Enforcement Guidelines for Illegal Trade Practices:
Unreasonably Low Pricing Policies (Under Paragraphs 50(1)(b) and 50(1)(c)
of the Competition Act)
Draft
(PDF: 85.7 KB)
March 8, 2002
Preface
Competition delivers many benefits to consumers, including competitive prices
and product choices. Low prices are usually a good indication that competition
is healthy and active in the marketplace. While competitive prices and low pricing
are beneficial to consumers generally, certain pricing behaviour can be designed
to frustrate and interfere with the process of competition in the longer term.
This type of undesirable pricing behaviour may have short-term benefits for
the consumer but will ultimately lead to higher prices or other anti-competitive
effects. These guidelines address paragraphs 50(1)(b) and 50(1)(c) of the Competition
Act (the "Act") which set out criminal offences of geographic
price discrimination and selling products at prices unreasonably low.
The Competition Bureau (the "Bureau") first published its Predatory
Pricing Enforcement Guidelines in 1992 to clarify its enforcement policy and
to ensure that the public understood when low pricing might result in an investigation
under the Competition Act (the "Act"). Those guidelines,
which addressed only paragraph 50(1)(c), evaluated predatory pricing using a
two-stage approach. The first stage evaluated an alleged predator's ability
to exercise market power and recoup losses incurred as a result of a policy
of predatory pricing. The second stage involved an assessment of whether the
prices in question were below average variable cost, otherwise known as the
Areeda and Turner test. However, since that time, there have been changes in
the economy as well as developments in economic thinking concerning low-pricing
behaviour. For this reason, the original guidelines have been updated to reflect
a modern perspective on low-pricing issues. These guidelines have adopted three
principal changes.
First, the ability to recoup losses will no longer be considered as the primary
screening criterion. Rather, it is properly considered as one of many factors
for determining whether or not unreasonably low anti-competitive pricing policies
have been adopted. However, the Bureau is of the view that, while an ability
to recoup losses can be an indicator of a policy of unreasonably low pricing,
it is not an element necessary to be proven under paragraphs 50(1)(b) and 50(1)(c).
Secondly, in carrying out the cost-revenue analysis to determine below-cost
selling, the Bureau will use ?avoidable cost' as opposed to average variable
cost and average total cost used in the previous guidelines. It is now recognized
that average variable cost is not appropriate for the analysis of a firm producing
multiple products. Accordingly, avoidable cost is the appropriate standard which
will be used in the Bureau's analysis addressing both single-product and multi-product
firms.
Finally, the Bureau has included a new section in these guidelines dealing
specifically with unreasonably low pricing resulting from market expansion.
The Bureau is always aware of business realities. In today's fast paced, global
economy, markets are constantly changing, demanding flexible and innovative
responses to competitive challenges. Transparency and certainty of enforcement
efforts are essential in this context. These Guidelines explain how the Bureau
enforces these provisions of the Act, with the aim of deterring anti-competitive
behaviour and, at the same time, avoiding a chilling effect on normal and healthy
price competition.
Konrad von Finckenstein, Q.C.
Commissioner of Competition
Interpretation
These Guidelines supersede all previous statements of the Commissioner of Competition
(the "Commissioner") or other officials of the Competition Bureau.
The Guidelines explain the general approach of the Commissioner and the Bureau
to the administration and enforcement of the legislation. They are not intended
to restate the law or to constitute a binding statement on how the Commissioner
will exercise his discretion in a particular situation. Consequently, they should
not replace the advice of legal counsel. Enforcement decisions of the Commissioner
or the Attorney General of Canada, and the ultimate resolution of issues, depend
on the surrounding circumstances. Guidance regarding a specific situation may
be requested from the Bureau through its Program of Advisory Opinions. These
guidelines and advisory opinions are also not intended to bind or affect in
any way the discretion of the Attorney General in the prosecution of matters
under the Act. Final interpretation of the law is the responsibility of the
courts.
How to Contact the Competition Bureau
These Guidelines and other publications of the Bureau are available on the
Internet at the Bureau's Web site address. To obtain general information, make
a complaint under the provisions of the legislation, or request an advisory
opinion, please contact the Bureau by any one of the means listed below:
Information Centre
Competition Bureau
Industry Canada
50 Victoria Street
Hull QC K1A 0C9
Tel.: (819) 997-4282
Toll-free: 1-800-348-5358
TDD (for the hearing impaired): 1-800-642-3844
Fax: (819) 997-0324
Fax-on-demand: (819) 997-2869
Web site: www.cb-bc.gc.ca
E-mail: compbureau@cb-bc.gc.ca
Table of Contents
Part 1: Introduction
Part 2: Relevant Provisions
Part 3: Enforcement Considerations
1. Thresholds for Examination
2. Preliminary Examination
3. Formal Inquiry
4. Option of Proceeding under Section 79
5. Alternative Case Resolution
Part 4: Elements of Unreasonably Low Pricing
1. Engaged in Business
2. Policy of Selling Products (Paragraphs 50(1)(b) and 50(1)(c))
3. Competitive Impact
4. Prices Lower than Those Exacted Elsewhere in Canada:
5. Prices That Are "Unreasonably Low" (Paragraph 50(1)(c))
Part 5: Low Pricing Resulting From Market Expansion
Part 6: Enforcement Outcomes
1. Prosecution
2. Other Remedies
3. Discontinuance
4. Right of Civil Action
5. Program of Advisory Opinions
Part 1: Introduction
The purpose of the Competition Act is to maintain and encourage
competition to achieve important economic objectives. These include providing
consumers with competitive prices and product choices as well as ensuring that
small and medium-sized enterprises have a fair opportunity to participate in
the Canadian economy.
Vigorous price competition is a hallmark of competitive markets. In most cases,
lower prices are driven by competitive market forces, and consumers benefit
from the rivalry among the firms in that market. Given the objectives of the
Act, it might seem a bit puzzling that there should be any concern about unreasonably
low prices. However, while the Act encourages vigorous price competition, it
also ensures that marketplace transactions are conducted on the basis of fair,
competitive rivalry rather than through anti-competitive behaviour. Unreasonably
low pricing is one example of such behaviour. It means involvement in a policy
of selling below cost in order to deter entry into a market, or to force competitors
out of a market. While consumers may benefit from the resulting low prices for
a brief period, they can be harmed in the long-run if the low pricing leads
to diminished competition and, ultimately, higher prices or reduced levels of
service, product quality or innovation.
Distinguishing between low prices resulting from illegal behaviour and those
stemming from legitimate competitive rivalry can be difficult. The Bureau exercises
caution when considering enforcement action against alleged unreasonably low
pricing behaviour in order not to inhibit beneficial price competition.
The Guidelines that follow are organized into five parts:
- Part 2 describes the geographic price discrimination and unreasonably low
pricing provisions of the Competition Act (paragraphs 50(1)(b) and
50(1)(c)).
- Part 3 provides an overview of how the Bureau administers and enforces the
Act. In particular, it focuses on how the Bureau screens cases of alleged
unreasonably low pricing in such a way that its resources are directed to
those most likely to harm the competitive process.
- Part 4 explains how the Bureau interprets the specific elements that must
be proved in order to establish a violation of paragraphs 50(1)(b) and 50(1)(c).
- Part 5 explains how the Bureau views low pricing resulting from market expansion
of a well established firm into a new market.
- Part 6 describes the different enforcement outcomes that could result from
allegations of unreasonably low pricing.
Part 2: Relevant Provisions
The Competition Act contains both criminal and civil provisions. Criminal
offences are prosecuted before criminal courts, and offenders can face substantial
fines and even imprisonment. Civil matters are adjudicated by the Competition
Tribunal which has powers to issue injunctive and remedial orders with respect
of mergers and anti-competitive practices which are likely to prevent or lessen
competition substantially.
Though anti-competitive low pricing is covered by several provisions of the
Act, it is most commonly addressed under paragraphs 50(1)(b) and 50(1)(c), which
are criminal provisions, and sections 78 and 79, the civil abuse of dominance
provisions. The Bureau's approach to the administration and enforcement of sections
78 and 79 is described in its Enforcement Guidelines
on the Abuse of Dominance Provisions.
The following section summarizes the elements of paragraphs 50(1)(b) and 50(1)(c).
A more detailed discussion can be found in Part 4 of these Guidelines.
Paragraphs 50(1)(b) and 50(1)(c)
Paragraphs 50(1)(b) and 50(1)(c) state:
Everyone engaged in a business who ...
(b) engages in a policy of selling products in any area of Canada at
prices lower than those exacted by him elsewhere in Canada, having the effect
or tendency of substantially lessening competition or eliminating a competitor
in that part of Canada, or designed to have that effect, or
(c) engages in a policy of selling products at prices unreasonably low,
having the effect or tendency of substantially lessening competition or eliminating
a competitor, or designed to have that effect,
is guilty of an indictable offence and liable to imprisonment for a term
not exceeding two years.
Paragraphs 50(1)(b) and 50(1)(c) require the following minimum elements that
must be proved beyond a reasonable doubt for an offence to occur:
1. the firm or person against whom allegations are made must be engaged in
a business;
2. the low pricing must be part of a "policy of selling products";
and
3. the policy must have at least one of the following effects or designs:
- the effect or tendency of substantially lessening competition;
- the effect or tendency of eliminating a competitor;
- be designed to substantially lessen competition; or
- be designed to eliminate a competitor.
The two provisions differ from each other in the following respects:
4. 50(1)(b) requires proof of a policy of selling products at prices that
are lower in one area of Canada compared to another (prices exacted lower
than elsewhere in Canada);
5. 50(1)(c) requires proof of a policy of selling products at prices that
are unreasonably low.
Table of content
Part 3: Enforcement Considerations
In administering and enforcing the Competition Act, the Bureau's key
objective is to safeguard the process of competition. In cases involving paragraphs
50(1)(b) and 50(1)(c), the Bureau applies the Act in a manner that maintains
and promotes healthy, vigorous price competition, while deterring anti-competitive
conduct. Identifying truly harmful low-pricing behaviour requires that a delicate
balance must be struck; otherwise, anti-competitive activity might go unchecked,
or legitimate price competition might be inhibited.
Typical complaints received by the Bureau regarding low pricing allege a competitor's
excessively low prices threaten to drive the complainant's firm (and possibly
others) from the market. Complainants usually ask the Bureau to explain the
steps involved in an investigation and to determine whether the low-pricing
activity of their competitor warrants the Bureau taking enforcement action.
Complainants then provide the Bureau with the relevant information supporting
the allegations, including information on prices, the magnitude and duration
of price reductions and costs. The Bureau considers the quality and quantity
of the evidence provided, as well as the likelihood that continued investigation
would uncover further evidence. The Bureau also prioritizes its cases in order
to make effective and efficient use of its financial and human resources.
1. Thresholds for Examination
When the complaint involves alleged low-pricing behaviour, the Bureau first
makes an initial assessment to confirm that the alleged behaviour is not legitimate
price competition, and also to ensure that the Bureau pursues enforcement
actions where unreasonably low pricing is likely to harm the competitive process.
For example, complaints regarding low pricing sometimes reveal upon examination
that the competitor was selling at prices above their costs. The courts have
concluded that selling at prices which are above costs can never be unreasonable
and does not offend paragraphs 50(1)(b) and 50(1)(c).
If prices appear to be below cost, the Bureau then defines the relevant
market both geographically and in terms of products. This procedure assists
the Bureau in determining the field in which firms are competing, the extent
of that competition, and the effects on competition and competitors of the
behaviour proscribed under the Act. Defining a relevant market is not an end
in itself, but is part of a framework of analysis that is used to determine
the competitive effects of alleged anti-competitive behaviour.
Defining a relevant market involves a variety of considerations. For one,
it is necessary to determine, from both the demand and the supply side, how
easily products can be substituted. Substitutes are considered to be in the
same market. The Bureau looks at the functional characteristics of products,
including their physical and technical characteristics, and their end use.
The views, strategies and behaviour of sellers and buyers are important as
well, especially in terms of how they respond to changes in the relative prices
of products. Transportation costs and shipment patterns can also help to define
the geographic dimensions of the market.
Once the relevant market has been defined, the Bureau assesses the likelihood
that the behaviour will harm competition, and therefore consumers and businesses.
The following considerations are taken into account:
- A low-pricing incumbent firm with an existing market share of less than
35% is considered to be less likely to engage in low-pricing behaviour harmful
to competition. In order not to discourage legitimate price competition,
the Bureau will not examine further the alleged low pricing by the incumbent
firm unless their market share is considerably greater than their rivals.
- If the low-pricing firm has a market share of more than 35% but barriers
to entry into the market are low, the Bureau will also conclude that the
low-pricing conduct is more likely to be of the kind that benefits the economy,
consumers and businesses. Consequently, no further examination is performed.
- In cases where the low-pricing incumbent firm has a market share of more
than 35%, or if its market share is considerably greater than its rivals,
and barriers to entry are significant, the Bureau will continue to examine
whether the elements of paragraphs 50(1)(b) or 50(1)(c) have been violated.
2. Preliminary Examination
If the thresholds described above are met, the Bureau continues with a preliminary
examination of the lawfulness of this behaviour, based on the elements of
unreasonably low pricing described in Part 4 of these Guidelines. The Bureau
pays particular attention to the duration, frequency, depth, and pattern of
the low-pricing behaviour. The Bureau also examines any price-cost information
that might be available, although it recognizes that information about the
low-pricing firm's costs might be limited at this early stage of the process.
Where the low-pricing firm is a well established firm expanding into a new
market, the Bureau also seeks to determine whether the firm's low pricing
represents a temporary introductory price promotion or another legitimate
business low-pricing objective such as selling off perishable inventory.
3. Formal Inquiry
At the conclusion of the preliminary examination, the Bureau will recommend
whether or not there is reason to believe that an offence has been, or is
likely to be, committed, and the Commissioner may decide to commence a formal
inquiry under the Act to determine all relevant facts. The decision to commence
a formal inquiry is based on whether the low-pricing activity meets the required
elements of the Act.
Once a formal inquiry is underway, the Bureau can make use of court-authorized
formal powers to gather further evidence about matters under investigation.
These powers can include orders for oral examination of witnesses under oath,
written returns of information and/or the production of records as well as
orders for search-and-seizure.
At the conclusion of the inquiry, the Bureau will decide how the case should
be resolved. The range of resolutions available is described in the Bureau's
Conformity Continuum Information Bulletin.
4. Option of Proceeding under Section 79
The Bureau may also address unreasonably low pricing under
section 79, the abuse of dominance provision of the Competition Act.
This is a non-criminal (or "civil") provision that seeks to address
abusive behaviour by a firm or firms dominant in the marketplace that engage
in a practice of anti-competitive acts which are likely to prevent or lessen
competition substantially. Section 79 authorizes the Commissioner to apply
to the Competition Tribunal, a specialized body composed of judges and lay
members, for remedies that are reasonable and necessary to overcome the anti-competitive
effects of activity which meets the elements of section 79.1
The application of section 79 to unreasonably low pricing is addressed more
specifically in section 4.3 of the Bureau's Enforcement Guidelines on the
Abuse of Dominance Provisions.
The Bureau will pursue allegations of unreasonably low pricing under section
79 when there is a dominant player, or a dominant group of firms, in the market.
To determine the presence of dominance, the Bureau examines market shares
and barriers to entry and assesses whether the players in question substantially
or completely control the class or species of business.
When the prerequisite elements have been met and pricing conduct falls within
the scope of both paragraph 50(1)(c) and section 79 of the Competition
Act, the particular facts of each case dictate which provision the Bureau
should employ to remedy the situation.
If a firm has a history of non-compliance with the Act or the nature of
the conduct is egregious, a referral to the Attorney General with a recommendation
of prosecution under section 50 with its consequent punitive remedies is appropriate.
The Bureau usually will proceed with an abuse of dominance inquiry when the
provisions of section 79 are established and there is also an element of unreasonably
low pricing as part of a broader pattern of anti-competitive acts. Finally,
when evaluating whether to undertake civil or criminal proceedings, the Bureau
weighs the effectiveness of remedies available to the Competition Tribunal
under section 79 against the criminal sanctions available under section 50.
5. Alternative Case Resolution
In appropriate cases, the Bureau attempts to resolve the matter through
alternative case resolution, thereby avoiding a full inquiry or judicial proceedings.
This reduces uncertainty, saves time and avoids lengthy court actions. Written
undertakings (a commitment to do or not to do something) may eliminate the
need for further Bureau action. The Bureau may accept an undertaking if it
remedies the effects of anti-competitive activity. Some matters can be settled
simply by having the Bureau contact the company involved to explain the law.
Table of content
Part 4: Elements of Unreasonably Low Pricing
If the thresholds for examination described in Part 3 have been met, the Bureau
will then analyze the evidence to determine if the elements of the offence are
met. This part provides guidance on how the Bureau interprets the specific elements
that must be proved under paragraphs 50(1)(b) and 50(1)(c).
It is important to note that one particular factor can have a bearing on several
elements of an offence. For example, the conduct of a firm, or the impact of
its anti-competitive conduct, can be used as evidence both of the firm's capacity
to exercise market power, and of underlying policy of selling at unreasonably
low prices. Likewise, a factor can relate to elements described both in paragraph
50(1)(b) and in 50(1)(c). The Bureau examines all these elements with the knowledge
that pricing decisions are made in the context of a complex and dynamic marketplace.
It is important to note that each of the three elements must be proved in order
to successfully establish an offence.
Once again the elements of paragraphs 50(1)(b) and 50(1)(c) are:
1. the firm or person against whom allegations are made must be engaged in
a business;
2. the low pricing must be part of a "policy of selling products";
and
3. the policy must have one of the following effects or designs:
- the effect or tendency of substantially lessening competition;
- the effect or tendency of eliminating a competitor;
- be designed to substantially lessen competition; or
- be designed to eliminate a competitor.
Again, the two praragraphs differ from each other in the following respects:
4. 50(1)(b) requires proof of a policy of selling products at prices lower
in one area of Canada than in another;
5. 50(1)(c) requires proof of a policy of selling products at unreasonably
low prices.
1. Engaged in a Business (Paragraphs 50(1)(b) and 50(1)(c))
The unreasonably low pricing provisions apply to persons "engaged in
business". Subsection 2(1) of the Act defines "business" as
including the following:
(a) manufacturing, producing, transporting, acquiring, supplying, storing
and otherwise dealing in articles; and
(b) acquiring, supplying and otherwise dealing in services.
It also includes the raising of funds for charitable or other non-profit
purposes.
2. Policy of Selling Products (Paragraphs 50(1)(b) and 50(1)(c))
Paragraphs 50(1)(b) and 50(1)(c) state that low pricing must be part of a
"policy of selling products". Under section 2 of the Act, a product
is defined as either an article or a service.
As part of its deliberations, the Bureau considers whether
the selling activity of the firm in question is a legitimate short-term competitive
tactic, or whether it is sufficiently long term or repetitive to be considered
a pricing strategy. In R. v. The Producers Dairy Limited, the Ontario Court
of Appeal interpreted "policy" as meaning more than the adoption
of a temporary measure to counteract an aggressive, competitive move aimed
directly at an important customer of the low-pricing firm. It found that the
low pricing in question, which lasted two days, did not constitute a policy.2
In R. v. Hoffmann-La Roche, the Ontario Court of Appeal stated that sales
made on a one-time basis are unlikely to constitute a policy. Rather, the
selling needed to be ongoing or repeated. In the latter case, the Court found
that products "given away" at no charge for a six-month period constituted
a policy of selling.3
When determining whether low pricing constitutes a policy, the Bureau considers
the surrounding circumstances. In Hoffman-La Roche, the Court found that any
course of pricing action as a "policy of selling", it must be established
that it was planned and deliberate conduct by responsible employees of the
company. For example, evidence that a program is aimed at eliminating a competitor
through below-cost pricing can indicate that the pricing is part of a planned
course of action.
A particular price which applies to one, or relatively few, market transactions
is unlikely by itself to constitute an unreasonably low pricing policy. Similarly,
prices which may have applied generally in the market for only a brief period
of time are unlikely to represent the sort of "policy of selling"
contemplated in paragraphs 50(1)(b) and 50(1)(c) of the Act. On the other
hand, in markets where the bulk of purchasing is done over a short period
of time, such as seasonal markets and those where infrequent large tender
calls constitute a significant portion of market transactions, the Bureau
may well conclude that prices applied over a short period reflect a "policy
of selling products" as envisaged by the provisions.
It is possible for an offence to be committed even if the pricing strategy
does not ultimately result in a substantial lessening of competition or the
elimination of a competitor. The Bureau is of the view that it should not
have to wait to take action until an unreasonably low pricing policy has had
a noticeably anti-competitive impact. In addition, to constitute a "policy
of selling", it is not necessary to show that the low-pricing behaviour
was officially authorized by the company.
3. Competitive Impact
Under both paragraphs 50(1)(b) and 50(1)(c), it must be proved that the policy
has one of the following three anti-competitive effects:
(a) the effect or tendency of substantially lessening competition;
(b) the effect or tendency of eliminating a competitor; or
(c) be designed to substantially lessen competition or eliminate a competitor.
Paragraphs 50(1)(b) and 50(1)(c) differ from each other in terms of the relevant
geographic market toward which the effect, tendency or design is aimed. The
geographic price discrimination elements of paragraph 50(1)(b) require proof
that the alleged low-pricing firm engaged in a policy of selling at prices
in the geographic market that were lower than prices it charged at the same
time elsewhere in Canada and the policy had the proscribed effect (or the
tendency or design to have this effect) in the geographic market in which
the low pricing occurred. Paragraph 50(1)(b) does not require prices to be
unreasonably low. The unreasonably low pricing provision in paragraph 50(1)(c)
requires that a policy of selling at prices that are unreasonably low having
the proscribed effects, but does not require a comparison of prices in different
geographic markets or regions.
The Bureau is of the view that the word "tendency" in 50(1)(b)
and 50(1)(c) implies more than the mere possibility that the policy will produce
one of the proscribed effects. To avoid characterizing potentially pro-competitive
low pricing as anti-competitive, the Bureau interprets this word as requiring
evidence that the low-pricing policy, if continued, will probably have a proscribed
effect.
Where the alleged unreasonably low pricing policy has already caused demonstrable
and measurable economic effects, these effects can be used to assess the extent
of the harm to competition and competitors. However, where the policy has
not been in place for long enough to have this impact, the Bureau assesses
the likelihood of competitive harm occurring over time. An unreasonably low
pricing policy by a firm with considerable financial strength relative to
its competitor(s) will be more likely to bring about the effects proscribed
by the Act. This kind of firm may be better able to outlast competitors in
a period of sustained price reductions.
Similarly, the Act prohibits anyone engaged in business from adopting low-pricing
policies designed to substantially lessen competition or eliminate a competitor
even where the policy is not effective or in place for a long enough period
of time to achieve its intended objectives.
A consideration of the effects, tendencies or designs which must be proved
under paragraphs 50(1)(b) and 50(1)(c) follows.
(a) Effect or Tendency of Substantially Lessening Competition
Generally, in competition law matters, a substantial lessening of competition
occurs when an anti-competitive practice, policy or merger transaction creates,
preserves or enhances market power, that is, the ability to profitably influence
price, quality, service or innovation, relatively independently of market
forces. A substantial lessening of competition does not require the creation
or preservation of a monopoly or the virtual elimination of all sources
of competition in a market.
While the degree and duration of the lessening of competition are relevant
to determining the extent of market power, rigid numerical criteria (such
as a particular percentage price rise over a period of years) are not required.
A detailed explanation of market power can be found in the Bureau's Merger
Enforcement Guidelines and in various decisions of the Competition Tribunal.4
The principal indicators of market power are market shares and levels of
concentration in, and barriers to entry to, the relevant market. However,
the actual behaviour of a firm can also be important. The ability to engage
in conduct which is predatory, exclusionary or disciplinary can itself be
a good indication of the presence of market power.
Levels of Concentration and Market Share
The level of market concentration and the market share held by the low-pricing
firm are important factors affecting its potential for exercising market
power. Market concentration is the extent to which leading suppliers control
the supply of a product in a market. It is measured by the number of sellers
in the market, and their combined market share. The Bureau is of the view
that the greater the level of concentration in the relevant market, the
more likely it is that a policy of unreasonably low pricing will adversely
affect competition and competitors. The Bureau analyzes the impact of the
alleged low-pricing policy on concentration levels and market shares to
determine whether the policy has maintained or increased the market share
of the alleged low pricing incumbent firm.
Evidence of persistently high market shares can be an indicator of market
power because, over time, the maintenance of high market shares depends
on the ability to prevent competitors and new entrants from increasing their
share of the available business. This can be accomplished through legitimate
means, such as greater efficiency or better products, or through improper
means, such as anti-competitive behaviour.
Differences in the relative size of market shares can also be important.
For example, a firm with relatively moderate market share may be able to
exercise market power if that share is considerably greater than its rivals.
As noted in the discussion of Enforcement Considerations, the Bureau usually
will pursue cases where the low-pricing incumbent firm has a market share
of more than 35%.
Conditions of Entry and Exit
Barriers to entry or exit can create and entrench the exercise of market
power. Where entry into the market is prevented or inhibited, it will be
easier for a firm to recoup the money it lost as a result of its below-cost
pricing. After a competitor has been eliminated, barriers to entry will
allow the firm to raise its prices without attracting new competitors into
the market.
i) Structural Barriers
Barriers to entry or exit include structural factors which prevent or
inhibit the entry of new firms into a market, or the exit of firms from
a market. Barriers to international and interprovincial trade, sunk costs
and regulatory requirements are examples of structural barriers.
New entrants often are at a cost disadvantage relative to incumbent firms,
particularly where initial production and/or sales are not sufficient
to achieve economies of scale or scope. Tariff or non-tariff barriers
to international trade, such as quota or ownership restrictions, impose
costs on potential foreign competitors which are not borne by domestic
firms. Similarly, interprovincial barriers to trade and regulatory control
over entry may present potential entrants with considerable, and possibly
insurmountable barriers to entry. For example, if approval from a government
regulatory body is required to enter a market or industry, this might
well pose a barrier, in terms of time, cost and risk associated with entry.
A scarcity of production inputs, or a lack of access to necessary technology,
could also represent an important cost disadvantage to potential entrants.
In some cases, necessary inputs and technology may be controlled by existing
industry members, including the firm in question. The firms may be integrated
to such an extent that they significantly control the sources of raw materials
used in the down-stream production processes, or possess patent rights
to products and processes necessary for the most efficient production
of the goods in question. Such controls, however legitimately they have
been obtained, may nevertheless represent obstacles to the effective entry
of competitors into the markets involved.
The need to make investments that cannot be recovered if entry is unsuccessful
is referred to as "sunk costs". The latter can impede entry
in two ways. First, they may be so significant relative to total entry
costs and expected rates of return that they deter entry altogether, or
prolong the time required to become an effective competitor. Second, even
if such barriers do not completely deter entry, they may lead firms to
decide to enter at a reduced scale, in an effort to minimize financial
risk. This latter circumstance may in turn result in entry which does
not represent effective competition to the existing market participants.
A common form of sunk costs involves the need to invest in market-specific
assets. For example, in some manufacturing industries the highly sophisticated,
specialized equipment dedicated to the production of unique products may
have little or no appreciable value outside the specific application for
which it is intended. Where such sunk costs represent a significant part
of the investment needed for entry or expansion, they are viewed by potential
entrants as being higher risk investments.
ii) Behavioural Barriers
The market power of a firm can be enhanced by behaviour which creates
or strengthens barriers to entry. In any given industry there may be a
number of factors which promote product differentiation advantages. Non-price
factors such as technical service, reputation, geographic proximity, and
even well established buyer/seller relationships may influence a buyer's
purchasing decisions and favour the incumbent firm. Where such non-price
factors appear to be significant in terms of quickly attaining the level
of sales required to succeed, they may pose a hindrance to effective and
sustainable entry to a market.
Strategic behaviour by an incumbent firm may also make new entry more
difficult. A firm may engage in conduct that could have an adverse effect
on existing rivals or even potential entrants in order to deter their
entry. The Commissioner will consider whether entry will be impeded or
delayed by an incumbent by looking for behaviour such as the following:
- using excess capacity to increase outputs and depress prices in response
to an entry attempt;
- excessive investment in research and development or advertising;
- pre-emptive acquisitions of inputs required by an entrant to enter
the incumbent's market; or
- pre-emptive expansion of capacity.
Barriers to exit can include sunk costs and other costs such as regulatory
requirements which impose significant costs on firms exiting a market.
For example, a firm may have to remediate a production site to comply
with environmental regulations once production ceases at its premises.
Barriers to exit may increase the incentive of a firm to sell at below-cost
prices to discipline competitors to compete less vigorously or end price
discounting as well as increase the prospects that competitors will increase
prices as opposed to exiting the market.
iii) Reputational Barriers
A firm can also deter entry by establishing a reputation for unreasonably
low pricing. By demonstrating its willingness to price below cost, a firm
can signal to potential competitors that it will respond aggressively
if they attempt to enter its markets. The creation of a barrier to entry
by virtue of reputation can increase a firm's market power and enhance
the exclusionary effects of its conduct.
If the incumbent firm is successful at persuading the entrant that its
continued presence or expansion in the market will be met with a strategy
of unreasonably low pricing, then the entrant will discontinue its expansion
and possibly exit the market. The incumbent firm thereby creates a reputation
for unreasonably low pricing that deters the entry or expansion of other
firms in that market or in other markets in which the incumbent competes.
In any given market, an unreasonably low pricing policy used to gain a
reputation is more likely when the firm in question operates in more than
one geographic or product market. An incumbent firm with "deep pockets"
might use its superior access to operating funds in order to help it cover
the costs of its pricing strategy. If the financing of an entrant is conditional
on its ongoing profitability, then an incumbent's unreasonably low pricing
policy can reduce the entrant's access to credit and increase its financing
costs. In such circumstances, a policy of selling at low prices is more
likely to have the effect, tendency or design proscribed by paragraphs
50(1)(b) and 50(1)(c).
In determining whether the firm has a reputation for unreasonably low
pricing, the Bureau will conduct an analysis that compares the subject
market(s) with conditions in other "similar" markets where the
firm is not present. To determine whether the firm enjoys less competition
in the subject market(s), the Bureau will consider whether:
(i) concentration of firms is higher in markets in which the firm
operates than in similar markets in which it does not;
(ii) the firm's sales and profits in markets in which it operates
are higher for a substantial period than are typically observed for
firms operating in similar markets;
(iii) low prices charged by the firm in the past have resulted in
exit and no new entry for an extended period after the low-pricing policy
has been discontinued; and
(iv) higher prices failed to induce new firms to enter the market.
In evaluating the potential for new entry, the Bureau
will consider the time it is likely to take the firm to raise prices and
recoup the costs of the pricing strategy. As a rule of thumb, the Bureau
will begin with a two-year time period, and then adjust for the nature
of the industry. For example, in an industry where only minimal investment
and expertise is required and where there is a history of rapid effective
entry, the Bureau will evaluate the possibility of new entry in response
to a significant price increase over a period significantly shorter than
two years. If entry is likely within the relevant time period, then the
probability of recouping the losses from the low-pricing strategy is reduced.
The approach to entry conditions is discussed in more detail in Merger
Enforcement Guidelines.5
iv) Ability to Recoup Losses
When a firm has market power, it can more easily recoup
foregone revenue due to its below-cost pricing. The ability to recoup
losses in this way is an additional indication of market power, whether
it occurs in the market where the low pricing took place or in another
market. A firm can recover its losses by increasing prices by a large
amount in a short period of time, or by increasing prices by a series
of small amounts over a longer period, during which new entry is unlikely
to occur. Alternatively, a firm can recoup losses incurred in one market
by exercising market power in another product or geographic market(s).
A firm's reputation for unreasonably low pricing can deter its competitors
from lowering their prices or expanding their operations, and can deter
potential competitors from entering a market, for fear of provoking an
aggressive response. Such "reputational" effects can increase
the firm's market power and thus make it easier to recoup losses. Low-pricing
behaviour can also be motivated by reasons other than recoupment. For
example, it may be rational for a firm to adopt a low-pricing policy and
sacrifice present profits in order to preserve the long-term stability
of an existing market structure. Additionally, a low-pricing policy could
assist in establishing an industry standard to exclude others or maintain
market control.6
The Bureau is of the view that, while an ability to recoup losses will
continue to be a factor to be considered, it is not a necessary element
to be proven under paragraphs 50(1)(b) and 50(1)(c).
(b) Effect or Tendency of Eliminating a Competitor
To conclude that a competitor has been eliminated, the Bureau must be satisfied
that a competing firm has, in fact, gone out of business or is otherwise
no longer in a position to be an effective competitor in a particular market.
Strategic-pricing behaviour that deters entry also constitutes a form of
competitor elimination, and the Bureau considers such behaviour as meeting
this element of the offence.
In cases in which the alleged low-pricing behaviour has not been in place
long enough to eliminate a competitor but likely will have this effect if
it continues, then this element of the offence will also have been met.
The Bureau examines evidence from the competitor showing its financial status
and projections for its future viability in the market to determine whether
elimination is a likely result of the low-pricing policy.
(c) Designed to Substantially Lessen Competition or Eliminate a Competitor
A low-pricing policy can also violate paragraphs 50(1)(b) and 50(1)(c)
when it is "designed" to have the effect of substantially lessening
competition or eliminating a competitor. The Bureau is of the view that
this element is met if it is proven that the accused engaged in the prohibited
conduct in order to cause either of these effects, even if the strategy
is entirely ineffective in achieving its objective.
This is different from the other scenarios in that the Bureau seeks evidence
of the aim of the policy. This evidence can be direct or indirect in nature.
The Bureau examines a number of factors, including for example, the magnitude
of the price cuts and the losses thereby incurred, the absence of any other
rationale for the price cuts (such as excess capacity in the market or the
need to dispose of perishable goods), and documentary and oral evidence
describing the alleged low-pricing firm's aim. The design or aim of the
policy can be inferred on the basis of these and other factors surrounding
the introduction of the low-pricing policy.
4. Prices Lower than Those Exacted Elsewhere in Canada: Paragraph 50(1)(b)
Section 50(1)(b) requires proof that a person has engaged in a policy of
selling products "in any area of Canada at prices lower than those exacted
by him elsewhere in Canada".
It is not unusual for the same products to be simultaneously sold at different
prices in different geographic markets. Prices can be influenced by variations
in costs, market demand or the intensity of local competition. Requiring a
firm to charge the same prices in all of the markets in which it operates
risks inhibiting legitimate price competition. For example, a firm may decide
to forego competitive price incentives in one local market if it is required
to similarly reduce its price in all of its markets. For these reasons, the
Bureau does not investigate every case where there are price differences among
geographic markets in Canada. Rather, to avoid inhibiting legitimate competition,
it will only investigate cases where the selling of a product in one local
market at prices lower than in another market in Canada will ultimately harm
the process of competition (see Part 3 above).
5. Prices That Are "Unreasonably Low" (Paragraph 50(1)(c))
Paragraph 50(1)(c) requires proof of a policy of selling products at "prices
unreasonably low". The Bureau regards these words as encompassing more
than just the amounts of the prices or their relationship to costs. The Bureau's
analysis also takes into account the context in which the firm competes. What
may on the surface appear to be unreasonably low pricing may be a justifiable
response to the behaviour of a competitor, or to other market conditions.
i) Price-Cost Comparison
To determine whether a specific price is low enough to be considered "unreasonable",
the Bureau determines whether the firm charging the price was able to cover
its costs of supplying the product(s) in question. The rationale for this
cost-based test is that it is reasonable to expect that a business will
operate with a view to covering its costs. A firm that charges a price insufficient
to do this without a legitimate business justification will not pass the
Bureau's cost-based test.
When conducting its cost-based test, the Bureau recognizes avoidable cost
as being the relevant cost concept. Avoidable costs refer to all costs that
could have been avoided by a firm had it chosen not to sell the product(s)
in question. In general, avoidable costs do not include sunk costs.
For the purposes of the price-cost analysis, there are two timing issues
that need to be addressed: the time period over which the cost-based analysis
is carried out, and the time period over which the costs of the firm are
avoidable. The resolution of both these issues will depend on the availability
of price and cost data, the period of time in which unreasonably low pricing
is alleged, and the need to take account of random variations or fluctuations
in demand. The second timing issue will also depend in part on the standard
amount of time taken by a firm's management to assess business performance
and implement any required changes.
Ordinarily, a multi-product firm incurs costs that are typical for the
production of all its products or for a particular group of products. Thus,
when the Bureau conducts its cost-based test for an allegation of unreasonably
low pricing concerning only one of the firm's products, it will consider
any common costs incurred in that product's production as unavoidable and
hence excluded from its analysis. This reflects the fact that the firm still
needs to incur these costs in order to produce other products not subject
to the low-pricing allegation. Thus the Bureau's cost test based on avoidable
cost does not require a firm to cover its fully allocated cost.
In the absence of business justification, the Bureau will consider a price
that is below avoidable cost to be unreasonable, since in the normal course
of business, a policy of selling at a price below this measure of cost would
be profit maximizing only because of its anti-competitive effects. A firm
pricing below avoidable cost is better off ceasing production altogether
or increasing its price(s).
ii) Business Justifications for Low Pricing
Jurisprudence under section 50(1)(c) requires that the Bureau take legitimate
business low-pricing objectives into consideration.7
For example, it may be reasonable for a company to sell excess, obsolete
or perishable goods, or products for which demand is shrinking at below-cost
prices. In the case of temporary cost increases or demand decreases, a firm
may use below-cost pricing to retain existing customers or to build inventory
in anticipation of increased business in the future. Companies may use below-cost
promotional pricing to induce customers to try a new product. A firm may
also use below-cost prices together with high volume production to gain
production experience quickly in order to become more efficient in the future
when it plans to recoup its costs. In each case, the Bureau considers the
particular competitive context of the pricing in question, with no single
factor predominating.
There also may be other legitimate business reasons for pricing below cost.
One such reason may be to remain competitive with a competitor's low prices.
For example, if a new entrant lowers prices to establish a presence in a
market, an incumbent firm may respond to this action in the short run by
matching those prices. There is jurisprudence to the effect that ?meeting
the competition' can be a defence to a charge of pricing below cost in certain
circumstances. Generally, this situation would not be considered by the
Bureau to be unreasonably low pricing. In assessing whether price matching
is anti-competitive, the Bureau will examine each situation on a case-by-case
basis to determine all facts and circumstances relevant to establishing
whether the low-pricing policy can be justified on legitimate business grounds.
One factor which the Bureau will consider is whether there is a qualitative
difference between the products being offered by the rival companies. Where
one product is superior to another in terms of quality or service, matching
prices would, in effect, be ?undercutting'. If the pricing results
in a situation where the matching firm is below its avoidable cost, the
Bureau may take enforcement action under the section. In addition, the Bureau
will consider the length of time the low prices are available in the market,
and whether there is evidence to indicate that the matching firm is taking
steps to reduce its own costs in order to remain competitive. The Bureau
also considers the ability of the alleged low-pricing firm to compete through
innovation or methods other than pricing below avoidable cost.
Table of content
Part 5: Low Pricing Resulting from Market Expansion
Most of the concern regarding unreasonably low pricing relates to an established
firm trying to protect or extend its market dominance by deterring or disciplining
new entrants. However, there may be circumstances in which a well established
firm expands into a new market and attempts to advance its market position by
engaging in unreasonably low pricing. While this is unlikely to happen if the
new entrant's market share is relatively small and it lacks operations elsewhere,
it becomes more feasible when the firm operates similar businesses in other
markets, has "deep pockets", and has behaved in an aggressively competitive,
and possibly anti-competitive, fashion in other markets. Such an entrant could
finance its low-pricing strategy from its earnings in other markets, a parent
with deep pockets or superior access to financing, and consequently be able
to enter a new market and sustain losses for an extended period of time.
Understandably, a new entrant is initially likely to engage in some form of
promotional pricing by offering products in the new market at prices lower than
in its other markets. In determining whether low pricing is a concern, the Bureau
will consider the length of the promotional period, the relative sizes of the
price differences in relation to its other markets, whether and for how long
the new entrant has achieved a foothold in the new market and the competitive
conditions in the new market.
In the event of a complaint about alleged unreasonably low pricing by a new
entrant, the Bureau applies the analysis described above. Unreasonably low pricing
by a new entrant is more likely to occur, or to have occurred, when the Bureau
finds that:
- the pricing behaviour satisfies the criteria outlined in these guidelines;
- there is no reasonable alternative explanation for the conduct;
- the conduct would harm competition in the market; and
- the entrant's prices are lower than prices it charges elsewhere for the
same products under similar competitive circumstances.
When examining alternative explanations for the observed conduct, as well as
its effects, the Bureau assesses whether the new entrant is more efficient than
the incumbent firm, offers more or less variety, is more or less attractive
to customers, and can cover its avoidable cost with the incumbent firm still
in the market.
When evaluating the impact of the new entrant's conduct, the Bureau seeks to
determine whether the entrant's continuing operation will likely lead to the
elimination of multiple competitors, whether the entrant's behaviour will result
in higher prices and other consumer costs (e.g., transportation costs), and
whether the entrant's costs are similar to, or higher than, those of existing
firms. If these criteria are substantiated, the Bureau will probably conclude
that the low-pricing policy would have an adverse impact on competition in the
market.
Table of content
Part 6: Enforcement Outcomes
When a preliminary examination proceeds to the formal inquiry stage, a range
of potential outcomes is possible. These outcomes are listed below, including
the Bureau's Program of Advisory Opinions which is designed to provide advice
on whether proposed business conduct is likely to raise an issue under the Competition
Act.
1. Prosecution
If the Commissioner concludes that an offence has been committed, evidence
may be referred to the Attorney General with a recommendation that criminal
charges be brought. The Attorney General will then decide whether or not to
follow that recommendation. A person found guilty of an offence under paragraph
50(1)(b) or 50(1)(c) may be imprisoned for a maximum of two years. A fine
may be imposed in lieu of a prison term.
2. Other Remedies
The remedies for anti-competitive conduct are not limited to those resulting
from a prosecution before the courts or proceedings before the Competition
Tribunal. Under section 34 of the Competition Act, the Attorney General
may apply for a prohibition order for a period of up to 10 years, to stop
behaviour that constitutes, or is directed toward, the commission of an offence.
In urgent circumstances, the Attorney General may apply for an interim injunction
under section 33 to temporarily halt such behaviour pending a prosecution
or the completion of proceedings under subsection 34(2).
In lieu of formal proceedings under the Act, the Commissioner has the discretion
to pursue alternative means of resolution. These less-formal remedies are
described in the Bureau's Conformity Continuum Information Bulletin.
3. Discontinuance
If the Commissioner concludes that the evidence does not establish the elements
of paragraphs 50(1)(b) or 50(1)(c), the inquiry is discontinued. The Commissioner
then produces a formal report for the Minister of Industry, indicating the
information obtained and the reason for the discontinuance. Following this,
the target of the inquiry as well as the complainant(s) are notified in writing
of the status of the inquiry.
4. Right of Civil Action
A right of private action also exists under section 36 of the Act. This
remedy is available if there has been a violation of the criminal provisions
of the Act, or a failure to comply with an order of the Tribunal or court.
Anyone who has suffered losses or damages as a result of conduct that is contrary
to section 50 may sue those who engaged in the anti-competitive behaviour.
Recovery can be equal to the loss or damage, if proof is provided by the person
bringing the action.
5. Program of Advisory Opinions
If a business is not sure whether an activity, if entered into, would contravene
the Act, it can submit a proposed plan or practice to the Bureau, which may
then provide an opinion on whether the situation described raises competition
concerns. Parties are not bound by the advice and are free to adopt their
plan or practice even in the face of a negative advisory opinion. Similarly,
the Bureau may re-examine the activity if the facts change. If Bill C-23 is
enacted, advisory opinions will be binding on the Commissioner provided the
subject fact situation is unchanged.
Footnotes
1 Section 79 provides
that the Competition Tribunal may make behavioural and structural orders against
a respondent firm(s) to overcome the effects of the practice of anti-competitive
acts. Under section 79, the Tribunal does not have the power to impose monetary
fines or order imprisonment. However, section 66 provides criminal penalties
for failing to comply with a Tribunal order. Additionally, if the amendments
to the Competition Act relating to the airline industry in Bill C-23 are adopted,
the Competition Tribunal will have the authority to impose monetary penalties
up to a maximum of $15 million against an airline carrier where the Competition
Tribunal has found that a dominant carrier has abused its dominant market position.
2 R. v. Producers Dairy
Ltd. (1966), 50 C.P.R. (2d) 265; see also R. v. Carnation Co., (1968), 58 C.P.R.
112 (Alta. C.A.)
3 R. v. Hoffmann-La
Roche (1980), 28 O.R. (2d) 164 affirmed (1981) 33 O.R. (2d) 694 (C.A.)
4 See, for example,
Canada (Director of Investigation and Research) v. NutraSweet Co. (1990), 32
C.P.R. (3rd) 1 (Comp. Trib.) and Canada (Director of Investigation and Research)
v. Laidlaw Waste Systems Ltd. (1992), 40 C.P.R. (3rd) (Comp. Trib.).
5 See, part 4.6, "Barriers
to Entry" pp. 33-36 and Appendix I of the Merger Enforcement Guidelines.
6 See, for example,
Australian Competition and Consumer Commission v. Boral Limited et. al., FCA
Australia,
7 R. v. Consumers Glass
Co. (1981), 33 O.R. (2d) 228. Also see Boehringer Ingelheim (Canada) Inc. v.
Bristol-Myers Squibb Canada Inc., Ontario Court of Justice (General Division),
October 9, 1998, unreported, a private action brought under section 36 of the
Competition Act.
