating the Bureau's desire to expand the role of recoupment beyond the classic form of predation described in section 2 of this paper. In any proceeding before the courts or the Competition Tribunal, the Attorney General and the Bureau would be faced with arguments that the absence of recoupment goes against the weight of academic and judicial thinking over the past two decades.

Messrs. Hunter and Brown of the law firm Stikeman Elliott criticized the inclusion of reputation effects, a new element in the treatment of barriers to entry, on the grounds that it does not reflect the jurisprudence³⁷. The last major case in Canada, Consumers Glass, was decided in 1981 and the concept has yet to be argued in a Canadian case. Reputational effects in predation cases have been before the courts in the United States albeit with mixed results³⁸.

At the same time, the law indicates that unreasonably low pricing policies with the effect, tendency or design of eliminating a competitor are illegal. Here recoupment may not be required. Intentionally or not, the Canadian Bar Association, among others, are arguing that elimination of a competitor alone should not be the basis for a predation case.

With the exception of Messrs. Hunter and Brown, the use of avoidable costs was accepted as an appropriate cost standard to determine predation³⁹. However, several commentators indicated that the description of the time period used for calculating avoidable costs is imprecise, and the section should provide more practical guidance on the treatment of specific cost items. Also several submissions noted that the Competition Tribunal would be conducting a hearing on avoidable costs as part of the Bureau's application alleging that Air Canada abused its dominant position in air carriers services by selling at prices below avoidable costs in seven city pair markets, and the Bureau should await the outcome of this proceeding.

The addition of predation resulting from market expansion attracted little in the way of negative comment and was supported by most commentators.

Finally, there is the view that the Draft Guidelines are too ambiguous with respect to market power considerations generally, and fail to precisely articulate the Bureau's enforcement process with the consequent risk of chilling legitimate price competition. Fettering aggressive but legal price competition is a concern the Bureau takes very seriously even though the "chilling effect" may be difficult to verify. On the other hand, the Association Québecoise des Indépendants du Pétrole and the Canadian Federation of Independent Grocers argue that the document does not go far enough to address all forms of predatory conduct.

 

8. Proposals for Further Consultation

At the time of writing, revised Draft Guidelines for further consultation have not received the approval of Bureau Policy Committee. Therefore, the discussion below should be seen as an exploration of ways to address market power issues as opposed to definitive statements on the content of a revised Draft Guideline.

Antitrust enforcers are often faced with a dilemma about whether there is really a distinction between a substantial lessening of competition and the elimination of a competitor, particularly if the target is a disruptive or innovative competitor and there are pre-existing concerns about market power in the relevant market. The Bureau is currently looking at ways to establish separate criteria for dealing with the substantial lessening of competition and competitor elimination branches so that policy guidance on both parts of the law can be addressed.

To show a substantial lessening of competition probable recoupment would be a necessary condition along with the minimum 35% market share guideline and high barriers to entry. However, in addition to the traditional "in-market" recoupment of lost profits, recoupment in other markets, preserving market position, establishing a standard or a reputation for predation, among others, could be included as forms of recoupment.

An analysis of the likelihood of recoupment could also include evaluating the reactions of customers. When customers are able to take steps to ensure their long term interest in a competitive market, recoupment is less likely. Typically predation is less likely where firms face a few sophisticated buyers. The likelihood that recoupment would be successful increases where there is a large number of customers or where there is a "free rider" problem. The latter can occur where each customer understands that their interests are maximized by buying from the predator while other customers support the target firm to maintain the long-term competitiveness of the market. The ensuing lack of support will not ensure the survival of the target firm.

Establishing probable recoupment may be too onerous to practically deal with complaints of predator elimination at the onset of an investigation. Measuring profitability of both the alleged predator and the target is a method the Bureau has used recently in the examination of pricing complaints dealing with the elimination of a competitor. Where both the alleged predator and target competitor are unprofitable in the relevant market, below cost pricing is more likely to have anti-competitive effects. If the alleged predator is unprofitable in a properly defined relevant market, predation could be one explanation. If the target is also unprofitable as a result of below cost prices, it is possible that the low pricing policy may have the tendency or design of eliminating the competitor. Under this scenario, we would also examine whether the structural characteristics of the market are conducive to the post-predation exercise of market power.

Simply waiting for firms to go out of business before the Bureau would start an investigation would lead to under enforcement for obvious reasons. Alleged targets of predatory conduct approach the Bureau when they are distressed and have hope of relief, not for post mortems. The Bureau would evaluate the target's ability to be an effective competitor during a period of below cost prices. Of course, there are many explanations for unprofitability that the Bureau would have to carefully ferret out before proceeding to analyzing price-cost relationships.

Another market power indicator that could be refined in revised Draft Guidelines is the treatment of market shares and concentration. The Draft Guidelines set out a threshold of 35% or where the predator's market share is considerably greater than its rivals. Commentators have understandably asked for guidance on how far below the 35% threshold the Bureau would venture. For instance, adding a requirement that the predator's market share is at least twice that of the target and/or the predator holds strategic advantages over its rivals would provide more guidance on the type of market conditions that are consistent with plausible theories of predation as opposed to aggressive competition where the alleged predator's market share is less than 35%. Examples of strategic advantages would include global firm size, reputational advantages, control over strategic assets or other advantages associated with vertical integration.

 

9. Conclusion

The debate on predatory pricing in Canada is proving to be very interesting. Concerns expressed to the Bureau and members of Parliament about the retail gasoline, grocery, airlines industries and the role of small and medium sized businesses have lead to in-depth studies, new legislation and recommendations for sweeping legislative changes. The Bureau is revising its enforcement policies on predation and important litigation on predatory conduct is currently before the Competition Tribunal.

The Bureau will complete its commitment to update the 1992 Guidelines. The debate on decriminalization will not conclude overnight. In the meantime, the 1992 Guidelines will continue in force until new guidelines are finalized.

The Draft Guidelines failed to articulate modern economic concepts as clearly as most stakeholders expected, and the Bureau will be issuing a revised document for further consultations which will address the concerns expressed about market power and other issues. The revised document may return to the two-stage examination process in the 1992 Guidelines where market power criteria, including probable recoupment or profitability tests, have to be established before the analysis moves to the second stage examination of price-cost relationships and possible business justifications for the below cost pricing policy. The revised document will likely retain the avoidable cost and predation resulting from market expansion concepts in the Draft Guidelines. Finally, an appendix of hypothetical case examples and another summarizing the major cases will also be added.

 

---

¹ R. H. Bork, The Antitrust Paradox: A Policy at War with Itself, (Toronto Free Press, 1993)

² J. McGee, Predatory Price Cutting: the Standard Oil (N.J.) Case (1958) 1 Journal of Law & Economics 137. and F. H. Easterbrook, Predatory Strategies and Counter Strategies (1981) 48 University of Chicago Law Review 263.

³ B. Yamey, Predatory Price Cutting: Notes and Comments (1972) 15 J. of Law & Economics 129 and J.Milgrom and J. Roberts, Predation, Reputation and Entry Deterrence, (1982) 27, Journal of Economic Theory 280.

⁴ Supra note 2.

⁵ P. Areeda and D.F. Turner, Predatory Pricing and Related Practices under Section 2 of the Sherman Act, (1975) 88 Harvard Law Review 697. Other proposed rules for detecting predation include selling below long run average cost with intent to lessen competition, Douglas F. Greer A Critique of Areeda and Turner's Standard for Predatory Practices (1979), 24 Antitrust Bulletin, 223 and Richard Posner, Antitrust Law: An Economic Perspective (1976), a combined structural factors- price-cost test, Paul L. Joskow and Alvin K. Klevorick, A Framework for Analyzing Predatory Pricing Policy (1979), 89 Yale Law Journal 213, post-entry pricing and output decisions by an incumbent firm, W. J. Baumol, Quasi-Permanence Of Price Reductions: A Policy for Prevention of Predatory Pricing (1979) 89 Yale Law Journal 1 and Oliver E. Williamson, Predatory Pricing: A Strategic and Welfare Analysis (1977) 87 Yale Law Journal. 284, a "total circumstances" test was proposed by F.M. Scherer Predatory Pricing and the Sherman Act: A Comment (1976), 89 Harvard Law Review 869 and finally a combined structural factors-exit inducing test was proposed by J.A. Ordover and Robert D. Willig, An Economic Definition of Predation: Pricing and Product Innovation (1981) Yale Law Journal 8.

⁶ Michael Trebilcock et. al., Chapter Five of The Law and Economics of Canadian Competition Policy (2002) University of Toronto Press, contains an excellent summary of various economic points of view on predation.

⁷ For a description of Parliament's consideration see, Chapter 5 of The Objectives of Canadian Competition Policy 1888-1983 by W.T. Stanbury and Paul K. Gorecki (1984) The Institute for Public Policy and Competition Policy in Canada, The First Hundred Years at pps 12 and 13 (1989) Bureau of Competition Policy, Consumer and Corporate Affairs.

⁸ 1969 Report of Economic Council. Also see Robert J. Patton, A Business perspective on the Application of Criminal law to Pricing Practices under the Competition Act, published in Papers of the Canadian Bar Association Fall Conference on Competition Law, 2000. The 1996 Report of the Consultative Panel on Amendments to the Competition Act recommended the repeal of paragraph 50(1)(a) and section 51. However, this recommendation was not ultimately included in Bill C-20 which was passed by Parliament and came into force March 18, 1999.

⁹ R. v. Carnation Co. (1968) 58 C.P.R. 112 (C.A. Alta).

¹⁰ In R. v. Perrault Driving Schools the accused was convicted by a jury and sentenced to a year of imprisonment for conspiracy and geographic price discrimination in the Eastern Townships of Quebec. There are also two unreported cases, R. v. Howard et. al. (1958) South Burnaby, B.C. Police Court Government No. 50-1and R. v. Fairmount Plating (Alta.) Ltd. (1977) Alta. Supreme Court Trial Division Government No. 255-1. In both cases the accused were acquitted basically on the grounds that the pricing behaviour involved meeting the competition. In R. Canada Safeway Ltd. (1973), 12 C.P.R. (2d) 3 (Alta. Trial Div.), the matter was settled by way of a prohibition order.

¹¹ R. v. Producers Dairy Ltd. (1966), C.P.R. (2d) 265.

¹² R. v. Hoffman LaRoche (1980), 28 O.R. (2d) 164 affirmed (1981), 33 O.R. (2d) 694 (C.A.).

¹³ R. v. Consumers Glass Co. (1981), 33 O.R. (2d) 228.

¹⁴ Boehringer Ingelheim (Canada) Inc. v. Bristol-Myers Squibb Canada Inc., (1998) C.P.R. (3d) 51 (Ontario Court of Justice - General Division).

¹⁵ R. v. Hoffman LaRoche (1980), Supreme Court of Ontario, Reasons for Sentence, No. 252.

¹⁶ This conclusion is noted by Donald F. McFetridge and Stanley Wong in Predatory Pricing in Canada: The Law and the Economics (1985), 63 Canadian Bar Review 4 at p. 698.

¹⁷ Enforcement Guidelines on Abuse of Dominant Position, Industry Canada, July 2001.

¹⁸ Director of Investigation and Research v. Tele-Direct Publications Inc. CT 94/03. The judgement specifically endorses recoupment as an essential element of predation. "The essence of an allegation of predatory pricing is that the firm foregoes short-run revenues by cutting prices, driving out rivals, and thus providing itself with an opportunity to recoup more than its short-term losses through higher profits earned in the longer term in the absence of competition." (p. 293) Also see Director of Investigation and Research v. The NutraSweet Company CT 89/2pps 73- 78.

¹⁹ In 1992 and 1993 the Bureau issued the Predatory Pricing Enforcement Guidelines and the Price Discrimination Enforcement Guidelines respectively.

²⁰ Matsuhita Electric Industrial Co. v. Zenith Radio Corp. 475 U.S. 574 (1986).

²¹ Supra note 5.

²² The U.S. Supreme Court affirmed the necessity of a "dangerous probability of recoupment" in its decision in Brooke Group Ltd. v. Brown & Williamson Tobacco Corp. 509 U.S. 209 (1993).

²³ Ibid at page 13.

²⁴ See Is the Price Right? Comments on the Predatory Pricing Enforcement Guidelines and Price Discrimination Guidelines of the Bureau of Competition Policy by Lawson A.W. Hunter and Susan Hutton (1993) McGill Law Journal 830. Supra note 6, Trebilcock et. al. endorse the 1992 Guidelines as consistent with sound economic principles and jurisprudence, and advocate removing the elimination of a competitor branch from the statute.

²⁵ Bill C-235 passed first reading in October 1997 and was then referred to the Standing Committee on Industry.

²⁶ Anticompetitive Pricing Practices and the Competition Act Theory, Law and Practice by J. Anthony VanDuzer and Gilles Paquet, respectively Professors of Law and Economics, University of Ottawa, October 22, 1999 available on the Bureau's website.

²⁷ For a description of Alternative Case Resolutions see the Conformity Continuum Bulletin, Competition Bureau available at www.cb-bc.gc.ca. Prosecutions of predatory pricing by the Antitrust Division of the United States Department of Justice are also quite rare. The Americans Airlines case currently before the appeal courts is the first predatory pricing case taken by the Antitrust Division in two decades. See Predatory Pricing and State Below Cost Sales Statutes in the United States: An Analysis, a study prepared for the Competition Bureau by Terry Calvani a former Commissioner of the U.S. Federal Trade Commission which is also available on the Bureau's website. Private suits are more common in the United States, but since the Brooke Group v. Brown & Williamson decision in 1993, few predatory pricing cases have survived summary judgement. See P. Boulton, J.F. Brodley and M.H. Riordan, Predatory Pricing; Strategic Theory and Legal Policy, (2000) 88 Georgetown Law Review.

²⁸ A Plan to Modernize Canada's Competition Regime, Report of the Standing Committee on Industry Science and Technology, April 2002, House of Commons Canada.

²⁹ Ibid. See the Foreword by the Committee's Chair.

³⁰ The latter theory was advanced in Brooke Group v. Brown & Williamson. The U.S. Supreme Court rejected the argument on the grounds that conditions leading to an expectation of an increase in interdependent market power that would result in recoupment were not evident. The Court did not reject the theory that predation could be harmful if it leads to increased interdependence.

³¹ The 35% market share and high barriers to entry indicators of market power are used in the Merger Enforcement Guidelines, Enforcement Guidelines on Abuse of Dominant Position and the 1992 Guidelines. The Draft Guidelines use the language " .. a market share of more than 35%, or if its market share is considerably greater than its rivals..." Footnote 8 of the 1992 Guidelines identifies where a firm with less than a 35% market share could affect pricing.

³² See P. Boulton, J.F. Brodley and M.H. Riordan, Predatory Pricing; Strategic Theory and Legal Policy, (2000) 88 Georgetown Law Review. In Paradigm Shift: The Competition Bureau's Draft "Enforcement Guidelines for Illegal Trade Practices: Unreasonably Low Pricing Policies" by Lawson A.W. Hunter and Jeffery Brown Competition Policy Record Spring/Summer 2002, the authors claim the Bureau is proposing the use of avoidable costs to be consistent with arguments the Bureau is using in its current litigation with Air Canada. They also allege the Bureau is adding more fixed cost items to the cost standard in an effort to make it easier to establish predation.

³³ For example, see discussion of Nutrasweet and Teledirect in part 3 of this paper. Also see Gary J. Dorman Implementing Price/Cost Tests for Predation: Practical Issues Antitrust Report May 2002. The latter addresses issues of calculating costs in the airline industry.

³⁴ For example, if a ready mix concrete or waste disposal firm acquires additional specialized trucks to engage in a predatory campaign, the non-sunk costs of the equipment would be included in the calculation of avoidable cost.

³⁵ Lawson A.W. Hunter and Jeffery Brown, Paradigm Shift: The Competition Bureau's Draft "Enforcement Guidelines for Illegal Trade Practices: Unreasonably Low Pricing Policies" Competition Policy Record Spring/Summer 2002.

³⁶ For example, 46 submissions were received on the Draft Intellectual Property Guidelines in the first round of consultations and 19 submissions in the second round on the revised draft of the document. Possibly the low response rate results from the potential divisive nature of the issue where business associations include members from both the large and small businesses communities.

³⁷ Supra note 35 at page 98.

³⁸ The U.S. government's argument of "reputation for predation" was rejected at the court of first instance in U.S. v. AMR Corporation et. al. , D. Kansas, 99-1180 JTM, April 30, 2001. Reputational effects, however, were accepted in Advo, Inc. v. Philadelphia Newspapers, Inc. 51 F.3d. 1196 (3rd Circuit 1995) and were incorporated in a U.S. Department of Transportation Proposal under the Clinton Administration entitled Proposal - Unfair Exclusionary Conduct in the Airline Transportation Industry Policy, Trade Regulation Reporter - 50,163, May 1998.

³⁹ In a footnote to their paper, Paradigm Shift, the authors indicate that Stikeman Elliott is counsel to Air Canada in the current litigation before the Competition Tribunal under section 79, abuse of dominant position.