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  • Is the Price Right?: Comments on the Predatory PricingEnforcement Guidelines and Price Discrimination Enforcement

    Guidelines of the Bureau of Competition Policy

    Lawson A.W. Hunter, Q.C." and Susan M. Hutton*"

    The Director of Investigation and Researchresponsible for enforcement of the Competi-tion Act has recently released guidelines re-garding paragraphs 50(l)(a) and 50(I)(c) ofthe Act. The Price. Discrimination Enforce-ment Guidelines and Predatory Pricing Enfor-cement Guidelines, while not legally binding,are nevertheless required reading for corporatecounsel, giving useful insight into the Direc-tor's approach to these important offences.The authors undertake an in-depth study ofthese two sets of guidelines. While hailing theadvent of these helpful documents, they iden-tify some theoretical and practical difficultieswhich remain unresolved, and offer sugges-tions for further debate of these complexissues.

    Le Directeur des enqu~tes et recherches res-ponsable de l'application de Ia Loi sur la con-currence a rdcemment publi6 ses lignes direc-trices sur les alin(as 50(1)a) (discriminationpar les prix) et 50(1)c) (prix d'6viction) de laLoi. Bien qu'elles n'aient pas force de loi, lesavocats ceuvrant aupr~s des compagnies nesauraient se passer de ces lignes directrices,qui fourmillent de renseignements utiles surl'approche prrconisde par le Directeur pources importantes infractions. Les auteurs entre-prennent une analyse approfondie de ces deuxpublications. Tout en reconnaissant leur im-portance et leur utilit6, ils soul~vent certainsproblimes th~oriques et pratiques et offrentune nouvelle perspective dans le but d'appro-fondir le drbat.

    *Partner with the law finn Stikeman, Elliott."Associate with the law firm Stikeman, Elliott, in its Ottawa office.

    McGill Law Journal 1993Revue de droit de McGillTo be cited as: (1993) 38 McGill L.J. 830Mode de rdfdrence: (1993) 38 R.D. McGill 830

  • IS THE PRICE RIGHT?

    Synopsis

    Introduction

    I. Predatory Pricing Enforcement GuidelinesA. Uncertainty in the JurisprudenceB. The Bureau's Approach to "Unreasonably Low"

    1. General Comments2. Step 1 - Market Power

    a. Market Shareb. Conditions of Entry

    3. Step 2 - Price-Cost Comparisona. The Appropriate Testb. Definition of Costc. The "Grey Area": Pricing between Average Variable and

    Average Total Cost4. Predatory Intent

    C. Are the Guidelines Specific Enough?D. Why Not Simply Use "Abuse of Dominance"?

    I. Price Discrimination Enforcement GuidelinesA. Parties to the OffenceB. Transactions CoveredC. Products CoveredD. "Discount, Rebate, Allowance, Price Concession or Other

    Advantage"E. "Available"F. "Purchaser"

    1. Buying Groups2. Franchise Systems3. IVPC's

    G. "Competitors of a Purchaser"H. "At the Time the Articles are Sold"L "Directly or Indirectly"J. "Like Quality and Quantity"K. "Knowledge"L. "A Practice of Discriminating"M. Implications for Promotional Allowances (section 51)N. Abuse of Dominance and Price Discrimination

    Conclusions

    1993]

  • REVUE DE DROIT DE McGILL

    Introduction

    On May 21, 1992 and September 14, 1992 respectively, the Director ofInvestigation and Research ("Director") of the Bureau of Competition Policy("Bureau") released the final versions of the Predatory Pricing EnforcementGuidelines' and the Price Discrimination Enforcement Guidelines.' TheseGuidelines now join the Merger Enforcement Guidelines3 and the MisleadingAdvertising Guidelines4 in the Bureau's arsenal of tools to encourage compli-ance by Canadian business with the provisions of the Competition Act.5

    The need for such guidance cannot be overemphasized. Price discrimina-tion and predatory pricing are the subjects of more requests for advice from theBureau than any others, yet there have been extremely few reported cases toprovide guidance in the interpretation of the legislation. In the absence of appli-cable jurisprudence, Canadian businesses may unwittingly violate the competi-tion laws, with serious criminal and/or civil consequences. Moreover, and mostpernicious from the point of view of Canadian economic efficiency, finms mayhold back from the aggressive fringe of competition for fear of violating the Act,even though much of that aggressive behaviour may actually promote "effi-ciency and adaptability" of the Canadian marketplace for goods and services.

    6

    By providing practical guidance to business people as to the range of permissi-ble behaviour, these Guidelines have had a significant impact on Canadian busi-ness pricing practices.

    The success of these Guidelines as compliance tools depends upon theextent to which they clarify the analytical approaches taken by the Director toparagraph 50(l)(a) (price discrimination) and paragraph 50(1)(c) (predatorypricing), and upon the extent to which they enable Canadian businesses andtheir corporate counsel to apply the analysis in a practical manner to pricingdecisions. In light of the underlying purpose of the Act to enhance the efficiencyof the Canadian economy by promoting competitive markets, their success mustalso be measured against the soundness of their underlying economics.

    On both counts, it is our view that the Price Discrimination EnforcementGuidelines will be the more effective. The various components of price discri-mina tion are clearly defined in practical terms, and applied to common busi-

    IDirector of Investigation and Research - Competition Act, Predatory Pricing EnforcementGuidelines (Ottawa: Supply & Services Canada, 1992).2Director of Investigation and Research - Competition Act, Price Discrimination EnforcementGuidelines (Ottawa: Supply & Services Canada, 1992).3Director of Investigation and Research - Competition Act, Merger Enforcement Guidelines(Ottawa: Supply & Services Canada, 1991).

    4Director of Investigation and Research - Competition Act, Misleading Advertising Guidelines(Ottawa: Supply & Services Canada, 1991).5Competition Act, R.S.C. 1985, c. C-34, as am. by R.S.C. 1985 (1st Supp.), c. 27, ss. 187, 189,R.S.C. 1985 (2d Supp.), c. 19, Part 1I, R.S.C. 1985 (3d Supp.), c. 34, s. 8, R.S.C. 1985 (4th Supp.),c. 1, s. 11, R.S.C. 1985 (4th Supp.), c. 10, s. 18, S.C. 1990, c. 37, ss. 29-32, S.C. 1991, c. 45, ss.547-550, S.C. 1991, c. 46, ss. 590-594, S.C. 1991, c. 47, ss. 714-717, S.C. 1992, c. 1, ss. 44-46,145, S.C. 1992, c. 14, s. 1, S.C. 1993, c. 34, ss. 50-51 [hereinafter the Act].

    61bid., s. 1.1: (Purpose of the Act).

    [Vol. 38

  • IS THE PRICE RIGHT?

    ness situations. Moreover, the result-oriented approach espoused in the PriceDiscrimination Enforcement Guidelines should discourage unwarranted com-plaints and encourage aggressive pricing behaviour. Our "criticism" of theseGuidelines is that, in their zest for encouraging economically beneficial pricingstrategies, they at times seem to read more precision into the legislation than iswarranted. Some of the more liberal aspects of the Director's price discrimina-tion analysis may not necessarily be shared by private plaintiffs seeking dam-ages, and businesses should apply such aspects with caution.

    The Predatory Pricing Enforcement Guidelines will also be helpful to busi-ness people who suspect that their own or others' aggressive pricing policiesmay be illegal. The jurisprudence in this area leaves many questions unan-swered, and the Guidelines enunciate generally applicable tests for the firsttime. While in our view the Predatory Pricing Enforcement Guidelines can befaulted for being at times inconsistent and/or impractical, one should never for-get the enormous contribution of such a thorough and thoughtful articulation ofthe Director's approach to competition law enforcement.

    Part I of this paper will provide an overview and critique of the PredatoryPricing Enforcement Guidelines, while Part II will deal with the Price Discrim-ination Enforcement Guidelines. We then summarize our principal conclusions.

    I. Predatory Pricing Enforcement Guidelines

    Predatory pricing is defined as "a policy of selling products at prices unrea-sonably low, having the effect or tendency of substantially lessening competi-tion or eliminating a competitor, or designed to have that effect."7 It is an indict-able offence, carrying the possibility of up to two years in prison for individualsfound guilty of the practice.8

    As stated in the Predatory Pricing Enforcement Guidelines ("Guidelines"in Part I):

    While the Guidelines reflect the law developed to date in these cases, it is apparentthat the Courts have had limited opportunity to interpret this provision. Accord-ingly, the Guidelines are intended to supplement the jurisprudence by providingthe Director's enforcement policy regarding the section.

    In essence, the complainant lays out a set of suggested facts, and asks the Directorto assess the likely outcome of the alleged predation.

    The purpose of the assessment is to distinguish predatory pricing from otherwisevigorous and desirable price competition.

    9

    The Director therefore recognizes the controversy in the legal and economiccommunities surrounding the appropriate interpretation of paragraph 50(l)(c).The Guidelines are a welcome attempt to clarify the Bureau's approach to theseissues. Of course, the Guidelines may or may not be accepted by the courts. Inthe meantime, it will nonetheless be helpful for business planners to know how

    71bid., s. 50(l)(c).'lbid., s. 50(1).9Predatory Pricing Enforcement Guidelines, supra note 1 at 4-5.

    1993]

  • McGILL LAW JOURNAL

    the Director will approach such topics, so that they may confidently planaggressive, but legal, pricing strategies.

    In this Part, we review the jurisprudence relating to predatory pricing, andhighlight the key aspects of predatory pricing which are in need of