An extract from The Dominance and Monopolies Review - Edition 9

Market definition and market power

Determining that a firm is dominant is the first of three statutory conditions that must be independently met for the abuse of dominance provisions to apply.

The statutory criteria for dominance are set out in Section 79(1)(a) of the Act, which requires a finding that 'one or more persons substantially or completely control, throughout Canada or any area thereof, a class or species of business'. Whether this statutory test is met turns on the definition of the relevant market and an assessment of the exercise of market power.

i Market definition

A 'class or species of business' and the words 'Canada or any area thereof' have been interpreted by the Tribunal to refer to the relevant product and geographical market or markets.32 Market definition focuses conceptually on the existence of substitutes for the product and geographical territory in question. It is usually determined on the basis of a 'hypothetical monopolist' test that looks at the smallest market in which a 'small but significant and non-transitory increase in price' could be profitably imposed, beginning with the product of the firm in question and the area in which it operates, and expanding the relevant market to include other products or supplier locations likely to be substituted.33

This is generally consistent with the approach taken by the Bureau in defining markets for purposes of merger analysis.34 As in the case of mergers, market definition may depend significantly on the particular features of the product and geographical markets in question. A market need not be conclusively defined to find that a firm or firms exercise market power.35

In addition to considering actual price and supply data where available, the Bureau may take into account a range of other factors in its assessment of the product and geographic market definition, including:

  1. consumer behaviour;
  2. past product or location substitution;
  3. product functional interchangeability;
  4. unique product characteristics;
  5. transportation costs and shipping patterns;
  6. switching costs;
  7. the role of distant sellers and foreign competition; and
  8. past price correlation among substitute products.36

The 2019 Guidelines specifically contemplate how to apply the hypothetical monopolist test to 'multi-sided' platforms, where demand for one side depends on use of another, and indicate that the Bureau may define the product market either as one side of the platform or as including multiple sides, depending on the case. The updated Guidelines also consider the challenges that may arise in the application of this test where services are offered at a 'zero-monetary price' (e.g., to attract users to a multi-sided platform), and indicate that in these cases, the Bureau may focus on 'qualitative indicators of substitutability' rather than seeking to analyse whether a hypothetical monopolist would find it profit-maximising to decrease a relevant non-price dimension of competition by a small but substantial amount for a non-transitory period of time.

More generally, the updated Guidelines retain ample flexibility for the Bureau to define one or more product markets. For instance, the Bureau 'may consider it appropriate to define markets in reference to particular types of purchasers in certain circumstances, such as where sellers engage in price discrimination between different sets of buyers', or by referring to 'a particular level of the supply chain'. Moreover, the Bureau 'may consider it appropriate to analyse several different (or potentially different) product markets together for the purposes of market definition'. This appears to reflect recent case law, such as Softvoyage, in which more than one relevant market was identified. Additionally, the Guidelines specifically contemplate the possibility of analysing several geographic markets together.

ii Market power

The words 'substantially or completely control' in the context of the abuse of dominance provisions have been held by the Tribunal in TREB to contemplate a substantial degree of market power. Such market power confers 'considerable latitude to determine or influence price or non-price dimensions of competition' in a market, and may be reflected in the power to exclude.37 The Guidelines, as updated in 2019, take this approach, indicating that market power (the assessment of which takes into account both pre-existing market power and the market power derived from allegedly anticompetitive practices) may be reflected in the power to exclude; that is, an ability to restrict the output of other existing or potential market participants and 'thereby profitably influence price'. Here again, the updated Guidelines reserve discretion for the Bureau, indicating that the assessment of whether a firm holds a substantial degree of market power may depend on 'the body of relevant information and/or documents on the whole' and noting that the 'exact nature of the Bureau's analysis and the weight accorded to any particular piece of information or document will depend on the circumstances of the case'.38

The Guidelines note that, while market power can be measured through direct factors such as high profit margins or 'supracompetitive profitability or pricing', these factors can present analytical issues and may be inconclusive. The more common analysis will, therefore, use indirect indicia of market power that suggest the extent to which a firm or firms will be constrained from implementing anticompetitive price increases, either owing to existing competition or likely competitive entry. Indirect indicia considered by the Bureau include the 'structural characteristics' of a market (such as market shares and barriers to entry) and the effects of anticompetitive acts and countervailing power from customers or suppliers.

Notably, in a clear nod to the outcome of the TREB case, the updated Guidelines expressly contemplate that a firm 'that does not compete in a market may nonetheless substantially or completely control that market'. In such cases, the power to exclude competitors will often feature prominently in the Bureau's analysis, whereas market shares or supracompetitive profits may not be as central. This update to the Bureau's approach presumably is the reason for which the 2019 version of the Guidelines also de-emphasises a market share safe harbour, as discussed below.

iii Market share

There is no statutory threshold for market share that will necessarily give rise to market power, nor a statutory safe harbour below which a firm will not be considered dominant. However, market share is 'usually a necessary, but not sufficient'39 condition of finding market power, and will ordinarily be considered together with other factors. Market share may be measured on the basis of revenues, unit sales, sales or production capacity or natural resource reserves, depending on which 'best reflects the current and future competitive significance of competitors'.40 In addition to the actual share, the Bureau will consider the distribution of market share among a firm's competitors, as well as market share fluctuations.

Although the Bureau has historically taken the position that a single firm market share below 35 per cent will be considered unlikely to give rise to a finding of market power, the 2019 Guidelines state only that a market share below 50 per cent will 'generally only prompt further examination' if it is believed that the anticompetitive conduct is likely to result in increased market share in a reasonable period.41 On the other hand, a single firm market share above 50 per cent (or a combined share above 65 per cent, in the case of joint dominance) will 'generally prompt further examination'. In the Tele-Direct case, the Tribunal held that where market share is 80 per cent or greater, it will look for 'extenuating circumstances' and 'generally, ease of entry' to outweigh a prima facie finding of market power.42 In practice, contested abuse of dominance cases both before and after Tele-Direct have involved market shares of 80 per cent to 100 per cent, usually in highly concentrated markets.

iv Barriers to entry; other factors

As market share is not determinative of market power, the Bureau will also consider the barriers to entry that may be present in the market, including:

  1. sunk investments (e.g., in equipment, infrastructure or research and development);
  2. regulatory barriers;
  3. whether the market is mature or depends on economies of scale or scope;
  4. network effects; and
  5. availability of scarce resources or inputs.

Market entry despite barriers to entry must be likely, timely and sufficient to prevent or discourage the exercise of market power.

The Guidelines recognise that, in some instances, customers will constrain market power, for example, through vertical integration or by encouraging entry or expansion of competitors. Markets that undergo rapid technological change or innovation, or some other material form of change, may warrant different consideration if this permits new or existing competitors to overcome the exercise of market power.

v Joint dominance

The words 'one or more persons' in Section 79(1)(a) of the Act explicitly recognise that two or more firms may have joint dominance. As explained in the Guidelines, the Bureau's approach to joint dominance is essentially similar to that for single firm dominance except that it is also necessary to find that control of the market is exercised jointly.

For purposes of the criminal conspiracy provisions of the Act, 'conscious parallelism', in itself, does not constitute an agreement, and the Bureau adopted this position in prior (2001) Abuse of Dominance Enforcement Guidelines, which also described factors that could be used to infer joint action in the civil context. The 2019 Guidelines simply state that '[s]imilar or parallel conduct by firms is insufficient' to establish joint dominance, and offer no further insight into the extent of joint conduct – or maximum level of intra-group competition – required to find joint control of the market. The threshold test for joint dominance has never been considered by the Tribunal as, although the Bureau has commenced three significant joint dominance cases, all have settled prior to a contested hearing.43

In addition to the application of the abuse of dominance provisions to joint dominance, since 2010 it has been possible to address coordinated conduct under Section 90.1 of the Act, a civil provision that applies to agreements between competitors that substantially lessen or prevent competition.44

vi Attempted monopolisation

In contrast to the US Sherman Act, attempted monopolisation is not caught by the abuse of dominance provisions in Canada. The existence of market power at the time anticompetitive conduct is engaged in is implicit in the formulation of the statutory test, and would prohibit an application to the Tribunal on the basis of anticipated market power. The 2019 Guidelines, moreover, no longer refer to the possibility that the Bureau may investigate the conduct of a firm that is expected to acquire market power as a result of the allegedly anticompetitive conduct 'within a reasonable period of time'.45

Nonetheless, the updated Guidelines suggest that the Bureau may contemplate, if not necessarily 'attempted' monopolisation, the possible acquisition of market power where none existed previously. For example, the Guidelines do refer to anticompetitive conduct that permits the exercise of 'new or increased market power'.46 More generally, the post-TREB updates to the Guidelines (including, in particular, the Bureau's consideration of dominance by firms that do not compete directly in the relevant market or markets, and of the ability to exclude, as well as the de-emphasising of market shares) suggest that the Bureau may apply a nuanced and potentially broad interpretation of monopolisation.