On October 9, 2007, the Competition Bureau (the Bureau) released new draft Predatory Pricing Enforcement Guidelines (the Guidelines)."1 Public comment is requested before January 18, 2008.
The Bureau first released guidelines on predatory pricing - the practice of pricing goods or services below their cost, so as to eliminate or discipline a competitor - in 1992. An attempt in 2002 to revise the Guidelines met with controversy, and that draft was ultimately withdrawn. The latest draft Guidelines go further than previous Guidelines in confirming the treatment of predatory pricing by the Bureau, at the first instance, as a civil matter under the "abuse of dominance" provisions, and thus subject to a competitive impact test (the actual legal provision being criminal and being capable of enforcement if a competitor is likely to be eliminated, even if there is no substantial lessening of competition). The new draft Guidelines also fully adopt the "avoidable cost" standard for the determination of unreasonably low prices.
According to the Guidelines, the Bureau's default approach to allegations of predatory pricing will be to examine the conduct under the civil "abuse of dominance" provisions of the Competition Act, which are contained in sections 78 and 79 (and subject to a substantial lessening or prevention of competition test). It is only in the case of particularly egregious conduct (such as predation as a disciplinary measure in furtherance of a cartel, or in contravention of a Tribunal order) that the Bureau will seek to have a firm prosecuted under the Act's relevant criminal provision in paragraph 50(1)(c).2
In the Guidelines, 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 for which low prices prevailed. In addition to variable costs of production, avoidable costs may include, depending on the time period in question, use-related depreciation, "quasi-fixed costs," and incremental fixed and sunk costs linked to sales during the period of alleged predation.
According to the draft Guidelines, the Bureau will take a default position that a firm is pricing predatorily if it is selling products below average avoidable costs. This presumption can be overturned by a reasonable business justification, which includes meeting the competition's prices, the quick sale of perishable goods, introductory sales, etc.
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.3 In the context of predatory pricing, the Bulletin takes 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, the potential or actual elimination of a competitor can also be the basis for sanction even without substantial anti-competitive effect, and this includes preventing a competitor from entering a market. 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, however, mentioned in the draft Guidelines.