Agreement to Reduce Samples

A not for profit organization ("the Organization") sought a written opinion in October 2003 on whether a proposed agreement to reduce the number of samples provided by four major suppliers of a product would raise concerns under the Competition Act ("Act"). As part of the arrangement, the suppliers of the product agreed to provide funding to the Organization to enable it to carry out its objectives which include the carrying out of research and providing education to specific groups of consumers. The proposed agreement would commence January 2004 and terminate December 2006 and followed a similar arrangement which terminated in December 2003.

The Competition Bureau examined the proposal under the criminal conspiracy provisions of the Act with particular reference to the statutory defence for agreements which restrict advertising and promotion under paragraph 45(3)(f) and the exceptions to these defences under paragraph 45(4). ¹ Based on its understanding of the facts, the Bureau determined that if the parties implemented the proposed agreement, it would not have sufficient grounds to commence an inquiry under the criminal provisions of the Act for the following reasons:

• The retail price of the product is regulated and there is little price variation between brands offered by suppliers. In real terms, retail prices have not increased during the last three years.
• Historical data was provided to the Bureau for the years 1999 to 2002 on the average number of units purchased by consumers. During that period of time the reduction in samples had little effect on the number of units purchased by consumers. However, it is possible that there were still a substantial number of samples available (not distributed to consumers) as they have a shelf life of approximately 3 years. Thus, a longer time period of data will be required to determine if a reduction in samples results in an 'effective increase' in prices.²
• New entrants into this particular market likely would benefit from the agreement as they could offer a significant number of samples without the fear of being swamped by samples from the incumbent suppliers.
• The agreement likely would not have an impact on the quantity or quality of production of the product and adequate levels of samples and sample choice would continue to be available to consumers.
• Data on the growth of the market and the volatility of market shares between the suppliers over the past several years is indicative of a competitive marketplace.

Based upon the above reasons, the Bureau concluded that the proposal was captured by the statutory defence under paragraph 45(3)(f), as an agreement which relates only to the restriction of advertising or promotion, and one that is unlikely to result in an undue lessening of competition. As a result, the Bureau provided the opinion that the proposed agreement, if implemented, would not provide the Commissioner with grounds to commence an inquiry under the conspiracy provisions of the Act.

A longer time period of data will be required to determine if a reduction in samples results in an effective increase in prices. The opinion covers only the stated period of the agreement, namely January 1, 2004 to December 31, 2006. Advice on the application of the Act to an extension of the Agreement or to any subsequent agreement would require a new advisory opinion.

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¹ Namely, agreements which lessen competition unduly in respect of prices, quantity or quality of production, markets or customers or channels or methods of distribution.

² To the extent that the proposal will reduce the number of free samples actually distributed to consumers, the total price paid for a given number of units would increase. This would constitute an 'effective increase' in prices.