Updated Enforcement Guidelines on the Abuse of Dominance Provisions

Sections 78 and 79 of the Competition Act

Enforcement Guidelines

Draft for Public Consultation — January 2009

(PDF; 688 KB; 61 Pages)

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Preface

The Competition Bureau (the “Bureau”) is an independent agency responsible for the administration and enforcement of the Competition Act (the “Act”). It contributes to the prosperity of Canadians by protecting and promoting competitive markets and enabling informed consumer choice.

The Bureau first published its Enforcement Guidelines on the Abuse of Dominance Provisions in 2001 to clarify its enforcement policy under section 79 of the Act to Canadian businesses and to the public. Subsequently, the Bureau published the Information Bulletin on the Abuse of Dominance Provisions as Applied to the Retail Grocery Industry and the Information Bulletin on the Abuse of Dominance Provisions as Applied to the Telecommunications Industry, which expand upon the Bureau’s approach to section 79 in the context of these industries. The Bureau has also taken cases to the Competition Tribunal (the “Tribunal”) in that time, most notably the Canada Pipe case, which resulted in the first decision from the Federal Court of Appeal with respect to section 79.

These updated guidelines describe the Bureau’s enforcement approach to the abuse of dominance provisions in light of recent jurisprudence and economic thinking. They expand upon the previous guidelines in a number of areas, including outlining the Bureau’s approach to anti-competitive intent and valid business justifications in light of the Federal Court of Appeal decision in Canada Pipe, clarifying the Bureau’s approach to joint dominance, and discussing specific forms of anti-competitive conduct such as exclusive dealing, tying and bundling, and denials of access.

Interpretation

These guidelines explain the general approach of the Bureau to abuse of dominance under the Act. They supersede all previous statements of the Commissioner of Competition (the “Commissioner”) or other officials of the Bureau addressing section 79 of the Act.

These guidelines are not intended to restate the law or to constitute a binding statement of how the Commissioner will exercise discretion in a particular situation. They do not replace the advice of legal counsel. The enforcement decisions of the Commissioner and the ultimate resolution of issues depend on the circumstances of the matter. Guidance regarding future business conduct can be obtained by requesting a binding Written Opinion from the Commissioner under section 124.1 of the Act. Final interpretation of the law is the responsibility of the Tribunal and the courts.

Executive Summary

Purpose and Scope of These Guidelines

As part of the Bureau’s continuing efforts to ensure a transparent and predictable enforcement policy, these guidelines provide an outline of the Bureau’s approach to enforcing the abuse of dominance provisions contained in sections 78 and 79 of the Act.

What Constitutes “Abuse of a Dominant Position”?

Abuse of a dominant position occurs when a dominant firm in a market or a dominant group of firms, engages in conduct that is intended to eliminate or discipline a competitor or to deter entry or expansion by competitors, with the result that competition is prevented or lessened substantially. These provisions, contained in sections 78 and 79, establish the bounds of legitimate competitive behaviour and provide for corrective action when firms engage in anti-competitive activities that damage or eliminate competitors and that are likely to substantially lessen or prevent competition.

The Bureau’s enforcement policy is to vigorously pursue cases that meet the elements of section 79. These guidelines make it clear, however, that section 79 is not intended to prohibit dominance itself or the mere presence of market power. Rather, the section seeks to address the abuse of a dominant market position where such abuse has had, is having, or is likely to have the effect of substantially preventing or lessening competition. While the ability to raise prices or maintain high prices usually indicates market power or dominance, high prices do not in themselves raise issues under the Act, and the Bureau’s role is not to function as a price regulator. These guidelines make it clear that in enforcing these provisions the Bureau will not attempt to tilt the playing field in favour of any particular market participant, nor will it otherwise protect competitors from the challenges of legitimate competition.

Subsection 79(1) sets out three essential elements, all of which must be found to exist by the Tribunal for it to grant an order. The Tribunal must find that:

• one or more persons substantially or completely control, throughout Canada or any area thereof, a class or species of business;
  
  
• that person or those persons have engaged or are engaging in a practice of anti-competitive acts; and
  
  
• the practice has had, is having or is likely to have the effect of preventing or lessening competition substantially in a market.

How the Bureau Establishes Dominance

The first element that the Bureau must establish when examining an allegation of abuse of dominance is whether or not the person(s) or firm(s) in question substantially or completely control a “class or species of business”. For the purposes of enforcing section 79, the Bureau treats the element “class or species of business” as synonymous with the relevant product market. Likewise, it approaches the element of “throughout Canada or any area thereof” as synonymous with the relevant geographic market. In defining relevant markets, the Bureau employs a standard economic approach that takes into account a variety of factors, the most important of which are the availability of close substitutes, transportation costs and customer switching costs.

The Bureau considers the element of “substantially or completely control”, or “dominance” as it is commonly referred to, to be synonymous with market power. In a general sense, market power is the ability of a single firm or a group of firms to profitably maintain prices above the competitive level for a significant period of time.¹ In regard to the abuse provisions, the Bureau is concerned with the creation, enhancement or preservation of market power as a result of an anti-competitive practice. If a firm does not have market power or is not expected to obtain market power through the alleged practice within a year, the Bureau will not pursue the issue.

It is sometimes difficult to measure market power directly, such as through evidence of supra-competitive pricing. Consequently, in addition to assessing any available information in regard to direct measures of market power, the Bureau assesses a number of indirect indicators of market power, including technological change, recent entry into or exit from the market, industry supply capacity, and countervailing market power on the part of customers and distributors. Factors on which the Bureau places particular emphasis are market shares and barriers to entry.

The objective of this analysis is to determine the extent to which a firm or group of firms is constrained from raising prices because of the presence of effective competition or the likelihood of competitive entry. In the case of entry barriers, including those created by the firm’s conduct, the Bureau will assess not only whether entry is likely, but also the time period required for an entrant to become a viable and effective competitor of sufficient scale and scope such that an attempted price increase is not likely to be sustainable.

All other things being equal, the higher the market share held by a firm or group of firms engaging in alleged anti-competitive behaviour, the greater the likelihood they will possess market power. However, given that the attempted exercise of market power may be mitigated by other factors, and that the dispersion of market shares among other competitors may be significant, there is not always a direct correlation between market share and market power. That said, the Bureau’s general approach in evaluating allegations of abuse of dominance is as follows:

• A market share of less than 35 percent will generally not give rise to concerns of market power.
  
  
• A market share of 35 percent or more will generally prompt further examination.
  
  
• In the case of a group of firms alleged to be jointly dominant, a combined market share equal to or exceeding 65 percent will generally prompt further examination.

The reference to “one or more persons” in section 79 contemplates a situation where a group of firms, none of which on its own is necessarily dominant, may collectively possess market power. The Bureau establishes joint dominance similarly to single-firm dominance. In assessing cases where joint dominance is alleged, the Bureau will assess which firms in that market would need to be each engaging in potentially anti-competitive behaviour such that together they have market power. This market power analysis is based on the collective market share of the firms alleged to be each engaging in potentially anti-competitive behaviour, the market’s barriers to entry or expansion, and any other relevant factors. Where the firms alleged to be each engaging in potentially anti-competitive behaviour appear to collectively hold market power, the Bureau will consider these firms to hold a jointly dominant position.

“Practice of Anti-Competitive Acts”

Having defined a relevant product and geographic market, and determined sufficient conditions to give rise to a finding of market power, the Bureau must establish as the second element required under section 79 that the firm or firms in question have engaged or are engaging in a “practice of anti-competitive acts”. The word “practice” normally denotes more than an isolated act. Within the meaning of section 79 and as reflected in the jurisprudence, a “practice” can encompass one occurrence that is sustained or systematic over a period of time, or a number of different acts taken together that are intended to have a negative effect on competitors.

Section 78 provides a non-exhaustive list of anti-competitive acts. None of these acts, nor any other potentially anti-competitive act, necessarily constitute an abuse of dominance in and of itself. For an act to be considered anti-competitive, it must be found to be for the purpose of an intended negative effect on a competitor that is exclusionary, disciplinary, or predatory.

The jurisprudence under section 79 has held that the element of anti-competitive intent or purpose can be established either with direct evidence or by inference, based on the reasonably foreseeable effects of a practice on competitors in the particular circumstances of a case.

Unlike the merger provisions of the Act, section 79 does not provide for an efficiency exception in assessing acts that are considered to be anti-competitive. However, in some cases the firm or firms in question may have a valid business justification for engaging in the conduct at hand. The Bureau will consider such justifications in determining whether the overall purpose of the conduct is anti-competitive.

The Test of Substantial Prevention or Lessening of Competition

A substantial lessening or prevention of competition is an effect that creates, preserves, or enhances barriers to entry and expansion and, by extension, market power. At this stage, the focus is placed squarely on effects on competition, rather than on the intent or purpose of the practice. In any given case, the degree of market power, the nature and severity of the anti-competitive acts, and the degree of competition remaining in the market will all form part of the determination.

The Bureau analyzes a potential substantial lessening or prevention of competition using a “but for” test: “but for” the practice in question, would there be substantially greater competition in the relevant market in the past, present, or future? If it can be demonstrated that, but for the practice of anti-competitive acts, an effective competitor or group of competitors would likely emerge within a reasonable period of time or would remain in the market to challenge the dominance of the firm(s), the Bureau will conclude that the practice in question results in a substantial lessening or prevention of competition. The Bureau will also examine such factors as whether or not consumer prices might be substantially lower; product quality, innovation, or choice might be substantially greater; or consumer switching between products or suppliers might be substantially more frequent in the absence of the practice.

Remedies

The abuse of dominance provisions grant certain remedial powers to the Tribunal. Where the Tribunal finds that the elements of section 79 are met, it may make an order prohibiting a respondent firm or firms from engaging in the practice of anti-competitive acts at issue. In addition, or alternatively, if the Tribunal concludes that a prohibition order may not be adequate to restore competition, it may make an order directing any such actions, including the divestiture of assets or shares, as are reasonable and necessary to overcome the effects of the practice of anti-competitive acts.

Although the Tribunal has latitude to impose remedies under section 79, subsections 79(3) to 79(7) contain a number of limitations, exceptions and clarifications with respect to orders of the Tribunal and applications by the Commissioner. These are discussed in Section 5.

Conclusion

These guidelines outline the Bureau’s enforcement approach to section 79 to address the abuse of a dominant market position. Competitive markets provide consumers with lower prices, greater choice, and innovative products, and protecting the integrity of competition is important to ensure both the efficiency of the Canadian economy and the prosperity of Canadians. Section 79 is intended to strike a balance by preventing anti-competitive conduct without deterring firms from aggressive competition.

To this end, these guidelines attempt to outline when otherwise legitimate conduct may raise issues under section 79, and when it will not.

This document cannot provide guidance for every situation, and the circumstances of each case will ultimately determine how the Bureau will exercise its enforcement discretion. Pursuant to its Program of Written Opinions, the Bureau has historically provided its views on proposed actions by businesses. Consequently, anyone can seek advice on whether or not a proposed course of action would raise an issue under the Act.

For further information, please contact the Bureau at the address and telephone numbers listed below.

Information Centre
Competition Bureau
50 Victoria Street
Gatineau, QC K1A 0C9

Tel.: 819-997-4282
Toll-free: 1-800-348-5358
TDD (for hearing impaired): 1-800-642-3844

Fax: 819-997-0324
Fax-on-demand: 819-997-2869

Web site: www.competitionbureau.gc.ca

Part 1: Introduction

1.1 Purpose of the Guidelines

These guidelines are part of the Bureau’s continuing effort to promote a transparent and predictable enforcement policy. It describes the Bureau’s approach under the abuse of dominance provisions (sections 78 and 79) of the Act². These guidelines are intended to help the general public, business people, and their legal and economic advisors to better understand the abuse of dominance provisions and the Bureau’s general approach to enforcing these provisions.

These guidelines are organized into five parts and five appendices as follows:

• Part 1 describes the purpose of the abuse of dominance provisions.
• Part 2 sets out the institutional framework for enforcement of the provisions.
• Part 3 provides a detailed discussion of the key elements of section 79.
• Part 4 discusses the economics of various types of anti-competitive acts.
• Part 5 deals with remedies available to the Tribunal under section 79.
• Appendix I contains the text of sections 78 and 79 and of other sections of the Act dealing with abuse of a dominant market position.
• Appendix II discusses the Bureau’s approach to exclusive dealing.
• Appendix III discusses the Bureau’s approach to tying, bundling, and bundled rebates.
• Appendix IV discusses the Bureau’s approach to denials of access.
• Appendix V provides a brief summary of the section 79 cases that have been decided by the Tribunal.

1.2 Purpose of the Abuse of Dominance Provisions

Under section 79, simply being a dominant firm or even a monopoly, with the associated market power, is not in and of itself sufficient to warrant competition law intervention. Charging higher prices to customers, or offering lower levels of service and choice, than would be expected in a more competitive market does not in and of itself constitute an abuse of a dominant position. Rather, the Tribunal has determined that an abuse occurs when a firm or group of firms with market power engages in conduct with an intended negative effect that is exclusionary, disciplinary or predatory towards competitors or potential competitors, with the result that competition is or is likely to be prevented or lessened substantially.³

The objective of the abuse of dominance provisions is to create a market framework within which all firms have an opportunity to either succeed or fail on the basis of their ability to compete. Providing such a framework, however, does not mean establishing equality among competitors. Rather, the objective of the abuse provisions is to promote effective competition and not the interests of any one competitor or group of competitors.

In all markets, some businesses will be better positioned than others to compete. Some may have superior products, more efficient distribution methods or greater marketing expertise. Firms may also employ different competitive strategies, including varying degrees of vertical integration. It is part of the normal competitive process that some firms will succeed while others will fail. The abuse provisions establish the bounds of competitive behaviour for firms and provide for corrective action where such firms go beyond legitimate competitive behaviour in order to damage or eliminate competitors with the result that competition is or is likely to be substantially lessened or prevented.

To reach a determination regarding any alleged breach of the abuse of dominance provisions, the circumstances of the industry and the particular facts of each case must be investigated and carefully analysed. For example, conduct engaged in by a firm with a relatively low market share in an industry with low or minimal barriers to entry would be unlikely to trigger an inquiry, or an application to the Tribunal. However, identical anti-competitive acts engaged in by a firm with a dominant position in a market in an industry with significant entry constraints could well trigger enforcement action by the Bureau. Therefore, in considering whether particular business conduct breaches the abuse of dominance provisions, it is necessary to evaluate the practices in question in the context of the structural and other characteristics specific to the market. In light of this, it is not possible in these guidelines to set hard and fast rules for all situations as to what would constitute an abuse of dominance. Nevertheless, these guidelines clarify the Bureau’s interpretation of existing jurisprudence and its general approach to enforcing these provisions.

Part 2: Institutional Framework for Enforcement

2.1 Investigation and Adjudication

The Act and the Competition Tribunal Act⁴ create a clear separation between the functions of investigation and adjudication. The Commissioner of Competition⁵ is responsible for inquiries under the Act and is provided with significant powers with which to carry them out.⁶ The Tribunal is responsible for adjudication of the civil provisions of the Act, including the abuse of dominance provisions.⁷

Only the Commissioner can make an application to the Tribunal for a remedial order under section 79. Likewise, the Tribunal can consider an issue under the Act only when it has received an application from the Commissioner. When an application has been filed with the Tribunal, the burden of proof is on the Commissioner to satisfy the Tribunal that all of the elements of section 79 are met and that an order of the Tribunal should be granted.⁸ In other words, the Commissioner cannot directly compel change in business behaviour. The Commissioner must take on the role of litigant before the Tribunal and must produce evidence and prove that there are grounds for the making of an order.

2.2 The Examination/Inquiry Process

An application by the Commissioner to the Tribunal is preceded by an investigation and inquiry by the Bureau. Examinations under the Act typically begin with the receipt of a complaint. In abuse of dominance cases, complaints may be received from firms alleging that competitors’ activities are inhibiting their ability to enter or compete in a market.

On receiving a complaint, the Bureau undertakes a preliminary examination to gather facts and determine: (i) whether there is a possible issue under the Act; (ii) whether grounds exist to pursue a formal inquiry under the Act; and (iii) under which provisions of the Act the inquiry should proceed. The Commissioner orders an inquiry where he or she has reason to believe that grounds exist for the making of an order under Part VIII of the Act, which contains the abuse of dominance provisions. Once the inquiry has begun, formal powers of investigation may be used.⁹

Before using formal powers of investigation, the Commissioner must seek the authorization of the court to compel persons to provide the information required to complete the inquiry. Section 11 of the Act allows the Commissioner to obtain authorization from the court to compel the production of documents, written returns of information, and/or attendance of persons for an oral examination under oath. Sections 15 and 16 provide for the search of premises and computer systems and the seizure of evidence.¹⁰

Often, allegations of abuse of dominance can also be examined under other more specific civil and criminal provisions. The Commissioner’s inquiries can be broad enough to consider possible contravention of the Act under a number of sections.¹¹ A final determination of which sections of the Act the Commissioner will invoke will depend on the specific facts of the case. There must also be an effective remedy available before the Commissioner will consider an application to the Tribunal.

In the course of its inquiries, the Bureau will pursue various avenues of investigation to obtain all relevant information. This normally includes information in the possession of complainants, third party market participants, and the firm or firms that are the subject of the inquiry. This information is carefully analysed within the legal and economic framework of the legislation. Frequently, the Bureau will obtain specialized legal and economic advice or industry-specific expertise as part of its case assessment process. Where the evidence discloses that the Bureau has grounds for an application to the Tribunal, parties against whom an order would be sought are provided with a full opportunity to present information to the Bureau or to indicate what, if any, measures they may be prepared to undertake to address the competition concerns.

The inquiry process is governed by a number of checks and balances. Subsection 10(3) of the Act requires that all inquiries be conducted in private. As noted, the Commissioner can only exercise formal powers of investigation by obtaining the prior authorization of the courts to do so. The importance of due process, the complexity of the issues, the volume of information and the degree of analysis required by the Bureau to make proper decisions on the disposition of inquiries combine to make the inquiry process potentially time-consuming and resource-intensive.

2.3 Disposition of Examinations/Inquiries

The final disposition of an examination or an inquiry depends upon whether or not the evidence establishes that the elements of subsection 79(1) are present. If the Commissioner concludes that the evidence does not establish the elements of subsection 79(1), the inquiry is discontinued. The Commissioner then produces a report for the Minister of Industry, indicating the information obtained and the reason for the discontinuance.¹² Following this, the target of the examination as well as the complainant(s) are notified in writing of the status of the inquiry. Where the Commissioner has grounds to do so, an application can be made to the Tribunal. Part 5 of these guidelines discusses the remedies available under section 79, as well as alternative approaches to resolving competition concerns without resorting to litigation before the Tribunal.

2.4 The Competition Tribunal Process

If the Commissioner, having investigated a complaint of abuse of dominance, is satisfied that the evidence supports an application to the Tribunal for a remedy, the Commissioner will normally communicate to the parties any concerns regarding the alleged contravention of the Act. The parties would then be afforded the opportunity to respond to the Commissioner’s concerns and propose means of addressing those concerns, and thereby avoid contested proceedings before the Tribunal.

Resolution of these matters is dealt with on a case-by-case basis. In most circumstances, the Commissioner’s strong preference is to have a remedy agreed upon by the parties set out in a registered consent agreement pursuant to section 105 of the Act. In instances where a non-contested course of action has been adopted to resolve competition issues, the Commissioner will issue a press release or an announcement on the Bureau’s Web site to ensure that all interested parties are informed that the matter has been resolved.

Where a consent agreement has not been reached with the respondent, the Commissioner will file an application with the Tribunal to resolve the issue through litigation. Whether cases come before the Tribunal on a consensual or contested basis, the rules of the Tribunal provide for an open public hearing process in which affected third parties can apply for intervener status. Proceedings are governed by the Competition Tribunal Rules, which include procedures for the appearance of witnesses as well as the production of documentary evidence.

Section 103.3 of the Act provides the Tribunal with the authority, on ex parte application by the Commissioner, to issue an Interim Order or “temporary order” to prevent irreparable harm to competition or to a competitor, while an inquiry by the Commissioner is underway. Interim orders are limited to a maximum of 80 days, unless the Tribunal is satisfied that the Commissioner has sought and not received information necessary to complete his or her inquiry. An interim order pursuant to section 104 of the Act may also be available once an application for a remedial order has been filed with the Tribunal.

Part 3: The Elements of Subsection 79(1)

3.1 Statutory Provision

Subsection 79(1) of the Act provides:

Where, on application by the Commissioner, the Tribunal finds that

• (a) one or more persons substantially or completely control, throughout Canada or any area thereof, a class or species of business,
• (b) that person or those persons have engaged in or are engaging in a practice of anti-competitive acts, and
• (c) the practice has had, is having or is likely to have the effect of preventing or lessening competition substantially in a market,

the Tribunal may make an order prohibiting all or any of those persons from engaging in that practice.

Thus, section 79 sets out the three essential elements; if any one element is not met, there are insufficient grounds for a remedial order.

Paragraph 79(1)(a) focuses on market power. The Bureau considers market power, in the general sense, to be the ability to profitably maintain prices above competitive levels (or similarly restrict non-price dimensions of competition) for a significant period of time. Market dominance can also arise on the buying side. Market power of buyers means the ability of a single firm or group of firms to profitably depress prices paid to sellers to a level that is below the competitive price for a significant period of time. In the context of paragraph 79(1)(a), the relevant level of market power includes both a firm’s pre-existing market power and its market power derived as a result of any anti-competitive conduct. If a firm does not have market power or is not expected to obtain market power through the alleged practice within a year, in the sense that prices are at competitive levels and it is not expected the firm will have the ability to raise them, the Bureau will not pursue any alleged abuse of dominance.

Paragraph 79(1)(b) focuses on behaviour that is anti-competitive. A dominant firm that charges prices above the competitive level is not, for that reason alone, subject to an application under section 79. The abuse of dominance provisions are not intended to regulate prices, but rather to ensure that anti-competitive conduct is properly addressed. Examples of business practices that constitute anti-competitive acts are listed in section 78. The list, although broad, is non-exhaustive. Accordingly, the Tribunal has the latitude to address anti-competitive acts not defined in section 78. Part 4 of this document provides more detail on anti-competitive acts.

Finally, paragraph 79(1)(c) requires proof that the practice of anti-competitive acts has had, is having or is likely to have the effect of "preventing or lessening competition substantially." This places the focus squarely on effects on competition, rather than on individual competitors.

3.2 The Elements

3.2.1 “One or more persons substantially or completely control, throughout Canada or any area thereof, a class or species of business”

This paragraph of the Act contains three elements that are discussed further below: (i) the existence of a class or species of business in Canada or any area thereof; (ii) the meaning of “control”; and (iii) the meaning of “one or more persons.”

3.2.1(a) “Class or species of business” - Product Market Definition

Assessing market power requires an identification of products and the competitors that produce them that are likely to constrain the ability of the firm(s) in question to profitably raise price(s) or otherwise restrict competition. The Bureau defines a “class or species of business” as synonymous with a relevant product market.¹³ Defining a relevant product market begins by examining the product in regard to which the alleged abuse of dominance has occurred or is occurring. It then considers whether a hypothetical monopolist would impose and sustain a significant and non-transitory price increase for that product above a given benchmark. In general, a five percent real price increase above the price level that would prevail absent the alleged anti-competitive act(s) (i.e., the relevant benchmark) for a period of one year is considered a significant and non-transitory amount.¹⁴ If the price increase would likely cause buyers to switch their purchases to other products in sufficient quantity to render the price increase unprofitable, the product in question is not the relevant market, and the next-best substitute is added to the candidate market. The analysis then repeats and continues until the point at which the hypothetical monopolist would impose and sustain the price increase. This is known as the “hypothetical monopolist” test.¹⁵

In applying the hypothetical monopolist test, the products of the firms that appear likely to have been predated, disciplined or excluded as a result of the alleged anti-competitive act are identified and taken into account when considering possible candidate markets. The products of firms that continue to sell potential substitute products in the presence of the alleged anti-competitive act are also considered. The smallest candidate market considered is the allegedly abusive firm’s product. If a hypothetical monopolist controlling that product would not impose a price increase of five percent or more above the benchmark, the candidate relevant market is expanded to include the next-best substitute. The next-best substitute could include the products of firms that continue to sell in the presence of the alleged anti-competitive act, as well as the products of firms that have been identified as likely to have been excluded. The smallest set of products in which the price increase would be sustained is defined as the relevant product market.

The above described approach allows for a determination of the products that an allegedly abusive firm would have to control, or otherwise affect by way of an anti-competitive act, in order to be able to raise price above the price that would otherwise prevail absent the anti-competitive act.¹⁶ The assessment of substitutability between products focuses on demand responses (i.e., buyer substitution) to relative price changes. Supply responses (i.e., the ability of potential competitors to begin supplying the relevant market in response to an increase in price) are important when assessing the potential for the exercise of market power, but are not examined when defining relevant markets.

An approach that considers buyer substitution in response to small but significant price changes was accepted by the Tribunal in Laidlaw,¹⁷ and later in Nielsen,¹⁸ where the Tribunal set its basic approach to product market definition:

• Direct evidence of switching behaviour in response to small changes in relative price would provide proof of substitutability. Where price and quantity changes are not in evidence . . . it is necessary to answer the question less directly by examining the evidence of both buyers and suppliers regarding the characteristics, the intended use and the price of [the product(s) in question].¹⁹

Ideally, direct evidence of buyer switching (i.e., changes in quantities purchased) in response to relative price changes can demonstrate substitutability for the purposes of market definition.²⁰ In practice, such direct evidence may be difficult to obtain. With or without direct evidence, however, the Bureau also looks at a number of qualitative factors in determining product substitutability under the abuse of dominance provisions. These include:

• The views, strategies, behaviour and identity of buyers. Whether buyers have substituted between products in the past and whether they plan on doing so in the future can indicate whether a price increase is sustainable.
  
  
• Trade views, strategies and behaviour. Industry surveys, industry participants and industry experts may provide helpful information on past and likely future developments in the industry in regard to products that are alleged to provide a significant constraining influence. Documents prepared by the allegedly abusive firm(s) in the ordinary course of business may also be useful in this regard.
  
  
• End use. Functional interchangeability is generally a necessary, but not a sufficient, condition for two products to warrant inclusion in the same relevant market.
  
  
• Physical and technical characteristics. In general, the greater the value that buyers place on the actual or perceived unique physical or technical characteristics of a product, the more likely it is that the product will be found to be in a distinct relevant market.
  
  
• Switching costs. The extent to which, absent the alleged practice of anti-competitive acts, the transaction costs that buyers would have to incur in order to retool, repackage, adapt their marketing, breach a supply contract, learn new procedures and so forth may be sufficient to make switching an unlikely response to a significant and non-transitory price increase.
  
  
• Price relationships and relative price levels. The absence of a strong correlation in price movements between two products over a significant period of time may suggest that the products are not in the same relevant market.

3.2.1(b) “Throughout Canada or any area thereof” - Geographic Market Definition

An analysis of the universe of existing competition also has a geographic dimension. The Bureau considers the determination of “throughout Canada or any area thereof” as equivalent to defining the relevant geographic market.²¹ As with defining a relevant product market, the Bureau will examine the dimensions of buyer switching, by location, in response to a small but significant and non-transitory increase in price, applying the hypothetical monopolist test as described above. A relevant geographic

market will consist of all locations or supply points regarded as close substitutes by buyers. This is consistent with the jurisprudence.²²

In addition to drawing on the available quantitative techniques used in product market definition, the Bureau also considers certain qualitative factors when determining geographic market definition under the abuse of dominance provisions:

• The views, strategies, behaviour and identity of buyers. Considerations relating to convenience or the particular characteristics of the product (e.g. fragility, perishability) may influence a buyer’s choice of supplier in the event of a price increase. The Bureau will examine what buyers have done in the past, and what they are likely to do in the future as options become available through, for instance, advances in technology.
  
  
• Trade views, strategies and behaviour. Third parties who know the industry in question may provide helpful information regarding past and likely future industry developments that help to define the relevant market. The extent to which distant sellers are taken into account in business plans, marketing strategies and other documentation of the allegedly abusive firm(s) and other sellers may also be useful indicators of geographic market definition.
  
  
• Switching costs. The extent to which, absent the alleged practice of anti-competitive acts, the transaction costs that buyers would have to incur in order to adapt their business to obtain the product from another source may be sufficient to make switching an unlikely response to a significant and non-transitory price increase.
  
  
• Transportation costs. In general, where prices in a distant area have historically been higher than prices in the relevant geographic area by an amount that exceeds the transportation costs, this is usually an indication that the distant area is in a separate relevant market. However, this may not be conclusive, because the postulated significant and non-transitory price increase above the level that would prevail in the absence of the alleged anti-competitive act(s) may elevate prices to a level above the distant price plus transportation costs. Where it is profitable for distant sellers to ship the product into the relevant market, it is generally assumed that the supplier would likely do so.
  
  
• Price relationships and relative price levels. Significant price differences or the absence of a strong correlation in price movements between two geographic areas over a significant period of time may suggest that the areas are not in the same relevant market.
  
  
• Shipment patterns. Significant shipments of the product in question from a more distant area into an area in relation to which a price increase is being postulated may suggest that the distant area is in the geographic market. However, past trading patterns can be a poor indicator of the extent to which sellers in one area constrain sellers in another area, particularly where there is an absence of shipping. In cases where there have been shipments, further analysis would be necessary to determine whether shipments from the distant area would render a small but significant price increase unprofitable.
  
  
• Foreign competition. While the principles above apply equally to domestic and international sources of competition, there may be other considerations when examining the influence of foreign-based suppliers, including tariffs, quotas, regulations, antidumping complaints or duties, government procurement policies, intellectual property laws, exchange rate fluctuations, and international product standardization.

3.2.1(c) “Substantially or completely control” - Market Power

Once the universe of existing competitors has been determined, it is necessary to assess the extent to which these rivals constrain any market power that the dominant firm(s) might otherwise possess. The Bureau considers “control” to be synonymous with market power.²³ As the Bureau is generally concerned with the enhancement or preservation of market power as a result of an anti-competitive practice (where the Bureau considers that preserving or enhancing market power may include the creation of market power, if “control” under paragraph 79(1)(a) is established as a result of the anti-competitive conduct at issue), in the context of paragraph 79(1)(a), the relevant level of market power includes both a firm’s pre-existing market power and its market power derived as a result of any anti-competitive conduct. The Bureau normally regards a “significant” period of time for the purposes of establishing market power to be one year. This does not mean that the Bureau will not pursue an abuse of dominance case where market power has been in place for less than one year. In these instances, the Bureau will examine the likelihood that this market power would continue to exist, or be enhanced, if the Bureau did not intervene.

Market power can be measured both directly and indirectly. Direct indicators of market power, such as profitability or evidence of supra-competitive pricing, are not always conclusive – it can be difficult to define the price level that would have prevailed in the absence of the alleged anti-competitive act(s) in determining whether prices are significantly above that level, and it can also be difficult to define the appropriate measure of cost to which prices should be compared. Nevertheless, some direct indicators have been accepted as evidence by the Tribunal where they are available. In Tele-Direct, for example, the Tribunal accepted that Tele-Direct’s high price to average cost margin, resulting in accounting profits of approximately 40 percent, was evidence of high economic rents and thus a direct indicator of Tele-Direct’s market power. Similarly, in Canada Pipe, the Tribunal accepted evidence of significant variations in price by region, along with the ability to lower prices in response to increased competition or entry, as evidence of supra-competitive pricing (at least in higher-price regions), although these indicators alone were not sufficient to establish market power. In both cases, market power was also shown to exist through indirect indicators.

The Bureau uses a number of indirect indicators, both qualitative and quantitative, to assess market power. These indicators include, but are not necessarily limited to, the following:

• market share, including share stability and distribution;
  
  
• barriers to entry, including the conduct engaged in by the allegedly dominant firm(s); and
  
  
• other market characteristics, including extent of technological change and customer or supplier countervailing power.

3.2.1(c)(i) Market Share

The case law indicates that, in addition to barriers to entry, one of the most important factors in determining market power is market share.²⁴ There is not, however, a definitive numeric market share threshold that implies that a firm has market power. The Bureau has adopted the view that high market share is usually a necessary, but not sufficient, condition to establish market power.

All other things being equal, the larger the share of the market held by remaining competitors, the less likely it is that the firm(s) in question would be able to exercise market power. Where remaining competitors have a large market presence, customers could pursue several competitive alternatives if a firm or group of firms attempts to increase price. Defection of a significant fraction of a firm's customer base may be enough to make an increase in price unprofitable.²⁵

In addition to considering current sellers of relevant products as competitors, the Bureau will also consider “supply responses”, or potential sellers that would divert sales or utilize excess capacity to begin supplying the market if prices rose by five percent. In such a case, a firm would be considered a participant in the relevant market if it did not require significant sunk investments to enter the market and would be able to do so within a one-year period. For firms that participate in the market through a supply response, only the output or capacity that would likely become available to the relevant market without incurring significant investments will be included in market share calculations. Situations where entry would require significant sunk investments or would take longer than one year are considered in entry analysis, described in the following section on barriers to entry.

Market shares can be measured in terms of revenues (dollar sales), demand units (unit sales), capacity (to produce or sell), or, in certain natural resource industries, reserves. If products in the relevant market are homogeneous and firms are all operating at capacity, firms’ relative shares of the market should be fairly similar whether measured on the basis of dollar sales, demand units or capacity. Where firms producing homogeneous products have excess capacity, market shares based on capacity may best reflect a firm’s relative market position and competitive influence in the market; if competitors can easily increase supply in response to an increase in price, they may be able to constrain a firm’s ability to raise its price above competitive levels. However, where products are more differentiated, market shares based on dollar sales, demand units and/or capacity can increasingly invite different inferences concerning firms’ relative competitive positions. Where markets are highly differentiated, total capacity may be a misleading indicator of market position, and shares based on revenues or demand units may be more probative in this regard.

In the contested abuse of dominance cases heard to date,²⁶ the market shares of the firms found to be dominant were very high, suggesting that in these instances customers had few alternatives to choose from in the event that the dominant firm increased prices or otherwise substantially lessened competition.²⁷ In Tele-Direct, the Tribunal stated that it would require evidence of “extenuating circumstances, in general, ease of entry” to overcome a prima facie determination of control based on market shares of 80 percent and higher in local telephone directory advertising markets. In Laidlaw, the Tribunal observed that a market share of less than 50 percent would not give rise to a prima facie finding of dominance, but this does not imply that market power could never be found below 50 percent.

The Bureau considers that a market share of less than 35 percent will normally not give rise to concerns of market power or dominance. If a firm has a 35 percent or higher market share, the Bureau will normally continue its investigation. In joint abuse cases, the Bureau considers that a combined market share of the group of firms alleged to be jointly dominant of less than 65 percent will normally not give rise to concerns of market power or dominance.²⁸ The Bureau’s approach to assessing joint dominance is discussed in more detail below.

3.2.1(c)(ii) Barriers to Entry

As noted above, high market share is not in itself sufficient to prove market power. A firm’s attempt to exercise market power may be thwarted by entry or expansion of existing and/or potential competitors on a sufficient scale and scope, if entry and/or expansion is expected to be profitable. Factors that reduce the likelihood of this profitability are referred to as barriers to entry. Barriers to entry can take many forms, from factors that deter entry by raising costs to factors that preclude entry absolutely. These can include sunk costs, regulatory barriers, economies of scale and scope, market maturity, network effects, access to scarce or non-duplicable inputs, and existing long-term contracts.²⁹ While, in some cases, each individual barrier may be insufficient to impede entry, the Bureau considers the collective influence of all barriers, which, when taken together, can effectively deter entry.

As the Tribunal noted in Laidlaw, the term “barriers to entry” carries with it the connotation of sustainability.³⁰ An entrant must not only be able to enter, but be able to become a viable competitor. In examining barriers to entry, therefore, the Bureau will assess whether entry would be timely, likely, and sufficient in scale and scope to make an increase in a dominant firm’s market power unsustainable. Timely means that entry will occur relatively quickly;³¹ likely refers to the expectation that entry will be profitable; and sufficient means that entry would deter dominant firms from augmenting their market power by a significant amount.

3.2.1(c)(iii) Other Factors

The Bureau considers other factors, in addition to market share and barriers to entry, when assessing market power. These include countervailing power, technological change and innovation.

In determining whether a firm has the ability to exercise market power, the Bureau assesses whether one or more customers have a countervailing ability to constrain an exercise of market power. For example, a customer may be able to constrain a dominant firm’s attempt to exercise market power by switching to other sellers in a reasonable period of time, vertically integrating their own operations, or encouraging entry or expansion of existing or potential competitors.

The Bureau also takes into account the nature and extent of change and innovation in a relevant market in assessing market power. A firm may not have market power, or its market power may be short-lived, if there is rapid change in the technologies used to produce the relevant products or services, or there is rapid change in the type of services offered. Evidence of a rapid pace of technological change and the prospect of firms being able to “innovate around” or “leapfrog over” an apparently entrenched position by the incumbent firm is an important consideration, along with change and innovation in relation to distribution, service, sales, marketing, packaging, buyer tastes, purchase patterns, firm structure and the regulatory environment.

3.2.1(d) “One or more persons” - Joint Dominance

The wording of the Act clearly contemplates cases where a group of unaffiliated firms may possess market power even if no single member of the group is dominant by itself. In joint dominance cases, there are three sources of competition that can defeat the profitability of a price increase. These are: competition from existing rivals outside the allegedly jointly dominant group; competition from potential rivals (i.e., entrants) outside the allegedly jointly dominant group; and competition from within the allegedly jointly dominant group.

The Bureau’s approach to assessing joint dominance is the same as with single-firm dominance; namely, it involves defining a relevant market and assessing the ability of a firm or firms to exercise market power within that market. In the case of joint dominance, this requires an assessment of which firms in that market would need to be each engaging in potentially anti-competitive behaviour such that together they have market power.³² If these firms are not each alleged to be engaging in potentially anti-competitive behaviour, the Bureau will not consider joint dominance to exist in that market. However, where these firms are each engaging in similar practices alleged to be anti-competitive, and they appear to together hold market power based on their collective share of the market, barriers to entry or expansion, and other factors as discussed above, the Bureau will consider these firms to hold a jointly dominant position.

As with single-firm dominance, however, the mere exercise of market power on a collective basis is not sufficient to raise an issue under the abuse provisions of the Act. While a group of firms may be exercising market power collectively, it is still necessary to establish a practice of anti-competitive acts that constitutes some abuse of that market power.

3.2.2 “Have engaged in or are engaging in a practice of anti-competitive acts”

The second element of section 79 examines whether “that person or those persons have engaged in or are engaging in a practice of anti-competitive acts.” As noted above, the law does not imply that the mere existence of market power will give rise to grounds for a remedial order by the Tribunal; rather, paragraph 79(1)(b) requires some form of anti-competitive conduct as well. According to the Federal Court of Appeal, “an anti-competitive act is one whose purpose is an intended negative effect on a competitor that is predatory, exclusionary, or disciplinary.”³³ The Bureau interprets this to include both existing and potential competitors.

Paragraph 79(1)(b) can be usefully divided into two parts. The first part involves showing that there is or has been a “practice”. The second part requires that it be shown that that practice is or has been performed for an anti-competitive purpose. Illustrative examples of business practices that could constitute anti-competitive acts are provided in section 78 (see Appendix I).

3.2.2(a) Practice

The term “practice” was considered in the context of single firm dominance in the NutraSweet case, where the Tribunal adopted a broad view of the term and established that different individual anti-competitive acts, taken together, may constitute a practice.³⁴

The Bureau considers that while a practice is normally more than an isolated act, it may also constitute one occurrence that is sustained and systemic or that has had or is having a lasting impact on competitors. For example, a long-term exclusionary contract may effectively prevent the entry or expansion of competitors even though the contract itself constitutes only a single act.

3.2.2(b) Anti-Competitive Acts

Section 78 of the Act provides a non-exhaustive list of anti-competitive acts. In addition to these acts, the Tribunal has recognized the generality of section 78 and has identified a number of other anti-competitive acts not listed in the section.³⁵ However, what the acts in section 78, along with other potential anti-competitive acts, all have in common is that they must be performed for an anti-competitive purpose, namely an intended negative effect on a competitor that is predatory, exclusionary, or disciplinary.³⁶

The purpose or intent of an act may be proven directly by evidence of subjective intent, or inferred as objective intent from the relevant circumstances and reasonably foreseeable consequences of the conduct at hand. The verbal or written statements of the personnel of a company are likely to establish subjective intent, although such evidence is not strictly necessary, because persons are assumed to intend the reasonably foreseeable consequences of their acts.³⁷ As the Tribunal noted in NutraSweet,³⁸ in most cases the purpose of the act will have to be inferred from the circumstances.

In some cases the firm(s) in question may have a valid business justification for engaging in the conduct at hand. Such a justification can overcome the deemed intention of the reasonably foreseeable effects of the conduct if the firm(s) can show that those anti-competitive effects were not in fact the predominant purpose of that conduct. The Federal Court of Appeal has ruled that “a business justification must be a credible efficiency or pro-competitive rationale for the conduct in question, attributable to the respondent, which relates to and counterbalances the anti-competitive effects and/or subjective intent of the acts.”³⁹ In other words, a business justification is not a strict defence for engaging in anti-competitive conduct, but rather an additional factor in the determination of whether the conduct was undertaken with the requisite anti-competitive intent, as it may provide an alternative, pro-competitive explanation for the conduct. As the Tribunal ruled in Nielsen, “all known factors must be taken into account in assessing the nature and purpose of the acts alleged to be anti-competitive.”⁴⁰ The Tribunal also stated in Nielsen that neither pure self-interest, nor retaining or obtaining a dominant position to guard against another firm doing the same, would constitute a legitimate justification.

In the Bureau’s view, a “credible efficiency or pro-competitive rationale”, without limiting its scope, will often comprise activities that minimize costs of production or operation, independent of the elimination or discipline of a rival; or activities that improve a firm’s product, service, or some other aspect of the firm’s business.⁴¹

There is a variety of ways in which a firm can improve its ability to produce more output for the same or lower cost. A firm may realize productive efficiencies by expanding to achieve economies of scale or scope, rationalizing its output from high-cost to low-cost facilities, or otherwise improving its ability to minimize production or distribution costs. If, in doing so, these activities also have exclusionary, disciplinary, or predatory effects on competitors, the Bureau will examine the credibility of any efficiency claims being made and the likelihood of these efficiencies being achieved before assessing the overall purpose of these activities. For example, where a firm already has a high degree of pre-existing market power, it becomes less likely that the firm will be able to achieve economies of scale through further expansion. The Bureau will also examine the necessity of the conduct in question for achieving those efficiencies; if the cost savings can be achieved in an equally effective manner other than through the conduct alleged to be anti-competitive, the Bureau will not consider the conduct as having a valid business justification.⁴²

Some activities may generate improvements in technology or production processes that result in innovative new products or improvements in product quality or service. This may change the consumer demand curve the firm faces, allowing the firm to sell its higher-quality products in greater quantities and/or at higher prices. Again, if in doing so, these activities also negatively affect competitors, the Bureau will examine their credibility and subsequently their overall purpose. As any demand-enhancing business justification must also be attributable to the firm in question, and beyond mere self-interest, the Bureau will examine whether the conduct in question changes either the firm’s core assets or demand, as opposed to merely the firm’s output and price decisions.⁴³

If, in the opinion of the Bureau, the firm in question has engaged in conduct with a valid business rationale, where it is clear that the firm’s objective in engaging in that conduct was for reasons other than the exclusion, discipline, or predation of a competitor, then the Bureau will likely elect not to pursue further investigation. However, where there is evidence that suggests a potentially anti-competitive purpose, the Bureau will continue to investigate the matter.

Anti-competitive acts, and the economic theory that will inform the Bureau’s analysis of these acts, are discussed in greater detail in Part 4.

3.2.3 “The practice has had, is having or is likely to have the effect of preventing or lessening competition substantially in a market”

While paragraph 79(1)(b) focuses on the overall purpose of the practice, the requirement of “preventing or lessening competition substantially in a market” ultimately focuses on the impact on competition itself. In other words, having determined that the purpose of a practice is an intended negative effect on a competitor that is predatory, exclusionary or disciplinary, it is still necessary to determine whether this practice results in substantial harm to competition.

The Federal Court of Appeal has ruled that in assessing a substantial lessening or prevention of competition, “the requisite assessment is thus a relative one: it is not the absolute level of competition in a market which must be substantial, but rather the preventing or lessening of competition that results from the impugned practice must be substantial.”⁴⁴ The Bureau analyzes a potential substantial lessening or prevention of competition using a “but for” test: “but for” the practice in question, would there be substantially greater competition in the past, present, or future?⁴⁵

Generally speaking, a substantial lessening or prevention of competition is an effect that creates, preserves, or enhances market power. The Tribunal in NutraSweet stated that “in essence, the question to be decided is whether the anti-competitive acts engaged in by NSC [NutraSweet] preserve or add to NSC’s market power.”⁴⁶ The Bureau considers that preserving or enhancing market power may include the creation of market power, if “control” under paragraph 79(1)(a) is established as a result of the anti-competitive conduct at issue. As the Tribunal stated in NutraSweet, “the starting position as well as the change in market power resulting from a practice need to be considered in evaluating its effects.”⁴⁷

A firm can create, preserve, or enhance market power by erecting or strengthening barriers to entry,⁴⁸ thus inhibiting potential competitors from challenging the market power of the dominant firm. In examining anti-competitive acts that involve the creation, preservation, or enhancement of entry barriers, the Bureau focuses its analysis on determining the state of competition in the market in the absence of these acts.⁴⁹ If it can be demonstrated that, but for the anti-competitive acts, an effective competitor or group of competitors would emerge within a reasonable period of time to challenge the dominance of the firm(s), the Bureau will conclude that the acts in question result in a substantial lessening or prevention of competition. In assessing the potential to provide effective competition with the removal of the anti-competitive acts, the Bureau considers a reasonable time period to be two years, consistent with the time frame considered acceptable for entry into a market.

Aside from effects on entry or expansion, there is a variety of other considerations in determining whether or not there has been a substantial lessening or prevention of competition. The Bureau will examine such factors as whether or not consumer prices might be substantially lower; product quality, innovation, or choice might be substantially greater; or consumer switching between products or suppliers might be substantially more frequent in the absence of the practice.

Part 4: Anti-Competitive Acts

4.1 The Economics of Anti-Competitive Acts

When assessing whether a particular act is likely to have an anti-competitive effect on a competitor, and subsequently competition, the Bureau is of the view that anti-competitive conduct generally falls into two categories: (i) exclusionary conduct that raises rivals’ costs or reduces rivals’ revenues artificially; and (ii) predatory conduct.⁵⁰

In general, exclusionary conduct is designed to make current and/or potential rivals less effective at disciplining the exercise of a firm’s market power or eliminate them from the market entirely. This may take the form of raising their costs, such as by foreclosing access to inputs necessary to compete, artificially reducing their revenues, or engaging in any other conduct designed to make them less effective competitors. Predatory conduct, by contrast, primarily involves offering discounts to consumers at a loss to the firm, with the expectation that otherwise effective competitors unable to match that discount will be disciplined, eliminated, or deterred from entry, thus preventing them from constraining the firm’s ability to exercise market power by raising prices later on.

In practice, particular forms of conduct may have both exclusionary and predatory effects on competitors; for example, consider a firm that offers a rebate program to retailers for carrying that firm’s products, with the effect that the program induces several retailers into exclusivity with that firm. This may constitute exclusionary conduct if it raises the costs of otherwise effective competitors by forcing them to turn to other inferior retailers or develop their own retail operations. At the same time, if competitors are harmed because the firm’s rebates are effectively providing its products to retailers below its own costs, this may constitute predatory conduct as well. In such cases, it may be relevant to examine whether the primary effect of such conduct is predatory discounts to retailers, or whether such discounts have primarily served as a device to raise rivals’ costs (by increasing rivals’ distribution costs, for example).⁵¹

4.2 Raising Rivals’ Costs

A firm may undertake a number of strategies that raise the costs of an otherwise effective rival, rendering the rival a less effective competitor. By increasing certain costs of a rival, the firm can have the effect of inducing the rival to raise its prices, allowing it to profitably increase its own prices. This strategy will be profitable provided the ultimate price increase raises the firm’s revenues sufficiently to offset the costs of the strategy. Similarly, the firm may undertake a number of strategies that raise rivals’ costs that have the effect of eliminating existing competitors from the market, or of deterring entry. This may involve raising a rival’s costs to the point where the rival is unable to remain in the market, or, for example, pre-empting key facilities to deter entry. Again, such a strategy will be profitable for the firm provided the costs of the strategy are offset by the ultimate increase in revenue, or by the prevention of lost revenues owing to entry.

Section 78 describes various means by which a firm may be able to raise its rivals’ costs. These include margin squeezing of a downstream competitor by a vertically-integrated supplier; vertical acquisitions; pre-empting scarce facilities or resources; and buying up products to prevent prices from falling. All of these methods can serve to increase the price an otherwise effective competitor pays for a necessary input, facility, service, or resource, which may render that competitor weaker or exclude them from the market.

Margin squeezing occurs when a vertically-integrated supplier raises the wholesale price of a product relative to the retail price, thus squeezing the margin between the wholesale and retail prices. It can also occur when a supplier lowers the retail price relative to the wholesale price, compelling his or her customer/competitor to follow suit. Margin squeezing may be used to deter or prevent entry into the downstream market, to confine downstream firms to small niches in the market, or to drive downstream competitors out of the market. The Bureau will examine the extent to which the allegedly squeezing firm can exclude rivals by raising their costs when alleged margin squeezing involves raising wholesale prices.⁵²

One common method by which a firm may be able to raise a rival’s costs, or exclude that rival from the market completely, is through exclusive dealing.⁵³ Effective exclusion may result from exclusive dealing contracts or from contractual practices that create exclusivity. Similarly, an exclusive buying arrangement with even a subset of the consumers may foreclose entry if, as a result, not enough customers are available to an entrant to justify entering because, for example, with so few customers available to it, the entrant would not be in a position to achieve a scale that would allow it to be an effective competitor.⁵⁴

Other contractual practices that may effectively create exclusivity include requirements contracts, which set out that a party must purchase all its requirements from a particular vendor. A “meet-or-release” clause may also work to discourage a potential supplier from seeking to sell to a buyer, because the potential supplier anticipates that the current suppliers will match the price. A most-favoured-nation (MFN) clause, which requires the seller to give a buyer the best price it offers to any other customer, could also result in exclusivity.⁵⁵ Such contractual practices can also aid a dominant firm in excluding competitors, by keeping the firm informed about attempted entry or any actions of its rivals. For more discussion of the topic of exclusive dealing, refer to Appendix II.

Another program with a potentially limiting effect on the number of customers that are available to rivals is tied selling. Tied selling or tying occurs when a firm that produces two or more products requires a buyer to purchase more than one product as a condition of sale; in other words, the firm refuses to sell good A to a buyer unless that buyer also purchases good B from the firm as well (and potentially goods C, D, and so on). Tying is generally combined with contractual or induced exclusivity, so that the buyer must purchase all of its requirements (present and potentially in the future) for good B from the firm in order to purchase good A, and not just a negligible amount.⁵⁶ Tying may also be technological if a firm can use operational controls or compatibility requirements to enforce the tie, such as with software and hardware.

Similar to tying is bundling. Bundling can take two forms: pure bundling or mixed bundling. Pure bundling occurs when a firm requires a buyer to purchase more than one product in fixed proportions (for example, each unit of A is packaged with one unit of B). In the case of mixed bundling, buyers have the option of purchasing individual products separately, but can also purchase them together where the package is offered on more favourable terms than the sum of the individual items. Because bundling occurs in fixed proportions, it can be distinguished from tying, which usually covers most or all of a customer’s requirements for a product or products.

Tying and bundling can be anti-competitive in two ways. First, to the extent that tying and bundling may raise the costs of non-bundling rivals, it may become more difficult to compete in the market for standalone products, leading to possible exclusion or disciplining of otherwise effective competitors. Second, by discounting a package of products, tying or bundling may constitute predatory conduct. Tying and bundling are discussed in more detail in Appendix III.

Refusing to allow a competitor access to an incumbent’s facility or service, or imposing restrictive terms of access, can constitute an anti-competitive act. In this context, the denial could refer to a facility or service that a firm had access to prior to the denial, or to a facility or service to which the firm has never had access. In such a case, the Bureau examines whether the firm that provides the facility or service has market power in the downstream market in which that facility or service is used, given a denial of access. If this is the case, as with the other conduct described above, the Bureau will then examine whether that denial has occurred for the purpose of excluding competitors from entering that downstream market, with the effect that competition is substantially lessened or prevented. A full discussion of the Bureau’s framework for this analysis is in Appendix IV.

4.2.1 Reducing Rivals’ Revenues

Besides having an exclusionary effect on rivals by raising their costs, a firm can engage in activities that limit rivals’ or potential entrants’ abilities to cost-effectively attract certain buyers. A firm can implement technology, contracts or other practices that make it costly for a customer to switch to an alternative supplier. A rival or an entrant would thus have to compensate the customers for their switching costs in order to induce them to switch to making their purchases from the rival or entrant. This compensation would effectively reduce the rival’s or entrant’s revenues. By fostering such switching costs and so reducing rivals’ expected revenues, a firm may be able to foreclose entry and/or limit the expansion of an otherwise effective competitor.

Alternatively, customers may face explicit or implicit penalties for terminating a supply arrangement, for example, the cost of removing equipment. Such a cost would have to be borne by a rival in order to induce the customer to switch. In Laidlaw, abuse of judicial process was a form of such a penalty. Laidlaw threatened both its customers and its rivals with breach of contract if a customer contemplating switching suppliers or a rival take action to induce switching. The Tribunal found that this behaviour constituted a practice of anti-competitive acts.

Similarly, certain rebate programs, such as fidelity or loyalty agreements, or bundled rebates, have the potential to lower the price a rival must offer in order to induce customer switching by compensating them for lost rebates on products the rival does not produce. For example, suppose a firm bundles the sale of a unit of product A with a unit of product B, such that the discount offered on A is not available if B is not also purchased. A rival only produces product A. In order to induce a buyer to switch from purchasing the bundle from this firm, the rival must not only offer a discount on A equivalent to that offered by the firm, it must also compensate the buyer for the discount that it would have otherwise also obtained on product B. Thus, while the rival may have been, absent the bundle, an effective competitor in the market for A, the additional discount it must offer may reduce its revenues to exclusionary effect. In other words, such penalties, where they are sufficiently high and if they involve a sufficient amount of demand, may adversely impact effective entry and/or expansion. Bundled rebates are discussed in more detail in Appendix III.

4.3 Predatory Conduct

Predatory conduct involves a firm offering a product or products at prices below some measure of cost in an attempt to harm rivals. This may be implicit (through bundling and/or rebates, for example), or explicit. The Bureau considers pricing to be predatory when a firm deliberately sets prices to incur losses for a sufficiently long period of time to eliminate, discipline, or deter entry by a competitor, in the expectation that the firm will subsequently be able to recoup its losses by charging prices above the level that would have prevailed in the absence of the impugned conduct, with the effect that competition would be substantially lessened or prevented.

It is difficult to distinguish predatory pricing from competitive pricing since both, at least in the short term, involve lower prices. However, predatory pricing involves the ability to raise long-term prices once rivals have been disciplined or have exited the market, which may result in a substantial lessening or prevention of competition. As a general principle, the Bureau takes a careful stance in its enforcement of predatory pricing in an attempt to avoid false positives and avoid chilling legitimate price competition. Low prices are generally a hallmark of competition and a benefit to consumers. As a result, the Bureau uses price-cost and recoupment screens to avoid over-deterrence. It is in this context that the Bureau has investigated and will continue to investigate allegations of predatory pricing that appear to meet the elements of section 79.

In the case of predatory behaviour by a firm or group of firms, establishing that market power exists is sufficient to establish that a firm will likely be able to recoup its losses following a period of predatory pricing. As with assessing market power in the first instance, high barriers to entry and a lack of remaining competition are generally sufficient to establish that a firm has or will likely have the market power necessary to engage in recoupment. The Bureau will also consider the extent to which the act of predation will deter entry through establishing a reputation for predation.

Having established dominance, the Bureau will consider whether the dominant firm is pricing below some measure of its costs. The Tribunal emphasized the importance of such a price-cost comparison in the NutraSweet case.⁵⁷ In conducting such price-cost comparisons, the Bureau’s view is that average avoidable costs are the most appropriate cost standard to use when determining if prices are predatory. Avoidable costs refer to the costs that a firm could have avoided had it chosen not to sell the product(s) in question during the period of time the practice of low pricing was in place.⁵⁸ In addition to examining whether the dominant firm is pricing below its average avoidable cost, the Bureau will also examine whether the alleged victim’s business in the relevant market is, or is likely to become, unprofitable as a result of the alleged predatory conduct. In order to help assess this, the Bureau will ask the alleged victim(s) to provide information on earnings on operations segregated by the relevant market or markets in question during the time period the alleged predatory pricing policy has been in effect and during previous time periods.⁵⁹

Part 5: Remedies

5.1 Resolution of Cases

If the Commissioner is satisfied that the evidence supports an application to the Tribunal, a number of options to remedy the situation are available. During the course of an examination or an inquiry, the Commissioner will present to the parties any preliminary concerns regarding the alleged contravention of the Act. The parties are afforded the opportunity to respond to the Commissioner's concerns and, at any time during the course of an examination or inquiry, can propose a means of dealing with the Commissioner's concerns. Where a party whose conduct is the subject of an examination or inquiry voluntarily changes its business practices in a manner that addresses the Commissioner's concerns, the Commissioner's strong preference would be to have any proposed remedy agreed upon by the parties incorporated into a consent agreement and registered with the Tribunal pursuant to section 105.⁶⁰

In instances where an alternative (to a consent agreement or litigation) course of action has been adopted to resolve the competition issues, the Commissioner will generally make the resolution public to ensure that the process remains transparent and that all interested parties have been informed of the fact that the matter has been resolved, and what means were used.

5.2 Orders of the Competition Tribunal

The abuse of dominance provisions provide certain remedial powers for the Tribunal. Where, on application by the Commissioner, the Tribunal finds that the elements of section 79 are met, it may, pursuant to subsection 79(1), make an order prohibiting a respondent firm or firms from engaging in the practice of anti-competitive acts. In addition, or alternatively, if the Tribunal finds that an order prohibiting the continuance of anti-competitive practices is not likely to restore competition in the affected market, the Tribunal may, pursuant to subsection 79(2), make an order directing any such actions, including the divestiture of assets or shares, as are reasonable and necessary to overcome the effects of the practice of anti-competitive acts.

5.3 Limitations and Exceptions

Although the Tribunal has latitude to impose remedies under subsection 79(2), subsections 79(3) to 79(7) contain a number of limitations, exceptions and clarifications with respect to orders of the Tribunal and the scope of conduct that may be legitimately subject to an application under subsection 79(1). These provisions are briefly described below.

5.3.1 Subsection 79(3) - “Rights of any person”

Subsection 79(3) places a limitation on the scope of an order under subsection 79(2) to provide for an additional safeguard that protects the rights of persons against whom an order is directed. The intent here is to have an order that is aimed at restoring competition, and not one that goes beyond achieving this objective. In other words, the order should be remedial and not punitive. Subsection 79(3) stipulates that the scope of the order under subsection 79(2) should not interfere with the rights of a person against whom the order is sought more than is needed to restore competition. This restriction is intended to protect existing private contractual relationships between persons, and other proprietary property such as trade secrets, unless a breach of these contracts or secrets is necessary to restore competition.

5.3.2 Subsection 79(4) - “Superior competitive performance”

Subsection 79(4) requires the Tribunal to consider whether the lessening of competition is attributable to the superior competitive performance of the dominant firm or firms. It does not call upon the Tribunal to balance superior competitive performance against the effects of anti-competitive acts.⁶¹ Superior competitive performance is only a factor to be considered in determining the cause of the lessening of competition, and not as a justifiable goal for engaging in an anti-competitive act. To the extent that a firm has a valid reason for engaging in potentially anti-competitive conduct, the Bureau will consider this as part of the business justification analysis under paragraph 79(1)(b). Superior competitive performance, by contrast, is a factor in assessing any substantial lessening or prevention of competition under paragraph 79(1)(c). Having lower costs, better distribution or production techniques, or a broader array of product offerings can put a firm at a competitive advantage that, when exploited, will lessen competition by leading to the elimination or restriction of inferior competitors. This is the sort of competitive dynamic that the Act is designed to preserve and, where possible, enhance, as it ultimately leads to a more efficient allocation of resources.

5.3.3 Subsection 79(5) - “Exercise of intellectual property rights”

Exclusive rights provided by intellectual property law do not of themselves constitute abusive conduct by a dominant firm. Subsection 79(5) is intended to ensure that the legitimate use of intellectual property rights does not constitute an anti-competitive act. However, conduct that is beyond the “mere exercise” of those rights could result in a violation of section 79, if it creates, preserves or enhances market power.⁶²

Consistent with section 79(4), the Bureau does not consider an owner of IP rights to have contravened the Act if it attained market power solely by possessing a superior quality product or process, introducing an innovative business practice, or by virtue of other exceptional reasons for performance.

5.3.4 Subsection 79(6) - Three-Year Limitation

Subsection 79(6) specifies that the Commissioner can take no action against an anti-competitive act by a dominant firm or group of firms three years after the practice has ceased.

5.3.5 Subsection 79(7) - Acts Where Proceedings Have Been Commenced Under Section 45 or Section 92

Subsection 79(7) requires the Commissioner to choose between the conspiracy, the merger or the abuse of dominance provisions when electing to proceed with either a recommendation to the Director of Public Prosecutions (alleging criminal conspiracy) or an application to the Tribunal (under the civil provisions). The subsection codifies for merger, conspiracy and abuse of dominance provisions the principle that a person should not be placed in jeopardy twice for the same or substantially the same cause. The choice of which provision the Bureau will pursue will depend on the facts of each case and the nature of the remedy sought to alleviate the competition issue.⁶³

5.3.6 Regulated Conduct

Although not a statutory exception, the Bureau will also consider whether the alleged anti-competitive conduct is mandated or authorized by another federal, provincial or municipal law or legislative regime. The Act is a framework law of general application, which, in its application to all types of potentially anti-competitive conduct, may in certain cases conflict with more specific legislation.⁶⁴

Appendix I: The Abuse of Dominance Provisions of the Competition Act (Sections 78 And 79)

78. (1) For the purposes of section 79, "anti-competitive act", without restricting the generality of the term, includes any of the following acts:

• (a) squeezing, by a vertically integrated supplier, of the margin available to an unintegrated customer who competes with the supplier, for the purpose of impeding or preventing the customer's entry into, or expansion in, a market;
• (b) acquisition by a supplier of a customer who would otherwise be available to a competitor of the supplier, or acquisition by a customer of a supplier who would otherwise be available to a competitor of the customer, for the purpose of impeding or preventing the competitor's entry into, or eliminating the competitor from, a market;
• (c) freight equalization on the plant of a competitor for the purpose of impeding or preventing the competitor's entry into, or eliminating the competitor from, a market;
• (d) use of fighting brands introduced selectively on a temporary basis to discipline or eliminate a competitor;
• (e) pre-emption of scarce facilities or resources required by a competitor for the operation of a business, with the object of withholding the facilities or resources from a market;
• (f) buying up of products to prevent the erosion of existing price levels;
• (g) adoption of product specifications that are incompatible with products produced by any other person and are designed to prevent his entry into, or to eliminate him from, a market;
• (h) requiring or inducing a supplier to sell only or primarily to certain customers, or to refrain from selling to a competitor, with the object of preventing a competitor's entry into, or expansion in, a market;
• (i) selling articles at a price lower than the acquisition cost for the purpose of disciplining or eliminating a competitor;
• (j) acts or conduct of a person operating a domestic service, as defined in subsection 55(1) of the Canada Transportation Act, that are specified under paragraph (2)(a); and
• (k) the denial by a person operating a domestic service, as defined in subsection 55(1) of the Canada Transportation Act, of access on reasonable commercial terms to facilities or services that are essential to the operation in a market of an air service, as defined in that subsection, or refusal by such a person to supply such facilities or services on such terms.⁶⁵

(2) The Governor in Council may, on the recommendation of the Minister and the Minister of Transport, make regulations

• (a) specifying acts or conduct for the purpose of paragraph (1)(j); and
• (b) specifying facilities or services that are essential to the operation of an air service for the purpose of paragraph (1)(k).

R.S., 1985, c. 19 (2nd Supp.), s. 45; 2000, c. 15, s. 13.

79. (1) Where, on application by the Commissioner, the Tribunal finds that

• (a) one or more persons substantially or completely control, throughout Canada or any area thereof, a class or species of business,
• (b) that person or those persons have engaged in or are engaging in a practice of anti-competitive acts, and
• (c) the practice has had, is having or is likely to have the effect of preventing or lessening competition substantially in a market, the Tribunal may make an order prohibiting all or any of those persons from engaging in that practice.

(2) Where, on an application under subsection (1), the Tribunal finds that a practice of anti-competitive acts has had or is having the effect of preventing or lessening competition substantially in a market and that an order under subsection (1) is not likely to restore competition in that market, the Tribunal may, in addition to or in lieu of making an order under subsection (1), make an order directing any or all the persons against whom an order is sought to take such actions, including the divestiture of assets or shares, as are reasonable and as are necessary to overcome the effects of the practice in that market.

(3) In making an order under subsection (2), the Tribunal shall make the order in such terms as will in its opinion interfere with the rights of any person to whom the order is directed or any other person affected by it only to the extent necessary to achieve the purpose of the order.

• (3.1) Where the Tribunal makes an order under subsection (1) or (2) against an entity who operates a domestic service, as defined in subsection 55(1) of the Canada Transportation Act, it may also order the entity to pay, in such manner as the Tribunal may specify, an administrative monetary penalty in an amount not greater than $15 million.
• (3.2) In determining the amount of an administrative monetary penalty, the Tribunal shall take into account the following:
  • (a) the frequency and duration of the practice;
  • (b) the vulnerability of the class of persons adversely affected by the practice;
  • (c) injury to competition in the relevant market;
  • (d) the history of compliance with this Act by the entity; and
  • (e) any other relevant factor.
• (3.3) The purpose of an order under subsection (3.1) is to promote practices that are in conformity with this section, not to punish.

(4) In determining, for the purposes of subsection (1), whether a practice has had, is having or is likely to have the effect of preventing or lessening competition substantially in a market, the Tribunal shall consider whether the practice is a result of superior competitive performance.

(5) For the purpose of this section, an act engaged in pursuant only to the exercise of any right or enjoyment of any interest derived under the Copyright Act, Industrial Design Act, Integrated Circuit Topography Act, Patent Act, Trade-marks Act or any other Act of Parliament pertaining to intellectual or industrial property is not an anti-competitive act.

(6) No application may be made under this section in respect of a practice of anti-competitive acts more than three years after the practice has ceased.

(7) No application may be made under this section against a person

• (a) against whom proceedings have been commenced under section 45, or
• (b) against whom an order is sought under section 92

on the basis of the same or substantially the same facts as would be alleged in the proceedings under section 45 or 92, as the case may be.

R.S., 1985, c. 19 (2nd Supp.), s. 45; 1990, c. 37, s. 31; 1999, c.2, s.37; 2002, c.16, s.11.4.

79.1 The amount of an administrative monetary penalty imposed on an entity under subsection 79(3.1) is a debt due to Her Majesty in right of Canada and may be recovered as such from that entity in a court of competent jurisdiction.

2002, c. 16, s. 11.5.

Appendix II: Exclusive Dealing

Exclusive dealing occurs when a firm supplies its product or products to a customer – either a consumer or a firm such as a retailer, distributor, or reseller – on the condition that the customer buy and/or sell only those versions of the product(s), and/or does not buy and/or sell those of competitors. Exclusive dealing can also take the form of a firm requiring that its own suppliers deal only with the firm itself and not with that firm’s competitors. Exclusivity may be enforced by a specific contract or induced through other terms, such as technological incompatibilities, requirements contracts, meet-or-release clauses, most-favoured-nation (MFN) clauses, or other contractual practices.

Exclusive dealing is considered explicitly in section 78 of the Act.⁶⁶ Paragraph 78(1)(h) contemplates “requiring or inducing a supplier to sell only or primarily to certain customers, or to refrain from selling to a competitor, with the object of preventing a competitor’s entry into, or expansion in a market.” This is exclusivity in the context of buying – in Nielsen, for example, Nielsen was the exclusive buyer of scanner-based data from retailers. However, as section 78 is a non-exhaustive list of acts that may potentially be found to be anti-competitive under section 79, the Bureau is not restricted from pursuing any form of exclusive dealing in the context of either buying or selling.

Exclusive dealing, like any other act, is not per se abusive under section 79; rather, exclusive dealing must have an intended exclusionary effect on a competitor and subsequently have the effect that competition is or is likely to be substantially lessened or prevented. To the extent that arrangements such as long-term contracts, evergreen (or automatic renewal) clauses, MFN clauses, or rights of first refusal contribute to an anti-competitive effect by maintaining or enhancing barriers to entry or expansion (and so raising rivals’ costs), they can lead to a finding that a firm’s exclusive dealing practice contravenes section 79. In Laidlaw, for example, Laidlaw’s long-term exclusive contracts (of three years or more) for waste disposal services involved evergreen clauses, damages for termination, meet-or-release clauses, and negative-option pricing. Meet-or-release and most-favoured-nation clauses were considered in NutraSweet, along with other inducements to exclusivity such as promotional allowances, and uses of trademarks and logos. In Nielsen, long-term contracts with most-favoured-nation clauses and strict termination conditions, combined with staggered contract renewals that significantly increased barriers to entry, were found to be anti-competitive by the Tribunal. In each of the above cases, the Tribunal considered the combined impact of the various exclusivity clauses to determine whether these arrangements had an exclusionary effect on a competitor or enhanced barriers to entry or expansion so as to substantially lessen competition in the relevant market.

As a standalone practice, exclusive dealing raises competition issues only under certain circumstances, and is often engaged in by firms for reasons unrelated to exclusion of competitors. For example, exclusive dealing may solve “free rider” problems where a firm supplying a product to a downstream retailer also provides some service component, technological information, or aftermarket support that improves the product for consumers. If the retailer can use this information to improve the products of rival suppliers as well, the firm, without contractual protection, will have little incentive to provide this support. Exclusive dealing may preserve such an incentive to offer these services, which is generally to the benefit of consumers. Exclusive dealing may also help ensure that the downstream retailer exercises marketing efforts on behalf of the supplier’s product. In this respect, exclusive dealing is ubiquitous in ensuring efficient distribution, particularly at the level of individual brands. As well, customers may offer to be exclusive buyers as a means to ensure competitive bidding between firms, and not as a means to specifically favour one firm to the exclusion of others.⁶⁷

However, there are situations where exclusive dealing may extend beyond preserving these incentives at the retail level, to potentially anti-competitive effect. For example, exclusive dealing in downstream markets reduces the options of competitors for the distribution or retail of their own products. To the extent that this may raise the costs competitors face in the market for distribution or retail – such as using less efficient distributors or retailers, being unable to reach efficient scale, or being forced to integrate these operations themselves – this may make these competitors less effective, allowing a firm with market power to raise its prices. Restrictive clauses of the type mentioned above may compound this effect by increasing the switching cost of distributors or retailers changing suppliers, or otherwise enhancing barriers to entry and/or expansion in these markets.

To the extent that a firm captures a share of a downstream market (e.g. distributors, retailers, or other customers) through exclusive dealing, it may raise barriers to entry by making less of that market contestable to competitors, which may provide the firm with market power in that market, or allow it to exercise more market power than it would have but for the practice of exclusive dealing. In some cases, a firm may offer lower prices or other inducements to distributors or retailers for them to enter into an exclusive arrangement, who may pass these discounts on to final consumers. In these cases, the Bureau’s “but for” assessment of whether competition is being substantially lessened or prevented will focus on whether the practice of exclusive dealing raises barriers to entry or expansion, such that prices in this market would be lower still, or consumer choice or product quality significantly greater, but for the practice’s effect on competitors.

Similarly, a firm engaging in upstream exclusive dealing with manufacturers of necessary inputs may have valid reasons for doing so – for example, this may function as a contractual form of vertical integration that reduces a firm’s transaction costs and makes them a more effective competitor downstream. However, this may also function as a form of vertical foreclosure if it denies competitors access to these inputs such that they are forced to turn to inferior alternatives or self-supply, which may raise the costs of rivals and make them a less effective competitor in a downstream market.

When a firm with downstream market power engages in exclusive dealing with respect to an upstream input, the issue is the extent to which that exclusive dealing preserves or enhances that firm’s market power in the downstream market by raising the costs or reducing the revenues of rivals downstream and making them less effective competitors in the downstream market. In these cases, the Bureau’s analysis will focus on whether the market power of the firm in the downstream market is in whole or in part attributable to upstream exclusive dealing with respect to an input (i.e., it is the upstream practice that is key to raising barriers to entry downstream).

Finally, it is worthwhile to elaborate upon potential business justifications for a firm engaging in exclusive dealing. As mentioned, exclusive dealing may allow a firm to achieve more efficient distribution of its product, or protect its incentives to provide service or support to retailers and/or customers. In certain circumstances, exclusive dealing may also support a viability argument, such as in a declining industry that can only support one firm, or a network industry seeking a single efficient standard. Exclusive dealing may be helpful for allowing a firm to achieve efficient scale, although if this requires controlling most, if not all, of a relevant market that may in fact suggest concerns about natural monopoly, and potentially a need for regulation beyond the scope of competition law. Ultimately, any potential business justification will depend upon the facts of the case at hand. In all cases, the Bureau will examine whether exclusive dealing is likely to have an efficiency effect, and where there is also a reasonably-foreseeable exclusionary effect on competitors, whether exclusive dealing is in fact the only method of achieving these efficiency goals. This involves an assessment of whether, absent this conduct, these goals would not be met, as well as whether these goals are in fact the predominant purpose of the conduct.

Similarly, if exclusive dealing is combined with restrictive contract terms such as evergreen or MFN clauses, as discussed above, it is less likely that these clauses would contribute to an overall business justification for exclusive dealing, and more likely contribute to a finding that the overall purpose of the practice was an intended negative effect on one or more competitors.

Appendix III: Tying, Bundling, and Bundled Rebates

There is a variety of ways in which products can be packaged together by a single firm; these combinations are commonly categorized as tying and bundling. Tying occurs when a firm that produces two or more products requires a buyer to purchase more than one product as a condition of sale; in other words, the firm refuses to sell product A to a buyer unless that buyer also purchases product B from the firm as well (and potentially products C, D, and so on).⁶⁸ Bundling typically refers to situations whereby products are sold together in fixed proportions, i.e., product A is sold in a package with product B (and potentially products C, D, and so on).⁶⁹

Tying and bundling are ubiquitous in many, if not most, markets – cars, for example, are usually sold with four tires (a bundle of car and tires) and require service under warranty from the same manufacturer (a tie between product and service). Generally speaking, there are often strong cost efficiencies that motivate tying and bundling; it may be less costly for firms to manufacture and/or package products together, and it may be more convenient for consumers to purchase that package than search for each individual product. This convenience can also serve to increase demand among consumers who prefer to buy the products together. Tying and bundling may help firms achieve economies of scope, which often leads to higher quality products or lower total prices than if each product were forced to be sold separately and may also prompt firms to broaden their product offerings in order to maintain as complete a set of products as that of their competitors. Tying is also often used, like exclusive dealing, as a means of ensuring product quality and service levels, particularly in aftermarkets.

In some cases, demand for a package of products may be sufficient such that that tie or bundle is no longer a combination of individual products, but a product market in itself. The Tribunal recognized in Tele-Direct that tying (and by extension bundling), in the first instance, involves a determination as to whether there are in fact two separate products, or only one.⁷⁰

Tying and bundling may also allow firms to engage in various forms of price discrimination. One rationale is metering demand, such as where a firm ties or bundles aftermarket products to the sale of the principal product. For instance, a firm that sells a printer may require that consumers also use that firm’s aftermarket ink cartridges, either through technological restrictions or through exclusive supply arrangements. The net result is that the firm can charge more to high-demand consumers that use the printer more (i.e., require more ink cartridges). In some cases, the ability to meter can ensure that both low and high-demand consumers are able to purchase the principal product; if the firm can charge only a single price for its product and is unable to meter demand through tying, its profit-maximizing price may exclude low-demand consumers. If it can instead meter demand, it may be able to charge a lower price for the principal product.⁷¹

Aftermarket tying that creates exclusivity, such as the examples above of a car requiring service under warranty from the manufacturer and printers requiring ink cartridges from the same firm, is one of the most common forms of tying in consumer markets. As a general principle, aftermarket tying raises competition issues only under limited circumstances. While aftermarket tying may restrict third-party access to service a particular brand, a brand itself will not necessarily constitute a relevant product market if consumers see other brands and products as substitutes, and so the owner of a particular brand will not necessarily hold a dominant position. Where aftermarket tying is common across brands within a particular product market – i.e., most or all of the firms in a market engage in aftermarket tying – the Bureau will examine the extent to which those firms compete for the customer in the first instance. If customers can choose between competing firms when buying the initial product and are widely aware of the subsequent aftermarket tying for that product, the Bureau will consider customers as taking that condition into account when purchasing the initial product, and firms as competing amongst each other across several dimensions of competition, including aftermarkets, when attempting to capture that customer.⁷²

However, there are certain circumstances under which both tying and bundling can be anti-competitive, if they are able to make it more difficult for non-tying/bundling rivals to compete. Theoretically, tying and bundling can be anti-competitive in two ways. First, to the extent that tying and bundling may raise the costs (or reduce the revenues) of non-bundling rivals, it may become more difficult to compete in the market(s) for standalone products, leading to possible exclusion or disciplining of otherwise effective competitors. Second, by discounting a package of products, tying or bundling may constitute predatory conduct. Where that package of products is properly classified as a separate relevant product market (i.e., the bundle itself is seen as a single product, not a package of separate products), the Bureau will analyze it as predatory conduct to determine whether the bundle, as a single product, is being sold below its total average avoidable cost.

One traditional concern with tying (which can hold for bundling as well) is “monopoly leveraging”, where a firm with market power in one market attempts to achieve a similar position in an otherwise competitive second market by engaging in tying between two markets. This will only be considered as potentially anti-competitive if it can deter the entry or expansion of rivals in the second market.⁷³ Anti-competitive “monopoly leveraging” is possible only under certain conditions; as noted above, a necessary condition is that it artificially raises rivals’ costs (or reduces rivals’ revenues). For example, if the tie captures enough customers desiring both products to keep rivals from obtaining efficient scale or covering the fixed costs of serving only standalone customers, or if the tie raises rivals’ costs or reduces their revenues by increasing consumer switching costs, for which consumers would have to be compensated, this theory may hold. In industries characterized by important fixed costs of production, this can also occur over time if tying discourages investment in research and development by competitors, or otherwise discourages potential dynamic innovation that would be profitable for competitors only if a larger portion of the market were contestable. Where it appears that a firm with market power is engaging in tying for the purpose of an intended negative effect on a competitor (or competitors) without a valid business justification as discussed above, the Bureau will examine the extent to which this may raise competitors’ costs or reduce their revenues, with the result that competition in a market is substantially lessened or prevented.

Tying and bundling (particularly bundling) can also be viewed as direct price competition. Where it appears a firm is selling a bundle of products primarily as a means of offering discounts to buyers, the Bureau may choose to examine such conduct under a predatory standard, in order to avoid chilling legitimate price competition. In this case, the key issue is whether the appropriate relevant market definition is the entire set of products, or whether component products comprise separate relevant product markets. Where the bundle is determined to be a single product market, the Bureau will assess whether the total bundle, as opposed to individual products within the bundle, is below average avoidable cost. In such a case, the Bureau will then examine whether this will result in a substantial lessening or prevention of competition, namely whether the bundling firm is able to engage in recoupment by raising the price of its bundle once its standalone competitors have been disciplined or eliminated. Where the appropriate market definition is separate products (for example, there are distinct groups of consumers that purchase the bundle and purchase some or all of the products on a standalone basis), it may be more appropriate to assess the extent to which the bundling firm can raise the costs of rivals offering standalone products, as described above.

Bundled Rebates

One specific form of conduct that falls under the category of packaged selling is bundled rebates. A bundled rebate is a practice whereby a firm offers a buyer a discount on a product if that buyer purchases a second product (or more) from the firm as well. For example, a buyer may receive a 15% discount on product A if it purchases product B from the same firm.⁷⁴

Bundled rebates were considered by the Tribunal in Canada Pipe. Canada Pipe, which was found to hold a dominant position in markets for cast-iron pipe, couplings, and fittings, offered distributors a stocking distributor program (SDP) that provided a system of rebates based on purchasing all three types of product exclusively from Canada Pipe. The Bureau argued that the SDP acted as a barrier to entry by foreclosing potential entrants and existing competitors from accessing distributors, with the result that competition was lessened substantially in markets for these products. In the Tribunal’s view, however, the switching costs (in the form of foregone rebates) faced by distributors moving their business from Canada Pipe to competitors were not great enough for this barrier to be significant. Ultimately, the Federal Court of Appeal ruled that the Tribunal had made an error in law in applying paragraphs 79(1)(b) and 79(1)(c) to the facts of the case, and the matter was eventually settled by a registered consent agreement between the Bureau and Canada Pipe.

Like other types of bundling and tying, bundled rebates may be considered either exclusionary or predatory conduct. For example, bundled rebates to retailers or distributors may have an exclusionary effect on competitors by raising their costs of getting their product or products to end consumers (or reducing their revenues by forcing them to match a discount), just as exclusive contracts would. Just as exclusive contracts render less of a market contestable, bundled rebates can have the same effect if the effect of a distributor or retailer foregoing the discount is sufficient to induce exclusivity or otherwise raise the costs of rivals, or reduce their revenues, to the point where they are less effective competitors.⁷⁵ In all cases, bundled rebates can enhance competitor barriers to entry in any or all of the product markets over which rebates are offered.

At the same time, bundled rebates can be a form of price competition, particularly when they are targeted at final buyers. In this case, bundled rebates may be assessed as predatory conduct, consistent with the Bureau’s approach to predation outlined in these guidelines. Where a bundled rebate comprises a separate relevant product market (i.e., the bundle is properly considered a single product, rather than a package of standalone products), the Bureau will assess it using a predatory standard. The Bureau recognizes that bundled rebate programs are often complex and may have several different percentage targets depending on each product; it may be appropriate to aggregate these when determining effective product prices for any price-cost analysis.

Appendix IV: Denial of Access to a Facility or Service

In an allegation of abuse of dominance involving denial of access to a facility,⁷⁶ the conduct at issue would be an actual or constructive⁷⁷ denial of access to the facility to a competitor. In this context, the denial could refer to a facility that a competitor had access to prior to the denial, or to a facility to which the competitor has never had access. Generally speaking, denial of access to a facility is a common practice that will raise issues under the Act only in limited circumstances. For such a denial to raise an issue under the Act, the following conditions must be present:

• (i) A vertically integrated firm that has market power in the downstream (or retail) market for the market in which the facility is used as an input in the time period following the denial;
  
  
• (ii) a denial of access to the facility has occurred for the purpose of excluding competitors from entering or expanding in the downstream market or otherwise negatively affecting their ability to compete; and
  
  
• (iii) the denial has had, is having or is likely to have the effect of substantially lessening or preventing competition in the downstream market.

The Bureau’s analysis begins with an assessment of downstream market power, once the denial has occurred. In cases where downstream firms do not currently have access, the ability and incentive of the allegedly dominant firm to impose a small but significant non-transitory increase in price in the downstream market will depend on the extent of barriers to entry, which in turn depends in part on the extent of upstream market power. For example, if upstream market power exists and it is very difficult or impossible for downstream competitors to duplicate the facility or obtain it from other sources, a denial of access to that facility would create a very high barrier to entry at the downstream level, and hence result in downstream market power as a result of the denial. An assessment of downstream market power will also depend on the willingness and ability of consumers to obtain the product or service from alternative downstream providers that do not rely on the facility in question.

Where there is no vertical integration, simply charging a monopoly price for access to a facility, imposing conditions on its use⁷⁸, or choosing not to offer access to downstream purchasers at any price would not, by itself, raise concerns. If a facility owner does not compete in the downstream market(s) in which the facility is used, the Bureau will not consider that supplier to have an incentive to affect downstream competition, and will not consider them to have downstream market power. However, the firm that controls the facility need not be explicitly vertically integrated; it can achieve the same result by contract, such as by designating one downstream firm as its exclusive retailer. Similarly, a firm may operate indirectly in the wholesale market by selling access to a facility to another wholesaler that then supplies the retail market.

With a finding of market power, a denial of access is an anti-competitive act when its purpose is to exclude or impede actual or potential competitors. To infer such a purpose, it must be difficult or impossible for those competitors to substitute to other inputs or to practically or reasonably duplicate the facility. The requirement that it is not practical or feasible for a competitor to duplicate the facility means that such an entrant would not find it feasible to enter, expand, or compete effectively if it had to self-supply the facility. At the same time, the purpose would not be anti-competitive if there is a credible and valid business justification for the denial, such as if the reason access was denied was because it would be prohibitively expensive to build the necessary capacity to supply competitors. The creation or preservation of vertical efficiencies could also qualify as a valid business justification.

Before the Tribunal is able to issue any remedial order under section 79, it must be shown that the practice of anti-competitive acts has had, is having, or is likely to have the effect of preventing or lessening competition substantially in the downstream market. Accordingly, if control of the facility is a source of market power in a downstream market and the denial of access has been for an anti-competitive purpose, the Bureau’s “but for” analysis would then focus on whether the denial of access likely leads to substantially less competition downstream than would occur absent the denial.

If, absent the denial, the dominant firm would sell access to the facility because it has no credible and valid business justification for denying access, the “but for” analysis would entail assessing the competitive conditions that would prevail if the dominant firm were charging the profit-maximizing access price to downstream competitors.⁷⁹ This analysis identifies a benchmark “but for” profit-maximizing access price for a given scope of relevant markets in which the dominant firm and its input buyers participate. If a dominant facility owner has a profit-maximizing incentive to increase its access price relative to this benchmark, or deny access at any price, often due to a change in the scope of the relevant markets in which the firms compete, the denial may result in a substantial lessening or prevention of competition.

In general, for a denial of access to raise issues under the abuse of dominance provisions, it must be the case that the purpose of the denial is to prevent the emergence of a market structure where there is increased horizontal competition. For example, a dominant facility owner could substantially lessen or prevent competition in a downstream market if, after a merger that allowed the firm to vertically integrate into that market, the merged entity refused to continue to offer competitors access at the pre-merger profit-maximizing price in order to cause their exit from the downstream market.⁸⁰ In such a situation, the pre-merger price provides the profit-maximizing “but for” benchmark. If the merger were to provide the dominant firm with the incentive to raise the input price above this level in order to impede or prevent competition from non-integrated rivals, this could raise abuse of dominance issues.⁸¹

Another example would be a dominant firm that offers access to a facility to competitors that offer a single product to downstream consumers. Suppose a firm that competes (or seeks to compete) with the dominant firm in a second market seeks access to the dominant firm’s facility in the first market in order to produce the first product and offer it to a separate market of consumers wishing to purchase products in both markets. This could include “one-stop shopping”, such as where a customer would otherwise require a product or service in multiple locations from suppliers. In such a situation, the dominant firm may have an incentive to charge a higher price or deny access entirely for the facility in one market in order to impede or prevent entry by a competitor into this “one-stop shopping” market.⁸² If the competitor could compete in the one-stop shopping market absent the denial, this could result in a substantial lessening or prevention of competition. As noted above, however, the analysis here assumes that such an entrant would not find it feasible to enter, expand, or compete effectively if it had to self-supply the input.⁸³

Appendix V: Summary of Competition Tribunal Decisions

Introduction

This appendix provides a brief summary of the decisions rendered by the Tribunal since the abuse of dominance provisions were introduced in the Act in 1986. This summary of the decided cases illustrates the Tribunal’s position on the key elements of section 79. It also provides specific examples of the type of conduct and the circumstances that the Tribunal has identified and defined as anti-competitive, and the scope and nature of remedies imposed under section 79.

NutraSweet

Key facts

Product market: the artificial sweetener aspartame
Geographic market: Canada
Market share: 95 percent
Application filed: June 1989
Tribunal order: October 1990

Anti-competitive acts

• contract clauses imposed by NutraSweet requiring or inducing exclusivity:
  • - clauses obligating customers to purchase all their aspartame from NutraSweet
  • - discounts and price allowances granted to customers for use of the NutraSweet logo and name
  • - promotional allowances awarded where only the NutraSweet product was used
  • - meet-or-release and most-favoured-nation clauses.

“Substantially lessening competition”

• high market share enjoyed by NutraSweet
• contracts covered 90 percent of the market
• contract exclusivity prevented the entry of competitors
• barriers to entry, including high customer switching costs, sunk costs, a two-year entry period and the economies of scale.

Order

• prohibited NutraSweet from enforcing the contractual terms requiring or inducing exclusivity
• prohibited NutraSweet from entering into future contracts containing these provisions

Other issues

• The argument made that advantages due to the non-payment of income taxes and predatory pricing were anti-competitive acts not accepted by the Tribunal.
• No order was made concerning allegations of selling below cost and rebates given to a party to take into account exchange differentials.
• The Tribunal rejected defences raised by NutraSweet of a superior competitive performance and a free rider (i.e. other parties taking advantage of NutraSweet’s investment), as well as efficiency and business justifications.

Laidlaw

Key facts

Product market: commercial waste services, collection and disposal
Geographic market: four local communities on Vancouver Island
Market share: 87 percent
Application filed: March 1991
Tribunal order: January 1992

Anti-competitive acts

• acquisition of competitors
• lengthy non-compete clauses in purchase agreements of competitors
• contracting practices:
  • - long-term customer contracts with automatic renewal
  • - excessive liquidated damages
  • - rights of first refusal
  • - intimidation through litigation or its threat to inhibit customers from switching suppliers

“Substantially lessening competition”

• existence of high prices and increases of these prices, indicating that Laidlaw possessed market power
• contracts between Laidlaw and its customers restricted competition
• high barriers to entry, including Laidlaw’s contracting practices, which erected barriers to the development of the necessary client base for new entrants
• acquisition of competitors created local monopoly.

Order

• Laidlaw barred from further acquisitions in three affected markets for three years
• amendments and deletions made to Laidlaw’s contracts with respect to rights of first refusal, non-compete clauses, exclusivity requirements and liquidated damages for early termination
• customers no longer obligated to disclose bids by competitors
• initial and renewal terms of contracts reduced to one year
• contract termination possible on 30 days’ notice
• notification and information requirements imposed on Laidlaw:
  • - customers to be advised that contract clauses subject to the order were no longer to be applied
  • - Laidlaw required to explain any amendments of contracts to its customers
  • - existence of the order to be made known to customers and managers
  • - employees to be notified in writing that compliance with the Act was company policy
  • - copies of existing and future contracts to be provided to the Bureau.

Other issues

• Laidlaw advanced economic and business justifications for several of the contractual clauses based upon its investments. The Tribunal found that these clauses could not be justified on the basis of efficiency or consumer benefit. The only effect of the clauses was to ensure that customers remained with Laidlaw, thus creating a barrier to entry.
• Laidlaw argued that the mergers were covered by section 91 of the Act, and, as such, could not be anti-competitive under section 78. The Tribunal rejected this proposition.
• The Tribunal condemned the use of litigation or Laidlaw’s threats of litigation as reprehensible and anti-competitive conduct.

Nielsen

Key facts

Product market: scanner-based market tracking services
Geographic market: Canada
Market share: 100 percent
Application filed: April 1994
Tribunal order: August 1995

Anti-competitive acts>

• the use of exclusive contracts to deny competitors access to scanner data:
  • - long-term contracts (three years or longer)
  • - most-favoured-nation clause to ensure that no competitor is paid less for data than Nielsen
  • - strict conditions for termination, including lengthy notification requirements and monetary penalties for early termination
  • - renewals structured to occur at different times so as to limit the available sources of data, thus creating a barrier to entry
  • - payment for exclusive access to data, or financial penalties if a retailer supplied data to a competitor.

“Substantially lessening competition”

• 100 percent control by Nielsen, combined with the use of practices designed to bar entry allowed it to maintain and increase its market power
• Nielsen’s practices raised barriers where they did not formerly exist
• nature of the industry did not permit entry over time, since the data needed for comparison was required from the outset
• intent of the contracts and results of their operation were anti-competitive

Order

• amendments imposed to the Nielsen contracts:
  • - provisions preventing or limiting the supply of data to any party declared to be null and void
  • - clauses promoting exclusivity of scanner data rendered unenforceable
  • - inducements to limit the supply of data banned
  • - use of the most-favoured-nation clause prohibited for 24 months after the issuance of the order
  • - the same term imposed on all future contracts signed within 18 months of the date of the order
  • - long-term contracts for Nielsen’s services reduced
• Nielsen ordered to provide 15 months of data, calculated from the date requested by a new entrant competitor, Information Resources, Inc.

Other issues

• The Tribunal considered several arguments seeking to justify Nielsen’s practices, but concluded that the denial of access could not be justified on business or efficiency grounds.
• In finding that the acts were anti-competitive, the Tribunal ruled that the existence of a valid business ground did not mitigate the conduct.
• Nielsen argued that its contracts were necessary to prevent a competitor from “free riding” on its investment. This proposition was not accepted by the Tribunal.

Tele-Direct

Key facts

Product market: telephone directory advertising
Geographic market: local markets across Canada
Market share: 96 percent of advertising space, 25 percent of advertising services
Application filed: December 1994
Tribunal order: February 1997

Anti-competitive acts

• tied selling of space in Yellow Pages directories to sales services, including advice, design and administration
• discrimination against independent directory publishers, advertising agencies and consultants as to accounts and commissions
• targeted price reductions and other competitive strategies against competitive directories
• refusal to license trade-marks.

“Substantially lessening competition”

• telephone directory advertising is a distinct market with no close substitutes
• Tele-Direct had an overwhelming share of the product market
• entry to the market was not easy.

Order

• Tele-Direct to cease the practice of tying space and services
• Tele-Direct to price space and services separately or offer an acceptable commission for the service function
• Tele-Direct to cease discrimination against consultants and customers who use consultants.

Other issues

• Allegations were dismissed with respect to:
  • - targeted anti-competitive acts against publishers, which the Tribunal found to be legitimate competitive responses to entry
  • - anti-competitive acts directed against advertising agencies, on the basis that Tele-Direct was not dominant in this sector of the market and there was no substantial prevention or lessening of competition
  • - withholding of the Yellow Pages and Walking Fingers logos, which the Tribunal found to be a legitimate exercise of rights under the Trade-marks Act.

Air Canada

Key facts

Product market: Air passenger services
Geographic market: Seven city-destination pairs (i.e. routes) in Atlantic and Central Canada
Market share: 80 to 100 percent depending on route
Application filed: March 2001
Tribunal decision: July 2003 on Phase I of the proceeding

Anti-competitive acts

• Air Canada responded to entry of WestJet and CanJet on certain routes by increasing capacity and/or decreasing fares
• These responses did not cover the avoidable costs of operating flights on these routes, in violation of paragraphs 1(a) and 1(b) of the Airline Regulations

“Substantially lessening competition”

• Phase I of the proceeding did not consider section 79(1)(c)

Decision

• Tribunal defined avoidable cost test for predation
• Tribunal found that Air Canada operated or increased capacity at fares that did not cover the avoidable costs of providing the service on two different routes.
• The Tribunal noted that even if Air Canada failed the avoidable cost test, it did not lead to a conclusion that Air Canada has engaged in an abuse of dominant position under section 79 of the Act. The element of “a practice of anti-competitive acts” and other elements set out in section 79 were to be determined in Phase II of the proceeding.

Other issues

• In May 2001, the Tribunal ordered that the matter be heard in two phases. Phase I addressed the application of the avoidable cost test in two sample routes while Phase II was to address the balance of the application. The Phase I hearing was adjourned twice following the events of September 11, 2001.
• In April 2003, Air Canada filed for protection under the Companies’ Creditors Protection Act, and the Phase II hearing was accordingly adjourned. In October 2004, the Commissioner withdrew the section 79 application on the basis that Air Canada had determined that it would not appeal the Phase I decision of the Competition Tribunal as well as on the basis that significant changes had taken place in the Canadian airline industry since the litigation began in 2001.

Canada Pipe

Key facts

Product markets: cast-iron pipe, fittings, and mechanical joint couplings used in drain, waste, and vent applications
Geographic markets: British Columbia, Alberta, the Prairies, Ontario, Quebec, Atlantic Canada
Market share: 80 to 90 percent
Application filed: October 2002
Tribunal decision: February 2005
Application to Federal Court of Appeal: March 2005
Federal Court of Appeal decision: June 2006
Supreme Court of Canada decision on application for leave: May 2007
Registered consent agreement: December 2007

Anti-competitive acts

• Canada Pipe offered distributors who purchased pipe, fittings and couplings exclusively from Canada Pipe, substantial annual and quarterly rebates, as well as significantly lower prices through the application of a multiplier discount. This program was called the stocking distributor program (SDP).
• Tribunal concluded SDP was not anti-competitive because of:
  • - absence of significant switching costs
  • - absence of penalties if a distributor wanted to leave the SDP
  • - no exclusionary effect;
  • - length of the commitment, which was one year;
  • - no prevention of entry or competition in certain regions.
• Tribunal accepted as a business justification that high volumes through the SDP allowed Bibby to stock a fuller line of products, benefiting consumers.

Substantial lessening or prevention of competition

• Tribunal concluded SDP was not responsible for a substantial lessening or prevention of competition.

The Federal Court of Appeal decision

• On appeal, the Federal Court of Appeal ruled that the Tribunal had made errors in law in applying paragraphs 79(1)(b) and 79(1)(c) to the facts of the case.

• Paragraph 79(1)(b)

• The Federal Court of Appeal stated that the Tribunal, in requiring a link between the practice and a decrease in competition was required for the purposes of paragraph 79(1)(b), made an error in law.
• With regard to paragraph 79(1)(b), the Federal Court of Appeal ruled that “an anti-competitive act is identified by reference to its purpose”, and the “requisite purpose is an intended negative effect on a competitor that is predatory, exclusionary, or disciplinary”.
• The Federal Court of Appeal ruled a business justification must be attributable to a respondent and must serve to counterbalance any negative intent in determining the overall purpose of a practice.

• Paragraph 79(1)(c)

• The Federal Court of Appeal ruled that the Tribunal should have examined whether in each of the relevant markets, competition was substantially lessened in presence of the SDP when compared to the likely state of competition in the absence of the SDP. The Federal Court of Appeal added that the occurrence of entry, or reference to evidence of competition subsisting in the presence of the practice, is insufficient.
• The Federal Court of Appeal also stated that proper examination of this question should have included an analysis of the following considerations:
  • - Whether entry or expansion might be substantially faster, more frequent or more significant without the SDP;
  • - Whether switching between products and suppliers might be substantially more frequent;
  • - Whether prices might be substantially lower; and,
  • - Whether the quality of the products might be substantially greater.

Consent Agreement

The Consent Agreement entered into by Canada Pipe, required them to implement a new rebate program that does not require distributors to purchase cast iron drain, waste and vent products exclusively from Canada Pipe in order to qualify for discounts and rebates.

Interac

Key facts

Product market: services associated with the electronic banking network, on which transactions are made through automated banking machines and debit cards
Geographic market: Canada
Market share: 100 percent
Application filed: December 1995
Tribunal order: June 1996

Anti-competitive acts

• prohibition of new members
• higher membership fees for competing financial services providers
• service fees charged to entities that had no direct connection to the system but were obligated to go through another member
• limitations on price competition and services.

“Substantially lessening competition”

• high barriers to entry and no alternative networks
• limited access to the main system
• limited service and price competition.

Consent order

• required the respondents to amend the by-laws of Interac in order to:
  • - remove restrictions on membership by other financial institutions
  • - allow indirect access by other commercial entities
  • - modify the governance of Interac with respect to the composition of its board
  • - modify pricing practices and procedures for approving new network services.

CANYPS (Canadian Yellow Pages Service)

Key facts

Product market: national Yellow Pages advertising
Geographic market: Canada
Market share: 90 percent
Application filed: September 1994
Tribunal order: November 1994

Anti-competitive acts

• restrictions, known as the “head office rule”, imposed on the sale of national advertising, requiring customers to arrange all national Yellow Pages advertising with the publisher serving the province where its head office was located.

”Substantially lessening competition”

• allegation by the Bureau that the arrangements among the members of CANYPS prevented competition between them and prevented the entry of independent sales agents into this market
• 90 percent of market controlled by the respondents.

Consent order

• respondents prohibited from:
  • - maintaining the head office rule
  • - maintaining exclusive selling arrangements
  • - refusing to deal with selling companies
  • - discriminating between selling companies
  • - refusing to license Yellow Pages trade-marks to selling companies
  • - agreeing on commissions or account eligibility criteria for commissions
  • - denying selling companies access to rates and other data published by CANYPS
• respondents required to provide the Bureau with minutes of all CANYPS meetings until July 1998, and a standard licensing agreement for trademarks.

Enbridge

Key facts

Product market: supply of natural gas hot water heaters and related services
Geographic market: local markets in Eastern Ontario (except Kingston), Greater Toronto Area and part of the Niagara Peninsula
Market share: 65 percent of sales of new water heaters, 86 percent of service
Application filed: December 2001
Tribunal order: February 2002

Anti-competitive acts

• exit charges and conditions imposed by the respondent
• prohibition of third parties from disconnecting and removing rental heaters
• imposition of an installation recovery charge for an 11-year period following installation of the rental heater
• rental heater buy-out plan and price match guarantee permitted the respondent to selectively adjust the buy-out price in relation to a competitor’s lower price

“Substantial lessening of competition”

• high market share in both sales and service markets
• practice of anti-competitive acts:
  • - preserved or enhanced barriers to entry by creating or maintaining costs for customers to switch to the respondent’s competitors
  • - prevented competitors from effectively entering or expanding in the markets by raising their costs
  • - maintained the respondent’s market share.

Consent order

• respondent prohibited from:
  • - preventing disconnection and return of rental heaters by qualified third parties
  • - imposing any exit charges on the respondent’s customers wishing to leave its rental program once their rental heaters are 5 years old
  • - offering different rental rates or buy-out prices to customers with the same rental heater (age and model) unless they reflect the costs of providing the service
• respondent also required to:
  • - maintain accessible drop-off locations
  • - provide all its customers with a fixed buy-out schedule, based on the prices of the rental heaters at the time of installation
  • - notify all customers of changes to the rental terms and conditions.

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Footnotes

¹Unless otherwise indicated, the term “price” in these guidelines refers to all aspects of firms’ actions that affect the interest of buyers. References to an increase in price include an increase in the nominal price and/or a reduction in product quality, choice, service, innovation or other dimension of competition that buyers value.

²R.S.C. 1985, c. C-34.

³Canada (Director of Investigation and Research) v. NutraSweet Co. (1990), 32 C.P.R. (3d) 1 (Comp. Trib.) NutraSweet.

⁴R.S.C. 1985 (2nd Supp.), c. 19.

⁵Known prior to the amendments to the Act in March 1999 as the Director of Investigation and Research.

⁶The Commissioner is appointed by the Governor in Council and, as head of the Bureau, is responsible for the administration and enforcement of the Act.

⁷The Tribunal is composed of judges of the Federal Court of Canada Trial Division, one of whom is Chair of the Tribunal, as well as lay members with expertise in the fields of business and economics.

⁸The standard of proof required under the civil reviewable matters is “on a balance of probabilities.”

⁹In addition to the authority of the Commissioner to commence an inquiry, section 9 of the Act provides that six Canadian residents may apply to the Commissioner for an inquiry. Further, section 10 allows the Minister of Industry to direct the Commissioner to cause an inquiry to be made. The vast majority of inquiries under the Act are initiated by the Commissioner where a complaint and preliminary examination provide the requisite “reasonable grounds to believe” that a breach of the Act has occurred.

¹⁰These are discussed in more detail in the Bureau’s Information Bulletin on Section 11 of the Competition Act (Ottawa: Industry Canada, 2005) and Information Bulletin on Sections 15 and 16 of the Competition Act (Ottawa: Industry Canada, 2008), online: Competition Bureau Canada, www.competitionbureau.gc.ca.

¹¹For example, an allegation of abuse may involve predatory conduct (also covered under subsection 50(1) of the criminal provisions); the refusal to supply a customer, (also covered under section 75 or section 61); or exclusive dealing, market restrictions, or tied selling, (also covered under section 77).

¹²Section 22 governs discontinuances. In the case of inquiries commenced as a result of an application under section 9, the Commissioner is required to inform the “six resident applicants” of the discontinuance and the reasons for it.

¹³In NutraSweet, the Tribunal concluded that delineating a “class or species of business” is equivalent to defining a relevant product market.

¹⁴This means that the current price may not be the appropriate benchmark to use when defining the relevant market in which the allegedly dominant firm competes. It is possible that some products that appear to be in the market would not be included in the market at price levels that would have existed in the absence of the alleged anti-competitive act(s). To include these products could lead to an overly broad product market definition from an antitrust perspective. This is because these products do not discipline the market power of the dominant firm but rather are only considered substitutes for products in the market at price levels where market power has already been exercised. A similar situation occurs in defining the geographic parameters of the market, which may be overstated if they include areas that would not be included at the price level that would prevail absent the alleged anti-competitive act(s). This problem is referred to as the “cellophane fallacy.” (This issue was first identified in the context of a case in the United States involving the producers of cellophane.)

¹⁵This approach is consistent with the approach to defining markets outlined in part 3 of the Bureau’s Merger Enforcement Guidelines (Ottawa: Industry Canada, 2004), online: Competition Bureau Canada, www.competitionbureau.gc.ca.

¹⁶While the Bureau’s market definition exercise focuses on a hypothetical monopolist’s ability to sustain a price increase above the level that would have prevailed but for the alleged anti-competitive act(s) in question, the Bureau will still consider any evidence presented by a firm or group of firms alleged to hold a dominant position that it does not have market power and is not likely to within a one year period – in other words, that its prices are not and cannot likely be raised within a year to be above competitive levels by a small but significant, non-transitory amount. This implies that the allegedly dominant firm's (or firms') current price would not only prevail in the absence of the alleged conduct, but is in fact at the competitive level. In such a situation, if it appears this firm or group of firms would not be able to sustain a price increase above the competitive level, the Bureau will not consider the firm(s) to possess market power. If market power exists, however, control of a class or species of business is established on the basis of the price(s) that would have prevailed but for the alleged anti-competitive act.

¹⁷Canada (Director of Investigation and Research) v. Laidlaw Waste Systems Ltd. (1992), 40 C.P.R. (3d) 289 (Comp. Trib.) Laidlaw.

¹⁸Canada (Director of Investigation and Research) v. The D & B Companies of Canada Ltd. (1995), 64 C.P.R. (3d) 216 (Comp. Trib.) Nielsen.

¹⁹Nielsen, ibid. at 241.

²⁰The main relevant quantitative technique is measurement of own- and cross-price elasticities of demand and, where necessary, comparison of these to computed critical elasticities. Own-price elasticities indicate how buyers change their consumption of a product in response to a change in its price; cross-price elasticities indicate consumption changes in response to changes in the prices of other product. While cross-price elasticities do not directly measure the ability of a firm to increase price, they are useful for determining whether differentiated products are close substitutes when defining a relevant product market.

²¹Despite the reference to “throughout Canada or any area thereof,” the relevant geographic market, from an antitrust perspective, may include territory outside of Canada.

²²In NutraSweet, the Tribunal stated that the relevant geographic market encompassed “an area [that] is sufficiently isolated from price pressures emanating from other areas so that its unique characteristics can result in prices differing significantly for any period of time from those in other areas.” See supra note 3 at 20-21.

²³This approach was adopted by the Tribunal in NutraSweet, supra note 3; Laidlaw, supra note 17; and Nielsen, supra note 18. See also note 1 for the dimensions of competition defined in the term “price”.

²⁴In NutraSweet, supra note 3 at 28, the Tribunal states: "While this [the ability to set prices above the competitive level] is a valid conceptual approach, it is not one that can readily be applied; one must ordinarily look to indicators of market power such as market share and entry barriers. The specific factors that need to be considered in evaluating control will vary from case to case.”

²⁵The ability to defect may be mitigated by the speed and ease with which rival firms are able to accommodate increased demand for their products as the market price increases.

²⁶The cases are NutraSweet, supra note 3; Laidlaw, supra note 17; Nielsen, supra note 18; Canada (Director of Investigation and Research) v. Tele-Direct (Publications) Inc. (1997), 73 C.P.R. (3d) 1 (Comp. Trib.) Tele-Direct; Canada (Commissioner of Competition) v. Air Canada (2003), 26 C.P.R.(4th) 476 (Comp. Trib.) [Air Canada]; and Canada (Commissioner of Competition) v. Canada Pipe (2005) 40 C.P.R. (4^th) 453 (Comp. Trib.).

²⁷For example, NutraSweet supplied 95 percent of the aspartame market in Canada. Laidlaw was found to have market shares between 87 percent and 100 percent in various commercial waste collection markets. Nielsen had a 100 percent share of the market for scanner-based market tracking services, providing a prima facie finding of market power, or control, that required evidence of the absence of barriers to entry for rebuttal.

²⁸The two cases involving joint dominance were dealt with under consent orders where the element of joint dominance was taken as a given. See Canada (Director of Investigation and Research) v. Bank of Montreal (1996), 68 C.P.R. (3d) 527 (Comp. Trib.) [Interac] and Canada (Director of Investigation and Research) v. AGT Director Ltd. et al. (1994), C.C.T. D. No. 24 Trib. Dec. No. CT9402/19 [CANYPS].

²⁹Sunk costs are expenditures that a firm cannot recover if it exits the market. A network industry is one where the value to one person of being connected to the network increases as more people join the network. Economies of scale occur if, over some interval of output, average total cost is decreasing. If the firm produces multiple outputs, the definition applies when the proportion of goods or services produced by the firm is held constant. Economies of scope occur when the cost of producing two products together is less than the combined costs of producing the two products separately.

³⁰Laidlaw, supra note 17 at 74. In this case, Laidlaw’s dominance was effectively created by the barriers raised by its anti-competitive conduct.

³¹In the Bureau's analysis, the beneficial effects of entry on prices in a market must normally occur within a two-year period.

³²As in the case of single-firm dominance, the Bureau will consider evidence that the allegedly jointly dominant firms do not have market power and are not expected to obtain market power within a year. It may be the case, for example, that competition from within the allegedly jointly dominant group is such that competitive price levels (that is, price levels that do not exhibit market power) are observed. In such a situation, the Bureau will not pursue any alleged abuse of dominance. If, however, market power is observed, given the Bureau’s concern with the creation, preservation, or enhancement of market power, control of a class or species of business is established on the basis of the price(s) that would have prevailed but for the alleged anti-competitive act.

³³Commissioner of Competition v. Canada Pipe Company Ltd./Tuyauteries Canada Ltée, 2006 FCA 233 at para. 77 Canada Pipe. While the purpose of paragraph 79(1)(b), according to the Federal Court of Appeal, is to assess negative effects on competitors, the Bureau, as noted above, is ultimately interested in harm to competition. Having determined that a practice negatively affects competitors, it still remains to be determined whether it results in a substantially lessening or prevention of competition under paragraph 79(1)(c).

³⁴NutraSweet, supra note 3 at 23.

³⁵NutraSweet, supra note 3 at 34; see also Laidlaw, supra note 17 at 331-332; Nielsen, supra note 18 at 257; Tele-Direct, supra note 26 at 180.

³⁶NutraSweet, supra note 3 at 34. The Tribunal noted that paragraph 78(1)(f) is an exception in that it does not contain an explicit reference to a purpose or object of the act in question.

³⁷Canada Pipe, supra note 33 at 72.

³⁸NutraSweet, supra note 3 at 35.

³⁹Canada Pipe, supra note 33 at 73.

⁴⁰Nielsen, supra note 18 at 265.

⁴¹Beyond this definition, there may be general business justifications that are not strictly credible efficiencies or pro-competitive rationales, but might nevertheless be accepted as valid by the Tribunal. In the context of s. 75, for example, the Tribunal has accepted legislative or regulatory obligations and security concerns as objectively justifiable business justifications for a refusal to deal. See B-Filer Inc. et al. v. The Bank of Nova Scotia (2005) 44 C.P.R. (4th) 214 B-Filer at paras. 161 and 172.

⁴²When assessing any cost-related business justification, the Bureau will focus on verified efficiencies that do not arise from anti-competitive reductions in output or service. Cost reductions resulting from decreased output or an elimination of rivalry will not qualify as cost-minimizing efficiencies. For example, a firm proposing to simply spend less on customer acquisition, advertising, service, or any other measure of quality as a result of the conduct in question will not be treated as having a valid business justification for that conduct; if anything, those contentions may speak more toward that conduct having an overall anti-competitive purpose.

⁴³In some cases, demand-enhancing activities may include conduct necessary to remain viable in a declining industry, or alternately, in an industry characterized by network effects (developing a definitive standard, for example).

⁴⁴Canada Pipe, supra note 33 at para. 36.

⁴⁵This test has also been endorsed by the Federal Court of Appeal, ibid. at para. 38. The Federal Court of Appeal stated, however, that in comparing the level of competitiveness in the presence of the impugned practice with that which would exist in the absence of the practice, other tests might also be appropriate.

⁴⁶NutraSweet, supra note 3 at 47.

⁴⁷NutraSweet, supra note 3 at 88.

⁴⁸In the Laidlaw case, the Tribunal concluded that Laidlaw's acquisition of 100 percent of the market in some instances, along with the exclusivity provisions and litigation threats that raised barriers to entry, lessened competition substantially. In Nielsen, the Tribunal noted that Nielsen's contracts with its customers were long-term and came up for renewal on a staggered basis; an entrant could not obtain the access to a broad supply of data required for effective entry. The Tribunal found that the practices lessened competition substantially.

⁴⁹This could include reference to the conditions that prevailed in the market prior to the practice of anti-competitive acts, or, where the practice of anti-competitive acts has prevented entry, could also involve a hypothetical consideration of market conditions in its absence.

⁵⁰The Bureau considers that “disciplinary” conduct will generally fall into one of these two broad categories.

⁵¹In cases where the relevant product market is properly defined as a single product (i.e., a bundle) as opposed to separate products, the Bureau will examine such conduct under a predatory standard. See Appendix III.

⁵²Where price squeezing involves lowering retail pricing only, the Bureau will examine it under a predatory standard.

⁵³The Nielsen case, for example, involved exclusive dealing. Retailers agreed to sell scanner-based data to Nielsen only, which, in combination with a number of other factors, foreclosed entrants from participating in the scanner-based tracking services market.

⁵⁴In NutraSweet, the Commissioner alleged that NutraSweet had engaged in a practice of anti-competitive acts by using its U.S. patent on aspartame to exclude rivals from Canada. The Tribunal found that NutraSweet had persuaded a Canadian customer of aspartame to switch from a rival, Tosoh, to NutraSweet by offering rebates to the customer on the basis of aspartame used in products manufactured in the U.S. and imported into Canada. The rebate would depend on the difference between the U.S. and the Canadian prices. The Tribunal held, among other things, that the fact that NutraSweet was willing to offer the rebate regardless of the size of the U.S.-Canada price differential indicated an intention to limit the expansion of its competitors. It held that the use of the monopoly position conferred by the U.S. patent for anti-competitive purposes was an anti-competitive act. This illustrates how a rebate, which would generally be pro-competitive, could also be used to prevent the expansion of NutraSweet’s rivals.

⁵⁵For example, in Nielsen, sellers of retail scanner data agreed to an MFN clause, which effectively committed the sellers not to sell the data to any other buyer, since another firm (as a duopolist) would not have been able to pay as much for the data as Nielsen (as a monopolist).

⁵⁶Tying was dealt with explicitly under section 77 and section 79 in Tele-Direct, in which Tele-Direct’s tied selling of advertising space in Yellow Pages directories, a market in which it held a dominant position, to advertising services was found to lessen competition substantially by raising barriers to entry in the advertising services market. As the Tribunal recognized, any examination of tying must first involve the appropriate relevant market definition and a determination as to whether there are in fact two separate products being tied, or only a single product to begin with.

⁵⁷NutraSweet, supra note 3 at 43.

⁵⁸The Tribunal has defined avoidable costs as “all costs that can be avoided by not producing the good or service in question. In general, the avoidable cost of offering a service will consist of the variable costs and the product-specific fixed costs that are not sunk.” Air Canada, supra note 26 at para. 76.

⁵⁹These factors and the Bureau’s approach to predatory pricing is discussed in greater detail in the Bureau’s Predatory Pricing Enforcement Guidelines (Ottawa: Industry Canada, 2008), online: Competition Bureau Canada, http://www.competitionbureau.gc.ca.

⁶⁰The Bureau’s Conformity Continuum Information Bulletin (Ottawa: Industry Canada 2000) describes the general approach used by the Bureau in the administration and enforcement of the Act including options available to address instances of non-conformity. Online: Competition Bureau Canada, http://www.competitionbureau.gc.ca.

⁶¹This is different from section 96 of the merger provisions, which calls for a balancing of efficiency gains with any substantial lessening or prevention of competition resulting from the merger.

⁶²In rare cases where the mere exercise of IP rights may unduly restrain or lessen competition, the Bureau may seek a remedy under section 32 of the Act. The circumstances under which this might occur are described in the Bureau’s Intellectual Property Enforcement Guidelines (Ottawa: Industry Canada, 2000), online: Competition Bureau Canada, http://www.competitionbureau.gc.ca.

⁶³Section 45 is the criminal conspiracy provision, and section 92 is the civil provision with respect to mergers.

⁶⁴The Bureau’s approach to regulated conduct is discussed in more detail in the Bureau’s Technical Bulletin on “Regulated” Conduct (Ottawa: Industry Canada, 2006), online: Competition Bureau Canada, http://www.competitionbureau.gc.ca.

⁶⁵See note 2.

⁶⁶Exclusive dealing can also be pursued under section 77, where it has a statutory definition very similar to paragraph 78(1)(h). The Federal Court of Appeal has noted that “a parallel structure and logic is readily apparent between the requisite elements of exclusive dealing under ss. 77(2) and abuse of dominant position under ss. 79(1).” Supra at note 33 at para. 21.

⁶⁷Note that exclusive dealing will not generally raise issues where it covers products or services that would not generally constitute a relevant product market. Consider for example a regulatory or professional body that exclusively contracts for a complementary product or service that would not otherwise be offered but for that initiative (e.g., continuing education requirements). If the product or service would not otherwise exist in a well-defined, competitive market, an exclusive practice that effectively “creates” that market will generally not raise issues under the Act.

⁶⁸Tying is often combined with contractual or induced exclusivity, so that the buyer must purchase all of its requirements for product B, now and potentially in the future, from the firm in order to purchase product A, and not just a negligible amount. Tying may also be technological if a firm can use operational controls or compatibility requirements to enforce the tie, such as with software and hardware.

⁶⁹Products A and B may or may not be available separately for sale. When products A and B are not available outside of a bundle (e.g., shoes and shoelaces), this is referred to as pure bundling. When they are available separately but the bundle is offered on more favourable terms than the sum of the individual products (e.g., fast food meal deals), this is referred to as mixed bundling.

⁷⁰Supra note 26 at p. 161.

⁷¹While metering can potentially improve firms’ incentives to increase output and make products available, unlike the other efficiency reasons noted above, the motivation for tying in such a situation is not cost minimization, but rather the ability to efficiently capture consumer surplus at the margin. This may be associated with higher prices for at least some subset of consumers. Nonetheless, because the Act is not concerned with mere exercises of market power, if tying for reasons of price discrimination does not have an exclusionary, disciplinary, or predatory effect on a competitor, the matter will not be considered further by the Bureau.

⁷²Note that if customers are not made aware of a subsequent aftermarket tie, this may raise issues under the misleading practices provisions of the Act.

⁷³Monopoly leveraging is often also only profitable if it has this exclusionary effect.

⁷⁴A particular form of bundled rebate is a loyalty rebate, which is a discount on a product that a buyer receives for purchasing a given percentage (often full exclusivity) of its total requirement of that product from one firm.

⁷⁵With exclusive dealing, buyers that switch are often forced to pay a fee for breach of contract. With bundled rebates, buyers that switch are foregoing their discounts on other products in the bundle. To illustrate consumer switching costs for which there would have to be compensation, suppose the prices of A and B are both $8. Further assume that demand is perfectly inelastic, and entails 10 units for A and 5 units for B. Suppose that a dominant firm, Firm 1, supplying A offers a 10% discount if A and the competitive good, B, are purchased together. The purchase price of the bundle is thus $8x10 + $8x5 = 120 – 10% = $108. Suppose that the competitor in the sale of B, Firm 2, also offers a 10% discount. A consumer buying 5 units of B from Firm 2 would pay $8x5= $40 – 10% = $36. Compare the total price the consumer pays when buying the bundle, $108, versus buying A from the dominant firm and B from Firm 2: $8x10 + $36 = $116. Consequently, in order to induce switching, Firm 2 would have to offer an additional discount of $8 to compensate consumers. This would amount to a total discount of 30% ($12/($8x5)).

⁷⁶The term “facility” may also refer to any necessary input or service.

⁷⁷Constructive denial is a practice that has the equivalent effect of an actual denial, e.g., by charging a prohibitively high access price or offering prohibitively poor quality of service for the facility.

⁷⁸Such conditions could include exclusive territories or field-of-use restrictions that limit the geographic and/or product markets in which downstream purchasers can use the facility.

⁷⁹The “profit-maximizing access price” would be that at the time of the denial (i.e., assuming the downstream market structure absent the denial).

⁸⁰The same logic could apply if, instead of a merger, there was an exogenous change in technology or costs that allowed an upstream supplier not previously able to compete in the downstream market, to enter the downstream market.

⁸¹If an acquisition were to generate such an incentive, it may be appropriate to examine the competitive effects of the transaction under the merger provisions of the Act.

⁸²In theory, even if the allegedly dominant firm has not historically made this input available to competitors, there exists a profit-maximizing price at which the dominant firm would supply competitors that offer downstream consumers only a single product. In practice, however, it may be difficult to quantify this price in cases where it has not been historically supplied through voluntary exchange.

⁸³If the entrant could enter, expand and/or compete effectively by making its own investments, an order requiring access could actually impede competition by creating a disincentive for facilities-based competition.