On July 21, 2008, the Competition Bureau (Bureau) published its new Predatory Pricing Enforcement Guidelines (New Guidelines), following the issuance of draft guidelines in October, 2007 and a period of public consultation.1 The New Guidelines supersede all previous statements of the Bureau and the Commissioner of Competition on the subject.
By way of background, the Bureau first released guidelines on predatory pricing - the practice of pricing goods or services below their cost, so as to eliminate or discipline or deter entry by a competitor - in 1992. A 2002 attempt to revise those guidelines was met with controversy, and that draft was ultimately withdrawn. Draft guidelines reappeared in October, 2007, and these have now been finalized in the form of the New Guidelines. The New Guidelines do not depart significantly from the draft version of October, 2007. The New Guidelines confirm three policy changes in terms of the Bureau's enforcement approach to predatory pricing.
First, the Bureau will, at first instance, examine allegations of predatory pricing under the civil "abuse of dominance" provisions of the Competition Act (Act), which are contained in sections 78 and 79 (and which include a "substantial lessening or prevention of competition" test). Generally, it is only in the case of egregious conduct (such as predation as a disciplinary measure in furtherance of a cartel, or where the person or firm has a history of non-compliance with the Act) that the Bureau will seek to have a firm prosecuted under the Act's relevant criminal provision in paragraph 50(1)(c).2
Second, the Bureau establishes "average avoidable costs" as the yardstick it will use to gauge when prices are "unreasonably low." In theory, these include all costs, including opportunity costs, which could have been avoided by not selling the products in question during the period of time for which low prices prevailed. In addition to variable costs of production (which generally include ongoing expenses such as labour, materials, rent and utility costs, use-related plant depreciation, and promotional allowances), avoidable costs include some fixed costs (those that are not product-specific), but do not include sunk costs. The longer the period of time for which the low prices are in effect, the greater the proportion of costs that will become "avoidable." According to the New Guidelines, the Bureau will take a default position that a firm is pricing predatorily if it is selling products below average avoidable costs.
Third, the New Guidelines clarify that the presumption that a firm selling products below average avoidable costs is selling at unreasonably low prices can be overturned by a reasonable business justification, including, among others, the need to meet the competition's prices, the quick sale of perishable goods, and introductory sales.
Both the abuse of dominance and the criminal provisions require consideration of whether substantial harm to competition results, or is likely to result, from the alleged predation.4 In the context of predatory pricing, the New Guidelines take the view that a substantial lessening or prevention of competition takes place when a firm increases its market power to the point where it can recoup its losses - including through cross-subsidization - once the desired anti-competitive effect has been achieved. In the case of the criminal provision, despite the fact that it contemplates the elimination of a competitor (as opposed to a substantial lessening of competition) as a basis for criminal liability, the New Guidelines provide that, in general, the mere elimination of a competitor is not a sufficient basis for the Bureau to pursue predatory pricing under the criminal provisions.
The Commissioner has stated previously that she supports proposals to repeal the criminal prohibition and to rely solely on abuse of dominance to control predatory pricing. Such potential repeal is not mentioned in the New Guidelines. However, Bill C-454, a private member's bill to amend the Act by, among other things, repealing the criminal predatory pricing provision, has received second reading and will be reviewed by a Parliamentary committee this fall.
While the standard of "avoidable costs" has not been endorsed by Canadian courts, and is of questionable utility to business people who make pricing decisions without benefit of the economic experts necessary to calculate such costs, the other revisions to the Guidelines provide welcome clarification to the Canadian business community. The New Guidelines will hopefully alleviate the "chilling effect" currently flowing from the antiquated criminal predatory pricing provisions. Low prices are, after all, what competition is all about.