Canadian COMPETITION LAW

August 15, 2014

CBC has reported that Canada’s Conservative Government still plans to introduce new competition rules in Canada to address the “Canada-U.S. price gap”. Despite significant criticism from Canadian businesses, competition law practitioners and other policy commentators (see for example the CD Howe Institute’s two companion reports recommending that the proposal be abandoned: here and here and my own comments here), according to CBC the Conservatives “intend to move forward on it in due course” and see it as a “budget commitment”.

The idea to amend Canada’s competition laws to introduce new rules to regulate “unjustified Canada/U.S. retail price discrimination” was first raised by the Government in its federal budget earlier this year.

In particular, the Government announced that it intended to “introduce legislation to address price discrimination that is not justified by higher operating costs in Canada and to empower the Commissioner of Competition to enforce the new framework”. While no draft legislation has yet been introduced, the Government has indicated that new competition rules would be intended to challenge “companies [that use] their market power to charge higher prices in Canada that are not reflective of legitimate higher costs” and that “some companies charge higher prices in Canada than in the U.S. for the same goods, beyond what could be justified by higher operating costs”.

The Government’s “price gap” law proposal makes as little sense now as it did earlier this year for a number of reasons.

Significant competition policy shift to price regulation

First and foremost, to me it is difficult to see how any new “price gap” competition rules would not significantly expand Canada’s current competition laws from the regulation (and in some cases prohibition) of specific market distortions to simple price regulation. Despite some public misperceptions, the Competition Act currently does not regulate prices. Instead, it allows the Competition Bureau (and in some cases private plaintiffs) to challenge certain specific anti-competitive conduct that may maintain or increase firms’ market power. In other words, while some countries’ competition laws include high pricing under the umbrella of abuse of dominance or monopolization, Canada is not one of them.

While the question in Canada (and elsewhere) of what is “abusive” or constitutes monopolization can require significant analysis, it nevertheless tends to be restricted to several specific categories of conduct: predation (e.g., below cost pricing to eliminate rivals), exclusionary conduct (e.g., foreclosing competitors from suppliers/customers), tying (requiring purchase of one product to obtain another in which a firm possesses market power), etc.  While price discrimination can of course constitute abuse, there should be some sensible economic test for price discrimination rules such as substantially lessening competition as a result of differential pricing.

In this respect, it is very difficult to understand why Canada’s right wing Conservative Government would introduce Soviet-era-appearing rules that would deviate from sound economics to simply dictate prices companies can charge in Canada and margins the Government, the Competition Bureau (or both) think appropriate. In sum, when did Canada move from a market based economy to central planning where our federal Government and federal regulators determine appropriate prices and profit margins?

Definitional and accounting issues

As has correctly been pointed out now by a number of commentators, the Government’s “price gap” proposal would likely raise significant, if not insurmountable, definitional problems associated with what would be considered “unjustified price discrimination” (and related operational terms). For example, how would the term be defined? Would it be a bright line figure? Depend on the industry sector? Or worse, be determined on a case-by-case basis?

The entire definitional issue, apart from the seriously misguided non-market determined policy rationales underpinning the proposal, would seem to be completely impossible. Also, how would “unjustified price discrimination” be calculated? Would the Bureau rely on existing internal corporate accounting records? Would additional books and records obligations be imposed for retailers operating in Canada? If so, which firms would be required to adhere to any new recordkeeping requirements (and what additional burdens and costs would that add)?

Enforcement and administration issues

To me, one of the greatest impracticalities associated with the Government’s seriously misguided “price gap” proposal lies in the unlikelihood that any such new rules could or would be effectively enforced. This is in no way meant to disparage the Competition Bureau or any other federal agencies that might be involved in the administration and enforcement of the new law.

The reality, however, is that the Bureau and other agencies have limited budgets and resources and simply have not been (nor are currently) able to commence any significant volume of effects related cases in Canada. For example, there have been only a handful of abuse of dominance (i.e., monopolization) cases commenced since Canada’s amended abuse of dominance rules came into force in 1986 – typically 1-2 a year at the most (and in some years less). There have only been several exclusive dealing and predatory pricing cases commenced over the same thirty-year period. Canada’s pre-amendment Competition Act‘s price discrimination rules were similarly seldom applied in practice. And in the case of another more recent effects based section – price discrimination (section 76 of the Act) – a single Bureau case has been commenced since the Competition Act was amended in 2010.

As such, suggesting that a new unjustified Canada/U.S. price discrimination rule, which would likely be as complex if not more so than all of the above existing provisions, would somehow provide some broad remedy for retail price differentials between the U.S. and Canada is simply unrealistic.

I also have concerns that, like the recent introduction of Canada’s federal anti-spam legislation (CASL), any new such “price gap” rules would also lead to appreciably more administration and cost without any clear benefits.

Nice sounding rules don’t necessarily lead to results

Finally, even assuming that the policy rationale for a new “price gap” rule was sound, which it is not given the clear departure from market based principles, nice sounding rules as I have tried to illustrate in the point above don’t necessarily lead to results.

This current law and order Government appears to believe that the solution to all of Canada’s issues is to pass yet more laws. To put it another way, simply having (in my clearly politically motivated) law on the books ostensibly to benefit consumers will not necessarily, and in my view likely would not, mean that most or even many U.S. Canada retail price differentials would be eliminated.

What we in fact need is less laws and less intermeddling by the Government in markets – lower trade barriers, reduce supply management, reduce regulated industries and, well, let the market operate.

And, as I have said above, why should they be if companies are merely operating unilaterally and fairly in a market that just simply happens to be smaller or more concentrated, etc. than the U.S.?

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Of course, there are a number of other legitimate criticisms of this proposed “price gap” law, but it seems to me that these are the most serious concerns.

It may seem rather pessimistic of me, but this entire Conservative Government proposal appears aimed at trying to placate Canadian consumers while not actually doing much (and not dealing with what may in fact be some of the most plausible causes of higher Canadian retail prices: some protected supply management markets and import tariffs).

Given also, for example, the tone deafness of the Government during four years of business criticism in the run-up to the introduction of CASL (Canada’s business unfriendly and un-wieldly anti-spam law), it seems to me that the only solution to such misguided and impractical laws can only come in the next election.

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