Sections 78 and 79 of the Competition Act
Draft for Public Consultation
This consultation takes place between March 14, 2018 and May 14, 2018 (11:59 pm Pacific time).
March 14, 2018
Competition among firms underpins a robust economy; it incentivizes the creation of value and rewards entrepreneurship and innovation. When firms compete on the merits, market forces generally deliver the most efficient and beneficial economic outcomes for society.
In some cases, however, dominant firms can frustrate this process by engaging in conduct that undermines competitive market forces in the economy, leading to inefficient outcomes. In these rare circumstances, the Competition Bureau (the “Bureau”) may rely upon the abuse of dominance (and other) provisions to address specific conduct and restore the competitive process.
The Bureau, as an independent law enforcement agency, ensures that Canadian businesses and consumers prosper in a competitive and innovative marketplace. Headed by the Commissioner of Competition (the "Commissioner"), the Bureau investigates anti‑competitive practices and promotes compliance with the laws under its jurisdiction; namely, the Competition Act (the "Act"),Footnote 1 the Consumer Packaging and Labelling Act, the Textile Labelling Act and the Precious Metals Marking Act.
The Abuse of Dominance Enforcement Guidelines do not replace the advice of legal counsel and are not intended to restate the law or to constitute a binding statement of how the Commissioner will proceed in specific matters. The decisions of the Commissioner and the ultimate resolution of issues will depend on the particular circumstances of the matter in question. Final interpretation of the law is the responsibility of the Competition Tribunal (the "Tribunal") and the courts.
Table of Contents
- Copyright and permission to reproduce
- Executive Summary
- 1. Dominance
- 2. Anti‑competitive Acts
- 3. Competitive Effects
- 4. Remedies
- 5. Illustrative Examples
- Example 1 - Mere Exercise of Market Power
- Example 2 - Market Definition
- Example 3 - Assessing Market Power
- Example 4 - Assessing Joint Dominance
- Example 5 - Predatory Pricing
- Example 6 - Exclusive Dealing
- Example 7 - Tied Selling
- Example 8 - Trade Association Rules
- Example 9 - Disciplinary conduct
- Appendix: Relevant Provisions of the Act
March 13, 2018
This publication is not a legal document. It is intended to provide general information and is provided for convenience. To learn more, please refer to the full text of the Acts or contact the Competition Bureau.
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Aussi offert en français sous le titre L’abus de position dominante - Lignes directrices, Articles 78 et 79 de la Loi sur la concurrence
Abuse of a dominant position occurs when a dominant firm or a dominant group of firms in a market engages in a practice of anti‑competitive acts, with the result that competition has been, is, or is likely to be prevented or lessened substantially.
Simply being a dominant firm, or even a monopoly, does not in and of itself engage the abuse of dominance provisions of the Act. Firms may acquire a dominant position by out-competing their rivals, for example, by offering higher quality products at a lower price. In these cases, sanctioning firms for simply being dominant would undermine incentives to innovate, outperform rivals and engage in vigourous competition. Similarly, charging higher prices to customers or offering lower levels of service and choice than would be expected in a more competitive market does not constitute an abuse of dominance.
Three elements must be established to constitute an abuse of dominance under section 79 of the Act:
- one or more persons must substantially or completely control a class or species of business throughout Canada or any area thereof;
- that person or those persons must have engaged in (within the previous three years) or be engaging in a practice of anti‑competitive acts; and
- the practice must have had, be having or be likely to have the effect of preventing or lessening competition substantially in a market.
The first element, dominance, focuses on whether a person (or persons) possesses a substantial degree of market power in a relevant product and geographic market. The second element considers whether the dominant person (or persons) has engaged in a practice of conduct intended to have a predatory, exclusionary or disciplinary negative effect on a competitor. The final element involves an analysis of whether competition—on prices, quality, innovation, or any other dimension of competitionFootnote 2—would be substantially greater in a relevant market in the absence of the anti‑competitive conduct.
Where all three elements of section 79 are present, the Tribunal may prohibit the person (or persons) who engaged in the conduct from continuing to do so. 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 the person (or persons) who engaged in the conduct to take any action that is reasonable and necessary to overcome the anti‑competitive effects of the practice, including the divestiture of assets or shares. Finally, if the Tribunal issues a remedial order, it may also order the respondent to pay an administrative monetary penalty of up to $10 million (or $15 million for each subsequent order) in order to promote practices by that person (or persons) that are in conformity with the purposes of the abuse of dominance provisions.
In considering enforcement action under section 79 of the Act, the Bureau carefully evaluates allegations of abuse of dominance on a case-by-case basis, in the context of structural and other market-specific characteristics. In the course of an examination or inquiry, the Commissioner will typically afford parties the opportunity to respond to the Bureau's concerns regarding alleged contraventions of section 79 and to propose an appropriate resolution to address them.
Paragraph 79(1)(a) of the Act requires an assessment of whether "one or more persons substantially or completely control, throughout Canada or any area thereof, a class or species of business." In other words, this first element of the Act's abuse of dominance provision requires a finding of "dominance".
Four factors are relevant to assessing dominance:
- a "class or species of business" - the relevant product market;
- "in Canada or any area thereof" - the relevant geographic market;
- "control" - substantial market power; and
- "one or more persons" - joint dominance.Footnote 3
Market definition in abuse of dominance cases is an analytical tool that may assist with the determination of whether a firm is dominant. The Tribunal has recognized that often it is neither possible nor necessary to precisely define a relevant market(s) in proceedings under section 79.Footnote 4 In some cases, it may be clear that a firm is dominant under all plausible market definitions.
In some abuse of dominance cases, the market in which dominance is assessed will be the same market in which the alleged practice of anti‑competitive acts has or is likely to result in a substantial prevention or lessening of competition; hence, only one market may be relevant. In other cases, it may be that a person is dominant in a market that is different from the market in which anti‑competitive effects are alleged, such that it is appropriate to consider more than one relevant market.Footnote 5
While the following discussion contemplates defining markets in the context of selling goods or services, a similar exercise can be conducted when defining input markets from the perspective of a dominant buyer.
A "Class or Species of Business": Product Markets
For the purposes of paragraph 79(1)(a), the Tribunal considers a "class or species of business" to be synonymous with a relevant product market(s).Footnote 6
Defining relevant product markets usually begins by examining the product in respect of which the alleged abuse of dominance has occurred or is occurring, and determining whether close substitutes exist for that product, focusing on demand responses.Footnote 7
The "hypothetical monopolist test" provides a useful framework to conceptualize substitutability between products—an analytical framework the Tribunal has recognized can be helpful in cases under section 79 of the Act.Footnote 8 The Bureau considers whether a profit-maximizing hypothetical monopolist would impose and sustain a small but significant and non-transitory price increase for a candidate set of products above a given benchmark. In general, the smallest set of products in which the price increase would be sustained, including the product in respect of which the alleged abuse of dominance has occurred or is occurring, is defined as the relevant product market.Footnote 9
For purposes of the hypothetical monopolist test, the Bureau generally considers a five percent price increase above the price level that would prevail absent the alleged anti‑competitive act(s) to be significant and a one-year period to be non-transitory.Footnote 10
It is important to note that, in the context of abuse of dominance cases, the current price may not be the appropriate benchmark to use when defining the relevant market, as some products that appear to be good substitutes at that price level might not be considered substitutes at price levels that would have prevailed in the absence of the alleged anti‑competitive act(s).Footnote 11 Inclusion of these products could lead to an overly broad product market definition because these products do not discipline the market power of the dominant firm(s), but rather are only considered substitutes for products in the market at price levels where market power has already been exercised.
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.Footnote 12 However, in practice, such direct evidence may be difficult to obtain.
For the above reasons, market definition for the purposes of section 79 will often focus on qualitative indicators of substitutability. Such indicators include:
- Views, strategies, behaviours and identity of buyers
- Whether buyers have substituted between products in the past, and whether they plan to do so in the future, can indicate whether a price increase in a candidate market is sustainable. Industry surveys, industry participants and industry experts may also provide helpful information with respect to products that may be substitutable. Documents prepared by the firm(s) in question in the ordinary course of business may also prove useful in this regard.
- End-use and physical characteristics
- Functional interchangeability between two products is generally a necessary, but not sufficient, condition to warrant inclusion in the same relevant market. In general, as buyers place greater value on the actual or perceived unique physical or technical characteristics of a product, the more likely it is that the product will fall within a distinct relevant market.
- Switching costs
- Transaction costs that buyers would have to incur to, among other things, retool, repackage, adapt their marketing, breach a supply contract or learn new procedures may be sufficient to suggest that switching is an unlikely response to a small but significant and non-transitory price increase.
- Price relationships and relative price levels
- The absence of a strong correlation in price movement between two products over a significant period of time may suggest that the products do not fall within the same relevant market.
In some cases the Bureau may consider it appropriate to aggregate several different (or potentially different) product markets,Footnote 13 effectively treating them as a single market for analytical purposes. This could occur when evidence indicates that there may be more than one relevant product market but that competitive conditions are sufficiently similar in each that treating them as a single market does not affect the assessment of dominance.Footnote 14
The Bureau may define a market as a group of diverse products that are not themselves substitutes for each other in cases where a sole, profit maximizing seller would increase the price of the group of the products because a sufficient number of buyers would not respond to the price increase by purchasing individual products from different sellers. This may occur where there are sufficiently large transaction costs associated with dealing with multiple sellers.Footnote 15
Special considerations arise when applying the hypothetical monopolist test to "multi-sided" platforms. For a multi-sided platform, demand for one "side" depends on use of another; one example would be an advertising service that matches consumers and advertisers, where greater consumer use increases the attractiveness to advertisers, and greater advertiser use increases the attractiveness to consumers. Depending on the facts of a case, the Bureau may define a relevant product market as one side of a multi-sided platform (i.e., consider the effects of a price increase on one side of the platform). However, when considering if a hypothetical monopolist would find it profit maximizing to impose that price increase, it may be necessary to account for the interdependence of demand, feedback effects, and changes in profit on all sides of the platform.Footnote 16 In other cases, the Bureau may view it appropriate to define a market to include multiple sides of the platform.
Additionally, challenges may arise in the application of the hypothetical monopolist test where services are offered at a zero-monetary price (for instance, where services are offered for free to attract users to a multi-sided platform that depends on advertisers for monetization). In such cases, firms may compete on dimensions other than monetary price (e.g., product quality). Although the Bureau may seek to analyze whether a hypothetical monopolist would find it profit maximizing to decrease a relevant non-price dimension of competition by a small but substantial amount for a non-transitory period of time, this may not be tractable in practise. As a result, the Bureau's analysis may focus on qualitative indicators of substitutability.
"Throughout Canada or any Area Thereof": Geographic Markets
The Tribunal considers "throughout Canada or any area thereof" to be synonymous with a relevant geographic market(s).Footnote 17
A relevant geographic market consists of all locations or supply points regarded as close substitutes by buyers. Similar to product market definition, the Bureau will generally apply the hypothetical monopolist test to examine the dimensions of buyer switching, from suppliers in one location to suppliers in another, in response to a small but significant and non-transitory price increase.Footnote 18 A relevant geographic market will consist of all locations or supply points that would have to be included for such a price increase to be profitable.
The Bureau will typically first consider if the area in which the allegedly dominant firm operates constitutes a relevant geographic market. However, the Bureau may ultimately define geographic markets more broadly or more narrowly. In the latter case, where an allegedly dominant firm operates in more than one geographic market, the Bureau will seek to assess if competitive conditions materially vary across those markets. If competitive conditions are similar in several geographic markets, the Bureau may aggregate them for analytical purposes.
The Bureau will also consider indirect evidence of substitutability between locations or supply points when defining relevant geographic markets.
- Views, strategies, behaviours 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 past and potential future behavior of buyers as new options are made available, through, for instance, advances in technology, which may impact the geographic dimension of a buyer's purchases. Third parties who are familiar with the industry in question may provide information regarding past and potential future industry developments that helps to define the relevant geographic market. The extent to which distant supply locations are taken into account in business plans, marketing strategies and other documentation of the firm(s) in question and of other sellers may also be useful indicators of geographic market definition.
- Switching costs
- Transaction costs that buyers would have to incur to adapt their business to obtain the product from another source may be sufficient to render switching an unlikely response to a small but significant and non-transitory price increase.
- Transportation costs and shipment patterns
- In general, where prices in a distant area have historically exceeded or been lower than prices in the candidate geographic market by more than transportation costs, this may indicate that the distant area constitutes a separate relevant market, for reasons that go beyond transportation costs. Conversely, if significant shipments of the product from a distant area in response to a price increase are likely, this may suggest that the distant area falls within the geographic market. In either case, the Bureau will assess whether a small but significant and non-transitory price increase in the candidate geographic market would change any locational pricing differential to the point where purchases from distant sellers may be able to constrain a price increase.
While the principles above apply equally to domestic and international sources of competition, other considerations, such as tariffs, duties, quotas, regulatory impediments, government procurement policies, intellectual property laws, exchange rate fluctuations and international product standardization, may be relevant when considering whether supply points located outside Canada should be included in the relevant geographic market.
"Substantially or completely control": Market Power
The Tribunal considers "substantially or completely control" to be synonymous with market power.Footnote 19 The Supreme Court of Canada has defined "market power" as "the ability to 'profitably influence price, quality, variety, service, advertising, innovation or other dimensions of competition'".Footnote 20 The Tribunal has stated that market power includes "the power to exclude", or the ability to restrict the output of other actual or potential market participants.Footnote 21
A firm that does not compete in a market may nonetheless substantially or completely control that market.Footnote 22 When assessing if a firm holds market power in a market in which it does not compete, the power to exclude current or potential competitors, or restrict output, will often be the focus of the Bureau's analysis. Conversely, indicators of market power such as market shares or supra-competitive profits may not be relevant in such circumstances, whereas they may be central to assessing market power where the allegedly dominant firm does compete in the relevant market.
The Tribunal considers a person to hold a dominant position where that person possesses a substantial degree of market power. In TREB CT, the Tribunal stated that a substantial degree of market power is greater than the material degree of increased or maintained market power that is required to demonstrate a substantial lessening of competition under paragraph 79(1)(c), and that a substantial degree of market power is one that "confers upon an entity considerable latitude to determine or influence price or non-price dimensions of competition in a market, including the terms upon which it or others carry on business in the market".Footnote 23
In the context of paragraph 79(1)(a), the relevant level of market power includes not only a firm's pre-existing market power (i.e., any market power held by the firm notwithstanding any alleged anti‑competitive conduct), but also market power derived from any alleged anti‑competitive conduct. While the Bureau would not commence an application against a firm that did not possess market power at any point in time during which it engaged in a practice of anti‑competitive acts,Footnote 24 the Bureau will generally investigate allegations of abuse of dominance if it appears a firm is likely to obtain market power through an alleged practice of anti‑competitive acts within a reasonable period of time where a practice of anti‑competitive acts may be ongoing.
Alternatively, where a firm has demonstrated "considerable latitude" to determine or influence a relevant dimension of competition—for instance, through the ability to leverage upstream suppliers or downstream customers to determine how that firm or its competitors competeFootnote 25—the Bureau may consider this as evidence of a substantial degree of market power.
Market power can be measured directly or indirectly. Direct indicators of market power, such as profitability or evidence of supra-competitive pricing, are not always conclusive or indeed possible to assess; practical difficulties can arise in defining the "competitive" price level and the appropriate measure of cost to which prices should be compared.Footnote 26
In any event, the Bureau commonly examines a number of indirect indicators, both qualitative and quantitative, in conducting its analysis of market power, such as:
- Structural characteristics of a market, including market shares and any barriers to entry (including barriers created by the conduct of the allegedly dominant firm);
- The ability to engage in exclusionary conduct; and
- Other factors, including the extent of technological change, the effects of a practice of anti‑competitive acts, and customer or supplier countervailing power.
The Bureau adopts a holistic approach to the assessment of market power, and will consider all relevant evidence. The objective of this analysis is to determine the extent to which a firm is constrained from raising prices owing to the presence of effective competition or the likelihood of competitive entry. The Bureau's analytical approach to the assessment of each of these indicators is discussed in greater detail below.
Market Shares and Barriers to Entry
Jurisprudence has often relied on a combination of high market shares and barriers to entry as evidence of market power. While there is no definitive numeric threshold, the Bureau is of the view that high market share is usually a necessary, but not sufficient, condition to establish market power. However, cases may arise where the Bureau considers firms with relatively low market shares to possess market power where other evidence establishes its existence.Footnote 27
All other things being equal, the larger the share of the market held by competitors, the less likely it is that the firm(s) in question would be capable of exercising market power. Where competitors have a large market presence, customers can switch to these alternatives if a firm attempts to increase price. In such cases, switching by a significant portion of a firm's customer base may be enough to render any increase in price unprofitable.Footnote 28
In addition to considering the market shares of current sellers of relevant products, the Bureau may also consider the shares of potential sellers that would participate in the relevant market through a supply response if prices rose by a small but significant and non-transitory amount. In such a case, a firm could be considered a participant in the relevant market if significant sunk investments are not required to enter, and it could rapidly and profitably divert existing sales or capacity to begin supplying the market in response to such a price increase. For those firms that would participate in the market through a supply response, market share calculations will include only the output or capacity that would likely become available to the relevant market without incurring significant investment.
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 operating at capacity, relative market shares should be similar regardless of the unit of measurement. If firms have excess capacity, market shares based on capacity may best reflect their relative market position if they can easily increase supply in response to an increase in price. In the case of differentiated products, market shares based on dollar sales, demand units and/or capacity can lead to varying inferences with respect to firms' relative competitive positions, and shares based on revenues or demand units may be more probative in this regard. When calculating market shares, the Bureau will use the measurement that it considers best reflects the current and future competitive significance of competitors.
In contested abuse of dominance cases to date, market shares of those firms found to have abused their dominant position were very high, suggesting that, in those instances, customers were left with too few alternatives to discipline a price increase or other conduct by the firm that substantially lessened or prevented competition.Footnote 29 However, in the context of other provisions of Part VIII of the Act, the Tribunal has found a firm to possess market power with a share as low as 33 percent,Footnote 30 and has recognized that market shares may either overstate or understate a firm's market power.Footnote 31
In many cases, the Bureau uses market shares as an initial screening mechanism to assess allegations of abuse of dominance. However, market shares are not the only factor the Bureau considers, and where other evidence provides sufficient indication that a firm may be dominant regardless of a relatively low market share, the Bureau will generally investigate further. When investigating allegations of abuse of dominance, the Bureau's general approach is as follows:Footnote 32
- A market share below 50 percent will generally only prompt further examination if other evidence indicates the firm possesses market power, or that it appears the firm is likely to realize market power through the alleged anti‑competitive conduct within a reasonable period of time while a practice of anti‑competitive acts is ongoing;
- A market share of 50 percent or more will generally prompt further examination; and
- 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.
In addition to the firm's market share, distribution of the remaining market among competitors is relevant. While the likelihood of a single firm's ability to sustain a price increase rises with its market share, it also increases with the disparity between its market share and those of its competitors, as a firm facing a disparate group of smaller rivals may be able to exercise more unilateral market power than a firm facing a single rival accounting for the remainder of the market. In some cases the Bureau may consider additional metrics derived from market shares that account for the shares of competitors when assessing dominance.
The Bureau will also examine the durability of market shares in a particular market. If market shares have fluctuated significantly among competitors over time (for example, because firms regularly develop new technologies to "leapfrog" their competitors), a current high market share may be less indicative of market power.
However, a high market share is not itself sufficient to establish market power. A firm's attempt to exercise market power may be thwarted by expansion or entry of existing and/or potential competitors on a sufficient scale and scope if expansion and/or entry are expected to be profitable.
Barriers to entry can take many forms, including 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. The Bureau will examine the nature of any barriers, including those created by the alleged practice of anti‑competitive acts,Footnote 33 to entry to assess whether entry would be timely, likely, and sufficient in scale and scope to make the exercise of market power unsustainable. "Timely" means that entry will occur within a reasonable period of time; "likely" refers to the expectation that entry will occur; and "sufficient" means that entry would occur on a sufficient scale to prevent or deter firms from exercising market power.
The Ability to Exclude
As noted above, the Tribunal has recognized that the ability to exclude—the ability to restrict the output of other actual or potential market participants, and thereby profitably influence price—constitutes market power.Footnote 34 Where through the impugned conduct assessed under paragraphs 79(1)(b) and 79(1)(c), a firm has demonstrated its ability to exclude rivals, this provides evidence that it has market power.Footnote 35
Assessing market power through the ability to exclude is particularly relevant when a firm does not compete in the relevant market. The Federal Court of Appeal has confirmed that a firm that does not compete in a particular market may nonetheless control it, for example, through control of a significant input to competitors in a market, or the ability to make rules that effectively control the business conduct of those competitors.Footnote 36 The Bureau does not view these two mechanisms as mutually exclusive: for example, a firm may leverage control of a significant input in order to impose and enforce rules that affect the business conduct of competitors in a market.
Where a firm is alleged to control a significant input to competition in a market in which it does not compete (e.g., a downstream market), the Bureau does not consider it strictly necessary to define and establish dominance in an additional market defined around that input (e.g., an upstream market).Footnote 37 However, the Bureau will consider the extent to which substitutes exist to the input provided by the allegedly dominant firm, as well as the extent to which that input is necessary to compete. In the absence of acceptable substitutes, and if competitors in the relevant market are unable to effectively compete without access to the input, the Bureau will conclude the allegedly dominant firm has market power in the relevant market (in the examples above, in the downstream market).
When assessing if a firm has the ability to impose rules that govern the conduct of competitors, the Bureau may consider the extent to which any rules are adhered to, or could be enforced by the allegedly dominant firm. If such rules are not adhered to or enforced, the Bureau is not likely to conclude the allegedly dominant firm has market power on that basis.
The Bureau may examine other potentially relevant indicators when assessing market power, including:
- Countervailing power
- A customer or supplier may have the ability and incentive to constrain a firm's attempt to exercise market power by vertically integrating its own operations; refusing to buy or sell other products or in other geographic markets from the firm; or encouraging expansion or entry of existing or potential competitors;
- Commercial Leverage
- Conversely, market or demand characteristics may provide the allegedly dominant firm sufficient commercial leverage over upstream or downstream firms such that it may exercise market power. Through influence on suppliers or customers, a dominant firm may affect the terms upon which it or its rivals compete;
- Effects of the anti‑competitive Acts
- Where an allegedly dominant firm is able to lessen or prevent competition significantly in excess of the threshold necessary to qualify as "substantial" under paragraph 79(1)(c), this may be evidence that the firm possesses substantial market power;Footnote 38 and
- Technological change and innovation
- Evidence of a rapid pace of technological change and the prospect of firms being able to "innovate around" or "leapfrog" an apparently entrenched position of an incumbent firm could be 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.
"One or more persons": Joint Dominance
Section 79 explicitly contemplates that a group of firms may jointly possess market power, satisfying paragraph 79(1)(a). The Bureau's analytical framework for assessing joint dominance is similar to that employed in examining single-firm dominance; namely, the Bureau defines a relevant market and considers the ability of a firm or firms to exercise market power within that market, taking into account market shares, barriers to entry and expansion and any other relevant factors. However, in the case of joint dominance, this exercise also requires an assessment of whether those firms that are alleged to be engaged in a practice of anti‑competitive acts jointly control a class or species of business such that they hold market power together.
As with single firm dominance, the Bureau will assess the extent to which competition from existing rivals and from potential rivals (i.e., entrants) outside the allegedly jointly dominant group is likely to defeat the profitability of a price increase by the firms that are alleged to be jointly dominant. If these two sources of competition are not likely to constrain a price increase, the Bureau will then consider the nature of competition within the allegedly jointly dominant group.
Vigorous price and non-price rivalry among firms is a hallmark of competitive markets. If the firms in the allegedly jointly dominant group are, in fact, competing vigorously with one another, they will not be able to jointly exercise market power.Footnote 39 Similar or parallel conduct by firms is insufficient, on its own, for the Bureau to consider those firms to hold a jointly dominant position; firms may engage in similar practices that are pro-competitive, such as matching price reductions or making similar competitive offers to customers.
As with single-firm dominance, the ability to exercise 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 collectively hold market power, it is still necessary to establish that these firms' conduct constitutes a practice of anti‑competitive acts that is preventing or lessening competition substantially. It may, however, be the case that a practice of anti‑competitive acts facilitates joint dominance.
2. Anti‑competitive Acts
Paragraph 79(1)(b) requires that a firm or firms "have engaged in or are engaging in a practice of anti‑competitive acts". This element consists of two factors, the Bureau's approach to which is discussed below:
- a "practice"; and
- anti‑competitive acts.
While a "practice" normally involves more than one isolated act, the Bureau considers that this element may be satisfied by a single act that is sustained and systemic, or that has had or is having a lasting impact in a market.Footnote 40 For example, a long-term exclusionary contract may effectively prevent the entry or expansion of competitors despite the fact that the contract itself could be viewed as a single act.
Section 78 of the Act enumerates a non-exhaustive list of acts that are deemed to be anti‑competitive in applying section 79.Footnote 41 The Federal Court of Appeal has stated that an anti‑competitive act is defined by reference to its purpose, and the requisite anti‑competitive purpose is an intended negative effect on a competitor that is predatory, exclusionary, or disciplinary.Footnote 42 While many types of anti‑competitive conduct may be intended to harm competitors, the Bureau considers that certain acts not specifically directed at competitors could still be considered to have an anti‑competitive purpose.Footnote 43 Specifically, conduct aimed at undermining the competitive process and the vigour with which other firms may compete may be considered as having the requisite anti‑competitive purpose.
In this context, a competitor is a person who competes in a relevant market, and need not be a competitor of the allegedly dominant firm.Footnote 44 Thus, a firm that does not compete in a relevant market may nonetheless engage in a practice of anti‑competitive acts directed toward competitors in that market.
When assessing whether an act is anti‑competitive, the purpose of an act may be established directly by evidence of subjective intent, or inferred from the reasonably foreseeable consequences of the conduct. Although verbal or written statements of a firm's personnel may assist in establishing subjective intent, evidence of subjective intent is neither strictly necessary nor completely determinative.Footnote 45 In most cases, the purpose of the act can be inferred from the circumstances, and persons are assumed to intend the reasonably foreseeable consequences of their acts.Footnote 46
An additional factor in the determination of whether an act is anti‑competitive is whether it was in furtherance of a legitimate business objective. A business justification is not a defence to an allegation that a firm has engaged in anti‑competitive conduct, but rather an alternative explanation for the overriding purpose of that conduct. Proof of the existence of some legitimate business purpose underlying the conduct is not sufficient. Rather, the Federal Court of Appeal has said 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."Footnote 47 Depending on the circumstances, this could include, for example, reducing the firm's costs of production or operation, or improvements in technology or production processes that result in innovative new products or improvements in product quality or service.
In assessing the overriding purpose of an alleged anti‑competitive practice, the Bureau will examine the credibility of any efficiency or pro-competitive claims raised by the allegedly dominant firm(s), their link to the alleged anti‑competitive practice, and the likelihood of these claims being achieved. The Bureau may also consider whether the efficiency or pro-competitive benefits could have been achieved by alternate means that did not impact competitors. Although the Bureau will consider any business justifications posited by the allegedly dominant firm, as the courts have recognized, where an allegedly dominant firm asserts a business justification it ultimately bears the burden of proof to establish it.Footnote 48
Business justifications are relevant to the assessment of anti‑competitive purpose, and do not directly bear on the analysis of competitive effects pursuant to paragraph 79(1)(c).Footnote 49 The Bureau is not required to quantify any efficiencies resulting from a practice of anti‑competitive acts, but will consider them qualitatively within the purpose-focussed assessment of paragraph 79(1)(b).Footnote 50
The Tribunal has indicated that when assessing the overall character of a practice, it may consider if the acts made no economic sense but for their anti‑competitive effect on a competitor, such as exclusion.Footnote 51 The Bureau is of the view that conduct that makes no economic sense but for an anti‑competitive effect is likely to be anti‑competitive. However, circumstances may arise where the Bureau finds a practice satisfies paragraph 79(1)(b) even when it may make economic sense without an anti‑competitive effect on a competitor. Such cases may include where evidence of subjective intent establishes that the purpose of the practice was anti‑competitive, or where the economic benefits resulting from exclusion are sufficiently large compared to the other profits derived from the practice to make it clear that the overall purpose was an anti‑competitive effect on a competitor.Footnote 52
Where a firm that does not compete in a relevant market is alleged to have engaged in a practice of anti‑competitive acts, the Tribunal has indicated that it must be satisfied that the firm has a "plausible competitive interest" in adversely impacting competition in that market.Footnote 53 As noted above, the Federal Court of Appeal has characterized anti‑competitive acts as those that have an intended negative effect on a competitor that is predatory, exclusionary, or disciplinary. Although the Bureau will typically consider the incentives a dominant firm faces to limit competition, the Bureau may conclude that a firm that does not compete in a relevant market has engaged in a practice of anti‑competitive acts where anti‑competitive intent can be demonstrated.
In assessing whether a particular act is likely to be anti‑competitive, the Bureau is of the view that anti‑competitive conduct generally falls into three broad categories:
- predatory conduct;
- exclusionary conduct; and
- disciplinary conduct.
Predatory conduct involves a firm deliberately setting the price of a product(s) below an appropriate measure of cost to incur losses on the sale of product(s) in the relevant market(s) for a period of time sufficient to eliminate, discipline, or deter entry or expansion of a competitor, in the expectation that the firm will thereafter recoup its losses by charging higher prices than would have prevailed in the absence of the impugned conduct.Footnote 54 Predatory pricing may be implicit (through discounts or rebates, for example), or explicit.
The Tribunal has found that average avoidable cost is the most appropriate cost standard to use when determining if a dominant firm's prices are below cost.Footnote 55 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. Where the firm's pricing of the product(s) does not cover its average avoidable costs, the Bureau will consider the pricing to be predatory in the absence of evidence that the overriding purpose of the conduct was in furtherance of a credible efficiency or pro-competitive rationale.Footnote 56
There are difficulties inherent in applying a price-cost test and in distinguishing between predatory and competitive pricing (as both involve lower prices in the short term). The Bureau generally uses various "screens" prior to conducting an avoidable cost analysis. Specifically, the Bureau will examine whether the alleged predatory price can be matched by competitors without incurring losses (suggesting that discipline or exclusion, and subsequent recoupment, is unlikely to occur), as well as whether the alleged predatory price is in fact merely "meeting competition" by reacting to match a competitor's price.
In general, the Bureau is not concerned with conduct that forces competitors to be more effective, but rather with conduct that makes it more difficult for competitors to be effective. Vigorous competition on the merits (e.g., offering superior services at a lower price) may force competitors to be more effective or drive them out of business, but does not engage the abuse of dominance provisions. In contrast, exclusionary conduct is designed to make current and/or potential rivals less effective at disciplining the exercise of a firm's market power, to prevent them from entering the market, or to eliminate them from the market entirely for reasons other than their relative competitive performance. Such conduct often does so by raising rivals' costs or reducing rival's revenues.
In a non-exhaustive list, Section 78 describes various means by which a firm may engage in exclusionary conduct. These include: margin squeezing of a downstream competitor by a vertically-integrated supplier; vertical acquisitions; pre-empting scarce facilities or resources; adopting incompatible product specifications; and exclusive dealing. Other exclusionary strategies can include tying and bundling, and conduct that increases customer switching costs. All such activities can, in certain circumstances, serve to increase a rival's costs and/or reduce their revenues, which may make it more difficult for the rival to compete or result in its exclusion from the market. This may allow the dominant firm to maintain or increase its prices, which can be profitable if the costs of the exclusionary strategy are offset by the ultimate increase in revenue, or by the preservation of revenues that would otherwise be lost, owing to competitive entry or expansion.
The Bureau considers that a dominant firm may engage in anti‑competitive disciplinary conduct where it undertakes actions intended to dissuade an actual or potential competitor from competing vigorously, or otherwise disrupting the status quo in a market. Such conduct may not have a predatory or exclusionary purpose, but rather, be intended to soften competition. Section 78 provides two examples of potentially disciplinary conduct: paragraph 78(1)(d) contemplates the use of fighting brands to discipline a competitor, and paragraph 78(1)(i) refers to discipline through selling articles at a price lower than their acquisition cost.
Disciplinary conduct may play a role in facilitating, maintaining, or inducing coordination among firms. In many cases when firms engage in coordinated conduct, each participant faces an incentive to deviate from the coordinated outcome.Footnote 57 As a result, one of the requirements for coordinated behaviour to likely be sustainable is the ability to respond to any deviations from the terms of coordination through credible deterrent mechanisms. Disciplinary conduct may provide such a mechanism: by engaging in disciplinary conduct, a dominant firm can induce or preserve coordination by punishing—or credibly threatening to punish—deviations from a coordinated outcome.
In order to assess if the purpose of a practice is disciplinary, the Bureau may be more likely to rely on subjective evidence of intent than when assessing other types of anti‑competitive acts. Because disciplinary acts may be particularly difficult to distinguish from vigorous competition on the merits, the Bureau may be hesitant to conclude an act is disciplinary based solely on its reasonably foreseeable consequences.Footnote 58 When evaluating evidence of subjective intent, the Bureau will typically look for evidence of "something more" than the typical intent of a firm to best its competition. For example, where evidence indicates that a firm engaged in an aggressive competitive response not to meet (or beat) competition from a rival, but instead to induce that rival to compete less vigorously, the Bureau may conclude that "something more" is present. As with any other conduct considered under paragraph 79(1)(b), the Bureau would also consider any business justifications advanced to explain the conduct.
Further, to engage section 79, it must be the case that the disciplinary practice has had, is having, or is likely to have the effect of preventing or lessening competition substantially in a market. This may occur where the disciplinary conduct causes one or more competitors to compete less vigorously, permitting greater exercise of market power than would otherwise be the case.
The Bureau anticipates that it would only investigate allegedly disciplinary conduct in exceptional circumstances. In order to investigate, the Bureau would generally have to be satisfied that, on its face, the alleged conduct is clearly disciplinary.Footnote 59
3. Competitive Effects
Paragraph 79(1)(c) requires that the conduct in question "has had, is having or is likely to have the effect of preventing or lessening competition substantially in a market". In other words, having determined that the firm has engaged in a practice of anti‑competitive acts, it remains necessary to determine whether this practice has resulted or is likely to result in substantial harm to competition. Generally speaking, a substantial lessening or prevention of competition occurs when an impugned practice enables a firm to exercise a materially greater degree of market power than in the absence of the practice.Footnote 60
Demonstrating a substantial lessening or prevention of competition does not entail an assessment of whether the absolute level of competition in a market is substantial or sufficient, but rather a relative assessment of the level of competitiveness in the presence and absence of the impugned practice. In carrying out this assessment, the Bureau's general approach is to ask whether, but for the practice in question, there would likely be substantially greater competition in the market in the past, present, or future.Footnote 61
To satisfy paragraph 79(1)(c), conduct can either lessen or prevent competition. The Tribunal has recognized that the general analytical approach is similar in either case, but important differences exist. Conduct that lessens competition typically permits the exercise of new or increased market power through lessening the constraint posed by current or potential competitors. Conduct that prevents competition, in contrast, typically preserves existing market power by preventing new competition that would have materialized in the absence of the impugned practice.Footnote 62
In many cases, a substantial lessening or prevention of competition is accomplished by erecting or strengthening barriers to entry or expansion. Through increased barriers to entry or expansion, competitors or potential competitors are inhibited from challenging the market power of the dominant firm.Footnote 63 In examining anti‑competitive acts and their effects on barriers to entry or expansion, the Bureau focuses its analysis on determining the state of competition in the market in the absence of these acts. If, for example, it can be demonstrated that, but for the anti‑competitive acts, an effective competitor or group of competitors would likely emerge within a reasonable period of time to challenge the market power of the firm(s), the Bureau will conclude that the acts in question result in a substantial lessening or prevention of competition.Footnote 64
Although the Bureau's conceptual approach focusses on increased barriers to entry or expansion, the Bureau may also assess the effects of a practice of anti‑competitive acts on various indicators of the intensity of competition. Such indicators include, whether, in the absence of the practice of anti‑competitive acts:
- prices might be substantially lower;
- product quality, service, innovation, or choice might be substantially greater; or
- switching between products or suppliers might be substantially more frequent.
Whether any lessening or prevention of competition is substantial is assessed in terms of its degree, duration, and the extent to which it extends throughout the relevant market. There is no definitive threshold past which a given lessening or prevention qualifies as substantial. Rather, substantiality is assessed based on market specific factors, including the market power of the allegedly dominant firm.Footnote 65
The Tribunal has recognized that when assessing whether a practice of anti‑competitive acts gives rise to a substantial lessening or prevention of competition, the Bureau may rely on either qualitative (e.g. business documents, views of industry participants, etc.) or quantitative evidence (e.g., econometric studies).Footnote 66 Although in certain circumstances the Bureau may undertake quantitative studies of competitive effects when assessing potential abuses of dominance, it is not necessary for the Bureau to adduce quantitative evidence to establish a substantial prevention or lessening of competition.Footnote 67
Conduct that creates or enhances barriers that reduce dynamic competition, such as innovation,—which the Tribunal has characterized as "the most important form of competition"Footnote 68—is of particular concern to the Bureau. In contrast to "static" competition focussed on prices and output, dynamic competition refers to rivalry driven by product or process innovation. However, as the Tribunal has also recognized, due to its forward-looking and uncertain nature, effects on dynamic competition are often more challenging to assess than effects on static competition. In such cases, natural experiments (where available) may assist in establishing competitive effects.
Natural experiments are often useful to assess a counterfactual by examining historical events that link changes in competitive conditions (e.g. entry or exit of firms, presence of certain competitors, products, services, contractual practices) to changes in observable effects. In appropriate circumstances, the study of events and their impact on competition in one market can be very informative to an assessment of likely effects in another market. For example, observing and analyzing price levels after the entry of certain competitors or services in one market may be useful in establishing the likely competitive effects of their exclusion in another market.
The Bureau is also conscious to avoid enforcement action that chills dynamic competition in favour of increased static competition. Healthy dynamic competition may result in sequential "winner take all" competition for a market based on product quality or innovation, with the result that the successful firm acquires market power. Often, it is the prospect of market power that provides the incentive for firms to engage in dynamic competition. The Bureau recognizes that focussing enforcement on static outcomes may result in longer term harm as it may undermine the incentives for firms to engage in beneficial dynamic competition, and that caution must be exercised when intervening in fast-moving markets. However, this does not give dominant firms a license to lessen or prevent competition. In particular, where a dominant firm raises barriers that prevent more (or potentially more) innovative rivals from challenging its position, the Bureau will not hesitate to take action where appropriate.
The Bureau considers potential remedies early in any examination or inquiry under section 79 in order to determine the nature and the scope of any eventual effective remedy, including the means by which it may be implemented.
Where the Commissioner is satisfied that the evidence supports a conclusion that the elements of section 79 have been satisfied, a number of avenues to remedy the situation are available to the Bureau.
Generally speaking, in using the range of enforcement tools available, the Bureau encourages and facilitates voluntary compliance and, when possible, will attempt to achieve a negotiated settlement in response to a breach of section 79.Footnote 69
In most circumstances the Commissioner will require that any proposed remedy agreed upon be formalized in a consent agreement and registered with the Tribunal pursuant to section 105 of the Act.Footnote 70 Consent agreements entered into by the Commissioner and a respondent must be based on terms that could be the subject of an order of the Tribunal. Upon registration, consent agreements have the same force and effect as orders of the Tribunal.
Orders of the Competition Tribunal
Where the Commissioner is satisfied that the evidence supports an application to the Tribunal under section 79 and the Bureau cannot resolve a case on a consensual basis, or where a consensual remedy is not considered appropriate in the circumstances, the Commissioner may make an application to the Tribunal for a remedial order.
Where, on application by the Commissioner, the Tribunal finds that the elements of section 79 are met, the Act grants the Tribunal broad discretionary remedial powers to address the anti‑competitive conduct in question,Footnote 71 including the ability to impose both behavioral and structural remedies, varying from prohibition orders (subsection 79(1)), prescriptive orders requiring that certain corrective action be taken (subsection 79(2)) and the imposition of administrative monetary penalties (subsection 79(3.1)).Footnote 72
Prohibition and Prescriptive Orders
Pursuant to subsection 79(1), the Tribunal may issue an order prohibiting a respondent from engaging in the impugned practice of anti‑competitive acts. In addition or alternatively, if the Tribunal finds that an order prohibiting the continuance of the practice is not likely to be sufficient to restore competition in the affected market, subsection 79(2) provides that the Tribunal may issue an order directing the respondent to take any such actions as are reasonable and necessary to overcome the effects of the practice of anti‑competitive acts, including the divestiture of assets or shares.Footnote 73 Other actions may include, for instance, changes to contractual terms, or the establishment of a corporate compliance program. The Bureau typically views prohibition and prescriptive orders as complementary, and as such, may seek, in appropriate circumstances, an order both prohibiting the continuation or repetition of the anti‑competitive conduct while also directing the respondent to take positive steps or actions as are necessary to restore competition in the market.
Failure to comply with an order rendered under section 79 (other than subsection 79(3.1)) or a consent agreement registered with the Tribunal under section 105 is a criminal offence.Footnote 74
Administrative Monetary Penalties
Where the Tribunal issues an order pursuant to subsections 79(1) and/or 79(2) of the Act, it may also, pursuant to subsection 79(3.1), order the respondent to pay an administrative monetary penalty ("AMP"). Such a penalty may not exceed $10 million, or $15 million for each subsequent order. The purpose of an AMP in an abuse of dominance case is to promote compliance with the Act, not to punish the respondent for the anti‑competitive conduct.Footnote 75 Failure to pay an AMP by a respondent may be enforced civilly as a debt due to the Crown.Footnote 76
While the Bureau's intention to seek an AMP and its amount will depend to a great extent on the facts specific to the case, its analysis and determination will be guided by the aggravating and mitigating factors set out in subsection 79(3.2) of the Act:
- The effect on competition in the relevant market;
- The gross revenue from sales affected by the practice;
- Any actual or anticipated profits affected by the practice;
- The financial position of the person against whom the order is made;
- The history of compliance with the Act by the person against whom the order is being made; and
- Any other relevant factor.Footnote 77
As such, the decision by the Commissioner to seek an AMP and its amount is very fact-oriented and will invariably depend on the specific circumstances of each case.
The Commissioner is guided by similar considerations and factors when determining whether to include an AMP in consent agreements in respect of abuse of dominance and in establishing the amount.
5. Illustrative Examples
The following examples are designed to illustrate the analytical framework that may be applied by the Bureau in enforcement of section 79. These examples are not intended to provide an exhaustive catalogue of all conduct that may raise issues under section 79, and depending on the facts of any individual case the Bureau may depart from the analytical approach set out below. As with these Guidelines generally, the Bureau's discussion of the examples below does not replace the advice of legal counsel and is not intended to restate the law or to constitute a binding statement of how the Commissioner will exercise discretion in a particular situation. The enforcement decisions of the Commissioner and the ultimate resolution of issues will depend on the particular circumstances of the matter in question.
Example 1 - Mere Exercise of Market Power
HO3 and SANTA are firms that compete in respect of the supply of Santa hats in Canada. These two firms are the most important players in the market with market shares of 65 percent and 20 percent for HO3 and SANTA respectively. High barriers to entry make it difficult for a new entrant to enter the market. Recently, HO3 unilaterally raised the prices for the Santa hats it sells in Canada by over 250 percent. The Bureau has received complaints that HO3 has abused its dominant position.
Although it is necessary for a firm to possess market power in order to contravene section 79, this alone is not sufficient to raise issues under the abuse of dominance provisions of the Act. Even where a firm may be dominant, it must also be engaging in a practice of anti‑competitive acts that gives rise to a substantial lessening or prevention of competition. The Bureau would not view HO3's price increase as an anti‑competitive act as it does not exclude, predate, or discipline a competitor or a potential competitor. Further, because the price increase is a result of HO3's pre-existing market power, not a practice of anti‑competitive acts, paragraph 79(1)(c) cannot be established.
Example 2 - Market Definition
DUTY is one of several manufacturers of heavy-duty drills in western Canada. During the last year, SMASH, a manufacturer with a great reputation in the market for high-end hammers, started marketing "hyper-duty" drills to retailers in western Canada. These "hyper-duty" drills are 20 percent more expensive than the ones offered by DUTY, but they are also thirty percent more powerful.
Different drill manufacturers operate in eastern Canada, and shipments of drills between the two regions are limited, accounting for approximately 5 percent of drills purchased in western Canada. The share of eastern Canadian drills has remained relatively stable, despite price fluctuations between the two regions. However, within western Canada, prices generally follow each other across the region and shipments of drills are observed in response to price differentials.
SMASH has complained to the Bureau, alleging that DUTY has engaged in a practice of anti‑competitive acts. As part of its complaint, SMASH has presented evidence that its costs, and consequently its prices, have increased as a result of DUTY's conduct, while the prices of DUTY and other traditional drills remained stable.
This example will focus on product and geographic market definition.
To initially conceptualize substitutability, the Bureau would generally use the hypothetical monopolist test. In order to do so, the Bureau may seek data on substitution patterns between different drill types and manufacturers. In addition, the Bureau would seek information on qualitative factors relating to substitutability.Footnote 78 For example, the Bureau would seek to examine if the additional power or higher cost from the "hyper-duty" drills prevents or limits substitution, or if the hyper-duty drills are interoperable with existing equipment. Such information may be sought from sources including contractors, retailers and other drill manufacturers.
In this instance, the Bureau would likely seek to define a market relating to the sale of drills to retailers, rather than consumers. However, as substitution at the retail level could be informed by consumer demand, evidence on end-consumer preferences and substitution patterns may be relevant.
When defining relevant markets for the purpose of section 79, it is necessary to assess substitutability at the price that would have prevailed absent the impugned conduct. In this case, the Bureau may accord particular weight to evidence of substitutability from before the period DUTY engaged in the alleged conduct. However, the Bureau would consider the fact that the increase in price for hyper-duty drills was not correlated with an increase in price for traditional drills to be indicative that they are not in the same market.
Similarly, the Bureau would use the hypothetical monopolist test to examine bounds of the relevant geographic market, i.e., the extent of retailer switching from drill manufacturers in one region to manufacturers in another region. The geographic market could range from local market(s) to a Canada-wide one depending on various factors. Generally, the Bureau would look at whether an area is sufficiently insulated from price pressures emanating from other areas so that its unique characteristics can result in its prices differing significantly in any period of time from those in other areas.Footnote 79 Due to the pricing differentials with eastern Canada, different competitors, and limited, price-differential invariant imports, the Bureau would likely conclude that eastern Canada is in a separate geographic market than western Canada. The fact that drill manufacturers compete across western Canada and that prices and purchases track each other across the region would support the conclusion that western Canada is the relevant geographic market.
Example 3 - Assessing Market Power
SUBSTANTIAL is Canada's premier supplier of toques. Toques are sold in specialized boutiques; although toque retailers usually stock several brands of toque, they do not typically sell unrelated products. SUBSTANTIAL has a market share of 40 percent. There are six other competitors who evenly account for the remainder of the market.
Information gathered by the Bureau suggests that a substantial number of consumers have a strong preference for SUBSTANTIAL's products, and only shop at retailers that stock them. Other customers do not share this preference, and are willing to consider other substitutes, but no other brand of toque attracts similar customer loyalty. Consumers view SUBSTANTIAL's products as key to establishing credibility as a toque boutique, and a retailer that does not carry SUBSTANTIAL toques will be significantly disadvantaged against its rivals as a result. For these reasons, SUBSTANTIAL is able to obtain considerably more favourable support from retail channels, including favourable placement and expenditure on promotional activities.
A competitor of SUBSTANTIAL has complained to the Bureau, alleging that SUBSTANTIAL has engaged in a practice of anti‑competitive acts which have excluded itself and other competitors. They have provided credible evidence that as a result of SUBSTANTIAL's practice, the price SUBSTANTIAL charges for toques has risen by more than 33 percent.
The purpose of this hypothetical is to illustrate the Bureau's approach to assessing market power in the context of abuse of dominance. For the purposes of this analysis, the Bureau has already determined that the relevant market is toques sold to retailers in Canada.
The Bureau will typically begin with an assessment of market power based on structural considerations. This involves determining the relevant market and then assessing market shares and barriers to entry. In the absence of other evidence, based on these factors alone, the Bureau will not typically find dominance in cases where the allegedly dominant firm has a market share of less than 50 percent. However, in most cases, the Bureau will gather and assess other contextual evidence of market power, regardless of whether the allegedly dominant firm has a market share of greater than 50 percent. In some cases, contextual factors may suggest that market shares may not be representative of the full extent of a firm's market power.
When assessing SUBSTANTIAL's market power, the Bureau would consider the extent to which SUBSTANTIAL has commercial leverage over its retail channels. One factor the Bureau would consider is whether SUBSTANTIAL is willing and able to discipline retailers that do not comply with SUBSTANTIAL's terms, or if the threat of punishment is sufficient to exert leverage over retailers. If SUBSTANTIAL is able to unilaterally demand and receive considerably more favourable terms than other suppliers or dictate the level of support other brands of toque receive the Bureau may consider this an indicator of market power. A key element of the Bureau's analysis would be examining the underlying consumer demand for SUBSTANTIAL's products, and the amount of diversion that would occur if the prices of SUBSTANTIAL's products increased notwithstanding any alleged anti‑competitive acts.
The Bureau may also consider that the evidence that SUBSTANTIAL's toque prices increased by more than 33 percent as a result of SUBSTANTIAL's alleged anti‑competitive conduct suggests SUBSTANTIAL has market power.Footnote 80
Given these factors, the Bureau may conclude that SUBSTANTIAL substantially or completely controls a market within the meaning of paragraph 79(1)(a), notwithstanding SUBSTANTIAL's market share of 40 percent.
Example 4 - Assessing Joint Dominance
BUDDY and PAL are both manufacturers of tandem bicycles, who sell their products through retailers. Both parties have significant market shares, 45 percent and 55 percent respectively. These market shares have remained stable over the past five years. Evidence suggests that neither BUDDY nor PAL materially attempts to solicit the customers of the other, and there is very little customer switching between the two firms.
Both BUDDY and PAL engage in long term contracts with retailers that include automatic renewals, significant liquidated damages clauses in the event of early termination, and meet-or-release clauses that apply for a period subsequent to a contract being terminated in accordance with its conditions.
FRIENDLY has unsuccessfully attempted to enter the market for tandem bicycles. Despite offering lower prices, FRIENDLY was unable to secure a sufficient number of customers due to the contracting practices of BUDDY and PAL, was not able to realize the economies of scale necessary to compete with BUDDY and PAL, and was forced to abandon its efforts to enter the market.
This hypothetical will focus on assessing whether BUDDY and PAL are jointly dominant, rather than the other elements of section 79. The Bureau has already established that the relevant product market is tandem bicycles, and the relevant geographic market is Canada.
First, the Bureau would seek to assess whether firms outside the allegedly dominant group, either existing competitors or potential entrants, can discipline any exercise of market power by BUDDY and PAL. In this case, as there are no other firms in the relevant market, the focus of this assessment would be on potential entrants. The Bureau would consider the barriers to entry that exist, as well as the history of failed entry by FRIENDLY. Unless the Bureau found barriers to entry were low (including barriers created by the conduct at issue), the Bureau may conclude that potential entrants could not discipline the joint exercise of market power by BUDDY and PAL.
The Bureau would then examine if competition between BUDDY and PAL is sufficient to prevent a joint exercise of market power. Relevant information to this assessment includes factors such as the stability of market shares over time, the lack of active solicitation of the other's clients, and low customer switching, which would suggest that BUDDY and PAL jointly possess market power.
As a result, the Bureau could conclude BUDDY and PAL are jointly dominant in the market for tandem bicycles in Canada, satisfying the requirement of paragraph 79(1)(a).Footnote 81
Example 5 - Predatory Pricing
CHATEAU and DOMAINE are two Canadian maple-infused ice wine producers. Both only produce one type of wine, which is unique to these two vineyards. Indeed, both are located on a major hill in Gatineau with a particular micro-climate that cannot be found anywhere else in the world and this gives their products a distinctive taste which is sought after by connoisseurs.
Following a change in the leadership of CHATEAU, last year its new management substantially increased production and now offers customers a $40 rebate to the regular $50 price on each bottle of this year's vintage of its classic ice wine. Following this, DOMAINE contacted the Bureau alleging that this constitutes predatory pricing.
Allegations of predatory pricing are examined under section 79 of the Act. Predatory pricing occurs when a firm deliberately prices below cost in order to eliminate or discipline existing rivals or to deter entry. This can substantially lessen or prevent competition when the firm engaging in the predation can subsequently recoup its losses by charging prices above the level that would otherwise have prevailed. For the purposes of this example, assume that the wines of CHATEAU and DOMAINE constitute the relevant product market, the relevant geographic market is Canada, and that CHATEAU holds a substantial degree of market power within that market.
As a pre-condition for predatory pricing, the Bureau considers it necessary for the relevant products to be priced below their average avoidable cost. The Tribunal has defined an avoidable cost as one that is "incurred in the production of a specified good or service and which would not be incurred if the enterprise ceased production of that good or service."Footnote 82 The Tribunal also mentioned that when the incumbent's revenue (price) is below its average avoidable cost, it may be inferred that the incumbent is predating its competitor.Footnote 83
Regarding this particular fact situation, a relevant way to assess the validity of DOMAINE's concerns would be to seek information from DOMAINE on its own costs and profitability. If CHATEAU's price is above DOMAINE's own costs, the Bureau would conclude that DOMAINE is not likely to be excluded by the pricing strategy and as a result, the requirements of paragraph 79(1)(c) are not likely met. Further, this would cast doubt on the assertion that CHATEAU is pricing below its own costs.
In the event the Bureau had reason to believe that CHATEAU was pricing below cost and that this may have anti‑competitive effects, the Bureau would seek information from CHATEAU regarding costs and revenues, as well as qualitative information to assist the Bureau in determining which costs are avoidable. Information on the extent to which certain costs are avoidable could also be obtained from DOMAINE, other ice wine producers and/or industry experts.
When assessing CHATEAU's average avoidable costs, the Bureau's focus will be on determining those costs that would have been avoided had CHATEAU not produced and sold the wine subject to the pricing strategy. For simplicity, assume that there are four categories of costs that CHATEAU incurs:
- Bottles: CHATEAU purchases bottles shortly before bottling a given vintage based on the quantity it needs;
- Barrels: CHATEAU has a fixed stock of aging barrels, which is larger than what it typically requires at any time and CHATEAU rents excess barrels out to other vineyards;
- Labour: CHATEAU has a permanent staff who can only be fired in extreme circumstances, and hires seasonal labour to assist with grape planting, harvesting, processing, and bottling; and
- Land: CHATEAU is 68 years into a 100 year lease for the land the vineyard is situated on, cannot increase or reduce the amount of land it leases, and cannot use the land for any other purpose.
Because the quantity of bottles CHATEAU purchases varies based on the amount of wine CHATEAU produces, the Bureau would view this as an avoidable cost. Conversely, because CHATEAU cannot increase or reduce the amount of land it leases, the Bureau would not view land as an avoidable cost regardless of what share of CHATEAU's total costs the lease represents.
Because CHATEAU rents out barrels to other vineyards, when it uses them to age its own wine CHATEAU incurs an opportunity cost for the foregone rent it otherwise would have received. As a result, this foregone rent becomes an avoidable cost even if CHATEAU would not have purchased additional barrels.
Certain elements of CHATEAU's labour costs would likely be avoidable, while others may not be. Any seasonal labour CHATEAU retained for the purposes of producing the wine subject to the pricing strategy would be avoidable. If CHATEAU would not have hired any additional permanent employees to produce the wine, and as CHATEAU is limited in its ability to terminate permanent employees, these costs would not be avoidable, depending on the duration of the pricing strategy.Footnote 84
Having determined CHATEAU's avoidable costs, the Bureau would then compare this to the price of the wine subject to the pricing strategy.
The Bureau would typically also seek to determine if there is credible evidence of a legitimate business objective on the part of CHATEAU - e.g. if they were selling excess, obsolete or perishable inventory, or to induce customers to try a new product. In addition to seeking evidence from CHATEAU, In this case, the Bureau could gather information through other relevant sources (DOMAINE, other vineyards, industry experts, etc.) on whether there could be any valid business justification for pricing below average avoidable cost or to assess the credibility of any business justification put forward by CHATEAU.
In addition, even where a firm is pricing below its average avoidable costs, in order to substantially lessen or prevent competition and thereby raise issues under the Act it must be likely for a firm to recoup the losses it incurred through its pricing strategy. If any attempt to subsequently raise prices would be thwarted by timely new entry or remaining competitors, the below cost pricing will not give rise to a substantial lessening or prevention of competition. In such cases, if the dominant firm successfully excludes its rivals and raises prices, and barriers prevent new entry or expansion of existing competitors from being sufficiently timely or sufficient to discipline the exercise of market power on the part of the dominant firm, competition will be substantially prevented or lessened.Footnote 85
In this case, if a new entrant would be unable to obtain the land, assets, or know-how necessary to produce a competing wine, or would face significant reputational barriers due to being an unproven entrant that would prevent it from disciplining CHATEAU's market power, the Bureau may conclude that recoupment is possible and that the conduct substantially lessens or prevents competition.
Example 6 - Exclusive Dealing
A Packer is a consumer electronic device that has become ubiquitous since its introduction three years ago. Most major consumer electronics manufacturers started developing their own Packers and are competing to offer the best Packers to consumers with the most advanced features.
Packers collect a significant volume of data on their users, including location and spending habits. Realizing the value of this data, several companies, known as Packer data aggregators, started buying Packer data directly from the Packer manufacturers in order to analyze it and monetize the intelligence mined from the data. One of the key uses of aggregated Packer data is providing insights into consumer preferences and purchases for advertising and marketing purposes.
In Canada, unlike in the United States where there are three major Packer data aggregators, only one firm is offering these services. That firm, named MERCANTILE, has been collecting Packer data for the last two years and uses this data to enhance the capabilities of its algorithm, making its product even more desirable to customers. Having two years of Canadian Packer data in its algorithm gives MERCANTILE a significant competitive advantage over any entrant in the market for Packer data aggregation in Canada. Further, MERCANTILE collects data on how its customers use MERCANTILE's aggregated data, which permit it to further improve the quality of its algorithm.
Over the last year, MERCANTILE has started signing new ten year contracts with all its suppliers of Packer data in Canada. These contracts include significant monetary penalties for early termination, as well as bonus payments for providing MERCANTILE exclusive access to data. MERCANTILE claims that these contractual terms are necessary in order for it to recoup the significant investments it has made in integrating the data from its suppliers into its algorithm. Further, MERCANTILE claims that the exclusivity payments incentivize data suppliers to technologically integrate themselves with MERCANTILE's platform, increasing the quality of data MERCANTILE collects and improving the analysis it can provide to customers.
COMBINES, MERCANTILE's largest competitor in the United States, has complained to the Bureau that because of these contractual terms COMBINES cannot secure the data it would require to enter the Canadian market and compete with MERCANTILE.
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 or inducing its own suppliers to deal only with the firm itself and not with that firm's competitors. Exclusivity may be mandated explicitly, or induced through other methods, such as technological incompatibilities, requirements contracts, meet-or-release clauses, most-favoured-nation (MFN) clauses, or other contractual practices.Footnote 86
Exclusive dealing is not necessarily anti‑competitive, and is often engaged in for reasons other than to exclude competitors. 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 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.
However, by inducing exclusivity from a sufficient quantity of suppliers or customers, a dominant firm may raise barriers to entry or expansion by raising rivals costs. Examples of how this may be achieved include denying rivals sufficient business to achieve economies of scale, forcing rivals to compensate customers for the penalties incurred for switching, or inducing rivals to inefficiently vertically integrate.
For the purposes of this hypothetical, assume that the Bureau has already defined a product market around Packer data aggregation in Canada, and that MERCANTILE is dominant in that market.
In order to determine whether MERCANTILE's actions are anti‑competitive acts,Footnote 87 as alleged by COMBINES, the Bureau must look at the purpose of those acts. It must determine whether the purpose of the contractual terms was to withhold scarce resources from the market, to prevent a competitor's entry into the market or to achieve some other exclusionary purpose.Footnote 88 In this case, the Bureau would most likely focus its analysis on the payments for exclusivity.
In addition to seeking subjective evidence of intent on the part of MERCANTILE, the Bureau may seek to determine if excluding COMBINES was a reasonably foreseeable consequence of the contractual terms. This may include gathering information on the extent to which substitutes exist for the data suppliers subject to the MERCANTILE contracts, whether additional suppliers could enter or COMBINES could self-supply with data, and if the payments for exclusivity have the effect of inducing some or all data suppliers to not deal with COMBINES. The Bureau would also assess the extent to which COMBINES requires data from all suppliers to be viable in the market. If the contractual terms have the effectFootnote 89 of preventing a sufficient number of data suppliers from dealing with COMBINES and there are no viable alternatives, the Bureau could conclude that a negative exclusionary effect on a competitor was reasonably foreseeable.
The Bureau may also assess any relevant business justifications for the contractual terms, here, that the exclusivity payments incentivize beneficial technological integration. If, for example, if there was no contemporaneous evidence at the time the contractual terms were entered into that the payments would improve technological integration and thereby product quality, the Bureau would be unlikely to find MERCANTILE's justification credible. Even if there is some evidence of the benefits of the payments, if MERCANTILE could achieve similar outcomes through less restrictive means (e.g., contracting for similar services instead of requiring exclusivity) the Bureau may not consider MERCANTILE's business justification persuasive.
The Bureau may also consider whether MERCANTILE's exclusivity payments made economic sense but for the exclusion of competitors. This would involve trading off the costs of the exclusivity payments against any revenues that would be derived from benefits other than exclusion (e.g., increased sales of aggregated Packer data due to higher quality, if any). In the absence of demonstrated revenues that do not depend on exclusion, the Bureau could consider this an indicator that the exclusivity payments are anti‑competitive.
The Bureau would then consider whether the contractual terms substantially lessened or prevented competition in the market for Packer data aggregation, i.e., if the contractual terms permit MERCANTILE to exercise materially greater market power in the past, present, or likely in the future.
In this circumstance, the Bureau would seek to determine the extent to which barriers to entry are the result of MERCANTILE's contractual terms, as compared to characteristics of the market itself. For instance, in an industry characterized by network effects,Footnote 90 the extent to which significant barriers to entry already exist must be taken into account when assessing the effect of the clauses on competition. Here, MERCANTILE's superior algorithm resulting from two years of Packer data aggregation and customer use data may create sufficiently strong barriers that the contractual terms have no incremental effect.
The Bureau would seek to determine if, in the absence of MERCANTILE's contractual terms, entry would be timely, likely, and sufficient to discipline the market power of MERCANTILE. In order to assess the effects of the contractual terms, the Bureau may seek information on the state of competition in the United States where there are no exclusivity clauses, and the views of other potential entrants. If evidence indicated that entry would be unlikely because of the market structure even in the absence of such clauses, it would make the Bureau significantly less likely to conclude that there has been, is or is likely to be a prevention of competition resulting from the clauses.
If the contractual terms are having the incremental effect of deterring entry, the Bureau would seek to assess the competitive significance of that entry. This may include examining evidence on the relative state of competition in markets for Packer data aggregation where no such exclusivity clauses with suppliers exist, such as the United States. If evidence indicated that prices paid for Packer data would be substantially lower, quality of services higher, or that there would be substantially more innovation in the absence of the contractual terms, the Bureau could conclude that MERCANTILE's conduct has substantially prevented competition.
Example 7 - Tied Selling
GORDIAN produces hitches, which are used in a variety of industrial applications. Use of a hitch requires rope, which quickly degrades and often needs to be replaced. Approximately 85 percent of all rope is used in connection with hitches; the remaining 15 percent is put to other uses.
As late as two years ago there were four different producers of rope, including GORDIAN. Two years ago GORDIAN introduced a policy requiring that only GORDIAN rope may be used with its hitches in order for the hitch to qualify for warranty coverage. Following this, the vast majority of hitch users switched to GORDIAN rope and the remaining third party rope manufacturers exited the market.
Following the exit of third party firms, prices for rope have risen for all customers. However, GORDIAN has introduced a rebate program for hitch users, and as such the price of rope has increased more for the segment of the market that uses rope for non-hitch related purposes. GORDIAN only provides the rebate to customers who have registered for hitch warranty service and caps the amount based on how much rope is typically used per hitch, preventing rope used for non-hitch purposes from benefiting from the rebate and limiting the ability for hitch-users to engage in arbitrage. As a result, rope prices for hitch operators have risen by 3 percent, but over 50 percent for other uses. Nonetheless, many hitch purchasers have expressed a preference to the Bureau to purchase non-GORDIAN rope at the old prices, but do not consider it feasible to do so if it means voiding their warranty coverage.
GORDIAN claims that this policy was implemented because of low quality third party rope causing damage to its hitches, increasing GORDIAN's costs to provide service and lowering the reputation of its products.
Tying occurs when as a condition of obtaining or using one product (the "tying" product, here hitches), a firm requires or induces a customer to purchase another product as well (the "tied" product, here rope). Closely related, 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.
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). 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 to 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 their competitors. Tying may also be used to implement price discrimination strategies that can increase consumption of the relevant products and thereby economic efficiency.
However, to the extent a tying or bundling strategy excludes, disciplines, or predates a competitor it may raise concerns under the abuse of dominance provisions of the Act.Footnote 91 In particular, the Bureau will consider whether the tie totally or partially excludes competitors by increasing their costs or reducing their revenue.
For the purposes of this hypothetical, assume that the Bureau has already defined a product market around hitches, and that GORDIAN is dominant in that market. Further, subject to hitches and rope being separate products (as discussed below), assume that the Bureau has defined rope to be a product market. In both cases, assume that the relevant geographic market is Canada.
Having established market power, consistent with the Tribunal's approach in Tele-Direct,Footnote 92 the Bureau would seek to determine whether the alleged tying and tied products are in fact separate products. A central question in the inquiry is the extent to which separate customer demand exists for the tying and tied products. The Bureau may also consider efficiencies that arise from a tie; if, for example, implementing a tie gives rise to efficiencies such that it is not commercially viable to offer the products separately the Bureau could not conclude the tying and tied products to be separate notwithstanding consumer demand.
In this case, when evaluating whether separate demand exists the Bureau may consider the history of hitches and rope being purchased from different manufacturers, as well as the views of current and potential rope purchasers. The Bureau would also have regard to the rope used separately from hitches. Based on these facts, the Bureau could conclude that separate demand exists.
The Bureau could also consider whether implementing the tie gives rise to efficiencies such that it is not practical to offer hitches and rope as separate products. Here, the Bureau could consider the history of the two products being sold separately at lower prices to be dispositive, and conclude that hitches and rope are separate products.
The Bureau may then turn to assessing whether GORDIAN's purpose in implementing the tie was anti‑competitive; in this case, focussing on if the tie was intended to exclude one or more competitors in the market for rope. This would involve examining evidence of GORDIAN's subjective intent in implementing the tie, as well as the reasonably foreseeable effects of the tie.
The Bureau would typically examine the extent to which the tie is binding. For instance, if hitch users can readily turn to effective substitutes for GORDIAN's warranty services at a sufficiently low cost, exclusion from the change to the warranty policy is not likely to be reasonably foreseeable. Naturally, the extent to which the tie is binding is also relevant to assessing whether there is a substantial lessening or prevention of competition.
The Bureau would also consider any business justifications posited by GORDIAN. In this case, this may include gathering evidence on the extent to which third party rope caused hitch breakdowns prior to the tie, whether breakdowns have decreased following the tie, and if customer satisfaction with hitches has improved.
If subjective or objective evidence suggests the tie was instituted with exclusionary intent, and that evidence in support of the business justification was not compelling, the Bureau could conclude that GORDIAN has engaged in a practice of anti‑competitive acts.
The Bureau would then consider whether the tie has, is, or is likely to cause a substantial lessening or prevention of competition. In this case, given the increased barriers to entry and expansion and increased prices as a result of the tie, the Bureau could conclude that there has been a substantial prevention or lessening of competition.
Example 8 - Trade Association Rules
SOL is a provincial trade association of solar panel manufacturers. Among other activities, SOL coordinates industry quality and performance standards for exclusive use of its members, and certifies compliance with these standards. Purchasers of solar panels have come to recognize and demand the certification SOL provides, and uncertified solar panels see markedly lower sales. Because of the significant benefits these standards provide, virtually all solar panel manufacturers in the province are members of SOL. There are similar trade associations to SOL in other provinces, who engage in similar activities. SOL is purely a trade association: it does not produce solar panels, and has not been provided with any powers or regulatory role by any federal or provincial statute.
There are many solar panel manufacturers that are members of SOL, and no individual member has a market share of more than 5 percent. The past several years have seen various solar panel manufacturers enter and exit the market.
SUNNY is a highly successful solar panel manufacturer outside the province in which SOL operates. Unlike other solar panel manufacturers who sell homogenous solar panels through traditional retail channels, SUNNY has pursued a business model where customers may order personalized solar panels through the internet, which are then shipped directly. Many consumers consider SUNNY's solar panels to be more convenient, of higher quality relative to those of its competitors, but at a comparable cost. SUNNY has grown rapidly in its native province, and is considering expanding its operations across the country.
Around the time SUNNY began rapidly expanding, SOL passed rules prohibiting its members from selling customized products directly to consumers. SOL claims that because customized solar panels are more varied, if they bypass traditional retail channels (where they can be more readily monitored) they cannot be subject to the same level of testing and cannot be certified as part of the standard for panels established by SOL. SUNNY has complained to the Bureau, stating that it wishes to begin operating in SOL's province, but is prevented due to the rules of SOL.
Trade associations may increase welfare through assisting firms to pool resources to engage in activities that increase demand or reduce costs: for instance, through trade associations firms may develop shared product standards that promote entry and mutual product compatibility. However, trade associations may also serve as a vehicle for collusive or exclusionary conduct through a variety of means. For example, where firms jointly develop assets or services that are practically necessary to compete in a market, control of these assets or services through a trade association or related rules can be leveraged to exclude or marginalize competitors, or prevent certain types of competition from emerging.
For the purpose of this hypothetical, assume the Bureau has determined the market to consist of solar panels sold in the province in which SOL operates.
Having defined the relevant market, the Bureau would assess whether SOL substantially or completely controls that market. Although the Bureau may seek to understand if substitutes exist for the services of SOL -- for example, if alternate certifications exist that SOL's members can effectively substitute for SOL's -- the Bureau does not view it as necessary to engage in a separate market definition exercise around the services of SOL or assess its market power in that second market (although the Bureau may nevertheless do so, depending on the circumstance). However, the existence and feasibility of substitutes for SOL's services may be relevant in assessing if SOL holds market power in solar panels, the reasonably foreseeable effects of SOL's restrictions, and if such restrictions give rise to a substantial lessening or prevention of competition.
When determining whether SOL holds market power in the market for solar panels, the Bureau could consider the extent to which SOL can influence factors such as price, quality, variety, service, advertising or innovation in the market for solar panels. This would typically include an examination of whether membership in SOL and access to its certification is commercially necessary to compete in the relevant market, and the extent to which SOL can enforce its rules on its members. If, for example, SOL can effectively exclude competitors or types of competition from the market, the Bureau could consider this requirement satisfied. In this case, the Bureau may seek to assess the extent to which consumer demand for a manufacturer's solar panels depends on SOL's certification. If consumer demand was sufficiently reduced for uncertified solar panels as to make it infeasible to compete, the Bureau could conclude SOL has market power.
The Bureau will then seek to understand if SOL has engaged in a practice of anti‑competitive acts. As SOL does not compete in the market for solar panels, the Bureau may seek to determine if SOL has a plausible competitive interest in affecting competition among its members. As SOL is a trade association that acts in the interests of its members, the Bureau may conclude that it has such a competitive interest.
The Bureau would seek to evaluate the purpose of the rules adopted by SOL. This may include examination of contemporaneous documents that speak to the intent behind SOL's rule changes. The Bureau may also consider whether exclusion of business models such as SUNNY's was a reasonably foreseeable consequence of the rules adopted by SOL. The Bureau would also consider any business justifications put forward by SOL, evaluate their credibility, and determine whether these business justifications outweigh any evidence of anti‑competitive intent. When evaluating the justification that individualized products may not conform to the standards set by SOL, the Bureau may evaluate the experience from areas where comparable restrictions are not adopted and the extent to which SOL conducted any studies to support the need for its restrictions. The Bureau may also have regard to whether the restrictions made economic sense, but for the exclusion of innovative competition.
The Bureau would then seek to evaluate whether the restrictions give rise to a substantial lessening or prevention of competition. In doing so, the Bureau would consider whether there would be substantially greater competition among the members of SOL in the absence of the restrictions. The Bureau's concern could be that the rules of SOL exclude or impede entrants (or potential entrants), as well as innovation among the members of SOL, leading to reduced dynamic competition. Notably, the Bureau would not consider the relatively small market shares of the individual members of SOL or entry and exit, as dispositive in this regard. Instead, relevant factors would include if the restrictions increased barriers to entry and expansion, whether the restrictions reduced the range of solar panels offered or their quality, and whether the restrictions have reduced innovation. The Bureau may find natural experiments in other markets persuasive, as well as the projections of businesses regarding the services they could offer but-for the restrictions. The Bureau would also seek to assess whether other members of SOL would be offering higher quality services, be more innovative, or otherwise be engaging in more vigorous competition in the absence of the restrictions.
Example 9 - Disciplinary Conduct
STATIC is Canada's largest provider of Secured Lending Cross-swaps (SLCs), a type of consumer-facing financial product, selling 60 percent of all SLCs in Canada. STATIC has one competitor, DYNAMIC, who accounts for the remaining 40 percent of sales. Since the entry of STATIC and DYNAMIC, significant tax incentives for the industry have been terminated and regulatory requirements for new entrants were increased, making new entry prohibitively difficult.
Competitive conditions in the SLC market—market shares, fee levels, and service offerings—have remained generally stable over the past decade. Documents gathered by the Bureau suggest that each market participant has historically realized that they benefit from less vigorous competition among each other, and have not traditionally attempted to solicit each other's customers, reduce prices, or improve their service offerings.
Six months ago, DYNAMIC hired a new CEO who publically stated that DYNAMIC would begin a new program of customer acquisition, cutting fees by 10 percent and developing a new and more convenient smartphone application for customers to monitor and manage their SLCs. Shortly thereafter, STATIC launched a second branding of SLCs, QUANTIFY, through which STATIC began selling SLCs at a 70 percent discount to regular fees. After one month, DYNAMIC announced it would continue with its pricing; STATIC immediately further dropped the fees of the QUANTIFY brand to 20 percent of historical levels, announcing that it would continue to offer these fees as long as STATIC continued with its customer acquisition program. The following month, DYNAMIC's CEO stated they would abandon their customer acquisition program, citing changed competitive conditions. STATIC withdrew the QUANTIFY brand from the market.
Following a complaint to the Bureau and a preliminary investigation, evidence indicates that STATIC was not pricing below its average avoidable costs at any point. However, internal correspondence and memos indicated that, through launching QUANTIFY, STATIC intended to punish DYNAMIC for adopting a new fee strategy and deter DYNAMIC from continuing its low fees, rather than simply matching or beating DYNAMIC's pricing. STATIC has told the Bureau it was simply a pro-competitive, aggressive response to DYNAMIC's pricing.
Assume the Bureau has defined the relevant market as SLCs sold in Canada.
Given STATIC's market share, if the Bureau concluded barriers to entry were present, the Bureau could view STATIC as unilaterally possessing market power, satisfying section 79(1)(a). The Bureau may also have regard to other factors, including the historical stability of market shares and lack of vigorous competition in SLCs.
When assessing if STATIC's conduct is an anti‑competitive act, the Bureau may accord particular weight to subjective evidence of intent, in order to distinguish a disciplinary act from aggressive competition on the merits. In particular, the Bureau may look for evidence that, in launching QUANTIFY, STATIC was attempting to punish DYNAMIC for its customer acquisition program, and restore market conditions to the historical status quo. Documentary evidence that STATIC considered other competitive responses that were more profitable, but for an expectation that DYNAMIC would abandon its customer acquisition program, could provide evidence regarding the overall purpose of STATIC's conduct.
If the Bureau were satisfied that STATIC's conduct constituted a practice of anti‑competitive acts, the Bureau would seek to determine if it caused a substantial lessening or prevention of competition. This could involve assessing the fee levels that would have likely prevailed if STATIC had adopted a different response and DYNAMIC had persisted in its customer acquisition strategy, as well as any non-price effects from DYNAMIC abandoning its new smartphone application.
Appendix: Relevant Provisions of the Act
78(1) For the purposes of section 79, "anti‑competitive act", without restricting the generality of the term, includes any of the following acts:
- 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;
- 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;
- 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;
- use of fighting brands introduced selectively on a temporary basis to discipline or eliminate a competitor;
- 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;
- buying up of products to prevent the erosion of existing price levels;
- 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;
- 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; and
- selling articles at a price lower than the acquisition cost for the purpose of disciplining or eliminating a competitor.
79(1) Where, on application by the Commissioner, the Tribunal finds 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 in 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, 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) If the Tribunal makes an order against a person under subsection (1) or (2), it may also order them to pay, in any manner that the Tribunal specifies, an administrative monetary penalty in an amount not exceeding $10,000,000 and, for each subsequent order under either of those subsections, an amount not exceeding $15,000,000.
(3.2) In determining the amount of an administrative monetary penalty, the Tribunal shall take into account any evidence of the following:
- the effect on competition in the relevant market;
- the gross revenue from sales affected by the practice;
- any actual or anticipated profits affected by the practice;
- the financial position of the person against whom the order is made;
- the history of compliance with this Act by the person against whom the order is made; and
- any other relevant factor.
(3.3) The purpose of an order made against a person under subsection (3.1) is to promote practices by that person that are in conformity with the purposes of this section and not to punish that person.
(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 on the basis of facts that are the same or substantially the same as the facts on the basis of which
- proceedings have been commenced against that person under section 45 or 49; or
- an order against that person is sought by the Commissioner under section 76, 90.1 or 92.
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.