One of the recent amendments to the Competition Act (on which we commented in a prior post) has the potential to seriously chill price competition by leading Canadian businesses.
Normally, the objective of competition law is to encourage competition on the basis that competition benefits consumers and results in a stronger and more competitive Canadian economy. This objective goes back to at least 1889 when Canada’s first law criminalizing price fixing cartels was enacted.
The recent amendments to the Competition Act, passed with no Parliamentary debate as part of a budget implementation bill, include an amendment to a section in the Competition Act that provides examples of anti-competitive acts for purposes of the abuse of dominance provision. The amendments added a new example of anti-competitive act:
“a selective or discriminatory response to an actual or potential competitor for the purpose of impeding or preventing the competitor’s entry into, or expansion in, a market or eliminating the competitor from a market”.
On its face, this description clearly catches the hypothetical scenario of an established national business lowering its price in a geographic area to match or beat the price that a competitor offers in that area. Price competition is exactly what competition laws should encourage. The objective of price competition is to retain or win business. When that business is retained or won by one firm, one or more other competitors obviously did not win that business or lost existing business. In the case of the hypothetical the consequence is that the competitor who started the price competition in a particular geographic area was prevented from expanding in that area. Thus the conduct would fall within the description of the new example quoted above.
Supporters of the amendment will point to the requirement that the “purpose” of the price reduction must be to have an effect on a competitor, not to win business. The problem is that the conduct of the responding firm, the price reduction, is exactly the same regardless of the purpose. Decisions as to whether there has been abuse of dominance will turn on whether price competition occurred for the right reasons as discerned from the emails, texts, etc. of employees of the responding firm. To discern good price competition from bad competition the Competition Tribunal, when hearing an abuse of dominance case, will need to consider the state of mind of the responding business.
It could also be argued, in defence of the amendments, that for the abuse of dominance provision to apply, the conduct has to be engaged in by a dominant firm. That might be true, but it comes with a problematic consequence: the ability of a business to compete will depend on whether the law regards it as “dominant”. If it isn’t dominant, a business can offer a price reduction to prevent the dominant firm from expanding, but a dominant firm that engages in the exact same conduct has committed an anti-competitive act. This reveals a bias towards a preferred outcome where dominant firms become smaller. This is the old and worn “big is bad” theory of competition that had its heyday many decades ago but now seems to have found new life in a political climate where business success is often regarded with suspicion.
Furthermore, while it is true that to prove abuse of dominance there has to be a substantial negative effect on competition, the amendments may still disincentivize price competition. For example, businesses will have to take into account the possibility that, if a price reduction that a competitor can’t match causes that competitor to fail, the argument in the Competition Tribunal will be that the requisite effect on competition has been proved. The business that responds to a price increase by cutting its own prices will thus be judged on what happened to its competitor. That’s a strong incentive to not compete or to compete less aggressively on price when responding to price competition by a competitor.
Further, the amendments now allow private litigants (such as failing businesses), on leave by the Competition Tribunal being granted, to bring abuse of dominance cases and seek penalties (to be paid to the government) of as much as 3% of the business’ worldwide revenues (that Parliament did not limit this to Canadian revenues for a provision that is specifically limited to Canada or any area thereof is a clear demonstration of its punitive nature). This creates extremely high stakes for businesses that are considering responding to price competition. Any business that is contemplating responding to price competition should consider the potential for the allegation to be made that such response would be an anti-competitive act. The logical risk-adverse decision in some cases will be to forgo responding to price competition. Thus, buyers of the business’ products will pay more than they otherwise would.
Canadian businesses should beware of the new risk created by the amendments, which will likely have a chilling effect on price competition in Canada in an exception to the general objective of competition law to foster competition for the benefit of consumers and economic activity generally.